<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1995
REGISTRATION NO. 33-61857
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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TENNESSEE 6712 62-0799975
(STATE OR OTHER JURISDICTION OF PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION 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:
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CATHERINE COLLINS MCCOY, ESQ. MARY M. SJOQUIST, ESQ.
ARNOLD & PORTER MULDOON, MURPHY & FAUCETTE
555 TWELFTH STREET, N.W. 5101 WISCONSIN AVENUE, N.W. SUITE 500
WASHINGTON, D.C. 20004-1202 WASHINGTON, D.C. 20016
(202) 942-5055 (202) 362-0840
</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 [ ].
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
FIRST AMERICAN CORPORATION
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
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HEADING IN PROXY STATEMENT
ITEM OF FORM S-4 (PROSPECTUS)
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Cover Page of Registration
Statement-Introduction; Cross Reference
Sheet; Outside Front Coverage Page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page 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
4. Terms of the Transaction.................. Introduction; Summary; Proposal I -- The
Merger
5. Pro Forma Financial Information........... Summary; Fully Pro Forma Combined Condensed
Financial Statements
6. Material Contacts with the Company Being
Acquired.................................. Summary; Proposal I -- The
Merger -- Interest of Certain Persons
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable
8. Interests of Named Experts and Counsel.... 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;
Summary; Incorporation of Certain Documents
by Reference
11. Incorporation of Certain Information by
Reference................................. 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........... Available Information; The Companies;
Summary
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........... Certain Information regarding Charter;
Summary; Charter Form 10-K
18. Information if Proxies, Consents or
Companies Authorizations are to be
Solicited................................. Introduction; 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
, 1995
Dear Shareholder:
We are pleased to enclose your Notice of Annual Meeting and Proxy Statement
for the Annual Meeting of Shareholders of Charter Federal Savings Bank
("Charter") to be held on November 30, 1995, at 10:00 a.m., local time, at
Electro-Mechanical Corporate Centre, 2310 Highway 421, Bristol, Tennessee.
At the meeting you will be asked to consider and vote on a proposed
Agreement and Plan of Reorganization, as amended, between Charter and First
American Corporation, a corporation organized under the laws of the State of
Tennessee and a registered bank holding company ("First American") (the
"Reorganization Agreement") and a related Agreement and Plan of Merger and
Combination ("Merger Agreement" and, collectively with the Reorganization
Agreement, "Agreement") pursuant to which Charter will be acquired by First
American. The acquisition will be accomplished by the merger ("Merger") of
Charter Interim Federal Savings Bank, a federally chartered interim savings bank
to be formed by First American immediately prior to the acquisition, with and
into Charter, with Charter as the surviving entity ("Surviving Charter"). As
part of the Merger, and immediately following consummation of the Merger, it is
anticipated that certain branches of Charter located in the Bristol, Tennessee
area, and perhaps certain branches of Charter located in the Bristol, Virginia
area, will be transferred to First American National Bank, a national banking
association subsidiary of First American, in a series of transactions described
in the Prospectus/Proxy Statement accompanying the enclosed Notice of Annual
Meeting of Shareholders. The capitalized terms used in this letter are defined
in the attached Prospectus/Proxy Statement.
The Agreement generally provides for an exchange of stock as consideration
for the Merger, in which you would receive 0.38 share of common stock of First
American for each share of common stock of Charter held by you, and cash in lieu
of any fractional share; provided, however that (i) if the FAC Market Value is
greater than $39.75 per share, then the exchange ratio shall be reduced to an
amount equal to $15.10 divided by the FAC Market Value, rounded to the nearest
one ten-thousandth of a share, and (ii) if, prior to the Effective Time of the
Merger, First American enters into a definitive agreement of merger or
reorganization with another entity as a result of which either First American
would not be the surviving entity or First American's Chief Executive Officer
would not become Chief Executive Officer of the surviving entity, then the
exchange ratio shall be 0.38 (the "Exchange Ratio"). The Agreement is subject to
various conditions and the final Exchange Ratio is subject to adjustment
depending on the average per share closing price of FAC Common Stock on The
Nasdaq Stock Market for the twenty consecutive trading days ending on and
including the third day immediately preceding but not including the day of the
Effective Time ("FAC Market Value").
In addition to the consideration described in the preceding paragraph,
holders of shares of Charter Common Stock as of the Effective Time, under
certain circumstances, shall be entitled to receive additional shares of FAC
Common Stock or other contingent consideration in the event that Surviving
Charter receives payments within five years of the Effective Time in respect of
certain pending goodwill litigation. THERE IS NO ASSURANCE THAT CHARTER
SHAREHOLDERS WILL RECEIVE THE CONTINGENT CONSIDERATION AND, UNDER CERTAIN
CIRCUMSTANCES, RECEIPT OF CONTINGENT CONSIDERATION COULD HAVE ADVERSE TAX
CONSEQUENCES. See "PROPOSAL I -- THE MERGER -- Contingent Consideration for
Goodwill Litigation Recovery" and "-- Certain Federal Income Tax Consequences."
Because the market value of the common stock of First American will
fluctuate, the market value of the common stock of First American that Charter
shareholders would receive upon actual consummation of the Merger will increase
or decrease prior to, as well as after, the consummation of the Merger. If the
FAC Market Value is less than $39.75, the Exchange Ratio will be equal to 0.38.
If the FAC Market Value is greater than $39.75, the Exchange Ratio will be
reduced in proportion to the amount by which the FAC Market Value exceeds
$39.75. Charter does not have the right to terminate the Agreement based on
fluctuations in the FAC Market Value.
First American common stock trades on The Nasdaq Stock Market under the
symbol "FATN". Based on the last reported sales price per share of FAC Common
Stock on May 16, 1995 (the date prior to the date of execution of the Agreement)
of $35.00 per share, each share of Charter Common Stock would have been
<PAGE> 4
exchangeable for 0.38 shares of FAC Common Stock, having a value of $13.30.
Based on the last reported sales price per share of FAC Common Stock on October
, 1995 of $ , each share of common stock of Charter would be
exchangeable for shares of common stock of First American having a
value of $ . There can be no assurance what the FAC Market Value will
be at the Effective Time. Depending upon fluctuations in the price of the FAC
Common Stock during the measurement period, the FAC Market Value may be more or
less than $ . You are advised to obtain a current market quotation for
the shares of FAC Common Stock.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER AND
RECOMMENDS A VOTE "FOR" THE MERGER. The proposed Merger has been approved by the
Charter Board as being in the best interest of Charter and its shareholders. The
Board reached this decision after careful consideration of a number of factors,
including an oral opinion of Wheat First Securities, Inc. ("Wheat"), its
financial advisers, as of the date of the execution of the Agreement, that the
Exchange Ratio is fair from a financial point of view to Charter shareholders. A
written opinion, dated as of the date of the enclosed Prospectus/Proxy
Statement, of Wheat is reproduced in full in Appendix B to the accompanying
Prospectus/Proxy Statement. The enclosed Prospectus/Proxy Statement contains
more detailed information concerning the Board's decision and the proposed
transaction. We urge you to consider it carefully.
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger by various regulatory agencies. In addition, the
affirmative vote of at least two-thirds of all of the outstanding shares of
Charter Common Stock is required to approve the Agreement. Charter and First
American intend to consummate the Merger by December 1, 1995.
IT IS VERY IMPORTANT THAT YOUR SHARES ARE VOTED AT THE MEETING, REGARDLESS
OF WHETHER YOU ATTEND IN PERSON. A FAILURE TO VOTE, EITHER BY NOT RETURNING THE
ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST APPROVAL OF THE AGREEMENT. PLEASE COMPLETE THE ENCLOSED
PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID, RETURN ENVELOPE. YOU
SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS TIME.
In addition to voting on the Merger, at the Annual Meeting you will be
asked to vote for the election of four directors to serve for the terms for
which they are nominated or until the proposed merger transaction is
consummated, the ratification of independent accountants, and to approve the
adjournment of the Annual 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 merger transaction.
In order to make sure that your vote is represented, indicate your vote on
the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the meeting in person, you may revoke your proxy at the
meeting and vote in person.
Sincerely,
/s/ Robert J. Bartel
Robert J. Bartel
Chairman of the Board of Directors
/s/ Cecil R. McCullar
Cecil R. McCullar
President and Chief Executive Officer
2
<PAGE> 5
CHARTER FEDERAL SAVINGS BANK
110 PIEDMONT AVENUE
BRISTOL, VA 24201
(703) 669-5101
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 30, 1995
To The Shareholders of
Charter Federal Savings Bank:
Notice is hereby given that the Annual Meeting of Shareholders of Charter
Federal Savings Bank ("Charter") will be held at Electro-Mechanical Corporate
Centre, 2310 Highway 421, Bristol, Tennessee, on November 30, 1995 at 10:00 a.m.
local time, for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Reorganization, as amended ("Reorganization Agreement"), between Charter and
First American Corporation ("First American"), a bank holding company organized
under the laws of the State of Tennessee, and a related Agreement and Plan of
Merger and Combination ("Merger Agreement" and, collectively, with the
Reorganization Agreement, "Agreement"), a copy of each of which is included as
Appendix A to the accompanying Prospectus/Proxy Statement.
2. To elect four directors to serve for the terms for which they are
nominated or until the proposed merger transaction is consummated.
3. To ratify the appointment by the Charter Board of Directors of the firm
of Price Waterhouse LLP as independent accountants of Charter for the fiscal
year ending June 30, 1996 or, if earlier, until the effective time of the
Merger.
4. To consider and vote upon a proposal to approve the adjournment of the
Annual Meeting for up to 29 days, if necessary, in order to solicit proxies if
shareholders holding two-thirds of the votes eligible to be cast at the Annual
Meeting do not submit proxies voting in favor of Proposal I.
5. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors of Charter has fixed October 16, 1995 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Annual Meeting, and accordingly, only shareholders of record at the close of
business on that date are entitled to notice of and to vote at such meeting or
any adjournment thereof.
By Order of the Board of Directors
Katherine L. Hale
/s/ Katherine L. Hale
Secretary
Bristol, Virginia
, 1995
<PAGE> 6
IMPORTANT
YOUR VOTE IS IMPORTANT. EVEN SHAREHOLDERS WHO EXPECT TO ATTEND THE ANNUAL
MEETING IN PERSON ARE URGED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY
IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE YOUR APPOINTMENT OF
PROXY AND VOTE YOUR SHARES IN PERSON. IF A SHAREHOLDER RECEIVES MORE THAN ONE
PROXY FOR ANY REASON, EACH PROXY SHOULD BE COMPLETED AND RETURNED. A FAILURE TO
VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN"
BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE
AGREEMENT.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE TO
APPROVE THE AGREEMENT AND FOR THE ELECTION AS DIRECTORS OF THE NOMINEES NAMED
HEREIN, FOR THE RATIFICATION OF INDEPENDENT ACCOUNTANTS AND FOR THE ADJOURNMENT
OF THE ANNUAL MEETING IF NECESSARY IN ORDER TO SOLICIT ADDITIONAL PROXIES.
2
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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INTRODUCTION.......................................................................... 1
AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 3
CERTAIN INFORMATION REGARDING CHARTER................................................. 4
SUMMARY............................................................................... 5
Parties To The Reorganization....................................................... 5
The Annual Meeting.................................................................. 6
The Merger.......................................................................... 6
Effective Time...................................................................... 8
Termination of the Agreement........................................................ 8
Accounting Treatment................................................................ 8
Recommendation of the Board of Directors............................................ 8
Opinion of Investment Banker........................................................ 9
Vote Required....................................................................... 9
No Dissenters' Rights............................................................... 9
Operation of Charter Following the Merger........................................... 9
Interests of Certain Persons........................................................ 10
Conditions; Regulatory Approvals; Abandonment; Amendment............................ 11
Certain Federal Income Tax Consequences............................................. 12
Certain Differences in Rights of Shareholders....................................... 13
Stock Option Agreement.............................................................. 14
Markets and Market Prices........................................................... 14
Market Prices and Dividends......................................................... 14
Common Stock Listing................................................................ 16
Comparative Per Share Data.......................................................... 16
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS..................... 17
SELECTED FINANCIAL DATA............................................................... 23
MEETING INFORMATION................................................................... 29
Date, Place and Time................................................................ 29
Record Date; Voting Rights.......................................................... 29
Voting and Revocation of Proxies.................................................... 29
Solicitation of Proxies............................................................. 30
PROPOSAL I -- THE MERGER.............................................................. 30
Background of and Reasons for the Merger............................................ 30
Terms of the Merger................................................................. 33
Contingent Consideration for Goodwill Litigation Recovery........................... 34
Opinion of Wheat.................................................................... 37
Conversion of Shares; Procedures for Exchange of Certificates....................... 41
Representations and Warranties; Conditions to the Merger; Waiver.................... 42
Regulatory Approvals................................................................ 43
Business Pending the Merger......................................................... 45
No Solicitation of Competing Transaction............................................ 45
Effective Time of the Merger; Termination........................................... 45
Management and Operations After the Merger.......................................... 46
Effect on Certain Employees and Benefit Plans....................................... 46
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1
<PAGE> 8
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PAGE
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Interests of Certain Persons in the Merger.......................................... 47
Certain Federal Income Tax Consequences............................................. 49
Stock Option Agreement.............................................................. 53
Certain Differences in Rights of Shareholders....................................... 55
Resale of FAC Common Stock.......................................................... 64
Dividend Reinvestment and Stock Purchase Plan....................................... 65
Expenses............................................................................ 65
Accounting Treatment................................................................ 65
No Dissenters' Rights............................................................... 65
Nasdaq Authorization................................................................ 65
CERTAIN REGULATORY CONSIDERATIONS..................................................... 66
General............................................................................. 66
Capital............................................................................. 67
Acquisition and Expansion........................................................... 68
Bank Regulation..................................................................... 68
PROPOSAL II -- ELECTION OF DIRECTORS.................................................. 71
General Information................................................................. 72
Information as to Nominees and Continuing Directors................................. 72
Board of Directors Meetings and Committees.......................................... 75
Human Resource Committee Report on Executive Compensation........................... 77
Compensation Committee Interlocks and Insider Participation......................... 79
Summary Compensation Table.......................................................... 80
Stock Performance Graph............................................................. 81
Information on Benefit Plans and Policies........................................... 81
Certain Transactions................................................................ 82
Compliance with Section 16 of the Securities Act.................................... 83
Security Ownership of Certain Beneficial Owners..................................... 84
PROPOSAL III -- RATIFICATION OF INDEPENDENT ACCOUNTANTS............................... 85
PROPOSAL IV -- AUTHORITY TO ADJOURN MEETING........................................... 85
SHAREHOLDER PROPOSALS................................................................. 85
OTHER MATTERS......................................................................... 85
EXPERTS............................................................................... 86
LEGAL OPINION......................................................................... 86
APPENDICES:
Appendix A -- Agreement and Plan of Reorganization and Amendment No. 1
To Agreement and Plan of Reorganization and
Related Agreement and Plan of Merger and Combination
Appendix B -- Opinion of Wheat, First Securities, Inc.
Appendix C -- Stock Option Agreement
Appendix D -- Annual Report on Form 10-K for the Fiscal Year Ending
June 30, 1995 of Charter Federal Savings Bank
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2
<PAGE> 9
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CHARTER FEDERAL SAVINGS BANK FIRST AMERICAN CORPORATION
PROXY STATEMENT PROSPECTUS
FOR UP TO 3,910,684 SHARES OF
ANNUAL MEETING OF SHAREHOLDERS COMMON STOCK
TO BE HELD ON NOVEMBER 30, 1995 (PAR VALUE $5.00 PER SHARE)
</TABLE>
INTRODUCTION
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, par value $.01 per share ("Charter Common Stock"), of Charter
Federal Savings Bank ("Charter") in connection with the solicitation of proxies
by the Board of Directors of Charter for use at an Annual Meeting of
Shareholders, and any adjournment thereof, to be held at the time and place set
forth in the accompanying notice ("Annual Meeting"). It is anticipated that the
mailing of this Prospectus/Proxy Statement and the enclosed proxy card will
commence on or about October , 1995. This Prospectus/Proxy Statement is being
delivered together with a copy of Charter's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995.
At the Annual Meeting, shareholders of Charter will be asked to approve an
Agreement and Plan of Reorganization, as amended, ("Reorganization Agreement")
between Charter and First American Corporation ("First American" or "FAC"), and
a related Agreement and Plan of Merger and Combination ("Plan of Merger" and
collectively with the Reorganization Agreement, "Agreement"), providing for the
acquisition of Charter by First American by means of the merger ("Merger") of
Charter Interim Federal Savings Bank ("Charter Interim"), a federally chartered
interim savings bank to be formed by First American immediately prior to the
Merger, with and into Charter, with Charter as the surviving entity ("Surviving
Charter"). First American is a Tennessee corporation and a registered bank
holding company. It is anticipated that, immediately following the Merger,
certain branches of Charter will be transferred to First American National Bank,
a subsidiary of First American ("FANB"). The Agreement is attached to this
Prospectus/Proxy Statement as Appendix A.
At the Effective Time (as defined in the Agreement), each share of Charter
Common Stock issued and outstanding immediately prior to the Effective Time will
be converted into 0.38 share of the common stock, par value $5.00 per share, of
First American ("FAC Common Stock") and cash in lieu of any fractional share;
provided, however, that (i) if the "FAC Market Value" as defined herein and in
the Agreement at the Effective Time of the Merger is greater than $39.75 per
share, then the exchange ratio shall be reduced to an amount equal to $15.10
divided by the FAC Market Value, rounded to the nearest one-ten thousandth of a
share, and (ii) if, prior to the Effective Time, First American enters into a
definitive agreement of merger or reorganization with another entity as a result
of which either First American would not be the surviving entity or First
American's Chief Executive Officer would not become the Chief Executive Officer
of the surviving entity, then the exchange ratio shall be 0.38 (the "Exchange
Ratio"). If the FAC Market Value is less than $39.75, the Exchange Ratio will be
equal to 0.38. If the FAC Market Value is greater than $39.75, the Exchange
Ratio will be reduced in proportion to the amount by which the FAC Market Value
exceeds $39.75. Charter does not have the right to terminate the Agreement based
on fluctuations in the FAC Market Value.
In addition to the consideration described in the preceding paragraph,
holders of shares of Charter Common Stock as of the Effective Time, under
certain circumstances, shall be entitled to receive additional shares of FAC
Common Stock or other contingent consideration in the event that Surviving
Charter receives payments within five years of the Effective Time in respect of
certain pending goodwill litigation. See "PROPOSAL I -- THE MERGER -- Contingent
Consideration for Goodwill Litigation Recovery." THERE IS NO ASSURANCE THAT
CHARTER SHAREHOLDERS WILL RECEIVE THE CONTINGENT CONSIDERATION, AND UNDER
CERTAIN CIRCUMSTANCES, RECEIPT OF CONTINGENT CONSIDERATION COULD HAVE ADVERSE
TAX CONSEQUENCES. See "PROPOSAL I -- THE MERGER -- Contingent Consideration for
Goodwill Litigation Recovery" and "-- Certain Federal Income Tax Consequences."
For a more complete description of the Agreement and the terms of the Merger,
see "PROPOSAL I -- THE MERGER."
<PAGE> 10
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, THE OFFICE OF THRIFT SUPERVISION ("OTS") OR ANY
GOVERNMENTAL AGENCY NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES AUTHORITY, THE OTS OR ANY GOVERNMENTAL AGENCY 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 Charter are Nasdaq National Market companies and the FAC
Common Stock and Charter Common Stock trade on The Nasdaq Stock Market. On May
16, 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 Charter Common Stock were $35.00 and $13.00, respectively.
Based on the last reported sales price per share of FAC Common Stock on May
16, 1995 of $35.00 per share, each share of Charter Common Stock would have been
exchangeable for 0.38 shares of FAC Common Stock having a value of $13.30. Based
on the last reported sales price per share of FAC Common Stock on October 1995
of $ (assuming that this is the FAC Market Value as described above),
each share of Charter Common Stock would be exchangeable for shares of
FAC Common Stock having a value of $ . Depending upon fluctuations in
the price of FAC Common Stock during the measurement period, the FAC Market
Value may be more or less than $ .
At the Annual Meeting, action also will be taken to elect four directors of
Charter to serve for the terms specified or until the Merger is consummated, to
ratify the appointment of independent accountants, and to approve the
adjournment of the Annual Meeting if necessary in order to solicit additional
proxies in favor of the Merger ("Adjournment Proposal").
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 Charter since
the date of this Prospectus/Proxy Statement.
The date of this Prospectus/Proxy Statement, which also constitutes a
prospectus of First American Corporation for shares of FAC Common Stock issuable
in connection with the Merger, is 1995.
AVAILABLE INFORMATION
First American and Charter 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, First American files
reports, proxy statements and other information with the Securities and Exchange
Commission ("Commission") and Charter files reports, proxy statements and other
information with the Office of Thrift Supervision ("OTS"). Such reports, proxy
statements and other information filed by First American 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, 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, at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
2
<PAGE> 11
Reports, proxy statements and other information filed by Charter can be
inspected and copied at the public reference facilities maintained by the OTS at
the Office of Public Information, OTS, 1700 G Street, N.W., Washington, D.C.
20552, and can be obtained by written request from such office at prescribed
rates. In addition, materials filed by First American or Charter 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 of Charter 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 Charter and its subsidiaries has been furnished by
Charter.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS
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, FIRST AMERICAN
CORPORATION, FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37237-0708. TELEPHONE
REQUESTS MAY BE DIRECTED TO (615) 748-2455. DOCUMENTS RELATING TO CHARTER
(OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE
UPON WRITTEN OR ORAL REQUEST TO KATHERINE L. HALE, CHARTER FEDERAL SAVINGS
BANK, 110 PIEDMONT AVENUE, BRISTOL, VIRGINIA 24201. TELEPHONE REQUESTS MAY BE
DIRECTED TO (703) 645-5220. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 14, 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,
November 29, 1985, May 13, 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.
4. First American's Current Reports on Form 8-K dated February 23, 1995,
May 22, 1995, July 7, 1995, August 15, 1995, October 3, 1995 and October 13,
1995.
5. Form 10-Q/A for the quarter ended June 30, 1995, filed September 22,
1995.
The following document filed with the OTS by Charter (Docket No. 0360) is
incorporated herein by reference:
Annual Report on Form 10-K for Charter for the fiscal year ended June 30,
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 Annual 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
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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.
CERTAIN INFORMATION REGARDING CHARTER
Charter's Annual Report on Form 10-K for the fiscal year ended June 30,
1995 (the "Charter Form 10-K") (without the exhibits thereto) appears at
Appendix D. Such Appendix is a part of this Prospectus/Proxy Statement and
should be carefully reviewed for the information regarding Charter contained
therein.
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SUMMARY
This summary is necessarily general 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 $8.1 billion
and shareholders' equity of $638.1 million. As of June 30, 1995, First American
ranked, on the basis of aggregate deposits held by First American's principal
subsidiary, FANB, 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 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 "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "AVAILABLE INFORMATION."
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 Charter, are designed to complement
First American's branch expansion strategy. First American has determined that
the acquisition of savings associations will help it to realize this strategy
and will enhance its ability to compete with other financial institutions. First
American was particularly attracted to Charter because it has a branch network
serving the needs of retail customers which will enhance First American's
ability to compete with other financial institutions.
First American entered into an Agreement and Plan of Merger dated as of
February 21, 1995 to acquire Heritage Federal Bancshares, Inc., a Tennessee
corporation ("HFB"), in a stock transaction valued at approximately $93 million,
through the merger of HFB with and into First American. HFB, with assets of
approximately $528 million, is the owner of 100% of the capital stock of
Heritage Federal Bank for Savings, a federal savings bank headquartered in
Kingsport, Tennessee. It is the intention of First American and HFB that
Heritage Federal Bank for Savings will be merged with and into FANB immediately
following the merger of HFB with and into First American.
The pro forma financial statements included in this Prospectus/Proxy
Statement show the effects on First American of the acquisition of both HFB and
Charter. See "UNAUDITED FULLY PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS."
First American also 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
$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 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.
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CHARTER FEDERAL SAVINGS BANK. Charter Federal Savings Bank is a federally
chartered savings bank. As of June 30, 1995, Charter had total consolidated
assets of $751 million and shareholders' equity of $46.4 million. Charter owns
100% of the stock of two subsidiaries, Charter Financial Services Corporation
and Highlands Service Corporation. Charter Financial Services Corporation sells
credit-related life, accident and health insurance to borrowers and owns 15% of
Virginia Title, LLC, which issues title insurance. Highlands Service Corporation
sells credit-related life, accident and health insurance.
The mailing address of the principal executive offices of Charter is 110
Piedmont Avenue, Bristol, Virginia 24201. Its telephone number is (703)
669-5101. For additional information concerning the business of Charter and its
financial condition, reference should be made to Charter documents attached
hereto as Appendix A. See "Certain Information Regarding Charter."
CHARTER INTERIM FEDERAL SAVINGS BANK. Charter Interim will be an interim
federal savings bank organized as a wholly owned subsidiary of First American.
Charter Interim will be organized solely to facilitate the acquisition by First
American of Charter through the Merger and will never operate as a savings
association.
THE ANNUAL MEETING
The Annual Meeting of Shareholders of Charter will be held on November 30,
1995, at 10:00 a.m. local time, at the Electro-Mechanical Corporate Centre, 2310
Highway 421, Bristol, Tennessee. The purpose of the Annual Meeting is to
consider and vote upon a proposal to approve and adopt the Agreement, to elect
four directors, to ratify the selection of independent accountants and to
approve the Adjournment Proposal. Only holders of record of Charter Common Stock
at the close of business on October 16, 1995 (the "Record Date") will be
entitled to notice of and to vote at such Annual Meeting. At such date,
5,125,713 shares of Charter Common Stock were outstanding and entitled to vote.
For additional information with respect to the Annual Meeting and the voting
rights of shareholders, see "MEETING INFORMATION."
THE MERGER
Pursuant to the terms of the Agreement, Charter Interim, a federally
chartered interim savings bank to be formed by First American, will be merged
with and into Charter, with Charter as the surviving entity. At the Effective
Time, each outstanding share of Charter Common Stock (excluding shares held by
Charter or by First American, in each case other than in fiduciary capacity or
in satisfaction of debts previously contracted) will be converted into 0.38
shares of FAC Common Stock and cash in lieu of any fractional share; provided,
however, that (i) if the FAC Market Value at the Effective Time is greater than
$39.75 per share, then the exchange ratio shall be reduced to an amount equal to
$15.10 divided by the FAC Market Value, rounded to the nearest one-ten
thousandth of a share; and (ii) if, prior to the Effective Time, First American
enters into a definitive agreement of merger or reorganization with another
entity as a result of which either First American would not be the surviving
entity or First American's Chief Executive Officer would not become the Chief
Executive Officer of the surviving entity, then the exchange ratio shall be 0.38
("Exchange Ratio"). For this purpose, the FAC Market Value shall mean the
average per share closing price of FAC Common Stock on The Nasdaq Stock Market
for the twenty consecutive trading days ending on and including the third day
immediately preceding, but not including, the date of the Effective Time. See
"PROPOSAL I -- THE MERGER." If the FAC Market Value is less than $39.75, the
Exchange Ratio will be equal to 0.38. If the FAC Market Value is greater than
$39.75, the Exchange Ratio will be reduced in proportion to the amount by which
the FAC Market Value exceeds $39.75. Charter does not have the right to
terminate the Agreement based on fluctuations in the FAC Market Value.
In addition to the consideration described in the preceding paragraph,
pursuant to an amendment to the Agreement entered into on October 11, 1995,
holders of shares of Charter Common Stock as of the Effective Time, under
certain circumstances, shall be entitled to receive additional shares of FAC
Common Stock or other contingent consideration in the event that Surviving
Charter receives payments within five years of the Effective Time in respect of
certain pending goodwill litigation, Charter Federal Savings Bank v. United
States, Civil Action No. 95-513C (the "Goodwill Litigation"). Subject to certain
limitations described below,
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Charter shareholders will receive a number of shares of FAC Common Stock equal
to the aggregate value of fifty percent (50%) of any Net Goodwill Litigation
Recovery received. For these purposes, "Net Goodwill Litigation Recovery" means
the sum of the cash payments, if any, net of certain litigation and related
expenses and taxes, received by Surviving Charter during the period between the
Effective Time and the fifth anniversary thereof, pursuant to any final judgment
in or a final settlement of the Goodwill Litigation. Holders of shares of
Charter Common Stock at the Effective Time will be entitled to receive, for each
share of Charter Common Stock held immediately prior to the Effective Time, the
number of shares of FAC Common Stock obtained by dividing (A) fifty percent
(50%) of the Net Goodwill Litigation Recovery, divided by the number of shares
of Charter Common Stock issued and outstanding immediately prior to the
Effective Time, by (B) the average per share closing price of FAC Common Stock,
as reported in The Wall Street Journal, on the date of receipt by Surviving
Charter of the last payment constituting the Goodwill Litigation recovery (the
"Contingent Consideration"). The number of shares of FAC Common Stock to be
issued to any Charter shareholder as Contingent Consideration will be rounded
down to the nearest whole number of shares.
In the event that, prior to the fifth anniversary of the Effective Time, a
consolidation, merger or acquisition of First American with, into or by another
corporation ("Acquiror"), other than a transaction pursuant to which First
American is the surviving entity and which does not result in a reclassification
of the outstanding shares of FAC Common Stock into shares of other stock, cash
or other securities or property, has been consummated, and thereafter but prior
to the fifth anniversary of the Effective Time there is a Goodwill Litigation
recovery, then each holder of Charter Common Stock at the Effective Time instead
will be entitled to receive contingent consideration having a value equal to the
product of (A) fifty percent (50%) of the Net Goodwill Litigation Recovery
divided by the number of shares of Charter Common Stock outstanding immediately
prior to the Effective Time and (B) the number of shares of Charter Common Stock
held by such Charter Shareholder immediately prior to the Effective Time
("Acquiror Consideration"). If there is Acquiror Consideration, the Acquiror
will have the right to elect whether to distribute such consideration in the
form of cash or shares of the capital stock of the Acquiror (or a combination
thereof). In the case of such consolidation, merger or acquisition, the holders
of Charter Common Stock at the Effective Time will receive no Acquiror
Consideration unless the aggregate value of the Acquiror Consideration is equal
to or greater than the product of Two Dollars ($2.00) and the number of shares
of Charter Common Stock issued and outstanding immediately prior to the
Effective Time.
The amount of the Contingent Consideration distributable to holders of
Charter Common Stock in the form of FAC Common Stock is limited to a maximum of
the number of shares of FAC Common Stock issued at the Effective Time in
connection with the Merger. In the event of the consolidation, merger or
acquisition of First American with, into or by another corporation as described
above, the maximum amount of Acquiror Consideration distributable to holders of
Charter Common Stock is limited to the maximum aggregate value of the FAC Common
Stock issued at the Effective Time, valued on the date of the Effective Time.
First American will have sole and exclusive direction and control of the
conduct of the Goodwill Litigation and in its discretion may, among other
things, dispose of the Goodwill Litigation in a manner that does not result in
any cash or other recovery.
Contingent Consideration (or Acquiror Consideration) will not be
transferable, assignable or alienable (except by will or the laws of descent and
distribution) and Charter shareholders will not be entitled to dividends, voting
rights, or any other rights as shareholders with respect to any shares of stock
issuable as Contingent Consideration (or Acquiror Consideration) until such time
as such shares, if any, have been issued.
THERE IS NO ASSURANCE THAT SURVIVING CHARTER WILL RECEIVE ANY PAYMENTS IN
RESPECT OF THE GOODWILL LITIGATION PRIOR TO THE EXPIRATION OF THE FIFTH
ANNIVERSARY OF THE EFFECTIVE TIME. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT
CHARTER SHAREHOLDERS AS OF THE EFFECTIVE TIME WILL EVER RECEIVE THE CONTINGENT
CONSIDERATION OR ACQUIROR CONSIDERATION. SEE "PROPOSAL I -- THE
MERGER -- CONTINGENT CONSIDERATION FOR GOODWILL LITIGATION RECOVERY."
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MOREOVER, DISTRIBUTION OF ANY ACQUIROR CONSIDERATION MAY ADVERSELY AFFECT
THE TAX-FREE NATURE OF THE MERGER AND CAUSE CHARTER SHAREHOLDERS TO REALIZE GAIN
ON SHARES OF FAC COMMON STOCK THAT THEY RECEIVED AT THE EFFECTIVE TIME. SEE
"PROPOSAL I -- THE MERGER -- CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
As of September 26, 1995, First American had repurchased in open market
transactions 1,453,158 shares of FAC Common Stock to be reissued in connection
with the Merger and First American intends to repurchase, in open market
transactions following the Effective Time, shares of FAC Common Stock equal to
the remaining approximately 500,000 shares of FAC Common Stock that will be
issued in connection with the Merger.
After the Merger, those persons serving as directors of First American
immediately prior to the Effective Time shall continue as directors of First
American. It is anticipated that five current Charter directors will serve as
directors of the surviving federal savings bank after the Merger ("Surviving
Charter") including Robert J. Bartel, Billy M. Brammer, Morton W. Lester, Cecil
R. McCullar and John G. Wampler. See "-- Interests of Certain Persons."
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
endorsement of the Articles of Combination filed with the OTS or on such other
date and at such other time as the OTS declares the Merger effective. The Merger
will be consummated at a closing to be held on the last business day of the
calendar quarter in which satisfaction of all conditions precedent to the Merger
occurs, or at such other time as First American and Charter shall mutually
agree. Each of First American and Charter has agreed to use its best efforts to
cause the Merger to become effective by December 1, 1995.
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Effective Time by
the mutual consent of Charter and First American and by either of them
individually under certain specified circumstances, including if the Merger has
not been consummated by March 31, 1996. In the event the Agreement is terminated
by mutual consent, each party will be responsible for its respective costs and
expenses.
In the event that the Agreement is terminated for breach of contract, the
breaching party may be liable to the non-breaching party for damages. The amount
of damages which may be payable to the non-breaching party is undeterminable at
this time. See "PROPOSAL I -- THE MERGER -- Terms of the Merger" and
"-- Effective Time of the Merger; Termination."
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a purchase of assets for
accounting and financial reporting purposes. See "PROPOSAL I -- THE
MERGER -- Accounting Treatment."
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF CHARTER HAS UNANIMOUSLY APPROVED THE AGREEMENT,
BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF CHARTER AND ITS
SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE MERGER. The
Board of Directors further believes that the terms of the Merger are fair to the
holders of the Charter Common Stock, and, among other things, will afford
Charter's shareholders the opportunity to continue as equity participants with a
more liquid investment in a larger regional banking organization. The Board of
Directors also believes that the Merger will enable Charter to compete more
effectively with other financial institutions in the markets served by those
institutions. See "PROPOSAL I -- THE MERGER -- Background of and Reasons for the
Merger." Each member of the Board of Directors has entered into an
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agreement with First American pursuant to which each such director has agreed to
vote in favor of the Merger in his or her capacity as a Charter Shareholder and,
subject to his or her fiduciary duties, to vote in favor of the Merger, in his
or her capacity as a member of the Board of Directors ("Voting Agreements"). No
party to the Voting Agreements was given any compensation for entering into such
agreement beyond the execution of the Agreement.
OPINION OF INVESTMENT BANKER
Wheat, First Securities, Inc. ("Wheat"), Charter's financial adviser, on
May 16, 1995 opined to Charter's Board of Directors, that as of such date the
Exchange Ratio was fair, from a financial point of view, to the holders of
Charter Common Stock. A written opinion dated as of this Prospectus/Proxy
Statement has been delivered to the Charter Board of Directors to the effect
that, as of such date, the Exchange Ratio is fair from a financial point of view
to holders of Charter Common Stock. A copy of the opinion of Wheat is attached
hereto as Appendix B and should be read in its entirety with respect to the
assumptions made, limitations on reviews undertaken and other matters. See
"PROPOSAL I -- THE MERGER -- Opinion of Wheat" for information regarding, among
other things, the selection of Wheat and its compensation for services rendered
in connection with the Merger and its rendering of such opinion. Charter has
agreed to pay Wheat for rendering its opinion and for its financial advisory
services a fee in the net amount of $826,522.
VOTE REQUIRED
Approval of the Merger requires the affirmative vote of the holders of
two-thirds of the outstanding shares of Charter Common Stock entitled to vote
thereon. A FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY
CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
APPROVAL OF THE AGREEMENT.
Directors are elected by a plurality of votes cast without regard to either
proxies as to which authority to vote for one or more nominees is withheld or
broker non-votes, if applicable. The ratification of independent accountants and
the Adjournment Proposal require a vote of holders of a majority of votes cast
including proxies marked "ABSTAIN," but without regard to broker non-votes.
Directors and executive officers of Charter and affiliates of such persons
had sole or shared voting power with respect to 2,413,287 shares of Charter
Common Stock, representing 47.08% of the Charter Common Stock outstanding as of
October 16, 1995. First American has entered into Voting Agreements with each
member of the Board of Directors of Charter, whereby each such person has agreed
to vote all shares of Charter Common Stock that he or she is entitled to vote in
favor of the Agreement, subject to certain conditions in the Voting Agreements.
Such persons had sole or shared voting power with respect to 2,406,634 shares of
charter Common Stock, representing 46.95% of the Charter Common Stock
outstanding as of October 16, 1995. An approximately 1,010,678 additional
shares, or 19.72%, of Charter Common Stock outstanding is required to approve
the Merger. See "MEETING INFORMATION -- Voting and Revocation of Proxies."
NO DISSENTERS' RIGHTS
The holders of Charter Common Stock will not have dissenters' rights in
connection with the Merger and the transactions contemplated thereby. Therefore,
if the Agreement is approved by the affirmative vote of at least two-thirds of
all of the outstanding shares of Charter Common Stock, and all other conditions
to the consummation of the Merger are satisfied, all shareholders of Charter
will receive the consideration provided for in the Agreement. See "PROPOSAL
I -- THE MERGER -- Terms of the Merger."
OPERATION OF CHARTER FOLLOWING THE MERGER
Immediately following consummation of the Merger, it is the intention of
First American to transfer certain branches of Charter to FANB pursuant to one
of two proposed transactions. In the first proposal, described in the Agreement
and herein as the "Preferred FAC Objective", immediately following the Merger,
Charter will transfer the assets and liabilities of the branches thereof located
in the City of Bristol and in
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Abingdon, Virginia and in Tennessee (the "Tennessee Branches") to a
newly-chartered interim federal savings bank subsidiary of First American
("Tennessee Interim") by means of a purchase and assumption transaction (the
"Branch Transfer"). Immediately thereafter, First American will cause Tennessee
Interim to be merged (the "Tennessee Merger") with and into FANB.
In the event that First American determines that, due to regulatory
considerations, it cannot operate the branches of Charter located in Virginia as
offices of FANB, it is the intention of First American that immediately
following consummation of the Merger, Charter will transfer only the assets and
liabilities of the Tennessee Branches (the "Alternative Transaction") to FANB by
means of a purchase and assumption transaction. In either event, Surviving
Charter will move its home office to Roanoke, Virginia and continue to operate
as a federal savings bank.
INTERESTS OF CERTAIN PERSONS
Certain members of Charter's management and of the Charter Board of
Directors have certain interests in the Merger that are in addition to their
interests as shareholders of Charter generally. These interests include, among
others, provisions in the Agreement relating to indemnification, and the
continuation of certain employee benefits. The Agreement also provides that
First American will cause Charter to honor the terms of the outstanding change
in control agreements, severance, consulting and other compensation contracts
between Charter and any current or former director, officer or employee of
Charter or any subsidiary of Charter, and all provisions for vested benefits or
other vested amounts earned or accrued through the Effective Time. In addition,
the Agreement provides for accelerated vesting of Charter Options and their
exchange for FAC Common Stock.
Messrs. McCullar and Buchanan have existing change in control agreements
with Charter. In the event of a change in control of Charter, followed by the
termination of the executive's employment (regardless of whether such
termination results from his dismissal or his resignation at any time during a
period of 120 days from the Effective Time following any alteration or
modification of such executive's job duties or responsibilities or job title
resulting in a job function or position less in responsibility, stature or
compensation than such executive's position at the Effective Time), such
executive will be entitled to receive an amount equal to three times his base
annual salary in effect at the Effective Time, either ratably over a three year
period or in a lump sum. Based on their current annual compensation and
estimated compensation through the Effective Time (assuming that the Effective
Time occurs in 1995), the aggregate amount of cash benefits under their change
in control agreements and benefits from receiving FAC Common Stock in respect of
accelerated Charter Options payable to Messrs. McCullar and Buchanan is
estimated to be, before payment of applicable taxes, $642,750 and $347,100,
respectively. If terminated within one year of the Merger, they will receive no
severance benefits under First American's reduction in force or severance
policies. See "PROPOSAL I -- THE MERGER -- Effect on Certain Employees and
Benefit Plans".
Pursuant to the existing change in control provisions of the Incentive
Stock Option Plan and other grants of Charter Options, the vesting of Charter
Options will be accelerated at the Effective Time. See "PROPOSAL I -- THE
MERGER-- Effect on Employees and Employee Benefit Plans of Charter." Pursuant to
the Agreement, First American will issue approximately 10,900 shares of FAC
Common Stock to directors and executive officers of Charter in exchange for
Charter Options. As of October 16, 1995, there were outstanding options granted
by Charter to purchase 146,800 shares of Charter Common Stock pursuant to the
Charter Options, of which options to purchase 108,700 shares of Charter Common
stock were held by one director and certain executive officers of Charter and
the remaining options were held by other employees of Charter. Of the options
granted, 74,500 were vested as of October 16, 1995 and the vesting of the
remaining options will be accelerated as a result of the Merger. Based on the
closing price of the FAC Common Stock on October 24, 1995, the latest
practicable trading date prior to the printing of this Prospectus/Proxy
Statement, the aggregate value of the unvested options that will be accelerated
by the Merger held by directors and executive officers of Charter under the
Charter Options was approximately $240,000.
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See "PROPOSAL II -- ELECTION OF DIRECTORS -- Information as to Nominees and
Continuing Directors" for a listing of Common Stock and option ownership of the
directors and certain executive officers.
In addition, Mr. McCullar has been offered the position of President of
Surviving Charter. Under the terms of the current offer, Mr. McCullar would
receive an annual salary of $140,000, together with a grant as of the Effective
Time of restricted stock with a value of approximately $600,000, but would
receive no compensation in respect of his current change in control agreement.
The restricted stock would vest twenty percent (20%) per year over five years,
except that such shares would vest immediately upon the termination of Mr.
McCullar other than for cause, or upon the occurrence of a change in control of
First American. It is anticipated that five current Charter directors, Robert J.
Bartel, Billy M. Brammer, Morton W. Lester, John G. Wampler and Mr. McCullar,
will serve as directors of Surviving Charter. Each such director, other than Mr.
McCullar, will receive approximately $11,000 in directors' fees annually during
each year of his initial three-year term.
Assuming the consummation of the Merger, the aggregate cash value of
benefits to be received by all directors of Charter who approved the Merger is
estimated to be $1,145,820, including approximately $33,000 payable as
directors' fees over the initial three-year term to each of the four
non-employee directors of Charter who will serve as directors of Surviving
Charter, the value of accelerated options, and the value of restricted stock
offered to Mr. McCullar, but excluding the proposed salary payable to Mr.
McCullar and any payment under his current change in control agreement.
The Charter Board of Directors was aware of these interests and considered
them among other matters in approving the Agreement and the amendment thereto,
and the transactions contemplated thereby. See "PROPOSAL I -- THE
MERGER -- Interests of Certain Persons in the Merger."
CONDITIONS; REGULATORY APPROVALS; ABANDONMENT; AMENDMENT
Consummation of the Merger is subject to satisfaction of a number of
conditions, including approval of the Agreement by the shareholders of Charter,
the receipt of all regulatory approvals required in connection with the
Agreement, and the transactions contemplated thereby, receipt of opinions of
counsel and the satisfaction of other closing conditions. See "PROPOSAL I -- THE
MERGER -- Conditions to Merger."
First American has filed applications with the Office of Thrift Supervision
("OTS") and the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") for prior approval to consummate the Merger and the other
transactions contemplated by the Agreement. Certain of the contemplated branch
transactions also require the approval of the OTS and the Office of the
Comptroller of the Currency ("OCC"). The proposed Merger and the other
transactions contemplated by the Agreement also require the approvals of the
state banking authorities in Virginia. Approval of the Federal Reserve Board has
been received and the other applications are pending. See "PROPOSAL I -- THE
MERGER -- Representations and Warranties; Conditions to the Merger; Waiver" and
"-- Regulatory Approvals." There can be no assurance as to whether or when the
regulatory approvals will be obtained.
All of the conditions to consummation of the Merger may be waived at any
time by the party for whose benefit they were created, with the exception of
conditions relating to approval of the Agreement by Charter's shareholders, the
receipt of all required regulatory approvals, the requirement that the
Registration Statement be declared effective under the Securities Act, and the
requirement that the FAC Common Stock to be issued in connection with the Merger
be approved for trading on The Nasdaq Stock Market. The Agreement may be amended
or supplemented at any time by written agreement of the parties upon the
approval of the Boards of Directors of Charter and First American. 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."
11
<PAGE> 20
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary discussion of certain anticipated federal income
tax consequences of the Merger to shareholders of Charter. This summary, which
is not a complete description of the federal income tax consequences of the
Merger, is based on the law as it currently exists and accordingly could be
changed in the event of changes in the law, including amendments to applicable
statutes or regulations or changes in judicial or administrative rulings, some
of which could be given retroactive effect. The federal income tax laws are
complex, and each shareholder's individual circumstances may affect the tax
consequences to the shareholder or may give rise to federal income tax issues
that are not addressed herein. In addition, no information is provided with
respect to the tax consequences of the Merger under any foreign, state, local
and other tax laws.
In addition, the anticipated federal income tax consequences of the
proposed Merger will vary depending on whether any contingent consideration
ultimately is issued in the future with respect to the Goodwill Litigation and,
if so, whether such contingent consideration consists solely of FAC Common Stock
or consists of property (including cash or stock of another corporation) other
than FAC Common Stock.
In general, if no contingent consideration is issued to the Charter
shareholders with respect to the Goodwill Litigation or any such contingent
consideration consists solely of FAC Common Stock, then, for federal income tax
purposes, the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). As
a result of the Merger qualifying as such a reorganization, the following
federal income tax consequences will apply: (i) no gain or loss will be
recognized by the shareholders of Charter who exchange all of their Charter
Common Stock solely for FAC Common Stock pursuant to the Merger (except with
respect to (a) cash received in lieu of a fractional share interest in FAC
Common Stock, and (b) shares of FAC Common Stock, if any, issued with respect to
the Goodwill Litigation to the extent such shares constitute imputed interest);
(ii) the aggregate adjusted tax basis of the shares of FAC Common Stock to be
received in the Merger by a holder of Charter Common Stock will be the same as
the aggregate adjusted tax basis in the shares of Charter Common Stock
surrendered in exchange therefor (but certain rules complicate the basis
determination due to the possibility that additional shares of FAC Common Stock
may be received with respect to the Goodwill Litigation); and (iii) the holding
period of the shares of FAC Common Stock (other than any such shares issued with
respect to the Goodwill Litigation that are deemed to constitute interest) to be
received in the Merger by a holder of Charter Common Stock will include the
holding period of the shares of Charter Common Stock surrendered in exchange
therefor, provided that such shares of Charter Common Stock are held as capital
assets at the Effective Time.
The possibility that contingent consideration may be distributed to the
Charter shareholders with respect to the Goodwill Litigation substantially
complicates the federal income tax consequences of the Merger to Charter
shareholders. Regardless of whether any contingent consideration is in fact
distributed, the mere possibility of such consideration will create difficulties
for each Charter shareholder in determining his adjusted tax basis in the shares
of FAC Common Stock (as well as any cash in lieu of fractional shares)
distributed at the Effective Time, which in turn may create problems in
determining the amount of gain or loss realized by the shareholder on a taxable
sale or exchange of such FAC Common Stock prior to a final determination of
whether any contingent consideration is to be distributed.
According to rules set forth in published procedures of the IRS, a Charter
shareholder's tax basis in the shares of FAC Common Stock issued at the
Effective Time (the "Noncontingent FAC Shares") will be affected by the
possibility that additional shares of FAC Common Stock (the "Contingent FAC
Shares") may be issued later, even though in fact no such shares may ever be
issued. Under the published IRS guidelines, each Charter shareholder should
determine his initial basis in the Noncontingent FAC Shares by dividing (a) the
aggregate tax basis in his Charter Common Stock surrendered pursuant to the
Merger (reduced by any basis allocated to a fractional share interest redeemed
for cash) by (b) the maximum number of shares of FAC Common Stock (both
Contingent and Noncontingent FAC Shares) that theoretically could be received by
such shareholder pursuant to the Agreement (excluding from such maximum number
any Contingent FAC Shares that would be allocable to imputed interest under the
rules
12
<PAGE> 21
described below). (These rules could be applied separately to blocks of Charter
Common Stock held by a Charter shareholder that have different per share tax
bases.) The consequence of this IRS position is that a Charter shareholder's
initial tax basis in the Noncontingent FAC Shares will be less in the aggregate
than his aggregate tax basis in his Charter Common Stock, with the difference
being attributable to the basis deemed to be allocated to the Contingent FAC
Shares that may or may not be issued in the future. Under the IRS approach, if
either no Contingent FAC Shares are issued or fewer than the maximum number of
Contingent FAC Shares are issued, the Charter shareholder would then readjust
his basis in the total number of shares of FAC Common Stock received (excluding
any Contingent FAC Shares allocable to imputed interest). The IRS approach just
outlined has not been challenged in court, and it is possible that some other
basis allocation method might be accepted by the courts.
Assuming the IRS approach must be followed, a Charter shareholder will face
a number of uncertainties as to his basis calculations. Since it is unclear when
the Contingent FAC Shares, if any, will be issued, it is difficult to determine
what portion of such shares would be allocable to imputed interest, and thus it
will be difficult to determine the maximum number of shares over which a Charter
shareholder's basis in the Charter Common Stock surrendered must be allocated in
computing his initial basis in the Noncontingent FAC Shares. In addition, there
is no clear guidance as to the basis consequences where a Charter shareholder
sells some of the Noncontingent FAC Shares before the end of the contingency
period. (For these purposes, the "contingency period" is the period commencing
on the Effective Time and ending on the earlier of the date on which Contingent
FAC Shares are issued to Charter shareholders or the fifth anniversary of the
Effective Time.) For example, there is no guidance on whether some portion of
any additional basis to be allocated (resulting from the issuance of fewer than
the maximum number of Contingent FAC Shares) will be allocated to the
Noncontingent FAC Shares previously sold (producing less gain or a greater loss
on such earlier sales), or whether such basis is to be allocated only to any
Noncontingent and Contingent FAC Shares held by the Charter shareholder at the
end of the contingency period. Depending on the answer to these questions, the
Charter shareholder might or might not be required to file amended returns to
take account of any basis allocated to the previously sold shares or might be
entitled to a capital loss in the year the contingency ends.
If any contingent consideration is paid, regardless of whether in the form
of FAC Common Stock or Acquiror Consideration, each Charter shareholder will
need to determine the portion of such consideration that constitutes imputed
interest and the proper treatment of the remaining contingent consideration.
MOREOVER, IF THE CONTINGENT CONSIDERATION CONSISTS OF ANY ACQUIROR
CONSIDERATION, IT IS LIKELY THAT THE MERGER WILL NOT QUALIFY AS A REORGANIZATION
WITHIN THE MEANING OF SECTION 368(A) OF THE CODE. INSTEAD, EACH CHARTER
SHAREHOLDER MOST LIKELY WILL BE TREATED AS HAVING A TAXABLE EXCHANGE OF HIS
CHARTER COMMON STOCK FOR FAC COMMON STOCK, CASH (IF ANY) IN LIEU OF A FRACTIONAL
SHARE OF FAC COMMON STOCK, AND ACQUIROR CONSIDERATION.
BECAUSE OF THE PROVISIONS FOR CONTINGENT CONSIDERATION, THE MERGER GIVES
RISE TO ESPECIALLY COMPLICATED FEDERAL INCOME TAX ISSUES MANY OF WHICH ARE
UNRESOLVED BY CURRENT LAW. Accordingly, each Charter shareholder should read in
full the discussion under the heading "PROPOSAL I -- THE MERGER -- Certain
Federal Income Tax Consequences." MOREOVER, EACH CHARTER SHAREHOLDER SHOULD
CONSULT HIS, HER OR ITS OWN TAX ADVISER REGARDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF THE MERGER.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Upon completion of the Merger, shareholders of Charter will become
shareholders of First American and their rights as such will be governed by
First American's charter and bylaws, and will be governed by Tennessee law.
Charter is, and will continue after the Merger to be, a federal savings bank
subject to the provisions of Home Owners' Loan Act of 1933, as amended ("HOLA"),
and the rules and regulations of the
13
<PAGE> 22
OTS promulgated thereunder. The rights of shareholders of First American are
different in certain respects from the rights of shareholders of Charter. For a
summary of these differences, see "PROPOSAL I -- THE MERGER -- Certain
Differences in Rights of Shareholders."
STOCK OPTION AGREEMENT
In connection with the execution of the Agreement, Charter and First
American entered into a Stock Option Agreement ("Option Agreement") pursuant to
which Charter granted to First American an option ("Option") to purchase up to
the number of authorized but unissued shares equal to 19.99% of the issued and
outstanding shares of Charter Common Stock (which would equal approximately
1,024,550 shares if the Option were exercised as of the date of the Agreement).
The exercise price under the Option Agreement is $9.08 per share, such number of
shares and exercise price being subject to adjustment under certain
circumstances. The Option is exercisable only upon the occurrence of certain
events that could jeopardize consummation of the Merger pursuant to the terms of
the Agreement. The $9.08 exercise price represents the approximate book value of
Charter Common Stock at the time the Option was negotiated as well as the
approximate per share price within the range of prices at which Charter Common
Stock traded prior to the announcement of the engagement by Charter of Wheat to
explore possible transactions involving Charter. The Option Agreement also
provides that, at the election of First American during specified time periods,
Charter will be required to repurchase the Option from First American together
with any shares of Charter Common Stock purchased by First American pursuant
thereto, at a price specified therein. See "PROPOSAL I -- THE MERGER -- Stock
Option Agreement" and the text of the Option Agreement, attached hereto as
Appendix C.
The Option Agreement was entered into as an inducement to First American to
enter into the Agreement by increasing the likelihood that the Merger will be
consummated in accordance with the terms of the Agreement. Consequently, the
Option Agreement may have the effect of discouraging persons who might now or
prior to the Effective Time be interested in acquiring all or a significant
interest in Charter from considering or proposing such an acquisition, even if
such persons were prepared to pay a higher price per share for Charter than the
price per share offered by First American.
MARKETS AND MARKET PRICES
FAC Common Stock and Charter Common Stock are both traded on The Nasdaq
Stock Market, under the symbol "FATN" in the case of First American and under
the symbol "CHFD" in the case of Charter. The information presented in the
following table reflects the closing price for FAC Common Stock and the last
reported sale price for Charter Common Stock on May 16, 1995, the last trading
day preceding public announcement of the proposed Merger, and on October ,
1995 and the Charter Common Stock equivalent per share basis, calculated by
multiplying the closing price of FAC Common Stock on such dates by the Exchange
Ratio. Shareholders are advised to obtain current market quotations for the FAC
Common Stock. No assurance can be given as to what the market price of FAC
Common Stock will be if and when the Merger is consummated.
<TABLE>
<CAPTION>
MARKET VALUE OF CHARTER
COMMON STOCK EQUIVALENT
-------------------------- PER SHARE
FIRST AMERICAN CHARTER BASIS
-------------- ------- -----------
<S> <C> <C> <C>
May 16, 1995................................. $35.00 $13.00 $ 13.30
October , 1995............................. $ $ $
</TABLE>
MARKET PRICES AND DIVIDENDS
FIRST AMERICAN. On September 30, 1995 there were approximately 8,174
record holders of FAC Common Stock and 25,346,884 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 two most recent fiscal years ended
14
<PAGE> 23
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 5/6 27 1/2
Second Quarter....................................... 0.25 36 33
Third Quarter........................................ 0.28 44 1/4 35 7/8
Fourth Quarter (through , 1995)............
</TABLE>
CHARTER. On October 16, 1995 there were approximately 1,300 record holders
of Charter Common Stock and 5,125,713 shares of Charter Common Stock issued and
outstanding.
The following table sets forth the cash dividends declared by Charter on
the Charter Common Stock and the range of high and low prices of the Charter
Common Stock during the two most recent years based on information obtained by
Charter. 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........................................ -- 31 1/4 15
Second Quarter....................................... -- 27 1/2 11 7/8
Third Quarter........................................ -- 15 5/8 9 11/16
Fourth Quarter(1).................................... -- 15 11 1/4
1994
First Quarter........................................ -- 14 1/2 11 1/2
Second Quarter....................................... -- 12 1/2 11 1/4
Third Quarter........................................ -- 13 11 3/4
Fourth Quarter....................................... -- 12 1/2 7 7/8
1995
First Quarter........................................ $0.075 13 1/2 8 3/4
Second Quarter....................................... 0.100 14 3/4 11 1/2
Third Quarter........................................ 0.100 14 1/4 12 1/4
Fourth Quarter (through , 1995)..........
</TABLE>
- ---------------
(1) All stock prices have been adjusted to reflect the one-for-five reverse
stock split in December 1993.
15
<PAGE> 24
COMMON STOCK LISTING
First American has agreed to cause the shares of FAC Common Stock to be
issued in the Merger to be approved for trading on The Nasdaq Stock Market. The
obligation of each of First American and Charter to consummate the Merger is
subject to approval of trading on The Nasdaq Stock Market of such shares.
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 Charter Common Stock, (iii) pro forma
combined per share data for FAC Common Stock (with Charter only), (iv)
historical per share data for HFB common stock, (v) fully pro forma combined per
share data for FAC Common Stock (with HFB and Charter), and (vi) equivalent per
share data for Charter Common Stock reflecting both Charter and HFB
transactions. The First American pro forma with Charter is presented using the
purchase method of accounting and the application of the assumed market price of
$35.875 FAC Common Stock (its closing price on June 30, 1995) and an Exchange
Ratio of 0.38 shares of FAC Common Stock for each share of Charter Common Stock.
The First American pro forma data with Charter represents the effect of the
Merger on a share of FAC Common Stock. The Charter pro forma equivalent data
represents the First American pro forma data with Charter multiplied by the
Exchange Ratio and thereby reflects the effect of the Merger on a share of
Charter Common Stock.
The First American fully pro forma combined (with HFB and Charter) is
presented using the pooling-of interests method of accounting for the merger
with HFB and the application of an assumed market price of $34.50 (the maximum
price allowed in calculating the HFB exchange ratio) 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 fully pro forma combined (with HFB and Charter)
data represents the effect of the HFB and Charter mergers on a share of FAC
Common Stock. The Charter equivalent pro forma data represent the First American
fully pro forma combined (with HFB and Charter) multiplied by the Charter
Exchange Ratio and thereby reflects the effect of the two mergers on a share of
Charter 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 mergers been consummated at the beginning of the periods
presented and are not indicative of future results.
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
FAC/HFB/ CHARTER
FAC CHARTER EQUIVALENT
HISTORICAL PRO FORMA CHARTER FULLY PRO FORMA
---------------- WITH EQUIVALENT HISTORICAL PRO FORMA (FAC/HFB/
FAC CHARTER CHARTER PRO FORMA HFB COMBINED CHARTER)
------ ------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE
Year Ended (a)
1995.......................... $ 3.48 $ 1.08 $ 3.57 $1.36 $ 1.58 $ 3.44 $1.31
CASH DIVIDENDS DECLARED PER
SHARE
Year Ended (a)
1995.......................... $ 0.88 $0.275 $ 0.96(b) $0.36(c) $ 0.38 $ 0.96(b) $0.36(d)
BOOK VALUE PER SHARE
End of Period (a)
1995.......................... $23.59 $ 9.06 $ 25.34 $9.63 $16.88 $ 24.77 $9.41
</TABLE>
- ---------------
(a) All columns are at or for the year ended June 30, 1995, except for the FAC
historical column which is at or for the fiscal year ended December 31,
1994. The FAC information reflected in the pro forma columns is at or for
the year ended June 30, 1995.
(b) Represents cash dividends declared per share by First American for the year
ended June 30, 1995.
(c) Represents FAC Pro Forma with Charter cash dividends of $0.96 per share
multiplied by the Exchange Ratio of 0.38.
(d) Represents FAC/HFB/Charter Fully Pro Forma Combined cash dividends per share
multiplied by the Exchange Ratio of 0.38.
16
<PAGE> 25
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 of FAC 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 pro forma
financial statements do not give effect to shares of FAC Common Stock or other
contingent consideration, if any, that may be issued in the event that Surviving
Charter receives payments within five years of the Effective Time in respect of
certain pending goodwill litigation. See "PROPOSAL I -- THE
MERGER -- Contingent Consideration for Goodwill Litigation Recovery."
The unaudited pro forma combined condensed statement 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 First American and HFB. Additionally, the
unaudited fully 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 financial statements are provided for informational purposes.
The pro forma combined condensed statement of income is 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 is
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 Charter 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. HFB 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
statement of income has been restated to conform with HFB's and Charter's fiscal
year end.
17
<PAGE> 26
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FAC FAC FAC
PRO FORMA PRO FORMA FULLY
PURCHASE WITH POOLING WITH PRO FORMA
FAC CHARTER ADJUSTMENTS CHARTER HFB ADJUSTMENTS HFB COMBINED
---------- -------- ----------- ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 413,232 $ 24,150 $ (49,340)(a) $ 388,042 $ 14,878 $ 428,110 $ 402,920
Time deposits with other
banks................. 26,284 26,284 26,284 26,284
Securities:
Held to maturity...... 1,461,960 295,191 (814)(a) 1,756,337 170,622 1,632,582 1,926,959
Available for sale.... 558,671 7,603 566,274 20,213 578,884 586,487
---------- -------- -------- ----------- -------- ------- ----------- ----------
Total securities.... 2,020,631 302,794 (814) 2,322,611 190,835 $ 0 2,211,466 2,513,446
---------- -------- -------- ----------- -------- ------- ----------- ----------
Federal funds sold and
securities purchased
under agreements to
resell................ 83,805 83,805 7,000 90,805 90,805
Trading account
securities............ 29,224 29,224 29,224 29,224
Total loans............. 5,285,743 410,104 (8,529)(a) 5,687,318 301,768 5,587,511 5,989,086
Unearned discount and
net deferred loan
fees.................. 5,463 1,272 6,735 1,908 7,371 8,643
---------- -------- -------- ----------- -------- ------- ----------- ----------
Loans, net of unearned
discount and net
deferred loan
fees................ 5,280,280 408,832 (8,529) 5,680,583 299,860 0 5,580,140 5,980,443
Allowance for possible
loan losses........... 126,575 5,021 131,596 2,327 128,902 133,923
---------- -------- -------- ----------- -------- ------- ----------- ----------
Total net loans....... 5,153,705 403,811 (8,529) 5,548,987 297,533 0 5,451,238 5,846,520
---------- -------- -------- ----------- -------- ------- ----------- ----------
Premises and equipment,
net................... 110,186 5,876 116,062 6,786 116,972 122,848
Foreclosed properties... 9,256 7,006 16,262 9,256 16,262
Other assets............ 224,823 7,690 8,822(a) 266,110 11,137 1,572(b) 237,667 278,954
24,775(a) 135(c)
---------- -------- -------- ----------- -------- ------- ----------- -----------
TOTAL ASSETS........ $8,071,146 $751,327 $ (25,086) $8,797,387 $528,169 $ 1,707 $8,601,022 $9,327,263
========== ======== ======== ========== ======== ======= =========== ===========
LIABILITIES
Deposits................ $6,158,336 $525,400 $ (3,854)(a) $6,679,882 $449,318 $6,607,654 $7,129,200
Short-term borrowings... 819,993 63,614 883,607 789 820,782 884,396
Long-term debt.......... 251,637 104,500 (3,947)(a) 352,190 17,452 269,089 369,642
Other liabilities....... 203,124 11,389 7,210(a) 222,845 6,836 $ 6,075(b) 216,035 235,756
1,122(a)
---------- -------- -------- ---------- -------- ------- ---------- -----------
TOTAL LIABILITIES... 7,433,090 704,903 531 8,138,524 474,395 6,075 7,913,560 8,618,994
---------- -------- -------- ---------- -------- ------- ---------- -----------
SHAREHOLDERS' EQUITY
Common stock............ 127,132 51 2,900(a) 130,032 3,186 9,744(d) 140,062 142,962
(51)(a)
Capital surplus......... 96,223 52,006 17,907(a) 114,130 16,510 (9,744)(d) 102,989 120,896
(52,006)(a)
Retained earnings....... 416,898 (5,612) 5,612(a) 416,898 35,070 (4,503)(b) 447,245 447,245
(220)(c)
Other................... (1,696) (49) 49(a) (1,696) (1,076) 355(c) (2,417) (2,417)
---------- -------- -------- ---------- -------- ------- ---------- -----------
Realized shareholders'
equity.............. 638,557 46,396 (25,589) 659,364 53,690 (4,368) 687,879 708,686
Net unrealized gains
(losses) on securities
available for sale,
net of tax............ (501) 28 (28)(a) (501) 84 (417) (417)
---------- -------- -------- ---------- -------- ------- ---------- -----------
TOTAL SHAREHOLDERS'
EQUITY............ 638,056 46,424 (25,617) 658,863 53,774 (4,368) 687,462 708,269
---------- -------- -------- ---------- -------- ------- ---------- -----------
TOTAL LIABILITIES
AND SHAREHOLDERS
EQUITY............ $8,071,146 $751,327 $ (25,086) $8,797,387 $528,169 $ 1,707 $8,601,022 $9,327,263
========== ======== ======== ========== ======== ======= =========== ===========
</TABLE>
(See footnotes on following page).
18
<PAGE> 27
FOOTNOTES TO UNAUDITED 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
Effective Time. The final allocation of the purchase price 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 will have a
corresponding impact on amortization expense.
(a) Based on an Exchange Ratio of 0.38 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 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 of
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.
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.
19
<PAGE> 28
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 serving 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>
(b) 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 HFB to a commercial bank.
(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 HFB Merger and to reduce unearned compensation of Management Recognition
Plan within other Shareholders' equity by $355,000.
(d) Reclassification of $9,744,000 of capital surplus to common stock to reflect
the common stock of FAC of $127,132,000 plus the $5 par value of 2,586,000
shares of FAC Common Stock to be issued to effect the HFB Merger.
20
<PAGE> 29
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FAC FAC FAC
PRO FORMA PRO FORMA FULLY
PURCHASE WITH POOLING WITH PRO FORMA
FAC CHARTER ADJUSTMENTS CHARTER HFB ADJUSTMENTS HFB COMBINED
-------- ------- ----------- --------- ------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income.......... $525,989 $53,117 $ 779(a) $576,924 $35,979 $561,968 $612,903
(2,961)(e)
Interest expense......... 238,841 30,818 3,901(b) 273,560 17,798 256,639 291,358
-------- ------- ------- -------- ------- ------- --------
Net interest income.... 287,148 22,299 (6,083) 303,364 18,181 305,329 321,545
Provision for loan
losses................. (10,000) 1,975 (8,025) 82 (9,918) (7,943)
-------- ------- ------- -------- ------- ------- --------
Net interest income
after provision...... 297,148 20,324 (6,083) 311,389 18,099 315,247 329,488
Non-interest income...... 86,831 5,282 92,113 2,755 89,586 94,868
Non-interest expense..... 233,855 16,676 898(c) 253,081 12,241 246,096 265,322
1,652(d)
-------- ------- ------- -------- ------- ------- --------
Income before income tax
expense and cumulative
effect of changes in
accounting
principles............. 150,124 8,930 (8,633) 150,421 8,613 158,737 159,034
Income tax expense....... 54,908 3,373 (2,716)(f) 55,565 3,146 58,054 58,711
-------- ------ ------- -------- ------- ------- --------
Income before cumulative
effect of changes in
accounting
principles............. $ 95,216 $5,557 $(5,917) $ 94,856 $ 5,467 $100,683 $100,323
======== ======= ======= ======== ======= ======= ========
Earnings before
cumulative effect of
changes in accounting
principles per share... $ 3.66 $ 3.57 $ 3.52 $ 3.44
Weighted average common
shares outstanding..... 26,020 26,600 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) $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.
(c) $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.
(d) $1,652,000 of amortization associated with purchase accounting adjustments
related to goodwill amortized over 15 years, the estimated life of the
asset.
(e) 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 shares of FAC Common Stock to exchange with Charter
shareholders.
(f) Reduction in income tax at a rate of 38.9% related to net of amounts in (a),
(b), (c), and (e).
21
<PAGE> 30
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
FAC
PRO FORMA
POOLING WITH
FAC HFB ADJUSTMENTS 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
PRO FORMA
POOLING WITH
FAC HFB ADJUSTMENTS 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>
22
<PAGE> 31
SELECTED FINANCIAL DATA
The following tables set forth certain historical and pro forma financial
data for First American, Charter and Heritage.
The selected financial data for the five years ended June 30, 1995 for
Charter, for First American combined with Charter, for HFB, and for First
American fully pro forma combined and for the five years ended December 31, 1994
for First American, are derived from the respective consolidated financial
statements of First American, HFB and Charter. This summary should be read in
connection with the consolidated 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 or
appended hereto. See "AVAILABLE INFORMATION." The pro forma information gives
effect to the expected merger of First American with HFB 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 HFB 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.
Historical selected financial data with respect to Charter is set forth in
Charter's Annual Report on Form 10-K for the fiscal year ended June 30, 1995,
attached hereto as Appendix D, at page 31 thereof.
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(thousands)
Net interest income.............. $146,111 $138,589 $279,626 $267,439 $251,688 $216,460 $226,853
Provision for loan losses........ 0 0 (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(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.......... 0.50 0.42 0.88 0.55 0.20 0.00 0.31
Book value, end of period........ 25.09 22.27 23.59 22.38 18.16 16.47 15.79
SHARES OUTSTANDING(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>
23
<PAGE> 32
CHARTER FEDERAL SAVINGS BANK(A)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30
---------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA (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................. 16,676 17,103 59,204(b) 19,539 19,169
Income tax (benefit)(c).............. 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
(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.............. 0.275 0.00 0.00 0.00 0.00
Book value, end of period............ 9.06 8.24 (13.51) 35.52 25.02
SHARES OUTSTANDING (thousands)
Average.............................. 5,125 4,596 731 731 731
End of period........................ 5,125 5,125 731 731 731
</TABLE>
- ---------------
(a) See "CERTAIN REGULATORY CONSIDERATIONS -- Capital" for a discussion of
Charter's regulatory capital ratios.
(b) The 1993 non-interest expense amount includes a write-off of $41.1 million
of remaining "goodwill" as of March 31, 1993.
(c) Charter's income tax returns have been examined by the Internal Revenue
Service through the year ended June 30, 1988.
24
<PAGE> 33
FIRST AMERICAN PRO FORMA COMBINED WITH CHARTER
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
JUNE 30, 1995
-----------------
<S> <C>
INCOME DATA (thousands)
Net interest income........................................................ $ 303,364
Provision for loan losses.................................................. (8,025)
Non-interest income........................................................ 92,113
Non-interest expense....................................................... 253,081
Income tax................................................................. 55,565
--------
Income (loss) before cumulative effect of changes in accounting
principles.............................................................. $ 94,856
========
END OF PERIOD BALANCE SHEET ITEMS (millions)
Assets..................................................................... $ 8,797
Total net loans............................................................ 5,549
Deposits................................................................... 6,680
Long-term debt............................................................. 352
Shareholders' equity....................................................... 659
PER SHARE DATA
Income before cumulative effect of changes in accounting principles........ $ 3.57
Cash dividends declared.................................................... 0.96
Book value, end of period.................................................. 25.34
SHARES OUTSTANDING (thousands)
Average.................................................................... 26,600
End of period.............................................................. 26,006
</TABLE>
25
<PAGE> 34
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 (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
(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................ 0.38 0.25 0.00 n/a n/a
Book value, end of period.............. 16.88 15.29 13.23 11.90 n/a
SHARES OUTSTANDING (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.
26
<PAGE> 35
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 (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 (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........... 0.96 0.72 0.45 -- --
Book value, end of period......... 24.54 21.96 19.33 16.96 n/a
SHARES OUTSTANDING (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 not presented for periods prior to
HFB's conversion from mutual to stock ownership during the fiscal year
ended June 30, 1992.
27
<PAGE> 36
FIRST AMERICAN FULLY PRO FORMA COMBINED(a)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30
------------------------------------------------------------
1995(a) 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA (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 (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 (loss) before extraordinary
item and cumulative effect of
changes in accounting
principles..................... $ 3.44 $ 3.78 $ 2.60 n/a n/a
Cash dividends declared........... 0.96 0.72 0.45 -- --
Book value, end of period......... 24.77 21.96 19.33 16.96 n/a
SHARES OUTSTANDING (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>
- ---------------
n/a -- First American fully pro forma combined data is not presented for periods
prior to HFB's conversion from mutual to stock ownership during the
fiscal year ended June 30, 1992.
(a) Represents First American, Charter, and HFB on a fully pro forma combined
basis.
28
<PAGE> 37
MEETING INFORMATION
DATE, PLACE AND TIME
The Annual Meeting of Shareholders of Charter will be held at
Electro-Mechanical Corporate Centre, 2310 Highway 421, Bristol, Tennessee on
November 30, 1995 at 10:00 a.m. Eastern Daylight Time.
RECORD DATE; VOTING RIGHTS
The close of business on October 16, 1995 (the "Record Date") has been
fixed as the record date for the determination of shareholders of Charter
entitled to receive notice of and to vote at the Annual Meeting of Shareholders
and any adjournment thereof. The holders of each of the 5,125,713 shares of
Charter Common Stock outstanding on the record date will be entitled to one vote
for each share held of record upon each matter properly submitted at the Annual
Meeting except for voting for directors. At such date, there were approximately
1,300 shareholders of record. Under Charter's bylaws, the presence, in person or
by proxy, of the holders of a majority of the outstanding shares of Charter
Common Stock entitled to vote at the Annual Meeting is necessary to constitute a
quorum for the transaction of business at the Annual Meeting. Approval of the
Agreement requires the affirmative vote of the holders of a two-thirds of the
outstanding shares of stock entitled to vote thereon. Therefore, 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. Similarly, abstentions and
"broker non-votes" will have the effect of votes against the Agreement. A
FAILURE TO VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING THE
"ABSTAIN" BOX THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF
THE AGREEMENT.
Directors are elected by a plurality of votes cast without regard to either
proxies as to which authority to vote for one or more nominees is withheld or
broker non-votes, if applicable. The ratification of independent accountants and
approval of the Adjournment Proposal requires a vote of holders of a majority of
votes cast including proxies marked "ABSTAIN," but without regard to broker
non-votes.
VOTING AND REVOCATION OF PROXIES
Shares of Charter Common Stock represented by a proxy properly signed and
returned will be voted at the Annual Meeting in accordance with the instructions
thereon. If a proxy is signed and returned without indicating any voting
instructions, the shares of Charter Common Stock represented by such proxy will
be voted FOR approval of the Agreement and FOR election of the nominees named
herein as directors, the ratification of independent accountants, the approval
of the Adjournment Proposal and on other matters presented for a vote in
accordance with the judgment of the persons acting under the proxy. Any
shareholder returning a proxy prior to the Annual Meeting has the right to
revoke it by delivering to the Secretary of Charter a later dated proxy or other
writing revoking the proxy before it is voted at the Annual Meeting or by voting
in person at the Annual Meeting.
The Board of Directors of Charter is not aware of any other business to be
acted upon at the Annual Meeting other than as described herein. It is not
anticipated that other matters will be brought before the Annual Meeting. If,
however, other matters are duly brought before the Annual Meeting, or any
adjournment thereof, the persons appointed as proxies will have discretion to
vote or act thereon according to their best judgment.
In connection with the Merger, each member of the Board of Directors of
Charter, beneficial owners (in the aggregate) of 2,406,634 shares of Charter
Common Stock (46.95% of Charter Common Stock outstanding as of October 16,
1995), has agreed to vote for the Merger as a shareholder of Charter with
respect to all of the shares of Charter Common Stock he or she is entitled to
vote at the Annual Meeting. An approximately 1,010,678 additional shares, or
19.72%, of Charter Common Stock outstanding is required for approval of the
Merger. Each Charter Board member also agreed, subject to the exercise of such
director's fiduciary duties, to vote for the Merger as a director and to
recommend the Merger to the other Charter shareholders. Additionally, each such
person has agreed not to transfer or otherwise dispose of his or her shares of
Charter Common Stock or to pledge or otherwise encumber any additional shares of
Charter
29
<PAGE> 38
Common Stock prior to shareholder approval of the Agreement or termination of
the Agreement pursuant to the terms thereof. The foregoing description sets
forth the material aspects of the agreements entered into between First American
and each member of the Board of Directors of Charter but does not purport to be
a complete description of such agreements.
SOLICITATION OF PROXIES
In addition to solicitation by mail, proxies may be solicited personally or
by telephone, and directors, officers and employees of Charter may solicit
proxies from the shareholders of Charter without additional compensation to them
and at nominal cost. Charter has retained Chemical Mellon Shareholder Services
("Chemical") to assist in the solicitation of proxies. Charter will pay Chemical
Bank, N.A. a fee of $4,500 for its services, plus reimbursement for its
out-of-pocket costs. Brokerage houses, nominees, fiduciaries and other
custodians have been requested to forward proxy materials to beneficial owners
of Charter Common Stock and, upon request, will be reimbursed by Charter for the
expenses incurred by them. Expenses for such solicitation will be borne by
Charter. First American and Charter each will bear and pay fifty percent of the
expenses associated with the printing and mailing of this Prospectus/Proxy
Statement.
CHARTER SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
PROPOSAL I -- THE MERGER
This section of the Prospectus/Proxy Statement describes the material
aspects of the Merger but does not purport to be a complete description 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 AND REASONS FOR THE MERGER
Since the late 1980s, Charter has faced a series of challenges posed by
changes in the regulatory and economic environment in which it operates. As a
result of certain supervisory acquisitions undertaken during the 1980s at the
behest of federal regulators, Charter accumulated a substantial amount of
supervisory goodwill. Primarily as a result of the imposition in 1989 of new
regulatory capital standards which mandated the phased exclusion of supervisory
goodwill from regulatory capital calculations and of operating losses incurred
during the period from 1989 through 1992, Charter's capital fell below
applicable minimum capital requirements. The failure to meet applicable capital
standards resulted in the imposition of operating restrictions and the
possibility that Charter could be placed in a conservatorship or receivership.
In 1993, Charter restructured its senior management, wrote-off its remaining
supervisory goodwill and successfully recapitalized by means of a rights
offering. Subsequent to the completion of the rights offering, Charter has
focused upon serving the retail, consumer financial and residential mortgage
needs of its market areas. Notwithstanding that Charter has been able to operate
profitably subsequent to its recapitalization, the Charter Board of Directors
determined in late 1994 that it was appropriate to review the strategic
alternatives available to Charter in light of the prevailing economic and
regulatory environment, which continues to be characterized by rapid changes and
increased consolidation within the banking industry.
In mid-December 1994, the Board of Directors of Charter retained Wheat to
evaluate the strategic alternatives available to Charter, including the possible
sale of Charter to another financial institution. Wheat, as part of its
engagement, contacted 28 financial institutions during January and February 1995
regarding their interest in exploring a possible acquisition of Charter. As a
result of these discussions, 19 financial institutions entered into
confidentiality agreements with Wheat, acting on behalf of Charter, pursuant to
which Wheat provided them with selected confidential information concerning
Charter. In late February 1995, Wheat received nine preliminary indications of
interest in acquiring Charter, including one from First American. Each of these
preliminary indications of interest, which included a preliminary transaction
value or range of transaction values and a proposed structure of the
transaction, was subject to, among other things, the opportunity to conduct
further due diligence. Following the receipt of these preliminary indications of
interest,
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Wheat made a presentation to Charter's Board of Directors concerning these
expressions of interest and the Board determined to invite the five institutions
with the highest transaction values to conduct further due diligence.
During March 1995 and the first part of April 1995, four of the five
institutions invited to conduct further due diligence conducted on-site due
diligence at Charter. The fifth institution informed Wheat that, after
reassessing its level of interest in acquiring Charter, it had determined not to
proceed with conducting on-site due diligence. Following the completion of
on-site due diligence, two of the four remaining institutions, including First
American, provided Charter with revised expressions of interest. On April 14,
1995, First American indicated its willingness to enter into a tax-free merger
transaction with Charter, with a transaction value of $12.50 per share based on
an exchange ratio of 0.3623. On April 18, 1995, the other institution submitted
a proposal contemplating a tax-free merger transaction with Charter, with a
transaction value of $60 million or $11.71 per share for each outstanding share
of Charter Common Stock.
On April 19, 1995, following the receipt of these two expressions of
interest, the Board appointed a special committee consisting of three outside
directors of the Board (the "Special Committee") to conduct, in conjunction with
Wheat, further discussions with the two institutions that had submitted revised
indications of interest and with three of the institutions which had not
performed on-site due diligence. During these discussions, First American agreed
to increase the exchange ratio to 0.38, thereby increasing the value of its
proposal to $13.25 per share, based upon the closing price of First American
common stock on May 2, 1995 ($34.88). The other institution that had submitted a
revised indication of interest declined to increase the value of its proposal
and the remaining three institutions contacted each stated that they were no
longer interested in exploring the acquisition of Charter.
On May 3, 1995, the Charter Board met to review the status of the process.
At this meeting, Wheat made a presentation to the Charter Board concerning the
results of the discussions that had transpired since April 19, 1995, and the
terms of First American's revised proposal. The Charter Board was also provided
with a draft Agreement between Charter and First American. At this meeting, the
Charter Board authorized the Special Committee, in conjunction with Charter's
legal and financial advisers, to complete the negotiation of a definitive
Agreement.
During the period from May 4, 1995 through May 15, 1995, the Special
Committee, together with Charter's legal and financial advisers, engaged in
negotiations with management of First American and its legal and financial
advisers concerning the terms of a transaction and a definitive agreement.
Charter and First American also conducted further due diligence examinations of
each other during this period.
On May 16, 1995, the Charter Board of Directors met to consider the
proposed Agreement with First American including a detailed review of the terms.
The Charter Board of Directors reviewed the business and financial prospects of
Charter and received a presentation by Wheat regarding efforts undertaken to
identify possible acquirors, the terms of the First American offer compared to
recent acquisitions and pending acquisitions, the financial results of First
American and the trading market information pertaining to the common stock of
both Charter and First American. At this meeting, Wheat provided its oral
opinion to the Charter Board of Directors that the Exchange Ratio was fair, from
a financial point of view, to the holders of Charter Common Stock (see "Opinion
of Investment Banker"). Following Wheat's presentation and a presentation by
Charter's legal advisers, and recommendation of the Special Committee that the
Merger be approved, the Charter Board of Directors authorized the execution of
the Agreement and the related Option Agreement, and the transactions
contemplated thereby. The Agreement was executed on May 17, 1995.
The Charter Board of Directors believes that the Merger is fair to, and in
the best interests of, Charter and its shareholders. Accordingly, the Charter
Board of Directors has unanimously (with two directors not present at the
meeting at which the Agreement was voted upon), approved and adopted the
Agreement. Subsequent to the meeting at which the Agreement was approved and
adopted by the Charter Board of Directors, the two directors who were not
present at the meeting voted to approve and adopt the Agreement. The Charter
Board of Directors therefore unanimously recommends that Charter's shareholders
vote FOR the approval and adoption of the Agreement.
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In reaching its determination that the Merger is fair to and in the best
interests of Charter and its shareholders, the Charter Board of Directors
considered a number of factors both from a short-term and long-term perspective,
including, without limitation, the following which were the material factors
considered:
(i) the Charter Board of Directors' knowledge of Charter's business
and review of Charter's current and prospective operations and financial
condition, including its capital position, asset quality and future growth
prospects were it to remain independent;
(ii) the current and prospective economic environment and competitive
and regulatory constraints facing financial institutions and particularly
Charter;
(iii) the Charter Board of Directors' review, based in part on
presentations by Wheat and the due diligence reviews by Wheat and Charter's
legal advisers and management of Charter, of the business, operations,
financial condition, earnings and prospects of First American on both a
historical and a prospective basis, and the increased number of
shareholders, capitalization and liquidity of the FAC Common Stock and
enhanced opportunities for growth in the combined company made possible by
the Merger;
(iv) The presentations of Charter's financial advisor, Wheat, as to
selected financial and stock market data concerning FAC, Charter and other
publicly held bank holding companies, certain financial analyses of the
terms of the Merger and a comparison to the terms of other recent business
combinations involving bank holding companies, and the opinion rendered by
Wheat to the effect that the Exchange Ratio was fair, from a financial
point of view, to the holders of Charter Common Stock and the significant
assumptions and methodologies utilized by Wheat in arriving at such
opinion, see "Opinion of Wheat";
(v) The consideration in relation to the then book value of Charter
Common Stock, and the past earnings of Charter. In this regard, the Charter
Board noted that while the consideration offered by First American did not
constitute a premium over the market price of Charter Common Stock on May
16, 1995, the market value of Charter Common Stock had increased
substantially since February 20, 1995, the date prior to the announcement
of the hiring of Wheat to evaluate strategic alternatives to maximize
shareholder value. Such consideration did represent a 35.44% premium over
the market value of the Charter Common Stock on February 14, 1995, one week
prior to the announcement. Also, based upon the market value of FAC Common
Stock on May 15, 1995 and financial data as of March 31, 1995, the
consideration represented 145.5% of Charter's book value and tangible book
value, 10.9x the trailing twelve months earning per share, and 11.0x the
latest quarter earnings per share on an annualized basis. See "-- Opinion
of Wheat;"
(vi) the Charter Board of Directors' review of the alternative of
continuing to remain independent. In this regard, the Charter Board of
Directors was aware of certain risks of remaining independent including,
among other things, the limited potential to engage in acquisitions which
could further enhance shareholder value and the costs and risks associated
with operational changes which would be necessary in order for Charter to
maintain its competitiveness;
(vii) the Charter Board of Directors' evaluation of the risks to
consummation of the Merger including, among others, the risks associated
with obtaining all necessary regulatory approvals without the imposition of
any condition which differs from conditions customarily imposed in
approving acquisitions of the type contemplated by the Agreement and
compliance with which would materially adversely affect the reasonably
anticipated benefits of the transactions to First American;
(viii) the expectation that the Merger generally will be a tax-free
transaction to Charter and its shareholders (although the Board later
considered in amending the Agreement the matters described below concerning
the effect of the Contingent Consideration; see "-- Contingent
Consideration For Goodwill Litigation Recovery" and "-- Certain Federal
Income Tax Consequences of the Merger");
(ix) the impact generally of the Merger on the employees, depositors
and customers of Charter and the communities in which Charter operates; and
(x) the terms of the Agreement, the Option Agreement and the other
documents executed in connection with the Merger.
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Although the Charter Board of Directors was aware of certain benefits and
interests of officers and directors of Charter resulting from the Merger, such
benefits did not influence the Board's decision to approve or recommend the
Merger. While the Board of Directors did not give greater weight to any one of
the factors listed above, the Board of Directors of Charter considered the
proposed Exchange Ratio to be particularly advantageous to its shareholders for
the following reasons: (i) because the aggregate consideration to be received
per share of Charter Common Stock has a value substantially in excess of the
book value of such Charter Common Stock; (ii) the Charter shareholders will
receive a security which, in the opinion of the Board, has a greater market
liquidity than the Charter Common Stock and which has historically paid
dividends; and (iii) Charter shareholders would have the ability to participate
in enhanced opportunities for growth in the combined company resulting from the
Merger.
BASED ON THE FOREGOING, THE BOARD OF DIRECTORS CONCLUDED THAT THE PROPOSED
MERGER WOULD BE IN THE BEST INTERESTS OF CHARTER AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY VOTED TO RECOMMEND THAT THE
SHAREHOLDERS VOTE "FOR" THE MERGER.
For information regarding the interests of directors and executive officers
of Charter in the Merger, see "Management and Operations after the Merger" and
"-- Effect on Certain Employees and Benefit Plans." For information as to the
stockholdings of directors and executive officers of Charter, see "PROPOSAL
II -- ELECTION OF DIRECTORS -- Security Ownership of Management and Certain
Other Entities."
TERMS OF THE MERGER
The Agreement contemplates that First American will establish Charter
Interim as an interim federal savings bank. Immediately thereafter, First
American will cause Charter Interim to undertake the Merger with and into
Charter, with Charter as the surviving federal savings bank subsidiary of First
American with its headquarters moved to Roanoke, Virginia. Upon consummation of
the Merger, each outstanding share of Charter Common Stock (excluding shares
held by Charter or by First American, in each case other than in a fiduciary
capacity or in satisfaction of debts previously contracted) will be converted
into and exchanged for 0.38 share of FAC Common Stock for each share of Charter
Common Stock and cash in lieu of any fractional share; provided, however, that
(i) if the FAC Market Value (as defined in the Summary) is greater than $39.75
per share, then the exchange ratio shall be reduced to an amount equal to $15.10
divided by the FAC Market Value, rounded to the nearest one-ten thousandth of a
share; and (ii) if, prior to the Effective Time, First American enters into a
definitive agreement of merger or reorganization with another entity as a result
of which either First American would not be the surviving entity or First
American's Chief Executive Officer would not become the Chief Executive Officer
of the surviving entity, then the exchange ratio shall be 0.38 ("Exchange
Ratio"). If the FAC Market Value is less than $39.75, the Exchange Ratio will be
equal to 0.38. If the FAC Market Value is greater than $39.75, the Exchange
Ratio will be reduced in proportion to the amount by which the FAC Market Value
exceeds $39.75. Charter does not have the right to terminate the Agreement based
on fluctuations in the FAC Market Value.
In addition to the consideration described in the preceding paragraph,
holders of shares of Charter Common Stock as of the Effective Time, under
certain circumstances, shall be entitled to receive Contingent Consideration or
Acquiror Consideration in the event that Surviving Charter receives payments
within five years of the Effective Time in respect of the Goodwill Litigation.
THERE IS NO ASSURANCE THAT CHARTER SHAREHOLDERS WILL RECEIVE THE CONTINGENT
CONSIDERATION OR ACQUIROR CONSIDERATION AND DISTRIBUTION OF ANY ACQUIROR
CONSIDERATION MAY ADVERSELY AFFECT THE TAX-FREE NATURE OF THE MERGER.
" -- Contingent Consideration for Goodwill Litigation Recovery;" and
" -- Certain Federal Income Tax Consequences."
Charter has issued options for the purchase of Charter Common Stock (the
"Charter Options"). At the Effective Time, each Charter Option outstanding will
be exchanged for that number of shares of FAC Common Stock determined by
dividing the excess of (A) the product of (i) the number of shares of Charter
Common Stock subject to the Charter Option, (ii) the Exchange Ratio, and (iii)
the FAC Market Value, over (B) the product of (i) the number of shares of
Charter Common Stock subject to the Charter Option, and (ii) the exercise price
at which shares of Charter Common Stock can be purchased pursuant to the Charter
Option by the FAC Market Value rounding down the nearest whole number. As of
October 16, 1995,
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there were outstanding Charter Options to acquire an aggregate of 146,800 shares
of Charter Common Stock at an exercise price ranging from $10.00 per share to
$12.25 per share. Of these options, 4,700 were held by one director who voted in
favor of the Merger. For additional information, see "-- Effect on Certain
Employees and Benefit Plans." See "PROPOSAL II -- ELECTION OF
DIRECTORS -- Information as to Nominees and Continuing Directors" for a
discussion of options outstanding to one director and certain executive
officers.
Notwithstanding any other provision of the Agreement, each holder of shares
of Charter Common Stock exchanged pursuant to the Merger 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 at the Effective Time. The market value of one share of FAC
Common Stock at the Effective Time shall be the closing price of such common
stock as reported on The Nasdaq Stock Market on the last trading day preceding
the Effective Time. No such holder will be entitled to dividends, voting rights,
or any other rights as a stockholder in respect of any fractional shares. As of
October 12, 1995, First American had repurchased in open market transactions
1,445,017 shares of FAC Common Stock to be reissued in connection with the
Merger and First American intends to repurchase, in open market transactions
following the Effective Time, shares of FAC Common Stock equal to the remaining
approximately 500,000 shares of FAC Common Stock that will be issued in
connection with the Merger.
In the event Charter or First American changes the number of shares of
Charter Common Stock or FAC Common Stock respectively, issued and outstanding
prior to the Effective Time as a result of a stock split, stock dividend, or
similar recapitalization with respect to such stock and the record date therefor
shall be prior to the Effective Time, the Exchange Ratio shall be
proportionately adjusted to reflect such stock split, stock dividend or similar
recapitalization.
In addition, each share of First American Common Stock issued in the Merger
will include the corresponding rights attached thereto pursuant to First
American's Shareholder Rights Agreement (as defined below). See " -- Certain
Differences in Rights of Shareholders."
CONTINGENT CONSIDERATION FOR GOODWILL LITIGATION RECOVERY
On August 7, 1995, Charter filed a lawsuit in the United States Court of
Federal Claims (the "Claims Court") against the federal government seeking
damages in an amount to be determined at trial for breach of contract and for an
unlawful taking of property arising out of the government's revocation of the
right of Charter to treat supervisory goodwill as an asset for regulatory
capital purposes (Charter Federal Savings Bank vs. United States, Civil Action
No. 95-513C ("Goodwill Litigation")). Charter had previously filed an action in
the United States District Court for the Western District of Virginia in 1991
arising out of the government's actions with respect to supervisory goodwill but
seeking rescission and other equitable relief. Although Charter prevailed on
certain claims in the District Court, in 1992 the United States Court of Appeals
for the Fourth Circuit reversed the decision of the District Court, which
reversal became final in 1993 after the United States Supreme Court denied
Charter's petition for a writ of certiorari. Although the government has agreed
to a stay of further proceedings in the Goodwill Litigation pending final
resolution in Winstar Corporation et al. v. the United States, No. 92-5164,
Charter expects the government to vigorously contest the claims made on a number
of procedural and substantive grounds. On August 30, 1995, the United States
Court of Appeals for the Federal Circuit issued an opinion in the Winstar case,
finding that the government entered into enforceable contracts with certain
thrifts regarding the treatment of supervisory goodwill, that subsequent federal
legislation constituted a repudiation of such contracts and that the government
could be held liable for such breach of contract. Although it is Charter's
management's belief that the Winstar decision may have a favorable impact upon
Charter's ability to pursue the claims made in its current goodwill lawsuit,
there can be no assurance that the Winstar decision will be affirmed, if
appealed, or that if the Winstar decision becomes final, Charter's claims will
not be found to be distinguishable from the claims upheld in Winstar. At June
30, 1989, Charter had $51 million of supervisory goodwill which could no longer
be treated as regulatory capital after an initial phase-in period pursuant to
the Financial Institutions Reform, Recovery and Enforcement Act
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of 1989, $41 million of which was written off by Charter as of June 30, 1993.
Neither of these amounts is determinative of the potential damages that may be
recovered in the Goodwill Litigation. Charter is seeking the monetary value of
the benefits that it could have derived, and the costs it could have avoided,
had it been able to continue to treat the goodwill as regulatory capital for the
amortization periods previously agreed upon by the government. The amount of any
recovery could be affected by a number of factors, including without limitation:
(i) Charter's ability to demonstrate what earnings may have been had Charter
been able to continue to include goodwill as capital and thereby not been
subject during the period from 1989 through 1993 to the stringent regulatory
restrictions imposed upon undercapitalized institutions; (ii) the economy in
general and the economy in Charter's market area in particular; and (iii) other
business and regulatory factors affecting Charter's profitability. A specific
amount of damages has not been claimed by Charter in the Goodwill Litigation;
rather, the amount of damages, if any, will be determined at trial. It is thus
not currently possible to predict whether Charter will prevail or if so, the
amount of damages that would be awarded. No amount has been recorded on
Charter's financial statements based on any possible recovery by Charter under
the Goodwill Litigation. See Note 14 to the Consolidated Financial Statements of
Charter incorporated into the Form 10-K for the year ended June 30, 1995 for
Charter which is attached to the Prospectus/Proxy Statement for a discussion of
the previous goodwill lawsuit.
In September 1995, Charter and First American commenced discussions
concerning a possible amendment to the Agreement to address the foregoing
developments related to the Goodwill Litigation. Pursuant to negotiations
between Charter and First American, an amendment to the Agreement was negotiated
and subsequently executed on October 11, 1995. The amendment, which eliminates
Charter's right to terminate the Agreement if the FAC Market Value is in excess
of a certain level, adds a provision for a mechanism whereby the holders of
shares of Charter Common Stock immediately prior to the Effective Time may,
under certain circumstances, receive Contingent Consideration or Acquiror
Consideration if there is a monetary recovery in the Goodwill Litigation during
the five year period following the Effective Time.
In negotiating the terms of the amendment to the Agreement, the Charter
Board considered the fact that, in the event that Acquiror Consideration was
paid to Charter shareholders rather than Contingent Consideration as damages in
the Goodwill Litigation, both the Acquiror Consideration and the gain on the
shares exchanged in the Merger would be taxed to Charter shareholders. See
"-- Certain Federal Income Tax Consequences." Notwithstanding the foregoing, the
Charter Board determined that the value of Acquiror Consideration that may be
received by Charter shareholders as damages in the Goodwill Litigation would
outweigh the negative income tax consequences so long as such value was equal to
or greater than the product of Two Dollars ($2.00) and the number of shares of
Charter Common Stock issued and outstanding immediately prior to the Effective
Time.
Subject to certain limitations described below, holders of Charter Common
Stock at the Effective Time will receive a number of shares of FAC Common Stock
equal to the aggregate value of fifty percent (50%) of any Net Goodwill
Litigation Recovery received. For these purposes, "Net Goodwill Litigation
Recovery" means the sum of the cash payments, if any, net of certain litigation
and related expenses and taxes, received by Surviving Charter during the period
between the Effective Time and the fifth anniversary thereof, pursuant to any
final judgment reached in, or a final settlement of, the Goodwill Litigation.
Holders of shares of Charter Common Stock at the Effective Time will be entitled
to receive, for each share of Charter Common Stock held immediately prior to the
Effective Time, the number of shares of FAC Common Stock obtained by dividing
(A) fifty percent (50%) of the Net Goodwill Litigation Recovery divided by the
number of shares of Charter Common Stock issued and outstanding immediately
prior to the Effective Time by (B) the average per share closing price of FAC
Common Stock, as reported in The Wall Street Journal, on the date of receipt by
Surviving Charter of the last payment constituting the Goodwill Litigation
recovery (the "Contingent Consideration"). No fractional shares of FAC Common
Stock will be distributed as contingent consideration and no cash shall be paid
in lieu thereof. The number of shares of FAC Common Stock to be issued to any
Charter shareholder as Contingent Consideration will be rounded down to the
nearest whole number of shares.
In the event that, prior to the fifth anniversary of the Effective Time, a
consolidation, merger or acquisition of First American with, into or by another
corporation ("Acquiror"), other than a transaction pursuant to which First
American is the surviving entity and which does not result in a reclassification
of the
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outstanding shares of FAC Common Stock into shares of other stock, cash or other
securities or property, has been consummated, and thereafter but prior to the
fifth anniversary of the Effective Time there is a Goodwill Litigation recovery,
then the holders of Charter Common Stock at the Effective Time will receive no
FAC Common Stock and will receive instead contingent consideration from the
Acquiror ("Acquiror Consideration"). If there is Acquiror Consideration, the
Acquiror will have the right to elect whether to distribute such consideration
in the form of cash or shares of the capital stock of the Acquiror (or a
combination thereof). Each holder of Charter Common Stock at the Effective Time
will receive, in such event, Acquiror Consideration having a value equal to the
product of (A) fifty percent (50%) of the Net Goodwill Litigation Recovery
divided by the number of shares of Charter Common Stock outstanding immediately
prior to the Effective Time and (B) the number of shares of Charter Common Stock
held by such Charter Shareholder immediately prior to the Effective Time
("Acquiror Consideration"). If part or all of the Acquiror Consideration is
distributed in shares of Acquiror capital stock, such shares shall be valued at
the last reported sales price or average closing price, as the case may be, per
share as reported in the Wall Street Journal on the date of the receipt by
Surviving Charter of the last payment constituting Goodwill Litigation recovery
and shall be rounded down to the nearest whole number of shares; no cash will be
paid in lieu of fractional shares of Acquiror capital stock. In the case of such
consolidation, merger or acquisition, the holders of Charter Common Stock at the
Effective Time will receive no Acquiror Consideration unless the aggregate value
of Acquiror Consideration is equal to or greater than the product of Two Dollars
($2.00) and the number of shares of Charter Common Stock issued and outstanding
immediately prior to the Effective Time.
The amount of the Contingent Consideration distributable to holders of
Charter Common Stock in the form of FAC Common Stock is limited to a maximum of
the number of shares of FAC Common Stock issued at the Effective Time in
connection with the Merger. In the event of the consolidation, merger or
acquisition of First American with, into or by another corporation as described
above, the maximum amount of the Acquiror Consideration distributable to holders
of Charter Common Stock is limited to the maximum aggregate value of the FAC
Common Stock issued at the Effective Time, valued on the date of the Effective
Time.
Within 20 days of receipt by Surviving Charter of the last payment
constituting the Net Goodwill Recovery, a transfer agent designated by First
American will mail to each holder of Charter Common Stock as of the Effective
Time, at the address shown for such shareholder on Charter's books and records
at the Effective Time, such blank documentation as may be necessary in the
reasonable judgment of the transfer agent. Within 30 days after the transfer
agent has received from a Charter shareholder all documentation properly
completed in form and substance satisfactory to the transfer agent, the transfer
agent will deliver the shares of FAC Common Stock (or the Acquiror
Consideration) to such Charter shareholder.
First American will have sole and exclusive direction and control of the
conduct of the Goodwill Litigation and in its discretion may, among other
things, dispose of the Goodwill Litigation in a manner that does not result in
any cash or other recovery.
Contingent Consideration (or Acquiror Consideration) will not be
transferable, assignable or alienable (except by will or the laws of descent and
distribution) and Charter Shareholders will not be entitled to dividends, voting
rights, or any other rights as shareholders with respect to any shares of stock
issuable as Contingent Consideration (or Acquiror Consideration), until such
time as such shares, if any, have been issued.
THERE IS NO ASSURANCE THAT SURVIVING CHARTER WILL RECEIVE ANY PAYMENTS IN
RESPECT OF THE GOODWILL LITIGATION PRIOR TO THE EXPIRATION OF THE FIFTH
ANNIVERSARY OF THE EFFECTIVE TIME. ACCORDINGLY, NO ASSURANCE CAN BE GIVEN THAT
CHARTER SHAREHOLDERS AS OF THE EFFECTIVE TIME WILL EVER RECEIVE THE CONTINGENT
CONSIDERATION OR ACQUIROR CONSIDERATION.
MOREOVER, DISTRIBUTION OF THE ACQUIROR CONSIDERATION MAY ADVERSELY AFFECT
THE TAX-FREE NATURE OF THE MERGER AND CAUSE CHARTER SHAREHOLDERS TO REALIZE GAIN
ON SHARES OF FAC COMMON STOCK THAT THEY RECEIVED AT THE EFFECTIVE TIME. SEE
"-- CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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OPINION OF WHEAT
Charter retained Wheat to act as its financial adviser in connection with
the Merger and to render an opinion to the Charter Board of Directors as to the
fairness, from a financial point of view, to the holders of Charter Common Stock
of the Exchange Ratio and a provision of the Agreement which would have
permitted Charter to terminate the Agreement if the FAC Market Value were in
excess of a certain level, which has been deleted from the Agreement by an
amendment thereto. Wheat is a nationally recognized investment banking firm
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. The Charter
Board of Directors selected Wheat to serve as its financial adviser in
connection with the Merger on the basis of such firm's expertise.
Representatives of Wheat attended the meeting of the Charter Board on May
16, 1995, at which the Merger was considered and approved. At the meeting, Wheat
issued its oral opinion that, as of such date, the Exchange Ratio was fair, from
a financial point of view, to the holders of Charter Common Stock. A written
opinion, dated as of the date of this Prospectus/Proxy Statement, has been
delivered to the Charter Board of Directors to the effect that, as of such date,
the Exchange Ratio is fair, from a financial point of view, to the holders of
Charter Common Stock.
THE FULL TEXT OF WHEAT'S OPINION AS OF THE DATE OF THIS PROSPECTUS/PROXY
STATEMENT, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON REVIEW UNDERTAKEN IS ATTACHED AS APPENDIX B TO THIS
PROSPECTUS/PROXY STATEMENT, IS INCORPORATED HEREIN BY REFERENCE, AND SHOULD BE
READ IN ITS ENTIRETY IN CONNECTION WITH THIS PROSPECTUS/PROXY STATEMENT. THE
SUMMARY OF THE OPINION OF WHEAT SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT
DESCRIBES THE MATERIAL ASPECTS OF THE OPINION, BUT DOES NOT PURPORT TO BE
COMPLETE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH OPINION. WHEAT'S
OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
EXCHANGE RATIO TO THE HOLDERS OF CHARTER COMMON STOCK AND DOES NOT ADDRESS ANY
OTHER ASPECT OF THE MERGER OR CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF
CHARTER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE MERGER.
In arriving at its opinions, Wheat reviewed certain publicly available
business and financial information relating to Charter and First American and
certain other information provided to it, including, among other things the
following: (i) Charter's Annual Reports to Stockholders, Annual Reports on Form
10-K and related financial information for the three fiscal years ended June 30,
1994, and in the written opinion dated as of the date of this Prospectus/Proxy
Statement, for the fiscal year ended June 30, 1995; (ii) Charter's Quarterly
Reports on Form 10-Q and related financial information for the six months ended
December 31, 1994, and for the nine months ended March 31, 1995; (iii) First
American's Annual Reports to Stockholders, Annual Reports on Form 10-K and
related financial information for the three fiscal years ended December 31,
1994; (iv) First American's Quarterly Report on Form 10-Q and related financial
information for the three months ended March 31, 1995, and in the case of the
written opinion dated as of the date of this Prospectus/Proxy Statement, First
American's Quarterly Report on Form 10-Q and related financial information for
the six months ended June 30, 1995; (v) certain publicly available information
with respect to historical market prices and trading activity for Charter Common
Stock and FAC Common Stock and for certain publicly traded financial
institutions which Wheat deemed relevant; (vi) certain publicly available
information with respect to banking companies and the financial terms of certain
other mergers and acquisitions which Wheat deemed relevant; (vii) the Agreement;
(viii) the Registration Statement on Form S-4 of First American, including this
Prospectus/Proxy Statement; (ix) other financial information concerning the
businesses and operations of Charter and First American, including certain
audited financial information and certain internal financial analyses and
forecasts for Charter prepared by senior management; and (x) such financial
studies, analyses, inquiries and other matters as Wheat deemed necessary. In
addition, Wheat met with members of senior management of Charter and First
American to discuss the business and prospects of each company.
In connection with its review, Wheat relied upon and assumed the accuracy
and completeness of all of the foregoing information provided to it or publicly
available, including representations and warranties of
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Charter and First American included in the Agreement, and Wheat has not assumed
any responsibility for independent verification of such information. Wheat
relied upon the management of Charter as to the reasonableness and achievability
of its financial and operational forecasts and projections, and the assumptions
and bases therefor, provided to it, and assumed that such forecasts and
projections reflect the best currently available estimates and judgments of such
management and that such forecasts and projections will be realized in the
amounts and in the time periods currently estimated by such management. Such
forecasts and projections had previously been reviewed by the Charter Board and
were found to be reasonable. Wheat also assumed, without independent
verification, that the aggregate allowances for loan losses and other
contingencies for Charter and First American are adequate to cover such losses.
Wheat did not review any individual credit files of Charter or First American,
nor did it make an independent evaluation or appraisal of the assets or
liabilities of Charter or First American.
Additionally, Wheat considered certain financial and stock market data of
Charter and First American and compared that data with similar data for certain
publicly-held financial institutions and considered the financial terms of
certain other comparable transactions that recently have been announced or
effected, as further discussed below. Wheat also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as it deemed relevant.
In connection with rendering its opinions, Wheat performed a variety of
financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Moreover, the evaluation of the fairness, from a
financial point of view, of the Exchange Ratio to holders of Charter Common
Stock was to some extent a subjective one based on the experience and judgment
of Wheat and not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors summarized below, Wheat
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. The ranges of valuations resulting
from any particular analysis described below should not be taken to be Wheat's
view of the actual value of Charter or First American.
In performing its analyses, Wheat made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Charter or First American. The analyses
performed by Wheat are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the prices at which businesses
actually may be sold. In rendering its opinion, Wheat assumed that, in the
course of obtaining the necessary regulatory approvals for the Merger, no
conditions will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger, on a pro forma basis, to First American.
In addition, in arriving at its written opinion dated as of the date of
this Prospectus/Proxy Statement, Wheat considered, without quantifying any value
with respect thereto, the matters discussed under "-- Contingent Consideration
for Goodwill Litigation Recovery" and the potential payment that could be
received by the holders of Charter Common Stock of any Net Goodwill Litigation
Recovery received as a result of the Goodwill Litigation on the basis described
in this Prospectus/Proxy Statement and as set forth in the Agreement.
Wheat's opinion is just one of the many factors taken into consideration by
the Charter Board of Directors in determining to approve the Agreement. Wheat's
opinion does not address the relative merits of the Merger as compared to any
alternative business strategies that might exist for Charter, nor does it
address the effect of any other business combination in which Charter might
engage.
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The following is a summary of the analyses performed by Wheat in connection
with its opinion delivered to the Charter Board on May 16, 1995:
Comparison of Selected Companies. Wheat compared the financial performance
and market trading information of First American to that of a group of regional
bank holding companies (the "Group"). This group included AmSouth
Bancorporation, Bank South Corporation, CCB Financial Corporation, Central
Fidelity Banks, Inc., Centura Banks, Inc., Compass Bancshares, Inc., Crestar
Financial Corporation, Deposit Guaranty Corporation, First Tennessee National
Corporation, First Virginia Banks, Inc., Mercantile Bankshares Corporation,
National Commerce Bancorporation, Regions Financial Corporation, Signet Banking
Corporation, Southern National Corporation, SouthTrust Corporation, Union
Planters Corporation and United Carolina Bancshares Corporation.
Based on financial data as of and for the year ended March 31, 1995, First
American had: (i) equity to assets of 8.24% compared to an average of 8.26% for
the Group; (ii) nonperforming assets to loans and real estate owned of 0.40%
compared to an average of 0.69% for the Group; (iii) reserves for loan losses to
nonperforming assets of 632.66% compared to an average of 254.73% for the Group;
(iv) returns on average assets before extraordinary items of 1.26% compared to
an average of 1.16% for the Group; and (v) returns on average equity before
extraordinary items of 15.15% compared to an average of 14.08% for the Group.
Based on the market values as of May 15, 1995 and financial data as of
March 31, 1995, First American had: (i) a stock price to book value multiple of
142.6% compared to an average of 154.4% for the Group; (ii) a stock price to
1994 earnings per share before extraordinary items multiple of 10.0x compared to
an average of 11.0x for the Group; (iii) a stock price to "First Call" (as
hereinafter defined) 1995 estimated earnings per share multiple of 9.2x compared
to an average of 9.9x for the Group; and (iv) an indicated dividend yield of
2.9% compared to an average of 3.7% for the Group. "First Call" is a data
service that monitors and publishes a compilation of earnings estimates produced
by selected research analysts regarding companies of interest to institutional
investors.
Analysis of Selected Transactions. Wheat performed an analysis of premiums
paid in 20 selected pending or recently completed acquisitions of thrifts or
thrift holding companies headquartered in the Southeast and Mid-Atlantic and
announced between January 1, 1994 and May 1, 1995 (the "Selected Transactions").
Multiples of book value, tangible book value, trailing twelve months earnings
and annualized latest quarter earnings, as well as deposit premiums paid in the
Selected Transactions were compared to the multiples and premiums implied by the
consideration offered by First American in the Merger. The Selected Transactions
included the following pending transactions: Crestar Corporation/Loyola Capital
Corporation, First Union Corporation/Columbia First Bank, F.S.B., First American
Corporation/Heritage Federal Bancshares, Inc., First Union Corporation/United
Financial Corporation of South Carolina, Inc., Valley National Bancorp,
Inc./Lakeland First Financial Group, Inc., UJB Financial Corporation/Bancorp New
Jersey, Inc., Fifth Third Bancorp/Falls Financial, Inc., Centura Banks,
Inc./First Southern Bancorp, Inc., First Union Corporation/Ameribanc Investors
and Crestar Financial Corporation/TideMark Bancorp, Inc. The Selected
Transactions also included the following completed transactions: Bank South
Corporation/Gwinnett Bancshares, Inc., Crestar Financial Corporation/Jefferson
Savings and Loan Association, F.A., Integra Financial Corporation/Lincoln
Savings Bank, Sovereign Bancorp, Inc./Charter FSB Bancorp, Inc., Huntington
Bancshares Inc./FirstFed Northern Kentucky Bancorp, Inc., CoreStates Financial
Corporation/Germantown Savings Bank, Signet Banking Corporation/Pioneer
Financial Corporation, The Summit Bancorporation/ Crestmont Financial
Corporation, Union Planters Corporation/BNF Bancorp, Inc. and Fifth Third
Bancorp/ Cumberland Federal Bancorporation, Inc.
The following comparisons are based on financial data as of and for the
three months ended March 31, 1995, for Charter and the three month reporting
period prior to the announcement of each transaction for each acquiree in the
Selected Transactions, Charter had: (i) equity to assets of 6.25% compared to an
average of 8.91% for the Selected Transaction acquirees; (ii) nonperforming
assets to assets of 1.77% compared to an average of 0.99% for the Selected
Transaction acquirees; (iii) reserves for loan losses to nonperforming assets of
56.34% compared to an average of 150.80% for the Selected Transaction acquirees;
(iv) returns on average assets before extraordinary items of 0.84% compared to
an average of 0.95% for the Selected Transaction
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acquirees; and (v) returns on average equity before extraordinary items of
13.54% compared to an average of 10.44% for the Selected Transaction acquirees.
Based on the market value of FAC Common Stock on May 15, 1995 and financial
data as of March 31, 1995, the analysis yielded ratios of the implied
consideration to be paid by First American to Charter (i) to book value of
145.5% compared to an average of 160.3% for the Selected Transactions; (ii) to
tangible book value of 145.5%, compared to an average of 164.5% for the Selected
Transactions; (iii) to trailing twelve months earnings (tax-effected for
Charter) of 10.9x compared to an average of 15.8x for the Selected Transactions;
and (iv) to latest quarter earnings annualized of 11.0x compared to an average
of 16.1x for the Selected Transactions. Additionally, Wheat examined the implied
consideration less tangible equity as a function of total deposits, yielding
ratios of 4.0% compared to an average of 7.3% for the Selected Transactions.
In evaluating the analysis of the comparisons, as described in the
preceding paragraph, of the ratios of the implied consideration to be paid by
First American to Charter Federal in the Merger to book value, tangible book
value, trailing twelve months earnings (tax-effective for Charter) and latest
quarter earnings annualized to such ratios in the Selected Transactions, Wheat
took into account the comparisons, as described in the second preceding
paragraph, of Charter's equity to assets, non-performing assets to assets,
reserves for loan losses to non-performing assets, returns on average assets
before extraordinary items and returns on average equity before extraordinary
items to such financial data for the Selected Transaction acquirees. In
addition, because of the inherent differences between the operations of Charter
and the Selected Transaction acquirees, Wheat made various qualitative judgments
concerning the differences between the financial and operating characteristics
of Charter and the Selected Transaction acquirees. These qualitative judgments
included Wheat's views as to the attractiveness of, and the business conditions
and prospects in, the various markets in which the Selected Transaction
acquirees operate, the market position of the Selected Transaction acquirees in
their respective markets and the business mix, sources of revenue, risk profile
and prospects for the Selected Transaction acquirees. In considering the
qualitative judgments, Wheat could not and did not quantify or attribute any
particular weight to any such factor, but determined that the comparisons, as
described in the second preceding paragraph, of the financial data for Charter
to the Selected Transaction acquirees were reflective of Wheat's qualitative
assessments and that such quantitative analysis and qualitative judgments were
consistent with the comparisons of the ratios of the implied consideration to be
paid by First American to Charter in the Merger to such ratios in the Selected
Transactions.
Discounted Dividend Analysis. Using discounted dividend analysis, Wheat
estimated the present value of the future stream of dividends that Charter could
produce through 1999, under various circumstances, assuming the company
performed in accordance with the earnings forecasts of management and an assumed
level of expense savings were achieved. Wheat then estimated the terminal values
for Charter Common Stock at the end of the period by applying multiples ranging
from 9.00x to 12.00x projected 1999 earnings. The dividend streams and terminal
values were then discounted to present values using different discount rates
(ranging from 10.00% to 14.00%) chosen to reflect different assumptions
regarding the required rates of return to holders or prospective buyers of
Charter Common Stock. This discounted dividend analysis indicated reference
ranges of between $10.80 and $15.70 per share for Charter Common Stock. These
values compare to the implied consideration to be offered by First American to
Charter in the Merger of $13.21 based on the market value of First American
Common Stock on May 15, 1995.
In connection with its opinion as of the date hereof, Wheat confirmed the
appropriateness of its reliance on the analyses used to render its May 16, 1995,
opinion by performing procedures to update certain of such analyses and by
reviewing the assumptions on which such analyses were based and the factors
considered in connection therewith.
No company or transaction used as a comparison in the above analysis is
identical to Charter, First American or the Merger. Accordingly, an analysis of
the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies used for comparison in the above analysis.
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This opinion is dated the date of this Prospectus/Proxy Statement and is
based solely upon the information available to Wheat and the economic, market
and other circumstances as they existed as of such date. Events occurring after
that date could materially affect the assumptions and conclusions contained in
our opinion. We have not undertaken to reaffirm or revise this opinion or
otherwise comment on any events occurring after the date hereof.
Charter has agreed to pay Wheat for rendering its opinion and for its
financial advisory services a fee in the net amount of $826,522. One-quarter of
the fee was payable on the date of the approval of the Merger by the Charter
Board, and three-quarters will be payable upon the closing date of the Merger.
Charter has agreed to reimburse Wheat for its out-of-pocket expenses incurred in
connection with the activities contemplated by its engagement, regardless of
whether the Merger is consummated. Charter has further agreed to indemnify Wheat
against certain liabilities, including certain liabilities under federal
securities laws. The payment of the above fees is not contingent upon Wheat
rendering a favorable opinion with respect to the Merger.
Wheat has provided investment banking services to Charter from time to
time. Wheat served as financial adviser in connection with the rights offering
completed by Charter in August 1993, for which it received financial advisory
fees in customary amounts for such transaction. In addition, in the course of
its securities business, Wheat actively trades Charter Common Stock for its
account and for the accounts of its customers and may, therefore, from time to
time hold a long or short position in such securities.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the Effective Time but no later than five (5) business days
thereafter, First American or the stock transfer agent of First American, acting
in the capacity of exchange agent, will mail to all holders of Charter Common
Stock a letter of transmittal, together with instructions for the exchange of
their Charter Common Stock certificates. Promptly upon surrender of the Charter
Common Stock certificates, the holders thereof will receive in exchange therefor
certificates representing shares of FAC Common Stock, together with all
undelivered dividends or distributions in respect of such shares of Charter
Common Stock (without interest thereon) and cash in lieu of any fractional
shares. Until so exchanged, each certificate representing Charter Common Stock
outstanding immediately prior to the Effective Time shall be deemed for all
purposes to evidence ownership of the number of shares of FAC Common Stock into
which such shares have been converted.
HOLDERS OF CHARTER COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE EXCHANGE
AGENT.
No dividend or other distribution payable after the Effective Time with
respect to FAC Common Stock will be paid to the holder of any unsurrendered
Charter certificate until the holder surrenders such certificate, at which time
the holder will be entitled to receive all previously withheld dividends and
distributions, without interest.
After the Effective Time, there will be no transfers on the stock transfer
books of Charter of shares of Charter Common Stock issued and outstanding
immediately prior to the Effective Time. If certificates representing shares of
Charter Common Stock are presented for transfer after the Effective Time, they
will be canceled and exchanged for certificates representing shares of FAC
Common Stock.
Neither First American nor Charter nor any other person will be liable to
any former holder of Charter Common Stock for any amount properly delivered to a
public officer pursuant to applicable abandoned property, escheat or similar
laws.
If a certificate for Charter Common Stock has been lost, stolen or
destroyed, the Exchange Agent will issue the consideration properly payable in
accordance with the Agreement upon receipt of appropriate evidence as to such
loss, theft or destruction, appropriate evidence as to the ownership of such
certificate by the claimant and appropriate and customary indemnification.
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Shares of First American capital stock (including FAC Common Stock) issued
and outstanding immediately prior to the Effective Time will remain issued and
outstanding after the Merger.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties by Charter regarding,
among other things, its capitalization, organization, ownership and
capitalization of its subsidiaries, authority to enter into the Agreement and
the Option Agreement, deposit accounts, filings with the OTS, financial
statements, absence of material adverse changes, adequacy of reserves, tax
matters, title to its assets, insurance, labor relations, employee benefit
plans, material contracts, loans, conduct of business, related party
transactions, intellectual property, the maintenance of its liquidation account,
undisclosed liabilities, pending and threatened litigation and environmental
liability, and compliance with applicable laws and regulations. The Agreement
also contains representations and warranties by First American regarding, among
other things, its capitalization and the capitalization of FANB, organization,
authority to enter into the Agreement, filings with the Commission, financial
statements, absence of material adverse changes, undisclosed liabilities,
pending and threatened litigation and compliance with applicable laws and
regulations. Except as otherwise provided in the Agreement, these
representations and warranties will not survive the Effective Time.
The respective obligations of First American and Charter to consummate the
Merger are conditioned upon, among other things: (i) approval of the Agreement
by the shareholders of Charter; (ii) the receipt of all necessary regulatory or
other consents or approvals for the Agreement, the Merger and the transactions
contemplated thereby, including but not limited to the Preferred FAC Objective
Transactions or the Alternative Transactions, and the expiration of all
applicable notice periods or waiting periods required after the granting of any
such approvals, without any condition or requirement which in the reasonable
good faith judgment of the Board of Directors of First American would so
materially adversely affect the economic benefits of the transactions
contemplated by the Agreement as to render consummation of the Merger
inadvisable; (iii) the receipt of an opinion of Arnold & Porter, counsel to
First American, to the effect that (a) the Merger, when consummated in
accordance with the Agreement and the Plan of Merger, will constitute a
reorganization within the meaning of Section 368(a) of the Code, (b) no gain or
loss will be recognized by the shareholders of Charter who exchange all of their
Charter Common Stock solely for FAC Common Stock pursuant to the Merger (except
with respect to cash received in lieu of a fractional share), and (c) each of
Charter, First American and Charter Interim will be a party to the
reorganization within the meaning of Section 368(a) of the Code; (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 action, suit, proceeding or investigation by the
Commission to suspend the effectiveness of such registration statement, and that
all necessary approvals under state securities laws or the Securities Act or the
Exchange Act related to the issuance or trading of the shares of FAC Common
Stock to be issued pursuant to the Merger shall have been received; (v) the
approval for trading on The Nasdaq Stock Market of the shares of FAC Common
Stock to be issued in the Merger; (vi) the absence of any action or proceedings
instituted or threatened by any governmental authority, and the absence of any
order, decree or judgment of any court, agency, commission or governmental
authority subsisting against First American or Charter or their respective
officers or directors, which seeks to, or would render it unlawful as of the
closing of the Merger, to effect the transactions contemplated by the Agreement,
or seeking damages in a material amount by reason of the transactions
contemplated by the Agreement; (vii) the accuracy of the representations and
warranties set forth in the Agreement as of the Effective Time; (viii) the
performance in all material respects of all obligations and compliance with all
covenants required to be performed or complied with at or prior to the Effective
Time by the parties to the Agreement; (ix) the absence of any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger by any regulatory authority which, in connection with
any regulatory approval, imposes any requirement upon First American or its
subsidiaries to dispose of 10% or more of the Tennessee-based assets or deposits
of Charter, except for certain transactions entered into by First American
subsequent to the date of the Agreement; (x) the receipt of certain opinions of
counsel; (xi) if requested by First American, the receipt of a letter from KPMG
Peat Marwick LLP to the
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effect that the Merger will qualify for pooling-of-interests accounting
treatment; and (xii) the receipt of certain letters from Charter's independent
accountants.
For purposes of the Agreement, "material adverse effect" means an event,
change or occurrence which, together with any other event, change or occurrence,
has or is reasonably likely to have a material adverse impact on (i) the
financial position, business prospects, or results of operations of Charter or
First American, or (ii) liability of Charter or First American to perform their
respective obligations under the Agreement or to consummate the Merger.
All of the conditions to consummation of the Merger may be waived at any
time by the party for whose benefit they were created, with the exception of
conditions relating to approval of the Agreement by Charter's shareholders, the
receipt of all regulatory approvals, the requirement that the Registration
Statement be declared effective under the Securities Act, and the requirement
that the FAC Common Stock to be issued in connection with the Merger be approved
for trading on The Nasdaq Stock Market. The Agreement may be amended or
supplemented at any time by written agreement of the parties upon the approval
of the Boards of Directors of both Charter and First American.
No assurance can be provided as to when, or whether, all of the regulatory
consents and approvals necessary to consummate the Merger will be obtained or
whether all of the other conditions precedent to the Merger will be satisfied or
waived by the party permitted to do so. See "-- Regulatory Approvals." If the
Effective Time has not occurred on or before March 31, 1996, the Agreement may
be terminated by a vote of a majority of the Board of Directors of either First
American or Charter, unless the failure to effect the Merger by such date is due
to the breach of an agreement or covenant of the Agreement by the party seeking
to terminate the Agreement.
REGULATORY APPROVALS
The Merger is subject to certain regulatory approvals, as set forth below.
To the extent the following information describes statutes and regulations, it
is qualified in its entirety by reference to the particular statutes and the
regulations promulgated thereunder.
The Merger (which includes the indirect acquisition of Charter by First
American) is subject to the approval of the OTS under Section 10 of the HOLA and
Section 18(c) of the Federal Deposit Insurance Act (the "Bank Merger Act"). In
reviewing the applications required for such approvals, the OTS is required to
take into consideration, among other things, the financial and managerial
resources and future prospects of the existing and proposed institutions, the
convenience and needs of the communities to be served and the insurance risk to
the Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund
("BIF") of the FDIC. The OTS also must consider whether the Merger would result
in a monopoly or if it would be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect in any section of the country may be
substantially to lessen competition or to tend to create a monopoly, or if it
would be in any other manner in restraint of trade. In addition, the OTS must
take into account the record of performance of First American and Charter in
meeting the credit needs of the entire communities, including low-and
moderate-income neighborhoods, served by such institutions. In connection with
granting the approvals described above, the OTS also is required to approve the
formation of Charter Interim and the acquisition thereof by First American under
the HOLA to facilitate consummation of the Merger. The OTS' regulations require
that notice of the application be published in a newspaper of general
circulation, giving the public the opportunity to comment on the application in
writing or to request a hearing. The OTS application was filed on July 16, 1994
and was accepted for filing on October 18, 1995. This application is currently
pending.
The Bank Merger Act requires that the Merger may not be consummated until
the thirtieth day after approval by the OTS, during which time the United States
Department of Justice ("DOJ") may challenge the transaction on antitrust
grounds; provided, however, that the OTS has the discretion, upon request, to
shorten the 30 day waiting period to 15 days in the event the DOJ indicates to
the OTS that it will not object to the transaction on competitive grounds.
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The Merger and the acquisition of Charter Interim by First American also
are subject to approval by the Federal Reserve Board under Section 4 of the
BHCA. Under Section 4 of the BHCA (which governs the acquisition of non-banking
subsidiaries by bank holding companies), the Federal Reserve Board must
determine that the activities of Charter are so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination, the Federal Reserve is required to consider whether the Merger
can reasonably be expected to produce benefits to the public (such as greater
convenience, increased competition and gain in efficiency) that outweigh
possible adverse effects (such as undue concentration of resources, decreased or
unfair competition, conflicts of interest and unsound banking practices). This
consideration includes an evaluation by the Federal Reserve as to whether the
Merger would result in a monopoly or otherwise would substantially lessen
competition, impair the financial and managerial resources and future prospects
of First American and Charter, or harm the institutions' abilities to serve the
convenience and needs of the communities to be served. The Federal Reserve
Board's regulations implementing Section 4 of the BHCA require publication of a
notice of the application thereunder and the opportunity for the public to
comment on the application in writing or to request a hearing. The Federal
Reserve application was filed on August 2, 1995 and was approved on October 20,
1995.
The Merger also is subject to approval by the Virginia Bureau of Financial
Institutions under Section 6.1-194.97 of the Code of Virginia, which governs the
acquisition of savings institutions located in Virginia by out-of-state holding
companies. Approval of such an application is conditioned upon, among other
things, the Bureau's determination that the laws of the state in which the
holding company is located (in this case, Tennessee) would permit a Virginia
savings institution holding company to acquire a savings institution in that
state. Tennessee law would permit a Virginia-based savings institution holding
company to acquire a savings institution located in Tennessee, subject to
appropriate regulatory approvals. This application was filed on August 29, 1995
and is currently pending.
As described above, it is the intention of First American to consummate the
Preferred FAC Objective (which consists of the Branch Transfer and the Tennessee
Merger) or the Alternative Transaction immediately following the Merger. See
"SUMMARY -- Operation of Charter Following the Merger." If the Preferred FAC
Objective is pursued, the Branch Transfer will be subject to the approval of the
OTS, and the Tennessee Merger will be subject to approval of the OCC, each
pursuant to the Bank Merger Act, under the standards, procedures and waiting
period described above. The OCC also will be required to approve the Tennessee
Merger pursuant to 12 U.S.C. sec. 215c and Section 5(d)(3) of the Federal
Deposit Insurance Act, as amended (the "Oakar Amendment"), under the same
standards set forth in the Bank Merger Act. In connection with its grant of
approval for the Branch Transfer, the OTS also will be required to approve the
formation of Tennessee Interim and the acquisition thereof by First American
under of the HOLA, and the Federal Reserve Board will be required to approve the
acquisition of Tennessee Interim under Section 4 of the BHCA, each under the
standards and procedures (and, under the Bank Merger Act, waiting period)
described above. The OCC application was filed on July 27, 1995 and was accepted
for filing September 14, 1995. This application is currently pending.
In the event that First American determines to pursue the Alternative
Transaction instead of the Preferred FAC Objective, the Alternative Transaction
will be subject to the approval of the OCC pursuant to the Bank Merger Act and
the Oakar Amendment, under the standards, procedures and waiting period
described above.
First American and Charter, as appropriate, have filed applications for
approval of the Merger and related transactions and the Preferred FAC Objective.
The Merger will not proceed in the absence of all such required approvals or, in
the event that the Preferred FAC Objective is not approved, the approvals
required to consummate the Alternative Transaction. There can be no assurance
that these approvals will be received, and if they are, there can be no
assurance as to the date of such approvals or that such approvals will be
conditioned upon matters that would not cause the Board of Directors of First
American to abandon the Merger. See "-- Representations and Warranties;
Conditions to the Merger; Waiver" and "-- Effective Time of the Merger;
Termination."
First American and Charter are not aware of any other governmental
approvals or actions that are required for consummation of the Merger or the
related transactions except as described above. Should any
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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 would not be conditioned in a manner that would cause First
American to abandon the Merger.
BUSINESS PENDING THE MERGER
The Agreement contains certain covenants concerning the conduct of
Charter's business pending the Effective Time of the Merger that are customary
in similar transactions. Among other things, the Agreement provides that, except
as otherwise specifically contemplated or permitted by the Agreement, Charter
shall, and shall cause each of its subsidiaries to, operate its business only in
the usual regular and ordinary course and preserve intact its business
organizations and assets and deposits and maintain its rights and franchises.
Further, without the prior written consent of First American, or as otherwise
provided in the Agreement, Charter generally may not, and may not permit its
subsidiaries to, incur new debt or forgive existing debt other than in the
ordinary course of business; declare or pay dividends or other distributions on
capital stock other than pursuant to certain specified limits; increase
compensation or benefits of employees and officers except in the ordinary course
of business and as specifically permitted by 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 Charter.
The Agreement also contains certain other provisions pursuant to which Charter
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 and, in the case of accruals and reserves, on
the day prior to the Effective Time. With respect to environmental matters,
these actions include obtaining Phase I and, where appropriate, Phase II
environmental assessments, on branch locations, other real estate owned and
certain classified assets and large credits. See Sections 7.1 and 7.2 of the
Agreement, attached hereto as Appendix A.
NO SOLICITATION OF COMPETING TRANSACTION
Charter has agreed in the Agreement that neither it nor any of its
subsidiaries or affiliates will solicit, initiate or encourage any proposals or
offers relating to any proposal for a merger, acquisition of all of the stock or
assets of, or other business combination involving Charter or any of its
subsidiaries or the acquisition of a substantial equity interest in, or a
substantial portion of the assets of, Charter or any of its subsidiaries, other
than as contemplated by the Agreement ("Acquisition Proposal"). Except to the
extent necessary to comply with the fiduciary duties of Charter's Board as
advised by counsel to such Board, Charter will not authorize or permit Charter
or any subsidiary or affiliate to cooperate with, furnish or cause to be
furnished any non public information that it is not legally obligated to furnish
or, to negotiate with respect to, any Acquisition Proposal and shall use its
reasonable efforts to prevent Charter or any subsidiary or affiliate from
engaging in any such activities. Charter has also agreed in the Agreement that
it would immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties other than First American with
respect to the foregoing. Charter will notify First American promptly if any
inquiry or proposal is received relating to such transaction.
In the event that Charter breaches this provision of the Agreement, First
American would have the right to terminate the Agreement. In addition, pursuant
to the terms of the Option Agreement, the breach of such covenant also would
give rise to a "Purchase Event." See "-- Stock Option Agreement."
EFFECTIVE TIME OF THE MERGER; TERMINATION
In the event that all conditions to the Merger have been satisfied or
waived, if appropriate, the Effective Time shall take place on the date and at
the time of endorsement of the Articles of Combination filed with the OTS or on
such other date and at such other time as the OTS declares the Merger effective.
The Merger will be consummated at a closing to be held on the last business day
of the calendar quarter in which satisfaction of all conditions precedent to the
Merger occurs, or at such other time as First American and Charter shall
mutually agree. Each of First American and Charter has agreed to use its best
efforts to cause the Merger to become effective by December 1, 1995.
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The Agreement may be terminated, whether before or after shareholder
approval, in writing: (i) by the mutual consent of First American and Charter,
(ii) by either party in the event of a material breach by the other party of any
covenant, agreement, representation or warranty in the Agreement which has not
been cured within the period allowed by the Agreement; (iii) by either party if
any of the conditions precedent to the obligations of such party to consummate
the Merger cannot be satisfied or fulfilled by March 31, 1996, in each case only
if the failure to consummate the transactions contemplated by the Agreement is
not caused by any breach of the Agreement by the party electing to terminate the
Agreement; (iv) by either party if any application for any required federal or
state regulatory approval for the Merger and the other transactions contemplated
by the Agreement has been denied, and the time for all appeals and requests for
reconsideration of such denial has run, and by First American if any such
regulatory approval shall be conditioned or restricted in a manner which in the
reasonable good faith judgment of the Board of Directors of First American would
so materially adversely affect the economic benefits of the transaction so as to
render inadvisable consummation of the Merger; (v) by either party if the
shareholders of Charter fail to approve the Agreement, the Plan of Merger, and
the transactions contemplated thereby; or (vi) by either party in the event that
the Merger is not consummated by March 31, 1996, in each case only if the
failure to consummate the transactions contemplated by the Agreement is not
caused by any breach of the Agreement by the party electing to terminate the
Agreement.
In the event of termination, the Agreement shall become null and void,
except that certain provisions thereof relating to expenses and confidentiality
of information exchanged between the parties shall survive any such termination
and any termination resulting from a material breach of a covenant or agreement
in the Agreement shall not relieve any breaching party from liability for any
uncured breach of any such covenant or agreement giving rise to such
termination.
In the event that the Agreement is terminated for breach of contract, the
breaching party may be liable to the non-breaching party for damages. The amount
of damages which may be payable to the non-breaching party is undeterminable at
this time.
In the event the Agreement is terminated by mutual consent, each party will
be responsible for its respective costs and expenses.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, Charter Interim will merge with and into Charter and
the home office will be moved to Roanoke, Virginia. As described above, if the
Preferred FAC Objective is consummated, three branches of Charter, located in
Bristol and Abingdon, Virginia, and nine branches in Tennessee, will be
transferred to FANB through the Branch Transfer and the Tennessee Merger. If the
Alternative Branch Transaction is consummated, nine branches of Charter, all
located in Tennessee, will be transferred to FANB through a purchase and
assumption transaction.
The Board of Directors of First American following the Merger shall consist
of those persons serving as directors immediately prior thereto. At the
Effective Time, following consummation of the Merger, the Board of Directors of
Surviving Charter shall be selected by First American. It is anticipated that
five current Charter directors, Cecil R. McCullar, Robert J. Bartel, Billy M.
Brammer, Morton W. Lester, and John G. Wampler, will serve as directors of
Surviving Charter. Mr. McCullar has been offered the position of President of
Surviving Charter. See "-- Interests of Certain Persons."
EFFECT ON CERTAIN EMPLOYEES AND BENEFIT PLANS
EMPLOYEES. At the Effective Time, all employees of Charter and/or its
subsidiaries on that date will continue to be employed by Charter and/or its
subsidiaries, upon the same terms and conditions (including benefits) which
First American provides to its similarly situated employees. First American
currently anticipates that in connection with the Merger, approximately 80
Charter positions will be eliminated following the Effective Time, by combining
certain of Charter'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. The Agreement provides that all Charter employees, with the exception
of Charter officers who currently have
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change in control agreements with Charter, who are terminated within one year
following the Merger, as a result of the Merger or as a result of staff
reductions or reorganizations, will be eligible for benefits available under
First American's reduction in force policy as in effect as of the date of the
Agreement, which includes, among other benefits, severance payments, continuing
paid health benefits, and outplacement assistance. Severance payments and health
benefits are based upon combined length of service with Charter and First
American. The Charter severance plan is substantially similar to First
American's plan. The Agreement provides that First American will cause Charter
to honor the terms of described change in control, severance, consulting and
other compensation contracts between Charter and any current or former director,
officer or employee of Charter or any subsidiary of Charter, and all provisions
for vested benefits or other vested amounts earned or accrued through the
Effective Time. See "-- Interests of Certain Persons in the Merger."
Notwithstanding the foregoing, First American intends to assess on an individual
basis whether to continue to employ senior officers of Charter and its
subsidiaries.
EMPLOYEE BENEFIT PLANS. Employees of Charter 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 Charter 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 such plans governing vesting service for
employees of acquired employers and consistent with the current policies of
First American. Employees of Charter 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 Charter and its subsidiaries
for eligibility and vesting purposes, but not for benefit accrual purposes.
The Agreement also provides that the tax-qualified defined contribution and
defined benefit plans maintained by Charter 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 Charter on or
before the Effective Time. First American will direct Charter concerning actions
to be taken with respect to the withdrawal of such tax-qualified defined
contribution from the Financial Institutions Thrift Plan, and defined benefit
plans from the Financial Institutions Retirement Fund and with respect to the
designation of the First American Plan as a successor plan. First American will
permit Charter employees to elect a transfer of accrued benefits (and
corresponding assets) to the First American Plan.
Pursuant to the terms of the Agreement, each Charter stock option will be
exchanged at the Effective Time for such number of shares of FAC Common Stock
determined by dividing the excess of (A) the product of (i) the number of shares
of Charter Common Stock subject to the option, (ii) the Common Stock Exchange
Ratio, and (iii) the FAC Market Value, over (B) the product of (i) the number of
shares of Charter Common Stock subject to the option, and (ii) the exercise
price at which shares of Charter Common Stock can be purchased pursuant to the
option by the FAC Market Value.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of Charter have interests in the
Merger in addition to their interests as shareholders of Charter Common Stock
generally. The Charter Board of Directors was aware of these interests and
considered them, among other matters, in approving the Agreement and the
transactions contemplated thereby.
CHANGE IN CONTROL AGREEMENTS; SEVERANCE BENEFITS AND OTHER INTERESTS OF
EXECUTIVE OFFICERS AND DIRECTORS. Messrs. McCullar and Buchanan have existing
change in control agreements with Charter. In the event of a change in control
of Charter, followed by the termination of the executive's employment
(regardless of whether such termination results from his dismissal or his
resignation at any time during a period of 120 days from the Effective Time
following any alteration or modification of such executive's job duties or
responsibilities or job title resulting in a job function or position less in
responsibility, stature or compensation than such executive's position at the
Effective Time), such executive will be entitled to receive an amount equal to
three times his base annual salary in effect at the Effective Time, either
ratably over a three year
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period or in a lump sum. Based on their current annual compensation and
estimated compensation through the Effective Time (assuming the Effective Time
occurs in 1995), the aggregate amount of cash benefits under their change in
control agreements and benefits from receiving FAC Common Stock in respect of
accelerated Charter Options payable to Messrs. McCullar and Buchanan is
estimated to be, before payment of applicable taxes, $642,750 and $347,100,
respectively. If terminated within one year of the Merger, they will receive no
severance benefits under First American's reduction in force or severance
policies. See "-- Effect on certain Employees and Benefit Plans".
Pursuant to the existing change in control provisions of the Incentive
Stock Option Plan and other grants of Charter Options, the vesting of Charter
Options will be accelerated at the Effective Time. See "-- Effect on Employees
and Employee Benefit Plans of Charter." Pursuant to the Agreement, First
American will issue approximately 10,900 shares of First American Common Stock
to directors and executive officers of Charter in exchange for Charter Options.
As of October 16, 1995, there were outstanding options granted by Charter to
purchase 146,800 shares of Charter Common Stock pursuant to the Charter Options,
of which options to purchase 108,700 shares of Charter Common stock were held by
directors and executive officers of Charter and the remaining options were held
by other employees of Charter. Of the options granted, 74,500 were vested as of
October 16, 1995 and the vesting of the remaining options will be accelerated as
a result of the Merger. Based on the closing price of the First American Common
Stock on October 24, 1995, the latest practicable trading date prior to the
printing of this Prospectus/Proxy Statement, the aggregate value of the unvested
options that will be accelerated by the Merger held by directors and executive
officers of Charter under the Charter Options was approximately $240,000. See
"PROPOSAL II -- ELECTION OF DIRECTORS -- Information as to Nominees and
Continuing Directors" for a listing of Common Stock and option ownership of the
directors and certain executive officers.
In addition, Mr. McCullar has been offered the position of President of
Surviving Charter. Under the terms of the current offer, Mr. McCullar would
receive an annual salary of $140,000, together with a grant as of the Effective
Time of restricted stock with a value of approximately $600,000, but would
receive no compensation in respect of his current change in control agreement.
The restricted stock would vest twenty percent (20%) per year over five years,
except that such shares would vest immediately upon the termination of Mr.
McCullar other than for cause, or upon the occurrence of a change in control of
First American. It is anticipated that five current Charter directors, Robert J.
Bartel, Billy M. Brammer, Morton W. Lester, John G. Wampler and Mr. McCullar,
will serve as directors of Surviving Charter. Each such director, other than Mr.
McCullar, will receive approximately $11,000 in directors' fees annually during
each year of his initial three-year term.
Assuming the consummation of the Merger, the aggregate cash value of
benefits to be received by all directors of Charter who approved the Merger is
estimated to be $1,145,820, including approximately $33,000 payable as
directors' fees over the initial three-year term to each of the four
non-employee directors of Charter who will serve as directors of Surviving
Charter, the value of accelerated options, and the value of restricted stock
offered to Mr. McCullar, but excluding the proposed salary payable to Mr.
McCullar and any payment under his current change in control agreement.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The
Agreement provides that for a period of six years after the Effective Time,
First American will indemnify the present and former directors, officers,
employees and agents of Charter to the same extent and subject to the conditions
set forth in applicable regulations of the OTS and Charter's charter and bylaws.
In addition, First American has agreed to use its reasonable efforts for a
period of not less than three years following the Effective Time to provide to
those persons who served as directors or officers of Charter or its subsidiaries
on or before the Effective Time, Charter's existing insurance against
liabilities and claims (and related expenses) made against them resulting from
their service as such prior to the Effective Time, or comparable substitute
coverage if reasonably available at reasonable cost. First American will not be
obligated to make annual premium payments for such insurance to the extent such
premiums exceed 1.5 times premiums paid by Charter as of the date of the
Agreement.
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For the year ended June 30, 1995, Charter paid an annual premium of $41,847
for $3.0 million worth of coverage for its directors and officer's liability
insurance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary discussion of the material anticipated federal
income tax consequences of the Merger to shareholders of Charter. This summary,
which is not a complete description of the federal income tax consequences of
the Merger, is based on the law as it currently exists and accordingly could be
changed in the event of changes in the law, including amendments to applicable
statutes or regulations or changes in judicial or administrative rulings, some
of which could be given retroactive effect. The federal income tax laws are
complex and each of the Charter shareholders' individual circumstances may
affect the tax consequences to the shareholder or may give rise to federal
income tax issues that are not addressed herein. In addition, no information is
provided with respect to the tax consequences of the Merger under any foreign,
state, local and other tax laws.
The anticipated federal income tax consequences of the proposed Merger will
vary depending on whether any contingent consideration ultimately is issued in
the future with respect to the Goodwill Litigation and, if so, whether such
contingent consideration consists solely of FAC Common Stock or consists of
property (including cash or stock of another corporation) other than FAC Common
Stock. In addition, regardless of whether any contingent consideration is ever
issued, the possibility that such consideration could be paid may require that,
until any such consideration is paid or five years elapse from the Effective
Time, Charter shareholders assume, in determining their basis in the FAC Common
Stock received at the Effective Time, that the maximum amount of contingent
consideration will be issued. The following discussion reviews the anticipated
federal income tax consequences of the Merger under each of two possible
scenarios. The first scenario assumes that either no contingent consideration
will be issued with respect to the Goodwill Litigation or, if such contingent
consideration is issued, it will consist solely of FAC Common Stock. The second
scenario assumes that contingent consideration consisting of property other than
FAC Common Stock is issued with respect to the Goodwill Litigation.
Because of the provisions for contingent consideration, the Merger gives
rise to especially complicated federal income tax issues, many of which are
unresolved by current law. FOR THESE REASONS, CHARTER SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF THE MERGER.
1. Federal income tax consequences if no contingent consideration is
issued or if any contingent consideration consists solely of FAC Common
Stock.
(a) The Merger will qualify as a tax-free reorganization.
If no contingent consideration is issued to the Charter shareholders with
respect to the Goodwill Litigation or any such contingent consideration consists
solely of FAC Common Stock, then, for federal income tax purposes, the Merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result of the
Merger qualifying as such a reorganization, the following federal income tax
consequences will apply: (i) no gain or loss will be recognized by the
shareholders of Charter who exchange all of their Charter Common Stock solely
for FAC Common Stock pursuant to the Merger (except as discussed below with
respect to (a) cash received in lieu of a fractional share interest in FAC
Common Stock, and (b) shares of FAC Common Stock, if any, issued with respect to
the Goodwill Litigation to the extent such shares constitute imputed interest);
(ii) the aggregate adjusted tax basis of the shares of FAC Common Stock to be
received in the Merger by a holder of Charter Common Stock will be the same as
the aggregate adjusted tax basis in the shares of Charter Common Stock
surrendered in exchange therefor (but see below for certain rules that
complicate the basis determination due to the possibility that additional shares
of FAC Common Stock may be received with respect to the Goodwill Litigation);
and (iii) the holding period of the shares of FAC Common Stock (other than any
such shares issued with respect to the Goodwill Litigation that are deemed to
constitute interest) to be received in the Merger by a holder of Charter Common
Stock will include the holding period of the shares of Charter
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Common Stock surrendered in exchange therefor, provided that such shares of
Charter Common Stock are held as capital assets at the Effective Time.
A holder of shares of Charter Common Stock who receives cash in the Merger
in lieu of a fractional share interest in FAC Common Stock should be treated as
having cash in redemption of such fractional share interest. The receipt of such
cash generally should result in gain or loss in an amount equal to the
difference between the amount of cash received and the portion of the
shareholder's adjusted tax basis in the shares of Charter Common Stock allocable
to the fractional share interest. Such gain or loss should be long-term capital
gain or loss if the holder holds the shares as capital assets and the holding
period for the fractional share of FAC Common Stock deemed to be received and
then redeemed is more than one year.
(b) Effect of possibility of contingent consideration on a Charter
shareholder's tax basis in shares of FAC Common Stock, and cash in lieu of
fractional shares, received at the Effective Time.
The possibility that additional shares of FAC Common Stock (the "Contingent
FAC Shares") may be issued complicates the calculation of the Charter
shareholders' tax basis in the FAC Common Stock issued at the Effective Time
(the "Noncontingent FAC Shares") and creates a number of uncertainties regarding
the basis calculations that are not answered by existing tax authorities. These
uncertainties will affect the calculation of the taxable gain or loss realized
by Charter shareholders who receive cash in lieu of fractional shares or who
sell or otherwise dispose of the Noncontingent FAC Shares at a point in time
prior to the determination of the amount of Contingent FAC Shares, if any, to be
issued with respect to the Goodwill Litigation. The possibility that Contingent
FAC Shares may be issued may also affect the calculation of basis in the FAC
Common Stock (and thus may affect the calculation of gain or loss on any
subsequent sales of such stock) on the part of Charter shareholders who do not
receive cash in lieu of fractional shares or do not sell any of their FAC Common
Stock prior to the determination of the contingent consideration.
The basis rules discussed below apply to the first scenario, in which
either no contingent consideration is issued or only FAC Common Stock is issued
as contingent consideration and the Merger qualifies as a tax-free
reorganization for federal income tax purposes.
According to rules set forth in published procedures of the IRS, a Charter
shareholder's tax basis in the Noncontingent FAC Shares will be affected by the
possibility that Contingent FAC Shares may be issued later, even though in fact
no such shares may ever be issued. Under the published IRS guidelines, each
Charter shareholder should determine his initial basis in the Noncontingent FAC
Shares by dividing (a) the aggregate tax basis in his Charter Common Stock
surrendered pursuant to the Merger (reduced by any basis allocated to a
fractional share interest redeemed for cash) by (b) the maximum number of shares
of FAC Common Stock (both Contingent and Noncontingent FAC Shares) that
theoretically could be received by such shareholder pursuant to the Agreement
(excluding from such maximum number any Contingent FAC Shares that would be
allocable to imputed interest under the rules described below). (These rules
could be applied separately to blocks of Charter Common Stock held by a Charter
shareholder that have different per share tax bases.) The consequence of this
IRS position is that a Charter shareholder's initial tax basis in the
Noncontingent FAC Shares will be less in the aggregate than his aggregate tax
basis in his Charter Common Stock, with the difference being attributable to the
basis deemed to be allocated to the Contingent FAC Shares that may or may not be
issued in the future. Under the IRS approach, if either no Contingent FAC Shares
are issued or fewer than the maximum number of Contingent FAC Shares are issued,
the Charter shareholder would then readjust his basis in the total number of
shares of FAC Common Stock received (excluding any Contingent FAC Shares
allocable to imputed interest). The IRS approach just outlined has not been
challenged in court, and it is possible that some other basis allocation method
might be accepted by the courts.
Assuming the IRS approach must be followed, a Charter shareholder will face
a number of uncertainties as to his basis calculations. Since it is unclear when
the Contingent FAC Shares, if any, will be issued, it is difficult to determine
what portion of such shares would be allocable to imputed interest, and thus it
will be difficult to determine the maximum number of shares over which a Charter
shareholder's basis in the Charter Common Stock surrendered must be allocated in
computing his initial basis in the Noncontingent FAC Shares. In addition, there
is no clear guidance as to the basis consequences where a Charter shareholder
sells
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some of the Noncontingent FAC Shares before the end of the contingency period.
(For these purposes, the "contingency period" is the period commencing on the
Effective Time and ending on the earlier of the date on which Contingent FAC
Shares are issued to Charter shareholders or the fifth anniversary of the
Effective Time.) For example, there is no guidance on whether some portion of
any additional basis to be allocated (resulting from the issuance of fewer than
the maximum number of Contingent FAC Shares) will be allocated to the
Noncontingent FAC Shares previously sold (producing less gain or a greater loss
on such earlier sales), or whether such basis is to be allocated only to any
Noncontingent and Contingent FAC Shares held by the Charter shareholder at the
end of the contingency period. Depending on the answer to these questions, the
Charter shareholder might or might not be required to file amended returns to
take account of any basis allocated to the previously sold shares or might be
entitled to a capital loss in the year the contingency ends.
(c) Treatment of a portion of Contingent FAC Shares as payment of
interest.
As mentioned previously, a portion of the Contingent FAC Shares, if any,
received by a Charter shareholder should be treated as a payment of interest for
federal income tax purposes. Although the law is not entirely clear on this
point, it appears that the amount of such interest should be calculated under
the provisions of Code Section 483 and the regulations promulgated thereunder.
Under those rules, a Charter shareholder generally would be required to
recognize interest income on the receipt of Contingent FAC Shares equal to the
excess of (a) the fair market value of the Contingent FAC Shares on the date the
shareholder becomes entitled to receive such shares, over (b) the amount
determined in clause (a) discounted back to the Effective Time using a
prescribed governmental discount rate determined on the date the shareholder
becomes entitled to receive such shares. Any shares allocable to interest under
these rules would have to be included in the former Charter shareholder's income
as ordinary income notwithstanding that the Merger qualifies as a reorganization
that is otherwise tax free. The Charter shareholder's basis in any shares
allocable to interest will be equal to such shares' fair market value on the
date distributed and the holding period in such shares will begin on the next
day.
2. Federal income tax consequences if contingent consideration
consisting of property (including cash) other than FAC Common Stock is
issued.
If a Goodwill Litigation Recovery is received prior to the fifth
anniversary of the Effective Time, but prior to such receipt FAC has been
acquired, the contingent consideration would be paid in either cash or capital
stock of the Acquiror, with the Acquiror having the election as to whether
payment is made in cash, securities or a combination of both. If any contingent
consideration that is issued to the Charter shareholders with respect to the
Goodwill Litigation consists of property (including cash) other than FAC Common
Stock, Arnold & Porter is unable to opine as to whether the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Code because the
law is unclear as to the issue and because such a determination would depend
upon the facts surrounding the receipt of such consideration and the state of
the law at that time. It is likely, however, under such circumstances that the
Merger would not qualify as a reorganization within the meaning of Section
368(a) of the Code. Although arguments may be made that, depending on the amount
and nature of the contingent consideration, the Merger should still qualify as
such a reorganization, there is no assurance such arguments would prevail.
Notwithstanding the foregoing, if contingent consideration consisting of
property other than FAC Common Stock is distributed to the Charter shareholders,
FAC at the present time anticipates that it will not treat the Merger as
qualifying as a reorganization under Code Section 368(a).
The possible disqualification of the Merger as a reorganization due to the
nature of the contingent consideration gives rise to numerous issues for Charter
shareholders, some of which are described below.
(a) Uncertainty as to tax-free nature of reorganization and basis
prior to 5 years or payment of contingent consideration.
At the Effective Time the Charter shareholders will not know whether any
contingent consideration will be issued in the future, and, if so, whether such
consideration will consist of property other than FAC Common Stock. Accordingly,
at least initially, Charter shareholders probably should treat the Merger as
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qualifying as a reorganization under Code Section 368(a). In addition, Charter
shareholders should be aware that the same uncertainties that are present with
respect to the determination of the tax basis of the shares of FAC Common Stock
received at the Effective Time, and described under scenario one above, will be
present prior to the payment of any contingent consideration under this scenario
as well.
(b) Effect if not tax-free reorganization.
Assuming the Merger is not a reorganization for federal income tax
purposes, each Charter shareholder should be treated as having a taxable
exchange of his Charter Common Stock in exchange for consideration consisting of
FAC Common Stock, and cash (if any) received in lieu of a fractional share of
FAC Common Stock, issued at the Effective Time and the other property received
as contingent consideration. Because Charter Common Stock is traded on an
established securities market, Charter shareholders would not be able to report
the gain, if any, arising from the exchange under the installment method.
Instead, the Code provides that all payments to be received on the exchange be
treated as received in the year in which the Merger takes place. At such time,
if ever, that Charter shareholders receive contingent consideration consisting
of property other than FAC Common Stock, Charter shareholders would then have to
determine whether the Merger no longer qualifies as a reorganization. Assuming
that at that time it is determined that the Merger was not a reorganization
under Code Section 368(a), a Charter shareholder generally will have had gain or
loss in an amount equal to the difference between (i) the sum of the fair market
value of the FAC Common Stock at the Effective Time, the cash (if any) received
in lieu of a fractional share of FAC Common Stock, and the fair market value at
the Effective Time of the right to receive contingent consideration in the
future, and (ii) the shareholder's adjusted tax basis in his Charter Common
Stock surrendered in the Merger. To the extent the value of the contingent
consideration actually received exceeds the value of the right to receive such
consideration at the Effective Time, additional income may have to be
recognized.
If the Merger is determined not to be a tax-free reorganization, the
Charter shareholders must determine whether they are required to file amended
returns for the year in which the Merger took place and how to treat the
contingent consideration in the year it is received, including the determination
of the amount of such contingent consideration that will constitute imputed
interest, and the basis and holding periods for the property constituting
contingent consideration. In the event the Merger is not a tax-free
reorganization, the Charter shareholders' tax basis in the consideration
received, including any Noncontingent FAC Shares and any other property received
as contingent consideration, generally will be equal to the fair market value of
such stock or property on the date it is issued pursuant to the Merger. (The tax
basis rules discussed above with respect to the first scenario do not apply in
the event the Merger is determined not to be a tax-free reorganization.)
The federal income tax issues arising if the Merger is disqualified as a
reorganization are highly complicated and technical. Moreover, such issues will
arise only when future events unfold -- principally a determination of whether
any contingent consideration will ever be paid, and, if so, the nature of such
consideration (for example, FAC Common Stock, voting stock of a successor
corporation to FAC, cash, etc.).
3. Tax Opinion
It is a condition to the obligations of First American and Charter to
consummate the Merger that they shall have received an opinion from Arnold &
Porter, counsel to First American, as to certain federal income tax consequences
of the Merger. Arnold & Porter's opinion will be based on laws, regulations,
rulings and judicial decisions as they will exist as of the date of the opinion.
These authorities are all subject to change and such change may be made with
retroactive effect. Arnold & Porter can give no assurance that, after any such
change, its opinion would not be different, and Arnold & Porter will not
undertake any responsibility to update or supplement its opinion. Arnold &
Porter's opinion will not be a complete description of the federal income tax
consequences of the Merger; for example, the rules set out in the opinion may
not apply to a holder of Charter Common Stock in light of his particular
circumstances or to holders subject to special rules, such as foreign persons,
financial institutions, tax-exempt organizations, insurance companies and
persons who acquired shares of Charter Common Stock pursuant to the exercise of
employee stock options or rights or otherwise as compensation.
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On the basis of facts, representations and assumptions that will be set
forth or referenced in its opinion and that will be consistent with the facts
Charter and First American believe will be existing at the Effective Time,
including the assumption that any contingent consideration paid with respect to
the Goodwill Litigation will consist solely of FAC Common stock, Arnold & Porter
will opine that, for federal income tax purposes: (i) the Merger, when
consummated in accordance with the Agreement and the Plan of Merger, will
constitute a reorganization within the meaning of Section 368(a) of the Code,
(ii) to the extent Charter Common Stock is exchanged in the Merger for FAC
Common Stock (including any Contingent FAC Shares) no gain or loss will be
recognized by the shareholders of Charter except to the extent any Contingent
FAC Shares constitute a payment of interest (including imputed interest), (iii)
gain or loss, if any, will be recognized by Charter shareholders upon their
receipt of cash in lieu of fractional shares of FAC Common Stock, and (iv) each
of Charter and FAC will be a party to that reorganization within the meaning of
Section 368(b) of the Internal Revenue Code. In rendering such opinion, Arnold &
Porter will rely upon representations of officers of Charter and FAC reasonably
satisfactory in form and substance to Arnold & Porter. First American and
Charter anticipate that, should Arnold & Porter or other counsel be unable to
render an opinion at the Effective Time that (assuming any contingent
consideration is paid solely in FAC Common Stock) the Merger will constitute a
tax-free reorganization and no gain or loss will be recognized by Charter
shareholders, except upon receipt of cash in lieu of fractional shares and to
the extent of contingent consideration constituting a payment of interest,
Charter shareholders will be resolicited and informed of such changed tax
consequences.
STOCK OPTION AGREEMENT
The discussion in this section describes the material terms of the Option
Agreement, but does not purport to be complete and is qualified in its entirety
by reference to the Option Agreement attached as Appendix C to this
Prospectus/Proxy Statement.
Under the Option Agreement, Charter has granted the Option to First
American to purchase up to the number of authorized but unissued shares equal to
19.99% of the issued and outstanding shares of Charter Common Stock (which would
equal approximately 1,024,550 shares if the Option were exercised as of the date
of the Agreement). The exercise price under the Option Agreement is $9.08 per
share, such number of shares and exercise price being subject to adjustment
under certain circumstances. The Option is exercisable only upon the occurrence
of certain events (each, a "Purchase Event") that could jeopardize consummation
of the Merger pursuant to the terms of the Agreement. In the event of any change
in Charter Common Stock by reason of stock dividends, split-ups,
recapitalizations, combinations, exchanges of shares or the like, the type and
number of shares subject to the Option and the purchase price therefor shall be
adjusted appropriately. If any additional shares of Charter Common Stock are
issued after the date of the Option Agreement (other than as contemplated in the
Option Agreement), the number of shares of Charter Common Stock subject to the
Option shall be adjusted so that, after such issuance, it equals 19.99% of the
number of shares of Charter Common Stock then issued and outstanding without
giving effect to any shares subject or issued pursuant to the Option. The $9.08
exercise price represents the approximate book value of Charter Common Stock at
the time the Option was negotiated as well as the approximate per share price
within the range of prices at which Charter Common Stock traded prior to the
announcement of the engagement by Charter of Wheat to explore possible
transactions involving Charter.
The purpose of the Option is to increase the likelihood that the Merger
will be consummated by making it more difficult and more expensive for a third
party to acquire control of Charter. Accordingly, the Option is exercisable only
upon the occurrence of a Purchase Event. The Option Agreement provides that a
Purchase Event shall mean the occurrence of any of the following events after
the date of execution of the Option Agreement: (i) the commencement by any
person (other than First American, an affiliate thereof, Charter or any
subsidiary of Charter) of a bona fide tender or exchange offer to purchase
shares of Charter Common Stock such that upon consummation of such offer such
person would own or control 15% or more of the outstanding shares of Charter
Common Stock; (ii) Charter or any subsidiary, without having received First
American's prior written consent, shall have entered into an agreement with any
person (other than First American or any subsidiary or affiliate thereof), or
shall have filed an application or notice with any federal or state regulatory
agency for clearance or approval, to (x) merge, consolidate or enter into any
similar
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transaction with Charter or any of its subsidiaries; (y) sell, lease or
otherwise dispose of all or substantially all of the assets of Charter; or (z)
sell or otherwise dispose of (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing 15% or more of the
voting power of Charter; (iii) any person (other than First American, an
affiliate thereof, a subsidiary of First American in a fiduciary capacity,
Charter, Charter in a fiduciary capacity) shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 15% or more of the
outstanding shares of Charter Common Stock, provided, however, that the
acquisition prior to the date of the Option Agreement of either such beneficial
ownership or the right to acquire such beneficial ownership by any director or
officer of Charter shall not constitute a Purchase Event; (iv) any person (other
than First American) shall have made a bona fide proposal to Charter by public
announcement or written communication that is or becomes the subject of public
disclosure to (x) acquire Charter by merger, consolidation, purchase of all or
substantially all of its assets or otherwise; or (y) make an offer described in
clause (i) above, and Charter's Board of Directors shall have failed to
recommend, or shall have withdrawn its recommendation, to Charter shareholders
that they approve the Agreement; or (v) Charter shall have willfully breached
any covenant or agreement contained in Sections 7.2(a), (c), (d), (m) and (n) or
Sections 8.1, 8.3, 8.4 or 8.7 of the Agreement ("Specified Covenants"), which
breach would entitle First American to terminate the Agreement (without regard
to the cure periods provided for therein) and such breach shall not have been
cured within the period provided for in the Agreement.
The Option may be exercised in whole or in part at one or more closings,
and may be exercised at any time if a Purchase Event shall have occurred and be
continuing and before the Option Agreement is terminated. The Option Agreement
provides that to the extent that it shall have not been exercised, the Option
shall terminate (i) at the effective time of the Merger; (ii) upon the
termination of the Agreement in accordance with the provisions thereof (other
than a termination resulting from a willful breach by Charter of a Specified
Covenant, or, following the occurrence of a Purchase Event, failure of Charter's
shareholders to approve the Agreement by the vote required under applicable
law); or (iii) six months after termination of the Agreement due to a willful
breach by Charter of a Specified Covenant or, following the occurrence of a
Purchase Event, failure of Charter's shareholders to approve the Agreement by
the vote required under applicable law, provided, that, any exercise shall be
subject to compliance with applicable provisions of law.
The Option Agreement provides that neither First American nor Charter may
assign any of its rights or obligations under the Option Agreement or the Option
created thereunder without the express written consent of the other party except
that, if a Purchase Event shall have occurred and be continuing, First American
may assign in whole or in part its rights and obligations under the Option
Agreement; provided, however, that to the extent required by applicable
regulatory authorities, First American may not assign its rights under the
Option except in (i) a widely dispersed public distribution, (ii) a private
placement in which no one party acquires the right to purchase in excess of 2%
of the voting shares of Charter, (iii) an assignment to a single party (e.g., a
broker or investment banker) for the purpose of conducting a widely dispersed
public distribution on First American's behalf, or (iv) any other manner
approved by applicable regulatory authorities. First American's acquisition of
more than certain percentages of the outstanding Charter Common Stock may be
subject to prior approval of, or the filing of notices with, applicable
regulatory authorities.
The Option Agreement also provides that, subject to compliance with
applicable regulatory restrictions, at the election of First American during the
nine months immediately following the later to occur of both a Purchase Event
set forth in Section 3(b)(ii), 3(b)(iv) or 3(b)(v) of the Option Agreement and
the termination of the Agreement pursuant to the terms thereof, Charter is
required to repurchase the Option from First American together with any shares
of Charter Common Stock purchased by First American pursuant thereto, at a price
equal to the sum of:
(i) the exercise price paid by First American for any shares of Charter
Common Stock acquired pursuant to the Option;
(ii) The difference between the "market/tender offer" price for shares of
Charter Common Stock (defined as the highest of (A) the highest price per share
at which a tender or exchange offer has been made, (B) the price per share,
whether in cash or the value of securities or other property or a combination
thereof,
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of Charter Common Stock to be paid by any third party pursuant to an agreement
with Charter, (C) the price at which First American has agreed to acquire
Charter Common Stock pursuant to the Reorganization Agreement, or (D) the
highest reported sale price for shares of Charter Common Stock within that
portion of the Repurchase Period preceding the date First American gives notice
of the required repurchase) and the exercise price, multiplied by the number of
shares of Charter Common Stock with respect to which the Option has not been
exercised, but only if the market/tender offer price is greater than such
exercise price; and
(iii) The difference between the market/tender offer price and the exercise
price paid by First American for any shares of Charter Common Stock purchased
pursuant to the exercise of the Option, multiplied by the number of shares so
purchased, but only if the market/tender offer price is greater than such
exercise price.
The Option would terminate: (i) at the Effective Time of the Merger; (ii)
upon termination of the Agreement, in accordance with the provisions thereof,
other than as provided in the following clause; or (iii) six months after
termination of the Agreement due to a willful breach by Charter of any
representation, warranty or covenant contained therein or, following the
occurrence of an event triggering the Option, failure of Charter's shareholders
duly to approve the Agreement. For additional information regarding the terms of
the Option and events upon which it could be exercised, reference should be made
to the Option Agreement, a copy of which is attached hereto as Appendix C.
Although the shares issuable upon exercise of the Option represent
approximately 16.67% of the Charter Common Stock that would be outstanding after
such exercise, First American may not acquire more than 5% of the Charter Common
Stock, pursuant to the exercise of the Option or otherwise, without prior
approval of the Federal Reserve and the OTS. First American has applied to the
Federal Reserve on August 2, 1995 for prior approval to exercise the Option
following any applicable event triggering the Option as part of its applications
to acquire Charter in the Merger.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
The present holders of Charter Common Stock own voting common stock in a
federal savings bank governed by the provisions of the HOLA and the rules and
regulations of the OTS promulgated thereunder. First American is a Tennessee
corporation, and shareholders of Charter who receive FAC Common Stock will
become 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 under the BHCA, and is
subject to certain of the state banking laws of each state in which its
subsidiary banks are located (Tennessee and Kentucky). Shareholders of Charter
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 Charter. 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 Charter's charter and
bylaws as well as the applicable statutes.
AUTHORIZED COMMON STOCK. Charter is authorized to issue 50,000,000 shares
of Charter Common Stock, 5,125,713 shares of which were issued and outstanding
as of October 16, 1995. First American is authorized to issue 50,000,000 shares
of FAC Common Stock, of which as of October 16, 1995, shares were
outstanding, and 780,660 shares were reserved for issuance pursuant to First
American's Dividend Reinvestment and Stock Purchase Plan and other employee
benefit plans.
AUTHORIZED PREFERRED STOCK. Charter is authorized to issue up to 7,500,000
shares of Preferred Stock, $.01 par value ("Charter Preferred Stock"), no shares
of which have been issued and are outstanding. The Board of Directors of Charter
also is expressly vested with the authority to amend Charter's charter to
establish and designate series of Charter Preferred Stock and to fix and define
the terms thereof, without the necessity of obtaining the approval of Charter's
shareholders.
As of October 16, 1995, First American was authorized to issue up to
2,500,000 shares of preferred stock, no par value ("FAC Preferred Stock"), no
shares of which were issued and outstanding. The rights and preferences
evidenced by shares of FAC Common Stock are limited or qualified by the rights
and preferences
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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." 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 shareholders.
ISSUANCE OF AUTHORIZED SHARES. The Boards of Directors of First American
and Charter generally may authorize the issuance of authorized and unissued
shares of common stock and preferred stock of First American and Charter,
respectively upon a majority vote of the respective Board of Directors present
at a meeting at which a quorum is present. In the case of Charter, neither
promissory notes nor future services may constitute payment or part payment for
the issuance of shares of Charter. Both First American and Charter 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 Charter) 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, or if such shares
would have voting power equal to or greater than 20% of the voting power
outstanding before the issuance of such shares.
NUMBER OF DIRECTORS. Charter's charter provides that the number of
directors, which shall be stated in Charter's bylaws, shall not be less than
seven nor more than fifteen except when a greater number is approved by the
Charter Board of Directors. Charter's bylaws currently provide that the Board of
Directors of Charter shall consist of eleven 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. Charter's bylaws may be amended, and therefore the number
of directors may be determined, by a majority vote of Charter Board.
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,
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 HFB merger,
effective as of July 20, 1995, the Board of Directors had increased the number
of directors from 20 to 21. First American does not intend to increase the
number of directors upon consummation of the Merger. 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 or her successor has
been elected and qualified.
DIRECTOR NOMINATIONS. Under Charter's bylaws, shareholders may nominate
candidates for the Charter Board of Directors by delivering to the secretary of
Charter a written nomination at least five days prior to the date of an annual
meeting; provided, however, that if the Charter Board of Directors, acting as
the nominating committee, fails to forward its slate of nominees to the
Secretary of Charter at least 20 days prior to the date of an annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote, and shall be voted upon at such meeting.
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 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 SEC 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.
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VOTING FOR DIRECTORS. Charter's bylaws provide for cumulative voting for
directors by permitting each shareholder entitled to vote at an election of
directors to give one nominee as many votes as the number of nominees,
multiplied by the number of shares the shareholder has the right to vote, or by
distributing such number of votes among any number of nominees. Because First
American's bylaws expressly prohibit cumulative voting for directors, each
shareholder will be permitted to vote the number of shares which he is entitled
to vote for as many persons as there are directors to be elected.
DIRECTOR VACANCIES. Charter's bylaws provide that any vacancy on the Board
of Directors may be filled by the affirmative vote of a majority of the
remaining directors. A director elected to fill a vacancy shall be elected to
serve until the next election of directors by the shareholders.
First American's bylaws provide that, subject to the rights of the holders
of any series of preferred stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors or any
vacancies in 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. Charter's bylaws provide that any director may be
removed only for cause by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors. In addition, Charter's bylaws
provide that if less than the entire Board is to be removed, a director may not
be removed if the votes cast against his removal would be sufficient to elect a
director if then cumulatively voted at an election of the class of directors of
which such director is a part.
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
seventy-five percent (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 shall 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 Charter's bylaws, any shareholder may make a
proposal at an annual meeting and the same may be discussed and considered, but
unless stated in writing and filed with the Secretary of Charter at least five
days before the meeting, a proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. However, federal law requires that a shareholder proposal
made in connection with an annual meeting and submitted for inclusion in
Charter's proxy statement under SEC Regulation 14A of the Exchange Act must be
received at Charter's principal executive offices not less than 120 calendar
days in advance of the date of Charter's proxy statement sent to shareholders in
connection with the previous year's annual meeting of shareholders, except in
limited circumstances in which a "reasonable time" prior to the proxy
solicitation is required. The shareholder also must comply with requirements
concerning, among other things, minimum stock ownership, notice and timeliness.
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 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 SEC 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 facts warrant,
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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 First American's
bylaws, written notices of the annual meeting of the shareholders of First
American are required to be mailed not less than ten (10) days nor more than
sixty (60) days before the meeting.
Charter's bylaws provide that, unless otherwise prescribed by the
regulations of the OTS, a special meeting of the shareholders of Charter may be
called by the Chairman of the Board of Directors, by the President or by a
majority of the Board of Directors, and shall be called by the Chairman of the
Board, the President or the Secretary upon the written request of the holders of
not less than 10% of all of the outstanding capital stock of Charter entitled to
vote at the meeting. Unless otherwise provided in Charter's bylaws or the rules
and regulations of the OTS, a majority of the votes cast is generally required
for any action by Charter's shareholders.
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 Charter's charter must be proposed
by Charter's Board, preliminarily approved by the OTS and approved by the
shareholders of Charter by a majority of the total votes eligible to be cast at
a meeting.
Under the TBCA, 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. Charter bylaws may be amended in a manner consistent
with OTS regulations at any time by a majority vote of the full Charter Board or
a majority of the votes cast by shareholders of Charter at a meeting of
shareholders.
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.
REQUIRED SHAREHOLDER VOTE FOR CERTAIN ACTIONS. Under OTS regulations, a
combination of two depository institutions that includes a federal savings bank
such as Charter, requires approval by a two-thirds vote of the entire board of
the federal savings bank entering into the combination. A combination is defined
by OTS regulations to include a merger, a consolidation, or an acquisition of
the assets or an assumption of the liabilities of one institution by another. In
general, the agreement in which the combination is set forth must
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be approved by an affirmative vote of two-thirds of the outstanding voting stock
of the federal savings institutions participating in the combination and by a
majority of the shares of each voting class entitled to vote as a class.
Under the TBCA, except as otherwise described below or provided in the
Business Combination Act, any plan of merger or share exchange involving First
American would require adoption by the Board of Directors, who would generally
be required to recommend its approval to the shareholders, who in turn would be
required to approve the plan by a vote of a simple majority of the outstanding
shares. Except as otherwise described below or provided in the Business
Combination Act, any sale, lease, exchange or other disposition of all or
substantially all of First American's assets not made in the usual and regular
course of business would generally require that the Board of Directors recommend
the proposed transaction to the shareholders who would be required to approve
the transaction by a vote of a simple majority of the outstanding shares. In
accordance with Tennessee law, the submission by the Board of Directors of any
such action may be conditioned on any basis, including, without limitation,
conditions regarding a supermajority voting requirement or that no more than a
certain number of shares indicate that they will seek dissenters' rights.
With respect to a plan of merger, no vote of the shareholders of First
American is required if First American is the surviving corporation and: (i)
First American's charter would remain unchanged after the merger, subject to
certain exceptions; (ii) each shareholder of First American immediately before
the merger would hold an identical number of shares, with identical
designations, limitations, preferences and relative rights, after the merger;
(iii) the voting power of the shares outstanding immediately after the merger,
plus the voting power of the shares issuable as a result of the merger will not
exceed by more than 20% the voting power of the total shares outstanding
immediately before the merger; and (iv) the number of shares of First American
stock entitling holders to participate without limitation in distributions to be
issued in the merger (either by the conversion of securities issued in the
merger or by the exercise of rights and warrants issued in the merger) would not
exceed more than 20% of the shares of First American stock entitling holders to
participate without limitation in distributions outstanding immediately before
the merger.
Except as otherwise provided below or in the charter or bylaws of First
American, with respect to a sale, lease, exchange or other disposition of all or
substantially all the assets of First American made upon the authority of the
Board of Directors, no vote of the shareholders of First American would be
required if such disposition is made in the usual and regular course of business
or if such disposition is made to a wholly-owned subsidiary of First American.
ANTITAKEOVER PROVISIONS. 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. Charter's charter and bylaws, and the
laws applicable to Charter, do not contain similar provisions. However,
regulations adopted by the OTS pursuant to the savings association holding
company provisions of the HOLA and the Change in Bank Control Act of 1978,
prohibit a person or company from acquiring "control" of a thrift unless an
application has been filed with the OTS and the OTS has approved or disapproved
such application. The acquisition of 25 percent or more of the outstanding
Charter Common Stock, among other things, would constitute control of Charter;
however, control may be presumed under OTS regulations once such company or
person owns more than ten percent of the outstanding shares of Charter Common
Stock. In addition, any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the OTS.
This section sets forth a brief discussion of the reasons for, and the
operation and effects of, the provisions applicable to First American.
Fair Price Provision. Charter's charter and bylaws contain no provisions
requiring more than a majority vote of all shares entitled to vote on any
particular matter that may be subjected to a shareholder vote. First American's
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
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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.
Generally, under Tennessee law, for a plan of merger, share exchange,
consolidation, liquidation or voluntary dissolution, or a plan to sell, lease,
exchange or otherwise dispose of all or substantially all of the property and
assets of a corporation to be adopted by a corporation, such plan must (i) be
approved by such corporation's Board of Directors; and (ii) receive a majority
of the votes cast by all shareholders of the corporation entitled to vote
thereon. The increased shareholder vote required to approve certain transactions
with an Interested Shareholder may have the effect of foreclosing such
transactions with respect to which a simple majority of the shareholders
believes is in the best interests of the shareholders and may place the power to
prevent such a merger or combination in the hands of a minority of shareholders.
Shareholder Rights Plan. First American has in place a Rights Agreement,
dated December 14, 1988, (the "Rights Agreement") under which holders of First
American Common Stock are issued certain 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
"Record Date") and for each share of Common Stock issued (including shares
distributed from treasury) by First American after the 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 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 share 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 will
represent the Rights.
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 (the "Redemption Price"), payable, at the election
of such majority of independent directors, in cash or shares of 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
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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 with 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.
Greenmail Act. The Tennessee Greenmail Act ("TGA") applies to any
corporation chartered under the laws of Tennessee which has a class of voting
stock registered or traded on a national securities exchange or registered with
the SEC pursuant to Section 12(g) of the Exchange Act, such as First American.
The TGA provides that it is unlawful for any corporation or subsidiary to
purchase, either directly or indirectly, any of its shares at a price above the
market value, as defined in the TGA, from any person who holds more than 3% of
the class of the securities purchased if such person has held such shares for
less than two years, unless either the purchase is first approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued or the corporation makes an offer of at least equal value per share
to all holders of shares of such class.
Charter is not subject to similar provisions with respect to such purchases
of shares by a corporation.
Control Share Acquisitions. The Tennessee Control Share Acquisition Act
(the "Tennessee CSAA") restricts the voting powers of shares acquired by a party
once a specific level of control is acquired, unless certain conditions are met.
Specifically, the Tennessee CSAA provides that "Control Shares" will not have
the voting rights to which they normally would be entitled unless approved by a
majority of the disinterested shareholders at an annual or special meeting.
"Control shares" are shares that, in the absence of the Tennessee CSAA,
would give the acquiror voting power within any of the following ranges of all
of the voting power of First American: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a majority
or more.
Pursuant to the Tennessee CSAA and the bylaws of First American, First
American is authorized to redeem all, but not less than all, of the control
shares acquired in a control share acquisition during a period ending 60 days
after the last acquisition of control shares by an acquiring person for the fair
value of such shares if: (i) no control acquisition statement has been filed or
(ii) a control acquisition statement has been filed and the shares are not
accorded voting rights by the shareholders pursuant to the Tennessee CSAA.
The provisions described above might be deemed to make First American less
attractive as a candidate for acquisition by another company than would
otherwise be the case in the absence of such provisions. For example, if another
company sought to acquire a controlling interest of less than 66 2/3% of the
outstanding shares of FAC Common Stock, the acquiror would not thereby obtain
the ability to replace a majority of the First American Board of Directors until
at least the second annual meeting of shareholders following the acquisition,
and furthermore the acquiror would not obtain the ability immediately to effect
a merger, consolidation or other similar business combination unless the
described conditions were met. As a result, First American's shareholders may be
deprived of opportunities to sell some or all of their shares at prices that
represent a premium over prevailing market prices in a takeover context. The
provisions described above also may make it more difficult for First American's
shareholders to replace the First American Board of Directors
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or management, even if the holders of a majority of the FAC Common Stock should
believe that such replacement is in the interests of First American. As a
result, such provisions may tend to perpetuate the incumbent First American
Board of Directors and management.
Tennessee Investor Protection Act. The Tennessee Investor Protection Act
makes it unlawful for any person to make a takeover offer or to acquire any
equity security in an offeree company unless the takeover offer is exempt or
becomes effective pursuant to the filing of a registration statement and other
documents with the Tennessee Commissioner of Commerce and Insurance. The
Tennessee Investor Protection Act also sets forth restrictions and limits on
takeover offers. For example, a person who beneficially owns 5% or more of any
class of the equity securities of a company is prohibited from making a takeover
offer for such company (the "offeree company") unless, prior to making such
offer, the offeror makes a public announcement of his intention with respect to
changing or influencing the management or control of the offeree company, makes
a disclosure of such intention to the persons from whom he intends to acquire
such securities, and files with the Commissioner and the offeree company a
statement signifying such intentions and containing any additional information
required. An offeror must make a takeover offer to the holders of record or
beneficial owners of equity securities of the offeree company who reside in
Tennessee on substantially the same terms as the offer is made to owners of
securities who reside outside of Tennessee. The securities of an offeree company
deposited pursuant to a takeover offer may be withdrawn by the offeree or on the
offeree's behalf at any time within seven days from the date the offer has
become effective or after 60 days from the date the offer has become effective.
If an offer is made for less than all the outstanding securities in a class, but
more securities are deposited within ten days after the offer is effective than
the offeror offered to accept, then the securities must be accepted on a
pro-rata basis. The Tennessee Investor Protection Act also provides that if an
offeror increases the consideration for the takeover offer before its expiration
date, the increase must be paid for all equity securities accepted before or
after the variation of the terms of the offer. The Tennessee Investor Protection
Act does not apply to state banks, savings and loan associations, public
utilities or domestic insurance companies (whose takeover is subject to other
specific provisions of title Tennessee law).
The Tennessee Business Combination Act. The Tennessee Business Combination
Act ("Business Combination Act") provides that a Tennessee corporation may not
engage in a business combination with an interested shareholder of such
corporation or any affiliate or associate of such interested shareholder for
five years following the interested shareholder's share acquisition unless the
business combination is approved by the board of directors of the corporation
prior to the date of the interested shareholder's share acquisition or the
business combination is exempt from the Business Combination Act. The Business
Combination Act also provides the procedure to be followed to carry out a
business combination after the five year period.
Under the Business Combination Act, a corporation may enact a charter
amendment or bylaw to remove itself entirely from the Business Combination Act.
Such an amendment or bylaw must be approved by a majority of the shareholders
who have held shares for more than one year prior to the vote. It may not take
effect for at least 2 years after the vote. First American has not adopted a
charter or bylaw amendment removing it from coverage under Business Combination
Act.
The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not vote to
approve proposed business combinations or charter amendments and bylaws removing
their corporations from the act's coverage so long as such officers and
directors act in "good faith belief" that the proposed business combination
would adversely affect their corporation's employees, customers, suppliers, or
the communities in which their corporation operates and such factors are
permitted to be considered by the board of directors under the corporate
charter. First American's charter provides that directors of First American,
when evaluating a tender or exchange offer for any equity security of First
American, the merger or consolidation of First American with another entity, or
the purchase of all or substantially all of the assets of First American shall
consider such factors as the value of the consideration in relation to the value
of First American and in relation to the Board of Directors' then estimate of
the future value of First American as an independent entity, the social and
economic effects on employees, customers, suppliers and other constituents of
First American and its subsidiaries and on the communities in which First
American and its subsidiaries operate or are located and the desirability of
maintaining First American's independence from other entities.
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DIVIDENDS AND OTHER DISTRIBUTIONS. Under the TBCA, First American
generally may pay dividends or make other distributions to its shareholders, but
may make no distribution if, after giving effect to it, either: (i) First
American would not be able to pay its debts as they become due in the usual
course of business; or (ii) First American's total assets would be less than the
sum of its total liabilities plus the amount that would be needed to satisfy the
preferential dissolution rights of shareholders whose preferential rights are
superior to those receiving the distribution. See "CERTAIN REGULATORY
CONSIDERATIONS -- Payment of Dividends."
Under OTS regulations limitations are imposed upon "capital distributions"
by savings institutions, including cash dividends, payments to repurchase or
otherwise acquire the institution's shares, payments to shareholders of another
institution in a cash-out merger, and other distributions charged against
capital, including direct and indirect distributions to affiliates. The
limitations vary depending upon the capital levels of the institution. In
addition, the OTS may prohibit a proposed capital distribution by an
institution, which would otherwise be permitted by the regulation, if the OTS
determines that the distribution would constitute an unsafe and unsound
practice.
VOLUNTARY DISSOLUTION. Charter's Board of Directors may, under OTS
regulations, propose a plan for dissolution of Charter. The plan may provide for
either: (i) appointment of the FDIC or the RTC as receiver for the purpose of
liquidation; (ii) transfer of all of Charter's assets to another association and
home-financing institution under federal or state charter either for cash
sufficient to pay all obligations of the bank and retire all outstanding
accounts or in exchange for that association's payment of all of Charter's
outstanding obligations and issuance of share accounts or other evidence of
interest to Charter's shareholders on a pro rata basis; or (iii) dissolution in
a manner proposed by the directors which they consider best for all concerned.
In order to take effect, the plan must be approved by the OTS and by Charter's
shareholders at a duly called meeting.
In connection with its conversion from the mutual to the stock form of
ownership, Charter was required to establish a "liquidation account" for the
benefit of savings account holders at the time of conversion The liquidation
account grants such savings account holders who have continued to maintain their
savings accounts at Charter the right to a priority distribution from the
liquidation account before any distribution is made with respect to Charter
Common Stock in the event of a complete liquidation of Charter. The Merger does
not constitute a complete liquidation and will not trigger a distribution from
the liquidation account. Upon consummation of the Merger, the liquidation
account will be maintained by Surviving Charter.
Tennessee law provides that First American may be dissolved if the Board of
Directors of First American proposes dissolution and a majority of the shares of
First American entitled to vote thereon approves. In accordance with Tennessee
law, the Board of Directors of First American may condition its submission of a
proposal for dissolution on any basis.
LIABILITY OF DIRECTORS; INDEMNIFICATION. OTS Regulations provide for
indemnification of directors, officers and employees of federal savings
associations against expenses (including reasonable attorney's fees), judgments,
fines and settlements in connection with litigation. Such indemnification is
available if final judgment on the merits is rendered in favor of the
indemnitee; or, in the case of settlement, final judgment against the indemnitee
or final judgment in favor of the indemnitee other than on the merits,
indemnification is available if a majority of the disinterested directors of the
savings association determine that the indemnitee was acting in good faith
within the scope of his or her employment or authority as he or she could
reasonably have perceived it under the circumstances and for a purpose he or she
could reasonably have believed under the circumstances was in the best interests
of the savings association and its members. However, no indemnification is
available unless the federal savings association provides the OTS within sixty
(60) days notice of its intention to provide such indemnification. Such notice
must state the facts on which the action arose and the terms of any settlement
or disposition. No such indemnification may be made if the OTS advises the
federal savings association of its objection thereto. The federal savings
association may obtain insurance to protect it and its directors, officers and
employees from potential losses arising from claims against any of them for
alleged wrongful acts committed in their capacity as directors, officers or
employees; provided, however,
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that no such insurance may be obtained that provides for payment of losses of
any person incurred as a consequence of his or her willful or criminal
misconduct.
Sections 48-18-501 through 48-18-507 of the TBCA provide that a business
corporation may indemnify directors and officers against liabilities they may
incur in such capacities provided certain standards are met, including good
faith and the belief that the particular action is in the best interests of the
corporation. In general, this power to indemnify does not exist in the case of
actions against a director or officer by or in the right of the corporation if
the person entitled to indemnification shall have been adjudged to be liable to
the corporation. A corporation is required to indemnify directors and officers
against expenses they may incur in defending actions against them in such
capacities if they are successful on the merits or otherwise in the defense of
such actions.
Section 48-18-507 of the TBCA provides that the foregoing provisions shall
not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled, consistent with public policy, pursuant to any
provision of a corporation's charter, bylaws, general or specific action of its
board of directors, or contract, provided that no indemnification may be made in
connection with any proceeding charging improper personal benefit to an officer
or director, where such officer or director is adjudged liable on the basis that
personal benefit was improperly received.
The charter of First American provides for the discretionary
indemnification of directors and officers in accordance with and to the full
extent permitted by the 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; or (iv) in a proceeding by First
American directly (and not derivatively) for expenses, unless such proceeding
shall be 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.
RESALE OF FAC COMMON STOCK
The shares of FAC Common Stock issuable to shareholders of Charter upon
consummation of the Merger have been registered under the Securities Act. It is
a condition 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 Charter 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, Charter,
and for purposes hereof could be deemed to include all executive officers,
directors and 10% shareholders of Charter.
FAC Common Stock received and beneficially owned by those shareholders who
are deemed to be affiliates of Charter 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 the event that
First American elects to restructure the Merger to qualify for
pooling-of-interests accounting, shares of FAC Common Stock issued to affiliates
of Charter 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 Charter have
been published.
If the Merger is accounted for as a pooling-of-interests, the Agreement
provides that Charter shall use its reasonable efforts to cause each person
identified by Charter as an affiliate of Charter to deliver to First
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American, at least 30 days prior to the Effective Time, a written agreement
providing that such person will not dispose of Charter 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 First American 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 Charter 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 shall bear and pay the filing fees payable in connection
with the Registration Statement, the Prospectus/Proxy Statement, and all
applications filed with the regulatory authorities and First American and
Charter will share equally the printing and mailing costs incurred in connection
with the Registration Statement and the Prospectus/Proxy Statement.
ACCOUNTING TREATMENT
First American anticipates that it will account for the Merger as a
purchase. Under the Agreement First American could elect to restructure the
Merger to qualify for pooling-of-interests accounting and it is a condition
precedent to First American's obligations to consummate the Merger that no event
shall have occurred that will preclude the Merger from being accounted for as a
"pooling-of-interests" transaction. Under the pooling-of-interests method of
accounting, the historical basis of the assets and liabilities of First American
and Charter would be combined and carried forward at their previously recorded
amounts. Revenue and expenses of First American and Charter would be combined at
historically recorded amounts. However, in view of the repurchases of FAC Common
Stock that First American has effected and the limited possibility as a result
of such repurchases that First American could restructure the transaction to
account for it as a pooling of interests, First American has determined that it
will not pursue these provisions of the Agreement, has waived this condition,
and will account for the Merger as a purchase.
The future impact of the Contingent Consideration, if any is issued, is not
determinable. If Contingent Consideration becomes issuable, the appropriate
accounting for the shares of FAC Common Stock or other consideration issued is
dependent on, among other things, the timing of any Goodwill Litigation
Recovery.
NO DISSENTERS' RIGHTS
The holders of Charter Common Stock will not have dissenters' rights in
connection with the Merger and the transactions contemplated thereby. Therefore,
if the Agreement is approved by the affirmative vote of at least two-thirds of
all of the outstanding shares of Charter Common Stock, and all other conditions
to the consummation of the Merger are satisfied, all shareholders of Charter
will receive the consideration provided for in the Agreement. See "-- Terms of
the Merger."
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 shall have been
approved for trading on The Nasdaq Stock Market.
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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. As a result of First American's ownership
of Charter as a separate savings association subsidiary of First American
following the Merger, 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. Charter is a federal
savings bank subject to the supervision of, and is regularly examined by, the
OTS. Each of First American's banking subsidiaries, as well as Charter, are also
insured by, and subject to the regulations of, the Federal Deposit Insurance
Corporation (the "FDIC"), and are 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 offerings and other aspects of operations.
First American's non-banking subsidiaries are, and following the Merger
Charter will be, 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 (which, following
consummation of the Merger, will include Charter) can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured subsidiary
or (ii) any assistance provided by the FDIC to any commonly controlled
FDIC-insured subsidiary "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the 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 (including, after
the Merger, Charter).
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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 HFB, 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.
Charter is, and will continue following the Merger to be, 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, Charter's tangible ratio was 6.18%, its
core (leverage) capital ratio was 6.18%, Tier 1 risk-based capital ratio was
12.79% of risk-weighted assets and its total risk-based capital ratio was
approximately 14.02% of risk-weighted assets.
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 have revised the 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. First American does not believe that these recent proposals and
revisions to the capital guidelines will materially impact its operations.
The OTS regulatory capital requirements already incorporate an interest
rate risk component. Under the OTS regulation, a savings institution's interest
rate risk is measured by the decline in the net portfolio value of its assets
that would result from a hypothetical 200 basis point increase or decrease in
interest rates, divided by
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the estimated economic value of the institution's assets. A savings institution
whose interest rate risk exposure exceeds 2% would be required to deduct an
amount equal to one half of the difference between the institution's interest
rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The OTS, however, has postponed requiring any such
deductions from capital until an appeals process is developed for the
measurement of an institution's interest rate risk. Charter does not believe
that these recent 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.
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state imposed concentration limits.
Under these concentration limits, a bank holding company which controls more
than 10% of the total amount of deposits of insured depository institutions in
the United States is prohibited 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 FANB is located.
Under federal law, 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 de novo interstate branching at an earlier date), provided certain
conditions are met, including that applicable state law must expressly permit
such de novo interstate branching. Both Virginia and Tennessee have enacted
interstate branching laws in response to the federal law. The Virginia law is
effective July 1, 1995; the Tennessee law is effective June 1, 1997.
BANK REGULATION
PAYMENT OF DIVIDENDS. First American is a legal entity separate and
distinct from its subsidiary banks. 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.
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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
most restrictive debt covenant in effect during 1995 (contained in the revolving
credit agreement), approximately $94.6 million of First American's retained
earnings were available to pay dividends on June 30, 1995.
OTS regulations also impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
savings institutions, such as Charter. Under these regulations, a savings
association, such as Charter that exceeds its fully phased-in capital
requirements both immediately prior to and on a pro forma basis after giving
effect to, a proposed capital distribution ("Tier 1 Association") is generally
permitted without prior approval of (but with prior notice to) the OTS to make a
capital distribution during a calendar year equal to the greater of (i) 100% of
its net earnings to date during the calendar year, plus the amount that would
reduce by one-half its 'surplus capital ratio' (i.e., the excess capital over
its fully phased in capital requirements) at the beginning of the calendar year;
or (ii) 75% of its net income for the previous four quarters. Restrictions on
the ability to make capital distributions would be imposed if the institution's
capital fell below its regulatory requirement or the OTS notified the
institution that it was in need of more than normal supervision, or that the
distribution would constitute an unsafe or unsound practice. Pursuant to this
regulation, as of June 30, 1995, Charter is a Tier 1 Association and had
approximately $13 million available to distribution as dividends to
shareholders.
In addition to the foregoing, under the FDIA, insured depository
institutions, such as FANB, FANBKY, FATC and Charter 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 or, after
the Merger, from Charter.
FDIC INSURANCE. First American's subsidiary banks and Charter 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%. Charter's
assigned assessment rate for the same period was 0.26%. 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 Charter 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
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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 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 has been assessed at June 30, 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 $4.4
million and $4.7 million and Heritage would have been required to pay between
$3.8 and $4.0 million.
COMMUNITY REINVESTMENT ACT. First American's subsidiary banks, as well as
Charter, 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 is being
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 the holding company and its
nonbank subsidiaries) and the insured bank itself (which for purposes of the law
would include Charter). 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.
Any loans made by First American's bank subsidiaries or by Charter to
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,
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and are subject to individual and aggregate limits depending on the person
involved. Further, provisions of the BHCA prohibit a bank holding company and
its subsidiaries from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
OTHER SAFETY AND SOUNDNESS REGULATIONS. 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 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 Charter, 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 or the Federal National Mortgage Association.
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, Charter maintained 89.7% of its
portfolio assets in Qualified Thrift Investments, which was well in excess of
the 65% minimum under the Qualified Thrift Lender Test.
PROPOSAL II -- ELECTION OF DIRECTORS
At each election for directors, every shareholder entitled to vote has the
right to vote, in person or by proxy, the number of shares owned by him for as
many persons as there are directors to be elected, or to cumulate his votes by
giving one nominee as many votes as shall equal the number of all such directors
to be
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elected multiplied by the number of his shares, or by distributing such votes on
the same principle among any number of nominees. If a shareholder intends to
cumulate his/her votes for the nominees, the proxy card must be filled out
pursuant to the instructions set forth therein.
Pursuant to its bylaws, the number of directors is currently set at eleven.
The directors are divided into three classes, as nearly equal in number as
possible. Four directors are to be elected at this meeting to serve until the
1998 annual meeting or until their successors are elected and qualified to
serve. The nominees, E.L. Byington, Jr., Lois A. Clarke, Clifford R.
Quesenberry, Sr. and John G. Wampler are all currently serving on the Board of
Directors and are being nominated by the Board of Directors for re-election. No
person being nominated as a director is being proposed for election pursuant to
any agreement or understanding between any person and Charter. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH NOMINEE.
IT IS THE INTENTION OF THE BOARD OF DIRECTORS AS PROXIES TO VOTE FOR THE
ELECTION OF ALL OR CUMULATIVELY FOR ANY ONE OR MORE OF THE NOMINEES FOR
DIRECTORS NAMED ABOVE, AT THEIR DISCRETION, UNLESS THE PROXY IS MARKED TO THE
CONTRARY.
Management believes that all such nominees will stand for election, but if
any person nominated fails to stand for election, the Board of Directors
reserves full discretion to vote for any other person who may be nominated.
Management has no reason to believe that any nominee named herein will not serve
if elected as director. If any nominee is not re-elected, the Charter Board will
decrease the size of the Board of Directors.
GENERAL INFORMATION
The Board of Directors is responsible for the overall affairs of Charter.
To assist in carrying out its duties, the Board of Directors has established
five committees and appointed board members to serve on these committees.
The Board of Directors, as required by the bylaws, acts as nominating
committee for selecting the management nominees for election as directors. A
slate of nominees to present to the shareholders is determined by at least a
majority vote of those directors whose terms do not expire during the year in
which the election of directors may be made. The nominating committee will
consider recommendations by shareholders in its selection of nominees to the
Board of Directors, such recommendations to be proposed for election at the 1996
annual shareholders' meeting should be made to the Board of Directors by May 1,
1996. However, no formal procedures have been established in that regard.
Under Charter's charter, nominations for directors and new business
submitted by shareholders must be submitted in writing and delivered to the
Secretary of Charter at least 5 days prior to the date of the annual meeting in
order to be considered at an annual meeting. Moreover, shareholder nominees
should be aware that any solicitation of proxies for such shareholder nominees
or new business are required to comply with the Federal securities laws in
addition to the charter provision and OTS regulations.
INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS
The nominees and continuing directors, their age, principal occupation or
employment for the past five years and position with Charter, the year first
elected as director of Charter, the year in which their current term will expire
and the amount of Common Stock and percent thereof beneficially owned on the
Record Date, are shown on the following table. "Common Stock owned" includes:
stock held in joint tenancy; stock owned or held by a spouse or other member of
the nominee's or continuing director's household; stock in which the nominee or
continuing director either has or shares voting and/or investment power, even
though
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the nominee or continuing director disclaims any beneficial interest in such
stock; and stock which the nominee or continuing director has the right to
acquire within sixty days.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME, AGE, PRINCIPAL OCCUPATION, OF BENEFICIAL OWNERSHIP
POSITION OR OFFICES HELD WITH DIRECTOR TERM OF COMMON STOCK PERCENT OF
CHARTER, IF ANY SINCE EXPIRES AS OF RECORD DATE CLASS
- --------------------------------------- -------- ------- ------------------------ ----------
<S> <C> <C> <C> <C>
NOMINEES -- THREE YEAR TERM
E. L. Byington, Jr..................... 1961 1998 22,153 (1) .43%
Age -- 67
Chairman Emeritus; Retired as President
and Chief Executive Officer of
Charter on March 15, 1993, the
position held since April 1, 1964,
Director; Director of Highlands
Service Corporation, and Charter
Federal Services Corp.
Lois A. Clarke......................... 1984 1998 6,783 (Directly) 14.50%
Age -- 50 478 (Indirectly)
Executive Vice President and Chief 735,969 (Indirectly)(3)
Financial
Officer of The United Company;
President of United Affiliates
Corporation and President of United
Investment Corporation, Director(2)
Clifford R. Quesenberry, Sr............ 1976 1998 5,480 .11%
Age -- 73
President of C. R. Quesenberry, Inc.,
an oil distributorship, Director
John G. Wampler........................ 1994 1998 100 .002%
Age -- 37
President and Chief Operating Officer
of Pulaski Furniture Corporation
since December 1993, formerly held
various positions with Pulaski
Furniture since 1980, Director
CONTINUING DIRECTORS
L. Lowell Anderson..................... 1959 1997 2,000 .04%
Age -- 71
Architect and sole practitioner;
retired, Director
Robert J. Bartel....................... 1989 1996 11,128 .22%
Age -- 63
Chairman of the Board of Charter since
1991; Professor of Economics and
Business and Director of
International Business Institute
Billy M. Brammer....................... 1994 1997 7,500 (Directly) .57%
Age -- 64 250 (Indirectly)
Executive Vice President -- Finance and 21,559 (Indirectly)(4)
Treasurer of Bassett Furniture
Industries, Inc. since 1989, Director
</TABLE>
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<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME, AGE, PRINCIPAL OCCUPATION, OF BENEFICIAL OWNERSHIP
POSITION OR OFFICES HELD WITH DIRECTOR TERM OF COMMON STOCK PERCENT OF
CHARTER, IF ANY SINCE EXPIRES AS OF RECORD DATE CLASS
- --------------------------------------- -------- ------- ------------------------ ----------
<S> <C> <C> <C> <C>
Morton W. Lester....................... 1985 1997 18,038 (Directly) .49%
Age -- 61 7,246 (Indirectly)
Owner and President of The Lester
Corporation, a building, contracting
and real estate firm, Director
Francis L. Leonard..................... 1984 1996 8,479 (Directly) 10.09%
Age -- 61 508,497 (Indirectly)(5)
Chairman and Chief Executive Officer of
Electro-Mechanical Corporation, of
which Line Power is a division,
Director
Cecil R. McCullar...................... 1993 1996 12,239 (1) .24%
Age -- 58
President and Chief Executive Officer
of Charter since March 15, 1993;
prior thereto, various executive
positions with Dominion Bank, N.A.;
since May 1984 Retail Executive
Officer of Dominion Bank, N.A.,
Director
Robert E. Torray....................... 1993 1997 677,935 (Directly) 20.49%
Age -- 58 372,500 (Indirectly)(6)
President and Chairman of Robert E.
Torray & Co., Inc., an investment
management company; and President of
The Torray Corporation, investment
adviser to The Torray Fund, a
no-load, open-end mutual fund,
Director
EXECUTIVE OFFICER (WHO IS NOT A DIRECTOR)
Richard Buchanan, Executive Vice
President -- Finance and Credit
Administration......................... 10,720 (1) 0.21%
All Directors, nominees and executive
officers, as a group (17 persons).... 2,454,487 (7)(8) 47.50%
</TABLE>
- ---------------
(1) Includes 4,700, 2,000 and 4,720 non-statutory options awarded to Messrs.
Byington, McCullar and Buchanan, respectively, which became exercisable on
October 14, 1994, one year from the date of grant. Also includes 5,000 and
2,000 incentive stock options, and does not include 20,000 and 8,000
incentive stock options, awarded to Messrs. McCullar and Buchanan,
respectively. The incentive stock options vest at a rate of 20% per year
commencing October 14, 1994.
(2) Mrs. Clarke's beneficial ownership of 691,969 shares of Common Stock is the
result of the direct ownership of those shares by The United Company, a
corporation with respect to which Mrs. Clark is Executive Vice President and
Chief Financial Officer and has shared dispositive power with respect to
those shares. Mrs. Clarke also serves a Vice President and Treasurer of
Unifund Corporation, a Virginia Corporation owned by certain employees of
The United Company and its subsidiaries. In her capacity as Vice President
and Treasurer of Unifund, she may be deemed to be the beneficial owner of
44,000 shares of Common Stock owned by Unifund.
(3) Mrs. Clarke, as Executive Vice President and Chief Financial Officer of The
United Company and Vice President and Treasurer of Unifund Corporation, is
deemed to beneficially own 735,969 shares held by those Corporations. See
"Security Ownership of Certain Beneficial Owners". In that capacity, she
shares
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the power to vote, to direct the vote, and shares the power to dispose of or
to direct disposition of the shares owned by The United Company and Unifund.
(4) Mr. Brammer's beneficial ownership of 21,559 shares of Common Stock is the
result of direct ownership of those shares by Bassett Furniture Industries,
a corporation with respect to which Mr. Brammer is Executive Vice
President -- Finance and Treasurer. In that capacity, Mr. Brammer possesses
voting and dispositive power with respect to those shares held by Bassett
Furniture Industries.
(5) Mr. Leonard's beneficial ownership of 508,497 shares of Common Stock is the
result of direct ownership of those shares by Line Power Manufacturing
Corporation, a corporation with respect to which Mr. Leonard is Chairman and
Chief Executive Officer. Mr. Leonard is also a majority stockholder of Line
Power Manufacturing Corporation and possesses voting and dispositive power
with respect to those shares held by Line Power Manufacturing Corporation.
(6) Mr. Torray's beneficial ownership of 292,500 shares of Common Stock is the
result of the direct ownership of those shares by Robert E. Torray &
Company, Inc. for the benefit of its clients, of that amount, Mr. Torray may
be deemed to have sole dispositive power over all shares and to share
dispositive power over no shares with a client. Mr. Torray may be deemed to
have sole voting authority over 196,500 of those shares and shared voting
authority over none. The Torray Fund, a no load, diversified, open end
management investment company owns 80,000 shares of Common Stock over which
Mr. Torray may be deemed to have shared voting and dispositive power over
all those shares by virtue of his position as President of The Torray
Corporation, investment adviser to the Torray Fund.
(7) All shares, except as noted in (3), (4), (5) and (6) above, are individually
held or held jointly with, or individually by spouses or children, or in an
Individual Retirement Account.
(8) Includes 41,200 shares subject to options which are currently exercisable
(including 18,420 shares set forth in footnote 1 above).
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors held twelve regular meetings and seven special
meetings during the fiscal year ended June 30, 1995. All directors attended more
than 80% of the meetings of the Board of Directors and of the Committees of
which they are members.
Membership in the standing committees of the Board of Directors is as
follows:
EXECUTIVE COMMITTEE
Robert J. Bartel, Chairman
E.L. Byington, Jr.
Lois A. Clarke
Francis L. Leonard
C.R. McCullar -- "ex-officio"
Robert E. Torray
<TABLE>
<CAPTION>
ASSET/LIABILITY COMMITTEE AUDIT/COMPLIANCE COMMITTEE
- ------------------------------------------------------ ---------------------------------------
<S> <C>
Robert E. Torray, Chairman Clifford R. Quesenberry, Sr., Chairman
Robert J. Bartel -- "ex-officio" L. Lowell Anderson
Billy M. Brammer Robert J. Bartel -- "ex-officio"
E.L. Byington, Jr. Billy M. Brammer
Lois A. Clarke Morton W. Lester
Francis L. Leonard
C.R. McCullar -- "ex-officio"
</TABLE>
75
<PAGE> 84
<TABLE>
<CAPTION>
HUMAN RESOURCES COMMITTEE STOCK OPTION COMMITTEE
- ------------------------------------------------------ ---------------------------------------
<S> <C>
Lois A. Clarke, Chairman Lois A. Clarke, Chairman
Robert J. Bartel -- "ex-officio" Robert J. Bartel -- "ex-officio"
Francis L. Leonard Francis L. Leonard
C.R. McCullar -- "ex-officio" Robert E. Torray
Robert E. Torray John G. Wampler
John G. Wampler
</TABLE>
EXECUTIVE COMMITTEE
Charter's Board of Directors, pursuant to its bylaws, and by resolution
adopted by a majority of the full Board of Directors has appointed an Executive
Committee of the Board of Directors which includes the Chief Executive Officer.
The members of the Executive Committee are appointed to serve one year terms.
The Executive Committee has the authority of the Board of Directors when
the Board of Directors is not in session and may exercise all of the authority
of the Board of Directors except with reference to certain extraordinary
corporate transactions, as specified in Charter's bylaws. The Executive
Committee held one meeting during the fiscal year ended June 30, 1995.
ASSET/LIABILITY COMMITTEE
The Asset/Liability Committee is responsible for the development and
coordination of asset/liability programs which will maximize the profits of
Charter. The Asset/Liability Committee held one meeting during the fiscal year
ended June 30, 1995.
AUDIT/COMPLIANCE COMMITTEE
The Audit/Compliance Committee is responsible for recommending Charter's
independent accountants, reviewing the scope and results of audits, reviewing
Charter's compliance with regulatory matters, and recommending internal
accounting controls. The Audit/Compliance Committee also reviews internal audit,
accounting, data processing and reporting functions. The Audit/Compliance
Committee held four meetings during the fiscal year ended June 30, 1995.
HUMAN RESOURCES COMMITTEE
The Human Resources Committee is responsible for recommending overall
compensation, and/or reviewing chief executive officer performance, developing
recommendations for compensation adjustment of officers reporting to the chief
executive officer, and developing recommendations for position changes of
officers and other personnel. The Human Resources Committee also establishes
reward systems in order to attract individuals who will excel in their
respective assignments. The Human Resources Committee recommends to the Board of
Directors possible candidates for consideration as nominees for election as
directors. The Human Resources Committee held three meeting during the fiscal
year ended June 30, 1995.
STOCK OPTION COMMITTEE
The Stock Option Committee is responsible for the administration of the
1993 Incentive Stock Option Plan. The Stock Option Committee is authorized,
subject to the provisions of the plan, to establish such rules and regulations
as it deems necessary for the proper administration of the plan and to make
whatever determinations and interpretations in connection with the plan as it
deems necessary or advisable. The Stock Option Committee did not meet during the
fiscal year ended June 30, 1995.
DIRECTORS' REMUNERATION
Directors receive an annual retainer of $5,000, in addition to $500 per
each Board meeting attended. Directors, except for salaried officers, receive a
fee of $150 ($200 in the case of the committee chairman) per
76
<PAGE> 85
committee meeting attended. Additional compensation is paid to directors who
must travel outside their immediate location to attend meetings, which
compensation is in the amount of $250 per day. During the fiscal year ended June
30, 1995, all directors received additional compensation for travel. The
Chairman of the Board is paid a monthly fee of $2,000 for attending all Board
and committee meetings held during each month, as well as for other
investor-related services performed by him on behalf of Charter. The Chairman
does not receive the annual retainer paid to other directors due to his
receiving a monthly fee in lieu of being compensated per meeting attended. The
method of Board remuneration was not changed during fiscal 1995. During the
fiscal year ended June 30, 1995, Charter paid the Board of Directors an
aggregate amount of $169,149 pursuant to the fee arrangements described above.
Pursuant to a Supplemental Retirement Agreement which Charter entered into
with Former President and Chief Executive Officer, E.L. Byington, Jr., on
January 13, 1988, Mr. Byington is currently receiving retirement benefits
entitled him under that agreement through disbursements from a paid-up insurance
policy Charter holds on Mr. Byington's life. In addition, Mr. Byington was
granted 4,700 non-statutory stock options by the Board of Directors in
recognition of his tenure and past performance for Charter as its former
President and Chief Executive Officer following his resignation from that
position in March of 1993.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The report of the Human Resources Committee and the stock performance graph
shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933 (the "1933 Act") or the Exchange Act, except to the
extent that Charter specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such acts.
Under the rules of the OTS, Charter is required to provide certain data and
information in regard to the compensation and benefits provided to Charter's
Chief Executive Officer and the other executive officers of Charter. The
disclosure requirements for the Chief Executive Officer and the other executive
officers include the use of tables and a report explaining the rationale and
considerations that led to fundamental compensation decisions affecting those
individuals. In fulfillment of the report requirement, the Human Resources
Committee has prepared the following report for inclusion in this
Prospectus/Proxy Statement.
The Human Resources Committee makes determinations on matters of executive
compensation, except the Stock Option Committee makes determinations concerning
the grant of options under the 1993 Incentive Stock Option Plan. The Human
Resources Committee consists of six directors, including Mr. Cecil R. McCullar,
Charter's current President and Chief Executive Officer. Mr. McCullar is
ineligible to vote on matters affecting specifically his compensation nor is he
allowed to be present during discussions regarding his compensation. The Stock
Option Committee is comprised entirely of nonemployee directors, none of whom
are eligible to participate in the plan. The Board of Directors reviews and
ratifies the decisions of both committees.
COMPENSATION PHILOSOPHY -- The Board's primary objective with regard to
executive compensation is to establish and maintain an overall compensation
program that helps to attract, motivate, and retain the caliber of management
talent required to deliver desired financial performance and enhance shareholder
value. This objective is met through the delivery of competitive base salaries
and meaningful stock-based incentives.
Charter believes in the importance of providing competitive compensation to
executives charged with Charter's financial performance and shareholder
investment. To measure the competitiveness of executive compensation, Charter
periodically conducts studies with the help of external consultants. A
comprehensive evaluation of Charter's executive compensation package was
completed by an outside firm in May 1994 and the basis of executive compensation
was not changed during fiscal 1995 from that set following that evaluation.
Charter compares its executive compensation levels to average compensation paid
to similar positions in like-sized financial institutions with comparable
operating characteristics. The financial institutions included in such
comparison were among the institutions that comprise the peer group index used
in the Stock Performance Graph.
77
<PAGE> 86
BASE SALARY -- The Human Resources Committee determines base salary levels
for each executive by reviewing the midpoints, or averages, for the comparison
group mentioned above. In addition, a determination is made on the level of
individual contribution to bank performance and the degree to which each
executive meets the expectations for their position. However, no specific
formula is used for decisionmaking, nor does the Human Resources Committee set
compensation levels for executive officers based on whether specific financial
goals have been achieved by Charter. Rather, individual salaries vary in
relation to market average levels and on individual performance and experience.
Executive officers, along with other employees, received an average increase in
base salary of 5% during the 1995 fiscal year.
The base salary for the President and CEO was reviewed and increased in
June 1994 from $140,000 to $200,000 based on the May 1994 outside evaluation of
executive compensation referenced above and the application of the Bank's
philosophy for setting base salary levels. This salary increase brought the
President and CEO to the market average or midpoint level. Mr. McCullar's annual
salary was not adjusted during fiscal 1995.
INCENTIVE COMPENSATION -- There is currently no annual cash incentive or
bonus arrangement for executives of Charter. The Stock Option Committee relies
upon the use of stock options, such as allowed under the 1993 Incentive Stock
Option Plan, to encourage and reward management to achieve desired financial
performance and enhance shareholder value. The Stock Option Committee believes
this approach to incentive compensation effectively links the interests of
executives and shareholders. In determining the size of stock option grants, the
Stock Option Committee draws comparisons to average long-term incentive levels
in comparable financial institutions, although the Stock Option Committee's
policy in regard to stock options is subjective and no specific formula is used
in decision making.
The President and CEO was granted 2,000 Non-Statutory Stock Options in
September 1993 which vested on October 14, 1994 under the 1993 Incentive Stock
Option Plan in recognition of past performance and the successful
recapitalization of Charter. In addition, a grant of 25,000 incentive stock
options was made to the President and CEO by the Stock Option Committee in June
1994 based on the executive compensation evaluation discussed earlier and in
recognition of the Board's desire to deliver a more significant portion of
executive compensation in a form consistent with the President and CEO's role
and responsibility to shareholders. These options relate to the 1993 Incentive
Stock Option Plan and began vesting 20% annually on October 14, 1994. In
addition, certain other executive officers were granted stock options during the
same time periods. The Stock Option Committee did not grant any additional
options to executive officers during fiscal 1995 but will consider any awards
outstanding when determining annual compensation in the future.
Congress enacted legislation disallowing corporate tax deductions for pay
in excess of $1 million to "proxy table" executives, effective for 1994. Certain
exemptions to the law are available, including "performance based" or formula
driven incentive compensation arrangements. Based on current and anticipated
executive compensation levels at Charter, Charter does not risk losing
deductions under the new law and therefore has not adopted a policy pertaining
to it.
HUMAN RESOURCES COMMITTEE
<TABLE>
<S> <C>
Lois A. Clarke -- Chairman Francis L. Leonard
Robert J. Bartel -- "ex C.R. McCullar -- "ex officio"
officio"
Robert E. Torray John G. Wampler
</TABLE>
STOCK OPTION COMMITTEE
<TABLE>
<S> <C>
Lois A. Clarke -- Chairman Francis L. Leonard
Robert J. Bartel -- "ex Robert E. Torray
officio"
John G. Wampler
</TABLE>
78
<PAGE> 87
BOARD OF DIRECTORS
<TABLE>
<S> <C>
Robert J. Bartel Francis L. Leonard
L. Lowell Anderson Morton W. Lester
Billy M. Brammer C.R. McCullar
E.L. Byington, Jr. Clifford R. Quesenberry, Sr.
Lois A. Clarke Robert E. Torray
John G. Wampler
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. McCullar, President and CEO, is an "ex officio" member of the Human
Resources Committee; however, he does not participate in discussions which
relate to his compensation.
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<PAGE> 88
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table shows for the periods indicated,
the cash compensation paid by Charter, as well as certain other compensation
paid or accrued for those years, to the Chief Executive Officer and Executive
Vice President -- Finance and Credit Administration. No other executive officers
of Charter received salary and bonus in excess of $100,000 in fiscal 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------------------
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------------- SECURITIES PAYOUTS
OTHER RESTRICTED UNDERLYING ------- ALL
ANNUAL STOCK OPTIONS/ LTIP OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ------ -------- ------ ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cecil R. McCullar....... 1995 $231,440(1) $ -- $ --(5) None -- None(7) $2,089(8)
President & CEO 1994 153,229(1) -- --(5) None 27,000(6) None(7) 600(8)
1993 34,306(1)(2) -- --(5) None -- None(7) --
Richard W. Buchanan..... 1995 117,795 7,536(4) --(5) None -- None(7) 1,181(8)
EVP -- Finance and 1994 79,898(3) -- --(5) None 14,720(6) None(7) 316(8)
Credit Administration 1993 54,360(3) -- --(5) None -- None(7) --
</TABLE>
- ---------------
(1) Includes salary received by Mr. McCullar for Highlands Service Corporation,
a wholly-owned subsidiary of Charter Savings Bank, in payment for duties
performed in service as President of the subsidiary during fiscal years 1994
and 1993 (Note: no fees were paid to Mr. McCullar by the subsidiary during
fiscal 1995), compensation deferred under Charter's 401(k) plan, and
directors' fees paid to Mr. McCullar by Charter.
(2) Mr. McCullar was appointed President and Chief Executive Officer of Charter
as of March 15, 1993. Mr. McCullar was not previously employed by Charter.
(3) Mr. Buchanan's salary includes compensation deferred under Charter's 401(k)
plan.
(4) Represents one-time bonus paid to Mr. Buchanan during fiscal 1995 for his
diligent efforts in disposing of Charter's mortgage interests related to its
obligations under letters of credit issued in connection with moderate
income housing projects located in Jacksonville, Florida and Lenexa, Kansas.
(5) For 1993 and 1994, there were no (a) perquisites over the lesser of $50,000
or 10% of the individual's total salary and bonus for the year; (b) payments
of above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e)preferential discounts on
stock.
(6) Messrs. McCullar and Buchanan were granted 2,000 and 4,720 non-statutory
stock options and 25,000 and 10,000 Incentive Stock Options, respectively,
under the 1993 Incentive Stock Option Plan. The non-statutory stock options
became exercisable on October 14, 1994. The incentive stock options were
granted on a five year vesting schedule, with 20% of the grant to vest on
October 14 of each year. Only 20% of the total grant has vested as of June
30, 1995.
(7) Charter does not maintain a long-term incentive plan and therefore, there
were no payouts under such plans.
(8) Represents matching contribution paid by Charter under Charter's 401(k)
plan.
80
<PAGE> 89
STOCK PERFORMANCE GRAPH
Set forth below is a line graph showing a five year comparison of
cumulative total shareholder return on Charter's Common Stock (adjusted for the
one-for-five reverse stock split effective December 20, 1993), the Total Return
Index for The Nasdaq Stock Market (U.S. companies), and an index of peer issuers
with Charter's same Industrial Classification Major Group Code prepared by the
Center for Research in Security Prices at The University of Chicago Graduate
School of Business.
(GRAPH)
<TABLE>
<CAPTION>
CRSP Index
Charter CRSP Index for Nasdaq
Measurement Period Federal Savings for Nasdaq Savings
(Fiscal Year Covered) Bank Stock Market Stocks
<S> <C> <C> <C>
06/29/90 100.0 100.0 100.0
06/28/91 55.0 105.0 105.9
06/30/92 173.3 155.4 127.3
06/30/93 160.0 228.0 160.0
06/30/94 216.8 300.8 161.6
06/30/95 218.0 337.8 215.3
</TABLE>
Notes:
A. The lines represent yearly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the yearly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 06/29/90.
INFORMATION ON BENEFIT PLANS AND POLICIES
CHANGE OF CONTROL AGREEMENT. On February 7, 1994, Charter entered into
Change of Control Agreements (the "Agreement") with Cecil R. McCullar and
Richard W. Buchanan. See "PROPOSAL I -- THE MERGER -- Interests of Certain
Persons."
STOCK OPTIONS. On October 14, 1993, the Board of Directors adopted the
1993 Incentive Stock Option Plan (the "Incentive Plan") which was approved by
the shareholders of Charter at the 1994 annual meeting. The Incentive Plan
provides discretionary awards to officers and key employees as determined by the
Stock Option Committee.
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<PAGE> 90
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the named
executive officers as of June 30, 1995. Also, reported are the values for
"In-the-Money" options which represent the positive spread between the exercise
price of any such existing stock options and the year-end price of the Common
Stock.
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS/SARS AT
UNEXERCISED OPTIONS AT FY-END FY-END
(#)(1) ($)(2)
------------------------------- ----------------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------- ------------------------------- ----------------------------
<S> <C> <C>
C.R. McCullar............................ 7,000/20,000 $ 4,500/0
Richard W. Buchanan...................... 6,720/8,000 10,620/0
</TABLE>
- ---------------
(1) All number of options shown have been adjusted to reflect the one-for-five
reverse stock split effective December 20, 1993.
(2) Market value of underlying securities at fiscal year-end ($12.25) minus the
exercise or base price.
PENSION PLAN. Charter maintains a tax-qualified noncontributory, defined
benefit pension plan (the "Pension Plan") that is designated to comply with the
requirements of the Employee Retirement Income Security Act of 1974, as amended.
The following table illustrates estimated annual retirement benefits under the
Pension Plan at age 65 for stated levels of salary and years of service. The
pension benefits are not subject to any deductions for Social Security or other
offset amounts.
The following table sets forth the estimated annual benefits payable upon
retirement to persons in the specified compensation and years-of-service
classifications.
<TABLE>
<CAPTION>
YEARS OF SERVICE(2)
----------------------------------------------
SALARY(1) 10 20 30 40
- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
$20,000 $ 4,000 $ 8,000 $ 12,000 $ 16,000
40,000 8,000 16,000 24,000 32,000
60,000 12,000 24,000 36,000 48,000
80,000 16,000 32,000 48,000 64,000
100,000 20,000 40,000 60,000 80,000
120,000 24,000 48,000 72,000 96,000
140,000 28,000 56,000 84,000 112,000
160,000 32,000 64,000 96,000 128,000
180,000 36,000 72,000 108,000 144,000
200,000 40,000 80,000 120,000 160,000
</TABLE>
- ---------------
(1) Assumed as highest average salary of five consecutive calendar years.
(2) Years of service for Cecil R. McCullar and Richard W. Buchanan are 2 years,
3 months and 17 years, 11 months, respectively, for purposes of determining
retirement qualifications. The covered compensation includes the salary
listed in the "Summary Compensation Table" under "Executive Compensation."
CERTAIN TRANSACTIONS
Charter offers loans to its directors, officers and employees for their
homes and consumer related items. These loans are made in the ordinary course of
business and, in the opinion of management, do not involve more than normal risk
of collection or present other unfavorable features. Prior to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), these
loans were made on substantially the same terms and conditions, except for
interest rates and cost, as those prevailing at the time for comparable
transactions with nonaffiliated persons. Charter's policy prior to June 1, 1989
was to make such loans for the
82
<PAGE> 91
purpose of purchasing or improving a home. Prior to June 1, 1989, Charter
entered into an agreement with such officer, director or employee that so long
as such person remained affiliated with Charter and occupied the property, the
interest rate charged would be reduced to a rate no more than 1/4% above
Charter's cost of money at the time the loan was made, provided that, if the
rate were adjustable, in no case would it be lower than the Applicable Federal
Rate (AFR) for below market short term monthly payment loans. Upon termination
of employment or service, such preferential rates revert to the market rate at
the time the loan was made. Effective June 1, 1989 and until August 9, 1989, all
new loans to directors, officers and employees were made bearing the same rate
of interest as comparable transactions with nonaffiliated persons. However, they
may have received a reduction of 1% in the loan origination fee. Loans
outstanding made since August 9, 1989 to directors, officers and employees no
longer have preferential terms. All loans to affiliated persons are made on
substantially the same terms and conditions, including interest rates, fees and
collateral, as those to nonaffiliated persons. All loans to directors and
executive officers were current as of June 30, 1995.
The following table sets forth certain information for each director and
executive officer or members of their immediate families indebted to Charter
aggregating $60,000 or more during the fiscal year ended June 30, 1995 and which
involved a loan(s) made prior to June 1, 1989 on preferential terms and such
other loan(s) made to those individuals:
<TABLE>
<CAPTION>
POSITION
WITH HIGHEST NOTE
CHARTER BALANCE ANNUAL OUTSTANDING
FEDERAL AT SINCE INTEREST PREFERENTIAL BALANCE AT
NAME 6/30/95 TYPE OF LOAN 7/19/94 RATE INTEREST RATE 6/30/95
- ---------------------- ------------- ------------ -------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
E.L. Byington, Jr. ... Chairman Mortgage(1) $250,766 9.00% 8.01% $ 246,831
Emeritus and Consumer(2) 95,266 9.00% -- 90,639
Director
</TABLE>
- ---------------
(1) First mortgage loan on personal residence.
(2) Equity Line of Credit with no preferential terms.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES ACT
Section 16(a) of the Exchange Act requires Charter's executive officers and
directors, and persons who own more than ten percent of a registered class of
Charter's equity securities, to file reports of ownership and changes in
ownership with the Office of Thrift Supervision and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than ten
percent shareholders are required by Securities and Exchange Commission
regulation to furnish Charter with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, Charter believes that, during the fiscal year ended
June 30, 1995, all filing requirements applicable to its executive officers,
directors and greater than ten percent beneficial owners were complied with
except that one report, covering one transaction, was filed late by Mr.
McCullar, but such transaction was subsequently reported on Form 4.
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<PAGE> 92
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons and groups beneficially owning in excess of five percent (5%) of
Charter's Common Stock are required to file certain reports regarding such
ownership with Charter and the OTS.
Charter is aware that the persons listed in the following table
beneficially own more than 5% of Charter's Common Stock as of the Record Date.
See also "-- Information as to Nominees and Continuing Directors".
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------------------------ ----------------------- ----------------
<S> <C> <C>
Robert E. Torray...................................... 1,050,435(1)(2) 20.49%
Robert E. Torray & Company, Inc.
Investment Management
6610 Rockledge Drive, Suite 450
Bethesda, Maryland 20817
The United Company and
Lois A. Clarke........................................ 743,230(3)(4) 14.50%
Glenway Avenue, P.O. Box 1280
Bristol, Virginia 24201
Line Power Manufacturing Corporation and
Francis L. Leonard.................................... 516,976(5)(6) 10.09%
329 East Williams Street
Bristol, Virginia 24201
</TABLE>
- ---------------
(1) This figure includes 292,500 shares beneficially held by Robert E. Torray &
Co., Inc. in respect of its clients, of which Mr. Torray may be deemed to
have sole dispositive power over all shares and to share dispositive power
over no shares with a client. Mr. Torray may be deemed to have sole voting
authority over 196,500 of those shares and shared voting authority over
none. Mr. Torray may be deemed to have shared voting and dispositive power
over 80,000 shares owned by The Torray Fund which are also included in this
figure by virtue of his position as President of The Torray Corporation,
investment advisor to The Torray Fund. The Torray Fund is a no load,
diversified, open end management investment company.
(2) On August 9, 1993, the OTS accepted Mr. Torray's Rebuttal of Presumption of
Control permitting him to acquire up to 24.99% of Charter's issued and
outstanding shares of Common Stock.
(3) The United Company, Unifund, Inc., and Lois A. Clarke, a director, are also
beneficial owners of these securities. This figure includes 7,261 shares
beneficially held by Lois A. Clarke. See "-- Information as to Nominees and
Continuing Directors".
(4) On April 1, 1988, the Federal Home Loan Bank Board (predecessor of OTS)
accepted United Affiliates Corporation's, a wholly-owned subsidiary of The
United Company, rebuttal of control permitting them to acquire up to 24.99%
of Charter's issued and outstanding Common Stock. In 1993, all of the
holdings of United Affiliates Corporation were transferred to the parent
company, The United Company.
(5) This figure includes 8,479 shares beneficially held by Francis L. Leonard.
See "-- Information as to Nominees and Continuing Directors".
(6) On August 15, 1988, the Federal Home Loan Bank Board (predecessor of OTS)
accepted Line Power Manufacturing Corporation's rebuttal of control
permitting them to acquire up to 24.99% of Charter's issued and outstanding
Common Stock.
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<PAGE> 93
PROPOSAL III -- RATIFICATION OF INDEPENDENT ACCOUNTANTS
On April 13, 1995, the Board of Directors of Charter appointed Price
Waterhouse LLP, independent certified public accountants, to audit the accounts
of Charter for the fiscal year ending June 30, 1996, or, if earlier, until the
effective time of the Merger. The appointment of Price Waterhouse LLP is being
presented to the shareholders for ratification. If the shareholders do not
ratify the selection of Price Waterhouse LLP, the selection will be reconsidered
by the Board of Directors.
Audit services performed by Price Waterhouse LLP during the year ended June
30, 1995 include examinations of the financial statements of Charter and its
subsidiaries, and consultations on matters related to accounting and financial
reporting. Price Waterhouse LLP also prepares Charter's income tax return and
provides tax service upon request. The Audit Committee is of the opinion that
the performance of these nonaudit services do not impair the independence of
Price Waterhouse LLP.
Price Waterhouse LLP has advised that neither the firm nor any present
member or associate of it has any financial interest, direct or indirect, in
Charter and has not had any connection with Charter in the capacity of promoter,
underwriter, voting trustee, director, officer or employee.
A representative of Price Waterhouse LLP will be present at the Annual
Meeting and available to respond to appropriate questions and will be given an
opportunity to make a statement if the representative chooses to do so.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT
OF PRICE WATERHOUSE LLP.
PROPOSAL IV -- AUTHORITY TO ADJOURN MEETING
Proposal I, as described above, must be approved by the holders of
two-thirds of the outstanding shares of Charter's Common Stock. The form of
Revocable Proxy sent to shareholders with this Prospectus/Proxy Statement sets
forth a proposal to permit the Board of Directors of Charter to vote the proxy
in favor of an adjournment of the Annual Meeting for up to 29 days in order to
solicit further proxies if shareholders holding two-thirds of the votes eligible
to be cast at the Annual Meeting do not submit proxies voting in favor of the
Merger. The proposal to authorize such adjournment must be approved by a
majority of the votes present in person or by proxy at the Annual Meeting. In
the event that a two-thirds vote has not been achieved within the 29 day
adjournment period, the Charter Board may elect to either re-solicit
shareholders based on a new or revised prospectus/proxy statement or, subject to
the terms of the Agreement, allow the Merger to terminate. THE CHARTER BOARD
RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSAL AND REQUESTS SHAREHOLDERS
CHECK THE BOX PERMITTING ADJOURNMENT OF THE ANNUAL MEETING IN THE EVENT
SUFFICIENT VOTES ARE NOT CAST IN FAVOR OF THE MERGER.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in Charter's proxy material for next
year's Annual Meeting of Shareholders, any shareholder proposal to take action
at such meeting must be received at the main office at 110 Piedmont Avenue,
Bristol, Virginia, no later than . Any such proposals shall be
subject to the requirements of the proxy rules, as amended, adopted under the
Securities Exchange Act of 1934.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
meeting other than those matters described above in the Prospectus/Proxy
Statement. However, if any other matters should properly come before the
meeting, it is intended that the proxies will be voted in respect thereof in
accordance with the judgment of the Board of Directors voting these proxies.
85
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EXPERTS
The consolidated financial statements of First American at December 31,
1994 and 1993 and for each of the years in the three-year 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 herein by reference 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 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 of 1933 for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the registration statement prepared or certified by the accountants
within the meaning of sections 7 and 11 of the Act.
The consolidated financial statements as of June 30, 1995 and 1994 and for
each of the two years in the period ended June 30, 1995 included in Appendix D
of this Proxy Statement have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows of Charter for the year ended June 30, 1993 included in
Appendix D have been audited by McGladrey & Pullen, LLP, independent
accountants, as stated in reports appearing in such Appendix, and are included
in reliance upon the report of such firm given upon its authority 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, General
Counsel, Secretary and Principal Financial Officer of First American. As of
October 12, 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.
86
<PAGE> 95
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
CHARTER FEDERAL SAVINGS BANK
AND
FIRST AMERICAN CORPORATION
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Parties................................................................................ A-5
Preamble............................................................................... A-5
ARTICLE ONE -- TRANSACTIONS AND TERMS OF MERGER........................................ A-5
1.1 Merger..................................................................... A-5
1.2 Time and Place of Closing.................................................. A-6
1.3 Effective Time............................................................. A-6
ARTICLE TWO -- TERMS OF MERGER......................................................... A-6
2.1 Business of Surviving Bank................................................. A-6
2.2 Assumption of Rights....................................................... A-6
2.3 Assumption of Liabilities.................................................. A-6
2.4 Charter.................................................................... A-6
2.5 Bylaws..................................................................... A-6
2.6 Directors and Officers..................................................... A-7
ARTICLE THREE -- MANNER OF CONVERTING SHARES........................................... A-7
3.1 Conversion of Shares....................................................... A-7
3.2 Anti-Dilution Provisions................................................... A-7
3.3 Shares Held by Charter or FAC.............................................. A-7
3.4 Fractional Shares.......................................................... A-7
3.5 No Dissenters' Rights...................................................... A-8
3.6 Market Value of FAC Common Stock........................................... A-8
ARTICLE FOUR -- EXCHANGE OF SHARES..................................................... A-8
4.1 Exchange Procedures........................................................ A-8
4.2 Rights of Former Charter Stockholders...................................... A-8
4.3 Termination of Exchange Agent Relationship................................. A-9
ARTICLE FIVE -- REPRESENTATIONS AND WARRANTIES OF CHARTER.............................. A-9
5.1 Organization, Standing, and Power.......................................... A-9
5.2 Authority; No Breach By Agreement.......................................... A-9
5.3 Capital Stock.............................................................. A-10
5.4 Charter Subsidiaries....................................................... A-10
5.5 Financial Statements....................................................... A-11
5.6 Deposit Accounts........................................................... A-11
5.7 Absence of Undisclosed Liabilities......................................... A-11
5.8 Absence of Certain Changes or Events....................................... A-11
5.9 Adequacy of Reserves....................................................... A-11
5.10 Tax Matters................................................................ A-12
5.11 Assets..................................................................... A-12
5.12 Environmental Matters...................................................... A-12
5.13 Compliance With Laws....................................................... A-13
5.14 Insurance.................................................................. A-14
5.15 Labor Relations............................................................ A-14
5.16 Employee Benefit Plans..................................................... A-14
5.17 Material Contracts......................................................... A-15
5.18 Legal Proceedings.......................................................... A-16
5.19 Reports.................................................................... A-16
5.20 Statements True and Correct................................................ A-16
5.21 Accounting, Tax, and Regulatory Matters.................................... A-17
5.22 Charter Provisions......................................................... A-17
5.23 Ownership of FAC Common Stock.............................................. A-17
</TABLE>
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<TABLE>
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<S> <C> <C>
5.24 Qualified Thrift Lender.................................................... A-17
5.25 Permissible Activities..................................................... A-17
5.26 Loans...................................................................... A-17
5.27 Conduct of Business........................................................ A-17
5.28 Related Party Transactions................................................. A-17
5.29 Intellectual Property...................................................... A-18
5.30 Liquidation Account........................................................ A-18
ARTICLE SIX -- REPRESENTATIONS AND WARRANTIES OF FAC................................... A-18
6.1 Organization, Standing, and Power.......................................... A-18
6.2 Authority; No Breach by Agreement.......................................... A-18
6.3 Capital Stock.............................................................. A-19
6.4 Financial Statements....................................................... A-19
6.5 Absence of Undisclosed Liabilities......................................... A-20
6.6 Absence of Certain Changes or Events....................................... A-20
6.7 Compliance With Laws....................................................... A-20
6.8 Legal Proceedings.......................................................... A-20
6.9 Reports.................................................................... A-20
6.10 Statements True and Correct................................................ A-21
6.11 Authority of Charter Interim............................................... A-21
6.12 Accounting, Tax and Regulatory Matters..................................... A-21
6.13 No Vote Required........................................................... A-21
6.14 Consideration.............................................................. A-22
ARTICLE SEVEN -- CONDUCT OF BUSINESS PENDING CONSUMMATION.............................. A-22
7.1 Affirmative Covenants of Charter........................................... A-22
7.2 Negative Covenants of Charter.............................................. A-23
7.3 Covenants of FAC........................................................... A-25
7.4 Adverse Changes in Condition............................................... A-25
7.5 Reports.................................................................... A-25
ARTICLE EIGHT -- ADDITIONAL AGREEMENTS................................................. A-26
8.1 Registration Statement; Proxy Statement; Stockholder Approval.............. A-26
8.2 Nasdaq Stock Market........................................................ A-26
8.3 Applications............................................................... A-26
8.4 Agreement as to Efforts to Consummate...................................... A-26
8.5 Investigation and Confidentiality.......................................... A-27
8.6 Press Releases............................................................. A-27
8.7 Certain Actions............................................................ A-27
8.8 Tax Matters................................................................ A-28
8.9 Agreements of Affiliates................................................... A-28
8.10 Transition of Certain Employee Benefit Plans; Employee Matters............. A-28
8.11 Indemnification............................................................ A-29
8.12 Charter Stock Options...................................................... A-30
8.13 Fairness Opinion........................................................... A-31
8.14 Agreements Relating to Pooling-of-Interests................................ A-31
ARTICLE NINE -- CONDITIONS PRECEDENT TO OBLIGATIONS
TO CONSUMMATE.......................................................... A-31
9.1 Conditions to Obligations of Each Party.................................... A-31
9.2 Conditions to Obligations of FAC........................................... A-32
9.3 Conditions to Obligations of Charter....................................... A-32
</TABLE>
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<TABLE>
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ARTICLE TEN -- TERMINATION............................................................. A-33
10.1 Termination................................................................ A-33
10.2 Effect of Termination...................................................... A-34
10.3 Non-Survival of Representations and Covenants.............................. A-34
ARTICLE ELEVEN -- MISCELLANEOUS........................................................ A-34
11.1 Definitions................................................................ A-34
11.2 Expenses................................................................... A-39
11.3 Brokers and Finders........................................................ A-39
11.4 Entire Agreement........................................................... A-39
11.5 Amendments................................................................. A-39
11.6 Waivers.................................................................... A-39
11.7 Assignment................................................................. A-40
11.8 Notices.................................................................... A-40
11.9 Governing Law.............................................................. A-40
11.10 Counterparts............................................................... A-40
11.11 Captions................................................................... A-40
11.12 Severability............................................................... A-41
Signatures............................................................................. A-41
</TABLE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
1. Form of Plan of Merger and Combination between Charter and Charter Interim.
(sec.sec. 1.1, 11.1).
2. Form of agreement of affiliates of Charter. (sec. 8.9).
3. Form of legal opinion of counsel to Charter. (sec. 9.2(g)).
4. Form of legal opinion of counsel to FAC (sec. 9.3(d)).
5. Form of Stock Option Agreement
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of May 17, 1995, by and between CHARTER FEDERAL SAVINGS BANK
("Charter"), a federal stock savings bank organized and existing under the laws
of the United States, with its principal office located in Bristol, Virginia;
and FIRST AMERICAN CORPORATION ("FAC"), a corporation organized and existing
under the laws of the State of Tennessee with its principal office located in
Nashville, Tennessee.
PREAMBLE
The Boards of Directors of Charter and FAC are of the opinion that the
transactions described herein are in the best interests of the parties and their
respective stockholders. This Agreement provides for the acquisition of Charter
by FAC pursuant to the merger of a newly formed first tier, interim federal
savings bank subsidiary of FAC ("Charter Interim") with and into Charter. At the
Effective Time of such Merger, the outstanding shares of the common stock of
Charter shall be converted into shares of the common stock of FAC (except as
provided herein). As a result, stockholders of Charter shall become stockholders
of FAC. It is the intention of the Parties that such additional transactions
also be effectuated immediately following the Merger as may be necessary or
appropriate to result in (a) the Charter branches located in Tennessee and in
Bristol, Virginia becoming and being operated as branches of First American
National Bank, Nashville, Tennessee, a wholly-owned, first-tier national bank
subsidiary of FAC ("First American National Bank"), and Charter continuing to
conduct the business and operations of the remaining Charter branches as a
wholly-owned, first-tier federal savings bank subsidiary of FAC (the "Primary
FAC Objective Transactions") or (b) if the transactions contemplated by (a) can
not or do not receive all necessary regulatory approvals, then the Charter
branches located in Tennessee becoming and being operated as branches of First
American National Bank and Charter continuing to conduct the business and
operations of the Charter branches located in Virginia as a wholly-owned,
first-tier federal savings bank subsidiary of FAC (the "Alternative FAC
Objective Transactions"). The transactions described in this Agreement are
subject to the approvals of the stockholders of Charter, and all necessary
regulatory approvals as may be required by the Office of Thrift Supervision, the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency and such state
regulatory authorities as may be appropriate to effectuate the intentions of the
parties hereto, and the satisfaction of certain other conditions described in
this Agreement. It also is the intention of the parties to this Agreement that
the Merger for federal income tax purposes shall qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code, and that the
exchange of Charter common stock to the extent exchanged for FAC common stock
will not give rise to gain or loss to the holders of Charter common stock with
respect to such exchange. In consideration of the execution of this Agreement by
FAC, Charter is granting to FAC an option to acquire up to 19.99% of the
authorized but unissued common stock on the terms and in the form attached
hereto as Exhibit 5.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
ARTICLE ONE
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time as hereinafter defined, Charter Interim shall be merged with and
into Charter in accordance with and with the effect provided in Title 12, United
States Code, Section 1467a(s) and 12 C.F.R. sec. 552.13(1) (the "Merger").
Charter shall be the Surviving Bank resulting from the Merger and shall be a
wholly-owned, first tier federal savings bank Subsidiary of FAC and shall
continue to be governed by the Laws of the United States. As a result of the
Merger, FAC will acquire 100% of the capital stock of Charter in accordance with
Title 12,
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United States Code, Section 1467(a)(e). The Merger shall be consummated pursuant
to the terms of this Agreement, which has been approved and adopted or
authorized by the respective Boards of Directors of Charter and FAC, and the
terms of a Plan of Merger to be entered into by Charter and Charter Interim.
Immediately following the Merger, such transactions as are necessary or
advisable to effectuate the Primary FAC Objective Transactions or the
Alternative FAC Objective Transactions shall be consummated. Charter agrees to
cooperate with FAC in all material respects and to use its best efforts to
obtain such regulatory approvals as may be required to allow the Primary FAC
Objective Transactions or the Alternative FAC Objective Transactions to be
consummated.
1.2 Time and Place of Closing. The Closing will take place at 9:00 A.M. on
the last business day of the calendar quarter in which the satisfaction of all
conditions precedent specified in Article Nine hereof occurs or at such other
time that the Parties, acting through their chief executive officers or
principal financial officers, shall mutually agree. The place of Closing shall
be at the offices of FAC, or such other place as may be mutually agreed upon by
the Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time of endorsement of
the Articles of Combination filed with the OTS or on such other date and at such
other time as the OTS declares the Merger effective (the "Effective Time").
Subject to the terms and conditions hereof, unless otherwise mutually agreed
upon in writing by the chief executive officers or principal financial officers
of each Party, the Parties shall use their reasonable efforts to cause the
Effective Time to occur at the end of the last day of the calendar quarter
during which the Closing takes place, or such later date within thirty (30) days
of such date as shall be mutually agreed upon by FAC and Charter.
ARTICLE TWO
TERMS OF MERGER
2.1 Business of Surviving Bank. The business of the Surviving Bank from
and after the Effective Time shall continue to be that of a federal stock
savings bank organized under the laws of the United States. The business shall
be conducted from its home office in Bristol, Virginia or such other location as
FAC shall designate at the Effective Time, and at its legally established
branches, which shall also include the main office and all branches, whether in
operation or approved but unopened, at the Effective Time.
2.2 Assumption of Rights. At the Effective Time, the separate existence
and corporate organization of Charter Interim shall be merged into and continued
in the Surviving Bank. All rights, franchises, and interests of both Charter and
Charter Interim in and to every type of property (real, personal, and mixed),
and all choses in action of both Charter and Charter Interim shall be
transferred to and vested in the Surviving Bank without any deed or other
transfer. The Surviving Bank, upon consummation of the Merger and without any
order or other action on the part of any court or otherwise, shall hold and
enjoy all rights of property, franchises, and interests, including appointments,
designations, and nominations, and all other rights and interests as trustee,
executor, administrator, registrar of stocks and bonds, guardian of estates,
assignee, receiver, and committee of estates of incompetent persons, and in
every other fiduciary capacity, in the same manner and to the same extent as
such rights, franchises, and interests were held or enjoyed by either Charter or
Charter Interim at the Effective Time.
2.3 Assumption of Liabilities. All liabilities and obligations of both
Charter and Charter Interim of every kind and description (including without
limitation the liquidation account established by Charter in connection with its
conversion to the stock form of organization, as in existence at the Effective
Time) shall be assumed by the Surviving Bank, and the Surviving Bank shall be
bound thereby in the same manner and to the same extent that Charter and Charter
Interim were so bound at the Effective Time.
2.4 Charter. The charter of Charter in effect immediately prior to the
Effective Time shall be the charter of the Surviving Bank until otherwise
amended or repealed.
2.5 Bylaws. The bylaws of Charter in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Bank until otherwise amended
or repealed.
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2.6 Directors and Officers. The directors of Charter Interim in office
immediately prior to the Effective Time, together with such additional persons
as may thereafter be elected, shall serve as the directors of the Surviving Bank
from and after the Effective Time in accordance with the bylaws of the Surviving
Bank. The officers of Charter Interim in office immediately prior to the
Effective Time, together with such additional persons as may thereafter be
elected, shall serve as the officers of the Surviving Bank from and after the
Effective Time in accordance with the bylaws of the Surviving Bank.
ARTICLE THREE
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article Three,
at the Effective Time, by virtue of the Merger and without any action on the
part of the holders thereof, the shares of the constituent corporations shall be
converted as follows:
(a) Each share of FAC Common Stock issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and
after the Effective Time.
(b) Each share of Charter Interim Common Stock issued and outstanding
prior to the Effective Time shall at the Effective Time continue to be
issued and outstanding and shall be an identical outstanding share of the
Surviving Bank.
(c) Each share of Charter Common Stock issued and outstanding at the
Effective Time (excluding shares held by any Charter Company or by any FAC
Company, in each case other than in a fiduciary capacity or in satisfaction
of debts previously contracted, which shares shall be canceled as provided
in Section 3.3 of this Agreement) shall cease to be outstanding and shall
be converted into and exchanged for 0.3800 shares of FAC Common Stock (the
"Common Stock Exchange Ratio"); provided, however, that, in the event the
FAC Market Value at the Effective Time (determined as provided in Section
3.6 of this Agreement) is greater than $39.75 per share, then the Common
Stock Exchange Ratio shall be reduced to such amount, rounded to the
nearest one-ten thousandth of a share, as shall equal $15.10 divided by the
FAC Market Value; and provided further, however, that, if FAC enters into a
definitive agreement of merger or reorganization with another entity as a
result of which either FAC is not the surviving entity or FAC's Chief
Executive Officer will not become the Chief Executive Officer of the
surviving entity, then the Common Stock Exchange Ratio shall be 0.3800
shares of FAC Common Stock for each share of Charter Common Stock
exchanged.
3.2 Anti-Dilution Provisions. In the event Charter or FAC changes the
number of shares of Charter Common Stock or FAC Common Stock respectively,
issued and outstanding prior to the Effective Time as a result of a stock split,
stock dividend, or similar recapitalization with respect to such stock and the
record date therefor shall be prior to the Effective Time, the Common Stock
Exchange Ratio shall be proportionately adjusted to reflect such stock split,
stock dividend or similar recapitalization.
3.3 Shares Held by Charter or FAC. Each of the shares of Charter Common
Stock held by any Charter Company or by any FAC Company, in each case other than
in a fiduciary capacity or in satisfaction of debts previously contracted, shall
be canceled and retired at the Effective Time and no consideration shall be
issued in exchange therefor.
3.4 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of Charter Common Stock exchanged pursuant to
the Merger 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 at the Effective Time. The
market value of one share of FAC Common Stock at the Effective Time shall be the
closing price of such common stock as reported on the Nasdaq Stock Market on the
last trading day preceding the Effective Time. No such holder will be entitled
to dividends, voting rights, or any other rights as a stockholder in respect of
any fractional shares.
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3.5 No Dissenters' Rights. The holders of Charter 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.
3.6 Market Value of FAC Common Stock. The market value of one share of FAC
Common Stock on the Effective Time (the "FAC Market Value") shall be the average
per share closing price of FAC Common Stock on the Nasdaq Stock Market (as
reported by The Wall Street Journal or other authoritative source) for the
twenty consecutive trading days ending on and including the third day
immediately preceding but not including the day of the Effective Time.
ARTICLE FOUR
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time but in no event
later than five (5) business days thereafter, FAC shall cause FAC itself or such
bank or trust company as FAC shall elect (which may be a subsidiary of FAC),
acting as the exchange agent (the "Exchange Agent"), to mail to the former
stockholders of Charter appropriate transmittal materials (which shall specify
that delivery shall be effected, and risk of loss and title to the certificates
theretofore representing shares of Charter Common Stock shall pass, only upon
proper delivery of such certificates to the Exchange Agent). After the Effective
Time, each holder of shares of Charter Common Stock (other than shares to be
canceled pursuant to Section 3.3 of this Agreement) issued and outstanding at
the Effective Time shall surrender the certificate or certificates representing
such shares to the Exchange Agent and shall promptly upon surrender thereof
receive in exchange therefor the consideration provided in Section 3.1 of this
Agreement, together with all undelivered dividends or distributions in respect
of such shares (without interest thereon) pursuant to Section 4.2 of this
Agreement. To the extent required by Section 3.4 of this Agreement, each holder
of shares of Charter Common Stock issued and outstanding at the Effective Time
also shall receive, upon surrender of the certificate or certificates
representing such shares, cash in lieu of any fractional share of FAC Common
Stock to which such holder may be otherwise entitled (without interest). FAC
shall not be obligated to deliver the consideration to which any former holder
of Charter Common Stock is entitled as a result of the Merger until such holder
surrenders such holder's certificate or certificates representing the shares of
Charter Common Stock for exchange as provided in this Section 4.1. The
certificate or certificates of Charter Common Stock so surrendered shall be duly
endorsed as the Exchange Agent may require. Any other provision of this
Agreement notwithstanding, neither FAC, the Surviving Bank, nor the Exchange
Agent shall be liable to a holder of Charter Common Stock or FAC Common Stock,
as the case may be, for any amounts paid or property delivered in good faith to
a public official pursuant to any applicable abandoned property, escheat or
similar Law.
4.2 Rights of Former Charter Stockholders. At the Effective Time, the
stock transfer books of Charter shall be closed as to holders of Charter Common
Stock immediately prior to the Effective Time, and no transfer of Charter Common
Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 4.1 of
this Agreement, each certificate theretofore representing shares of Charter
Common Stock (other than shares to be canceled pursuant to Section 3.3 of this
Agreement) shall from and after the Effective Time represent for all purposes
only the right to receive the consideration provided in Sections 3.1 and 3.4 of
this Agreement in exchange therefor and when issued, such consideration shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Charter Common Stock. Whenever a dividend or other distribution is
declared by FAC on the FAC Common Stock, the record date for which is at or
after the Effective Time, the declaration shall include dividends or other
distributions on all shares of FAC Common Stock issuable pursuant to this
Agreement, but no dividend or other distribution payable to the holders of
record of FAC Common Stock as of any time subsequent to the Effective Time shall
be delivered to the holder of any certificate representing shares of Charter
Common Stock issued and outstanding at the Effective Time until such holder
surrenders such certificate for exchange as provided in Section 4.1 of this
Agreement. However, upon surrender of such Charter Common Stock certificate,
both the FAC Common Stock certificate (together with all such undelivered
dividends or other distributions with a record date after the Effective Time and
a payment date at or prior to such surrender (without interest)) and any
undelivered cash payments to be paid for fractional
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share interests (without interest) shall be delivered and paid with respect to
each share represented by such certificate. If, after the Effective Time,
certificates representing Charter Common Stock are presented to the Surviving
Bank for any reason, they shall be surrendered and exchanged as provided in
Section 4.1.
4.3 Termination of Exchange Agent Relationship. At any time following one
year after the Effective Time, FAC shall be entitled to terminate the Exchange
Agent relationship, and any stockholders of Charter who have not theretofore
surrendered their shares of Charter Common Stock pursuant to this Article Four
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 (subject to
abandoned property, escheat or other similar laws).
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES OF CHARTER
Charter hereby represents and warrants to FAC as follows:
5.1 Organization, Standing, and Power. Charter is a federal stock savings
bank duly organized, validly existing, and in good standing under the Laws of
the United States, and has the corporate power and authority to carry on its
business as now conducted and to own, lease, and operate its Assets. Charter is
duly qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed will not have, individually or in the aggregate,
a Material Adverse Effect on Charter. The minute books of Charter contain
accurate records of all meetings and other corporate actions since January 31,
1993 of its stockholders and Board of Directors (including the committees of the
Board of Directors).
5.2 Authority: No Breach by Agreement. (a) Charter has the corporate power
and authority necessary to execute, deliver, and perform its obligations under,
this Agreement and the Plan of Merger and to consummate the transactions
contemplated hereby and thereby, subject to the approval of this Agreement and
the Plan of Merger by the holders of two-thirds of the outstanding shares of
Charter Common Stock. The execution, delivery, and performance of this Agreement
and the Plan of Merger have been approved by the Board of Directors of Charter
and the consummation of the transactions contemplated herein and therein,
including the Merger, have been or will be duly and validly authorized by all
necessary corporate action in respect thereof on the part of Charter, subject to
the approval of this Agreement and the Plan of Merger by the holders of
two-thirds of the outstanding shares of Charter Common Stock. Subject to such
requisite approval, this Agreement represents, and, when executed and delivered,
the Plan of Merger will represent, a legal, valid, and binding obligation of
Charter, enforceable against Charter in accordance with its terms (except in all
cases as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement or the Plan of
Merger by Charter, nor the consummation by Charter of the transactions
contemplated hereby or thereby, nor compliance by Charter with any of the
provisions hereof or thereof, will (i) conflict with or result in a breach of
any provision of Charter's charter or bylaws except for possible redesignation
of Charter's home office, or (ii) constitute or result in a Default under, or
require any Consent pursuant to, or result in the creation of any Lien on any
Asset of any Charter Company under, any Contract or Permit of any Charter
Company, or (iii) subject to receipt of the requisite approvals referred to in
Section 9.1(b) of this Agreement, violate any material Law or Order applicable
to any Charter Company or any of their respective Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the Nasdaq Stock Market, and other than Consents required from Regulatory
Authorities, and other than notices to or filings with the Internal Revenue
Service or the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, and other than Consents, filings, or
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notifications which, if not obtained or made, will not have, individually or in
the aggregate, a Material Adverse Effect on Charter. No notice to, filing with,
or Consent of, any public body or authority is necessary for the consummation by
Charter of the Merger and the other transactions contemplated in this Agreement
and the Plan of Merger.
5.3 Capital Stock. (a) The authorized capital stock of Charter consists of
(i) 50,000,000 shares of $.01 par value Charter Common Stock, of which 5,125,313
shares are issued and outstanding as of the date of this Agreement and not more
than 5,272,513 shares will be issued and outstanding at the Effective Time which
includes currently outstanding Charter Stock Options, excluding any shares
resulting from an adjustment pursuant to Section 3.2, and (ii) 7,500,000 shares
of $.01 par value Charter Preferred Stock of which no shares of Charter
Preferred Stock are issued and outstanding as of the date of this Agreement or
will be issued and outstanding at the Effective Time. All of the issued and
outstanding shares of Charter Common Stock are duly authorized, validly issued
and fully paid and nonassessable. None of the outstanding shares of Charter
Common Stock has been issued in violation of any preemptive rights of the
current or past stockholders of Charter.
(b) Except as set forth in Section 5.3(a) of this Agreement, or as
disclosed in Section 5.3(b) of the Charter Disclosure Memorandum, there are no
shares of capital stock or other equity securities of Charter outstanding and no
outstanding options, warrants, scrip, rights to subscribe to, calls, or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of Charter or
contracts, commitments, understandings, or arrangements by which Charter is or
may be bound to issue additional shares of Charter Common Stock or options,
warrants, or rights to purchase or acquire any additional shares of its capital
stock.
(c) 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 Charter were issued or outstanding.
(d) Since March 31, 1995, Charter 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 Charter or any of its Subsidiaries, other than
pursuant to and as required by the terms of any Charter Stock Options; (B)
repurchased, redeemed or otherwise acquired, directly or indirectly through one
or more of its Subsidiaries, any shares of capital stock of Charter 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 Charter dividends or
other distributions on the outstanding shares of capital stock of Charter, other
than regular quarterly cash dividends at a rate not in excess of the regular
quarterly cash dividends most recently declared by Charter prior to the date
hereof.
5.4 Charter Subsidiaries. Charter has disclosed in Section 5.4 of the
Charter Disclosure Memorandum each of the Charter Subsidiaries and the
activities in which each of them engages as of the date of this Agreement.
Except as disclosed, Charter or one of its Subsidiaries owns all of the issued
and outstanding shares of capital stock of each Charter Subsidiary. No equity
securities of any Charter Subsidiary are or may become required to be issued by
reason of any options, warrants, scrip, rights to subscribe to, calls, or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of any such
Subsidiary, and there are no Contracts by which any Charter Subsidiary is bound
to issue additional shares of its capital stock or options, warrants, or rights
to purchase or acquire any additional shares of its capital stock or by which
any Charter Company is or may be bound to transfer any shares of the capital
stock of any Charter Subsidiary. There are no Contracts relating to the rights
of any Charter Company to vote or to dispose of any shares of the capital stock
of any Charter Subsidiary. All of the issued and outstanding shares of capital
stock of each Charter Subsidiary held by a Charter Company are duly authorized,
validly issued, and fully paid and nonassessable under the applicable
corporation Law of the jurisdiction in which such Subsidiary is incorporated or
organized and are owned by the Charter Company free and clear of any Lien. Each
Charter Subsidiary is a corporation, and is duly organized, validly existing,
and in good standing under the Laws of the jurisdiction in which it is
incorporated or organized, and has the corporate power and authority necessary
for it to own, lease, and operate its Assets and to carry on its business
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as now conducted. Each Charter Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed, individually or in the aggregate, would not have a Material Adverse
Effect on it or Charter. Except as disclosed in Section 5.4 of the Charter
Disclosure Memorandum, no Charter Company is a party to a joint venture or is a
partner in a general or limited partnership.
5.5 Financial Statements. Charter has disclosed in Section 5.5 of the
Charter Disclosure Memorandum, and has delivered to FAC copies of, all Charter
Financial Statements for periods ended prior to the date hereof, and will
deliver to FAC copies of all Charter Financial Statements prepared subsequent to
the date hereof, including monthly financial statements. The Charter Financial
Statements (as of the dates thereof and for the periods covered thereby) (i) are
or, if dated after the date of this Agreement, will be in accordance with the
books and records of the Charter Companies, which are or will be, as the case
may be, complete and correct and which have been or will have been, as the case
may be, maintained in accordance with good business practices, (ii) present or
will present, as the case may be, fairly the consolidated financial position of
the Charter Companies as of the dates indicated and the consolidated results of
operations, changes in stockholders' equity, and cash flows of the Charter
Companies for the periods indicated, in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of interim financial statements, to normal
recurring year-end adjustments that are not material), and (iii) as included in
reports filed with the OTS under the Securities Exchange Act of 1934 comply as
to form in all material respects with applicable accounting requirements and
published rules and regulations.
5.6 Deposit Accounts. The deposit accounts of Charter are insured by the
Savings Association Insurance Fund of the FDIC to the maximum extent permitted
under Law, and Charter has paid all premiums and assessments and filed all
reports required to have been paid or filed under the Federal Deposit Insurance
Act.
5.7 Absence of Undisclosed Liabilities. No Charter Company has any
Liabilities that will have, individually or in the aggregate, a Material Adverse
Effect on Charter, except Liabilities which are accrued or reserved against in
the consolidated balance sheets of Charter as of March 31, 1995 included in the
Charter Financial Statements or reflected in the notes thereto. No Charter
Company has incurred or paid any Liability since March 31, 1995, except for such
Liabilities incurred or paid in the ordinary course of business consistent with
past business practice and which will not have, individually or in the
aggregate, a Material Adverse Effect on Charter. Except as set forth in Section
5.7 of the Charter Disclosure Memorandum, Charter has no off-balance sheet
financial instruments including but not limited to letters of credit, unfunded
commitments and derivative financial instruments. To Charter's knowledge, there
are no unasserted claims that are not disclosed in the Charter Financial
Statements that would have a Material Adverse Effect on Charter.
5.8 Absence of Certain Changes or Events. Since June 30, 1994, except as
disclosed in the Charter Financial Statements filed with the OTS after such date
and prior to the date of this Agreement, (i) no events or changes have occurred
or have been threatened which have had, will have or are reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect upon the
Charter Companies considered as a whole, (ii) the Charter Companies have not
taken any action, or failed to take any action, prior to the date of this
Agreement, which action or failure, if taken after the date of this Agreement,
would represent or result in a material breach or violation of any of the
covenants and agreements of Charter in this Agreement, and (iii) neither Charter
nor any of its Subsidiaries has suffered any loss or damage to their respective
properties, or Assets, whether or not insured, or union activity that would
have, individually or in the aggregate, a Material Adverse Effect on the Charter
Companies taken as a whole.
5.9 Adequacy of Reserves. (a) The allowance for loan losses (the
"Allowance") set forth in Note 4 to the Charter Financial Statements dated March
31, 1995 was, and the Allowance shown in the notes to the consolidated
statements of financial condition of Charter included in the Charter Financial
Statements as of dates subsequent to the execution of this Agreement will be, as
of the dates thereof, adequate (within the
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meaning of GAAP and applicable OTS requirements or guidelines) to provide for
losses relating to or inherent in the loan and lease portfolios (including
accrued interest receivables) of the Charter Companies and other extensions of
credit (including letters of credit and commitments to make loans or extend
credit) by the Charter Companies as of the dates thereof.
(b) The allowance for loss on real estate acquired in settlement of loans
("REO Reserve") shown on Schedule SC to the Charter Thrift Financial Report
dated March 31, 1995 and filed with the OTS was, and the REO Reserve shown on
the consolidated statements of financial condition of Charter included in the
Charter Financial Statements or notes thereto or Schedule SC to the Charter
Thrift Financial Reports filed with the OTS as of dates subsequent to the
execution of this Agreement will be, as of the dates thereof, adequate (within
the meaning of GAAP and applicable OTS requirements or guidelines) to provide
for losses relating to or inherent in the other real estate owned portfolios of
the Charter Companies as of the dates thereof and the resulting net assets are
carried at the fair value less costs to sell.
5.10 Tax Matters. (a) All Tax returns required to be filed on behalf of
any of the Charter Companies have been timely filed, or requests for extensions
have been timely filed, granted, and have not expired for periods ended on or
before December 31, 1993 and on or before the date of the most recent fiscal
year end immediately preceding the Effective Time. All Taxes shown on filed
returns and all estimated Taxes for periods for which extensions have been
requested have been paid. No deficiencies for any Taxes have been proposed,
asserted, or assessed against Charter or any of its Subsidiaries that are not
adequately reserved for in the Charter Financial Statements dated prior to the
date of this Agreement, except for deficiencies that will not have a Material
Adverse Effect on Charter. Except with respect to claims for refunds, the
Federal income tax returns of Charter 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. All Taxes and other Liabilities due with respect to completed and settled
examinations or concluded Litigation have been paid.
(b) None of the Charter Companies has executed an extension or waiver of
any statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by the
Internal Revenue Service or other applicable Taxing authorities) that is
currently in effect.
(c) Adequate provisions for any current and deferred Taxes due or to become
due for any of the Charter Companies for the period or periods through and
including the date of the respective Charter Financial Statements have been
accrued and are reflected on such Charter Financial Statements.
5.11 Assets. Except as disclosed in the Charter Financial Statements and
in Section 5.11 of the Charter Disclosure Memorandum, the Charter Companies have
good and marketable title, to all of their respective Assets that are material
to the business of the Charter Companies on a consolidated basis, and such
Assets are owned free and clear of all Liens. All material tangible properties
used in the businesses of the Charter Companies are in good condition reasonable
wear and tear excepted, and are usable in the ordinary course of business
consistent with Charter's past practices. All Assets which are material to the
business of the Charter Companies, held under leases or subleases by any of the
Charter Companies, are held under valid Contracts enforceable in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought), and
each such Contract is in full force and effect.
5.12 Environmental Matters. Except as set forth in Section 5.12 of the
Charter Disclosure Memorandum and to Charter's Knowledge:
(a) The operations of Charter and its Subsidiaries have been in the
past and are now 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 Environmen-
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tal 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 Occupation Safety and Health Act.
(b) Neither Charter 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
Charter 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 health or safety matters, or (z) any statutory or commonlaw
theory of liability involving environmental or health and safety matters.
(c) No use, disposal, releases, burial, placement or migration of any
material regulated under or defined by any Environmental Law, including
without limitation, asbestos (collectively, "Hazardous Materials"), has
occurred on, in, at, or under any of the property owned, leased or operated
at any time by Charter or any Subsidiary.
(d) There has been no disposal, release, burial or placement of
Hazardous Materials on any real property not owned, leased or operated by
Charter or any Subsidiary which may result or has resulted in contamination
of or beneath the property owned, leased or operated at any time by Charter
or any Subsidiary.
(e) All of the above-ground and underground storage tanks presently on
any real property owned, leased or operated by Charter or any Subsidiary
have been properly registered.
(f) No audit or investigation has been conducted as to environmental
matters relating to any property owned, leased or operated by Charter or
any Subsidiary by any governmental agency.
(g) 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 Charter or any Subsidiary under any
Environmental Law.
5.13 Compliance With Laws. Charter is an "insured depository institution"
as defined in the Federal Deposit Insurance Act and applicable regulations
thereunder. Each Charter Company has in effect all Permits necessary for it to
own, lease, or operate its Assets and to carry on its business as now conducted,
except for those Permits the absence of which will not have, individually or in
the aggregate, a Material Adverse Effect on Charter, and there has occurred no
Default under any such Permit, other than Defaults which will not have,
individually or in the aggregate, a Material Adverse Effect on Charter. None of
the Charter Companies:
(a) Is in violation of any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for violations which
will not have, individually or in the aggregate, a Material Adverse Effect
on Charter; and
(b) As of the date of this Agreement, 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 notification,
communication or extraordinary supervisory letter from, any governmental
authority or Regulatory Authority which asserts that any Charter Company is
not in compliance with any material Laws or material Orders where such
noncompliance will have individually or in the aggregate, a Material
Adverse Effect on Charter, restricts materially the conduct of its
business, or in any manner relates to its capital adequacy, its credit
policies, its management, or the payment of dividends, nor has Charter been
advised by any Regulatory Authority that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or
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requesting) any such order, decree, condition, notification, agreement,
memorandum of understanding, extraordinary supervisory letter, commitment
letter or similar submission.
5.14 Insurance. Each of Charter and its Subsidiaries is presently insured,
and since January 1, 1993 has been insured for reasonable amounts against such
material risks as companies engaged in a similar business would, in accordance
with good business practice, customarily be insured. The policies of fire,
theft, liability, and other insurance maintained with respect to the assets or
businesses of Charter and its Subsidiaries provide adequate coverage against
loss, and the fidelity bonds in effect as to which any of Charter or its
Subsidiaries is a named insured are sufficient for their purpose.
5.15 Labor Relations. No Charter Company is the subject of any Litigation
asserting that it or any other Charter Company has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other Charter Company to bargain with
any labor organization as to wages or conditions of employment, nor is any
Charter Company a party to or bound by any collective bargaining agreement,
contract, or other agreement or understanding with a labor union or labor
organization, nor is there any strike or other labor dispute involving any
Charter Company, pending or threatened, or to its Knowledge, is there any
activity involving any Charter Company's employees seeking to certify a
collective bargaining unit or engaging in any other organization activity.
5.16 Employee Benefit Plans. (a) Charter has disclosed in Section 5.16(a)
of the Charter Disclosure Memorandum, and has delivered or made available to FAC
prior to the execution of this Agreement correct and complete copies in each
case of, all pension, retirement, profit-sharing, deferred compensation, stock
option, employee stock ownership, severance pay, vacation, bonus, or other
incentive plans, all other written employee programs or agreements, all medical,
vision, dental, or other health plans, all life insurance plans, and all other
employee benefit plans or fringe benefit plans, including, without limitation,
"employee benefit plans" as that term is defined in Section 3(3) of ERISA,
currently or previously adopted, maintained by, sponsored in whole or in part
by, or contributed to by any Charter Company for the benefit of employees,
retirees, dependents, spouses, directors, independent contractors, or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, the "Charter Benefit Plans"). Any of the Charter
Benefit Plans which is an "employee welfare benefit plan," as that term is
defined in Section 3(1) of ERISA, or an "employee pension benefit plan," as that
term is defined in Section 3(2) of ERISA, is referred to herein as a "Charter
ERISA Plan." On or after September 26, 1980, neither Charter nor any Charter
Company has participated in or had an "obligation to contribute" (as defined in
ERISA Section 4212) to a "multiemployer plan" (as defined in ERISA Sections
4001(a)(3) and 3(37)(A)). Except as disclosed in Section 5.16(a) of the Charter
Disclosure Memorandum, with respect to each Charter Benefit Plan that is subject
to Title IV of ERISA, the present value of accrued benefits under such plan
based upon the actuarial assumptions used for funding purposes in the most
recent actuarial report prepared by such plan's actuary with respect to such
plan does not exceed the fair market value of the assets of such plan allocable
to such accrued benefits. If Charter and its Subsidiaries at any time withdraw
from participation as a contributing sponsor in any Charter Benefit Plan that is
a plan described in Section 4063(a) of ERISA, neither Charter nor any of its
Subsidiaries would incur any liability to such plan. Neither Charter nor any of
its Subsidiaries is a "substantial employer" within the meaning of Section
4001(a)(2) of ERISA, with respect to any plan described in Section 4063(a) of
ERISA.
(b) Except as disclosed in Section 5.16(b) of the Charter Disclosure
Memorandum, Charter has delivered or made available to FAC prior to the
execution of this Agreement correct and complete copies of the following
documents: (i) all trust agreements or other funding arrangements for such
Charter Benefit Plans (including insurance contracts), and all amendments
thereto, (ii) with respect to any such Charter Benefit Plans or amendments, all
determination letters, rulings, opinion letters, information letters, or
advisory opinions issued by the Internal Revenue Service, the United States
Department of Labor, or the Pension Benefit Guaranty Corporation after December
31, 1974, (iii) annual reports or returns, audited or unaudited financial
statements, actuarial valuations and reports, and summary annual reports
prepared for any Charter Benefit Plan with respect to the most recent three plan
years, and (iv) the most recent summary plan descriptions and any material
modifications thereto.
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(c) Except as disclosed in Section 5.16(c) of the Charter Disclosure
Memorandum, all Charter Benefit Plans are in compliance with the applicable
terms of ERISA, the Internal Revenue Code, and any other applicable Laws the
breach or violation of which would have, individually or in the aggregate, a
Material Adverse Effect on Charter. Each Charter ERISA Plan which is intended to
be qualified under Section 401(a) of the Internal Revenue Code has received a
favorable determination letter from the Internal Revenue Service, and Charter is
not aware of any circumstances which will or could result in revocation of any
such favorable determination letter. Each trust created under any Charter ERISA
Plan has been determined to be exempt from Tax under Section 501(a) of the
Internal Revenue Code and Charter is not aware of any circumstance which will or
could result in revocation of such exemption. Except as disclosed in Section
5.16(c) of the Charter Disclosure Memorandum, with respect to each Charter
Benefit Plan, no event has occurred which will or could give rise to a loss of
any intended Tax consequences under the Internal Revenue Code or to any Tax
under Section 511 of the Internal Revenue Code. There is no material pending or
threatened Litigation relating to any Charter ERISA Plan. No Charter Company has
engaged in a transaction with respect to any Charter Benefit Plan that, assuming
the taxable period of such transaction expired as of the date hereof, would
subject any Charter Company to a tax or penalty imposed by either Section 4975
of the Internal Revenue Code or Section 502(i) of ERISA in amounts which would
have, individually or in the aggregate, a Material Adverse Effect on Charter. No
event that constitutes a "reportable event", as defined in Section 4043 of ERISA
has occurred with respect to any Charter ERISA Plan. All Charter Benefit Plans
that are group health plans as defined in Section 5000(b) of the Internal
Revenue Code have been operated in compliance with the applicable requirements
for continuation coverage of Section 4980B of the Internal Revenue Code.
(d) Except as disclosed in Section 5.16(d) of the Charter Disclosure
Memorandum, no liability under Title IV of ERISA has been or is expected to be
incurred by any Charter Company with respect to any defined benefit plan
currently or formerly maintained by any of them or by any entity which is
considered a single employer with a Charter Company under Section 4001 of ERISA
or Section 414 of the Internal Revenue Code (an "ERISA Affiliate").
(e) Except as disclosed in Section 5.16(e) of the Charter Disclosure
Memorandum, no defined benefit plan of a Charter Company or an ERISA Affiliate
has an "accumulated funding deficiency" (whether or not waived) within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA and
no Charter Company or ERISA Affiliate has an outstanding funding waiver. No
Charter Company or ERISA Affiliate has provided, or is required to provide,
security to any plan of a Charter Company or an ERISA Affiliate pursuant to
Section 401(a)(29) of the Internal Revenue Code.
(f) Except as disclosed in Section 5.16(f) of the Charter Disclosure
Memorandum, no Charter Company has any obligations for retiree health and life
benefits under any of the Charter Benefit Plans.
(g) Except as disclosed in Section 5.16(g) of the Charter Disclosure
Memorandum, no oral or written representation or communication with respect to
any aspect of the Charter Benefit Plans has been made to employees of any of the
Charter Companies prior to the date hereof which is not in accordance with the
written or otherwise preexisting terms and provisions of such plans. All Charter
Benefit Plan documents and annual reports or returns, audited or unaudited
financial statements, actuarial valuations, summary annual reports, and summary
plan descriptions issued with respect to the Charter Benefit Plans are correct
and complete and there have been no changes in the information set forth
therein.
(h) Except as disclosed in Section 5.16(h) of the Charter Disclosure
Memorandum, to the Knowledge of Charter, there are no issues or disputes with
respect to any Charter Benefit Plans, or the administration thereof, currently
between any trustee or other fiduciary thereunder, Charter or any of its
Subsidiaries and any governmental agency or, employee, which would, individually
or in the aggregate, have a Material Adverse Effect on Charter.
5.17 Material Contracts. Except as disclosed in Section 5.17 of the
Charter Disclosure Memorandum, none of the Charter Companies, nor any of their
respective Assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, (i) any employment, severance,
termination, consulting, or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $10,000,
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(ii) any Contract relating to the borrowing of money by any Charter Company or
the guarantee by any Charter Company of any such obligation (other than
Contracts evidencing deposit liabilities, purchases of federal funds,
fully-secured repurchase agreements, and Federal Home Loan Bank advances, trade
payables, and Contracts relating to borrowings or guarantees made in the
ordinary course of business), (iii) any Contracts between or among Charter
Companies, and (iv) any other material Contract (together with all Contracts
referred to in Sections 5.11 and 5.16(a) of this Agreement, the "Charter
Contracts"). None of the Charter Companies or, to Charter's Knowledge, any
counterparty to a Charter Contract, is in Default under any Charter Contract
which, individually or in the aggregate, will have a Material Adverse Effect on
Charter. All contracts or amendments thereto that were required to be filed as
exhibits to Charter's Form 10-K filed for the fiscal year ended June 30, 1994
and quarterly reports on Form 10-Q for quarters subsequent thereto were filed as
exhibits to such reports by Charter with the OTS as of the date of this
Agreement.
5.18 Legal Proceedings. Except to the extent specifically and adequately
reserved against in the Charter Financial Statements dated prior to the date of
this Agreement, there is no Litigation instituted or pending, or, to the
Knowledge of Charter, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any Charter Company, or against any Asset,
interest, or right of any of them, that will have, individually or in the
aggregate, a Material Adverse Effect on Charter. Charter has disclosed in
Section 5.18 of the Charter Disclosure Memorandum all Litigation pending or, to
the Knowledge of Charter, threatened as of the date of this Agreement where
there are claims against Charter.
5.19 Reports. Since January 1, 1993, or the date of organization if later,
each Charter Company has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with (i) the OTS, including, but not limited to, Forms 10-K, Forms 10-Q,
Forms 8-K, and proxy statements, (ii) other Regulatory Authorities, and (iii)
any applicable state securities or banking authorities (except, in the case of
state securities authorities, failures to file which will not have, individually
or in the aggregate, a Material Adverse Effect on Charter) and have made
available to FAC true and complete copies of all such reports. As of their
respective dates, each of such reports and documents, including the financial
statements, exhibits, and schedules thereto, complied in all material respects
with all applicable Laws and regulatory requirements. As of its respective date,
each such report and document did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading.
5.20 Statements True and Correct. None of the information supplied or to
be supplied by any Charter Company or any Affiliate thereof for inclusion in the
Registration Statement to be filed by FAC with the SEC will, when the
Registration Statement becomes effective, be false or misleading with respect to
any material fact, or 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 in light of the circumstances in which
they were made. None of the information supplied or to be supplied by any
Charter Company or any Affiliate thereof for inclusion in the Proxy Statement to
be mailed to Charter's stockholders in connection with the Stockholders'
Meeting, and any other documents to be filed by a Charter Company or any
Affiliate thereof with the OTS or any other Regulatory Authority in connection
with the transactions contemplated hereby, will, at the respective time such
documents are filed, and with respect to the Proxy Statement and any and all
supplements and amendments thereto, when first mailed to the stockholders of
Charter, be false or misleading with respect to any material fact, or 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, in
light of the circumstances under which they were made, not misleading, or, in
the case of the Proxy Statement or any amendment thereof or supplement thereto,
at the time of the Stockholders' Meeting, be false or misleading with respect to
any material fact, or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances in which they were made. All documents that any Charter
Company or any Affiliate thereof is responsible for filing with any Regulatory
Authority in connection with the transactions contemplated hereby will comply as
to form in all material respects with the provisions of applicable Law.
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5.21 Accounting, Tax, and Regulatory Matters. No Charter Company has taken
any action, or agreed to take any action, or has any Knowledge of any fact or
circumstance that will (i) prevent the transactions contemplated hereby,
including the Merger, from qualifying for pooling-of-interests accounting
treatment or treatment as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement. To the Knowledge of Charter, there exists no fact, circumstance, or
reason why the requisite Consents referred to in Section 9.1(b) of this
Agreement cannot be received in a timely manner without imposition of any
condition of the type described in the second sentence of such Section 9.1(b).
5.22 Charter Provisions. Each Charter Company has taken all action so that
the entering into of this Agreement and the consummation of the Merger and the
other transactions contemplated by this Agreement (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 (other than a FAC Company) under the charter,
bylaws, or other governing instruments of any Charter Company or restrict or
impair the ability of FAC to vote, or otherwise to exercise the rights of a
stockholder with respect to, shares of any Charter Company that may be acquired
or controlled by it.
5.23 Ownership of FAC Common Stock. As of the date hereof, neither Charter
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 an 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).
5.24 Qualified Thrift Lender. Since the date of its conversion to stock
form, Charter has satisfied, and as of the date hereof satisfies, the qualified
thrift lender test under applicable regulations.
5.25 Permissible Activities. Except as set forth in Section 5.25 of the
Charter Disclosure Memorandum, all of the business activities conducted by
Charter and its Subsidiaries as of the date hereof are business activities in
which a bank holding company is permitted to engage under the federal BHC Act,
as amended, and Regulation Y promulgated thereunder and all business activities
conducted by Charter and its Subsidiaries as of the date hereof are business
activities in which national banks are permitted to engage under the rules and
regulations of the OCC.
5.26 Loans. Each loan of each Charter Company (i) is evidenced by notes,
agreements or other evidences of indebtedness which are true, genuine and what
they purport to be, (ii) to the extent secured, has been secured by valid liens
and security interests which have been perfected, and (iii) is the legal, valid
and binding obligation of the obligor named therein, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, reorganization, moratorium,
or similar Laws affecting the enforcement of creditors' rights generally. All
loans and extensions of credit that have been made by Charter, and either (a)
are outstanding as of the date of this Agreement and as of the Effective Time,
or (b) as to which applicable statutes of limitations have not run, comply with
all applicable Laws and regulations.
5.27 Conduct of Business. Since June 30, 1994, each of the Charter
Companies has conducted its business only in the ordinary course. For purposes
of the foregoing, none of the Charter Companies has in any material respect,
during the period since June 30, 1994, controlled expenses through the
elimination of employee benefits, deferral of routine maintenance of real
property or leased premises, elimination of reserves where the liability related
to such reserve has remained, reduction of capital improvements from previous
levels, failure to depreciate capital assets in accordance with past practice or
eliminate capital assets that are no longer used in the business of Charter's
Subsidiaries, capitalization of loan production other than in accordance with
Financial Accounting Standard 91 or extraordinary reduction or deferral of
ordinary or necessary expenses.
5.28 Related Party Transactions. Except as disclosed in the Charter SEC
Documents filed prior to the date of this Agreement or as set forth in Section
5.28 of the Charter Disclosure Memorandum, (i) there are no transactions to
which Charter or any Subsidiary was a party in which any officer or director of
Charter or any Subsidiary or any other entity controlled by, under common
control with or in control of Charter had a
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direct or indirect interest and (ii) no Charter Company is a party to any loan,
including any loan guaranty, with any director, executive officer or 5%
Stockholder of Charter or any Affiliate of Charter.
5.29 Intellectual Property. To Charter's Knowledge the Charter Disclosure
Memorandum lists all patents, patent applications, inventions, licenses, trade
names, trademarks, service marks, brandmarks, copyrights or registrations or
applications therefore, franchises and other assets of like kind (such assets
and rights herein called "Rights"), used in the business of Charter, or which
are registered in the name of Charter, the ownership of all the foregoing being
separately stated. The expiration dates, if any, of each of the Rights are also
set forth in the Charter Disclosure Memorandum. Charter owns and possesses all
Rights used in the conduct of Charter's business; such Rights are adequate for
the conduct of Charter's business and will not be adversely affected by the
transactions contemplated hereby; and, to Charter's Knowledge, are not being
infringed or violated by any other person or entity. All Rights are, and upon
the consummation of the transactions contemplated by this Agreement will be,
vested in FAC free of any equities, claims, liens, encumbrances or restrictions
and Charter has not granted any licenses thereunder to others. No products sold
by Charter infringe the Rights of others. All licenses granted to Charter by
other with respect to the business of Charter are set forth in the Charter
Disclosure Memorandum, and all such licenses are freely assignable. No holder of
any equity security, general or limited partner, or director, officer, employee
or agent of such owns, directly or indirectly, in whole or in part, any Rights
which the business of Charter has used, or the use of which is necessary for the
business of Charter as now conducted. All technology, data, precesses, formulas,
trade secrets and the like used in the operation of Charter's business therein
called "Know-How") are owned exclusively by Charter, free of any equities,
claims, liens or encumbrances, and Charter has not granted any license or right
thereto to others.
5.30 Liquidation Account. At the time of conversion from a mutual to a
stock association, Charter established a liquidation account in an amount equal
to its equity as of the latest date prior to conversion, which amounted to
approximately $12,632,000 at September 30, 1983. In addition, at the time of
conversion of First Federal Savings and Loan Association of Danville, Charter
established a liquidation account which amounted to approximately $1,960,000 at
December 31, 1984. The liquidation account has been maintained at the above
stated levels in compliance with applicable Laws and regulations.
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES OF FAC
FAC hereby represents and warrants to Charter as follows:
6.1 Organization, Standing, and Power. FAC is a corporation duly
organized, validly existing, and in good standing under the Laws of the State of
Tennessee, and is a bank holding company registered under the BHC Act. First
American National Bank ("FANB") is a national banking organization validly
existing and in good standing under the laws of the United States. Each of FAC
and FANB has the corporate power and authority to conduct its business as now
conducted and to own, lease, and operate its Assets. Each of FAC and FANB is
duly qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its current business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed will not have, individually or
in the aggregate, a Material Adverse Effect on FAC and its Subsidiaries taken as
a whole. All of the issued and outstanding capital stock of FANB is owned by
FAC. FANB is the only Significant Subsidiary of FAC.
6.2 Authority: No Breach By Agreement. (a) FAC has the corporate power and
authority necessary to execute, deliver, and perform its obligations under this
Agreement and FAC and FANB have the corporate power and authority necessary to
consummate the transactions contemplated hereby except to the extent that FAC,
which is not as of the date of this Agreement qualified to do business in
Virginia, may be required to be qualified to do business in Virginia in order to
carry out the provisions of this Agreement. The execution, delivery, and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of FAC and
FANB. This Agreement represents a legal, valid, and binding obligation of
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FAC, enforceable against FAC in accordance with its terms (except in all cases
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by FAC, nor the
consummation by FAC and FANB of the transactions contemplated hereby, nor
compliance by FAC with any of the provisions hereof, will (i) conflict with or
result in a breach of any provision of FAC's or FANB's charter or bylaws, or
(ii) constitute or result in a Default under, or require any Consent pursuant
to, or result in the creation of any Lien on any Asset of any FAC Company under,
any Contract or Permit of any FAC Company, or (iii) subject to receipt of the
requisite approvals referred to in Section 9.1(b) of this Agreement, violate any
Law or Order applicable to any FAC Company or any of their respective Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the Nasdaq Stock Market, and other than Consents required from Regulatory
Authorities, and other than notices to or filings with the Internal Revenue
Service or the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, and other than Consents, filings, or notifications which, if not
obtained or made, will not have, individually or in the aggregate, a Material
Adverse Effect on FAC, no notice to, filing with, or Consent of, any public body
or authority is necessary for the consummation by FAC or Charter Interim of the
Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock. (a) As of the date hereof, the authorized capital stock
of FAC consists of (i) 50,000,000 shares of $5.00 par value FAC Common Stock and
(ii) 2,500,000 shares of no par value preferred stock ("FAC Preferred"). As of
the close of business on May 4, 1995, (A) 25,930,950 shares of FAC Common Stock
were outstanding, no shares of FAC Preferred Stock were outstanding, and (B)
806,248 shares of FAC Common Stock were reserved for issuance pursuant to FAC's
Dividend Reinvestment and Stock Purchase Plan, 3,018,279 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"), 908,859 shares
of FAC Common Stock were reserved for transfer to the First American Corporation
First Incentive Reward Savings Thrift 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").
Pursuant to the repurchase program authorized by the FAC Board of Directors on
December 15, 1994, FAC is authorized to repurchase up to 800,000 shares of the
FAC Common Stock, and the number of shares of FAC Common Stock issued and
outstanding at the Effective Time will be reduced by the number of shares
repurchased pursuant to this program. In addition, FAC has entered into an
agreement with Heritage Federal Bancshares Inc. pursuant to which FAC has agreed
to acquire Heritage Federal Bancshares Inc. in exchange for FAC Common Stock.
(b) All of the issued and outstanding shares of FAC Capital Stock are, and
all of the shares of FAC Common Stock to be issued in exchange for shares of
Charter Common Stock upon consummation of the Merger, when issued in accordance
with the terms of this Agreement, will be, duly authorized and validly issued
and outstanding and fully paid and nonassessable under the Laws of the State of
Tennessee. None of the outstanding shares of FAC Capital Stock has been, and
none of the shares of FAC Common Stock to be issued in exchange for shares of
Charter Common Stock upon consummation of the Merger will be, issued in
violation of any preemptive rights of the current or past stockholders of FAC.
6.4 Financial Statements. FAC has delivered to Charter copies of all FAC
Financial Statements. The FAC Financial Statements (as of the dates thereof and
for the periods covered thereby) (i) are or, if dated after the date of this
Agreement, will be in accordance with the books and records of the FAC
Companies, which are or will be, as the case may be, complete and correct and
which have been or will have been, as the case may be, maintained in accordance
with good business practices, and (ii) present or will present, as the
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case may be, fairly the consolidated financial position of the FAC Companies as
of the dates indicated and the consolidated results of operations, changes in
stockholders' equity, and cash flows of the FAC Companies for the periods
indicated, in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of interim financial statements, to normal recurring year-end adjustments
that are not material).
6.5 Absence of Undisclosed Liabilities. No FAC Company has any Liabilities
that will have, individually or in the aggregate, a Material Adverse Effect on
FAC, except Liabilities which are accrued or reserved against in the
consolidated balance sheets of FAC as of March 31, 1995 included in the FAC
Financial Statements or reflected in the notes thereto. No FAC Company has
incurred or paid any Liability since March 31, 1995, except for such Liabilities
incurred or paid in the ordinary course of business consistent with past
business practice and which will not have, individually or in the aggregate, a
Material Adverse Effect on FAC. To FAC's Knowledge, there are no unasserted
claims that are not disclosed in the FAC Financial Statements that will have a
Material Adverse Effect on FAC.
6.6 Absence of Certain Changes or Events. Since December 31, 1994, except
as disclosed in the FAC Financial Statements filed with the SEC after such date
and prior to the date of this Agreement, (i) no events or changes have occurred
or have been threatened which have had, will have or are reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on the FAC
Companies considered as a whole, (ii) the FAC Companies have not taken any
action, or failed to take any action, prior to the date of this Agreement, which
action or failure, if taken after the date of this Agreement, would represent or
result in a material breach or violation of any of the covenants and agreements
of FAC in this Agreement, and (iii) neither FAC nor any of its Subsidiaries has
suffered any loss or damage to their respective properties or Assets, whether or
not insured, or union activity that would have, individually or in the
aggregate, a Material Adverse Effect on the FAC Companies taken as a whole.
6.7 Compliance with Laws. Each FAC Company has in effect all Permits
necessary for it to own, lease, or operate its Assets and to carry on its
business as now conducted, except for those Permits the absence of which will
not have, individually or in the aggregate, a Material Adverse Effect on FAC,
and there has occurred no Default under any such Permit, other than Defaults
which will not have, individually or in the aggregate, a Material Adverse Effect
on FAC. None of the FAC Companies:
(a) Is in violation of any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for violations which
will not have, individually or in the aggregate, a Material Adverse Effect
on FAC; and
(b) As of the date of this Agreement, 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 notification,
communication or extraordinary supervisory letter from, any governmental
authority or Regulatory Authority which asserts that any FAC Company is not
in compliance with any material Laws or material Orders where such
noncompliance will have, individually or in the aggregate, a Material
Adverse Effect on FAC, restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit policies, its
management, or the payment of dividends, nor has FAC been advised by any
Regulatory Authority that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, condition, notification, agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter or similar submission.
6.8 Legal Proceedings. Except to the extent reserved against in the FAC
Financial Statements, there is no Litigation instituted or pending, or, to the
Knowledge of FAC, threatened (or unasserted but considered probable of assertion
and which if asserted would have at least a reasonable probability of an
unfavorable outcome) against any FAC Company, or against any Asset, interest, or
right of any of them, that will have, individually or in the aggregate, a
Material Adverse Effect on FAC.
6.9 Reports. Since January 1, 1993, FAC has filed all reports and
statements, together with any amendments required to be made with respect
thereto, that it was required to file with (i) the SEC, including,
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but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy statements,
(ii) other Regulatory Authorities, and (iii) any applicable state securities or
banking authorities (except, in the case of state securities authorities,
failures to file which will not have, individually or in the aggregate, a
Material Adverse Effect on FAC) and have made available to Charter true and
complete copies of all such reports. As of their respective dates, each of such
reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all applicable Laws
and regulatory requirements. As of its respective date, each such report and
document did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
6.10 Statements True and Correct. None of the information supplied or to
be supplied by any FAC Company or any Affiliate thereof for inclusion in the
Registration Statement to be filed by FAC with the SEC, will, when the
Registration Statement becomes effective, be false or misleading with respect to
any material fact, or contain any untrue statement of a material fact, or omit
to state any material fact required to be stated thereunder or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made. None of the information supplied or to be supplied by any FAC
Company or any Affiliate thereof for inclusion in the Proxy Statement and any
and all Supplements and amendments thereto to be mailed to Charter's
stockholders in connection with the Stockholders' Meeting, and any other
documents to be filed by any FAC Company or any Affiliate thereof with the SEC
or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and
with respect to the Proxy Statement, when first mailed to the stockholders of
Charter, be false or misleading with respect to any material fact or contain any
untrue statement of a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they were
made, not misleading, or, in the case of the Proxy Statement or any amendment
thereof or supplement thereto, at the time of the Stockholders' Meeting, be
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary to make the statement
therein not misleading in light of the circumstances in which they were made.
All documents that any FAC Company or any Affiliate thereof is responsible for
filing with any Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
6.11 Authority of Charter Interim. Charter Interim upon its formation and
at the Effective Time will be a federal stock savings bank duly organized,
validly existing, and in good standing under the Laws of the United States as a
wholly-owned, first tier Subsidiary of FAC. Charter Interim upon its formation
will have, the corporate power and authority necessary to execute, deliver, and
perform its obligations under the Plan of Merger and to consummate the
transactions contemplated thereby. The execution, delivery, and performance of
the Plan of Merger and the consummation of the transactions contemplated
therein, including the Merger, will be duly and validly authorized by all
necessary corporate action in respect thereof on the part of Charter Interim.
When executed and delivered, the Plan of Merger will represent a legal, valid,
and binding obligation of Charter Interim, enforceable against Charter Interim
in accordance with its terms (except in all cases as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
similar Laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding may be brought).
6.12 Accounting, Tax, and Regulatory Matters. No FAC Company thereof has
taken any action, or agreed to take any action, or has any Knowledge of any fact
or circumstance that will (i) prevent the transactions contemplated hereby,
including the Merger, from qualifying for treatment as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, or (ii) materially
impede or delay receipt of any Consents of Regulatory Authorities referred to in
Section 9.1(b) of this Agreement. To the Knowledge of FAC, there exists no fact,
circumstance, or reason why the requisite Consents referred to in Section 9.1(b)
of this Agreement cannot be received in a timely manner without imposition of
any condition of the type described in the second sentence of such Section
9.1(b).
6.13 No Vote Required. No vote of the stockholders of FAC is required in
order to enter into this Agreement or to consummate the Merger.
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6.14 Consideration. FAC has reserved or will reserve for issuance
sufficient shares of FAC Common Stock for issuance in the Merger.
ARTICLE SEVEN
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of Charter. (a) Unless the prior written consent
of the chief executive officer or principal financial officer of FAC shall have
been obtained and except as otherwise specifically contemplated or permitted by
this Agreement, Charter shall and shall cause each of its Subsidiaries to (i)
operate its business only in the usual, regular, and ordinary course (which,
among other things, does not include engaging in transactions involving
derivatives), and (ii) preserve intact its business organizations and Assets and
deposits and maintain its rights and franchises.
(b) Charter 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:
(i) as soon as reasonably practicable, but not later than 45 days
after the date hereof, obtain and promptly provide to FAC a report of a
Phase I environmental assessment performed by an environmental expert
retained for such purpose by Charter and reasonably acceptable to FAC (the
"Environmental Expert") of (A) Charter's branch locations (other than space
in retail and similar establishments leased by Charter for automatic teller
machines), (B) other real estate owned, (C) all classified assets over
$500,000 and all in substance foreclosed assets disclosed in Section 7.1(b)
of the Charter Disclosure Memorandum, and (D) those credits over $500,000
identified on the list previously provided to Charter by FAC. The Phase I
assessment shall be required to include a recommendation as to whether a
Phase II assessment should be prepared; if the Phase I assessment
recommends the undertaking of a Phase II assessment, and if such Phase II
assessment is necessary in FAC's reasonable opinion, Charter shall provide
to FAC a report of a Phase II assessment prepared by the Environmental
Expert on such properties requiring such additional study as promptly as
practicable. FAC shall have 15 business days from the receipt of any such
Phase II assessment to notify Charter of any objection to the contents of
such report. Should the cost of taking all remedial and corrective actions
and measures required by applicable law, health or safety concerns as
reasonably estimated by the Environmental Expert, in the aggregate, exceed
an amount which would have a Material Adverse Effect on Charter, or if the
cost of such actions and measures cannot be so reasonably estimated by such
expert with any reasonable degree of certainty to be an amount which would
not have a Material Adverse Effect on Charter, FAC shall have the right
pursuant to Section 10.1(g) hereof, for a period of 10 business days
following receipt of such estimate or indication that the cost of such
actions and measures cannot be so reasonably estimated, to terminate this
Agreement, which shall be FAC's sole remedy in such event. With respect to
assessments of assets described in (C) and (D) of this subsection (b),
provided Charter shall have used its best efforts to obtain any necessary
approvals or access for the conduct of each assessment and shall have used
its best efforts to obtain amended loan documentation for this purpose if
necessary, then Charter shall not be required to obtain assessments on
assets which it is not legally possible for it to obtain;
(ii) coordinate Charter's CRA and Fair Lending program in consultation
with FAC's CRA officer for consistency purposes in transitioning to FAC's
program; and
(iii) cooperate and coordinate with FAC in good faith to adopt and
implement policies and procedures with respect to CRA and lending
(including documentation, appraisals and guaranties) consistent with those
of FAC and FAC's Affiliates and in accordance with guidelines previously
provided by FAC to Charter.
(c) Within ten (10) days after the end of each month commencing on June 10,
1995 and continuing to the Effective Time, Charter 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 tasks set forth in Section 7.1(b).
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(d) Prior to the Effective Time, Charter agrees to take any action that may
be necessary, including seeking injunctive or equitable relief, to enforce the
provisions of certain confidentiality agreements between Charter and third
parties that participated in the bidding process pursuant to which Charter
received FAC's bid to enter into this Agreement and the Plan of Merger. Charter
recognizes FAC as a third party beneficiary to each such confidentiality
agreement.
(e) Charter shall coordinate with FAC the declaration of any dividends in
respect of Charter Common Stock and the record dates and payment dates relating
thereto, it being the intention of Charter and FAC that holders of Charter
Common Stock shall not receive two dividends, or fail to receive one dividend,
for any single calendar quarter with respect to their shares of Charter Common
Stock and any shares of FAC Common Stock any such holder received in exchange
therefor in the Merger.
(f) Prior to the Closing, Charter 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 Bank's plans with respect to the conduct of Charter'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, Charter also will adjust loan loss and REO
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 Charter assets. The parties
agree to cooperate in preparing for the implementation of the adjustments
contemplated by this provision. On the date of Closing, Charter will take such
actions as are necessary to complete the payments, expenses and adjustments
contemplated by this provision. Notwithstanding the foregoing, Charter shall not
be obligated to take in any respect any such action pursuant to this Section
7.1(f) (other than pursuant to the preceding sentence) unless and until FAC
acknowledges in writing all conditions to its obligations to consummate the
Merger have been satisfied.
(g) Charter shall, at its own expense, recompute the liquidation account
and subaccount balances and make the adjustment to the amount disclosed in
Section 5.30 of this Agreement in the manner provided in 12 C.F.R. Section
563b.3(f)(5) (without regard to the second sentence following subsection
563b.3(f)(5)(ii), which provides that such amount need not be recomputed by an
association if the association has maintained records sufficient to make any
necessary computations in the event of a complete liquidation or other event
requiring such a computation) so that the balances accurately reflect the
balances that would have been computed in such liquidation account and
subaccounts, in each case as of the latest annual closing date of the conversion
prior to the Closing.
7.2 Negative Covenants of Charter. Except as specifically contemplated or
permitted by this Agreement or disclosed in Section 7.2 of the Charter
Disclosure Memorandum, from the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, Charter 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 or principal financial
officer of FAC:
(a) amend the charter, bylaws, or other governing instruments of any
Charter Company; or
(b) incur, guarantee, or otherwise become responsible for, any
additional debt obligation or other obligation for borrowed money except in
the ordinary course of the business of Charter Companies consistent with
past practices (which shall include, for Charter, creation of deposit
liabilities, purchases of federal funds, advances from the Federal Home
Loan Bank of Atlanta or the Federal Reserve Bank, and entry into repurchase
agreements fully secured by U.S. government or agency securities), or,
forgive any such indebtedness of any Person to any Charter Company, or
impose, or suffer the imposition, on any share of stock held by any Charter
Company of any Lien or permit any such Lien to exist; or
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(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any Charter Company, or declare or pay any dividend or
make any other distribution in respect of any Charter Common Stock;
provided that: (i) Charter may (to the extent legally and contractually
permitted to do so), but shall not be obligated to, declare and pay one
regular cash dividend per quarter on the shares of Charter Common Stock at
a rate not in excess of $0.10 per share (in accordance with Section 7.2(e))
with usual and regular record and payment dates in accordance with past
practice; or
(d) except 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, 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 Charter Common Stock or any other capital stock of any Charter
Company, 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 any
Charter Company or issue or authorize the issuance of any other securities
in respect of or in substitution for shares of Charter Common Stock or
sell, lease, mortgage, or otherwise dispose of or otherwise encumber any
shares of capital stock of any Charter Subsidiary (unless any such shares
of stock are sold or otherwise transferred to another Charter Company).
(f) acquire direct or indirect control over, or invest in equity
securities of, any Person, other than in connection with (i) foreclosures
in the ordinary course of business, or (ii) acquisitions of control by
Charter in its fiduciary capacity; or
(g) grant any increase in compensation or benefits to the employees or
officers of any Charter Company except in the ordinary course of business
and disclosed in Section 7.2(g) of the Charter Disclosure Memorandum or as
required by Law; 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 and disclosed in Section 7.2(g) of the Charter
Disclosure Memorandum; enter into or amend any severance agreements with
officers of any Charter Company except as disclosed in Section 7.2(g) of
the Charter Disclosure Memorandum; grant any increase in fees or other
increases in compensation or other benefits to directors of any Charter
Company except as disclosed in Section 7.2(g) of the Charter Disclosure
Memorandum; or
(h) enter into or amend any employment Contract between any Charter
Company and any Person (unless such amendment is required by Law) that the
Charter Company does not have the unconditional right to terminate without
Liability (other than Liability for services already rendered), at any time
on or after the Effective Time; or
(i) except as disclosed in Section 7.2(i) of the Charter Disclosure
Memorandum, adopt any new employee benefit plan or program of any Charter
Company or make any material change in or to any existing employee benefit
plans or programs of any Charter Company other than any such change that is
required by Law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan; or
(j) make any change with respect to loan or lease loss reserves, REO
Reserves, or make any significant change in any accounting methods,
principles, or practices or systems of internal accounting controls, except
as may be necessary to reflect actual developments with respect to Assets
such as downgrades in classification or to conform to changes in regulatory
accounting requirements or GAAP and except for those set forth in Section
7.1(f); or
(k) commence or settle any Litigation, other than immaterial
Litigation, in accordance with past practice; provided, that, except to the
extent specifically reserved against in the Charter Financial Statements
dated prior to the date of this Agreement, no Charter Company shall settle
any Litigation
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involving any Liability of any Charter Company for money damages in excess
of $10,000 or restrictions upon the operations of any Charter Company; or
(l) except in the ordinary course of business, 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 as disclosed pursuant to Sections 7.2(g), (h), or (i)
of the Charter Disclosure Memorandum; or
(m) materially adversely affect the ability of any Party to obtain any
Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the
last sentence of Section 9.1(b) or in 9.1(c) of this Agreement, or
materially adversely affect the ability of any Party to perform its
covenants and agreements under this Agreement, or materially adversely
affect the accounting treatment of the Merger as a pooling-of-interests
under Accounting Principles Board Opinion No. 16; or
(n) liquidate or sell or dispose of any material Assets or acquire any
material Assets, except as disclosed in Section 7.2(n) of the Charter
Disclosure Memorandum, make any capital expenditures in excess of $10,000
in the aggregate, establish new branches or other similar facilities or
enter into or modify any leases or other Contracts that involve annual
payments by any Charter Company that exceed $10,000 or that are not
terminable on 30 days' notice, except as required by Section 7.1(b); or
(o) change its lending, investment, asset/liability management or
other material banking policies in any material respect except as may be
required by changes in applicable law, regulation or regulatory directives,
and except as may be required pursuant to Section 7.1 hereof; or
(p) restructure any Asset over $250,000 classified by Charter or
identified in a list previously provided to Charter by FAC.
7.3 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 shall, and shall cause each of its Subsidiaries to (i) continue
to conduct its business and the business of its Subsidiaries in the usual,
regular and ordinary course; (ii) take no action which would (x) materially
adversely affect the ability of any Party to obtain any Consents required for
the transactions contemplated hereby without imposition of a condition or
restriction of the type referred to in the last sentences of Section 9.1(b) or
9.1(c) of this Agreement, or (y) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement; provided,
that the foregoing shall not prevent FAC or any FAC Company from discontinuing
or disposing of any of its Assets or business, or entering into or consummating
any additional agreements to acquire any assets or businesses or engage in any
merger, whether material or immaterial to FAC, if such action is, in the
judgment of FAC, desirable in the conduct of the business of FAC and its
Subsidiaries and such discontinuance or disposition would not represent a
material portion of the Assets of the FAC Companies, and (iii) amend the charter
or bylaws of FAC, in each case, in any manner which is adverse to, and
discriminates against, the holders of Charter Common Stock.
7.4 Adverse Changes in Condition. Each Party agrees to give written notice
promptly to the other Party upon becoming aware of the occurrence or impending
occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it or (ii) is reasonably likely to cause
or constitute a material breach of any of its representations, warranties, or
covenants contained herein, and to use its reasonable efforts to prevent or
promptly to remedy the same.
7.5 Reports. Each Party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and 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, in the case of FAC, or the
OTS, in the case of Charter, 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
stockholders' equity, and cash flows for the periods then ended in accordance
with GAAP (subject in the case of interim financial statements to
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normal recurring year-end adjustments that are not material). As of their
respective dates, such reports filed with the SEC or the OTS, as the case may
be, 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 applicable to
such reports.
ARTICLE EIGHT
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Stockholder Approval. FAC
shall use its reasonable efforts to file as soon as reasonably practicable after
the execution of this Agreement, the Registration Statement with the SEC,
provided Charter has provided, on a reasonably timely basis, all information
concerning Charter necessary for inclusion in the Registration Statement, and
shall use its reasonable efforts to cause the Registration Statement to become
effective under the 1933 Act as soon as reasonably practicable after the filing
thereof and, at FAC's option, of an amendment to include audited Financial
Statements for the fiscal year ending on June 30, 1995, and take any action
required to be taken under the applicable state Blue Sky or securities Laws in
connection with the issuance of the shares of FAC Common Stock upon consummation
of the Merger. Charter shall promptly furnish all information concerning it and
the holders of its capital stock as FAC may reasonably request in connection
with such action. Charter shall call a Stockholders' Meeting, Charter and FAC
shall coordinate and cooperate with respect to the timing of such meeting, which
shall be held as soon as practicable after the Registration Statement is
declared effective by the SEC and, for the purpose of voting upon approval of
(i) this Agreement and the Plan of Merger and (ii) such other related matters as
it deems appropriate. In connection with the Stockholders' Meeting, (i) Charter
shall file the Proxy Statement (which shall be included in the Registration
Statement) with the OTS and mail it to its stockholders, (ii) the Parties shall
furnish to each other all information concerning them that they may reasonably
request in connection with such Proxy Statement, (iii) the Board of Directors of
Charter shall recommend (subject to compliance with their fiduciary duties as
advised by counsel in writing to such Board) to its stockholders the approval of
this Agreement and the Plan of Merger, and (iv) the Board of Directors and
officers of Charter shall use their reasonable efforts to obtain such
stockholders' approval (subject to compliance with their fiduciary duties as
advised in writing by counsel to such Board).
8.2 Nasdaq Stock Market. FAC shall file with the Nasdaq Stock Market a
notification for trading on the Nasdaq Stock Market relating to the proposed
issuance of the shares of FAC Common Stock to be issued to the holders of
Charter Common Stock pursuant to the Merger.
8.3 Applications. As soon as reasonably practicable after execution of
this Agreement, FAC and its Subsidiaries shall prepare and file, and Charter
shall cooperate in all respects in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction over
the transactions contemplated by this Agreement (including the Primary FAC
Objective Transactions or the Alternative FAC Objective Transactions) including
but not limited to the OTS, the Board of Governors of the Federal Reserve
System, the FDIC, the Office of the Comptroller of the Currency and such state
regulatory authorities as may be appropriate, seeking the requisite Consents
necessary to consummate the transactions contemplated by this Agreement
(including the Primary FAC Objective Transactions or the Alternative FAC
Objective Transactions). FAC and its Subsidiaries shall use all reasonable
efforts to obtain the requisite Consents of all Regulatory Authorities as soon
as reasonably practicable after the filing of the appropriate applications.
8.4 Agreement as To Efforts To Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective at the earliest
practicable date, the transactions contemplated by this Agreement and the Plan
of Merger (including the Primary FAC Objective Transactions or the Alternative
FAC Objective Transactions), including, without limitation, using its reasonable
efforts to lift or rescind any Order adversely affecting its ability to
consummate the transactions contemplated herein and to cause to be
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satisfied the conditions applicable to such Party referred to in Article Nine of
this Agreement. Each Party shall use, and shall cause each of its Subsidiaries
to use, its reasonable efforts to obtain all Consents necessary or desirable for
the consummation of the transactions contemplated by this Agreement (including
the Primary FAC Objective Transactions or the Alternative FAC Objective
Transactions). In addition, each Party agrees to use its best efforts after the
Effective Time to take or cause to be taken, and to cause its respective
Subsidiaries to take or cause to be taken any such further action as may be
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Bank with full title to all properties, assets, approvals,
immunities and franchises of the Charter Companies.
8.5 Investigation and Confidentiality.
(a) Upon reasonable notice, Charter shall (and shall cause its Subsidiaries
to) afford to the officers, employees, accountants, counsel and other
representatives of FAC access, during normal business hours during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments and records (including individual credit and collateral files) and,
during such period, Charter shall make available to FAC all other information
concerning its businesses, properties and personnel as FAC may and reasonably
request and each of Charter and FAC shall (and shall cause each of the
respective Subsidiaries to) make available to the other 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). The Parties will hold in
confidence any or other such information which is nonpublic. No investigation by
either FAC or Charter 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.
(b) Each Party shall, and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by the other
Party concerning its and its Subsidiaries' businesses, operations, and financial
positions and shall not use such information for any purpose except in
furtherance of the transactions contemplated by this Agreement. If this
Agreement is terminated prior to the Effective Time, each Party shall promptly
return or destroy all documents and copies thereof, and all work papers
containing confidential information received from the other Party and shall not
be used by FAC in any way detrimental to Charter or any of its Affiliates.
(c) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
Party which it has discovered through the course of its investigation and which
represents, or is reasonably likely to represent, either a material breach of
any representation, warranty, covenant, or agreement of the other Party or which
has had or is reasonably likely to have a Material Adverse Effect on the other
Party.
8.6 Press Releases. Prior to the Effective Time, Charter and FAC shall
consult with each other as to the form and substance of any press release or
other public disclosure announcing this Agreement or any material change to, or
development with respect to, this Agreement; provided, however, that nothing in
this Section 8.6 shall be deemed to prohibit any Party from making any
disclosure which its counsel advises as necessary or advisable in order to
satisfy such Party's disclosure obligations imposed by Law.
8.7 Certain Actions. Except with respect to this Agreement and the
transactions contemplated hereby, no Charter Company nor any Affiliate thereof
nor any investment banker, attorney, accountant, or other representative
(collectively, "Representatives") retained by any Charter Company shall directly
or indirectly initiate contact with any person or entity in an effort to
solicit, initiate, or encourage any proposals or offers relating to any
Acquisition Proposal by or from any Person or enter into any agreement, letter
of intent or agreement in principle as to any Acquisition Proposal. Except to
the extent necessary to comply with the fiduciary duties of Charter's Board of
Directors as advised by counsel to such Board of Directors, Charter will not
authorize or permit (and shall use its reasonable efforts to prevent) any
Charter Company or any Affiliate or Representative thereof to cooperate with,
furnish or cause to be furnished any non public information that it is not
legally obligated to furnish, or to negotiate with respect to, any Acquisition
Proposal. Charter shall promptly notify FAC orally and in writing in the event
that it receives any inquiry or proposal relating to any
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such transaction. Charter shall immediately cease and cause to be terminated as
of the date of this Agreement any existing activities, discussions or
negotiations with any Persons conducted heretofore with respect to any of
the foregoing.
8.8 Tax Matters. The Parties agree to use their reasonable efforts to
obtain a written opinion of Arnold & Porter reasonably acceptable to the Parties
to the effect that (i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code, (ii) the exchange in the
Merger of Charter Common Stock for FAC Common Stock will not give rise to gain
or loss to the stockholders of Charter with respect to such exchange (except to
the extent of any cash received), and (iii) each of Charter, FAC, and Charter
Interim will be a party to that reorganization within the meaning of Section
368(b) of the Internal Revenue Code ("Tax Opinions"). In rendering such Tax
Opinions, counsel shall be entitled to rely upon representations of officers of
Charter and FAC reasonably satisfactory in form and substance to such counsel.
Each of the Parties undertakes and agrees to use its reasonable efforts to cause
the Merger, and to take no action which would cause the Merger not, to qualify
for treatment as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code for Federal income tax purposes.
8.9 Agreements of Affiliates. Charter has disclosed in Section 8.9 of the
Charter Disclosure Memorandum each Person whom it reasonably believes is an
"affiliate" of Charter for purposes of Rule 145 under the 1933 Act. Charter
shall use its reasonable efforts to cause each such Person to deliver to FAC not
later than thirty (30) days prior to the Effective Time, a written agreement,
substantially in the form of Exhibit 2 to this Agreement, providing that such
Person will not sell, pledge, transfer, or otherwise dispose of the shares of
Charter Common Stock held by such Person except as contemplated by such
agreement or by this Agreement and will not sell, pledge, transfer, or otherwise
dispose of the shares of FAC Common Stock to be received by such Person upon
consummation of the Merger except in compliance with applicable provisions of
the 1933 Act and the rules and regulations thereunder (and FAC shall be entitled
to place restrictive legends upon certificates for shares of FAC Common Stock
issued to affiliates of Charter pursuant to this Agreement to enforce the
provisions of this Section 8.9). FAC shall not be required to maintain the
effectiveness of the Registration Statement under the 1933 Act for the purposes
of resale of FAC Common Stock by such affiliates.
8.10 Transition of Certain Employee Benefit Plans; Employee Matters.
(a) FAC also shall cause Charter and its Subsidiaries to honor in
accordance with their terms all employment, severance, consulting, and other
compensation Contracts disclosed in Section 5.16 of the Charter Disclosure
Memorandum to FAC between any Charter Company and any current or former
director, officer, or employee thereof, and all provisions for vested benefits
or other vested amounts earned or accrued through the Effective Time under the
Charter Benefit Plans.
(b) The tax-qualified defined contribution and defined benefit plans
maintained by Charter or its Subsidiaries (other than any such plans that are
described in Section 4063(a) of ERISA), will be terminated by Charter on or
before the Effective Time and, subject to Section 8.10(d), the benefits
thereunder distributed to participants to the extent permitted under the Code,
ERISA and the respective plan provisions. 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, Charter or its
Subsidiaries will, to the extent permitted by applicable funding rules under the
Code and ERISA, contribute to each Charter Benefit Plan that is subject to Title
I, subtitle B, part 3 of ERISA any amount required to cause the fair market
value of the plan assets of such plan to equal the plan termination labilities
of such plan determined as of a date within thirty (30) days of the Closing.
Prior to the Effective Time, Charter and its Subsidiaries shall take such
actions as may be requested by FAC with respect to the withdrawal of Charter and
its Subsidiaries, effective immediately prior to the Effective Time or at such
later date as may be specified by FAC, as contributing sponsors in any Charter
Benefit Plan that is described in Section 4063(a) of ERISA.
(c) Employees of Charter 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 pension
plans maintained by FAC, employees
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of Charter or its Subsidiaries shall be credited with service with Charter and
its Subsidiaries to the extent credited under the respective predecessor plans.
Vesting service under the FAC Benefit Plans will be in accordance with the rules
of such plans governing vesting service for employees of acquired employers and
consistent with the current policies of FAC in that regard. Employees of Charter
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 Charter and its
Subsidiaries for eligibility and vesting purposes, but not for benefit accrual
purposes, under the Retirement Plan. Subject to the usual rules applicable to
the vacation and short-term disability programs of FAC, service with Charter and
its Subsidiaries will be recognized in determining the vacation and short-term
disability benefits of employees of Charter and its Subsidiaries after the
Effective Time.
(d) Notwithstanding the provisions of Sections 8.10(b) and 8.10(c), FAC
shall cause any Charter 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 Charter Benefit Plans to FAC plans
in a fair, equitable and administratively reasonable manner.
(e) The actions prescribed by this Section 8.10 are all contingent upon
obtaining such determinations and rulings from the IRS and, if necessary, other
governmental agencies as FAC may deem appropriate with respect to the effect of
such actions on the qualification of the plans involved and the compliance of
such actions with other applicable Law. If such determinations or rulings cannot
be obtained, Charter 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.
(f) From and after the Effective Time, all Charter employees who are
terminated within one year following the Merger, as a result of the Merger or as
a result of staff reductions or reorganizations, will be eligible for benefits
available under FAC's reduction in force policy as in effect as of the date of
this Agreement, which include but are not limited to: (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. For purposes of the foregoing and for purposes of
calculating benefits available under FAC's reduction in force policy in effect
after such one year period, Charter employees will receive credit for service
with Charter to the same extent and in the manner as if such employees had been
employed by FAC.
(g) From and after the Effective Time, FAC shall honor the employment
agreements between Charter and its senior officers as of the date hereof, listed
in Section 5.16(a) of the Charter Disclosure Memorandum, 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. Charter will make such officers available to FAC
to negotiate economic packages with those officers who stay with FAC.
(h) To the extent not covered by the foregoing, from and after the
Effective Time, FAC shall provide generally to officers and employees of the
Charter Companies who at or after the Effective Time become employees of an FAC
Company, employee benefits under employee benefit plans on terms and conditions
which when taken as a whole are substantially the same as those provided by the
FAC Companies to their similarly situated officers and employees. Nothing in
this Section 8.10 shall create any third-party beneficiary rights in any
employee or former employee of any of the Charter Companies or any of their
beneficiaries or dependents.
8.11 Indemnification.
(a) Subject to the conditions set forth in paragraph (c) below, for a
period of six (6) years after the Effective Time, FAC shall, and shall cause the
Surviving Bank to, indemnify, defend, and hold harmless each person entitled to
indemnification from a Charter Company (each, an "Indemnified Party") against
all Liabilities arising out of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement) to the same extent and subject to the conditions
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set forth in applicable regulations of the OTS (including all official
interpretations thereof) and Charter's charter and bylaws, in each case as in
effect on the date hereof, including provisions relating to advances of expenses
incurred in the defense of any Litigation. Without limiting the foregoing, in
any case in which approval by the Surviving Bank is required to effectuate any
indemnification, FAC shall cause the Surviving Bank to direct, at the election
of the Indemnified Party, that the determination of any such approval shall be
made by independent counsel mutually agreed upon between FAC and the Indemnified
Party.
(b) FAC shall, or shall cause the Surviving Bank to, use its reasonable
efforts (and Charter shall cooperate prior to the Effective Time in these
efforts) to maintain in effect for a period of three (3) years after the
Effective Time Charter's existing directors' and officers' liability insurance
policy (provided, that FAC may substitute therefor (i) policies of at least the
same coverage and amounts containing terms and conditions which are
substantially no less advantageous or (ii) with the consent of Charter given
prior to the Effective Time, any other policy) with respect to claims arising
from facts or events which occurred prior to the Effective Time and covering
persons who are currently covered by such insurance; provided, 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
Charter 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 Charter's
directors' and officers' insurance policies (or any substitute policies
permitted by this Section 8.11(b)).
(c) Any Indemnified Party wishing to claim indemnification under paragraph
(a), upon learning of any such Liability or Litigation, shall promptly notify
FAC thereof. In the event of any such Litigation (whether arising before or
after the Effective Time), (i) FAC or the Surviving Bank shall have the right to
assume the defense thereof and FAC shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the defense
thereof, except that if FAC or the Surviving Bank elects not to assume such
defense or counsel for the Indemnified Parties advises that there are
substantive issues which raise conflicts of interest between FAC or the
Surviving Bank and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and FAC or the Surviving Bank shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, however, that FAC shall
be obligated pursuant to this paragraph (c) to pay for only one firm of counsel
for all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties
will cooperate to the extent practicable in the defense of any such Litigation,
and (iii) FAC shall not be liable for any settlement effected without its prior
written consent; and provided further, that the Surviving Bank shall not have
any obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall determine, and such determination shall have become
final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable Law.
(d) If the Surviving Bank or any of its successors or assigns shall
consolidate with or merge into any other Person and shall not be the continuing
or surviving Person of such consolidation or merger or shall transfer all or
substantially all of its assets to any Person, then and in each case, proper
provision shall be made so that the successors and assigns of the Surviving Bank
shall assume the obligations set forth in this Section 8.11.
8.12 Charter Stock Options. At the Effective Time, Charter's plans
providing for the issuance of options for the purchase of Charter Common Stock
shall terminate; no options shall be granted under any such plans between the
date of this Agreement and the Effective Time. At the Effective Time, each
outstanding option to purchase shares of Charter Common Stock issued under such
plans or otherwise issued to any officers or directors of Charter shall be
exchanged for that number of shares of FAC Common Stock determined by dividing
the excess of (A) the product of (i) the number of shares of Charter Common
Stock subject to the option, (ii) the Common Stock Exchange Ratio, and (iii) the
FAC Market Value, over (B) the product of (i) the number of shares of Charter
Common Stock subject to the option, and (ii) the exercise price at which shares
of Charter Common Stock can be purchased pursuant to the option by the FAC
Market Value, rounding down to the nearest whole number.
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8.13 Fairness Opinion. Charter has received an opinion from Wheat First
Butcher Singer, Inc. ("Wheat First") dated the date of the approval of this
Agreement by the Charter Board of Directors to the effect that in the opinion of
such firm, the consideration to be received in the Merger by the stockholders of
Charter is fair to the stockholders of Charter from a financial point of view.
Nothing in this Agreement shall prevent Charter from obtaining an updated
opinion from Wheat First or such other financial advisor selected by Charter as
to whether the consideration to be received by the holders of Charter Common
Stock pursuant to the Merger is fair to such stockholders from a financial point
of view dated not more than five days prior to the date of the Proxy Statement.
8.14 Agreements Relating To Pooling-Of-Interests. If FAC elects to account
for the Merger as a purchase instead of as a pooling-of-interests, those
provisions of such written agreements relating solely to the ability of FAC to
account for the Merger as a pooling-of-interests shall not be required and shall
no longer be of any force and effect.
ARTICLE NINE
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions To Obligations Of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6 of
this Agreement:
(a) Stockholder Approval. The stockholders of Charter shall have
approved (i) this Agreement and the Plan of Merger, and (ii) the
consummation of the transactions contemplated hereby, including the Merger,
as and to the extent required by Law or by the provisions of any governing
instruments.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for
consummation of (i) the Merger, (ii) either the Primary FAC Objective
Transactions or the Alternative FAC Objective Transactions, and (iii) the
other transactions contemplated by this Agreement and the Plan of Merger
shall have been obtained or made and shall be in full force and effect and
all waiting periods required by Law shall have expired. No Consent so
obtained which is necessary to consummate the transactions as contemplated
hereby shall be conditioned or restricted in a manner which in the
reasonable good faith judgment of the Board of Directors of FAC would so
materially adversely impact the economic benefits of the transaction as
contemplated by this Agreement so as to render inadvisable the consummation
of the Merger.
(c) Consents and Approvals. Each Party shall have obtained any and
all other Consents required for consummation of (i) the Merger, (ii) either
the Primary FAC Objective Transactions or the Alternative FAC Objective
Transactions (other than those referred to in Section 9.1(b) of this
Agreement) or for the preventing of any Default under any Contract or
Permit of such Party which, if not obtained or made, is reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on
such Party.
(d) Legal Proceedings. No action or proceedings shall have been
instituted or threatened by any governmental authority or Regulatory
Authority against, and no order, decree or judgment of any court, agency,
commission or governmental authority shall be subsisting against FAC or
Charter or the officers or directors of FAC or Charter which seeks to, or
would, render it unlawful as of the Closing to effect the transactions
contemplated by this Agreement and the Plan of Merger, or seeking damages
in a material amount by reason of the transactions contemplated thereby.
(e) Registration Statement. The Registration Statement shall be
effective under the 1933 Act, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued, no action, suit,
proceeding, or investigation by the SEC to suspend the effectiveness
thereof shall have been initiated and be continuing, and all necessary
approvals under state securities Laws or the 1933 Act or 1934 Act relating
to the issuance or trading of the shares of FAC Common Stock issuable
pursuant to the Merger shall have been received.
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(f) Nasdaq Stock Market. The shares of FAC Common Stock issuable
pursuant to the Merger shall have been approved for trading on the Nasdaq
Stock Market.
(g) Tax Matters. Each Party shall have received a copy of the Tax
Opinion referred to in Section 8.8 of this Agreement. Each Party shall have
delivered to the other a Certificate, dated as of the Effective Time,
signed by its chief executive officer and principal financial officer, to
the effect that, to the Knowledge and belief of such officers, the
statement of facts and representations made on behalf of the management of
such Party, presented to the legal counsel delivering the Tax Opinion were
at the date of such presentation, true, correct, and complete, and are on
the date of such Certificate, to the extent contemplated by the
presentation, true, correct, and complete, as though such presentation had
been made on the date of such Certificate.
9.2 Conditions To Obligations Of FAC. The obligations of FAC to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by FAC pursuant to Section 11.6(a) of this Agreement:
(a) Representations and Warranties. The representations and
warranties of Charter set forth or referred to in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided, that representations and warranties which are confined to a
specified date shall speak only as of such date), except (i) as expressly
contemplated by this Agreement, or (ii) as consented to in writing by FAC.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Charter to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied
with in all material respects.
(c) Certificates. Charter shall have delivered to FAC (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its principal financial officer, to the effect
that the conditions of its obligations set forth in Sections 9.2(a) and
9.2(b) of this Agreement have been satisfied, and (ii) certified copies of
resolutions duly adopted by Charter's Board of Directors and stockholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery, and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all satisfactory in
form and substance to FAC and its counsel acting reasonably and in good
faith.
(d) Affiliate Letters. FAC shall have received a written agreement
from each affiliate of Charter, substantially in the form of Exhibit 2.
(e) Pooling Letter. If it so requests, FAC shall have received a
letter from Peat Marwick, L.L.P. dated as of the Effective Time, to the
effect that the Merger will qualify for pooling-of-interests accounting
treatment under Accounting Principles Board Opinion No. 16 if closed and
consummated in accordance with this Agreement.
(f) Accountant's Letter. FAC shall have received from Price
Waterhouse, LLP, a letter dated not more than five business days prior to
the date of the Closing, with respect to certain financial information
regarding Charter, in form and substance satisfactory to FAC and consistent
with applicable professional standards for letters delivered by independent
public accountants in connection with transactions of the nature
contemplated by this Agreement.
(g) Legal Opinion. FAC shall have received a written opinion, dated
as of the Effective Time, of counsel to Charter, in form reasonably
satisfactory to FAC, as to the matters set forth in Exhibit 3 to this
Agreement.
(h) 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 Regulatory Authority 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
Tennessee-based assets or deposits of Charter, except for
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such actions that are reasonably attributable to a Business Combination or
other similar transaction entered into by FAC subsequent to the date of
this Agreement.
(i) Documents. FAC shall have received all documents required to be
received from Charter on or prior to the Closing, all in form and substance
satisfactory to FAC and its counsel.
9.3 Conditions to Obligations of Charter. The obligations of Charter to
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Charter pursuant to Section 11.6(b) of this Agreement:
(a) Representations and Warranties. The representations and
warranties of FAC set forth or referred to in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and
as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided, that representations and warranties which are confined to a
specified date shall speak only as of such date), except (i) as expressly
contemplated by this Agreement, or (ii) as consented to in writing by
Charter.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of FAC to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
(c) Certificates. FAC shall have delivered to Charter (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its principal financial officer, to the effect
that the conditions of its obligations set forth in Sections 9.3(a) and
9.3(b) of this Agreement have been satisfied, and (ii) certified copies of
resolutions duly adopted by FAC's Board of Directors and Charter Interim's
Board of Directors and stockholders evidencing the taking of all corporate
action necessary to authorize the execution, delivery, and performance of
this Agreement, and the consummation of the transactions contemplated
hereby, all satisfactory in form and substance to Charter and its counsel
acting reasonably and in good faith.
(d) Legal Opinion. Charter shall have received a written opinion of
Martin E. Simmons, Esquire, Executive Vice President, Administration,
General Counsel and Secretary dated as of the Effective Time, in form
reasonably satisfactory to Charter, as to the matters set forth in Exhibit
4 to this Agreement.
(e) Documents. Charter shall have received all documents required to
be received from FAC on or prior to the Closing, all in form and substance
satisfactory to Charter and its counsel.
ARTICLE TEN
TERMINATION
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the stockholders of
Charter, this Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time:
(a) By mutual consent in writing of FAC and Charter; or
(b) By either Party in writing (provided, that the terminating Party
is not then in material breach of any representation, warranty, covenant,
or other agreement contained in this Agreement) in the event of a breach by
the other Party of any representation or warranty contained in this
Agreement which cannot be or has not been cured within thirty (30) days
after the giving of written notice to the breaching Party of such breach
and which breach would provide the non-breaching Party the ability to
refuse to consummate the Merger under the standard set forth in Section
9.2(a) of this Agreement in the case of FAC and Section 9.3(a) of this
Agreement in the case of Charter; or
(c) By either Party in writing (provided, that the terminating Party
is not then in material breach of any representation, warranty, covenant,
or other agreement contained in this Agreement) in the event of a material
breach by the other Party of any covenant or agreement contained in this
Agreement which
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cannot be or has not been cured within thirty (30) days after the giving of
written notice to the breaching Party of such breach; or
(d) By either Party in writing (provided, that the terminating Party
is not then in material breach of any representation, warranty, covenant,
or other agreement contained in this Agreement) in the event (i) any
Consent of any Regulatory Authority required for consummation of the Merger
and the other transactions contemplated hereby shall have been denied by
final nonappealable action of such authority or if any denial by such
authority is not appealed within the time limit for appeal or, in the case
of FAC, if any Consent shall be conditioned in the manner provided in the
last sentence of Section 9.1(b) of this Agreement, or (ii) the stockholders
of Charter fail to vote their approval of this Agreement, the Plan of
Merger, and the transactions contemplated hereby as required by the HOLA at
the Stockholders' Meeting where the transactions were presented to such
stockholders for approval and voted upon; or
(e) By either Party in writing in the event that the Merger shall not
have been consummated by March 31, 1996, in each case only if the failure
to consummate the transactions contemplated hereby on or before such date
is not caused by any breach of this Agreement by the Party electing to
terminate pursuant to this Section 10.1(e); or
(f) By either Party in writing (provided, that the terminating Party
is not then in material breach of any representation, warranty, covenant,
or other agreement contained in this Agreement) in the event that any of
the conditions precedent to the obligations of such Party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in Section
10.1(e) of this Agreement as the date after which such Party may terminate
this Agreement; or
(g) By FAC in writing to the extent provided in Section 7.1(b)(i); or
(h) By Charter in writing if the FAC Market Value (determined as
provided in Section 3.6 of this Agreement) is more than $43.50.
10.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 10.1 of this Agreement, this Agreement shall
become void and have no effect, except that (i) the provisions of this Section
10.2 and Article Eleven and Section 8.5(b) of this Agreement shall survive any
such termination, and (ii) a termination pursuant to Sections 10.1(b) or 10.1(c)
of this Agreement shall not relieve the breaching Party from Liability for an
uncured willful breach of a representation, warranty, covenant, or agreement
giving rise to such termination.
10.3 Non-Survival of Representations and Covenants. All representations,
warranties and covenants in this Agreement, or in any instrument delivered
pursuant hereto shall expire on, and be terminated and extinguished at, the
Effective Time other than covenants that by their terms are to survive or be
performed after the Effective Time, provided that no such representations,
warranties or covenants shall be deemed to be terminated or extinguished so as
to deprive FAC or Charter (or any director, officer or controlling person
thereof) of any defense in law or equity which otherwise would be available
against the claims of any person, including, without limitation, any stockholder
or former stockholder of either FAC or Charter, the aforesaid representations,
warranties and covenants being material inducements to the consummation by FAC
and Charter of the transactions contemplated herein.
ARTICLE ELEVEN
MISCELLANEOUS
11.1 Definitions. Except as otherwise provided herein, the capitalized
terms set forth below (in their singular and plural forms as applicable) shall
have the following meanings:
"Acquisition Proposal" with respect to Charter shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the stock
or assets of, or other business combination involving Charter or any of its
Subsidiaries or the acquisition of a substantial equity interest in, or a
substantial portion of the assets of, Charter or any of its Subsidiaries.
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"Affiliate" of a Person shall mean (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by, or
under common control with such Person, (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any ten percent (10%) or
greater equity or voting interest of such Person, or (iii) any other Person for
which a Person described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Reorganization, the
Preamble to this Agreement, including the Plan of Merger and each of the
Exhibits delivered pursuant hereto and incorporated herein by reference.
"Allowance" shall have the meaning provided in Section 5.9 of this
Agreement.
"Alternative FAC Objective Transactions" shall have the meaning set forth
in the Preamble of this Agreement.
"Articles of Combination" shall mean the Articles of Combination to be
filed with the OTS relating to the Merger as contemplated by Section 1.3 of this
Agreement.
"Assets" of a Person shall mean all of the assets, properties, businesses,
and rights of such Person of every kind, nature, character, and description,
whether real, personal, or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, and whether or not owned in the name of such Person or any
Affiliate of such Person and wherever located.
"BHC Act" shall mean the federal Bank Holding Company Act of 1956, as
amended.
"Business Combination" shall mean an acquisition of, merger or combination
with, share exchange involving any class of voting stock of, sale of more than
fifty percent (50%) of the consolidated assets by, or other business combination
involving, or tender offer for or sale or issuance of any equity securities
involving an acquisition by a third-party of more than fifty percent (50%) of
the voting stock of, Charter, other than the formation of a newly organized
holding company for Charter in which the shares of Charter Common Stock are
exchanged for shares of the holding company on a basis that does not cause the
respective beneficial interests of each stockholder to change or transactions
with a FAC Company.
"CRA" shall mean the Community Reinvestment Act of 1977, 12 U.S.C.
sec. 2901 et seq.
"Charter Benefit Plans" shall have the meaning set forth in Section 5.14 of
this Agreement.
"Charter Capital Stock" shall mean, collectively, the Charter Common Stock
the Charter Preferred Stock, and any other class or series of capital stock of
Charter.
"Charter Common Stock" shall mean the $.01 par value common stock of
Charter.
"Charter Companies" shall mean, collectively, Charter and all Charter
Subsidiaries.
"Charter Disclosure Memorandum" shall mean the written information entitled
"Charter Federal Savings Bank Disclosure Memorandum" delivered prior to the date
of this Agreement to FAC describing in reasonable detail the matters contained
therein and, with respect to each disclosure made therein, specifically
referencing each Section of this Agreement under which such disclosure is being
made.
"Charter Financial Statements" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of Charter as of March
31, 1995, and as of June 30, 1994 and 1993, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for the nine months ended March 31, 1995,
and for each of the three fiscal years ended June 30, 1994, 1993, and 1992, as
disclosed by Charter in the Charter Disclosure Memorandum, and (ii) the
consolidated balance sheets of Charter (including related notes and schedules,
if any) and related consolidated statements of income, changes in stockholders'
equity, and cash flows (including related notes and schedules, if any) with
respect to periods ended subsequent to March 31, 1995.
"Charter Interim Common Stock" shall mean the $1.00 par value common stock
of Charter Interim.
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"Charter Preferred Stock" shall mean the serial preferred stock par value
$.01 per share, of Charter.
"Charter Subsidiaries" shall mean the Subsidiaries of Charter, which shall
include the Charter Subsidiaries described in Section 5.4 of this Agreement and
any corporation, bank savings association, or other organization acquired as a
Subsidiary of Charter in the future and owned by Charter at the Effective Time.
"Closing" shall mean the closing of the transactions contemplated hereby,
as described in Section 1.2 of this Agreement.
"Common Stock Exchange Ratio" shall have the meaning provided in Section
3.1(c) of this Agreement.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease, obligation,
plan, practice, restriction, understanding, or undertaking of any kind or
character, or other document to which any Person is a party or that is binding
on any Person or its capital stock Assets, or business.
"Default" shall mean (i) any breach or violation of or default under any
Contract, Order, or Permit, (ii) any occurrence of any event that with the
passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order, or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the current
terms of, or renegotiate, or to accelerate, increase, or impose any Liability
under, any Contract, Order, or Permit.
"Effective Time" shall mean the date and time at which the Merger becomes
effective as defined in Section 1.3 of this Agreement.
"ERISA Plan" shall have the meaning provided in Section 5.14 of this
Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Agent" shall have the meaning provided in Section 4.1 of this
Agreement.
"Exhibits" 1 through 4, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FAC Capital Stock" shall mean, collectively, the FAC Common Stock, the FAC
Preferred Stock, and any other class or series of capital stock of FAC.
"FAC Common Stock" shall mean the $5.00 par value common stock of FAC.
"FAC Companies" shall mean, collectively, FAC and all FAC Subsidiaries.
"FAC Financial Statements" shall mean (i) the consolidated statements of
condition (including related notes and schedules, if any) of FAC as of March 31,
1995, and as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for the three months ended March 31, 1995,
and each of the three years ended December 31, 1994, 1993 and 1992, as filed by
FAC in SEC Documents and (ii) the consolidated statements of condition of FAC
(including related notes and schedules, if any) and related consolidated
statements of income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) included in SEC Documents filed with
respect to periods ended subsequent to March 31, 1995.
"FAC Market Value" shall have the meaning set forth in Section 3.6 of this
Agreement.
"FAC Subsidiaries" shall mean the Subsidiaries of FAC.
"FDIC" shall mean Federal Deposit Insurance Corporation.
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"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Knowledge" or "Best Knowledge" as used with respect to a Person shall mean
the knowledge after due inquiry under the circumstances, of the chairman,
president, principal financial officer, chief accounting officer, chief credit
officer, general counsel, any assistant or deputy general counsel, or any senior
or executive vice president of such Person.
"Law" shall mean any code, law, ordinance, regulation, reporting, or
licensing requirement, rule, or statute applicable to a Person or its Assets,
Liabilities, or business, including, without limitation, those promulgated,
interpreted, or enforced by any of the Regulatory Authorities.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost, or expense (including,
without limitation, costs of investigation, collection, and defense), claim,
deficiency, guaranty, or endorsement of or by any Person (other than
endorsements of notes, bills, checks, and drafts presented for collection or
deposit in the ordinary course of business) of any type, whether accrued,
absolute, or contingent, liquidated or unliquidated, matured or unmatured, or
otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention,
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institutions, pledges to secure deposits and
other Liens incurred in the ordinary course of the banking business, and (iii)
Liens which are not reasonably likely to have, individually or in the aggregate,
a Material Adverse Effect on a Party.
"Litigation" shall mean any action, arbitration, cause of action, claim,
complaint, criminal prosecution, demand letter, governmental or other
examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability, but shall not include regular, periodic examinations of depository
institutions and their Affiliates by Regulatory Authorities.
"Loan Property" shall mean any property owned by the Party in question or
by any of its Subsidiaries or in which such Party or Subsidiary holds a security
interest, and, where required by the context, includes the owner or operator of
such property, but only with respect to such property.
"Material Adverse Effect" on a Party shall mean an event, change, or
occurrence which, together with any other event, change, or occurrence, has or
is reasonably likely to have a material adverse impact on (i) the financial
position, business, prospects, or results of operations of such Party and its
Subsidiaries, taken as a whole, or (ii) the ability of such Party to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided, that "material adverse
impact" shall not be deemed to include the impact of (x) changes in banking and
similar Laws of general applicability or interpretations thereof by courts or
governmental authorities, (y) changes in GAAP or regulatory accounting
principles generally applicable to banks and savings associations and their
holding companies, or (z) changes effected at the request of the FAC Companies
pursuant to Section 7.1(b).
"Material" for purposes of this Agreement shall be determined in light of
the facts and circumstances of the matter in question; provided, that any
specific monetary amount stated in this Agreement shall determine materiality in
that instance.
"Merger" shall mean the merger of Charter Interim with and into Charter
referred to in Section 1.1 of this Agreement.
"NASDAQ Stock Market" shall mean the National Market System of the Nasdaq.
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"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local, or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"OTS" shall mean the Office of Thrift Supervision (including its
predecessor, the Federal Home Loan Bank Board).
"Party" shall mean either Charter or FAC and "Parties" shall mean both
Charter and FAC.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets, or
business.
"Person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Plan of Merger" shall mean the Agreement and Plan of Merger and
Combination, in substantially the form of Exhibit 1 to this Agreement, to be
entered into by Charter and, upon its organization, Charter Interim setting
forth the terms of the Merger.
"Proxy Statement" shall mean the proxy statement used by Charter to solicit
the approval of its stockholders of the transactions contemplated by this
Agreement and the Plan of Merger, and shall include the prospectus of FAC
relating to the shares of FAC Common Stock to be issued to the stockholders of
Charter.
"Primary FAC Objective Transactions" shall have the meaning set forth in
the Preamble of this Agreement.
"Registration Statement" shall mean the Registration Statement on Form S-4,
or other appropriate form, filed with the SEC by FAC under the 1933 Act in
connection with the transactions contemplated by this Agreement.
"Regulatory Authorities" shall mean, collectively, the Federal Trade
Commission, the United States Department of Justice, the Board of the Governors
of the Federal Reserve System, the OTS, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, all state regulatory
agencies having jurisdiction over the Parties and their respective Subsidiaries,
the Nasdaq Stock Market, and the SEC.
"SEC Documents" shall mean all reports and registration statements filed,
or required to be filed, by a Party or any of its Subsidiaries with any
Regulatory Authority pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder, including the
regulations of the OTS included in 12 C.F.R. Part 563g.
"Significant Subsidiary" shall mean any present or future consolidated
Subsidiary of the Party in question, the assets of which constitute ten percent
(10%) or more of the consolidated assets of such Party as reflected on such
Party's consolidated statement of condition prepared in accordance with GAAP.
"Stockholders' Meeting" shall mean the meeting of the stockholders of
Charter to be held pursuant to Section 8.1 of this Agreement, including any
adjournment or adjournments thereof.
"Subsidiary" or collectively "Subsidiaries" shall mean all those
corporations, banks, associations, or other entities of which the entity in
question owns or controls fifty percent (50%) or more of the outstanding equity
securities either directly or through an unbroken chain of entities as to each
of which fifty percent (50%) or more of the outstanding equity securities is
owned directly or indirectly by its FAC; provided, however, there
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shall not be included any such entity acquired through foreclosure or any such
entity the equity securities of which are owned or controlled in a fiduciary
capacity.
"Surviving Bank" shall mean Charter, as the surviving federal savings bank
resulting from the Merger.
"Tax" or "Taxes" shall mean any federal, state, county, local or foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, occupancy, and other taxes, assessments, charges,
fares, or impositions, of any nature whatsoever, including interest, penalties,
and additions imposed thereon or with respect thereto.
11.2 Expenses. Each of the Parties shall bear and pay all direct costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including filing, registration and application fees,
printing fees, and fees and expenses of its own financial or other consultants,
investment bankers, accountants, and counsel, except that FAC shall bear and pay
the filing fees payable in connection with the Registration Statement, the Proxy
Statement, and all applications filed with the Regulatory Authorities and FAC
and Charter will share equally the printing and mailing costs incurred in
connection with the Registration Statement and the Proxy Statement.
Notwithstanding the foregoing, in the event that Charter terminates this
Agreement pursuant to Section 10.1(h), Charter shall pay to FAC an amount equal
to all costs and expenses incurred by FAC in connection with the transactions
contemplated hereunder, including filing, registration and application fees,
printing fees, mailing costs, and fees and expenses of FAC's financial or other
consultants, investment bankers, accountants and counsel; such payment shall be
made in immediately available funds within five business days after such
termination.
11.3 Brokers and Finders. Except for Wheat First as to Charter and
Merrill, Lynch, Pierce, Fenner & Smith, Inc. as to FAC, each of the Parties
represents and warrants that neither it nor any of its officers, directors,
employees, or Affiliates has employed any broker or finder or incurred any
Liability for any financial advisory fees, investment bankers' fees, brokerage
fees, commissions, or finders' fees in connection with this Agreement or the
transactions contemplated hereby. In the event of a claim by any broker or
finder based upon his or its representing or being retained by or allegedly
representing or being retained by Charter or FAC, each of Charter and FAC, as
the case may be, agrees to indemnify and hold the other Party harmless of and
from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement,
expressed or implied, is intended to, or shall, confer upon any Person, other
than the Parties or their respective successors, any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, other than as
provided in Section 8.11 of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of the Boards of Directors of each of the Parties; provided, however, that after
any such approval by the holders of Charter Common Stock, there shall be made no
amendment to the consideration to be received by Charter stockholders without
the further approval of such stockholders.
11.6 Waivers.
(a) Prior to or at the Effective Time, FAC, acting through its Board of
Directors, chief executive officer, president, or other authorized officer,
shall have the right at any time (whether before or after approval of the Plan
of Merger by the Charter stockholders) to waive on behalf of it and Charter
Interim any Default in the performance of any term of this Agreement by Charter,
to waive or extend the time for the compliance or fulfillment by Charter of any
and all of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of FAC under this Agreement, except any
condition which, if not satisfied, would result in the violation of any Law. No
such waiver shall be effective unless in writing signed by a duly authorized
officer of FAC.
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(b) Prior to or at the Effective Time, Charter, acting through its Board of
Directors, chief executive officer, president, or other authorized officer,
shall have the right (whether before or after approval of the Plan of Merger by
the Charter stockholders) to waive any Default in the performance of any term of
this Agreement by FAC, to waive or extend the time for the compliance or
fulfillment by FAC or Charter Interim of any and all of their obligations under
this Agreement, and to waive any or all of the conditions precedent to the
obligations of Charter under this Agreement, except any condition which, if not
satisfied, would result in the violation of any Law. No such waiver shall be
effective unless in writing signed by a duly authorized officer of Charter.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by, the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided, hereunder), and shall he deemed to
have been delivered as of the date so received:
<TABLE>
<S> <C>
Charter: Charter Federal Savings Bank
110 Piedmont Avenue
Bristol, Virginia 24201
Attention: Cecil R. McCullar
President and Chief Executive Officer
Copy to
Counsel: Mary M. Sjoquist
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
FAC: First American Corporation
615 First American Center
Nashville, TN 37237
Attention: Dennis C. Bottorff
Chairman of the Board and
Chief Executive Officer
Copy to
Counsel: Catherine C. McCoy
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
</TABLE>
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Tennessee, without regard to any
applicable conflicts of Laws, except to the extent that the federal laws of the
United States may apply to the Merger.
11.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions. The captions contained in this Agreement are for reference
purposes only and are not part of this Agreement.
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11.12 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto as of the day and year first above written.
ATTEST: CHARTER FEDERAL SAVINGS BANK
<TABLE>
<S> <C>
By: /s/ Robert J. Bartel By: /s/ Cecil R. McCullar
- ------------------------------------------ ------------------------------------------
Robert J. Bartel Cecil R. McCullar
President and Chief Executive Officer
[CORPORATE SEAL]
ATTEST: FIRST AMERICAN CORPORATION
By: /s/ Mary C. Price By: /s/ Dennis C. Bottorff
- ------------------------------------------ ------------------------------------------
Mary C. Price Dennis C. Bottorff
Assistant Secretary Chairman of the Board and Chief Executive
Officer
[CORPORATE SEAL]
</TABLE>
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AMENDMENT NO. 1 TO AGREEMENT AND
PLAN OF REORGANIZATION
BY AND BETWEEN
CHARTER FEDERAL SAVINGS BANK
AND
FIRST AMERICAN CORPORATION
This Amendment No. 1 ("Amendment") to the Agreement and Plan of
Reorganization By and Between Charter Federal Savings Bank ("Charter") and First
American Corporation ("FAC") dated as of May 17, 1995 ("Agreement"), is made and
entered into as of October 11, 1995.
WITNESSETH:
WHEREAS, FAC and Charter have previously entered into the Agreement; and
WHEREAS, since the execution of the Agreement, Charter has filed a lawsuit
in the United States Court of Federal Claims ("Claims Court") against the United
States Government ("United States") seeking damages for breach of contract and
unlawful taking of property arising out of the revocation by the United States
of Charter's right to treat supervisory goodwill as an asset for regulatory
capital purposes ("Goodwill Lawsuit"); and
WHEREAS, the United States Court of Appeals for the Federal Circuit
subsequently ruled in favor of a litigant in a goodwill lawsuit; and
WHEREAS, Charter desires that the amount of consideration to be distributed
to Charter stockholders be adjusted to take into consideration the potential
recovery of damages in the Goodwill Lawsuit, and in consideration of FAC's
agreement to so adjust such consideration, Charter has agreed to the deletion of
its right under Section 10.1(h) of the Agreement to terminate the Agreement if
the FAC Market Value is above $43.50; and
WHEREAS, Charter and FAC wish to clarify in certain other provisions of the
Agreement their mutual intention to proceed expeditiously with the transactions
contemplated by the Agreement;
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms not specifically defined
herein shall have the meanings ascribed to them in the Agreement.
2. Effect of Amendment. This Amendment shall become effective as of
the date hereof. Except as expressly provided herein, all of the terms and
conditions of the Agreement shall remain unchanged and in full force and
effect.
3. Additional Defined Terms. The capitalized terms set forth below
(in their singular and plural forms as applicable) shall have the following
meanings:
"Charter Stockholders" shall mean the holders of record of shares of
Charter Common Stock as of the Effective Time, except for shares of Charter
Common Stock to be canceled pursuant to Section 3.3 of the Agreement.
"Goodwill Litigation" shall mean Charter Federal Savings Bank v. United
States, Civil Action No. 95-513C, filed on August 7, 1995, in the United States
Court of Federal Claims, in which Charter alleges that the United States
breached certain contractual commitments regarding the computation of its
regulatory capital and deprived Charter of certain of its property rights
without just compensation in violation of the United States Constitution.
"Goodwill Litigation Recovery" shall mean the sum of the cash payments, if
any, actually received by Charter or its successor during the period beginning
on the Effective Time and ending on the fifth anniversary
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of the Effective Time, in respect of the Goodwill Litigation pursuant to a
final, nonappealable judgment in, or final settlement of, the Goodwill
Litigation.
"Net Goodwill Litigation Recovery" shall mean the excess, if any, of the
Goodwill Litigation Recovery over the sum of -- (i) the aggregate expenses
incurred from May 17, 1995 in prosecuting the Goodwill Litigation including,
without limitation, legal and accounting fees and disbursements and the fees and
expenses of any agents employed in connection with the Goodwill Litigation; (ii)
the expenses incurred by FAC in connection with the preparation and negotiation
of this Amendment, including, without limitation, legal and accounting fees and
disbursements and the fees and expenses of any agents employed in connection
therewith; and (iii) the product of (a) the excess of the Goodwill Litigation
Recovery over the aggregate expenses incurred in prosecuting the Goodwill
Litigation, and (b) the sum of the highest corporate federal income tax rate in
effect for any year in which a payment constituting a Goodwill Litigation
Recovery is received and the highest corporate Virginia income tax rate in
effect for any such year.
"Per Share Recovery Ratio" shall mean the number of shares of FAC Common
Stock obtained by dividing (A) by (B), where (A) equals 50% of Net Goodwill
Litigation Recovery divided by the number of shares of Charter Common Stock
issued and outstanding immediately prior to the Effective Time, and (B) equals
the average per share closing price of FAC Common Stock on The NASDAQ Stock
Market, as reported in The Wall Street Journal, on the date of receipt by
Charter of the last payment constituting Goodwill Litigation Recovery.
For example, if the Net Goodwill Litigation Recovery is $5,000,000, the
number of shares of Charter Common Stock issued and outstanding immediately
prior to the Effective Time is 2,000,000, and the value of one share of FAC
Common Stock on the date of receipt by Charter of the last payment constituting
Goodwill Litigation Recovery is $45.00, then the Per Share Recovery Ratio would
be 0.0278.
4. Control of Litigation.
FAC, as the owner of Charter as a wholly owned subsidiary after the
Effective Time, shall have sole and exclusive direction and control of the
conduct of the Goodwill Litigation and in its discretion may, among other
things, dispose of the Goodwill Litigation in a manner that does not result in
any cash or other recovery. The Charter Stockholders will not have any rights to
receive payment in respect of the Goodwill Litigation except to the extent
expressly provided in the Agreement, as amended hereby.
5. Contingent Consideration. The following Section 3.1A is hereby added
immediately after Section 3.1 and immediately before Section 3.2 of the
Agreement:
3.1A Contingent Consideration. (a) Subject to paragraph (b) of this
Section 3.1A, in addition to the shares of FAC Common Stock to be issued in
exchange for shares of Charter Common Stock pursuant to the provisions of
Section 3.1(c) of this Agreement, each Charter Stockholder shall be
entitled to receive an additional number of shares of FAC Common Stock,
rounded down to the nearest number of whole shares, equal to the product of
the number of shares of Charter Common Stock held by such Charter
Stockholder immediately prior to the Effective Time and the Per Share
Recovery Ratio. Shares of FAC Common Stock, if any, described in this
Section 3.1A are hereinafter referred to as "Contingent Shares." In the
event that the circumstances described in paragraph (b) of this Section
3.1A arise, then each Charter Stockholder shall be entitled to receive the
consideration described in such paragraph (b), if any, in lieu of any FAC
Common Stock.
(b) In the event that (i) a consolidation, merger or acquisition of
FAC with, into or by another corporation ("Acquiror"), other than a
transaction pursuant to which FAC is the surviving entity and which does
not result in a reclassification of the outstanding shares of FAC Common
Stock into shares of other stock, cash or other securities or property has
been consummated prior to the fifth anniversary of the Effective Time, and
(ii) the last payment constituting Goodwill Litigation Recovery is received
after the consummation of a transaction described in (i) above but before
the fifth anniversary of the Effective Time, then each Charter Stockholder
shall be entitled to receive, at the election of Acquiror, either cash or
shares of the Acquiror's capital stock, or a combination of cash and shares
of the Acquiror's capital stock, having a value equaling the product of (A)
fifty percent (50%) of Net Goodwill Litigation
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Recovery divided by the number of shares of Charter Common Stock issued and
outstanding immediately prior to the Effective Time and (B,) the number of
shares of Charter Common Stock held by such Charter Stockholder immediately
prior to the Effective Time ("Acquiror Consideration"); provided, however,
that no Acquiror Consideration shall be distributable to the Charter
Stockholders unless the aggregate value of such Acquiror Consideration
would equal or exceed the product of Two Dollars ($2.00) and the number of
shares of Charter Common Stock issued and outstanding immediately prior to
the Effective Time. To the extent that any Acquiror Consideration is paid
in Acquiror capital stock, such stock will be valued based on the last
reported sales price per share or average per share closing price of such
stock as reported in The Wall Street Journal on the date of receipt by
Charter of the last payment constituting Goodwill Litigation Recovery.
(c) Notwithstanding any other provision of this Agreement --
(i) under no circumstances shall the total number of Contingent
Shares to be issued to Charter Stockholders pursuant to Section 3.1A(a),
if any, exceed the number of shares of FAC Common Stock issued pursuant
to the provisions of Section 3.1(c) (the "Maximum Number"); in the event
the number of Contingent Shares would, absent the provisions of this
Section 3.1A(c), exceed the Maximum Number, the number of Contingent
Shares to be distributed to each Charter Stockholder shall be equal to
the product of the Maximum Number and a fraction, the numerator of which
is the number of shares of Charter Common Stock held by such Charter
Stockholder immediately prior to the Effective Time and the denominator
of which is the total number of shares of Charter Common Stock held by
all Charter Stockholders immediately prior to the Effective Time; and
(ii) under no circumstances shall the total value of Acquiror
Consideration to be distributed to Charter Stockholders pursuant to
Section 3.1A(b), if any, have an aggregate value in excess of the
product of (A) the number of shares of FAC Common Stock issued pursuant
to the provisions of Section 3.1(c) and (B) the last reported sales
price of one share of FAC Common Stock as reported in The Wall Street
Journal on the date of the Effective Time (the "Maximum Value"); in the
event that the total value of Acquiror Consideration would, absent the
provisions of this Section 3.1A(c), exceed the Maximum Value, the amount
of Acquiror Consideration to be distributed to each Charter Stockholder
shall be equal to the product of the Maximum Value and a fraction, the
numerator of which is the number of shares of Charter Common Stock held
by such Charter Stockholder immediately prior to the Effective Time and
the denominator of which is the total number of shares of Charter Common
Stock held by all Charter Stockholders immediately prior to the
Effective Time.
(d) The contingent consideration provided under this Section 3.1A
shall not be transferable, assignable or alienable, except by will or the
laws of descent and distribution, until such time as the Contingent Shares
or Acquiror Consideration, if any, have been issued or distributed. Any
attempt by a Charter Stockholder to assign any rights to receive Contingent
Shares or Acquiror Consideration shall be null and void.
(e) Contingent Shares or Acquiror Consideration, if any, shall be
distributed to Charter Stockholders pursuant to the rules and provisions of
Section 4.1(b) and Section 4.1(c).
(f) Notwithstanding any other provision of this Agreement, the
provisions of Section 3.4 of this Agreement shall apply only to shares of
FAC Common Stock received in exchange for shares of Charter Common Stock
pursuant to the provisions of Section 3.1(c) of this Agreement. No
fractional shares of FAC Common Stock or Acquiror capital stock shall be
distributed pursuant to the provisions of this Section 3.1A and no cash
shall be paid in lieu thereof. Rather, the number of Contingent Shares or
shares of Acquiror capital stock to be distributed to each Charter
Stockholder shall be rounded down to the nearest whole number of shares.
(g) Charter Stockholders will not be entitled to dividends, voting
rights, or any other rights as stockholders with respect to any shares of
stock prior to the issuance of such shares, if any, pursuant to this
Section 3.1A.
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6. Procedures.
(a) Section 4.1 of the Agreement is hereby redesignated as subsection (a)
of Section 4.1 of the Agreement. All references to "Section 3.1" in subsection
(a) of Section 4.1 are hereby amended to read "Section 3.1(c)."
(b) New subsections (b) and (c) are hereby added to Section 4.1 of the
Agreement as follows:
(b) Within forty-five (45) days of receipt by Charter of the last
payment constituting Goodwill Litigation Recovery, FAC or Acquiror shall
issue and deliver the Contingent Shares or Acquiror Consideration to a
transfer agent to be designated by FAC or Acquiror (the "Transfer Agent"),
(c) Within twenty (20) days of receipt by Charter of the last payment
constituting Goodwill Litigation Recovery, the Transfer Agent shall mail to
each Charter Stockholder at the address shown for such stockholder on
Charter's books and records at the Effective Time such blank documentation
and related certificates and materials as may be necessary in the
reasonable judgment of the Transfer Agent to ensure the delivery of the
Contingent Shares or Acquiror Consideration to the Charter Stockholders and
to ensure compliance with all applicable laws and regulations. Within
thirty (30) days after the Transfer Agent has received all required
documentation from a Charter Stockholder, properly completed in form and
substance satisfactory to the Transfer Agent, the Transfer Agent shall
cause the delivery to such Charter Stockholder of his, her or its
Contingent Shares or Acquiror Consideration. Notwithstanding any other
provision of this Agreement, neither FAC, Acquiror, the Surviving Bank, the
Exchange Agent nor the Transfer Agent shall be liable to a holder of
Charter Common Stock or FAC Common Stock, as the case may be, for any
property, including any Contingent Shares or Acquiror Consideration
delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat or similar Law.
7. Rights of Former Charter Stockholders. The reference to Section 3.1 in
Section 4.2 of the Agreement is hereby modified to refer to Section 3.1(c).
8. Environmental Matters. The penultimate sentence of Subparagraph (b)(i)
of Section 7.1 of the Agreement is hereby deleted in its entirety.
9. Affirmative Covenants of Charter.
(a) Section 7.1(b) is hereby amended by adding a parenthetical phrase to
the lead-in language thereof so that the lead-in reads as follows:
(b) Charter agrees to take or cause to be taken commencing as soon as
practicable following the execution of this Agreement, and continuing
thereafter as appropriate (and in the case of (ii) and (iii) such
obligations shall not be fully implemented until the day prior to the
Effective Time), the following affirmative actions prior to the Effective
Time:
(b) The last sentence of Section 7.1(f) is hereby amended by inserting the
following words at the end thereof:
and in no event until the day prior to the Effective Time.
10. Tax Matters. The following new Section 8.8 is inserted in substitution
of Section 8.8 of the Agreement:
The Parties agree to use their reasonable efforts to obtain a written
opinion of Arnold & Porter reasonably acceptable to the Parties to the
effect that, for federal income tax purposes, (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, (ii) to the extent Charter Common Stock is exchanged
in the Merger for FAC Common Stock (including any Contingent Shares) no
gain or loss will be recognized by the stockholders of Charter except to
the extent any Contingent Shares constitute a payment of interest
(including imputed interest), (iii) gain or loss, if any, will be
recognized by Charter Stockholders upon their receipt of cash in lieu of
fractional shares of FAC Common Stock, and (iv) each of Charter, FAC, and
Charter Interim will be a party to that
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reorganization within the meaning of Section 368(b) of the Internal Revenue
Code ("Tax Opinions"). In rendering such Tax Opinions, counsel shall be
entitled to rely upon representations of officers of Charter and FAC
reasonably satisfactory in form and substance to such counsel. The Parties
understand that (i) Arnold & Porter's opinion will be premised on, among
other things, the assumption that any consideration paid pursuant to
Section 3.1A will consist solely of FAC Common Stock, and (ii) if any
consideration paid pursuant to Section 3.1A is not FAC Common Stock, then
the Merger may not qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. Except for any action that may
be taken relating to the provisions of Section 3.1A (or any provision of
this Agreement related to the implementation of the provisions of Section
3.1A), each of the Parties undertakes and agrees to use its reasonable
efforts to cause the Merger, and to take no action which would cause the
Merger not, to qualify for treatment as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code for federal income
tax purposes.
11. Deletion of Certain Termination Rights. Subparagraphs (g) and (h) of
Section 10.1 of the Agreement are hereby deleted in their entirety.
12. Non-Survival of Representations and Covenants. The following sentence
shall be added at the end of Section 10.3 of the Agreement:
Without limiting the generality of the foregoing, Sections 3.1A and 4.1 of
this Agreement, as amended, shall survive the Effective Time.
13. Expenses. The last sentence of Section 11.2 of the Agreement is hereby
deleted in its entirety.
14. November 30, 1995 Closing. FAC and Charter each agree to use its best
efforts to cause the Merger to become effective by December 1, 1995, and Charter
agrees with FAC that, if all conditions precedent specified in Article Nine of
the Agreement have been satisfied by November 30, 1995, the Closing of the
Merger will take place on November 30, 1995, and the Merger and other
transactions contemplated by the Agreement shall become effective on December 1,
1995, or as soon thereafter as practicable.
15. Plan of Merger. The Plan of Merger to be entered into as of the
Effective Time shall contain provisions consistent with the Agreement, as
amended hereby.
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IN WITNESS WHEREOF, each of FAC and Charter has caused this Amendment to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested thereunto by its authorized officer as of the day and year first above
written.
ATTEST: CHARTER FEDERAL SAVINGS BANK
<TABLE>
<S> <C>
By: /s/ Katherine L. Hale By: /s/ Cecil R. McCullar
------------------------------------------ -------------------------------------------------------
Katherine L. Hale Cecil R. McCullar
Secretary President and Chief Executive Officer
</TABLE>
[CORPORATE SEAL]
ATTEST: FIRST AMERICAN CORPORATION
<TABLE>
<S> <C>
By: /s/ Mary Neil By: /s/ Dennis C. Bottorff
------------------------------------------ -------------------------------------------------------
Mary Neil Price Dennis C. Bottorff
Assistant Secretary Chairman of the Board and Chief Executive Officer
</TABLE>
[CORPORATE SEAL]
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<PAGE> 142
AGREEMENT AND PLAN OF MERGER AND COMBINATION
THIS AGREEMENT AND PLAN OF MERGER AND COMBINATION (this "Plan of Merger")
is made and entered into as of the day of , 1995, by and between
CHARTER FEDERAL SAVINGS BANK ("Charter"), a federal stock savings bank organized
and existing under the laws of the United States, with its home office located
in Bristol, Virginia, and CHARTER INTERIM FEDERAL SAVINGS BANK ("Charter
Interim"), an interim federal stock savings bank organized and existing under
the laws of the United States, with its home office located in Bristol,
Virginia.
PREAMBLE
Each of the Boards of Directors of Charter and Charter Interim deems it
advisable and in the best interests of their respective institutions and the
stockholders thereof for Charter Interim to be merged with and into Charter (the
"Merger") on the terms and conditions provided in this Plan of Merger. This Plan
of Merger is made and entered into pursuant to an Agreement and Plan of
Reorganization, dated as of May 17, 1995, by and between Charter and First
American Corporation ("FAC"), as amended by Amendment No. 1 to Agreement and
Plan of Reorganization dated as of October 11, 1995 ("Agreement"). At the
Effective Time of the Merger, the outstanding shares of Charter Common Stock (as
defined herein) shall be converted into the right to receive shares of FAC
Common Stock (subject to certain exceptions as set forth in the Agreement). As a
result, stockholders of Charter shall become stockholders of FAC and Charter
shall continue to conduct its business and operations as a wholly-owned, first
tier federal savings bank subsidiary of FAC.
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Charter and Charter Interim hereby
make, adopt, and approve this Plan of Merger in order to set forth the terms and
conditions of the merger of Charter Interim into Charter.
ARTICLE ONE
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth below
(in their singular and plural forms, as applicable) shall have the meanings set
forth in the Agreement.
ARTICLE TWO
TERMS OF MERGER
2.1 Merger. Subject to the terms of this Plan of Merger and the Agreement,
at the Effective Time, Charter Interim shall be merged with and into Charter in
accordance with and with the effect provided in Title 12, United States Code,
Section 1467a(s) and 12 C.F.R. Section 552.13(l). Charter shall be the Surviving
Bank resulting from the Merger, shall be a wholly-owned, first tier subsidiary
of FAC and shall continue to be governed by the laws of the United States as a
federal stock savings bank operating under the name "Charter Federal Savings
Bank." The Merger shall be consummated pursuant to the terms of this Plan of
Merger.
2.2 Surviving Bank. The business of the Surviving Bank from and after the
Effective Time shall continue to be that of a federal stock savings bank
organized under the laws of the United States. The business shall be conducted
from its office located in [Bristol, Virginia], and its legally established
branches as listed on the attached Exhibit A, which shall also include the main
office and all branches of Charter, whether in operation or approved but
unopened, at the Effective Time.
2.3 Assumption of rights. At the Effective Time, the separate existence
and corporate organization of Charter Interim shall be merged into and continued
in the Surviving Bank. All rights, franchises, and interests of both Charter and
Charter Interim in and to every type of property (real, personal, and mixed),
and all chosen in action of both Charter and Charter Interim shall be
transferred to and vested in the Surviving Bank
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without any deed or other transfer. The Surviving Bank, upon consummation of the
Merger and without any order of other action on the part of any court or
otherwise, shall hold and enjoy all rights of property, franchises, and
interests, including appointments, designations, and nominations, and all other
rights and interests as trustee, executor, administrator, registrar of stocks
and bonds, guardian of estates, assignee, receiver, and committee of estates of
incompetent persons, and in every other fiduciary capacity, in the same manner
and to the same extent as such rights, franchises, and interests were held or
enjoyed by either Charter or Charter Interim at the Effective Time.
2.4 Assumption of Liabilities. All liabilities and obligations of both
Charter and Charter Interim of every kind and description (including without
limitation the liquidation account established by Charter in connection with its
conversion to the stock form of organization, and the liquidation account
assumed by Charter Federal in connection with its merger conversion with First
Federal Savings and Loan Association of Danville, as in existence at the
Effective Time) shall be assumed by the Surviving Bank, and the Surviving Bank
shall be bound thereby in the same manner and to the same extent that Charter
and Charter Interim were so bound at the Effective Time.
2.5 Savings Accounts and Deposits. All savings accounts and deposits of
Charter shall be and continue to be savings accounts and deposits of the
Surviving Bank, without change in their respective terms, maturity, minimum
required balances or withdrawal value. As of the Effective Time, each savings
accounts or deposit of Charter shall be considered for dividend or interest
purposes as a savings account or deposit of the Surviving Bank from the time
said savings account or deposit was opened in Charter and at all times
thereafter until such account or deposit ceases to be a savings account or
deposit of the Surviving Bank.
2.6 Charter. The charter of Charter in effect immediately prior to the
Effective Time shall be the Charter of the Surviving Bank until otherwise
amended or repealed.
2.7 Bylaws. The bylaws of Charter in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Bank until otherwise amended
or repealed.
2.8 Board of Directors. Upon the Effective Time, the Board of Directors of
the Surviving Bank shall consist initially of the following [number]
individuals, each of whom shall serve for one-year terms:
<TABLE>
<CAPTION>
NAME RESIDENCE ADDRESS
- --------------------------------------------- ---------------------------------------------
<S> <C>
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
2.9 Offices. The main office of the Surviving Bank after the Effective
Time will be located at the main office of the Surviving Bank in [Bristol,
Virginia]. The Surviving Bank's offices will after the Effective Time be located
at the locations set forth in Exhibit A to this Plan of Merger.
ARTICLE THREE
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article Three,
at the Effective Time, by virtue of the Merger and without any action on the
part of the holders thereof, the shares of the constituent corporations shall be
converted as follows:
(a) Each share of Charter Interim Common Stock issued and outstanding
prior to the Effective Time shall at the Effective Time continue to be
issued and outstanding and shall be an identical outstanding share of the
Surviving Bank.
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(b) Each share of Charter Common Stock issued and outstanding at the
Effective Time (excluding shares held by any Charter Company or by any FAC
Company, in each case other than in a fiduciary capacity or in satisfaction
of debts previously contracted, which shares shall be canceled as provided
in Section 3.3 of this Plan of Merger) shall cease to be outstanding and
shall be converted into and exchanged for 0.3800 shares of FAC Common Stock
(the "Common Stock Exchange Ratio"); provided, however, that, in the event
the FAC Market Value at the Effective Time (determined as provided in
Section 3.6 of this Plan of Merger) is greater than $39.75 per share, then
the Common Stock Exchange Ratio shall be reduced to such amount, rounded to
the nearest one-ten thousandth of a share, as shall equal $15.10 divided by
the FAC Market Value; and provided further, however, that, if FAC enters
into a definitive agreement of merger or reorganization with another entity
as a result of which either FAC is not the surviving entity or FAC's Chief
Executive Officer will not become the Chief Executive Officer of the
surviving entity, then the Common Stock Exchange Ratio shall be 0.3800
shares of FAC Common Stock for each share of Charter Common Stock
exchanged.
3.2 Contingent Consideration.
(a) Subject to paragraph (b) of this Section 3.2, in addition to the
shares of FAC Common Stock to be issued in exchange for shares of Charter
Common Stock pursuant to the provisions of Section 3.1(b) of this Plan of
Merger, each Charter Stockholder shall be entitled to receive an additional
number of shares of FAC Common Stock, rounded down to the nearest number of
whole shares, equal to the product of the number of shares of Charter
Common Stock held by such Charter Stockholder immediately prior to the
Effective Time and the Per Share Recovery Ratio. Shares of FAC Common
Stock, if any, described in this Section 3.2, are hereinafter referred to
as "Contingent Shares." In the event that the circumstances described in
paragraph (b) of this Section 3.2 arise, then each Charter Stockholder
shall be entitled to receive the consideration described in such paragraph
(b), if any, in lieu of any FAC Common Stock.
(b) In the event that (i) a consolidation, merger or acquisition of
FAC with, into or by another corporation ("Acquiror"), other than a
transaction pursuant to which FAC is the surviving entity and which does
not result in a reclassification of the outstanding shares of FAC Common
Stock into shares of other stock, cash or other securities or property has
been consummated prior to the fifth anniversary of the Effective Time, and
(ii) the last payment constituting Goodwill Litigation Recovery is received
after the consummation of a transaction described in (i) above but before
the fifth anniversary of the Effective Time, then each Charter Stockholder
shall be entitled to receive, at the election of Acquiror, either cash or
shares of the Acquiror's capital stock, or a combination of cash and shares
of the Acquiror's capital stock, having a value equaling the product of (A)
fifty percent (50%) of Net Goodwill Litigation Recovery divided by the
number of shares of Charter Common Stock issued and outstanding immediately
prior to the Effective Time and (B) the number of shares of Charter Common
Stock held by such Charter Stockholders immediately prior to the Effective
Time ("Acquiror Consideration"); provided, however, that no Acquiror
Consideration shall be distributable to the Charter Stockholders unless the
aggregate value of such Acquiror Consideration would equal or exceed the
product of Two Dollars ($2.00) and the number of shares of Charter Common
Stock issued and outstanding immediately prior to the Effective Time. To
the extent that any Acquiror Consideration is paid in Acquiror capital
stock, such stock will be valued based on the last reported sales price per
share or average per share closing price of such stock as reported in The
Wall Street Journal on the date of receipt by Charter of the last payment
constituting Goodwill Litigation Recovery.
(c) Notwithstanding any other provision of this Plan of Merger--
(i) under no circumstances shall the total number of Contingent
Shares to be issued to Charter Stockholders pursuant to Section 3.2(a),
if any, exceed the number of shares of FAC Common Stock issued pursuant
to the provisions of Section 3.1(b) (the "Maximum Number"); in the event
the number of Contingent Shares would, absent the provisions of this
Section 3.2(c), exceed the Maximum Number, the number of Contingent
Shares to be distributed to each Charter Stockholder shall be equal to
the product of the Maximum Number and a fraction, the numerator of which
is the
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number of shares of Charter Common Stock held by such Charter
Stockholder immediately prior to the Effective Time and the denominator
of which is the total number of shares of Charter Common Stock held by
all Charter Stockholders immediately prior to the Effective Time; and
(ii) under no circumstances shall the total value of Acquiror
Consideration to be distributed to Charter Stockholders pursuant to
Section 3.2(b), if any, have an aggregate value in excess of the product
of (A) the number of shares of FAC Common Stock issued pursuant to the
provisions of Section 3.1(b) and (B) the last reported sales price of
one share of FAC Common Stock as reported in The Wall Street Journal on
the date of the Effective Time (the "Maximum Value"); in the event that
the total value of Acquiror Consideration would, absent the provisions
of this Section 3.2(c), exceed the Maximum Value, the amount of Acquiror
Consideration to be distributed to each Charter Stockholder shall be
equal to the product of the Maximum Value and a fraction, the numerator
of which is the number of shares of Charter Common Stock held by such
Charter Stockholder immediately prior to the Effective Time and the
denominator of which is the total number of shares of Charter Common
Stock held by all Charter Stockholders immediately prior to the
Effective Time.
(d) The contingent consideration provided under this Section 3.2 shall
not be transferable, assignable or alienable, except by will or the laws of
descent and distribution, until such time as the Contingent Shares or
Acquiror Consideration, if any, have been issued or distributed. Any
attempt by a Charter Stockholder to assign any rights to receive Contingent
Shares or Acquiror Consideration shall be null and void.
(e) Contingent Shares or Acquiror Consideration, if any, shall be
distributed to Charter Stockholders pursuant to the rules and provisions of
Section 4.1(b) and Section 4.1(c).
(f) Notwithstanding any other provision of the Plan of Merger, the
provisions of Section 3.5 of this Plan of Merger shall apply only to shares
of FAC Common Stock received in exchange for shares of Charter Common stock
pursuant to the provisions of Section 3.1(b) of this Plan of Merger. No
fractional shares of FAC Common Stock or Acquiror capital stock shall be
distributed pursuant to the provisions of this Section 3.2 and no cash
shall be paid in lieu thereof. Rather, the number of Contingent Shares or
shares of Acquiror capital stock to be distributed to each Charter
Stockholder shall be rounded down to the nearest whole number of shares.
(g) Charter Stockholders will not be entitled to dividends, voting
rights, or any other rights as stockholders with respect to any shares of
stock prior to the issuance of such shares, if any, pursuant to this
Section 3.2.
3.3 Anti-Dilution Provisions. In the event Charter or FAC changes the
number of shares of Charter Common Stock or FAC Common Stock, respectively,
issued and outstanding prior to the Effective Time as a result of a stock split,
stock dividend, or similar recapitalization with respect to such stock and the
record date therefor shall be prior to the Effective Time, the Common Stock
Exchange Ratio shall be proportionately adjusted to reflect such stock split,
stock dividend or similar recapitalization, as the case may be.
3.4 Shares Held by Charter or FAC. Each of the shares of Charter Common
Stock held by any Charter Company or by any FAC Company, in each case other than
in a fiduciary capacity or in satisfaction of debts previously contracted, shall
be canceled and retired at the Effective Time and no consideration shall be
issued in exchange therefor.
3.5 Fractional Shares. Notwithstanding any other provision of this Plan of
Merger, each holder of shares of Charter Common Stock exchanged pursuant to the
Merger 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 at the Effective Time. The
market value of one share of FAC Common Stock at the Effective Time shall be the
closing price of such common stock as traded on the Nasdaq Stock Market on the
last trading day preceding
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the Effective Time. No such holder will be entitled to dividends, voting rights,
or any other rights as a stockholder in respect of any fractional share.
3.6 No Dissenters' Rights. The holders of Charter Common Stock will not
have dissenters' rights of appraisal as a result of the Merger or any other
event or transaction contemplated by this Plan of Merger.
3.7 Market Value of FAC Common Stock. The market value of one share of FAC
Common Stock on the Effective Time (the "FAC Market Value") shall be the average
per share closing price of FAC Common Stock on the Nasdaq Stock Market (as
reported by The Wall Street Journal or other authoritative source) for the
twenty consecutive trading days ending on and including the third day
immediately preceding but not including the day of the Effective Time.
ARTICLE FOUR
EXCHANGE OF SHARES
4.1 Exchange Procedures.
(a) Promptly after the Effective Time, but in no event later than five (5)
business days thereafter, FAC shall cause FAC itself or such bank or trust
company as FAC shall elect (which may be a subsidiary of FAC) acting as the
exchange agent (the "Exchange Agent") to mail to the former stockholders of
Charter appropriate transmittal materials (which shall specify that delivery
shall be effected, and risk of loss and title to the certificates theretofore
representing shares of Charter Common Stock shall pass, only upon proper
delivery of such certificates to the Exchange Agent). After the Effective Time,
each holder of shares of Charter Common Stock (other than shares to be canceled
pursuant to Section 3.4 of this Plan of Merger) issued and outstanding at the
Effective Time shall surrender the certificate or certificates representing such
shares to the Exchange Agent and shall promptly upon surrender thereof receive
in exchange therefor the consideration provided in Section 3.1 of this Plan of
Merger, together with all undelivered dividends or distributions in respect of
such shares (without interest thereon) pursuant to Section 4.2 of this Plan of
Merger. To the extent required by Section 3.5 of this Plan of Merger, each
holder of shares of Charter Common Stock issued and outstanding at the Effective
Time also shall receive, upon surrender of the certificate or certificates
representing such shares, cash in lieu of any fractional share of FAC Common
Stock to which such holder may be otherwise entitled (without interest). FAC
shall not be obligated to deliver the consideration to which any former holder
of Charter Common Stock is entitled as a result of the Merger until such holder
surrenders such holder's certificate or certificates representing the shares of
Charter Common Stock for exchange as provided in this Section 4.1(a). The
certificate or certificates of Charter Common Stock so surrendered shall be duly
endorsed as the Exchange Agent may require. Any other provision of this Plan of
Merger notwithstanding, neither FAC, the Surviving Bank, nor the Exchange Agent
shall be liable to a holder of Charter Common Stock or FAC Common Stock, as the
case may be, for any amounts paid or property delivered in good faith to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(b) Within forty-five (45) days of receipt by Charter of the last payment
constituting Goodwill Litigation Recovery, FAC or Acquiror shall issue and
deliver the Contingent Shares or Acquiror Consideration to a transfer agent to
be designated by FAC or Acquiror (the "Transfer Agent").
(c) Within twenty (20) days of receipt by Charter of the last payment
constituting Goodwill Litigation Recovery, the Transfer Agent shall mail to each
Charter Stockholder at the address shown for such stockholder on Charter's books
and records at the Effective Time such blank documentation and related
certificates and materials as may be necessary in the reasonable judgment of the
Transfer Agent to ensure the delivery of the Contingent Shares or Acquiror
Consideration to the Charter Stockholders and to ensure compliance with all
applicable laws and regulations. Within thirty (30) days after the Transfer
Agent has received all required documentation from a Charter Stockholder,
properly completed in form and substance satisfactory to the Transfer Agent, the
Transfer Agent shall cause the delivery to such Charter Stockholder of his, her
or its Contingent Shares or Acquiror Consideration. Notwithstanding any other
provision of this Agreement, neither FAC, Acquiror, the Surviving Bank, the
Exchange Agent nor the Transfer Agent shall be
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<PAGE> 147
liable to a holder of Charter Common Stock or FAC Common Stock, as the case may
be, for any property, including any Contingent Shares or Acquiror Consideration
delivered in good faith to a public official pursuant to any applicable
abandoned property, escheat or similar Law.
4.2 Rights of Former Charter Stockholders. At the Effective Time, the
stock transfer books of Charter shall be closed as to holders of Charter Common
Stock immediately prior to the Effective Time, and no transfer of Charter Common
Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 4.1(a) of
this Plan of Merger, each certificate theretofore representing shares of Charter
Common Stock (other than shares to be canceled pursuant to Section 3.4 of this
Plan of Merger) shall from and after the Effective Time represent for all
purposes only the right to receive the consideration provided in Sections 3.1
and 3.5 of this Plan of Merger in exchange therefor, and when issued, such
consideration shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Charter Common Stock. Whenever a dividend or
other distribution is declared by FAC on the FAC Common Stock, the record date
for which is at or after the Effective Time, the declaration shall include
dividends or other distributions on all shares of FAC Common Stock issuable
pursuant to this Plan of Merger, but no dividend or other distribution payable
to the holders of record of FAC Common Stock as of any time subsequent to the
Effective Time shall be delivered to the holder of any certificate representing
shares of Charter Common Stock issued and outstanding at the Effective Time
until such holder surrenders such certificate for exchange as provided in
Section 4.1(a) of this Plan of Merger. However, upon surrender of such Charter
Common Stock certificate, both the FAC Common Stock certificate (together with
all such undelivered dividends or other distributions without interest with a
record date after the Effective Time and a payment date at or prior to such
surrender (without interest)) and any undelivered cash payments to be paid for
fractional share interests (without interest) shall be delivered and paid with
respect to each share represented by such certificate. If after the Effective
Time, certificates representing Charter Common Stock are presented to the
Surviving Bank for any reason, they shall be surrendered and exchanged as
provided in Section 4.1(a) of this Plan of Merger.
4.3 Termination of Exchange Agent Relationship. At any time following one
year after the Effective Time, FAC shall be entitled to terminate the Exchange
Agent relationship, and any stockholders of Charter who have not theretofore
surrendered their shares of Charter Common Stock pursuant to this Article Four
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 (subject to
abandoned property, escheat or other similar laws).
ARTICLE FIVE
CLOSING AND EFFECTIVE DATE
5.1 Time and Place of Closing. The closing of the Merger ("Closing") will
take place at 9:00 a.m. on the last business day of the calendar quarter in
which the satisfaction of all conditions precedent specified in Article Nine of
the Agreement occurs or at such other time as the Parties to the Agreement,
acting through their chief executive officers or chief financial officers, shall
mutually agree. The place of Closing shall be at the offices of FAC, or such
other place as may be mutually agreed upon by the Parties to the Agreement.
5.2 Effective Time. The Merger and other transactions contemplated by this
Plan of Merger shall become effective on the date and at the time of endorsement
of the Articles of Combination filed with the OTS or on such other date and at
such other time as the OTS declares the Merger effective (the "Effective Time").
Subject to the terms and conditions hereof, unless otherwise mutually agreed
upon in writing by the chief executive officers or principal financial officers
of each party to the Agreement, the parties to the Agreement shall use their
reasonable efforts to cause the Effective Time to occur on the first business
day of the first calendar quarter following the Closing, or such later date
within thirty (30) days of such date as shall be mutually agreed upon by FAC and
Charter.
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<PAGE> 148
ARTICLE SIX
EFFECTIVENESS
6.1 Conditions Precedent. Consummation of the Merger is conditioned upon
the approval of the Merger by the stockholders of Charter and the sole
stockholder of Charter Interim, as and to the extent required by law, and the
receipt of the requisite regulatory approvals as set forth in the Agreement. The
Merger shall not be consummated unless and until approved by the OTS.
Additionally, consummation of the Merger is conditioned upon the fulfillment of
the conditions precedent set forth in Article Nine of the Agreement or the
waiver of such conditions as provided in Section 11.6 of the Agreement.
6.2 Termination. This Plan of Merger may be terminated at any time prior
to the Effective Time by the parties hereto at any time simultaneously with the
termination of the Agreement as provided in Article Ten of the Agreement.
6.3 Amendments. To the extent permitted by law, this Plan of Merger may be
amended by a subsequent writing signed by each of the parties upon the approval
of the Boards of Directors of each of the parties; provided, however, that after
any such approval by the holders of Charter Common Stock, there shall be made no
amendment decreasing the consideration to be received by Charter stockholders
without the further approval of such stockholders.
ARTICLE SEVEN
MISCELLANEOUS
7.1 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth in
Section 11.8 of the Agreement (or at such other address as may be provided
hereunder), and shall be deemed to have been delivered as of the date so
received;
provided, however, that notice of termination of this Plan of Merger shall be
effective only upon actual delivery of such notice to the party entitled to the
same.
7.2 Governing Law. This Plan of Merger shall be governed by and construed
in accordance with the laws of the State of Tennessee, without regard to any
applicable conflicts of laws, except to the extent that the federal laws of the
United States may apply to the Merger.
7.3 Counterparts. This Plan of Merger may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
7.4 Inconsistent Provisions. The parties agree that, to the extent any of
the provisions of this Plan of Merger shall conflict or be inconsistent with any
provision of the Agreement, the provisions of the Agreement shall control and
prevail and the parties hereto agree to execute such amendments to this Plan of
Merger to conform the provisions hereof to the provisions of the Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Plan of Merger to
be executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto duly authorized all as of the day and year first
above written.
ATTEST: CHARTER FEDERAL SAVINGS BANK
<TABLE>
<S> <C>
By: By:
- ------------------------------------------ ------------------------------------------
[Name] Cecil R. McCullar
Secretary President and Chief Executive Officer
ATTEST: CHARTER INTERIM FEDERAL SAVINGS BANK
By: By:
- ------------------------------------------ ------------------------------------------
[Name] [Name]
Secretary [Title]
</TABLE>
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<PAGE> 150
APPENDIX B
, 1995
Board of Directors
Charter Federal Savings Bank
110 Piedmont Avenue
Bristol, Virginia 24203
Members of the Board:
Charter Federal Savings Bank ("Charter Federal") and First American
Corporation ("First American") have entered into an Agreement and Plan of
Merger, dated as of May 17, 1995, as amended by Amendment No. 1 to Agreement and
Plan of Reorganization, dated as of October 11, 1995 (collectively, the
"Agreement"), pursuant to which Charter Federal will combine with First American
by means of the merger (the "Merger") of a newly formed, first tier, interim
federal savings bank subsidiary of First American with and into Charter Federal.
At the "Effective Time" (as defined in the Agreement), each of the outstanding
shares of the $0.01 par value common stock of Charter Federal ("Charter Federal
Common Stock") will be converted into .38 of a share of the $5.00 par value
common stock of First American ("First American Common Stock") and cash in lieu
of any fractional share; provided, however, that (i) if the "FAC Market Value"
(as defined in the Agreement) at the Effective Time is greater than $39.75 per
share, then the exchange ratio shall be reduced to an amount equal to $15.10
divided by the FAC Market Value, rounded to the nearest one-ten thousandth of a
share, and (ii) if, prior to the Effective Time, First American enters into a
definitive agreement of merger or reorganization with another entity as a result
of which either First American would not be the surviving entity or First
American's Chief Executive Officer would not become the Chief Executive Officer
of the surviving entity, then the exchange ratio shall be 0.38 (the "Exchange
Ratio").
Wheat, First Securities, Inc. ("Wheat") as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. In the ordinary course of our business as a broker-dealer, we
may, from time to time, have a long or short position in, and buy or sell, debt
or equity securities of Charter Federal or First American for our own account or
for the accounts of our customers. Wheat has previously provided investment
banking services to Charter Federal and will also receive a fee from Charter
Federal for rendering this opinion.
You have asked us whether, in our opinion, the Exchange Ratio is fair, from
a financial point of view, to the holders of Charter Federal Common Stock.
In arriving at the opinion set forth below, we have conducted discussions
with members of senior management of Charter Federal and First American
concerning their businesses and prospects and have reviewed certain publicly
available business and financial information and certain other information
prepared or provided to us in connection with the Merger, including, among other
things, the following:
(1) Charter Federal's Annual Reports to Stockholders, Annual Reports
on Form 10-K and related financial information for the three fiscal years
ended June 30, 1995;
(2) First American's Annual Reports to Stockholders, Annual Reports on
Form 10-K and related financial information for the three fiscal years
ended December 31, 1994;
(3) First American's Quarterly Report on Form 10-Q and related
financial information for the three months ended March 31, 1995 and for the
six months ended June 30, 1995;
(4) Certain publicly available information with respect to historical
market prices and trading activity for Charter Federal Common Stock and
First American Common Stock and for certain publicly traded financial
institutions which Wheat deemed relevant;
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<PAGE> 151
(5) Certain publicly available information with respect to banking
companies and the financial terms of certain other mergers and acquisitions
which Wheat deemed relevant;
(6) The Agreement;
(7) The Registration Statement on Form S-4 of First American,
including the Prospectus/Proxy Statement;
(8) Other financial information concerning the businesses and
operations of Charter Federal and First American, including certain audited
financial information and certain internal financial analyses and forecasts
for Charter Federal prepared by senior management; and
(9) Such financial studies, analyses, inquiries and other matters as
we deemed necessary.
In preparing our opinion, we have relied on and assumed the accuracy and
completeness of all information provided to us or publicly available, including
the representations and warranties of Charter Federal and First American
included in the Agreement, and we have not assumed any responsibility for
independent verification of such information. We have relied upon the management
of Charter Federal as to the reasonableness and achievability of its financial
and operational forecasts and projections, and the assumptions and bases
therefor, provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of such
management and that such forecasts and projections will be realized in the
amounts and in the time periods currently estimated by such management. We also
assumed, without independent verification, that the aggregate allowances for
loan losses and other contingencies for Charter Federal and First American are
adequate to cover such losses. We did not review any individual credit files of
Charter Federal or First American, nor did we make an independent evaluation or
appraisal of the assets or liabilities of Charter Federal or First American. We
also assumed that, in the course of obtaining the necessary regulatory approvals
for the Merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger, on a pro forma basis, to
First American.
Our opinion is necessarily based upon economic, market and other conditions
as they exist and can be evaluated on the date hereof and the information made
available to us through the date hereof. Events occurring after that date could
materially affect the assumptions and conclusions contained in our opinion. We
have not undertaken to reaffirm or revise this opinion or otherwise comment on
any events occurring after the date hereof. Wheat's opinion is directed only to
the fairness, from a financial point of view, of the Exchange Ratio to the
holders of Charter Federal Common Stock and does not address any other aspect of
the Merger or constitute a recommendation to any shareholder of Charter Federal
as to how such shareholder should vote with respect to the Merger. Wheat's
opinion does not address the relative merits of the Merger as compared to any
alternative business strategies that might exist for Charter Federal, nor does
it address the effect of any other business combination in which Charter Federal
might engage.
In addition, in arriving at our opinion, we have considered, without
quantifying any value with respect thereto, the matters discussed under
"PROPOSAL I -- THE MERGER -- Contingent Consideration for Goodwill Litigation
Recovery" and the potential payment that could be received by the holders of
Charter Federal Common Stock of any "Net Goodwill Litigation Recovery" (as
defined in the Agreement) received as a result of the "Goodwill Litigation" (as
defined in the Agreement) on the basis described in the Prospectus/Proxy
Statement and as set forth in the Agreement.
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It is understood that this opinion may be included in its entirety in the
Prospectus/Proxy Statement. This opinion may not, however, be summarized,
excerpted from or otherwise publicly referred to without our prior written
consent.
On the basis of and subject to the foregoing, we are of the opinion that as
of the date hereof the Exchange Ratio is fair, from a financial point of view,
to the holders of Charter Federal Common Stock.
Very truly yours,
WHEAT, FIRST SECURITIES, INC.
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<PAGE> 153
APPENDIX C
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT ("Option Agreement") dated as of May 17, 1995
by and between FIRST AMERICAN CORPORATION ("FAC"), a Tennessee corporation, and
CHARTER FEDERAL SAVINGS BANK ("Charter"), a federal stock savings bank organized
and existing under the laws of the United States.
WITNESSETH
WHEREAS, the Boards of Directors of FAC and CHARTER have authorized or
approved an Agreement and Plan of Reorganization ("Reorganization Agreement")
providing for certain transactions pursuant to which FAC would acquire Charter
pursuant to the merger of a newly formed first tier, interim federal savings
bank subsidiary of FAC ("Charter Interim") with and into Charter;
WHEREAS, as a condition to FAC's entry into the Reorganization Agreement
and to induce such entry, Charter has agreed to grant to FAC the option set
forth herein to purchase authorized but unissued shares of Charter Common Stock;
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions.
Capitalized terms defined in the Reorganization Agreement and used herein
shall have the same meanings as in the Reorganization Agreement.
2. Grant of Option.
Subject to the terms and conditions set forth herein, Charter hereby grants
to FAC an option ("Option") to purchase up to the amount comprising 19.99% of
the issued and outstanding shares of Charter Common Stock, at a price of $9.08
per share payable in cash as provided in Section 4 hereof; provided, however,
that in the event Charter issues or agrees to issue any shares of Charter Common
Stock (other than as permitted under the Reorganization Agreement) at a price
less than $9.08 per share (as adjusted pursuant to Section 6 hereof), the
exercise price shall be equal to such lesser price.
3. Exercise of Option.
a. Unless FAC shall have breached in any material respect any material
covenant, agreement or representation contained in the Reorganization Agreement
and such breach has not been cured within the period provided for in the
Reorganization Agreement, FAC may exercise the Option, in whole or part, at any
time or from time to time if a Purchase Event (as defined below) shall have
occurred and be continuing; provided that to the extent the Option shall not
have been exercised, it shall terminate and be of no further
force and effect (i) upon the Effective Time of the Merger or (ii) upon
termination of the Reorganization Agreement in accordance with the provisions
thereof (other than a termination resulting from a willful breach by Charter of
a Specified Covenant (as defined herein) or, following the occurrence of a
Purchase Event, failure of Charter's stockholders to approve the Reorganization
Agreement by the vote required under applicable law), or (iii) six months after
termination of the Reorganization Agreement due to a willful breach by Charter
of a Specified Covenant or, following the occurrence of a Purchase Event,
failure of Charter's stockholders to approve the Reorganization Agreement by the
vote required under applicable law; and provided further that any such exercise
shall be subject to compliance with applicable provisions of law.
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b. As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) any person (other than Charter or any Charter Company, FAC or any
affiliate of FAC) shall have commenced (as such term is defined in Rule
14d-2 under the Securities Exchange Act of 1934 ("Exchange Act")) a bona
fide tender or exchange offer to purchase shares of Charter Common Stock
such that upon consummation of such offer such person would own or control
15% or more of the outstanding shares of Charter Common Stock;
(ii) Charter or any Charter Company, without having received FAC's
prior written consent, shall have entered into an agreement with any person
(other than FAC or any subsidiary or affiliate of FAC), or shall have filed
an application or notice with any federal or state regulatory agency for
clearance or approval, to (x) merge or consolidate, or enter into any
similar transaction, with any such person, (y) sell, lease or otherwise
dispose of all or substantially all of the assets of Charter or (z) sell or
otherwise dispose of (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing 15% or more of
the voting power of Charter;
(iii) any person (other than Charter, Charter in a fiduciary capacity,
FAC, affiliates of FAC or subsidiaries of FAC in a fiduciary capacity)
shall have acquired beneficial ownership or the right to acquire beneficial
ownership of 15% or more of the outstanding shares of Charter Common Stock
(the term "beneficial ownership" for purposes of this Option Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act
and the regulations promulgated thereunder); provided, however, that the
acquisition prior to the date hereof of either such beneficial ownership or
the right to acquire such beneficial ownership by any director or officer
of Charter shall not constitute a Purchase Event;
(iv) any person other than FAC shall have made a bona fide proposal to
Charter by public announcement or written communication that is or becomes
the subject of public disclosure to (x) acquire Charter by merger,
consolidation, purchase of all or substantially all of its assets or any
other similar transaction, or (y) make an offer described in clause (i)
above and Charter's Board of Directors shall have failed to recommend, or
shall have withdrawn its recommendation, to Charter stockholders that they
approve of the Reorganization Agreement and Plan of Merger with FAC; or
(v) Charter shall have willfully breached a Specified Covenant which
breach would entitle FAC to terminate the Reorganization Agreement and such
breach has not been cured within the period provided for in the
Reorganization Agreement prior to the Notice Date (as defined below).
If more than one of the transactions giving rise to a Purchase Event under
this Section 3(b) is undertaken or effected, then all such transactions shall
give rise only to one Purchase Event, which Purchase Event shall be deemed
continuing for all purposes hereunder until all such transactions are abandoned.
As used in this Option Agreement, "person" shall have the meanings specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
c. In the event FAC wishes to exercise the Option, it shall send to
Charter a written notice (the date of which being herein referred to as
"Notice Date") specifying (i) the total number of shares it will purchase
pursuant to such exercise, and (ii) a place and date not earlier than three
business days nor later than 60 business days from the Notice Date for the
closing of such purchase ("Closing Date"); provided that if prior
notification to or approval of any federal or state regulatory agency is
required in connection with such purchase, FAC shall promptly file the
required notice or application for approval and shall expeditiously process
the same and the period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
period has expired or been terminated or such approval has been obtained
and any requisite waiting period shall have passed.
d. As used herein, "Specified Covenant" means any covenant or
agreement contained in Sections 7.2(a), (c), (d), (e), (m) and (n), or
Sections 8.1, 8.3, 8.4 and 8.7, of the Reorganization Agreement.
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4. Payment and Delivery of Certificates.
a. At the closing referred to in Section 3(c) hereof, FAC shall pay to
Charter the aggregate purchase price for the shares of Charter Common Stock
purchased pursuant to the exercise of the Option in immediately available
funds by a wire transfer to a bank account designated by Charter.
b. At such closing, simultaneously with the delivery of funds as
provided in subsection (a), Charter shall deliver to FAC a certificate or
certificates representing the number of shares of Charter Common Stock
purchased by FAC, and FAC shall deliver to Charter a letter agreeing that
FAC will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Option Agreement.
c. Certificates for Charter Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend which shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and Charter Federal Savings Bank and to resale
restrictions arising under applicable federal law, as amended, a copy
of which agreement is on file at the principal office of Charter
Federal Savings Bank. A copy of such agreement will be provided to the
holder hereof without charge upon receipt by Charter Federal Savings
Bank of a written request."
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if FAC shall have
delivered to Charter a copy of a letter from the staff of the Office of Thrift
Supervision, or an opinion of counsel, in form and substance reasonably
satisfactory to Charter, to the effect that such legend is not required for
purposes of applicable federal law.
5. Representations.
Charter hereby represents, warrants and covenants to FAC as follows:
a. Charter shall at all times maintain sufficient authorized but
unissued shares of Charter Common Stock so that the Option may be exercised
without authorization of additional shares of Charter Common Stock.
b. The shares to be issued upon due exercise, in whole or in part, of
the Option, when paid for as provided herein, will be duly authorized,
validly issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization.
In the event of any change in Charter Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of Charter Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement), the number of shares of Charter Common Stock
subject to the Option shall be adjusted so that, after such issuance, it equals
19.99% of the number of shares of Charter Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 6 shall be deemed to authorize
Charter to breach any provision of the Reorganization Agreement.
7. Repurchase.
a. At the request of FAC at any time during the nine months
immediately following the later to occur of both a Purchase Event set forth
in Section 3(b)(ii), 3(b)(iv) or 3(b)(v) and the termination of the
Reorganization Agreement pursuant to the terms thereof ("Repurchase
Period"), Charter shall
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repurchase the Option from FAC together with any shares of Charter Common
Stock purchased by FAC pursuant thereto, at a price (the "Option Repurchase
Price") equal to the sum of:
(i) The exercise price paid by FAC for any shares of Charter Common
Stock acquired pursuant to the Option;
(ii) The difference between the "market/tender offer" price for
shares of Charter Common Stock (defined as the highest of (i) the
highest price per share at which a tender or exchange offer has been
made, (ii) the price per share, whether in cash or the value of
securities or other property or a combination thereof, of Charter Common
Stock to be paid by any third party pursuant to an agreement with
Charter, (iii) the price at which FAC has agreed to acquire Charter
Common Stock pursuant to the Reorganization Agreement, or (iv) the
highest reported sale price for shares of Charter Common Stock within
that portion of the Repurchase Period preceding the date FAC gives
notice of the required repurchase under this Section 7) and the exercise
price as determined pursuant to Section 2 hereof, multiplied by the
number of shares of Charter Common Stock with respect to which the
Option has not been exercised, but only if the market/tender offer price
is greater than such exercise price; and
(iii) The difference between the market/tender offer price (as
defined in Section 7(b) hereof) and the exercise price paid by FAC for
any shares of Charter Common Stock purchased pursuant to the exercise of
the Option, multiplied by the number of shares so purchased, but only if
the market/tender offer price is greater than such exercise price.
b. To the extent that Charter is prohibited under applicable law or
regulation from repurchasing in full the Option, and any shares of Charter
Common Stock purchased by FAC pursuant thereto, Charter shall immediately
so notify FAC and thereafter deliver or cause to be delivered, from time to
time, to FAC, the portion of the Option Repurchase Price that it is no
longer prohibited from delivering, within five business days after the date
on which Charter is no longer so prohibited; provided, however, that if
Charter at any time after delivery of a notice of repurchase is prohibited
under applicable law or regulation from delivering to FAC the Option
Repurchase Price in full (and Charter hereby undertakes to use its best
efforts to obtain all required regulatory and legal approvals and to file
any required notices as promptly as practicable in order to accomplish such
repurchase), FAC may revoke its notice of repurchase of the Option, or any
shares of Charter Common Stock purchased by FAC pursuant thereto, either in
whole or to the extent of the prohibition, whereupon, in the latter case,
Charter shall promptly: (i) deliver to FAC that portion of the Option
Repurchase Price that Charter is not prohibited from delivering; and (ii)
at FAC's option, either: (A) deliver to FAC a new Option Agreement
evidencing the right of FAC to purchase that number of shares of Charter
Common Stock obtained by multiplying the number of shares of Charter Common
Stock for which the surrendered Option Agreement was exercisable at the
time of delivery of the notice of repurchase by a fraction, the numerator
of which is the Option Repurchase Price less the portion thereof
theretofore delivered to FAC and the denominator of which is the Option
Repurchase Price, or (B) make provision for payment of the remainder of the
Option Repurchase Price at such time as Charter is not so prohibited under
applicable law or regulation.
c. In addition to the limitation set forth in Section 7(b) on
Charter's obligation to repurchase the Option, and any shares of Charter
Common Stock purchased by FAC pursuant thereto, if the repurchase in full
of the Option, and any shares of Charter Common Stock purchased by FAC
pursuant thereto, by Charter would reduce Charter's Tier 1 capital ratio as
defined in 12 C.F.R. Section 565.2(g) ("Tier 1 Capital") to less than 5%,
then Charter shall be obligated to repurchase the Option, and any shares of
Charter Common Stock purchased by FAC pursuant thereto, only to the extent
that such repurchase will not reduce Charter's Tier 1 capital to less than
5%. To the extent that Charter is temporarily excused under the immediately
preceding sentence from repurchasing all or any portion of the Option, or
any shares of Charter Common Stock purchased by FAC pursuant thereto,
Charter shall immediately so notify FAC and thereafter deliver or cause to
be delivered, from time to time, to FAC, the portion of the Option
Repurchase Price that it is no longer excused from delivering, within five
business days after the date on which Charter is no longer so excused;
provided, however, that if Charter at any time after
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delivery of a notice of repurchase is excused under this Section 7(c) from
delivering to FAC the Option Repurchase Price in full (and Charter hereby
undertakes to use its best efforts to maintain its Tier 1 capital at such
levels as may be necessary in order to permit it to accomplish such
repurchase), FAC may revoke its notice of repurchase of the Option, or any
shares of Charter Common Stock purchased by FAC pursuant thereto, either in
whole or to the extent that Charter is excused from repurchasing the same,
whereupon, in the latter case, Charter shall promptly: (i) deliver to FAC
that portion of the Option Repurchase Price that Charter is not excused
from delivering; and (ii) at FAC's option, either (A) deliver to FAC a new
Option Agreement evidencing the right of FAC to purchase that number of
shares of Charter Common Stock obtained by multiplying the number of shares
of Charter Common Stock for which the surrendered Option Agreement was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to FAC and the denominator of which
is the Option Repurchase Price, or (B) make provision for payment of the
remainder of the Option Repurchase Price at such time as Charter is not so
excused under this Section 7(c).
d. In the event FAC exercises its right to require the repurchase of
the Option, or any shares of Charter Common Stock purchased by FAC pursuant
thereto, Charter shall, within ten business days thereafter, pay the
required amount to FAC in immediately available funds and FAC shall
surrender the Option to Charter and the certificates evidencing the shares
of Charter Common Stock purchased thereunder; provided that if prior
notification to or approval of the Federal Reserve Board or other
regulatory agency is required in connection with such purchase, Charter
shall promptly file the required notice or application for approval and
shall expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification period has expired or been terminated.
8. Registration Rights.
Charter shall, if requested by FAC, as expeditiously as possible file a
registration statement on a form of general use as required by the Office of
Thrift Supervision if necessary in order to permit the sale or other disposition
of the shares of Charter Common Stock that have been acquired upon exercise of
the Option in accordance with the intended method of sale or other disposition
requested by FAC. FAC shall provide all information reasonably requested by
Charter for inclusion in any registration statement to be filed hereunder.
Charter will use its best efforts to cause such registration statement first to
become effective and then to remain effective for such period not in excess of
270 days from the day such registration statement first becomes effective as may
be reasonably necessary to effect such sales or other dispositions. The first
registration effected under this Section 8 shall be at Charter's expense except
for underwriting commissions and the fees and disbursements of FAC's counsel
attributable to the registration of such Charter Common Stock. A second
registration may be requested hereunder at FAC's expense. In no event shall
Charter be required to effect more than two registrations hereunder. The filing
of any registration statement hereunder may be delayed for such period of time
as may reasonably be required to facilitate any public distribution by Charter
of Charter Common Stock. If requested by FAC, in connection with any such
registration, Charter will become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements. Upon receiving any request
from FAC or assignee thereof under this Section 8, Charter agrees to send a copy
thereof to FAC and to any assignee thereof known to Charter, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies.
9. Severability.
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or
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regulatory agency determines that the Option will not permit the holder to
acquire the full number of shares of Charter Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of Charter to allow the holder to acquire such lesser number of shares as may be
permissible, without any amendment or modification hereof.
10. Miscellaneous.
a. Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
b. Entire Agreement. Except as otherwise expressly provided herein,
this Option Agreement contains the entire agreement between the parties
with respect to the transactions contemplated hereunder and supersedes all
prior arrangements or understandings with respect thereto, written or oral.
The terms and conditions of this Option Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns. Nothing in this Option Agreement, expressed or
implied, is intended to confer upon any party, other than the parties
hereto, and their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Option Agreement,
except as expressly provided herein.
c. Assignment. Neither of the parties hereto may assign any of its
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of the
other party, except that in the event a Purchase Event shall have occurred
and be continuing, FAC may assign in whole or in part its rights and
obligations hereunder; provided, however, that to the extent required by
applicable regulatory authorities, FAC may not assign its rights under the
Option except in (i) a widely dispersed public distribution, (ii) a private
placement in which no one party acquires the right to purchase in excess of
2% of the voting shares of Charter, (iii) an assignment to a single party
(e.g., a broker or investment banker) for the purpose of conducting a
widely dispersed public distribution on FAC's behalf, or (iv) any other
manner approved by applicable regulatory authorities.
d. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered in the
manner and to the addresses provided for in or pursuant to Section 11.8 of
the Reorganization Agreement.
e. Counterparts. This Option Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute
but one agreement.
f. Specific Performance. The parties agree that damages would be an
inadequate remedy for a breach of the provisions of this Option Agreement
by either party hereto and that this Option Agreement may be enforced by
either party hereto through injunctive or other equitable relief.
g. Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, without
regard to applicable conflicts of laws, except to the extent that the
federal laws of the United States may apply to the Merger.
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IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
FIRST AMERICAN CORPORATION
By: /s/ DENNIS C. BOTTORFF
------------------------------------
Dennis C. Bottorff
Chairman of the Board
and Chief Executive Officer
CHARTER FEDERAL SAVINGS BANK
By: /s/ CECIL R. MCCULLAR
------------------------------------
Cecil R. McCullar
President and Chief Executive
Officer
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APPENDIX D
OFFICE OF THRIFT SUPERVISION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended JUNE 30, 1995
Office of Thrift Supervision file number 0360
CHARTER FEDERAL SAVINGS BANK
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
UNITED STATES 540150368
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER I.D. NO.)
OF INCORPORATION OR
ORGANIZATION)
</TABLE>
110 PIEDMONT AVENUE, BRISTOL, VIRGINIA 24201
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (540) 669-5101
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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 the 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. [ ]
As of July 31, 1995, there were issued and outstanding 5,125,313 shares of
the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the last reported sales price of such
stock on the Nasdaq Stock Market, as of July 31, 1995, was $36,648,168. (Note:
Assuming a last sales price of $13.38 and 2,386,287 shares held by officers and
directors.)
DOCUMENTS INCORPORATED BY REFERENCE
I. PORTIONS OF CHARTER FEDERAL SAVINGS BANK ANNUAL MEETING PROXY STATEMENT ARE
INCORPORATED BY REFERENCE INTO CERTAIN ITEMS OF PART III.
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PART I
ITEM 1. BUSINESS OF THE BANK
Charter Federal Savings Bank ("Charter Federal" or the "Bank") operates as
a federally-chartered capital stock savings bank. It was originally chartered as
Interstate Building and Loan Association (the "Association"), a Virginia mutual
association, in 1920 and obtained a federal charter in 1934. In March, 1984, the
Association converted from a mutual to a stock form of organization. On March 1,
1982, the Association merged with Peoples Federal Savings and Loan Association
and First Federal Savings and Loan Association of New River Valley and
subsequently changed its name to Charter Federal Savings and Loan Association.
Charter Federal acquired New Federal Savings and Loan Association of Knoxville,
Tennessee in March, 1985 and Magnolia Federal Savings and Loan Association of
Knoxville, Tennessee in June, 1985 in supervisory transactions approved by the
Federal Savings and Loan Insurance Corporation ("FSLIC"). Charter Federal also
merged with First Federal Savings and Loan Association of Danville, Danville,
Virginia ("First Federal of Danville"), in connection with the merger conversion
of First Federal of Danville as of June 30, 1985. On March 20, 1987, Charter
Federal acquired six branch offices and certain assets therein from Carteret
Savings Bank, F.A., Morristown, New Jersey, located in Wytheville, Bluefield,
Pearisburg, Galax, Blacksburg, and Christiansburg, Virginia. Charter Federal
assumed the deposit liabilities at these offices and currently operates four of
them as its own branch offices. The Pearisburg office was sold as of June 30,
1988 and the Christiansburg office was closed on August 31, 1988. As a result of
certain of these acquisitions, the Association recorded intangible assets in the
form of goodwill. See Note 3 of the "Notes to Consolidated Financial Statements"
under Item 8 of this report. In October, 1988, Charter Federal replaced its
association charter with a savings bank charter. The Bank sold the previous
Abingdon branch location and moved to a new leased structure at 968 West Main
Street on December 19, 1994. The Bank sold the Jefferson Street branch building
and leased space for the branch operation from the new owner on February 16,
1995. The Bank also opened a full service branch office in Bristol located at
1501 King College Road on June 19, 1995. Additionally, the Bank sold its
Danville, Virginia area deposits, deposit related loans, and fixed assets on
November 19, 1994.
The Bank's savings accounts are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC")
and it is a member of the Federal Home Loan Bank of Atlanta. The Bank's primary
business is attracting funds from the general public and using such funds,
together with borrowings, to make real estate loans and various types of
consumer loans. Charter Federal's principal sources of income are interest on
loans, mortgage-backed securities, and investment securities. Its principal
expenses are interest payments on deposits and borrowings, and normal operating
costs. Charter Federal's four geographic market areas extend throughout
southwest Virginia and northeast Tennessee, stretching from Knoxville, Tennessee
and surrounding areas in the south, to Bristol in the center; and Roanoke,
Virginia in the north. As of June 30, 1995, the Bank operates 27 full service
retail offices, including its main office, within southwest Virginia and
northeast Tennessee counties and cities.
On May 17, 1995, Charter Federal entered into a definitive merger agreement
(the "Agreement") with First American Corporation ("First American") whereby
Charter Interim Federal Savings Bank, a federally chartered interim savings bank
to be formed by First American would be merged with and into Charter with
Charter as the surviving entity. Each outstanding share of common stock of
Charter, par value $0.01 per share, would be converted into 0.38 shares of the
common stock of First American, par value $5.00 per share ("FAC Common Stock");
provided, however, that (i) if the FAC Market Value (as defined in the
Agreement) is greater than $39.75 per share, then the exchange ratio shall be
reduced to an amount equal to $15.10 divided by the FAC Market Value, rounded to
the nearest one ten-thousandth of a share, and cash in lieu of any fractional
share, and (ii) if, prior to the effective time of the Merger, First American
enters into a definitive agreement of merger or reorganization with another
entity as a result of which either First American would not be the surviving
entity or First American's Chief Executive Officer would not become Chief
Executive Officer of the surviving entity, then the exchange ratio shall be 0.38
(the "Exchange Ratio"). The Agreement may be terminated prior to the effective
time by Charter if the FAC Market Value is more than $43.50. In connection with
the merger, Charter also entered into an option agreement with First American
which
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provides for the purchase of up to a number of shares equal to 19.99% of
Charter's issued and outstanding common stock by First American under certain
circumstances at $9.08 per share. The consummation of the transaction is subject
to approval by Charter's stockholders, regulatory approvals and various other
conditions. Certain regulatory applications have been filed; however, no
approvals have been received.
LENDING ACTIVITIES
As a result of strategies implemented by management in December 1989,
virtually all of the Bank's lending since March 1990 through June 30, 1995 has
consisted of (i) first and second mortgage loans secured by one- to four-family
residences and (ii) consumer loans, primarily to finance the purchase of new or
used automobiles. Prior to December 1989, the Bank also made commercial and
multi-family real estate loans and construction loans secured by commercial real
estate and multi-family residential development projects.
Management plans to continue to emphasize one- to four-family residential
mortgage lending and consumer lending. In addition, the Bank anticipates
engaging on a limited basis in commercial lending for middle market businesses
within its market areas. Such commercial lending will be limited in amounts and
concentrations.
With the enactment of Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the loans-to-one-borrower limits applicable
to the Bank significantly changed and are now the same as those applicable to
national banks. At June 30, 1995, the Bank's loans-to-one borrower limit was
$7.7 million. FIRREA also limits nonresidential real property loans to 400% of
an institution's capital.
Current regulations permit federal savings and loan associations to invest
up to 35% of assets in consumer loans. Secured or unsecured loans for
commercial, corporate, business and agricultural purposes may be made in an
aggregate amount up to 10% of assets. The regulations also permit investment of
10% of assets in general leasing.
However, some or all of these lending authorities may be constrained by
savings institution eligibility tests for regulatory and income tax purposes.
The qualified thrift lender ("QTL") test applicable to all savings
associations requires that a savings institution's "qualified thrift
investments" equal or exceed 65% of the savings institution's "portfolio
assets." For a discussion of the provisions of the QTL test see "Regulation and
Supervision -- Federal Savings Institution Regulation -- Qualified Thrift Lender
Test." Under the current version of the QTL test, the Bank's qualifying assets
were 89.7% of portfolio assets at June 30, 1995.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth information
summarizing the composition of Charter Federal's loan portfolio by dollar
amounts and in percentages by type of loan for the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Mortgage:
One-to four-family residential..... $260,930 63.3% $243,395 60.5% $225,418 54.3%
Multi-family....................... 3,601 .9 5,158 1.3 12,227 2.9
Commercial......................... 44,151 10.7 45,712 11.4 46,179 11.2
-------- ------ -------- ------ -------- ------
Total......................... 308,682 74.9 294,265 73.2 283,824 68.4
-------- ------ -------- ------ -------- ------
Construction:
One- to four-family residential.... 8,637 2.1 6,379 1.6 2,483 0.6
Commercial......................... 531 .1 -- -- -- --
-------- ------ -------- ------ -------- ------
Total......................... 9,168 2.2 6,379 1.6 2,483 0.6
-------- ------ -------- ------ -------- ------
Consumer Loans.......................... 94,214 22.9 101,447 25.2 128,611 31.0
-------- ------ -------- ------ -------- ------
Total loans receivable before
deductions............................ 412,064 100.0% 402,091 100.0% 414,918 100.0%
====== ====== ======
Undisbursed loan funds.................. (3,963) (4,839) (1,680)
Unamortized premium, net................ (196) 434 1,163
Allowance for loss on loans............. (5,021) (8,356) (10,344)
Net deferred loan fees.................. (1,076) (1,314) (1,229)
-------- -------- --------
Net loans receivable.................... 401,808 388,016 402,828
-------- -------- --------
Direct finance leases, net.............. -- -- 173
Net loans receivable and direct finance
leases................................ $401,808 $388,016 $403,001
======== ======== ========
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. Charter Federal's current
mortgage loan originations are loans on existing one- to four-family residential
properties and a limited number of permanent, nonspeculative, end-user
construction loans on single family residences, and speculative construction
loans for one- to four-family residential properties, on a limited scale. At
June 30, 1995, adjustable rate mortgage loans ("AMLs") represented approximately
32.5% and fixed rate mortgage loans represented approximately 67.5% of Charter
Federal's total mortgage loan portfolio. At June 30, 1995, 85.9% of mortgage
loans originated by Charter Federal have loan-to-value ratios of 80% or less. In
the case of a loan with a ratio exceeding 80% and up to 95%, Charter Federal
requires the borrower to obtain private mortgage insurance to reduce Charter
Federal's exposure on that portion of the original amount of the loan that is in
excess of 80% of the value of the property. Charter also originates real estate
secured consumer loans on a limited basis over 80% loan to value without
requiring private mortgage insurance increasing the loan yield to offset related
risks.
Charter Federal offers fixed rate and adjustable rate ("AML") residential
mortgage loans for terms up to 30 years. Subsequent to June 30, 1992, Charter
Federal began selling substantially all fixed rate mortgage loans based upon the
loan's contractual interest rate and maturity into the secondary market as part
of its continuing efforts to improve its gap position. The average remaining
term to maturity of Charter Federal's mortgage loan portfolio is approximately
14 years. AMLs enable Charter Federal to reduce the level of interest rate risk
in its portfolio. Currently, the interest rates on AMLs are subject to
adjustment, not to exceed 2% annually, with such adjustment being based on a
margin of 3% for terms greater than 15 years and 2.75% for 15 year terms, above
the weekly average yield on one year U.S. Treasury securities. Over the life of
the loan, the interest rate cannot be adjusted more than 2% below the initial
rate nor increased more than 6% above the initial rate. Charter Federal offers
below-market initial rates on AMLs. For loans with terms
D-4
<PAGE> 164
exceeding 15 years, the three year AML rate as of June 30, 1995 was 7.375%; one
year AML rate, 6.125%; the fixed rate mortgage loan rate was 8.0%. The volume
and types of AMLs originated by the Bank have been affected by such market
factors as the level of interest rates, competition, consumer preferences and
the availability of funds. AMLs pose credit risks somewhat greater than the risk
inherent in fixed rate loans primarily because, as interest rates rise, the
underlying payments of the borrower rise, increasing the potential for default.
Under the Community Reinvestment Act, Charter Federal is required, as are
other banks and thrifts, to lend to all segments of its market areas to include
low to moderate income and minorities. In an effort to improve its lending to
low to moderate income and minority individuals, the Bank implemented its
Affordable Housing Loan Program during the fiscal year ended June 30, 1995.
Loans under this program have a maximum LTV of 95% (with no private mortgage
insurance requirement), terms up to 30 years, maximum loan amount of $50,000, a
discounted rate and no closing cost, with less stringent debt to income
qualifying guidelines and downpayment restrictions. The program is designed to
target low to moderate income and/or minorities who desire to buy single family,
owner occupied dwellings and make home ownership easier. Maximum household
income must be equal to or less than $30,000 to qualify for this program.
All of Charter Federal's mortgage lending is subject to prescribed loan
origination procedures, including the requirement of fire and casualty
insurance. Detailed loan applications are submitted and property valuations by
Charter Federal and independent appraisers are required. In addition, loans must
be approved by various levels of management or by a committee of the board of
directors depending on the loan amount.
Interest rates and loan origination fees charged on loans originated by
Charter Federal are generally competitive with other thrift institutions and
mortgage originators in its general market areas.
"Due-on-sale" clauses are an important means of increasing the rate of
payoffs on existing fixed-rate mortgage loans. Since 1975, Charter Federal's
fixed-rate first mortgages have customarily included a "due-on-sale" clause
which is a provision giving Charter Federal the right to declare a loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the real property subject to the mortgage and the loan
is not repaid. When a loan is to be assumed, Charter Federal is actively
enforcing such "due-on-sale" clauses in its mortgage contracts for the purpose
of originating and underwriting a new loan.
In 1991, in response to an increase in refinancing applications, the
management of the Bank implemented a mortgage loan modification program as a
means of maintaining Charter Federal's existing customer base. Under the terms
of the program, borrowers may refinance existing mortgages at current market
rates by paying a fee of 1% of the outstanding balance of the loan with a $500
minimum, and agreeing to reduce the remaining term of the loan to 15 years or
less without being required to submit a new application or appraisal.
CONSUMER LOANS. In addition to mortgage lending, the Bank offers consumer
loans (e.g., for cars, home improvements, boats and certain other personal
property) and equity lines of credit. Charter Federal has emphasized the
origination of consumer loans as part of its operating strategy because such
loans have shorter terms than mortgages, provide for higher interest rates and
yields and have maturities that more closely match the liabilities funding them.
Individual consumer loans involve greater credit risk than single-family
mortgage loans; however, the risk is in smaller increments. At June 30, 1995,
Charter Federal had $94.2 million in consumer loans or 22.9% of total loans.
CONSTRUCTION LENDING. Charter Federal makes nonspeculative end user
construction/ permanent loans for single-family residences and commercial
properties. Additionally, Charter Federal makes speculative construction loans
on one to four family dwellings with a term not to exceed one year, on a limited
basis, to builders approved by reputable title insurance companies.
Construction/ permanent single-family residential loans secured by
owner-occupied properties in the Bank's portfolio generally have an initial
construction term of six months and automatically convert to permanent
residential mortgage loans upon completion of the construction phase. At June
30, 1995, the Bank had $9.2 million in construction loans outstanding, an
increase from $6.4 million at June 30, 1994. The largest construction loan
outstanding on June 30, 1995 had a balance due of $417,000.
D-5
<PAGE> 165
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE-PERMANENT AND
CONSTRUCTION LENDING. Prior to December 1989, Charter Federal provided
construction loans for multi-family residences and for commercial and industrial
properties including office buildings, warehouses and special purpose
properties.
Prior to December 1989, Charter Federal also engaged in commercial and
multi-family real estate lending. Commercial and multi-family real estate loans
in Charter Federal's portfolio are generally secured by income-producing
properties. During the period in which the Bank engaged in such lending, loans
were generally made with balloon terms of five to ten years and adjustable rates
of interest which, in some cases, were capped.
Construction, multi-family and commercial real estate financing involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate. In originating these loans, Charter Federal
considered, among other things, the reputation of the borrower or developer,
cash flow projections and independent appraisals. Loans of these types currently
in the Bank's portfolio, the majority of which were originated prior to 1989 are
located in the following states: Tennessee, Virginia, North Carolina, Louisiana,
Georgia, South Carolina and Mississippi. At June 30, 1995, the Bank had $3.6
million, or .9%, of total loans in multi-family residential loans and $44.2
million or 10.7% of total loans in commercial real estate loans. The largest
multi-family loan outstanding had a balance of $919,000 and the largest
commercial real estate loan outstanding, consisting of a loan secured by a
hotel, had a balance of $6.5 million at June 30, 1995.
The Bank anticipates engaging on a limited basis in commercial lending for
middle market businesses within its market areas. Such commercial lending will
be limited in amounts and concentrations.
The following table sets forth the Bank's loan originations and loan
purchases, sales and principal repayments for the periods indicated (excluding
mortgage backed certificates and loans held for sale).
D-6
<PAGE> 166
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period..................................... $300,644 $286,307 $313,567
-------- -------- --------
Mortgage loans originated:
One- to four-family residential....................... 41,382 81,132 39,426
Multi-family and commercial real estate............... 6,908 1,366 37(1)
Construction.......................................... 11,044 7,714 3,564
-------- -------- --------
Total mortgage loans originated.................. 59,334 90,212 43,027
-------- -------- --------
Mortgage loans purchased:
One- to four-family residential.......................... -- 9,901 --
Multi-family real estate................................. -- -- --
-------- -------- --------
Total mortgage loans purchased................... -- 9,901 --
-------- -------- --------
Total mortgage loans originated and purchased.... 59,334 100,113 43,027
-------- -------- --------
Transfer of mortgage loans to foreclosed real estate....... (5,454) (84) (5,644)
Principal repayments..................................... (34,607) (62,563) (55,465)
Sale of loans............................................ (2,067) (23,129) (9,178)
-------- -------- --------
At end of period........................................... $317,850 $300,644 $286,307
======== ======== ========
Consumer loans (gross):
At beginning of period................................... $101,447 $128,611 $122,077
Consumer loans originated............................. 50,999 39,912 68,740
Principal repayments.................................. (58,232) (67,076) (62,206)
-------- -------- --------
At end of period......................................... $ 94,214 $101,447 $128,611
======== ======== ========
</TABLE>
- ---------------
(1) Each of the loans reflected in these amounts was a refinancing of previous
loans funded by the Bank prior to December 1989.
LOAN MATURITY SCHEDULE. The following table sets forth certain information
at June 30, 1995 regarding the dollar amount of loans held for investment
maturing in Charter Federal's portfolio based on their contractual terms to
maturity and rate sensitivity. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
AFTER 3 AFTER 5 AFTER 10
THROUGH 5 THROUGH 10 THROUGH 15
AT YEAR ENDED YEARS YEARS YEARS AFTER 15
JUNE 30, AFTER AFTER AFTER YEARS AFTER
---------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1998 1995 1995 1995 1995 TOTAL
-------- -------- -------- ---------- ---------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
mortgage........ $ 46,463 $ 42,214 $ 36,626 $ 61,514 $ 85,361 $ 20,957 $15,547 $308,682
Real estate
construction(1).. 5,205 -- -- -- -- -- -- 5,205
Consumer.......... 35,500 23,529 13,568 10,951 13,743 (2,500) (577) 94,214
------- ------- ------- ------- ------- ------- ------- --------
Total........... $ 87,168 $ 65,743 $ 50,194 $ 72,465 $ 99,104 $ 18,457 $14,970 $408,101
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
D-7
<PAGE> 167
<TABLE>
<CAPTION>
AT YEAR ENDED
JUNE 30, 1995
--------------------------
FIXED RATE VARIABLE RATE
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Rate sensitivity:
Matures after one year:
Real estate mortgage......................................... $178,127 $84,092
Consumer..................................................... 48,704 10,010
-------- -------
Total..................................................... $226,831 $94,102
======== =======
</TABLE>
- ---------------
(1) Amount is net of loans in process of $3,963,000.
MORTGAGE-BACKED CERTIFICATES. The Bank maintains a portfolio of
mortgage-backed certificates issued or guaranteed by the Federal Home Loan
Mortgage Corporation ("FHLMC"), Government National Mortgage Association
("GNMA") or Federal National Mortgage Association ("FNMA"), and certain other
mortgage-backed certificates. Such securities may be purchased with fixed or
adjustable rates of interest and with varying terms to maturity. Such securities
are beneficial to the Bank's risk-based capital position because the risk
weighting is 20% for certain mortgage-backed certificates as compared to 50% for
residential mortgage loans. At June 30, 1995, Charter Federal's investment in
mortgage-backed certificates totaled $281.1 million ($131.8 million of which
carried adjustable rates of interest) as compared to $259.2 million ($110.5
million of which carried adjustable rates of interest) at June 30, 1994. The
adjustable interest rate mortgage-backed certificates also contribute to the
Bank's ability to respond to changes in interest rates. The market value of the
Bank's investment in such securities at June 30, 1995 was $281 million.
The following table sets forth the Bank's portfolio of mortgage-backed
certificates by type and dollar amount at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed certificates:
FHLMC-Participation Certificates ("PC").................. $ 129,456 $ 126,585 $ 97,618
FHLMC & FNMA-Balloon..................................... 66,361 67,788 33,016
FNMA Certificates........................................ 55,833 37,831 17,810
GNMA Certificates........................................ 29,228 26,643 39,301
Other securities......................................... 234 317 612
-------- -------- --------
Total................................................. $ 281,112 $ 259,164 $ 188,357
======== ======== ========
</TABLE>
NON-PERFORMING AND CLASSIFIED ASSETS
NONPERFORMING ASSETS. The Bank's nonperforming assets include (i)
nonperforming loans (loans 90 days or more delinquent and restructured loans
that have not yet demonstrated a sufficient payment history to warrant returning
to a performing status) and leases and (ii) REO, net of any allowances (real
estate owned through foreclosure or deed in lieu of foreclosure and loans deemed
in substance foreclosure ("ISF")). At June 30, 1995, the Bank had nonperforming
assets of $19.6 million consisting of $6.3 million of loans that were non
accrual loans.
D-8
<PAGE> 168
The following tables reflect the Bank's improvement in asset quality and
collections for the past two years.
<TABLE>
<CAPTION>
AT JUNE 30, 1995
-----------------------------------
NUMBER OF
LOANS AMOUNT % OF TOTAL
--------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans delinquent for:
30 to 59 days.............................................. 196 $3,415 .8%
60 to 89 days.............................................. 44 1,526 .4
90 or more days............................................ 73 2,425 .6
--- ------ ----
Total................................................... 313 $7,366 1.8%
=== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1994
-----------------------------------
NUMBER OF
LOANS AMOUNT % OF TOTAL
--------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans delinquent for:
30 to 59 days.............................................. 237 $4,484 1.1%
60 to 89 days.............................................. 38 527 0.2
90 or more days............................................ 81 3,266 0.8
--- ------ ----
Total................................................... 356 $8,277 2.1%
=== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Non-accruing(1)............................................. $ 6,320 $ 3,266 $10,512
Accruing, delinquent for 90 days or more(2)................. -- -- --
Trouble debt restructurings(3).............................. 6,314 3,727 --
Other non-performing assets(4).............................. 7,014 5,641 7,917
------- ------- -------
Total.................................................... $19,648 $12,634 $18,429
======= ======= =======
Non-performing assets to total assets....................... 2.62% 1.72% 2.72%
</TABLE>
- ---------------
(1) As of June 30, 1995, approximately $98,000 in interest income would have
been recorded in the period ended June 30, 1995 for these loans if they had
been current in accordance with the terms of the note and had been
outstanding throughout the period or since origination, if held for part of
the period. For the year ended June 30, 1995, interest income from these
loans was included in net income only if actually received by the Bank and
collection of principal was not in doubt.
(2) The Bank reserves all accrued interest on loans greater than 90 days
delinquent.
(3) Approximately $664,000 in interest income would have been recorded in the
year ended June 30, 1995 for all TDRs if they had been current in accordance
with their original terms and had been outstanding throughout the period or
since origination, if held for part of the period. For the year ended June
30, 1995, $518,000 in interest income from these loans was included in net
income.
(4) Consists of real estate owned, as acquired in settlement of loans net of
allowances for losses, delinquent direct finance leases, receivables for
terminated leases and repossessed vehicles net of allowances for losses. See
Note 9 of the "Notes to Consolidated Financial Statements" for an analysis
of real estate owned contained under Item 8 of this report
From 1989 through 1991, the Bank experienced declines in asset quality. The
amount of nonperforming assets reached its highest quarter-end level at $31.02
million of total assets at June 30, 1990. At June 30, 1995, nonperforming assets
totaled $19.6 million, a reduction of approximately 36.8% from the highest level
in June 1990. As a result of Charter Federal's primary emphasis on one- to
four-family mortgage and consumer
D-9
<PAGE> 169
lending in its market areas, improved underwriting controls, and centralized
collection efforts, the greatest exposure to further loan losses rests with the
remaining nonperforming commercial and multi-family real estate loans (and total
REO (net)) originated prior to January, 1990 that represent 2.52% of total
assets and 96% of nonperforming assets. Nonperforming one- to four-family
mortgage and consumer loans represent .10% of total assets and 4% of
nonperforming assets.
The following table sets forth the volume of nonperforming one- to
four-family residential mortgage loans, consumer and other loans (e.g. sales
finance and other loans), and commercial and multi-family real estate loans at
period end for the last five quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1995 1995 1994 1994 1994
-------- --------- ------------ ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
One- to four-family residential
mortgage......................... $ 410 $ 599 $ 499 $ 462 $ 557
Consumer and other loans........... $ 360 $ 382 $ 243 $ 273 $ 436
Commercial and multifamily real
estate loans..................... $ 11,864 $ 9,130 $9,159 $ 9,259 $6,000
</TABLE>
A substantial portion (88%) of Charter Federal's total nonperforming assets
consist of three substandard commercial loans (See "Classified Assets") and five
commercial loans classified as in-substance foreclosure ("ISF"). Commercial real
estate loans represent a relatively small and declining portion of Charter
Federal's assets, but a substantial portion of nonperforming assets. Charter
Federal discontinued this type of lending in December 1989 and actively managed
its commercial loan portfolio to reduce its nonperforming loans. In 1994 Charter
resumed, on a limited basis, commercial lending concentrating on loans of
$1,000,000 or less only in its market areas. The largest commercial loan made
during 1995 had a balance of $757,000 as of June 30, 1995.
At June 30, 1995, the Bank's nonperforming commercial and multi-family real
estate loans consisted of loans to five borrowers. Those with outstanding
balances exceeding $1,000,000 at June 30, 1995, consisted of the following:
- A $3.8 million loan originated in 1989 and secured by a retail/office
center in Charlotte, North Carolina with 51,687 total square feet. At
June 30, 1995, the retail complex was 73% leased and the office complex
was 68% leased. The cash flow from the property will not support the loan
payment. The borrower has supplemented payments from other sources, and
although the loan has never been delinquent, it is classified because of
the slow leasing of available space resulting in insufficient collateral
value. The borrower's tax returns and financial statements reflect
sufficient income and net worth to fund rental income shortfalls. This
combined with his excellent payment history provide good guaranty
strength.
- A $3.28 million loan secured by a 91-room motel in Hilton Head, South
Carolina. Charter Federal financed the construction of this motel with an
original loan of $3.3 million in 1988. Following the completion of the
motel, local economic conditions constrained cash flow, but as a result
of subsequently increased occupancy levels and room rates, Charter
Federal restructured the original loan as two separate loans on September
8, 1992, including a $2.65 million loan, which is included in
restructured loans, and a $644,000 loan which has been charged off and is
being tracked to pursue collection in the future. This restructuring
permitted the $2.65 million loan to be restored to an accruing status in
January, 1994. Under the restructured payment plan, the borrower is
making loan payments in accordance with the terms of the agreement. The
balance on this loan at June 30, 1995 was $2,638,339. The average
occupancy for the first quarter of 1995 was 49.1% as compared to 47.6% in
1994. The average daily rate was $39.86 as compared to $44.21 in 1994.
- A $3.95 million loan originated in 1987 and secured by two motels. One in
Charlotte, North Carolina has 81 rooms and the other in Charleston, South
Carolina has 89 rooms. The average occupancy for the first quarter of
1995 for the Charlotte property was 118.1% as compared to 95.6% in 1994.
The
D-10
<PAGE> 170
average daily rate was $23.28 as compared to $21.15 in 1994. The average
occupancy for the first quarter of 1995 (latest date available) for the
Charleston property was 46.6% as compared to 46.0% in 1994. The average
daily rate was $33.54 as compared to $32.78 in 1994. Because of a
dramatic increase in the interest rate on the adjustable rate mortgage
and inadequate cash flow to support the new payment, Charter restructured
the loan in September 1994 to a three year adjustable with a beginning
rate of 7.875%. Prior to the restructuring, the loan was never more than
30 days delinquent and since the restructuring has been consistently
current.
REAL ESTATE OWNED. REO consists of real estate acquired through
foreclosure or deed in lieu of foreclosure or loans that are considered
in-substance foreclosure ("ISF") under accounting and regulatory guidelines.
Real estate that served as security for a loan and that becomes REO upon a
default of such loan is recorded at fair market value. After foreclosure, the
property is recorded at the lower of the fair market value on the date of
foreclosure or fair market value less selling costs. The Bank also maintains an
REO allowance to provide for losses that may result from unforeseen market
changes after the property is transferred to REO. REO properties are analyzed
periodically to determine the adequacy of the REO allowance. From time to time,
if the Bank determines that it will be unable to realize the full book value of
a particular REO property as a result of a subsequent appraisal, executed
contract of sale or other appropriate indicator of fair value, a write down is
recorded to reflect the reduced value estimation and is charged to the REO
allowance.
At June 30, 1995, the Bank's total REO was $7.5 million and consisted of 16
properties with most located in Virginia, North Carolina, and Tennessee. Six
properties are located in Louisiana. Of the total REO amount, $6.8 million was
included in REO as ISF. The REO loss allowances of approximately $500,000
reduces net REO to $7.0 million. At June 30, 1995, the REO properties with
recorded values in excess of $1,000,000 were as follows:
- An office/warehouse complex in Bristol, Tennessee which serves as
security for a $3.98 million loan originated in 1986. The loan is
recorded as in-substance REO, at its fair market value of $3.47 million,
because of inadequate cash flow to support debt service. The adjustable
loan recently experienced a dramatic rate increase for which adequate
cash flow is not available to meet the higher payment. The borrower has
limited personal resources so management is currently considering
restructuring the loan. Loan payments were current at June 30, 1995. The
property is currently 97% occupied.
- A $2.98 million loan originated in 1988 and secured by a retail/office
center located in Charlotte, North Carolina. The center has 56,611 total
square feet of retail space, 77% of which is leased. Approximately 45% of
lease revenues are derived from one tenant that occupies 19,100 square
feet of the total retail space of the center. Charter has proceeded with
foreclosure and now owns the property. A court appointed receiver has
been managing the property for Charter since early 1995. The loan is
recorded as in-substance REO at its fair market value of $2.18 million.
Although improved collection efforts, improved documentation and
underwriting and limited origination of commercial and multi-family real estate
lending have been implemented, nonperforming assets continue to have an adverse
effect on the Bank, and there can be no assurance that the market and economic
conditions in the Bank's market areas will not worsen and result in a further
increase in the level of nonperforming assets in future periods. Any such
developments could further adversely affect the Bank's operations by requiring
additional provisions for losses, decreased accrual of interest income and
increased noninterest expenses as a result of the allocation of resources to the
management of nonperforming assets and increased REO expenses.
LETTERS OF CREDIT. In 1984 and 1985, Charter Federal entered into five
separate agreements to act as a participating credit enhancer of five separate
municipal revenue bond issues in Oklahoma (three issues), Florida (one issue)
and Kansas (one issue). See Note 17 to the Notes of the "Consolidated Financial
Statements" under Item 8 of this report. Under each of these arrangements, the
Bank issued a letter of credit to guarantee repayment of the principal amount
due under the bonds, plus its share of the interest due thereunder for a maximum
period of 185 days. Commonwealth Federal Savings Association of Houston, Texas
("Commonwealth") was the lead participant in each of those transactions. In
1991, the RTC was appointed receiver for Commonwealth.
D-11
<PAGE> 171
In January 1993, Charter Federal consummated a transaction with the RTC
pursuant to which Charter Federal was released from any further obligations as a
credit enhancer on the bond issues for the three Oklahoma projects in exchange
for assuming the RTC's obligations as a credit enhancer on the bond issues for
the Florida and Kansas projects, making a cash payment to the RTC of $2.5
million.
As of July 22, 1994, Charter Federal sold its Letter of Credit position
relating to the Florida project. The Bank's loss exposure with respect to the
Letter of Credit totaled $14,093,000, including original principal and projected
maximum interest shortfall. The loss totaled $3,148,000 which was totally
reserved for at June 30, 1994 and no further losses resulted from this
transaction. As part of the transaction, this letter of credit was canceled and
$20.2 million of securities pledged by Charter Federal to back the Letter of
Credit were released.
As of June 1, 1995, Charter Federal sold its Letter of Credit position
relating to the Kansas project. The exposure relative to the Letter of Credit
totaled $6,678,000 including original principal and projected maximum interest
shortfall. The loss totaled $1,367,000 which was totally reserved for at June
30, 1994 and no further losses resulted from this transaction. As part of the
transaction, this Letter of Credit was cancelled and $10.7 million of securities
pledged by Charter Federal to back the Letter of Credit were released.
As a result of these two transactions, the Bank's risk-based capital
requirement has been reduced by approximately $1.5 million and classified assets
have been reduced by approximately $18.8 million. (See "Classified Assets")
DIRECT FINANCE AUTOMOBILE LEASES. Prior to 1990, the Bank was actively
involved in the direct financing of automobile leases. In 1990, the company
responsible for the majority of the Bank's direct finance automobile leases
experienced financial difficulty. In order to protect its investment in those
loans, Charter Federal assumed ownership of the leases. In September 1990,
approximately 67% of the direct finance automobile lease portfolio was sold with
recourse and, as a result, $1.09 million was provided as an escrow for possible
losses. The $1.09 million escrow was the maximum exposure for Charter Federal on
the leases sold. At June 30, 1995, the escrow account had been drawn down to
zero. At June 30, 1995, the Bank had no net investment in direct finance
automobile leases with all remaining leases being paid in full or charged off.
See Note 7 to the "Notes to Consolidated Financial Statements" under Item 8 of
this report.
CLASSIFIED ASSETS
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser quality as
"substandard", "doubtful" or "loss" assets. Assets which do not currently expose
the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are designated "special
mention".
A classification of "substandard" or "doubtful" requires the establishment
of general allowances for loan losses in an amount deemed prudent by management.
Assets classified as "loss" require either a specific allowance for losses equal
to 100% of the amount of the asset so classified or a charge off of such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can require the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement requires that institutions have effective systems and controls to
identify, monitor and address asset quality problems; have analyzed all
significant factors that affect the collectability of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
The Bank regularly reviews the loans in its portfolio and other assets to
determine whether any require classification in accordance with applicable
regulations. At June 30, 1995, the Bank had $20.8 million or 2.77% of its total
assets that required classification, $16.6 million is "substandard", $3.4
million is "doubtful", and $410,000 is "loss". Real estate acquired in
settlement of loans classified as "substandard", "doubtful", and
D-12
<PAGE> 172
"loss" at June 30, 1995 totaled $7.5 million, of which $7.4 million is
"substandard", and $108,000 is "loss". At June 30, 1995, Charter Federal had
$409,000 additional assets which were classified in excess of the amount of the
nonperforming assets.
As a result of Charter Federal's renewed emphasis on one- to four-family
mortgage and consumer lending in its market areas, improved underwriting
controls and centralized collection efforts, the greatest exposure to further
loan losses rest with the remaining classified commercial and multi-family real
estate loans and REO that represent 2.60% of total assets. Classified one- to
four-family mortgage and consumer loans represent only .18% of total assets.
A substantial portion (91%) of Charter Federal's total classified assets
(i.e., nonperforming and monitored loans) is made up of nine commercial and
multi-family real estate loans and REO properties.
MONITORED LOANS. In addition to tracking its nonperforming and adversely
classified assets, the Bank monitors its entire loan portfolio (by overall
statistical measures and, in some cases, by loan-by-loan analysis) in an effort
to identify loans that have the potential to become problem assets in the
future. At June 30, 1995, the Bank monitored several loans that were between 60
and 89 days delinquent or that were current but showed some signs of weakness
(e.g., cash flow problems, collateral value deterioration or borrower or
guarantor financial weaknesses). Those special mention loans are not included in
nonperforming loans. The following loan is classified by the Bank as "special
mention" due to delinquent status (less than 90 days). The loan is not included
as nonperforming because sufficient progress in curing the delinquency and
establishing a consistent pay history justifies returning the loan to a
performing status.
- A $1.6 million loan originated in 1985 and secured by a 61-room motel in
Savannah, Georgia. The average occupancy for the first quarter of 1995
was 70.7% as compared to 76.4% in 1994. The average daily rate was $37.09
as compared to $33.66 in 1994. The owner is abiding by the loan
modification agreement entered into in July, 1991. As of July, 1991, the
loan was approximately eight months delinquent. However, since 1991,
progress has been made to reduce the delinquent amount due to less than
three months under agreements with the borrower.
LOSS EXPERIENCE. The allowance for loan losses is available to absorb
future losses that could be incurred from the current loan portfolio. The
allowance is increased by provisions charged to operations and decreased by
charge-offs, net of recoveries. Management evaluates the adequacy of the
allowance at least quarterly using the classification categories discussed under
Classified Assets. In establishing the appropriate classification for specific
assets, management takes into account the estimated value of underlying
collateral, the borrower's ability to repay, the borrower's payment history and
the current delinquent status, among other factors. The remaining loan portfolio
is evaluated for potential loss exposure by examining the growth and composition
of the portfolio, historical loss experience, current delinquency levels,
industry concentration and general economic conditions.
The allowance for losses on REO is evaluated continuously. Additional
allowances are established when the carrying value exceeds fair market value
less estimated selling costs.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for potential losses inherent in the loan portfolio.
However, there are additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because those
risks include general economic trends as well as conditions affecting individual
borrowers, management's judgment of the allowance necessary is approximate. The
allowance also is subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peer
institutions identified by the regulatory agencies. The OTS last examined the
Bank during November 1994 and did not recommend any material changes to the
Bank's allowance for loan losses.
At June 30, 1995, the allowance for losses was $5.0 million or 39.7% of
nonperforming loans and leases compared to $8.4 million or 119.58% at June 30,
1994. Management considers the allowance for losses to be adequate based upon
its current judgment and evaluation and analysis of such portfolios. However, no
assurance can be given that the ongoing evaluation of such portfolios, in light
of economic conditions and other
D-13
<PAGE> 173
prevailing factors, would not require significant future additions to the
allowance which, in turn, would adversely impact the results of operations of
the Bank.
The Bank's loss experience on its loan portfolio for the periods shown is
summarized in the following table:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable, net at end of period..................... $401,808 $388,016 $402,828
Net charge-offs............................................ 5,310 4,138 4,756
Percent delinquent 61 days or more at end of period........ .98% .98% 2.80%
Total dollar amount foreclosed............................. $ 5,454 $ 84 $ 5,644
Percent foreclosed......................................... 1.36% .02% 1.40%
</TABLE>
The following table reflects the activity in the allowance for losses by
type of asset, for the periods indicated. However, the entire allowance for
losses remains available for losses from any asset type.
<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........... $ 8,427 $11,232 $12,938 $13,218 $ 3,157
Charge-offs:
Loans:
Commercial and multi-family real
estate............................ (746) (3,407) (1,680) -- --
One- to four-family residential
mortgage.......................... (32) (12) (20) (432) (63)
Consumer............................... (520) (861) (595) (385) (698)
Letters of credit...................... (4,515) -- (2,500) -- --
Leases and assets derived from
termination of leases and contingent
losses.............................. (42) (828) (3,646) (1,385) (481)
Recoveries:
Loans:
Commercial and multi-family real
estate............................ 422 -- -- -- --
One- to four-family residential
mortgage.......................... -- 40 3 12 6
Consumer............................... 81 102 36 42 47
Leases and assets derived from
termination of leases and contingent
losses.............................. 22 88 257 750 135
------- ------- ------- ------- -------
Net charge-offs.......................... (5,330) (4,878) (8,145) (1,351) (1,054)
------- ------- ------- ------- -------
Additions charged to operations:
Provision for loan losses.............. 1,975 2,150 5,087 (1,011) 9,791
------- ------- ------- ------- -------
Provision for direct finance lease
losses
and assets derived from termination
of leases........................... (51) (77) 1,352 2,082 1,324
------- ------- ------- ------- -------
1,924 2,073 6,439 1,071 11,115
------- ------- ------- ------- -------
Balance at end of period................. $ 5,021 $ 8,427 $11,232 $12,938 $13,218
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans and leases
outstanding during the period.......... 1.33% 1.21% 1.97% 0.31% 0.23%
Ratio of allowance for loan and lease
losses to nonperforming loans and
leases................................. 39.74 119.58 105.71 57.22 59.57
Ratio of allowance for loan and lease
losses to outstanding loans and
leases................................. 1.21 2.10 2.79 2.95 3.12
Ratio of allowance for loan and lease
losses to nonperforming assets......... 25.55 66.70 60.95 49.85 47.50
</TABLE>
D-14
<PAGE> 174
The following table sets forth the allocation of the allowance for losses
by asset category at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ----------------------
% OF LOANS % OF LOANS % OF LOANS
IN CATEGORY IN CATEGORY IN CATEGORY
TO TOTAL TO TOTAL TO TOTAL
OUTSTANDING OUTSTANDING OUTSTANDING
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ------------ ------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family
residential mortgage...... $ 273 65.62% $ 268 62.12% $ 346 54.92%
Commercial and multi-family
real estate............... 4,212 11.72 3,242 12.65 6,820 14.08
Consumer..................... 536 22.66 541 25.23 578 31.00
------ ------ ------ ------ ------- ------
5,021 100.00% 4,051 100.00% 7,744 100.00%
====== ====== ======
Letters of credit.............. -- 4,305 2,600
Leases and related assets...... -- 71 888
------ ------ -------
Total..................... $5,021 $8,427 $11,232
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------
1992 1991
---------------------- ----------------------
% OF LOANS % OF LOANS
IN CATEGORY IN CATEGORY
TO TOTAL TO TOTAL
OUTSTANDING OUTSTANDING
AMOUNT LOANS AMOUNT LOANS
------- ------------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans:
One- to four-family residential mortgage........ $ 874 55.29% $ 2,151 63.96%
Commercial and multi-family real estate......... 5,874 16.69 5,499 17.96
Consumer........................................ 765 28.02 437 18.08
------- ------ ------- ------
7,513 100.00% 8,087 100.00%
====== ======
Letters of credit................................. 2,500 3,700
Leases and related assets......................... 2,925 1,431
------- -------
Total........................................ $12,938 $13,218
======= =======
</TABLE>
INVESTMENT ACTIVITIES
Federally chartered savings institutions are authorized to invest in
various types of liquid assets, including U.S. Government obligations and
securities of various agencies, certificates of deposit issued by insured banks
and savings institutions, banker's acceptances, and federal funds. Subject to
various restrictions, federally chartered savings institutions may also invest a
portion of their assets in commercial paper and corporate debt securities and in
mutual funds, the assets of which conform to the investments that such an
institution is authorized to make directly.
Charter Federal's portfolio of investment securities provides a source of
liquidity when loan demand exceeds funding capability, provides funding for
unexpected savings withdrawals, serves as a vehicle for interest rate risk
management and provides a source of income.
The Bank also deposits excess funds in jumbo certificates of deposit
offered by insured financial institutions. At June 30, 1995, the Bank did not
have any jumbo certificates of deposit at other institutions.
D-15
<PAGE> 175
The following table sets forth information summarizing the composition of
Charter Federal's investment securities at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL YIELD COST TOTAL YIELD COST TOTAL YIELD
--------- ----- ----- --------- ----- ----- --------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Held for investment:
U. S. government and agency
obligations....................... $ 8,230 38.0% 5.4% $ 8,287 15.1% 5.4% $47,036 89.3% 6.8%
FHLB stock.......................... 5,771 26.7 7.3 5,771 10.5 6.0 5,546 10.5 6.0
Other............................... 78 .4 -- 81 0.1 -- 76 0.2 --
------- ----- --- ------- ----- --- ------- ----- ---
Total held for investment..... $14,079 65.1 6.1% 14,139 25.7 5.6% -- -- --%
------- ----- --- ------- ----- --- ------- ----- ---
Available for sale:
U. S. government and agency
obligations(1).................... 7,558 34.9 6.4 40,888 74.3 6.5 -- -- --
------- ----- --- ------- ----- --- ------- ----- ---
Total investment
securities(2)............... $21,637 100.0% 6.2% $55,027 100.0% 6.3% $52,658 100.0% 6.7%
======= ===== === ======= ===== === ======= ===== ===
Interest bearing deposits(3).......... $13,414 100.0% 5.8% $ 4,536 100.0% 6.2% $ 6,158 87.9% 3.2%
Federal funds sold.................... -- -- -- -- -- -- 850 12.1 3.3
------- ----- --- ------- ----- --- ------- ----- ---
Total of interest bearing
deposits and federal funds
sold........................ $13,414 100.0% 5.8% $ 4,536 100.0% 6.2% $ 7,008 100.0% 3.2%
======= ===== === ======= ===== === ======= ===== ===
</TABLE>
- ---------------
(1) The securities are available for sale. No securities are held in a trading
account as of June 30, 1995.
(2) Total investment securities had a market value of $21,407 at June 30, 1995
and $54,469 at June 30, 1994. See Note 4 of the "Notes to Consolidated
Financial Statements" contained under Item 8 of this report.
(3) Includes interest-bearing cash, restricted cash and certificates of deposit.
The following table sets forth the contractual maturity of investment
securities as of June 30, 1995:
Securities Available for Sale as of June 30, 1995:
<TABLE>
<CAPTION>
AMORTIZED 1995
COST YIELD
---------- -----
<S> <C> <C>
Due in one year or less.................................................. $ -- --%
Due after one year through five years.................................... 2,007,000 6.3
Due after five years through ten years................................... 5,551,000 6.5
--------- ----
$7,558,000 6.4%
========= ====
</TABLE>
Securities Held For Investment as of June 30, 1995:
<TABLE>
<S> <C> <C>
Due in one year or less.................................................. $ -- --%
Due after one year through five years.................................... 8,230,000 5.4
Due after five years through ten years................................... 78,000 --
---------- -----
$8,308,000 5.4%
========= ====
</TABLE>
FHLB stock with an amortized cost of $5,771,000 has been excluded from the
maturity table listed above because it does not have a contractual maturity.
MARKETABLE EQUITY SECURITIES. The marketable equity securities in the
Bank's investment portfolio consisted of investments in mutual funds which
invest solely in U.S. Government and agency securities and are carried at the
lower of their aggregate cost or market. Unrealized losses on these securities
were deducted from stockholders' equity in the Bank's Statement of Financial
Condition through June 30, 1991. During fiscal year 1992, management of Charter
Federal determined that the portfolio was available for sale and unrealized
losses were deducted from net income. The Bank sold the portfolio during 1993
and realized a $592,000 gain.
D-16
<PAGE> 176
DEPOSITS
GENERAL. Charter Federal offers several types of transaction, savings and
investment accounts, including certificates of deposit ("CDs"), money market
deposit accounts ("MMDA's"), negotiable order of withdrawal ("NOW") accounts and
Christmas club accounts. At June 30, 1995, the Bank had no brokered deposits.
The following table reflects the maturity of jumbo certificates:
<TABLE>
<CAPTION>
MATURITY DATE
--------------------------------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
July 1, 1995 -- September 30, 1995................................... $ 10,533
October 1, 1995 -- December 31, 1995................................. 15,469
January 1, 1996 -- March 31, 1996.................................... 12,114
April 1, 1996 -- June 30, 1996....................................... 10,221
After July 1, 1996................................................... 12,490
-------
Total.............................................................. $ 60,827
=======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $60,827,000 at June 30, 1995.
The following table sets forth principal types of deposit accounts offered
by Charter Federal at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------
WEIGHTED
AVERAGE RATES
AT JUNE 30, 1995 1995 1994
---------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT %
-------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Passbook Accounts................ 3.00% $ 18,654 3.55% $ 21,161 3.86%
Other Savings Accounts........... 3.09% 31,640 6.02 67,054 12.23
NOW Accounts..................... 2.03% 19,820 3.78 20,203 3.69
Non-interest Bearing Checking.... -- 14,996 2.85 10,166 1.85
Money Market Deposit Accounts.... 3.75% 17,144 3.26 29,146 5.32
-------- ------- -------- -------
$102,254 19.46 $147,730 26.95
-------- ------- -------- -------
Certificates:
2.00% to 3.99% $ 4,960 .94 $147,842 26.97
4.00% to 5.99% 272,023 51.78 236,120 43.08
6.00% to 7.99% 143,950 27.40 9,468 1.73
8.00% to 9.99% 1,360 .26 2,909 .53
10.00% to 11.99% 853 .16 2,938 .54
12.00% to 13.99% -- -- 1,119 .20
-------- ------- -------- -------
Total Certificates............... 423,146 80.54 400,396 73.05
-------- ------- -------- -------
Total Deposits................... $525,400 100.00% $548,126 100.00%
======== ======= ======== =======
</TABLE>
D-17
<PAGE> 177
CERTIFICATES OF DEPOSIT. The following table shows maturity date
information for the certificates of deposit accounts by rate categories at June
30, 1995:
<TABLE>
<CAPTION>
AMOUNT
--------------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ------------------------------------- --------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
2.00% to 3.99%....................... $ 4,960 $ -- $ -- $ -- $ 4,960
4.00% to 5.99%....................... 222,630 38,292 3,941 7,160 272,023
6.00% to 7.99%....................... 68,787 19,376 50,319 5,468 143,950
8.00% to 9.99%....................... 1,212 100 11 37 1,360
10.00% to 11.99%..................... 782 -- -- 71 853
12.00% to 13.99%..................... -- -- -- -- --
-------- ------- ------- ------- --------
$ 298,371 $57,768 $54,271 $12,736 $423,146
======== ======= ======= ======= ========
</TABLE>
SAVINGS DEPOSIT ACTIVITY. The following table sets forth the deposit
activities at Charter Federal during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1995 1994 1993
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits.................................................. $ 791,534 $714,420 $692,120
Withdrawals............................................... 790,291 754,671 755,841
-------- -------- --------
Excess withdrawals........................................ 1,243 (40,251) (63,721)
Interest credited......................................... 17,397 15,426 20,714
Sale of deposits.......................................... (41,366) -- --
-------- -------- --------
Net savings (deposit) withdrawals......................... $ (22,726) $(24,825) $(43,007)
======== ======== ========
</TABLE>
BORROWINGS
As a member of the Federal Home Loan Bank ("FHLB") of Atlanta, Charter
Federal is authorized to apply for advances from the FHLB on the security of
FHLB stock owned by Charter Federal and certain of its residential mortgages and
other assets, provided that certain credit standards are met. The FHLB
prescribes the acceptable uses for funds advanced under each of its credit
programs which differ according to interest rate, maturity date and amount
limitations. At June 30, 1995, advances to Charter Federal from the FHLB
amounted to $104,500,000. Other short-term borrowings at year end totaled
$63,614,000. (See Notes 12 and 13 of the "Notes to Consolidated Financial
Statements" contained under Item 8 of this report.)
The following table sets forth certain information regarding short-term
borrowings and advances by Charter Federal at or during the periods indicated:
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Weighted average rate(1) paid on:
Securities sold under agreements to repurchase.................... 5.98% 4.55% --%
FHLB advances and other borrowings................................ 4.63% 4.63% 3.54%
</TABLE>
D-18
<PAGE> 178
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase........... $ 63,614 $ 32,744 $ 34,262
FHLB advances and other borrowings....................... $104,500 $104,500 $104,500
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase........... $ 41,696 $ 21,488 $ 14,249
FHLB advances and other borrowings....................... $104,500 $104,500 $104,500
Approximate weighted average rate(1) paid on:
Securities sold under agreements to repurchase........... 5.69% 3.62% 3.30%
FHLB advances and other borrowings....................... 4.55% 4.28% 4.39%
</TABLE>
- ---------------
(1) The weighted average rate was computed using the average daily balance and
total interest expense.
ASSET/LIABILITY MANAGEMENT
Charter Federal's asset/liability management discussion is contained in
"Management Discussion and Analysis of Financial Condition and Results of
Operations" under Item 8 of this report.
YIELDS EARNED AND RATES PAID; CERTAIN RATIOS. The following tables set
forth for Charter Federal for the periods and at the dates indicated, the
weighted average yields earned on its interest-earning assets, the
weighted-average interest rates paid on its interest-bearing liabilities and the
yield spread between yields earned and rates paid. The average yield or rate, is
computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Weighted average yield on loan portfolio............................. 8.38% 8.56% 9.09%
Weighted average yield on mortgage-backed certificates portfolio 6.14 5.92 7.35
Weighted average yield on investment portfolio 6.27 6.36 7.19
Weighted average yield on direct finance leases -- 11.54 13.51
Weighted average yield on other interest-earning assets 5.35 3.10 3.03
Weighted average yield on all interest-earning assets 7.39 7.43 8.32
Weighted average rate paid on deposits 4.44 3.87 4.65
Weighted average rate paid on FHLB advances and other borrowings 4.55 4.28 4.39
Weighted average rate paid on other interest-bearing liabilities 5.69 3.62 3.31
Weighted average rate paid on all interest-bearing liabilities 4.53 3.92 4.58
Net yield on average interest-earning assets (1) 3.10 3.67 3.64
</TABLE>
- ---------------
(1) Net interest-earnings divided by average interest-earning assets, with net
interest-earnings equaling the difference between the dollar amount of
interest earned and paid.
D-19
<PAGE> 179
(Continued from previous page)
<TABLE>
<CAPTION>
AT JUNE 30,
1995
-----------
<S> <C>
Weighted average yield on loan portfolio.......................................... 8.44%
Weighted average yield on mortgage-backed certificates............................ 7.08
Weighted average yield on investment portfolio.................................... 6.21
Weighted average yield on direct finance leases................................... --
Weighted average yield on other interest-earning assets........................... 6.00
Weighted average yield on all interest-earning assets............................. 7.80
Weighted average rate paid on deposits............................................ 4.98
Weighted average rate paid on FHLB Advances....................................... 4.63
Weighted average rate paid on other interest-bearing liabilities.................. 5.98
Weighted average rate paid on all interest-bearing liabilities.................... 5.02
Net interest spread............................................................... 2.78
</TABLE>
The following table sets forth certain performance ratios of Charter
Federal for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1995 1994 1993
----- ----- -------
<S> <C> <C> <C>
Return on average assets.......................................... .76% 1.35% (4.78)%
Return on average equity.......................................... 12.31 29.64 (445.67)
Average net worth-to-average assets ratio......................... 6.15 4.56 1.07
Interest rate sensitivity at one year............................. (4.52) 1.26 (29.48)
Dividend payout ratio............................................. 25.46 -- --
</TABLE>
COMPETITION
In its market areas, Charter Federal is subject to intense competition from
a number of local, regional and super-regional banking organizations, along with
other financial institutions and companies that offer financial services, such
as credit unions, industrial loan associations, securities firms, insurance
companies, small loan companies, finance companies, mortgage companies and other
financial service enterprises. Competition among financial institutions is based
upon interest rates offered on deposit accounts, interest rates charged on loans
and other credit and service charges, the quality of services rendered and the
convenience of banking facilities. Additional competition for depositors' funds
comes from issuers and suppliers of U.S. Government securities, private debt
obligations and other investment alternatives for depositors. Many of the Bank's
non-bank competitors are not subject to the same extensive federal regulations
that govern federally-insured banks and thrifts and state regulations governing
state-chartered banks. As a result, such non-bank competitors may have certain
advantages over the Bank in providing certain services. In addition, many of the
financial organizations in competition with Charter Federal have much greater
financial resources than the Bank and are able to offer similar services at
varying costs with greater loan capacities.
REGULATION AND SUPERVISION
GENERAL
The activities of savings institutions, such as the Bank, are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and the Federal Deposit
Insurance Act ("FDI Act"). The Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and
the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan
Bank ("FHLB") System and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
D-20
<PAGE> 180
examinations to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress could have a material adverse impact upon the Bank and its operations.
Certain of the regulatory requirements applicable to the Bank are referred to
below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions set forth in this Form 10-K does
not purport to be a complete description of such statutes and regulations and
their effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the leverage ratio, tangible and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. If the Bank had been subject
to an interest rate risk capital component as of June 30, 1995, the
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Bank's total risk-weighted capital would have been reduced from 14.02% to
12.84%. At June 30, 1995, the Bank met each of its capital requirements, in each
case on a fully phased-in basis.
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
OF OF OF
TANGIBLE TANGIBLE CORE CORE RISK-BASED RISK-BASED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
-------- -------- -------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital -- Tier I................ $ 46,424 6.18% $ 46,424 6.18% $ 46,424 12.80%
SFAS No. 115 adjustment............... (28) -- (28) -- (28) (0.01)
-------- ----- -------- ----- -------- -----
GAAP capital -- Tier 1 (adjusted)..... 46,396 6.18 46,396 6.18 46,396 12.79
General valuation allowance........... -- -- -- -- 4,518 1.25
Non-includable assets................. -- -- -- -- (53) (0.02)
-------- ----- -------- ----- -------- -----
Regulatory capital computed........... 46,396 6.18 46,396 6.18 50,861 14.02
Minimum capital requirement........... (11,269) (1.50) (22,538) (3.00) (29,022) (8.00)
-------- ----- -------- ----- -------- -----
Regulatory capital excess............. $ 35,127 4.68% $ 23,858 3.18% $ 21,839 6.02%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Although the OTS capital regulations require savings institutions to meet a
1.5% tangible capital ratio and a 3% leverage (core) capital ratio, the
prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL
financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to weighted assets of less than 8%, a ratio of Tier I
(core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC has adopted a risk-based deposit
insurance system that assesses deposit insurance premiums according to the level
of risk involved in an institution's activities. An institution's risk category
is based upon whether the institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized" and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the
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<PAGE> 182
deposit insurance fund. Based on its capital and supervisory subgroups, each
Bank Insurance Fund ("BIF") and SAIF member institution is assigned an annual
FDIC assessment rate between 23 basis points for an institution in the highest
category (i.e., well-capitalized and healthy) and 31 basis points for an
institution in the lowest category (i.e., undercapitalized and posing
substantial supervisory concern). The Bank's assessment rate for the fiscal year
ended June 30, 1995 was .26% of deposits. The FDIC has authority to further
raise premiums if deemed necessary. If such action is taken, it could have an
adverse effect on the earnings of the institution.
The FDIC recently proposed to establish a new assessment rate schedule of 4
to 31 basis points for BIF members beginning in the third quarter of 1995. Under
that proposal, approximately 91% of BIF members would pay the lowest assessment
rate of 4 basis points. The FDIC proposed to retain the existing assessment rate
schedule of 23 to 31 basis points applicable to SAIF member institutions. In
announcing the proposed rule, the FDIC noted that the premium differential may
have adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank, could be placed at a substantial disadvantage to BIF
members with respect to pricing of loans and deposits and the ability to achieve
lower operating costs.
Several alternatives to mitigate the effect of the BIF/SAIF premium
disparity have been suggested including, among others, the merger of BIF and
SAIF or the assessment of a one time fee on the deposits held by SAIF members to
recapitalize the SAIF fund. A significant increase in SAIF insurance premiums or
a significant one-time fee to recapitalize the SAIF would likely have on adverse
effect on the operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus and general reserve allowances. An additional amount may be lent, equal
to 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1995, the Bank's limit on loans to one
borrower was $7.7 million. At June 30, 1995, the Bank's largest aggregate
outstanding balance of loans to one borrower consisted of a $7.56 million. All
loans to this borrower were current.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
June 30, 1995, the Bank maintained 89.5% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus
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<PAGE> 183
the amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its regulatory requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. In December 1994,
the OTS proposed amendments to its capital distribution regulation that would
generally authorize the payment of capital distributions without OTS approval
provided the payment does not make the institution undercapitalized within the
meaning of the prompt corrective action regulation. However, institutions in a
holding company structure would still have a prior notice requirement. At June
30, 1995, the Bank was a Tier 1 Bank.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for June 30,
1995 were 9.37% and 4.05% respectively, which exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended June 30, 1995 totaled $157,000.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution) is limited by Sections
23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities such persons control, is governed by
Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans 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. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position and requires certain board approval procedures to
be followed.
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<PAGE> 184
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and an
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies are expected to adopt a proposed rule that proposes asset quality
and earnings standards which, if adopted in final, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in that FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB-Atlanta, whichever is greater. The Bank was in
compliance with this requirement, with an investment in FHLB-Atlanta stock at
June 30, 1995, of $5.8 million. FHLB advances must be secured by specified types
of collateral and may be obtained primarily for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended June 30, 1995, 1994, and 1993, dividends from the FHLB-Atlanta to the Bank
amounted to $402,000, $304,000 and $320,000, respectively. If dividends were
reduced, or interest on future FHLB advances increased, the Bank's net interest
income might also be reduced.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements. The
balances maintained to
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<PAGE> 185
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank. For federal income tax purposes, the Bank reports its
income and expenses using the accrual method of accounting and files its federal
income tax returns on a fiscal year basis. The Bank has been audited by the IRS
for the years up to and including the 1988 tax year. The Bank is subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below.
BAD DEBT RESERVES. Savings institutions such as the Bank which meet
certain definitional tests primarily relating to their assets and the nature of
their business ("qualifying thrifts") are permitted to establish reserves for
bad debts and to make annual additions thereto which additions may, within
specified formula limits, be deducted in arriving at their taxable income.
The Bank's deduction with respect to "qualifying loans" (generally, loans
secured by certain interests in real property), may be computed using a
percentage based on the Bank's actual loss experience, or a percentage equal to
8% of the Bank's taxable income. Use of the percentage of taxable income method
of calculating its deductible addition to its loss reserve has the effect of
reducing the marginal rate of federal tax on the Bank's income derived from
qualifying loans to 31.3%, exclusive of any minimum or environmental tax, as
compared to the generally applicable maximum corporate federal income tax rate
of 34%. The Bank's deduction with respect to non-qualifying loans must be
computed under the experience method which essentially allows a deduction for
actual charge-offs. Any deduction for the addition to the reserve for no-
qualifying loans reduces the addition to the reserve for qualifying real
property loans calculated under the percentage of taxable income method. Each
year the Bank selects the most favorable way to calculate the deduction
attributable to an addition to the bad debt reserve.
No bad debt deduction is allowed for federal income tax purposes in the
event that less than 60% of the total dollar amount of the assets of an
institution do not fall within certain designated categories of assets
("qualified assets"). 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 were qualified assets.
Qualifying savings institutions, such as Charter Federal, that file federal
income tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce proportionately their percentage bad debt
deduction for tax losses attributable to activities of the non-savings
institution members of the consolidated group that are functionally related to
the activities of the savings institution member. These Treasury regulations
historically have had no impact on the Bank, but could reduce the amount of the
bad debt deduction available to it in the future.
DISTRIBUTIONS. To the extent that (i) the Bank's reserve for losses on
qualifying real property loans exceeds the amount that would have been allowed
under the experience method; and (ii) the Bank makes "nondividend distributions"
to stockholders that are considered to result in distributions from the excess
bad debt reserve, the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Nondividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for distribution from the Bank's bad debt reserves.
The amount of additional taxable income created from an excess distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated bad debt reserve are used for any purpose other than to absorb
qualified
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<PAGE> 186
bad debt losses, such as for the payment of dividends or other distributions
with respect to the Bank's capital stock (including distributions upon
redemption or liquidation), approximately one and one-half times the amount so
used would be includable in gross income for federal income tax purposes,
assuming a 34% corporate income tax rate (exclusive of state taxes). The Bank
does not anticipate paying dividends or making distributions with respect to the
Bank's capital stock which would give rise to such federal tax liabilities.
CORPORATE ALTERNATIVE MINIMUM TAX. Like other corporations, Charter
Federal generally is subject to a 34.0% federal alternative corporate income tax
on its federal taxable income. An alternative minimum tax may be levied, instead
of the 34% tax, if such a levy would result in a greater tax liability. The
alternative minimum tax is imposed at the rate of 20% on a specially computed
tax base. Included in this alternative base is a number of adjustments and
preference items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been allowable
on the basis of actual experience; (ii) interest on certain tax-exempt bonds
issued after August 7, 1986; and (iii) an amount relating to "adjusted current
earnings" as specially computed. In addition, the amount of alternative minimum
taxable income that may be offset by NOLs is limited to 90% of alternative
minimum taxable income. For taxable years beginning before January 1, 1996,
Charter Federal also is subject to the 0.1% environmental tax imposed on the
excess of a corporation's alternative minimum taxable income (with certain
modifications) over $2 million. The Bank has not been subject to a material
amount of AMT or environmental tax to date. (See Note 16 of the "Notes to
Consolidated Financial Statements" under Item 8 of this report.)
STATE TAXATION
The Commonwealth of Virginia imposes an income tax of 6% and the State of
Tennessee imposes a corporate excise tax of 6% on Charter Federal's taxable
income apportioned to each of those states. The State of Tennessee also imposes
a corporate franchise tax of twenty-five cents per $100 of the franchise tax
base. These taxes are deductible in determining federal taxable income.
SUBSIDIARIES
Charter Federal has two wholly-owned service corporation subsidiaries,
Highlands Service Corporation ("Highlands") and Charter Financial Services
Corporation ("Charter Financial").
Highlands has, in the past, constructed 25 condominiums in Bristol,
Tennessee on a joint venture basis with a general contractor. Highlands has in
the past sold loan-related life, accident and health insurance to borrowers from
Charter Federal. Highlands sold all real estate holdings during the period
ending June 30, 1994. Therefore, Highlands is no longer considered a
non-qualifying subsidiary for purposes of computing the OTS regulatory capital.
At June 30, 1995, the Bank's investment in Highlands was $75,000. During the
fiscal year ended June 30, 1995, Charter Federal recognized approximately
$35,000 net income from Highlands after inter-company eliminations.
Until March 1990, Charter Financial was engaged in extending lines of
credit to Charter Federal employees. There are no outstanding employee lines of
credit from Charter Financial at June 30, 1995. Charter Financial discontinued
sales of tax-deferred annuities as an agent for several life insurance companies
and mutual funds as a branch office of a broker dealer on October 14, 1994.
Charter Financial also sells loan-related life, accident and health insurance to
borrowers from Charter Federal. Charter Financial owns 15% of Virginia Title
Center, a title insurance company, and receives quarterly dividends based on
profits of the title insurance operation. Charter Financial is a qualifying
subsidiary for purposes of computing the OTS regulatory capital requirements. At
June 30, 1995, Charter Federal's investment in Charter Financial was
approximately $3,000. During the period ended June 30, 1995, Charter Federal
recognized approximately $101,000 in aggregate net income from Charter Financial
after inter-company eliminations.
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<PAGE> 187
EMPLOYEES
At June 30, 1995, Charter Federal and its subsidiaries had 262 employees,
including 47 part-time employees down from 271 employees at June 30, 1994.
Management considers its relations with employees to be excellent.
Charter Federal currently maintains a comprehensive employee benefit
program providing, among other benefits, a qualified pension plan, 401-K savings
plan with employer matching, stock option plan, hospitalization and major
medical insurance, paid vacations, paid sick leave, long-term disability
insurance and life insurance. Charter Federal's employees are not represented by
any collective bargaining group.
ITEM 2. PROPERTIES
The listing of office locations of Charter Federal follows. The book value
of equipment, premises owned and leasehold improvements (net of accumulated
depreciation) at June 30, 1995, was $5.9 million. Charter Federal has 27 full
service offices. At June 30, 1995, Charter Federal owned 13 of its 27 offices;
the remaining 14 offices were leased. Substantially all equipment items are
owned by Charter Federal.
During the year ended June 30, 1995, the Bank sold its previous Abingdon
branch location and moved to a new leased structure at 968 West Main Street. The
Bank sold its Jefferson Street building and leased space for the branch location
from the new owners. The Bank completed in June of 1995 a full service modular
office on King College Road on leased land. As previously discussed, the Bank
sold the Danville Branch facilities.
<TABLE>
<CAPTION>
LOCATIONS DATE OCCUPIED OWNED/LEASED EXPIRATION
- -------------------------------------------- ------------- ------------------- ----------
<C> <S> <C> <C> <C>
1. 110 Piedmont Avenue.................... 1941 Owned
Bristol, Virginia
2. 707 Gate City Highway.................. 1976 Owned
Bristol, Virginia
3. 1388 Volunteer Parkway................. 1994 Leased Land/ 8/30/03
Bristol, Tennessee Owned Improvements
4. 968 W. Main Street..................... 1995 Leased 12/31/10
Abingdon, Virginia
5. 303 South Commerce Street.............. 1967 Owned
Marion, Virginia
6. 211 East Fifth Street.................. 1979 Owned
Big Stone Gap, Virginia
7. 210 South Jefferson Street............. 1977 Leased 2/29/00
Roanoke, Virginia
8. 999 Hardy Road......................... 1988 Leased 4/01/98
Vinton, Virginia
9. 5102 Williamson Road, N.W.............. 1994 Owned
Roanoke, Virginia
10. 2033 Electric Road, S. W............... 1962 Leased 11/16/95
Roanoke, Virginia
11. 2706 Ogden Road, S. W.................. 1974 Leased land/ 12/31/02
Roanoke, Virginia Owned Improvements
12. 250 N. Washington Avenue............... 1964 Owned
Pulaski, Virginia
13. U.S. Route 11.......................... 1976 Owned
Dublin, Virginia
14. 2001 Norwood Street.................... 1967 Owned
Radford, Virginia
</TABLE>
D-28
<PAGE> 188
<TABLE>
<CAPTION>
LOCATIONS DATE OCCUPIED OWNED/LEASED EXPIRATION
- -------------------------------------------- ------------- ------------------- ----------
<C> <S> <C> <C> <C>
15. 531 S. Gay Street...................... 1986 Leased 9/30/96
Knoxville, Tennessee
16. 6821 Maynardville Highway.............. 1985 Leased 4/30/96
Knoxville, Tennessee
17. 18 Merchants Road...................... 1985 Leased 4/30/96
Knoxville, Tennessee
18. 6000 Chapman Highway................... 1987 Owned
Knoxville, Tennessee
19. 330 Cedar Bluff Road................... 1985 Leased 4/30/96
Knoxville, Tennessee
20. 7521 Kingston Pike..................... 1985 Leased Land/ 6/30/97
Knoxville, Tennessee Owned Improvements
21. 11428 Kingston Pike.................... 1985 Leased 9/30/96
Knoxville, Tennessee
22. 374 Forks of the River................. 1986 Leased 5/08/96
Parkway Sevierville, Tennessee
23. 185 E. Main Street..................... 1987 Owned
Wytheville, Virginia
24. 427 Virginia Avenue.................... 1987 Owned
Bluefield, Virginia
25. 605 E. Stuart Drive.................... 1987 Owned
Galax, Virginia
26. 111 E. Roanoke Street.................. 1987 Owned
Blacksburg, Virginia
27. 1501 King College Road................. 1995 Leased Land/ 1/31/99
Bristol, Tennessee Owned Improvements
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Bank is not involved in any material pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which are believed by management to be immaterial to the business and financial
condition of the Bank.
On November 24, 1993, Charter Federal filed a brief of Amicus Curiae in the
case of Winstar Corporation et. al. and Glendale Federal Bank. FSB v. The United
States in the United States Court of Appeals for the Federal Circuit. Charter's
interest in the Winstar case is due to the similar nature of its earlier suit.
Charter's earlier action was to compel the OTS and the FDIC to honor contractual
promises to allow Charter Federal to include supervisory goodwill in assets for
regulatory capital purposes or, in the alternative, to rescind certain
supervisory acquisitions by Charter Federal that gave rise to the creation of
supervisory goodwill.
On August 7, 1995, Charter Federal filed an action in the United States
Court of Federal Claims seeking damages from the federal government for breach
of contract.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
D-29
<PAGE> 189
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF REGISTRANT
The following lists the names and ages of the executive officers of the
Bank as of June 30, 1995, all positions held by them in the Bank (including the
period each such position has been held), a brief account of their business
experience during the past five years.
<TABLE>
<CAPTION>
AGE AT
JUNE 30, EMPLOYMENT FOR THE
NAME 1995 POSITION PAST FIVE YEARS
- ------------------------ -------- --------------------------- ----------------------------------
<S> <C> <C> <C>
Cecil R. McCullar....... 58 President and Chief President and Chief Executive
Executive Officer of Officer of Charter since March 15,
Charter Federal 1993; prior thereto, various
executive positions with Dominion
Bank, N.A.; since May 1984, Retail
Executive Officer of Dominion
Bank, N.A.
Richard W. Buchanan..... 40 Executive Vice Senior Vice President -- Corporate
President -- Finance and Asset/Loan Officer since January
Credit Administration 1991; formerly Vice President
C. Allen Cross.......... 44 Senior Vice President -- Senior Vice President since 1988
Human Resources
Douglas D. Deppen....... 53 Senior Vice President and Senior Vice President since 1985
Chief Financial Officer
Douglas L. Murray....... 47 Senior Vice President -- Senior Vice President since
Marketing/Support Services January 1991; formerly Vice
President
W. Mark Nelson.......... 33 Senior Vice President -- Director of Internal Audit since
Director of Internal Audit October 1987, Compliance Officer
and Compliance Officer since October 1993; formerly Vice
President
James E. Sells.......... 49 Senior Vice President Senior Vice President since
January 1991; formerly Vice
President
</TABLE>
D-30
<PAGE> 190
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Charter Federal's common stock is traded on the over-the-counter market and
is listed on the Nasdaq Stock Market under the symbol "CHFD". If traded, prices
are quoted daily by the Nasdaq Stock Market in a listing in the Wall Street
Journal and in various other financial publications and daily newspapers.
As of June 30, 1995, there were 5,125,313 shares of common stock
outstanding and approximately 1,300 stockholders of record, not including the
number of persons or entities whose stock is held in nominee or "street" name
through various brokerage firms or banks. The Bank completed a Subscription
Rights Offering of its common stock on August 13, 1993, which resulted in an
increase of the number of shares outstanding to 25,627,802. The Bank's Board of
Directors declared a one-for-five reverse stock split of the institution's
common stock, effective December 20, 1993, which reduced the number of shares
outstanding from 25,627,802 to 5,125,313. On January 18, 1994, the Bank's common
stock, previously listed for trading on the Nasdaq Small-Cap Market, began
trading on the Nasdaq Stock Market. Charter Federal was also notified that,
effective May 9, 1994, its common stock would be included on the List of
Marginable OTC Stocks (the "List") maintained by the Board of Governors of the
Federal Reserve System. Inclusion on the List means that securities brokers and
dealers may make margin loans using Charter Federal's common stock as
collateral.
Charter Federal's stock was split three-for-one on May 9, 1986, and a 5%
stock dividend was paid on November 17, 1986. Quarterly cash dividends of $0.025
per share were paid on February 19, 1988, May 19, 1988, August 25, 1988, and
October 28, 1988. Due to regulatory restrictions, Charter Federal was prohibited
from paying dividends to stockholders when the Bank failed to meet regulatory
capital requirements upon the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act in August 1989. With the successful completion of
the Bank's Subscription Rights Offering on August 13, 1993, Charter Federal now
complies with all current regulatory capital requirements and is no longer
subject to dividend restrictions. During fiscal 1995, the Bank's Board of
Directors declared quarterly cash dividends of $0.075 per share payable on
November 14, 1994; $0.10 per share payable on February 17, 1995; and $0.10 per
share payable on May 15, 1995. The following table lists the high and low stock
price for the past two years:
<TABLE>
<CAPTION>
QUARTER ENDED: HIGH* LOW*
------------------------------------------------------------- ----- -----
<S> <C> <C>
September 30, 1993........................................... 15.63 9.69
December 31, 1993............................................ 15.00 11.25
March 31, 1994............................................... 14.50 11.50
June 30, 1994................................................ 12.50 11.25
September 30, 1994........................................... 13.00 11.75
December 30, 1994............................................ 12.50 7.88
March 31, 1995............................................... 13.50 8.75
June 30, 1995................................................ 14.75 11.50
</TABLE>
- ---------------
* All stock prices have been adjusted to show effect of December 20, 1993
one-for-five reverse stock split.
D-31
<PAGE> 191
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS (for the year ended
June 30):
Interest income........................... $ 53,117 $ 51,690 $ 58,207 $ 65,873 $ 75,917
Interest expense.......................... 30,818 26,156 32,753 47,662 63,988
Net interest income....................... 22,299 25,534 25,454 18,211 11,929
Net gain (loss) on sales of
mortgage-backed certificates, other
investments and loans.................. 72 (329) 797 535 587
Extraordinary item........................ -- -- 1,238 -- --
Cumulative effect of accounting change.... -- 990 -- -- --
Net income (loss)......................... 5,557 9,583 (35,854) 4,401 (13,424)
FINANCIAL CONDITION (as of June 30):
Total Assets.............................. 751,327 733,444 678,395 821,559 842,903
Investments and certificates of deposit... 21,665 55,105 53,579 66,720 113,981
Loans receivable, including
mortgage-backed certificates and direct
finance automobile leases.............. 684,923 648,122 592,809 655,802 619,731
Cost in excess of fair value of net assets
acquired and identified intangibles.... -- -- -- 43,055 45,649
Savings deposits.......................... 525,400 548,126 572,951 616,740 627,454
Borrowed money............................ 168,114 134,962 104,500 168,159 187,063
Stockholders' equity (deficit)............ 46,424 42,247 (9,881) 25,972 18,293
Offices that are full-service
facilities............................. 27 27 26 26 29
PER SHARE DATA* (for the year ended June
30):
Based on weighted-average shares
outstanding
Extraordinary item per share........... $ -- $ -- $ 1.69 $ -- $ --
Cumulative effect of accounting
change............................... -- .22 -- -- --
Net income (loss) per share............ 1.08 2.09 (49.03) 6.02 (18.36)
Stockholders' equity (book value) per
shares outstanding at June 30..... 9.06 8.24 (13.51) 35.52 25.02
SIGNIFICANT RATIOS:
Return on average assets.................. .76% 1.35% (4.78)% 0.53% (1.55)%
Return on average equity.................. 12.31% 29.64% (445.67)% 18.62% (50.25)%
Average stockholders' equity to average
assets................................. 6.15% 4.56% 1.07% 2.87% 3.08%
Nonperforming assets to total assets...... 2.62% 1.72% 2.72% 3.16% 3.30%
Nonperforming loans and leases to total
loans and leases....................... 3.09% 1.77% 2.56% 5.16% 5.25%
Ratio of allowance for loan and lease
losses to nonperforming loans and
leases................................. 39.74% 119.58% 105.71% 57.22% 59.57%
</TABLE>
- ---------------
* Per share data of previous years adjusted for the effect of the one-for-five
reverse stock split
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
At June 30, 1995, Charter Federal Savings Bank (the "Bank") had total
assets of approximately $751 million, deposits of approximately $525 million,
and stockholders' equity of approximately $46 million.
D-32
<PAGE> 192
ASSET/LIABILITY MANAGEMENT
The Bank is engaged primarily in the business of investing funds obtained
from deposits and borrowings in interest-earning loans and investments.
Consequently, the Bank's earnings depend to a significant extent on its net
interest income, which is the difference between (i) the interest income on
loans, mortgage-backed certificates and investments, and (ii) the interest
expense on deposits and borrowings. The Bank is subject to interest rate risk
and corresponding fluctuations in its net interest income, to the extent that
its interest-bearing liabilities and interest-earning assets do not mature or
reprice at the same time. Asset/liability management policies are employed in an
effort to reduce the Bank's exposure to interest rate risk by matching, to the
extent deemed feasible and appropriate, the repricing periods of the Bank's
interest-earning assets and interest-bearing liabilities and thereby reducing
the volatility of net interest income. The primary goal of these policies is to
achieve a satisfactory interest rate spread without incurring unacceptable
interest rate or credit risk.
The one-year cumulative gap, expressed as a percentage of earning assets
was (4.52)% at June 30, 1995, compared to a positive 1.26% at June 30, 1994.
Significantly affecting the one-year cumulative gap position of the Bank at June
30, 1995, was approximately $104.5 million of Federal Home Loan Bank ("FHLB")
advances that remain outstanding, with the first maturities beginning in July
1995 and extending through April 1998. Approximately $36 million of these
advances moved to the 1 year or less maturity range in fiscal 1995 from the more
than 1 year range in fiscal 1994. Subsequent to June 30, 1995, as various
segments matured, the maturing balances were renewed and maturities extended
past the 1 year timeframe improving the one year cumulative gap.
The Bank's asset/liability management strategies have been altered
significantly after regulatory capital compliance was restored with the
successful completion of the subscription rights offering on August 16, 1993.
Charter Federal's Board of Directors has adopted an Interest Rate Risk
Policy Statement in compliance with Office of Thrift Supervision ("OTS") policy.
The OTS policy requires that thrifts develop a method of measuring the effect of
instantaneous changes in interest rates on the institution's net interest income
and on the market value of the institution's assets, liabilities, and
off-balance sheet items. On a quarterly basis, management evaluates the results
of this analysis to determine its optimum asset/liability mix. During the 1995
and 1994 fiscal years, management presented these evaluations to the Board of
Directors for their review to determine if the actions taken by management were
consistent with Charter Federal's interest rate risk policy. Actions taken to
date by management with regard to the Bank's interest rate risk policy have been
reviewed and deemed prudent by the Board of Directors.
D-33
<PAGE> 193
The following table illustrates the repricing analysis of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1995. For
purposes of this table, the Bank has used OTS decay and FHLB prepayment
assumptions for loans and deposits, respectively.
<TABLE>
<CAPTION>
WITHIN 6-12 1-5 OVER PERCENT
AS OF JUNE 30, 1995(1) 6 MONTHS MONTHS YEARS 5 YEARS TOTAL OF TOTAL
- ------------------------------------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Cash(2)............................ $ 24,150 $ -- $ -- $ -- $ 24,150 3.36%
Investment securities:
U.S. Gov't and Agency securities
held for sale(3)............... 7,603 -- -- -- 7,603 1.06
U.S. Gov't and Agency
securities(3).................. -- -- 8,000 -- 8,000 1.11
Federal Home Loan Bank
stock(4)....................... 5,771 -- -- -- 5,771 0.80
Other miscellaneous
investments(4)................. -- -- -- -- 78 0.01
Mortgage-backed certificates(5)(6)
Fixed rate residential........... 16,016 14,931 77,630 39,032 147,609 20.54
Adjustable rate residential...... 71,806 56,303 -- -- 128,109 17.82
Loans receivable(6)(7)
Mortgage loans:
Adjustable..................... 55,517 46,686 751 -- 102,954 14.32
Fixed 1-4 family............... 13,180 11,643 74,549 78,882 178,254 24.80
Fixed other.................... 3,508 2,768 6,580 7,550 20,406 2.84
Consumer and other............... 31,417 14,970 43,316 4,150 93,853 13.06
Loans held for sale(8)............. 2,003 -- -- -- 2,003 0.28
-------- -------- -------- --------- -------- ------
Total interest-earning assets...... 230,971 147,301 210,826 129,692 718,790 100.00%
======== ======== ======== ========= ======== ======
INTEREST-BEARING LIABILITIES:
Deposits(9):
Passbook and savings............. $ 5,145 $ 4,460 $ 26,804 $ 13,886 $ 50,294 7.24%
NOW demand accounts(10).......... 7,497 5,888 14,471 6,960 34,816 5.01
Money market accounts............ 9,369 4,250 1,237 2,288 17,144 2.47
Certificates of deposit.......... 153,533 144,838 124,058 717 423,146 60.93
Checks outstanding on
disbursement account........... 932 -- -- -- 932 0.14
Federal Home Loan Bank advances.... 18,000 18,000 68,500 -- 104,500 15.05
Short term and other borrowings.... 38,864 -- 24,750 -- 63,614 9.16%
-------- -------- -------- --------- -------- ------
Total interest-bearing
liabilities...................... $233,339 $177,435 $259,821 $ 23,851 $694,446 100.00%
======== ======== ======== ========= ======== ======
Excess of interest-earning assets
over (under) interest-bearing
liabilities...................... $ (2,368) $(30,135) $(48,995) $(105,842) $ 24,344
======== ======== ======== ========= ========
Cumulative excess of
interest-earning assets over
(under) interest-bearing
liabilities...................... $ (2,368) $(32,520) $(81,518) $ 24,344 $ 24,344
======== ======== ======== ========= ========
Excess of interest-earnings assets
over (under) interest-bearing
liabilities as a percent of total
interest-earnings assets......... (0.33)% (4.19)% (6.82)% 14.73% 3.39%
======== ======== ======== ========= ========
Cumulative excess of
interest-earning assets over
(under) interest-bearing
liabilities as a percent of total
interest-earning assets.......... (0.33)% (4.52)% (11.34)% 3.39% 3.39%
======== ======== ======== ========= ========
</TABLE>
- ---------------
(1) Schedule was prepared in accordance with the Office of Thrift Supervision
instructions for preparation of Thrift Financial Report Schedule MR.
Consequently, premiums and discounts on investment securities,
mortgage-backed certificates and loans receivable, deferred loan fees on
loans receivable,
D-34
<PAGE> 194
valuation allowances and nonperforming loans were not considered in the
schedule. Conversely, noninterest-earning cash and noninterest-bearing
deposits are considered. This model used by the Office of Thrift
Supervision and the Federal Home Loan Bank of Atlanta prepayment and decay
rate assumptions.
(2) Amount includes noninterest-earning cash of $10,736,000.
(3) Amounts are scheduled gross of unearned premiums of $230,000. Securities
classified as "Available for Sale" are, regardless of their maturity,
grouped in the period of their potential sale.
(4) Federal Home Loan Bank stock is subject to repricing every quarter, other
miscellaneous stock do not have stated maturities; thus, they are assumed
to have maturities of greater than five years for the purposes of this
schedule.
(5) Amounts are scheduled gross of earned premiums and discounts of $5,641,000
and $247,000, respectively.
(6) Weighted-average prepayment rates assumed for the major asset types are
mortgage-backed certificates (15%), mortgage loans (13%), and consumer
loans (18%).
(7) Amounts are scheduled gross of net unearned discounts on mortgage loans of
$196,000, net deferred loan fees of $1,076,000, and valuation allowances of
$5,021,000, and net of nonperforming and restructured mortgage loans of
$12,274,000, and nonperforming consumer loans of $360,000.
(8) Assets not intended to be held to maturity are shown as repricing in the
period of disposal.
(9) The decay rates assumed for the respective deposit types are passbooks and
statement accounts (17%), NOW accounts (37%), and MMDAs (79%). Club
accounts were not assigned a prepayment percentage and noninterest-bearing
checking accounts were assigned a prepayment percentage of 37%.
(10) Amount includes noninterest-bearing deposits of $14,996,000.
D-35
<PAGE> 195
ANALYSIS OF NET INTEREST INCOME. The tables below set forth, for the
periods indicated, information regarding: (i) the average balances and rates for
interest-earning assets and interest-bearing liabilities; (ii) the total dollar
amount of interest income recognized on interest-earning assets; (iii) the total
dollar amount of interest expense incurred on interest-bearing liabilities; (iv)
net interest income; (v) interest rate spread; and (vi) the ratio of average
total interest-earning assets to average interest-bearing liabilities.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans, net........................ $401,106 $33,613 8.38 % $403,915 $34,560 8.56 % $426,437 $38,780 9.09 %
Mortgage-backed certificates...... 276,996 17,013 6.14 232,077 13,738 5.92 206,678 15,182 7.35
Investment securities............. 34,679 2,173 6.27 46,661 2,968 6.36 52,363 3,764 7.19
Direct finance leases............. -- -- -- 208 24 11.53 592 80 13.51
Other interest-earning assets..... 5,943 318 5.35 12,883 400 3.10 13,239 401 3.03
-------- ------- ------ -------- ------- ------ -------- ------- -----
Total interest-earning assets....... 718,723 53,117 7.39 695,744 51,690 7.43 699,309 58,207 8.32
-------- ------- ------ -------- ------- ------ -------- ------- -----
INTEREST-BEARING LIABILITIES:
Savings deposits.................. 534,045 23,687 4.44 540,547 20,909 3.87 595,699 27,697 4.65
Short-term borrowings............. 41,696 2,374 5.69 21,487 777 3.62 14,249 471 3.31
Advances from FHLB and other
borrowings...................... 104,500 4,757 4.55 104,500 4,470 4.28 104,500 4,585 4.39
-------- ------- ------ -------- ------- ------ -------- ------- -----
Total interest-bearing
liabilities....................... 680,241 30,818 4.53 666,534 26,156 3.92 714,448 32,753 4.58
-------- ------- ------ -------- ------- ------ -------- ------- -----
Net interest income/interest rate
spread............................ $22,299 2.86 % $25,534 3.51 % $25,454 3.74 %
======= ====== ======= ====== ======= =====
Net interest-earning assets/net
yield on interest-earning assets
(net interest margin)............. $ 38,482 3.10 % $ 29,210 3.67 % $(15,139) 3.64 %
======== ====== ======== ====== ======== =====
RATIO OF INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES...... 105.66% 104.38% 97.88 %
====== ====== =====
</TABLE>
D-36
<PAGE> 196
RATE/VOLUME ANALYSIS. The table below sets forth certain information
regarding changes in interest income and interest expense of Charter Federal for
the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(i) changes in volume (changes in volume multiplied by old rate), (ii) changes
in rate (changes in rate multiplied by old volume), and (iii) changes in
rate-volume (changes in rate multiplied by the change in volume). The changes in
rate/volume have been allocated proportionately to rate and volume using the
ratio of rate or volume to the total change to rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------------------------
1995 V. 1994 1994 V. 1993 1993 V. 1992
------------------------------ ------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------ ------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans............. $(239 ) $ (708) $ (947) $(1,989) $(2,231) $(4,220) $ 371 $ (2,185) $ (1,814)
Mortgage-backed
securities...... 2,740 535 3,275 2,334 (3,778) (1,444) (1,400) (1,189) (2,589)
Direct finance
leases.......... 0 (24) (24) (45) (11) (56) (122) (25) (147)
Investments....... (751 ) (44) (795) (386) (410) (796) (2,012) (796) (2,808)
Other interest-
earning
assets.......... (625 ) 543 (82) (14) 13 (1) (172) (136) (308)
------ ------- ------- ------- ------- ------- ------- -------- --------
Total change in
interest
income........ $1,125 $ 302 $ 1,427 $ (100) $(6,417) $(6,517) $(3,335) $ (4,331) $ (7,666)
====== ======= ======= ======= ======= ======= ======= ======== ========
Interest expense:
Savings
deposits........ $(248 ) $ 3,026 $ 2,778 $(2,390) $(4,398) $(6,788) $ (664 ) $ (9,791) $(10,455)
Short-term
borrowings...... 923 674 1,597 257 49 306 (1,641 ) (647) (2,288)
Other borrowing
and FHLB
advances........ 0 287 287 -- (115) (115) (2 ) (2,164) (2,166)
------ ------- ------- ------- ------- ------- ------- -------- --------
Total change in
interest
expense....... $ 675 $ 3,987 $ 4,662 $(2,133) $(4,464) $(6,597) $(2,307) $(12,602) $(14,909)
====== ======= ======= ======= ======= ======= ======= ======== ========
Total change in
net interest
income........ $ 450 $(3,685) $(3,235) $2,033 $(1,953) $ 80 $(1,023) $ 8,271 $ 7,243
====== ======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1995 AND 1994
Total assets at June 30, 1995 were $751.3 million compared to $733.4
million at June 30, 1994. The increase in total assets was part of Charter
Federal's operating strategy to obtain the maximum leverage on its capital while
exceeding regulatory requirements to be considered "well capitalized". Loans
receivable (net) and loans held for sale at June 30, 1995 were $403.8 million
compared with $388.9 million at June 30, 1994. The increase in loans is
attributable primarily to the growth in the Bank's consumer loan portfolio, with
some additional growth in mortgages as well.
Total liabilities at June 30, 1995 were $704.9 million compared to $691.2
million at June 30, 1994. Deposits at June 30, 1995 were $525.4 million compared
to $548.1 million at June 30, 1994. The decrease in deposits for the year ended
June 30, 1995 is attributable primarily to the sale of the Bank's Danville,
Virginia office deposits totaling approximately $42 million.
Total borrowings at June 30, 1995 were $168.1 million, representing an
increase of approximately $33.2 million or 24.6% from the $134.9 million amount
at June 30, 1994. The increase in total borrowings offset the decline in
deposits allowing the bank to maintain a higher earning asset level.
D-37
<PAGE> 197
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
GENERAL. Charter Federal enjoyed growth in its consumer loan portfolio
through increased production generated by its retail branch network. This
increased production more than offset the runoff experienced in the sales
finance portfolio. The sales finance/indirect dealer finance operation was
discontinued in September 1994. The higher-yielding, shorter-amortization
consumer loans helped the Bank respond more favorably to a rising interest rate
environment during fiscal 1995.
The Danville, Virginia office deposits and fixed assets were sold to
Co-operative Savings Bank during fiscal 1995 for which Charter Federal
recognized a gain of approximately $2.4 million. Another factor substantially
impacting net income was a $3.7 million increase in income taxes in fiscal 1995
due to the elimination of the remaining net operating loss carryforwards.
In May 1995, the Bank signed a definitive agreement with First American
Corporation, Nashville, Tennessee under which Charter Federal will merge with
and into a subsidiary of First American. The merger, which is subject to
regulatory and Charter Federal stockholder approval, is expected to close during
fiscal 1996. Merger-related expenses of approximately $1,104,000 were expensed
in fiscal 1995.
INTEREST INCOME. Total interest income for the year ended June 30, 1995
was $53.1 million, an increase of $1.4 million or 2.7% compared to fiscal 1994.
This increase was due primarily to favorable adjustable rate repricing in the
Bank's mortgage and securities portfolios, increased mortgage backed securities
balances, and increased higher-yielding consumer loan production.
The yield on average interest-earning assets for the year ended June 30,
1995 was 7.39%, compared with 7.43% for the comparable 1994 period. The 1995
yield on loans was 8.38% and on mortgage-backed certificates was 6.14% while the
yield on investments was 6.27%. This represented an 18 basis point decrease in
yield on loans, a 22 basis point increase in yield on mortgage-backed
certificates, and a 9 basis point decrease in yield on investments.
INTEREST EXPENSE. In the year ended June 30, 1995, interest expense was
$30.8 million, an increase of $4.6 million or 17.6% compared with fiscal year
1994. Sharp increases in market rates resulted in an increase of $2.78 million
in deposit expense and higher levels of borrowed money, along with higher rates,
increased borrowing expense by $1.88 million.
The average cost of interest-bearing liabilities increased 61 basis points.
The cost of deposits for the year ended June 30, 1995 was 4.44%, compared to
3.87% in 1994. The cost of borrowed money for the year ended June 30, 1995 was
4.88%, compared to 4.16% in 1994.
NET INTEREST INCOME. Net interest income for the year ended June 30, 1995
decreased $3.2 million to $22.3 million as compared to $25.5 million for the
year ended June 30, 1994.
Average interest-bearing liabilities for the year ended June 30, 1995,
increased $13.7 million or 2.1% compared to the year ended June 30, 1994.
Average deposits decreased by $6.5 million or 1.2% and average borrowings
increased by $20.2 million or 16.0% from fiscal 1994.
Average interest earning assets increased $23.0 million while average
interest-bearing liabilities increased $13.7 million. The impact of four Federal
Reserve Board rate increases in fiscal 1995 contributed to a decline in the
interest rate spread for the year ended June 30, 1995, of 65 basis points to
2.86% compared with the same period in 1994. This decreased spread resulted from
a decline in the yield on average interest-earning assets (4 basis points) and
an increase in the cost of average interest-bearing liabilities (61 basis
points). The interest margin of 3.10% for the year ended June 30, 1995 compared
to 3.67% one year ago and the ratio of interest-earning assets to
interest-bearing liabilities was 105.7% in 1995 compared to 104.4% the prior
year.
PROVISION FOR LOSSES ON LOANS. For the year ended June 30, 1995, the Bank
allocated $1.98 million for provision for losses as compared with $2.15 million
for fiscal 1994. The provision for fiscal year 1995 resulted primarily from
management's assessment of the potential risk of loss presented by large
non-performing commercial real estate loans and in-substance REO and the
potential impact of rising rates on certain of the Bank's customers.
D-38
<PAGE> 198
NONINTEREST INCOME. Noninterest income increased $3.29 million for the
year ended June 30, 1995, compared with 1994. The increase was due largely to a
gain of $2.4 million on the sale of the Danville, Virginia office deposits and
fixed assets. Excluding the gain on the sale of these deposits, the Bank
experienced an increase of over $900,000 in noninterest income. This $900,000
improvement resulted primarily from increased NOW account fee income, loan fee
income, REO operating income and other miscellaneous operating income.
NONINTEREST EXPENSE. Noninterest expense decreased $427,000 or 2.5% for
the year ended June 30, 1995, compared to 1994. Major changes in the elements of
non-interest expense include: (i) a $333,000 increase in compensation and
employee benefits due to salary increases; (ii) a $300,000 decrease in Federal
Deposit Insurance premium expense due to lower rate and lower deposit base;
(iii) a $916,000 decrease in provision for losses on REO; (iv) a $1,104,000
increase for expenses for merger expenses; and (v) a $422,000 increase in other
expenses as a result of a variety of items, such as merger related expenses
offset to some extent by reduced marketing and consulting expenses.
INCOME TAXES. During fiscal 1995 Charter Federal became fully taxable
having exhausted the use of tax loss carryforwards early in the year. Income
taxes as of June 30, 1995 were $3.4 million as compared to a tax benefit of
$322,000 for fiscal 1994. Charter Federal's tax benefit for fiscal 1994 of
$322,000 was the result of the utilization of carryforwards which reduced
current tax expense and the reduction of the valuation allowance applied to
deferred income taxes (See Note 16.)
NET INCOME. Net income for fiscal year 1995 ending June 30, 1995 was $5.56
million as compared to $9.58 million for fiscal year 1994. The decrease in Net
Income from fiscal 1994 to fiscal 1995 can be attributed primarily to (i) a
decrease in Net Interest Income due to margin compression; (ii) an increase in
compensation and employee benefits; (iii) an increase in legal and management
expense, most of which is related to the pending acquisition of Charter Federal
by First American Corporation; and (iv) income tax expense versus a benefit last
fiscal year.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1994 AND 1993
Total assets at June 30, 1994 were $733.4 million compared to $678.4
million at June 30, 1993. The increase in total assets was part of Charter
Federal's operating strategy to obtain the maximum leverage on its capital while
exceeding regulatory requirements and maintaining an additional amount for
potential interest rate or asset valuation exposure.
Total liabilities at June 30, 1994 were $691.2 million compared to $668.3
million at June 30, 1993. The increase in total liabilities also has been part
of Charter Federal's operating strategy to provide the funds for the asset level
strategy. Deposits at June 30, 1994 were $548.1 million compared to $573 million
at June 30, 1993. The decrease in deposits for the year ended June 30, 1994 is
attributable primarily to continued competition from non-bank financial vehicles
such as tax deferred annuities, mutual funds, and rate competition from other
banks.
Total borrowings at June 30, 1994 were $135 million, representing an
increase of approximately $30.5 million or 29% from $104.5 million at June 30,
1993. The increase in total borrowings is attributable to offsetting the decline
in deposits to maintain the asset level strategy discussed previously.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1994 AND 1993
GENERAL. Rights Offering -- On August 13, 1993, Charter Federal completed
a subscription rights offering which increased its equity by $42.5 million. The
resulting capital level qualified the Bank to be considered "well capitalized"
under the provisions of the Prompt Corrective Action ("PCA") section of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
enabled the Bank to comply with an OTS PCA directive. The relief from the PCA
directive, along with the termination of a previously issued supervisory
agreement, and the additional capital has allowed the Bank to resume its
activities in a less restrictive manner and restructure its balance sheet to
reduce its exposure to interest rates.
D-39
<PAGE> 199
INTEREST INCOME. Total interest income for the year ended June 30, 1994
was $51.7 million, a decline of $6.5 million or 11.2% compared to fiscal 1993.
This decline was caused primarily by a decline in overall interest rates, along
with Charter Federal's decision to suspend its automobile financing operation
because the lower interest rate environment eliminated its profitability. The
Bank shortened the maturities of its assets and accepted lower yields to reduce
its exposure to rising interest rates.
The yield on average interest-earning assets for the year ended June 30,
1994 was 7.43%, compared with 8.32% for the comparable 1993 period. The 1994
yield on loans was 8.56% and on mortgage-backed certificates was 5.92% while the
yield on investments was 6.36%. This represented a 53 basis point decrease in
yield on loans, a 143 basis point decrease in yield on mortgage-backed
certificates, and an 83 basis point decrease in yield on investments. The
decrease in the yields on loans, mortgage-backed certificates, and investment
securities resulted primarily from a general decline in interest rates of
origination compounded by heavy refinancing activity and the Bank's decision to
invest in adjustable rate mortgage-backed certificates.
INTEREST EXPENSE. In the year ended June 30, 1994, interest expense was
$26.2 million, a decline of $6.6 million or 20.2% compared with fiscal year
1993. Lower market rates and reduced balances resulted in a decline of $6.8
million in deposit expense and $191,000 in borrowing expense. The average cost
of interest bearing liabilities decreased 66 basis points.
NET INTEREST INCOME. Net interest income for the year ended June 30, 1994
was virtually unchanged from the year ended June 30, 1993, with an increase of
only $80,000. Average interest-bearing liabilities for the year ended June 30,
1994, decreased $47.9 million or 6.7% compared to the year ended June 30, 1993.
Average deposits decreased by $55.2 million or 9.3% and average borrowings
increased by $7.2 million or 6.1% from fiscal 1993.
Average interest-earning assets decreased $3.6 million while average
interest-bearing liabilities decreased $47.9 million. The impact of declining
interest income resulted in a decrease in the interest rate spread for the year
ended June 30, 1994, of 23 basis points to 3.51% compared with the same period
in 1993. This decreased spread resulted from a greater decrease in the yield on
average interest-earning assets (89 basis points) than the decrease in the cost
of average interest-bearing liabilities (66 basis points). This decline in
spread was offset by the increase in average interest-earning assets compared to
average interest-bearing liabilities as the result of the $42.5 million
generated by the rights offering. The result was a margin of 3.67% compared to
3.64% one year ago and the ratio of interest-earning assets to interest-bearing
liabilities was 104.4% in 1994 compared to 97.9% the prior year. (See table on
Analysis of Net Interest Income.)
PROVISION FOR LOSSES ON LOANS. For the year ended June 30, 1994, the
provision for losses on loans was $2.1 million as compared with $5.1 million for
fiscal 1993. The provision for fiscal year 1994 resulted primarily from an
assessment of the potential risk of loss presented by (i) certain letters of
credit on which the Bank is an obligor, and (ii) two commercial real estate
loans. This reassessment was based on an evaluation by Bank management of the
loss potential, along with the results of an agreement to sell Charter Federal's
interest in the letters of credit in early fiscal 1995. (See Note 17.)
NONINTEREST INCOME. Noninterest income declined $1.5 million or 43.5% for
the year ended June 30, 1994, compared to 1993. The decline was due largely to
the losses incurred by Charter Federal as part of its asset/liability strategies
of selling long-term fixed rate loans and investment securities to reduce its
exposure to higher interest rates while meeting customer needs.
NONINTEREST EXPENSE. Noninterest expense decreased $1 million or 5.5% for
the year ended June 30, 1994, compared to 1993. Major changes in the elements of
non-interest expense include: (i) a $1.1 million increase in employee-related
expenses due to stock option expense, staff increases and salary increases as
the Bank begins a more aggressive marketing stance; (ii) a $156,000 increase in
net occupancy expense as the result of (1) an additional branch, (2) previously
postponed branch improvements, and (3) additional automated teller machines
("ATMs"); (iii) a $1.9 million decrease in amortization of "goodwill" due to the
"goodwill" write-off during fiscal 1993; (iv) a $1.4 million decrease in
provision for losses on direct finance automobile leases as that portfolio
declines; and (v) a $.9 million increase in other expenses as a result of a
variety of issues, such as marketing expenses as Charter Federal returns to
active solicitation of business, stock
D-40
<PAGE> 200
expenses relative to the reverse stock split and changes in the stock's Nasdaq
listing status, and payment for services at correspondent banks instead of
maintaining compensating balances. Charter Federal's FDIC expense also increased
$161,000, despite decreased deposit balances, due to secondary reserve credits
having been exhausted in fiscal 1993.
INCOME TAXES. The Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", in July 1993 and, as a result,
the adjustments to the July 1, 1993 balance sheet netted to $990,000. The impact
of these adjustments was to change deferred tax liabilities of $445,000 as of
June 30, 1993, to deferred tax assets of $545,000 as of July 1, 1993. The
ability to recognize a portion of future tax benefits to be derived from the
utilization of net operating loss carryforwards and the other future tax
deductions accounted primarily for the amount recognized. Charter Federal's net
benefit for fiscal 1994 of $322,000 was the result of the utilization of
carryforwards which reduced current tax expense and the reduction of the
valuation allowance applied to deferred income taxes. (See Note 16.)
REGULATORY CAPITAL
The following table sets forth the regulatory capital calculations of the
Bank at June 30, 1995, calculated in accordance with the requirements of the
OTS.
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
OF OF OF
TANGIBLE TANGIBLE CORE CORE RISK-BASED RISK-BASED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
-------- -------- -------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital -- Tier I............ $ 46,424 6.18% $ 46,424 6.18% $ 46,424 12.80%
SFAS No. 115 adjustment........... (28) -- (28) -- (28) (0.01)
-------- ----- -------- ----- -------- -----
GAAP capital -- Tier 1
(adjusted)...................... 46,396 6.18 46,396 6.18 46,396 12.79
General valuation allowance....... -- -- -- -- 4,518 1.25
Non-includable assets............. -- -- -- -- (53) (0.02)
-------- ----- -------- ----- -------- -----
Regulatory capital computed....... 46,396 6.18 46,396 6.18 50,861 14.02
Minimum capital requirement....... (11,269) (1.50) (22,538) (3.00) (29,022) (8.00)
-------- ----- -------- ----- -------- -----
Regulatory capital excess......... $ 35,127 4.68% $ 23,858 3.18% $ 21,839 6.02%
======== ===== ======== ===== ======== =====
</TABLE>
Charter Federal has the requisite capital levels to qualify for treatment
as a well capitalized institution.
LIQUIDITY
The Bank's primary sources of funds are loan principal repayments, growth
in savings deposits, borrowings, FHLB advances and earnings.
Savings institutions are required by OTS regulations to maintain a minimum
liquidity ratio of 5.0 %. This ratio is represented by cash and eligible
investments expressed as a percentage of net withdrawable savings and short-term
borrowings. The ratio is a measure of an institution's ability to meet demands
for savings withdrawals and to fund loan commitments.
Charter Federal's liquidity at June 30, 1995, June 30, 1994 and June 30,
1993 was 9.37%, 7.34% and 6.60%, respectively, and is a result of management's
interest rate expectations for the short term and management's recognition that
liquidity, while supporting stability in a period of rising rates, may result in
decreased yields in periods of declining interest rates.
The Bank's goal has been to meet fully its customer loan demand while
closely monitoring its liquidity position in order to maintain sufficient
liquidity to satisfy reasonably foreseeable needs. At June 30, 1995, Charter
Federal had sufficient collateral to support approximately $24.5 million in
additional FHLB advances. The Bank also has unpledged investments and
mortgage-backed securities with a carrying value of approximately $171.3 million
which qualify for borrowing under reverse repurchase agreements. The anticipated
loan repayments are also expected to be sufficient to meet future loan demand
and repay borrowings.
D-41
<PAGE> 201
At June 30, 1995, commitments to originate mortgage loans totaled
$4,624,000. The Bank anticipates funding loan commitments from normal
operations. In addition, the Bank has outstanding unused consumer equity lines
of credit to customers totaling $14,961,000. (See Note 17.)
EFFECTS OF INFLATION
As a financial institution, the majority of the Bank's assets and
liabilities are monetary in nature and, therefore, differ greatly from those of
most industrial or commercial companies that have significant investments in
fixed assets. The effects of inflation on Charter Federal's financial condition
and results of operations, therefore, are less significant than the effects of
changes in interest rates. The most significant effect of inflation is on
noninterest expense which tends to rise during periods of general inflation.
CHANGES IN ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently adopted or
issued proposals and guidelines that may have a significant impact on the
accounting practices of commercial enterprises in general, and financial
institutions in particular.
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of Loans", relating to the accounting for impaired loans. SFAS No.
114, as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," requires that specified impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate. The effective rate of a loan
is defined as the contractual interest rate adjusted for any deferred loan fees
or costs, premiums or discounts existing at the inception or acquisition of the
loan. Implementation of SFAS No. 114 is required for fiscal years beginning
after December 15, 1994. SFAS No. 114 is not expected to have a material effect
on the Bank's results of operations.
In June 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", relating to the accounting for
investments such as debt securities and equity securities which have a readily
determined fair value. Implementation of SFAS No. 115 is required for fiscal
years beginning after January 1, 1994. This statement classifies securities as
either securities that the holder has the positive intent and ability to hold to
maturity, securities that were bought with the intention to sell in the near
future, which are defined as trading securities, or securities that are
available for sale. Securities that will be held to maturity will be reported at
amortized costs. Securities that are classified as trading securities will be
reported at fair value, with unrealized gains and losses included in the
statement of operations. (Charter Federal has no intention of having trading
account securities.) Securities that are not classified as held to maturity or
trading will be recorded at fair value with unrealized gains and losses excluded
from earnings and shown as a component of stockholders' equity. The impact of
SFAS No. 115 upon the results of operation of Charter Federal at July 1, 1994
resulted in an increase to net worth of approximately $34,000 (net of tax) due
to the unrealized gains on the securities available for sale.
In October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures," to Amend SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" to allow a creditor to
use existing methods for recognizing interest income on an impaired loan. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1994. SFAS 118 is not expected to have a material effect on the
Bank's operations.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" which requires
more complete disclosure of information about derivative financial instruments,
such as forward, futures, swap and option contracts. The statement requires that
a distinction be made between financial instruments held or issued for trading
purposes (including dealing and other trading activities measured at fair value
with gains and losses recognized in earnings) and financial instruments held or
issued for purposes other than trading. The statement applies to all business
enterprises and is effective for financial statements for fiscal years beginning
January 1, 1994. The Bank has not invested in any derivative financial
instruments at June 30, 1995.
D-42
<PAGE> 202
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Interest-bearing deposits.................................. $ 13,414,000 $ 4,378,000
Noninterest-bearing deposits............................... 10,736,000 5,955,000
Restricted cash (Note 7)...................................... -- 80,000
Certificates of deposit....................................... -- 78,000
Investment securities available for sale
(estimated market 1995, $7,603,000; 1994, $40,939,000)..... 7,603,000 40,888,000
Investment securities held for investment (estimated market
1995, $13,804,000; 1994, $13,530,000) (Note 4)............. 14,079,000 14,139,000
Mortgage-backed certificates (estimated market 1995,
$280,988,000; 1994, $253,109,000) (Notes 5, 11, 12 and
17)........................................................ 281,112,000 259,164,000
Loans receivable, net (Notes 6, 13 and 17).................... 401,808,000 388,016,000
Loans held for sale (Note 6).................................. 2,003,000 942,000
Office properties and equipment, net (Note 8)................. 5,876,000 5,946,000
Real estate owned ("REO"), net (Note 9)....................... 7,006,000 5,569,000
Accrued interest receivable (Note 10)......................... 5,278,000 5,119,000
Prepaid and other assets...................................... 2,412,000 3,170,000
------------ ------------
Total assets............................................... $751,327,000 $733,444,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Savings deposits (Note 11)................................. $525,400,000 $548,126,000
Short-term borrowings (Note 12)............................ 63,614,000 30,462,000
Advance payments by borrowers for taxes and insurance...... 3,022,000 3,138,000
Accounts payable and accrued liabilities (Note 15)......... 7,435,000 3,726,000
Checks outstanding on disbursement account................. 932,000 1,245,000
Advances from Federal Home Loan Bank ("FHLB") (Note 13).... 104,500,000 104,500,000
------------ ------------
Total liabilities.......................................... 704,903,000 691,197,000
------------ ------------
Commitments and contingencies (Notes 7 and 17)
Stockholders' equity (Notes 14 and 16)
Capital stock:
Preferred stock, $.01 par value, 7,500,000 shares
authorized, none outstanding.......................... -- --
Common stock, $.01 par value, authorized 1995, 10,000,000
shares; issued 1995 and 1994, 5,127,071 shares (Note
14)................................................... 51,000 51,000
Additional paid-in capital................................. 52,006,000 52,006,000
Accumulated deficit, substantially restricted.............. (5,612,000) (9,761,000)
Unrealized gain in investments available for sale, net of
tax...................................................... 28,000 --
------------ ------------
46,473,000 42,296,000
Less cost of treasury stock, 1995 and 1994, 1,758 shares...... 49,000 49,000
------------ ------------
Total stockholders' equity................................. 46,424,000 42,247,000
------------ ------------
$751,327,000 $733,444,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
D-43
<PAGE> 203
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans................................................ $33,613,000 $34,560,000 $ 38,780,000
Mortgage-backed certificates......................... 17,013,000 13,738,000 15,182,000
Investment securities................................ 2,173,000 2,968,000 3,764,000
Direct finance automobile leases..................... -- 24,000 80,000
Other short-term investments and interest-bearing
deposits.......................................... 318,000 400,000 401,000
----------- ----------- -----------
Total interest income........................ 53,117,000 51,690,000 58,207,000
----------- ----------- -----------
INTEREST EXPENSE:
Savings deposits (Note 11)........................... 23,687,000 20,909,000 27,697,000
Short-term borrowings (Note 12)...................... 2,374,000 777,000 471,000
Advances from FHLB (Note 13)......................... 4,757,000 4,470,000 4,585,000
----------- ----------- -----------
Total interest expense....................... 30,818,000 26,156,000 32,753,000
----------- ----------- -----------
Net interest income.......................... 22,299,000 25,534,000 25,454,000
PROVISION FOR LOAN LOSSES (Note 6):.................... 1,975,000 2,150,000 5,087,000
----------- ----------- -----------
Net interest income after provision for loan
losses............................................ 20,324,000 23,384,000 20,367,000
----------- ----------- -----------
NONINTEREST INCOME:
Loan fees and service charges........................ 526,000 435,000 702,000
Net gain (loss) on sale of investment and marketable
equity securities (Note 4)........................ 44,000 (126,000) 592,000
Net gain (loss) on sale of loans (Note 6)............ 28,000 (203,000) 205,000
Net gain on sale of branches and deposits............ 2,543,000 -- --
Other................................................ 2,141,000 1,884,000 2,024,000
----------- ----------- -----------
Total noninterest income..................... 5,282,000 1,990,000 3,523,000
----------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and employee benefits (Notes 15 and
17)............................................... 6,799,000 6,466,000 5,371,000
Net occupancy (Note 17).............................. 1,782,000 1,782,000 1,626,000
Federal insurance premium expense.................... 1,402,000 1,702,000 1,541,000
Service bureau expense............................... 1,094,000 1,086,000 1,124,000
Amortization of costs in excess of fair value of net
assets acquired and identified intangibles........ -- -- 1,947,000
Provision for losses on REO (Note 9)................. 849,000 1,765,000 1,619,000
Provision for losses (recoveries) on direct finance
automobile leases and related assets (Note 7)..... (51,000) (77,000) 1,352,000
Other (Note 19)...................................... 4,801,000 4,379,000 3,516,000
----------- ----------- -----------
Total noninterest expense.................... 16,676,000 17,103,000 18,096,000
----------- ----------- -----------
Income before income taxes and write-off of costs in
excess of fair value of net assets acquired and
identified intangibles, extraordinary item and
cumulative effect of accounting change............ 8,930,000 8,271,000 5,794,000
WRITE-OFF OF COSTS IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED AND IDENTIFIED INTANGIBLES........... -- -- 41,108,000
----------- ----------- -----------
</TABLE>
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<PAGE> 204
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting change........ $ 8,930,000 $ 8,271,000 $(35,314,000)
INCOME TAXES (Note 16):................................ 3,373,000 (322,000) 1,778,000
----------- ----------- -----------
Income (loss) before extraordinary item and
cumulative effect of accounting change............ 5,557,000 8,593,000 (37,092,000)
EXTRAORDINARY ITEM (Note 16):.......................... -- -- 1,238,000
----------- ----------- -----------
Income (loss) before cumulative effect of accounting
change............................................ 5,557,000 8,593,000 (35,854,000)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 16)....... -- 990,000 --
----------- ----------- -----------
Net income (loss)................................. $ 5,557,000 $ 9,583,000 $(35,854,000)
=========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:(1)
Income (loss) before extraordinary item and
cumulative effect of accounting change............ $ 1.08 $ 1.87 $ (50.72)
Extraordinary item................................... -- -- 1.69
----------- ----------- -----------
Income (loss) before cumulative effect of accounting
change............................................ 1.08 1.87 (49.03)
Cumulative effect of accounting change............... -- .22 --
----------- ----------- -----------
Net income (loss)................................. $ 1.08 $ 2.09 $ (49.03)
=========== =========== ===========
Average number of common shares outstanding.......... 5,125,313 4,595,654 731,279
=========== =========== ===========
</TABLE>
- ---------------
(1) Prior years adjusted for effect of one-for-five reverse split.
See Notes to Consolidated Financial Statements.
D-45
<PAGE> 205
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
RETAINED UNREALIZED
EARNINGS GAIN IN TOTAL
ADDITIONAL (DEFICIT), INVESTMENTS STOCKHOLDERS'
COMMON PAID-IN SUBSTANTIALLY AVAILABLE FOR SALE, TREASURY EQUITY
STOCK CAPITAL RESTRICTED NET OF TAX STOCK (DEFICIT)
--------- ----------- ------------- ------------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992............... $ 37,000 $ 9,475,000 $ 16,510,000 $ -- $(50,000) $ 25,972,000
Reissuance of treasury stock......... -- -- -- -- 1,000 1,000
Net loss............................. -- -- (35,854,000) -- -- (35,854,000 )
------- ----------- ----------- ------- -------- -----------
Balance at June 30, 1993............... 37,000 9,475,000 (19,344,000) -- (49,000) (9,881,000 )
Net proceeds of rights offering...... 219,000 42,329,000 -- -- -- 42,548,000
Adjustment for one-for-five reverse
stock split and odd shares......... (205,000) 202,000 -- -- -- (3,000 )
Net income........................... -- -- 9,583,000 -- -- 9,583,000
------- ----------- ----------- ------- -------- -----------
Balance at June 30, 1994............... 51,000 52,006,000 (9,761,000) -- (49,000) 42,247,000
Dividends ($0.275 per share)......... -- -- (1,408,000) -- -- (1,408,000 )
Effect of adoption of SFAS No. 115,
net of tax......................... -- -- -- 34,000 -- 34,000
Change in unrealized gain in
investments available for sale, net
of tax............................. -- -- -- (6,000) -- (6,000 )
Net income........................... -- -- 5,557,000 -- -- 5,557,000
------- ----------- ----------- ------- -------- -----------
Balance at June 30, 1995............... $ 51,000 $52,006,000 $ (5,612,000) $28,000 $(49,000) $ 46,424,000
======= =========== =========== ======= ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
D-46
<PAGE> 206
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 5,557,000 $ 9,583,000 $ (35,854,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses........................ 1,975,000 2,150,000 5,087,000
Provision for REO losses......................... 849,000 1,765,000 1,619,000
Provision (recovery) for direct finance
automobile
leases........................................ (51,000) (77,000) 1,352,000
Provision for depreciation....................... 541,000 461,000 497,000
Amortization of loans receivable, mortgage-backed
certificates and investment securities premium
and discounts, net............................ 2,562,000 3,395,000 693,000
FHLB stock dividends............................. -- (226,000) (320,000)
Proceeds from sales of loans originated for
resale........................................ 2,095,000 22,926,000 9,383,000
(Gain) loss on sale of loans..................... (28,000) 203,000 (205,000)
Gain on sale of deposits......................... (2,167,000) -- --
Loss on sale of REO.............................. 7,000 6,000 127,000
Write-off of intangible assets................... -- -- 41,108,000
Amortization of intangible assets................ -- -- 1,947,000
(Gain) loss on sale of office properties and
equipment..................................... (317,000) 14,000 55,000
(Amortization) accretion of deferred loan fees,
net........................................... (252,000) (478,000) 257,000
(Gain) loss realized on investment and marketable
equity securities............................. (44,000) 126,000 (592,000)
(Increase) decrease in interest receivable....... (159,000) (123,000) 1,081,000
Increase in deferred taxes....................... 3,129,000 (1,196,000) --
Changes in operating assets and liabilities:
(Increase) decrease in prepaid and other
assets...................................... 758,000 (362,000) 102,000
Increase (decrease) in accounts payable,
accrued liabilities and checks
outstanding................................. 250,000 (3,677,000) (1,597,000)
------------ ------------- ------------
Net cash provided by operating activities..... 14,705,000 34,490,000 24,740,000
------------ ------------- ------------
Cash flows from investing activities:
Proceeds from maturities of certificates of
deposits...................................... 78,000 -- --
Proceeds from maturities of investment securities
held to maturity.............................. -- 9,222,000 6,000,000
Proceeds from maturities of investment securities
available for sale............................ 7,000,000 -- --
Transfer from restricted cash.................... 80,000 667,000 572,000
Proceeds from sale of marketable equity
securities.................................... -- -- 25,211,000
Proceeds from sales of investment securities
available
for sale...................................... 36,436,000 9,354,000 1,161,000
Purchases of investment securities............... (10,235,000) (21,029,000) (19,657,000)
Purchases of mortgage-backed certificates........ (64,803,000) (159,491,000) (15,293,000)
Disbursements to purchase loans.................. -- (10,183,000) --
Payments received on mortgage-backed
certificates.................................. 41,634,000 86,914,000 56,538,000
Decrease (increase) in loans receivable.......... (25,205,000) (882,000) 446,000
</TABLE>
D-47
<PAGE> 207
CHARTER FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Proceeds from sale of office properties and
equipment..................................... $ 1,223,000 $ -- $ 213,000
Purchases of office properties and equipment..... (1,377,000) (1,496,000) (207,000)
Proceeds from sales of REO....................... 3,161,000 601,000 2,472,000
Purchases for REO................................ -- -- (55,000)
Decrease in direct finance automobile leases..... 51,000 250,000 501,000
------------ ------------- ------------
Net cash provided by (used in) investing
activities.................................. (11,957,000) (86,073,000) 57,902,000
------------ ------------- ------------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts...... $ 18,640,000 $ (24,825,000) $ (43,007,000)
Decrease in deposits due to sale of Danville
branch, net of premium........................ (39,199,000) -- --
Net increase (decrease) in short-term
borrowings.................................... 33,152,000 30,462,000 (63,659,000)
Proceeds from reissuance of treasury stocks...... -- -- 1,000
Net increase (decrease) in advance payments by
borrowers for taxes and insurance............. (116,000) 961,000 284,000
Proceeds of rights offering...................... -- 42,548,000 --
Purchase of "odd shares" for reverse stock
split......................................... -- (3,000) --
Payment of cash dividend......................... (1,408,000) -- --
------------ ------------- ------------
Net cash provided by (used in) financing
activities.................................... 11,069,000 49,143,000 (106,381,000)
------------ ------------- ------------
Net increase (decrease) in cash and cash
equivalents................................... 13,817,000 (2,440,000) (23,739,000)
Cash and cash equivalents:
Beginning........................................ 10,333,000 12,773,000 36,512,000
------------ ------------- ------------
Ending........................................... $ 24,150,000 $ 10,333,000 $ 12,773,000
============ ============= ============
Supplemental schedule of cash and cash equivalents:
Cash:
Interest-bearing deposits..................... $ 13,414,000 $ 4,378,000 $ 5,340,000
Noninterest-bearing deposits.................. 10,736,000 5,955,000 6,583,000
Federal funds sold............................... -- -- 850,000
------------ ------------- ------------
$ 24,150,000 $ 10,333,000 $ 12,773,000
============ ============= ============
Supplemental disclosures of cash flow information:
Cash payments (refunds) for:
Interest...................................... $ 30,911,000 $ 26,145,000 $ 33,153,000
============ ============= ============
Income taxes.................................. $ (1,388,000) $ 1,651,000 $ 90,000
============ ============= ============
Supplemental disclosure of non-cash transactions:
Transfer of loans to REO......................... $ 5,454,000 $ 84,000 $ 5,644,000
============ ============= ============
Refinancing of advances from FHLB................ $ -- $ 104,500,000 $ --
============ ============= ============
Securities held to maturity transferred to
available for sale............................ $ -- $ 50,242,000 $ --
============ ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
D-48
<PAGE> 208
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1995, 1994, AND 1993
NOTE 1. POTENTIAL SALE OF COMPANY
On May 17, 1995, Charter Federal entered into a definitive merger agreement
(the "Agreement") with First American Corporation ("First American") whereby
Charter Interim Federal Savings Bank, a federally chartered interim savings bank
to be formed by First American would be merged with and into Charter with
Charter as the surviving entity. Each outstanding share of common stock of
Charter, par value $0.01 per share, would be converted into 0.38 shares of the
common stock of First American, par value $5.00 per share ("FAC Common Stock");
provided, however, that (i) if the FAC Market Value (as defined in the
Agreement) is greater than $39.75 per share, then the exchange ratio shall be
reduced to an amount equal to $15.10 divided by the FAC Market Value, rounded to
the nearest one ten-thousandth of a share, and cash in lieu of any fractional
share, and (ii) if, prior to the effective time of the Merger, First American
enters into a definitive agreement of merger or reorganization with another
entity as a result of which either First American would not be the surviving
entity or First American's Chief Executive Officer would not become Chief
Executive Officer of the surviving entity, then the exchange ratio shall be 0.38
(the "Exchange Ratio"). The Agreement may be terminated prior to the effective
time by Charter if the FAC Market Value is more than $43.50. In connection with
the merger, Charter also entered into an option agreement with First American
which provides for the purchase of up to a number of shares equal to 19.99% of
Charter's issued and outstanding common stock by First American under certain
circumstances at $9.08 per share. The consummation of the transaction is subject
to approval by Charter's stockholders, regulatory approvals and various other
conditions.
NOTE 2. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Charter Federal Savings Bank ("Charter Federal" or the
"Bank") is primarily engaged in the business of obtaining savings deposits and
originating one- to four-family residential mortgage loans and consumer loans
within its primary lending areas, Southwest Virginia and Northeast Tennessee.
The Bank's underwriting policies require such mortgage loans to be made based
upon appraised values, not exceeding an 80% loan-to-value ratio, unless private
mortgage insurance is obtained. These loans are secured by the underlying
properties.
The following is a description of the significant accounting policies used
in the preparation of the accompanying consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiaries, Charter Financial
Services Corporation and Highlands Service Corporation. All significant
inter-company transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of federal
funds sold and interest-bearing and noninterest-bearing deposits. For the
purposes of the Consolidated Statement of Cash Flows, the Bank considers all
highly liquid debt instruments with original maturities of three months or less
when purchased to be cash equivalents, but does not include restricted cash.
From time to time, the Bank may have deposits in excess of insurance coverage at
other institutions.
INVESTMENT SECURITIES. Investment securities held for investment are
carried at amortized cost and are not adjusted to the lower of cost or market
because the Bank has the ability to hold them to maturity and it is management's
intention to hold them to maturity. In determining whether investment securities
can be held to maturity, management considers whether there are conditions, such
as liquidity or regulatory requirements, which would impair its ability to hold
such securities. Gains or losses on the sale of investment securities are taken
into income at the time of sale, with cost being determined on a specific
identification basis. Premiums and discounts on investment securities are
amortized into income over the life of the security using a method which
approximates the interest method.
D-49
<PAGE> 209
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities available for sale are comprised of investments which
management has identified which may be sold in response to changes in liquidity,
interest rates, prepayments and similar factors. These securities are accounted
for at fair value with unrealized gains and losses included in stockholders'
equity. Prior to July 1, 1994, these securities were accounted for at lower of
cost or market value.
At July 1, 1994 the Bank adopted SFAS Statement No. 115, "Accounting for
Certain Investment in Debt and Equity Securities." See Note 20 for a discussion
of the provisions of SFAS No. 115 and its effect on the Bank.
MORTGAGE-BACKED CERTIFICATES. Mortgage-backed certificates are stated at
cost, adjusted for amortization of premiums and accretion of discounts using a
method that approximates the interest method over the period to maturity. The
Bank has the ability to hold mortgage-backed certificates to maturity and it is
management's intention to hold such assets to maturity. Should unanticipated
sales occur, gains and losses will be recognized based on the
specific-identification method.
LOANS RECEIVABLE. Loans receivable are stated at unpaid principal balances
less the allowance for loan losses and net deferred loan origination fees and
costs.
The allowance for loan losses is increased by provisions charged to income
and reduced by charge-offs, 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 borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued and income is subsequently recognized only to the
extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no longer
in doubt, in which case the loan is returned to accrual status.
LOAN ORIGINATION FEES, PREMIUMS AND DISCOUNTS. The Bank defers all loan
fees received less certain direct costs. These deferred fees and costs are
amortized into income to achieve a level yield throughout the life of the loan.
Premiums and discounts on loans are amortized to interest income over the life
of the loan using a method which approximates the interest method.
LOAN SALES. The Bank periodically reduces its interest rate sensitivity
and generates additional funds for lending by selling whole, fixed-rate real
estate loans. Loans held for sale are carried at the lower of cost or market.
Gains or losses on such sales are recognized at the time of sale and are
determined by the difference between the net sales proceeds and the unpaid
principal balance of the loans sold adjusted for any yield differential,
servicing fees and servicing costs applicable to future years. Management
intends to hold all other loans to maturity and is not aware of any conditions,
such as liquidity or regulatory requirements, which would impair its ability to
hold loans to maturity.
OFFICE PROPERTIES AND EQUIPMENT. Office properties and equipment are
stated at cost less accumulated depreciation computed principally by the
straight-line method over the estimated useful lives of the assets ranging from
3 to 40 years.
REAL ESTATE OWNED. Real estate acquired in settlement of loans is
initially recorded at estimated fair value less selling costs. The Bank complies
with Statement of Position 92-3, "Accounting for Foreclosed Assets" where the
carrying values of REO are reduced when they exceed fair value minus the
estimated costs to sell. Costs relating to the development and improvement of
the property are capitalized, while holding costs of the property are charged to
expense in the period incurred.
COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND IDENTIFIED
INTANGIBLES. The costs in excess of fair value of net assets acquired related
to acquisitions, the majority of which were being amortized over forty
D-50
<PAGE> 210
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years using the straight-line method prior to fiscal year 1994. The identified
intangibles included values assigned to the estimated future benefits to be
derived from the deposit base of certain financial institutions and the branch
offices acquired. Such values were being amortized over five to fifteen years.
The Bank annually assessed the remaining unamortized amounts of such intangible
assets to determine if impairment of value had occurred. (See Note 3.)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Charter Federal enters
into sales of securities under agreements to repurchase (dollar price reverse
repurchase agreements and reverse repurchase agreements). Such agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as a liability in the Consolidated Statement of Financial Condition.
The securities underlying the agreements remain in the asset accounts.
OFF-BALANCE SHEET ITEMS. The Bank is party to financial instruments with
off-balance-sheet risk such as commitments to extend credit and lines of credit
as part of its consumer lending program. Management assesses the risk related to
these instruments for potential losses on an on-going basis. (See Notes 17 and
22.)
PENSION PLAN. Pension expense is computed on the basis of actuarial
methods. It is the Bank's policy to fund pension costs accrued.
INCOME TAXES. The Bank and its subsidiaries file a consolidated tax
return. In July 1993, the Bank adopted SFAS No. 109, "Accounting for Income
Taxes." The adoption of SFAS No. 109 changed the Bank's method of accounting for
income taxes from the deferred method ("Accounting Principles Board Opinion No.
11") to an asset and liability approach. Previously, the Bank deferred the past
tax effects of timing differences between financial reporting and taxable
income. The asset and liability approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities.
NOTE 3. ACQUISITIONS
Effective March 1, 1982, Peoples Federal Savings and Loan Association,
Roanoke, Virginia ("Peoples") and First Federal Savings and Loan Association of
New River Valley, Pulaski, Virginia ("New River Valley") were merged into
Charter Federal. Effective March 29, 1985, the Bank acquired certain assets and
assumed the liabilities of New Federal Savings and Loan Association, Knoxville,
Tennessee ("New Federal") from the Federal Savings and Loan Insurance
Corporation. On March 20, 1987, the Bank acquired six branch offices and an
operations center previously operated by another financial institution.
The purchase method of accounting was used to record the acquisitions of
Peoples, New River Valley, New Federal and the branch office acquisitions. Under
the purchase method of accounting, all assets and liabilities acquired were
adjusted to fair value as of the date of acquisition. As a consequence of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA")
and the adverse disposition on March 26, 1993 of litigation instituted by the
Bank against the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC") to require the OTS to permit the Bank to include
supervisory goodwill in the calculation of its capital requirements
notwithstanding FIRREA, management determined that the supervisory goodwill no
longer had excess earnings capability and therefore no future economic benefit.
The Bank wrote off the remaining unamortized portion of costs in excess of fair
value of net assets acquired and identified intangibles totaling $41,108,000
associated with the acquisitions as described above as of June 30, 1993.
The amortization and accretion of discounts, costs in excess of fair value
of net assets acquired in business combinations and identified intangibles prior
to impairment related to the acquisition of Peoples, New River Valley, New
Federal and branch offices increased/(decreased) income before income taxes and
write-off of costs in excess of fair value of net assets acquired and identified
intangibles, cumulative effect of accounting
D-51
<PAGE> 211
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
change and extraordinary item by $393,000, $512,000 and ($1,108,000) for the
years ended June 30, 1995, 1994 and 1993, respectively.
NOTE 4. INVESTMENT SECURITIES
Management specifically identifies certain investment securities as either
available for sale or held for investment at the time such securities are
purchased. Securities available for sale may be sold in response to changes in
liquidity, interest rates, prepayments and other similar factors.
Securities available for sale at June 30, 1995 consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Federal
agency securities..................... $ 7,559,000 $ 44,000 -- $ 7,603,000
=========== ========== ========= ===========
</TABLE>
Securities held for investment at June 30, 1995 consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Federal agency
securities............................ $ 8,230,000 $ -- $ (275,000) $ 7,955,000
Other securities...................... 78,000 -- -- 78,000
----------- ---------- --------- -----------
8,308,000 -- (275,000) 8,033,000
FHLB stock.............................. 5,771,000 -- -- 5,771,000
----------- ---------- --------- -----------
$14,079,000 $ -- $ (275,000) $13,804,000
=========== ========== ========= ===========
</TABLE>
Securities available for sale at June 30, 1994 consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Federal
agency securities..................... $40,888,000 $ 322,000 $ (271,000) $40,939,000
=========== ========== ========= ===========
</TABLE>
Securities held for investment at June 30, 1994 consist of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Federal agency
securities............................ $ 8,287,000 $ -- $ (609,000) $ 7,678,000
Other securities........................ 81,000 -- -- 81,000
----------- ---------- --------- -----------
8,368,000 -- (609,000) 7,759,000
FHLB stock.............................. 5,771,000 -- -- 5,771,000
----------- ---------- --------- -----------
$14,139,000 $ -- $ (609,000) $13,530,000
=========== ========== ========= ===========
</TABLE>
D-52
<PAGE> 212
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities available
for sale, by contractual maturity, at June 30, 1995 are shown below:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less........................................... $ 2,007,000 $ 2,010,000
Due after one year through five years............................. 5,552,000 5,593,000
Due after five years through ten years............................ -- --
----------- -----------
$ 7,559,000 $ 7,603,000
=========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities held for
investment, by contractual maturity, at June 30, 1995 are shown below:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less........................................... $ -- $ --
Due after one year through five years............................. 8,230,000 7,955,000
Due after five years through ten years............................ 78,000 78,000
----------- -----------
$ 8,308,000 $ 8,033,000
=========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities available
for sale, by contractual maturity, at June 30, 1994 are shown below:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less........................................... $ 8,053,000 $ 8,040,000
Due after one year through five years............................. 19,746,000 19,536,000
Due after five years through ten years............................ 13,089,000 13,363,000
----------- -----------
$40,888,000 $ 40,939,000
=========== ===========
</TABLE>
The amortized cost and estimated market value of debt securities held for
investment, by contractual maturity, at June 30, 1994 are shown below:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less........................................... $ -- $ --
Due after one year through five years............................. -- --
Due after five years through ten years............................ 8,368,000 7,759,000
----------- -----------
$ 8,368,000 $ 7,759,000
=========== ===========
</TABLE>
FHLB stock has been excluded from the maturity tables above because it does
not have a contractual maturity. The Bank, as a member of the FHLB system, is
required to maintain an investment in capital stock of the FHLB in an amount
equal to the greater of 1% of its outstanding home loans or 5% of advances from
the FHLB. No ready market exists for this stock, and it has no quoted market
value. For presentation purposes, such stock is assumed to have a market value
which is equal to cost.
D-53
<PAGE> 213
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results from sales of investment securities available for sale for the year
ended June 30 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Gross proceeds from sales............................. $36,436,000 $9,354,000 $1,161,000
=========== ========== ==========
Gross realized gains.................................. $ 263,000 $ -- $ 15,000
Gross realized losses................................. (219,000) (126,000) (13,000)
----------- ---------- ----------
Net realized gains (losses)........................... $ 44,000 $ (126,000) $ 2,000
=========== ========== ==========
</TABLE>
NOTE 5. MORTGAGE-BACKED CERTIFICATES
The carrying values and estimated market values of mortgage-backed
certificates and related securities are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995
-----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED CARRYING UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS VALUE GAINS LOSSES VALUE
------------ ----------- --------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC-PC............... $127,435,000 $2,177,000 $(156,000) $129,456,000 $1,241,000 $ (506,000) $130,191,000
FHLMC-balloon.......... 65,227,000 1,134,000 -- 66,361,000 42,000 (714,000) 65,689,000
FNMA certificates...... 53,959,000 1,874,000 -- 55,833,000 288,000 (1,275,000 54,846,000
GNMA certificates...... 28,863,000 456,000 (91,000) 29,228,000 860,000 (57,000) 30,031,000
Other securities....... 234,000 -- -- 234,000 -- (3,000) 231,000
------------ ---------- --------- ------------ ---------- ----------- ------------
$275,718,000 $5,641,000 $(247,000) $281,112,000 $2,431,000 $(2,555,000) $280,988,000
============ ========== ========= ============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1994
---------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED CARRYING UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS VALUE GAINS LOSSES VALUE
------------ ----------- --------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC-PC................. $124,558,000 $2,201,000 $(174,000) $126,585,000 $394,000 $(2,251,000) $124,728,000
FHLMC-balloon............ 66,197,000 1,591,000 -- 67,788,000 -- (3,269,000) 64,519,000
FNMA certificates ....... 36,126,000 1,705,000 -- 37,831,000 6,000 (1,385,000) 36,452,000
GNMA certificates ....... 26,509,000 237,000 (103,000) 26,643,000 462,000 (12,000) 27,093,000
Other securities......... 318,000 -- (1,000) 317,000 -- -- 317,000
------------ ---------- --------- ------------- -------- ----------- ------------
$253,708,000 $5,734,000 $(278,000) $259,164,000 $862,000 $(6,917,000) $253,109,000
============ ========== ========= ============= ======== =========== ============
</TABLE>
No mortgage-backed certificates were sold in the years ended June 30, 1995,
1994 or 1993.
D-54
<PAGE> 214
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. LOANS RECEIVABLE
Loans receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one- to four-family residences.................. $260,930,000 $243,395,000
Secured by other properties................................ 47,752,000 50,870,000
Construction loans......................................... 9,168,000 6,379,000
------------ ------------
317,850,000 300,644,000
============ ============
Consumer and other loans:
Principal balances:
Automobile................................................. 37,655,000 59,855,000
Manufactured homes......................................... 568,000 121,000
Home equity and second mortgage............................ 45,223,000 33,608,000
Other...................................................... 10,768,000 7,863,000
------------ ------------
Total consumer and other loans........................ 94,214,000 101,447,000
------------ ------------
Allowance for loan losses....................................... (5,021,000) (8,356,000)
Undisbursed portion of construction loans....................... (3,963,000) (4,839,000)
Unearned premiums............................................... (196,000) 434,000
Net deferred loan origination fees.............................. (1,076,000) (1,314,000)
------------ ------------
(10,256,000) (14,075,000)
------------ ------------
$401,808,000 $388,016,000
============ ============
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning................................... $8,356,000 $10,344,000 $10,013,000
Provisions charged to operations..................... 1,975,000 2,150,000 5,087,000
Loans charged off.................................... (5,813,000) (4,280,000) (4,796,000)
Recoveries........................................... 503,000 142,000 40,000
---------- ----------- -----------
Balance, ending...................................... $5,021,000 $ 8,356,000 $10,344,000
========== =========== ===========
</TABLE>
At June 30, 1995, 1994 and 1993, non-accrual loans aggregated $6,320,000,
$3,266,000 and $10,512,000, respectively. Non-accrual loans had the effect of
reducing income by $98,000, $189,000 and $720,000, respectively. As of June 30,
1995, 1994 and 1993, $6,314,000, $5,237,000 and $4,324,000, respectively, of
loans were classified as restructured loans in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings." Gross
interest income of $664,000, $523,000 and $338,000 would have been realized on
restructured loans in accordance with the loans' original terms for the years
ended June 30, 1995, 1994 and 1993, respectively. Actual interest income earned
as a result of the restructurings was $518,000, $415,000 and $243,000 for the
years ended June 30, 1995, 1994 and 1993, respectively. The Bank does not have
commitments to lend additional funds on the restructured loans at June 30, 1995.
D-55
<PAGE> 215
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage loans serviced for others are not included in the accompanying
Consolidated Statements of Financial Condition. The unpaid principal balances of
these loans at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage loan portfolios serviced for:
FHLMC............................................. $60,387,000 $66,735,000 $64,794,000
Washington Mutual................................. 2,421,000 3,001,000 4,081,000
PNC Securities.................................... 2,034,000 2,468,000 3,487,000
PNC Mortgage...................................... 394,000 514,000 766,000
Other investors................................... 483,000 548,000 1,497,000
---------- ----------- -----------
$65,719,000 $73,266,000 $74,625,000
========== =========== ===========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,511,000 and $1,648,000 at June 30, 1995 and
1994, respectively.
Results from sales of loans for the year ended June 30 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Gross proceeds from sales............................ $2,095,000 $22,926,000 $ 9,383,000
========== =========== ===========
Gross realized gains................................. $ 34,000 $ 156,000 $ 205,000
Gross realized losses................................ (6,000) (359,000) --
---------- ----------- -----------
Net realized gains (losses).......................... $ 28,000 $ (203,000) $ 205,000
========== =========== ===========
</TABLE>
Loans held for sale, which are carried at the lower of cost or market, were
$2,003,000 and $942,000 at June 30, 1995 and 1994, respectively.
NOTE 7. NET INVESTMENT IN DIRECT FINANCE AUTOMOBILE LEASES
The following lists the components of the net investment in direct finance
automobile leases as of June 30:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Total minimum lease payments to be received.............................. $ -- $29,000
Less allowance for uncollectibles...................................... -- 29,000
Net minimum lease payments receivable.................................... -- --
Less unearned income................................................... -- --
Net investment in direct finance automobile leases....................... $ -- $ --
</TABLE>
At June 30, 1995 and 1994, interest-bearing deposits representing cash
restricted for potential losses associated with the leases sold were
approximately $0 and $80,000, respectively.
Included in other assets are receivables from an insurance company due to
terminated leases and repossessed automobiles totaling $0 and $42,000 at June
30, 1995 and 1994, respectively.
D-56
<PAGE> 216
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis of the allowance for direct finance automobile
leases related to receivables and contingent losses:
<TABLE>
<CAPTION>
ALLOWANCE FOR
PROBABLE ALLOWANCE
LOSSES FOR ALLOWANCE FOR TOTAL
ON DIRECT PROBABLE CONTINGENT ALLOWANCE
FINANCE LOSSES ON LOSSES ON FOR LEASES
AUTOMOBILE RELATED LEASES AND RELATED
LEASES RECEIVABLES SOLD ASSETS
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, June 30, 1992................... $ 150,000 $ 2,775,000 $ -- $ 2,925,000
Provisions charged to operations......... 30,000 654,000 668,000 1,352,000
Losses charged off, net of recoveries.... -- (3,389,000) -- (3,389,000)
-------- ---------- -------- ----------
Balance, June 30, 1993................... 180,000 40,000 668,000 888,000
Provisions charged to operations......... (151,000) 74,000 -- (77,000)
Losses charged off, net of recoveries.... -- (72,000) (668,000) (740,000)
-------- ---------- -------- ----------
Balance, June 30, 1994................... 29,000 42,000 -- 71,000
Provisions charged to operations......... (29,000) (22,000) -- (51,000)
Losses charged off, net of recoveries.... -- (20,000) -- (20,000)
-------- ---------- -------- ----------
Balance, June 30, 1995................... $ -- $ -- $ -- $ --
======== ========== ======== ==========
</TABLE>
NOTE 8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land and improvements............................................... $1,111,000 $1,256,000
Buildings and building improvements................................. 5,995,000 6,887,000
Furniture and fixtures.............................................. 6,613,000 6,496,000
Automobiles......................................................... 109,000 109,000
---------- ----------
13,828,000 14,748,000
Accumulated depreciation............................................ (7,952,000) (8,802,000)
---------- ----------
$5,876,000 $5,946,000
========== ==========
</TABLE>
NOTE 9. REAL ESTATE OWNED
Real estate owned at June 30 consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Real estate acquired in settlement of loans......................... $ 647,000 $ 666,000
In-substance foreclosures........................................... 6,836,000 5,052,000
---------- ----------
7,483,000 5,718,000
Allowance for loss on real estate owned............................. (477,000) (149,000)
---------- ----------
$7,006,000 $5,569,000
========== ==========
</TABLE>
D-57
<PAGE> 217
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis for the years ended June 30 of activity in the
allowance for losses on real estate acquired in settlement of loans:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning...................................... $149,000 $2,067,000 $1,449,000
Provisions charged to operations........................ 849,000 1,765,000 1,619,000
Losses charged off...................................... (521,000) (3,683,000) (1,505,000)
Recoveries.............................................. -- -- 504,000
-------- ---------- ----------
Balance, ending......................................... $477,000 $ 149,000 $2,067,000
======== ========== ==========
</TABLE>
Losses on sales of real estate owned for the year ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Realized losses................................................. $7,000 $6,000 $127,000
====== ====== =======
</TABLE>
NOTE 10. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Investment securities............................................... $ 515,000 $ 872,000
Mortgage-backed certificates........................................ 2,217,000 1,946,000
Loans receivable.................................................... 2,546,000 2,301,000
---------- ----------
$5,278,000 $5,119,000
========== ==========
</TABLE>
D-58
<PAGE> 218
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. SAVINGS DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED- 1995 1994
AVERAGE RATE ------------------------ ------------------------
AT JUNE 30, 1995 AMOUNT PERCENT AMOUNT PERCENT
---------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Passbook accounts............ 3.00% $ 18,654,000 3.55% $ 21,161,000 3.86%
Other savings accounts....... 3.09 31,640,000 6.02 67,054,000 12.23
Negotiable Order of
Withdrawal "NOW"
accounts................... 2.03 19,820,000 3.78 20,203,000 3.69
Noninterest-bearing
checking................... -- 14,996,000 2.85 10,166,000 1.85
Money Market Deposit
Accounts("MMDAs").......... 3.75 17,144,000 3.26 29,146,000 5.32
------------ ------- ------------ -------
102,254,000 19.46 147,730,000 26.95
------------ ------- ------------ -------
Certificate of Deposit:
Less than 2%............... -- -- -- --
2% -- 3.99%............. 4,960,000 .94 147,842,000 26.97
4% -- 5.99%............. 272,023,000 51.78 236,120,000 43.08
6% -- 7.99%............. 143,950,000 27.40 9,468,000 1.73
8% -- 9.99%............. 1,360,000 .26 2,909,000 0.53
10% -- 11.99%........... 853,000 .16 2,938,000 0.54
12% -- 13.99%........... -- -- 1,119,000 0.20
------------ ------- ------------ -------
423,146,000 80.54 400,396,000 73.05
------------ ------- ------------ -------
$525,400,000 100.00% $548,126,000 100.00%
============ ======= ============ =======
Weighted-average cost of
savings deposits........... 5.0% 3.9%
======= =======
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $48,337,000 and $50,723,000
at June 30, 1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
------------ ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
2% - 3.99%............. $ 4,960,000 $ -- $ -- $ -- $ -- $ --
4% - 5.99%............. 222,630,000 38,292,000 3,941,000 6,491,000 258,000 411,000
6% - 7.99%............. 68,787,000 19,376,000 50,319,000 1,839,000 3,395,000 234,000
8% - 9.99%............. 1,212,000 100,000 11,000 1,000 35,000 1,000
10% - 11.99%........... 782,000 -- -- -- -- 71,000
------------ ----------- ----------- ---------- ---------- --------
$298,371,000 $57,768,000 $54,271,000 $8,331,000 $3,688,000 $ 717,000
============ =========== =========== ========== ========== ========
</TABLE>
D-59
<PAGE> 219
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on savings deposits for the years ended June 30 consist of
the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Passbook and other savings accounts................. $ 1,892,000 $ 3,195,000 $ 5,088,000
NOW accounts and MMDAs.............................. 1,149,000 1,441,000 1,684,000
Certificate accounts................................ 20,646,000 16,273,000 20,925,000
---------- ---------- ----------
$23,687,000 $20,909,000 $27,697,000
========== ========== ==========
</TABLE>
The Bank has pledged mortgage-backed certificates and other securities with
a book value of approximately $38,290,000 and $33,832,000 at June 30, 1995 and
1994, respectively, as collateral for public deposits.
NOTE 12. SHORT-TERM BORROWINGS
Short-term borrowings at June 30 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Borrowings under reverse repurchase agreements.................... $63,614,000 $30,462,000
=========== ===========
</TABLE>
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Average balance during the year................................... $41,696,000 $21,488,000
Average interest rate during the year............................. 5.69% 3.62%
Maximum month-end balance during the year......................... $63,614,000 $32,744,000
Mortgage-backed certificates underlying the agreements at year
end:
Carrying value, including accrued interest........................ $71,693,000 $33,551,000
Estimated market value............................................ $71,211,000 $31,882,000
</TABLE>
The Bank enters into sales of securities under agreements to repurchase.
Reverse repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reported as a liability in the accompanying
Consolidated Statement of Financial Condition. The dollar amount of securities
underlying the agreements remains in the asset accounts. Mortgage-backed
certificates sold under dollar reverse repurchase agreements were delivered to
the broker-dealers who arranged the transactions. The broker-dealers may have
sold, loaned or otherwise disposed of such certificates to other parties in the
normal course of their operation, and have resold to the Bank substantially
identical certificates at the maturity date of the agreements.
Interest expense on short-term borrowings for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Dollar reverse repurchase and other reverse repurchase
agreements.............................................. $2,374,000 $777,000 $471,000
========== ======== ========
</TABLE>
D-60
<PAGE> 220
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB at June 30 consist of the following:
<TABLE>
<CAPTION>
INTEREST RATE 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Maturing Year Ending June 30
1995................................................. -- $ -- $ --
1996................................................. 4.24%-4.46% 36,000,000 36,000,000
1997................................................. 4.53%-4.75% 36,000,000 36,000,000
1998................................................. 4.83%-5.05% 32,500,000 32,500,000
------------ ------------
$104,500,000 $104,500,000
============ ============
</TABLE>
Pursuant to collateral agreements with the FHLB, advances are
collateralized by all of the Bank's stock in the FHLB and qualifying first
mortgage loans with principal balances of $225,732,000 and $202,981,000, at June
30, 1995 and 1994, respectively.
Interest expense on advances for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Advances from the FHLB................................. $4,757,000 $4,470,000 $4,585,000
========== ========== ==========
</TABLE>
NOTE 14. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
("FIRREA"); FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF
1991 ("FDICIA"); CAPITAL AND REGULATORY RESTRICTIONS AND STOCK MATTERS
FIRREA AND FDICIA. In August 1989 FIRREA was signed into law. It was
designed to provide funds to reduce the number of problem savings and loan
associations, recapitalize the thrift insurance fund, and reform and reorganize
the regulatory structure applicable to savings associations.
FDICIA was enacted in 1991 and required prompt corrective action by
regulators for institutions in financial difficulty, mandated a risk-based
deposit insurance system, and imposed a number of additional safety and
soundness factors.
CAPITAL. Under OTS regulations, savings associations are to comply with
each of three separate capital adequacy standards: (i) "tangible capital"; (ii)
"leverage ratio"; and (iii) "risk-based capital".
Regulations require supervisory goodwill to be deducted from tangible
capital. In 1991, the Bank filed suit to compel the OTS and the FDIC to honor
contractual promises made under certain supervisory acquisitions that gave rise
to the creation of supervisory goodwill. Although initially successful in the
United States District Court, the suit was denied at the appellate level and an
attempt to be heard before the United States Supreme Court was denied. As a
result of these actions, the Bank charged off, as worthless, the remaining
goodwill during the year ended June 30, 1993. (See Note 3.)
RIGHTS OFFERING AND SUBSEQUENT CAPITAL. With the Supreme Court's denial of
the Bank's writ of certiorari, as discussed above, the Bank entered into
discussions with the OTS to devise a means for achieving capital compliance.
From those discussions, the Bank's Board of Directors determined that an
offering of additional shares of common stock in a subscription rights offering
was the only means for the Bank to achieve capital compliance.
On May 18, 1993, the Bank submitted an amended capital plan designed to
achieve capital compliance. In general, to achieve capital compliance with the
levels required by the OTS, the capital plan contemplated raising, at a minimum,
$41.3 million of additional capital through issuance of additional common stock
D-61
<PAGE> 221
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursuant to a subscription rights offering. The OTS approved Charter Federal's
capital plan on June 21, 1993 and issued a Prompt Corrective Action Directive
("PCA") to the Bank on July 7, 1993.
On August 13, 1993, the subscription rights offering was successfully
completed. The Bank issued and sold 21,971,405 shares of common stock (4,394,281
adjusted for the one-for-five reverse stock split effected December 20, 1993),
raising over $42.5 million in net proceeds. During the year ended June 30, 1994,
all operating restrictions imposed earlier by the regulators were rescinded.
Below is a reconciliation of the Bank's capital as calculated in accordance with
generally accepted accounting principles ("GAAP") to the three components of
regulatory capital calculated at June 30, 1995:
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT
OF OF OF
TANGIBLE TANGIBLE CORE CORE RISK-BASED RISK-BASED
CAPITAL ASSETS CAPITAL ASSETS CAPITAL ASSETS
-------- -------- -------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital -- Tier I...... $ 46,424 6.18% $ 46,424 6.18% $ 46,424 12.80%
SFAS No. 115 adjustment..... (28) -- (28) -- (28) (0.01)
-------- ------ -------- ------ -------- ------
GAAP capital -- Tier 1
(adjusted)................ 46,396 6.18 46,396 6.18 46,396 12.79
General valuation
allowance................. -- -- -- -- 4,518 1.25
Non-includable assets....... -- -- -- -- (53) (0.02)
-------- ------ -------- ------ -------- ------
Regulatory capital
computed.................. 46,396 6.18 46,396 6.18 50,861 14.02
Minimum capital
requirement............... (11,269) (1.50) (22,538) (3.00) (29,022) (8.00)
-------- ------ -------- ------ -------- ------
Regulatory capital excess... $ 35,127 4.68% $ 23,858 3.18% $ 21,839 6.02%
======== ====== ======== ====== ======== ======
</TABLE>
STOCK MATTERS. The stockholders have approved two stock option grants made
to officers and employees of Charter Federal Savings Bank under the "1993
Incentive Stock Option Plan" (the "Plan") during fiscal 1994. Under one grant,
five senior officers were granted a total of 30,200 non-qualified stock options
at a price of $10.00 per share, adjusted for the one-for-five reverse stock
split, for which the price was $5.00 per share less than the price of the Bank's
common stock on the date of the grant. Those options vested immediately upon
stockholder approval of the Plan and will expire in the year 2003. The second
grant of stock options made during fiscal 1994 was that of incentive stock
options made to senior officers and certain key employees at an option price of
$12.25 per share, which was equal to the closing market price of the Bank's
stock on the date of grant. The grant of incentive stock options was made on a
five year vesting schedule with 20% of the grant to vest immediately upon
stockholder approval of the Plan, and the remainder to vest ratably over the
next four years. Under the terms of the Plan, all outstanding options become
fully vested upon a change of control of the Bank. A total of 121,000 incentive
stock options were granted to expire in the year 2004, of which 4,000 have been
forfeited.
At the time of conversion from a mutual to a stock association, the Bank
established a liquidation account in an amount equal to its equity as of the
latest date prior to conversion, which amounted to approximately $12,632,000 at
September 30, 1983. In addition, at the time of conversion of First Federal
Savings and Loan Association of Danville, the Bank established a liquidation
account which amounted to approximately $1,960,000 at December 31, 1984. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintain their savings accounts in the Bank after
conversion. In the event of a complete liquidation (and only in such an event),
each eligible savings account holder will be entitled to receive a distribution
of a proportionate share of the liquidation account before any liquidation
distribution may be made with respect to capital stock. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of the
liquidation account will not restrict the use or application of such equity.
D-62
<PAGE> 222
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank may not declare or pay a cash dividend on or purchase any of its
capital stock if the effect would be to reduce its equity below either the
amount of the liquidation account or the capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 imposes
uniform limitations on the ability of savings banks to engage in various
distributions of capital such as dividends and stock repurchases. The
limitations vary based upon a savings bank's capital and earnings levels. The
Bank may not make any capital distributions without prior notice of the
intention to pay such dividend to the OTS.
Earnings (loss) per share of common stock was calculated by dividing net
income (loss) by the weighted-average shares as if those shares had been
outstanding for each period. The weighted-average number of shares at June 30,
1995, 1994 and 1993 were 5,125,313, 4,595,654, and 731,729, respectively. The
1993 weighted-average number of shares has been adjusted to give effect to the
one-for-five reverse stock split which became effective December 21, 1993.
NOTE 15. EMPLOYEE BENEFIT PLANS
The Bank participates in a multiemployer, noncontributing defined benefit
plan covering substantially all employees. No contributions were made to the
plan for the years ended June 30, 1995, 1994 and 1993, respectively, as it was
determined that earnings and previous excess contributions were sufficient.
Accumulated benefit and net assets information relative to Charter Federal's
interest in the plan are not determinable.
On March 31, 1993 the Bank adopted a multiemployer employee retirement plan
covering all eligible employees. Employee eligibility is based on age and length
of service. Employees may contribute a portion of their pre-tax compensation
under a 401(k) arrangement. Effective January 1, 1994, the Bank began making
employer contributions at a rate of 25% of employee contributions to a maximum
of 1.5% of salary. Total contributions for the fiscal year ended June 30, 1995
were $35,000.
SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions", requires accrual basis accounting for postretirement benefits
effective July 1, 1993. The net periodic cost recognized during the year ended
June 30, 1995 is $37,000, which is included in "Compensation and Employee
Benefits".
NOTE 16. INCOME TAXES
As discussed in Note 2, the Bank adopted SFAS No. 109 in July 1993. The
adjustments to the July 1, 1993 balance sheet to adopt SFAS No. 109 netted to
$990,000. The impact of these adjustments was to change deferred tax liabilities
of $445,000 as of June 30, 1993 to deferred tax assets of $545,000 as of July 1,
1993. This amount is reflected in fiscal year 1994 net income as the effect of a
change in accounting principle. It primarily represents the impact of adjusting
deferred taxes to recognize a portion of future tax benefits to be derived from
the utilization of net operating loss carryforwards and other tax deductions.
Such benefits generally could not be recognized under the Bank's previous method
of accounting for income taxes.
D-63
<PAGE> 223
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes charged to continuing operations was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1995 1994 1993
---------- --------- --------
<S> <C> <C> <C>
Current tax expense
U.S. federal........................................... $ 181,000 $ 314,000 $540,000
State.................................................. 63,000 15,000 --
---------- ---------- --------
Total current.......................................... 244,000 329,000 540,000
---------- ---------- --------
Deferred tax expense
U.S. federal........................................... 2,623,000 (642,000) --
State.................................................. 506,000 (9,000) --
---------- ---------- --------
Total deferred......................................... 3,129,000 (651,000) --
---------- ---------- --------
Total provision........................................ $3,373,000 $(322,000) $540,000
========== ========== ========
</TABLE>
The Bank utilized tax loss carryforwards, for which no benefit had been
previously recognized as of July 1, 1993, of $4,096,000 and $7,483,000 during
fiscal year 1995 and 1994, respectively. These carryforwards were used to reduce
the amount of current tax expense by approximately $1,549,000 and $2,841,000 for
the fiscal year ended 1995 and 1994, respectively.
Deferred tax assets (liabilities) are comprised as follows at June 30:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Allowance for loan losses.................................. $1,332,000 $ 2,423,000
Deferred loan fees......................................... 182,000 532,000
Discount on loans acquired................................. 321,000 423,000
Discount on property and equipment acquired................ 165,000 212,000
Nondeductible accruals..................................... 232,000 211,000
Deductible core deposit intangible assets.................. 157,000 232,000
Net operating loss carryforwards........................... -- 1,549,000
Minimum tax credit carryforwards........................... 95,000 --
Other...................................................... 26,000 127,000
---------- ----------
Gross deferred tax assets.................................. 2,510,000 5,709,000
---------- ----------
Depreciation............................................... (125,000) (195,000)
FHLB stock dividends....................................... (870,000) (870,000)
---------- ----------
Gross deferred tax liabilities............................. (995,000) (1,065,000)
---------- ----------
Valuation allowance........................................ -- (3,448,000)
---------- ----------
Net deferred tax asset..................................... $1,515,000 $ 1,196,000
========== ==========
</TABLE>
A valuation allowance was established against certain deferred tax assets
in fiscal year 1994; $3,448,000 of such allowance was outstanding at June 30,
1994. During fiscal year 1995, the book expenses creating these deferred tax
assets were deducted in the Bank's current tax returns. Because this treatment
for income tax purposes reduced income taxes currently payable, the valuation
allowance was reclassified as an accrued liability to reflect continued
uncertainty regarding the realization of these income tax benefits, with no
impact on income tax expense or net income.
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. The applicable provisions of the law
D-64
<PAGE> 224
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
permit the Bank to deduct from taxable income an allowance for bad debts based
on the greater of 8% of taxable income before such deductions or actual loss
experience. Because the Bank does not intend to use the reserve for purposes
other than to absorb losses, deferred income taxes have not been provided.
Retained earnings include approximately $5,154,000 at June 30, 1995 for
which no provision for income taxes has been made. This amount represents
allocations of income to bad debt deductions for tax purposes only. If the
amounts that qualify as deductions for income tax purposes are later used for
purposes other than bad debt or operating losses, they will be subject to the
income tax at the then current corporate rate. The Bank estimates that
approximately $1,752,000 of income tax would be payable on the tax bad debt
reserve described above if these amounts are used for purposes other than bad
debt or operating losses.
The effective rate of the provision for income taxes differs from the
applicable U.S. statutory federal income tax rate as a result of the following
differences:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate............................ 34.0% 34.0% (34.0)%
Increase (decrease) in taxes resulting from:
Nondeductible merger costs................................. 4.1 -- --
Effect on net nondeductible expenses on assets and
liabilities
acquired in merger...................................... -- 40.7
State taxes, net of federal benefit........................ 4.2 3.8 --
Reduction of valuation allowance for deferred income
taxes................................................... -- (49.5) --
Net operating loss carryforwards........................ -- -- (4.3)
Other................................................... (4.5) 7.8 (0.9)
----
--
------ ------
37.8% (3.9)% 1.5%
====== ====== ======
</TABLE>
NOTE 17. COMMITMENTS, CONTINGENCIES AND RELATED PARTIES
The Bank has rented land, office facilities and equipment under
noncancelable operating leases expiring at various dates through 2003. Minimum
rental payments due under these leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
PAYMENT
YEAR ENDING JUNE 30, REQUIRED
----------------------------------------------------------------- ----------
<S> <C>
1996............................................................. $ 395,000
1997............................................................. 243,000
1998............................................................. 167,000
1999............................................................. 145,000
2000............................................................. 133,000
Thereafter....................................................... 739,000
----------
$1,822,000
==========
</TABLE>
For the years ended June 30, 1995, 1994 and 1993, $476,000, $442,000 and
$477,000, respectively, have been charged to rental expense.
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 lines of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the
D-65
<PAGE> 225
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Statement of Financial Condition. The contract or notional amounts
of those 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 is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to
off-balance-sheet risk, except for undisbursed loan funds, as of June 30, is as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------- --------------------------------------
FIXED VARIABLE FIXED VARIABLE
RATE RATE TOTAL RATE RATE TOTAL
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial instruments with
contract amounts representing
credit risk:
Commitments to extend credit,
mortgage loans.............. $3,871,000 $ 753,000 $ 4,624,000 $5,149,000 $ 2,985,000 $ 8,134,000
Commitments to extend credit,
consumer and other loans.... 264,000 -- 264,000 516,000 -- 516,000
Undisbursed lines of credit... 4,273,000 10,688,000 14,961,000 -- 12,239,000 12,239,000
Letters of credit............. -- -- -- -- 20,771,000 20,771,000
</TABLE>
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(s). Collateral held varies but may include real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees were
issued primarily to support public and private borrowings arrangements,
including bond financing, and similar transactions.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
The Bank entered into five separate agreements to act as a participating
credit enhancer of five separate municipal revenue bond issues. Under each of
these agreements, the Bank issued a letter of credit to guarantee repayment of
the principal amount due under the bond, plus its share of the interest due
thereunder for a maximum number of days. Each bond is secured by first mortgage
or leasehold mortgage on a multi-family residential property built with the
proceeds from the sale of the bonds. Three properties are located in Oklahoma,
one is in Florida and one is in Kansas. Commonwealth Federal Savings Association
("Commonwealth") was the lead participant in these transactions. In 1989,
Commonwealth was placed in conservatorship under the Resolution Trust
Corporation ("RTC") and in 1991, was placed in receivership.
In the event of default on the bonds, the letters of credit would be
exercised or pledged assets liquidated, and the participants would become owners
of the properties.
The Bank's letters of credit on these bond issues totaled $26,765,000,
including interest, at June 30, 1992. During the year ended June 30, 1993, the
Bank entered into an agreement with the RTC whereby the RTC would assume the
Bank's enhancement responsibilities in three of the letters of credit relating
to the Oklahoma property and the Bank would assume the RTC's enhancement
responsibilities in two letters of credit relating to the Kansas and Florida
properties. The Bank paid $2,500,000 to the RTC which primarily
D-66
<PAGE> 226
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represented the net change in bond enhancement exposure to the parties following
the swap. This left the Bank with 100% enhancement responsibility on two letters
of credit totaling $20,771,000, including interest, at June 30, 1993.
The properties securing the letters of credit had experienced negative cash
flows in the past which resulted in borrower/participant shortfalls, which the
Bank wrote off through reserves totaling $2,554,000. On July 22, 1994, Charter
Federal sold its letter of credit position relative to the Florida property. On
June 1, 1995, Charter Federal sold its letter of credit position relative to the
Kansas property. At June 30, 1995, Charter Federal had no remaining exposure
under any letters of credit. All mortgage-backed securities held as collateral
under the letters of credit have been released and are no longer encumbered.
The Bank has entered into an unfunded deferred compensation agreement
providing retirement benefits for a former executive officer. Vested benefits
under the agreement are payable in installments over a 10-year period, upon
death or retirement. The Bank has insured the life of the employee for an amount
sufficient to discharge its obligation under such agreement. The present value
of the liability has been accrued over the expected term of active service of
the employee. Annual expense under the agreement was approximately $-0-, $-0-
and $60,000 for the years ended June 30, 1995, 1994, and 1993, respectively.
Pursuant to 12 CFR Section 545.121, the Bank must indemnify its officers
and directors under certain circumstances. The Bank's bylaws also require the
Bank to indemnify its officers and directors in certain circumstances. Should
the Bank be required by regulation or its agreement to provide indemnification,
the cost would be incurred by the Bank; however, the Bank has obtained
Directors' and Officers' liability insurance coverage as protection in the event
such action would be necessary.
The Bank has made loans to officers and directors in the normal course of
business. The following is an analysis of the loans to executive officers,
directors, major stockholders and related interests:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Balance, beginning.................................. $2,486,000 $2,158,000
Originations........................................ 808,000 1,215,000
Collections......................................... (537,000 (887,000)
---------- ----------
Balance, ending..................................... $2,757,000 $2,486,000
========== ==========
Directors, executive officers, major stockholders
and related interest.............................. $ 855,000 $ 850,000
Other officers...................................... 1,902,000 1,636,000
---------- ----------
$2,757,000 $2,486,000
========== ==========
</TABLE>
D-67
<PAGE> 227
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for the years ended
June 30, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED FISCAL 1995
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net interest income............................ $5,477,000 $5,493,000 $ 5,591,000 $5,738,000
Net gain on sale of GNMA, FHLMC, other loans
and investment and marketable securities..... 39,000 5,000 1,000 27,000
Gain on sale of branch......................... -- -- 2,378,000 --
Other income................................... 551,000 878,000 614,000 789,000
Other expense, income taxes (benefit) and
provision for loan losses.................... 5,748,000 4,835,000 6,945,000 4,496,000
---------- ---------- ---------- ----------
Net income..................................... $ 319,000 $1,541,000 $ 1,639,000 $2,058,000
========== ========== ========== ==========
Earnings per share on common stock............. $ .06 $ .30 $ .32 $ .40
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FISCAL 1994
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net interest income............................ $5,851,000 $6,405,000 $ 6,731,000 $6,547,000
Net loss on sale of GNMA, FHLMC, other loans
and investment and marketable securities..... (159,000) (136,000) -- (34,000)
Other income................................... 688,000 636,000 245,000 750,000
Other expense, income taxes (benefit) and
provision
for loan losses.............................. 4,172,000 4,408,000 4,407,000 5,944,000
---------- ---------- ---------- ----------
Income before cumulative effect of accounting
change....................................... 2,208,000 2,497,000 2,569,000 1,319,000
Cumulative effect of accounting change......... -- -- -- 990,000
---------- ---------- ---------- ----------
Net income..................................... $2,208,000 $2,497,000 $ 2,569,000 $2,309,000
========== ========== ========== ==========
Earnings per share on common stock:
Before cumulative effect of accounting
change.................................... $ 0.48 $ 0.54 $ 0.56 $ 0.29
Cumulative effect of accounting change......... -- -- -- .22
---------- ---------- ---------- ----------
Net income..................................... $ 0.48 $ 0.54 $ 0.56 $ 0.51
========== ========== ========== ==========
</TABLE>
NOTE 19. OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended June 30:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Merger-related expenses........................ $1,104,000 $ -- $ --
Marketing...................................... 542,000 611,000 263,000
Other.......................................... 3,155,000 3,768,000 3,253,000
---------- ---------- ----------
$4,801,000 $4,379,000 $3,516,000
========== ========== ==========
</TABLE>
NOTE 20. FASB STATEMENTS
The FASB has issued Statement No. 114, which has not been adopted by the
Bank as of June 30, 1995. SFAS Statement No. 114, as amended, must be applied by
the Bank for the fiscal year ending June 30, 1996, although it may be applied
earlier.
D-68
<PAGE> 228
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 114, "Accounting by Creditors for Impairment of Loans," relates to
the accounting for impaired loans. SFAS No. 114 requires that specified impaired
loans be measured based on the present value of expected cash flows discounted
at the loan's effective interest rate. The effective interest rate of a loan is
defined as the contractual interest rate adjusted for any deferred loan fees or
costs, premiums or discounts existing at the inception or acquisition of the
loan. SFAS No. 114 is not expected to have a material effect on the Bank's
results of operations.
The FASB has issued SFAS No. 115, which was adopted by the Bank on July 1,
1994. SFAS No. 115 is effective for fiscal years beginning after December 15,
1993.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," relates to the accounting for investments such as debt securities
and equity securities which have a readily determinable fair value. This
statement classifies securities as either securities that the holder has the
positive intent and ability to hold to maturity, securities that were bought
with the intention to sell in the near future which are defined as trading
securities, or securities that are available for sale. Securities that will be
held until maturity will be reported at amortized cost. Securities that are
classified as trading securities will be reported at fair value with unrealized
gains and losses included in the statement of operations. Securities that are
not classified as held to maturity or trading will be recorded at fair value
with unrealized gains and losses excluded from earnings and shown as a component
of stockholders' equity. The adoption of SFAS No. 115 at July 1, 1994 resulted
in an increase to stockholders' equity of approximately $34,000 (net of tax).
In October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures," to amend SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" to allow a creditor to
use existing methods for recognizing interest income on an impaired loan. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1994. SFAS 118 is not expected to have a material effect on the
Bank's operations.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" which requires
more complete disclosure of information about derivative financial instruments,
such as forward, futures, swap and option contracts. The statement requires that
a distinction be made between financial instruments held or issued for trading
purposes (including dealing and other trading activities measured at fair value
with gains and losses recognized in earnings) and financial instruments held or
issued for purposes other than trading. The statement applies to all business
enterprises and is effective for financial statements for fiscal years beginning
January 1, 1994. The Bank has not invested in any derivative financial
instruments at June 30, 1995.
D-69
<PAGE> 229
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21. CONSOLIDATED SUBSIDIARIES
The following condensed statements summarize the financial position and
operating results of the Bank's wholly-owned subsidiaries:
CONDENSED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
HIGHLANDS CHARTER
SERVICE FINANCIAL SERVICE
CORPORATION CORPORATION
---------------------- ----------------------
1994 1995 1995 1994
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Assets:
Cash (primarily savings deposits with
parent).................................. $ 14,000 $624,000 $ 32,000 $198,000
Loans receivable............................ -- -- -- --
Real estate owned........................... -- -- -- --
Property, plant and equipment............... -- -- 1,000 1,000
Accrued interest receivable on cash deposits
(primarily from parent).................. -- -- 17,000 2,000
Prepaid expenses and other assets........... -- 5,000 25,000 49,000
--------- -------- --------- --------
$ 14,000 $629,000 $ 75,000 $250,000
========= ======== ========= ========
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities.... $ 11,000 $ 30,000 $ -- $ 3,000
Capital stock............................... 550,000 550,000 200,000 200,000
Retained earnings (deficit)................. (547,000) 49,000 (125,000) 47,000
--------- -------- --------- --------
$ 14,000 $629,000 $ 75,000 $250,000
========= ======== ========= ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
HIGHLANDS CHARTER
SERVICE FINANCIAL SERVICE
CORPORATION CORPORATION
---------------------- ----------------------
1994 1995 1995 1994
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Income:
Interest on loans........................... $ -- $ 9,000 $ -- $ --
Interest on interest-bearing deposits
(primarily from parent).................. 4,000 11,000 3,000 8,000
Other....................................... 40,000 101,000 181,000 281,000
--------- -------- --------- --------
44,000 121,000 184,000 289,000
Expenses:
Compensation................................ 2,000 8,000 61,000 152,000
Occupancy................................... 500 6,000 3,000 6,000
Other....................................... 2,500 2,000 17,000 32,000
--------- -------- --------- --------
5,000 16,000 81,000 190,000
--------- -------- --------- --------
Net Income.................................. $ 39,000 $105,000 $ 103,000 $ 99,000
========= ======== ========= ========
</TABLE>
D-70
<PAGE> 230
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 22. DISCLOSURES ABOUT FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values required under SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," have been determined by the Bank using
available market information and appropriate valuation methodologies; however,
considerable judgment is required to develop the estimates of fair value.
Accordingly, the estimates presented in this note for the fair value of the
Bank's financial instruments are not necessarily indicative of the amounts the
Bank could realize in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair market amounts.
The fair value of the Bank's cash and cash equivalents, restricted cash,
federal funds sold, and certificates of deposit is estimated to be equal to
their recorded amounts. For investment securities and mortgage-backed
certificates, the fair value is estimated using quoted market values obtained
from independent pricing services.
The fair value of loans and direct finance automobile leases has been
estimated by discounting projected cash flows at June 30, 1995, using nationally
published rates including those published by the Federal Reserve Bank, the
Federal Home Loan Bank of Atlanta, and the Federal Housing Finance Board. These
rates have been adjusted as necessary to conform with the attributes of the
specific loan types in the portfolio. The valuation has also been adjusted for
prepayment risk using prepayment percentages published by the Federal Home Loan
Bank of Atlanta, which approximate the Bank's estimates of actual prepayment
activity experienced in the portfolio. Nonperforming and restructured loans and
leases are valued at their recorded book values, because it is not practicable
to reasonably assess the credit adjustment that would be applied in the
marketplace for such loans. Management believes that the Bank's general
valuation allowances at June 30, 1995 are an appropriate indication of the
applicable credit risk associated with determining the fair value of its loan
portfolio and such allowances have been deducted from the estimated fair value
of loans. The estimated fair value of loans held for sale is presumed to be the
actual selling price of the loans in the marketplace as of June 30, 1995.
The fair value of deposits with no stated maturities, including checking
accounts and statement savings accounts, is estimated to be equal to the amount
payable on demand as of June 30, 1995. The fair value of certificates of deposit
is based upon the discounted value of the contractual cash flows. The discount
rates used in these calculations approximate the Treasury yield curve and
current rates offered for deposits of similar remaining maturities.
The fair value of Federal Home Loan Bank advances outstanding at June 30,
1995 is based upon the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for advances of similar
remaining maturities. The fair value of checks outstanding on disbursement
account is presumed to be its recorded book value.
The estimated fair value of letters of credit is presumed to be the
appraised values of the underlying real estate properties. The estimated fair
value of commitments to extend credit is estimated using fees currently charged
for similar arrangements adjusted for changes in interest rates and credit risk
that have occurred subsequent to origination. Because the Bank believes that the
credit risk associated with available but undisbursed commitments would
essentially offset fees that could be recognized under similar arrangements,
D-71
<PAGE> 231
CHARTER FEDERAL SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and because the commitments are either short term in nature or subject to
immediate repricing, no fair value has been assigned to these off-balance-sheet
commitments.
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
RECORDED ESTIMATED RECORDED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 24,150 $ 24,150 $ 10,333 $ 10,334
Certificates of deposit......................... -- -- 78 78
Investment securities, held for investment...... 14,079 13,804 14,138 13,529
Investment securities available for sale........ 7,603 7,603 40,888 40,939
Mortgage-backed certificates.................... 281,112 280,983 259,164 253,109
Loans receivable, net........................... 401,808 400,654 388,016 385,888
Loans held for sale............................. 2,003 2,046 942 942
Financial liabilities:
Savings deposits with no stated maturities...... 102,254 102,254 147,730 147,730
Savings deposits with stated maturities......... 423,146 423,130 400,396 396,261
Checks outstanding on disbursement account...... 932 932 1,245 1,245
Advances from Federal Home Loan Bank and short-
term borrowings............................... 168,114 165,400 134,962 130,347
Unrecognized financial instruments:
Letters of credit............................... --(1) -- 14,508(1) 14,508
</TABLE>
- ---------------
(1) These figures are net of reserves of $0 and $4,305,000 for 1995 and 1994,
respectively. These reserves are reflected in loans receivable, net on the
Consolidated Statement of Financial Condition.
D-72
<PAGE> 232
MANAGEMENT'S REPORT ON INTERNAL CONTROL
The management of Charter Federal Savings Bank is responsible for establishing
and maintaining an adequate internal control structure and procedures for
financial reporting, including the safeguarding of assets, which are designed to
provide reasonable assurance to the Company's management and board of directors
regarding the preparation of reliable annual published financial statements. The
system contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified. Even an effective internal control system,
no matter how well designed, has inherent limitations -- including the
possibility of the circumvention or overriding of controls -- and therefore can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
The Company assessed its internal control system as of June 30, 1995 in relation
to criteria for effective internal control over financial reporting described in
"Internal Control -- Integrated Framework," issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This assessment complied
fully with the requirements of management concerning safeguarding of assets as
stated in Guideline No. 9 of the June, 1993 Regulations implementing Section 112
of the Federal Deposit Insurance Corporation Improvement Act of 1991. Based on
this assessment, the Company believes that, as of June 30, 1995, its system of
internal control over financial reporting met those criteria and provided an
effective control structure.
CHARTER FEDERAL SAVINGS BANK
By: /s/ C. R. MCCULLAR
----------------------------------
C. R. McCullar
President and Chief Executive
Officer
By: /s/ RICHARD W. BUCHANAN
----------------------------------
Richard W. Buchanan
Executive Vice President
Finance and Credit Administration
June 30, 1995
D-73
<PAGE> 233
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Charter Federal Savings Bank
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Charter Federal Savings Bank and its subsidiaries at June 30, 1995
and 1994, and the results of their operations and their cash flows for each of
the two years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 16 to the financial statements, the Company changed its
method of accounting for income taxes during the year ended June 30, 1994.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, Georgia
August 11, 1995
D-74
<PAGE> 234
MCGLADREY & PULLEN, LLP
-------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
To the Board of Directors and Stockholders
Charter Federal Savings Bank
Bistrol, Virginia
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Charter Federal Savings Bank
and subsidiaries (the "Bank") for the year ended June 30, 1993. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Charter Federal Savings Bank and subsidiaries for the year ended June 30, 1993,
in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
August 13, 1993
D-75
<PAGE> 235
ITEM 9. DISAGREEMENT ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Charter Federal, their principal
occupation or employment for the past five years, and position appears under
"Proposal II -- Election of Directors -- Information as to Nominees and
Continuing Directors" and "Compliance with Section 16 of the Securities Act" in
the Prospectus/Proxy Statement for the Charter Federal Annual Meeting and is
incorporated herein by reference. The Proxy Statement will be filed within 120
days of June 30, 1995. Information concerning Executive Officers is contained in
Part I of this report in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding directors and executive compensation appears under
"Proposal II -- Election of Directors -- Directors Remuneration" and "Summary
Compensation Table" and "Information and Benefit Plans and Policies" in the
Prospectus/Proxy Statement for the Charter Federal Annual Meeting and is
incorporated herein by reference (excluding the Stock Performance Graph and
Human Resources Committee Report). The Proxy Statement will be filed within 120
days of June 30, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the above-captioned item appears under "Proposal
II -- Election of Directors -- Information as to Nominees and Continuing
Directors" and "Security Ownership of Certain Beneficial Owners" in the
Prospectus/Proxy Statement for the Charter Federal Annual Meeting and is
incorporated herein by reference. The Proxy Statement will be filed within 120
days of June 30, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above-captioned item appears under "Proposal
II -- Election of Directors -- Executive Compensation -- Certain Transactions"
in the Prospectus/Proxy Statement of the Charter Federal Annual Meeting and is
incorporated herein by reference. The Proxy Statement will be filed within 120
days of June 30, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Exhibits (listed numbers correspond to Item 60l of Regulation S-K)
<TABLE>
<S> <C>
(2) Agreement and Plan of Merger, dated as of May 17, 1995.****
(3)(a) Federal Stock Charter of Charter Federal Bank, as amended*
(3)(b) Bylaws of Charter Federal Bank, as amended.***
(4) Instruments Defining the Rights of Security Holders, Including
Indentures -- Reference is made to Exhibit (3) above.
(9) Voting Trust Agreement -- Not applicable.
(10) Change of Control agreement with C. R. McCullar.***
(10.2) Change of Control agreement with Richard W. Buchanan.***
(10.3) 1993 Incentive Stock Option Plan.**
</TABLE>
D-76
<PAGE> 236
<TABLE>
<S> <C>
(11) Statement re Computation of Per Share Earnings -- Reference is made to the
information under Note 14 to the financial statements contained under Item
8 of this report.
(12) Statement re Computation of Ratios -- Not applicable.
(13) Annual Report to Security Holders -- Not applicable.
(18) Letter re Change in Accounting Principles -- Not applicable.
(19) Previously unfiled Documents -- Not applicable.
(21) Subsidiaries of the Registrant. The Association has two wholly-owned
subsidiaries, Highlands Service Corporation and Charter Financial Services
Corporation, both of which are incorporated in the state of Virginia and do
business under the aforementioned names.
(22) Published Report Regarding Matters Submitted to Vote of Security
Holders -- Not applicable.
(23)(a) Consent of Price Waterhouse LLP -- Filed herewith.
(23)(b) Consent of McGladrey & Pullen, LLP -- Filed herewith.
(24) Power of Attorney -- Not applicable.
(99)(a) Additional Exhibits
The individual financial statements of the Registrant have been omitted
since (1) consolidated financial statements have been filed, (2) there are
no subsidiaries not consolidated nor any affiliates whose securities are
pledged as collateral and (3) Registrant is primarily an operating
association and there is no long term indebtedness of consolidated
subsidiaries guaranteed by the Registrant in excess of 5% of consolidated
total assets as of June 30, 1995.
</TABLE>
- ---------------
* Incorporated herein by reference to the Form 10-K for the year ended June
30, 1993.
** Incorporated herein by reference from the Proxy Statement for the October
12, 1994 Annual Meeting of Stockholders.
*** Incorporated herein by reference to the Form 10-K for the year ended June
30, 1994.
**** Incorporated herein by reference to the Form 8-K filed on May 23, 1995.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on May 23, 1995 announcing that Charter
Federal and First American Corporation had entered into a definitive merger
agreement.
D-77
<PAGE> 237
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.
CHARTER FEDERAL SAVINGS BANK
By: /s/ CECIL R. MCCULLAR
------------------------------------
Cecil R. McCullar
President and
Chief Executive Officer
Date: August 11, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on August 11, 1995 by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<C> <S>
/s/ CECIL R. MCCULLAR President and Chief Executive Officer
- ---------------------------------------------
Cecil R. McCullar
/s/ DOUGLAS D. DEPPEN Senior Vice President and Chief Financial and
- --------------------------------------------- Accounting Officer
Douglas D. Deppen
/s/ L. LOWELL ANDERSON Director
- ---------------------------------------------
L. Lowell Anderson
/s/ ROBERT J. BARTEL Chairman of the Board
- ---------------------------------------------
Robert J. Bartel
/s/ E. L. BYINGTON, JR. Director
- ---------------------------------------------
E. L. Byington, Jr.
/s/ BILLY M. BRAMMER Director
- ---------------------------------------------
Billy M. Brammer
/s/ LOIS A. CLARKE Director
- ---------------------------------------------
Lois A. Clarke
/s/ FRANCIS L. LEONARD Director
- ---------------------------------------------
Francis L. Leonard
</TABLE>
D-78
<PAGE> 238
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<C> <S>
/s/ MORTON W. LESTER Director
- ---------------------------------------------
Morton W. Lester
/s/ CLIFFORD R. QUESENBERRY, SR. Director
- ---------------------------------------------
Clifford R. Quesenberry, Sr.
Director
- ---------------------------------------------
Robert E. Torray
Director
- ---------------------------------------------
John G. Wampler
</TABLE>
D-79
<PAGE> 239
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 (and not derivatively) for
expenses, unless such proceeding shall be 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 (the "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> 240
more than a 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 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 by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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 Securities and Exchange 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 such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 241
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 26th day of October, 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 Executive October 26, 1995
- ----------------------------------- Officer and Director (Principal
Dennis C. Bottorff Executive Officer)
/s/ MARTIN E. SIMMONS Executive Vice President - October 26, 1995
- ----------------------------------- Administration, General Counsel,
Martin E. Simmons Secretary and Principal Financial
Officer
/s/ M. JACK VANNATTA Executive Vice President and October 26, 1995
- ----------------------------------- Principal Accounting Officer
M. Jack Vannatta
Directors:
/s/ SAMUEL E. BEALL, III* Director October 26, 1995
- -----------------------------------
Samuel E. Beall, III
/s/ DENNIS C. BOTTORFF* Director October 26, 1995
- -----------------------------------
Dennis C. Bottorff
/s/ EARNEST W. DEAVENPORT, JR.* Director October 26, 1995
- -----------------------------------
Earnest W. Deavenport, Jr.
/s/ REGINALD D. DICKSON* Director
- -----------------------------------
Reginald D. Dickson
/s/ T. SCOTT FILLEBROWN, JR.* Director October 26, 1995
- -----------------------------------
T. Scott Fillebrown, Jr.
/s/ JAMES A. HASLAM II* Director October 26, 1995
- -----------------------------------
James A. Haslam II
/s/ MARTHA R. INGRAM* Director October 26, 1995
- -----------------------------------
Martha R. Ingram
/s/ WALTER G. KNESTRICK* Director
- -----------------------------------
Walter G. Knestrick
</TABLE>
II-3
<PAGE> 242
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------------------- --------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
/s/ GENE C. KOONCE* Director October 26, 1995
- -----------------------------------
Gene C. Koonce
/s/ JAMES R. MARTIN* Director October 26, 1995
- -----------------------------------
James R. Martin
/s/ ROBERT A. MCCABE, JR.* Director October 26, 1995
- -----------------------------------
Robert A. McCabe, Jr.
/s/ WILLIAM O. MCCOY* Director October 26, 1995
- -----------------------------------
William O. McCoy
/s/ DALE W. POLLEY* Director October 26, 1995
- -----------------------------------
Dale W. Polley
/s/ ROSCOE R. ROBINSON, M.D.* Director October 26, 1995
- -----------------------------------
Roscoe R. Robinson, M.D.
Director
- -----------------------------------
James F. Smith, Jr.
/s/ CAL TURNER, JR.* Director October 26, 1995
- -----------------------------------
Cal Turner, Jr.
/s/ TED H. WELCH* Director October 26, 1995
- -----------------------------------
Ted H. Welch
/s/ DAVID K. WILSON* Director October 26, 1995
- -----------------------------------
David K. Wilson
Director
- -----------------------------------
Toby S. Wilt
/s/ WILLIAM S. WIRE II* Director October 26, 1995
- -----------------------------------
William S. Wire II
*By: /s/ MARTIN E. SIMMONS
------------------------------
Martin E. Simmons
as Attorney-in-Fact
</TABLE>
II-4
<PAGE> 243
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 the Registration Statement.
Amendment No. 1 to Agreement and Plan of Reorganization, included in Appendix A
to the Prospectus/Proxy Statement which is a part of the Registration
Statement.
Exhibit 2.2 Stock Option Agreement, included as Appendix C to the Prospectus/Proxy
Statement which is a part of the Registration Statement.
Exhibit 3.1 Charter of First American, as amended, incorporated herein by reference to
Exhibit 1.1 to the First American 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.
Exhibit 8 Form of Opinion of Arnold & Porter as to certain tax consequences of the
Merger.
Exhibit 13 Charter's Annual Report on Form 10-K for the fiscal year ended June 30, 1995,
included as Appendix D to the Prospectus/Proxy Statement which is a part of the
Registration Statement.
Exhibit 15 Letter of KPMG Peat Marwick LLP re: unaudited interim financial information
Exhibit 23.1 Consent of KPMG Peat Marwick LLP, independent accountants for First American.
Exhibit 23.2 Consent of Price Waterhouse LLP, independent auditors for Charter.
Exhibit 23.3 Consent of McGladrey & Pullen, LLP independent auditors for Charter.
Exhibit 23.4 Consent of Martin E. Simmons, Esq., contained in the opinion filed as Exhibit 5
hereto.
Exhibit 23.5 Consent of Wheat, First Securities, Inc.
Exhibit 23.6 Consent of Arnold & Porter.
Exhibit 24 Powers of Attorney of certain directors and officers of First American,
previously filed.
Exhibit 99.1 Form of Proxy relating to Charter Common Stock.
Exhibit 99.2 Opinion of Wheat, First Securities, Inc. 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]
October 26, 1995
First American Corporation
First American Center
Nashville, TN 37237
Re: 3,910,684 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 Reorganization dated as of May 17,
1995 and amended as of October 11, 1995, and a related Agreement and Plan of
Merger and Combination by and between Charter Federal Savings Bank 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 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.
The undersigned hereby consents to the undersigned being named as a party
rendering a legal opinion under the caption "Legal Opinion" in the Prospectus
constituting part of the Registration Statement and to
<PAGE> 2
First American Corporation
October 26, 1995
Page 2
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
[A&P LETTERHEAD]
October , 1995
First American Corporation
First American Center
Nashville, Tennessee 37237-0700
Charter Federal Savings Bank
110 Piedmont Avenue
Bristol, Virginia 24201
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the proposed merger (the "Merger") of Charter Interim Federal
Savings Bank ("Charter Interim"), a federal savings bank to be formed as a
wholly owned first tier subsidiary of the First American Corporation ("FAC"),
with and into Charter Federal Savings Bank ("Charter").
FAC is a registered bank holding company organized under the laws of
Tennessee and headquartered in Nashville, Tennessee. Charter Interim will be a
federally chartered interim savings bank headquartered in Bristol, Virginia and
organized solely for the purpose of facilitating the Merger. First American
National Bank ("FANB"), a national banking association headquartered in
Nashville, Tennessee, is organized under the laws of the United States. FANB is
a wholly owned subsidiary of FAC.
Charter, a federally chartered savings bank headquartered in Bristol,
Virginia, is organized under the laws of the United States. Charter, which
operates offices in Virginia and Tennessee, provides retail, consumer financial
and residential mortgage services in its market areas.
The terms of the proposed Merger are contained in (i) the Agreement and
Plan of Reorganization dated as of May 17, 1995, as amended as of October 11,
1995, between FAC and Charter (the "Plan of Reorganization"), and (ii) the
Agreement and Plan of Merger and Combination that will be entered into by
Charter and Charter Interim after the formation of Charter Interim (the "Plan of
Merger"). A copy of the Plan of Merger is attached as an Exhibit to the Plan of
Reorganization. Charter and FAC have also entered into the Stock Option
Agreement (the "Option Agreement") dated as of May 17, 1995, pursuant to which
Charter granted FAC an option to purchase Charter Common Stock. Exercise of the
option is contingent upon the occurrence of specified events described in the
Option Agreement. The Plan of Reorganization, the Plan of Merger and the Option
Agreement are collectively referred to as the "Agreements."1
You have permitted us to assume in preparing this opinion that (1) the
Merger will be consummated in accordance with the terms, conditions and other
provisions of the Agreements, (2) all of the factual information, descriptions,
representations and assumptions set forth in the Agreements and in the letters
to us from FAC dated , 1995, and from Charter dated , 1995 (the
"Letters"), were accurate and complete at the respective dates of such letters
and will be accurate and complete at the time the Merger becomes effective (the
"Effective Time"), and (3) the disclosure set forth in the Prospectus/Proxy
Statement dated , 1995, that is to be mailed to Charter shareholders
in connection with the annual meeting of shareholders (at which the shareholders
will be asked to approve the Merger among other proposals), was accurate and
complete and will be accurate and complete at the Effective Time, and (4) any
contingent consideration paid with respect to the Goodwill Litigation will
consist solely of FAC Common Stock. You have also received an advance copy of
this letter and recognize that we are relying upon the assumptions set forth
herein. We have not independently verified any factual matters relating to the
Merger with or apart from our preparation of this opinion and, accordingly, our
opinion does not take into account any matters not set forth herein which might
have been disclosed by independent verification.
- ---------------
1 Unless otherwise defined herein, capitalized terms used in this letter shall
have the meanings assigned to them in the Plan of Reorganization.
<PAGE> 2
First American Corporation
October , 1995
Page 2
Subject to the qualifications and other matters set forth herein and based
on all the assumptions set forth in the preceding paragraph, it is our opinion
that for federal income tax purposes --
1. The Merger will constitute a "reorganization" within the meaning of
section 368(a) of the Internal Revenue code of 1986, as amended (the
"Code");
2. To the extent Charter Common Stock is exchanged in the Merger for
FAC Common Stock (including any Contingent FAC Shares), no gain or loss
will be recognized by the shareholders of Charter, except to the extent any
Contingent FAC Shares constitute a payment of interest (including imputed
interest);
3. Gain or loss, if any, will be recognized by Charter shareholders
upon the receipt of cash in lieu of fractional shares of FAC Common Stock;
and
4. Each of FAC and Charter will be a "party to a reorganization"
within the meaning of section 368(b) of the Code.
Our opinion is limited to the foregoing federal income tax consequences of
the Merger, which are the only matters as to which you have requested our
opinion, and you must judge whether the matters addressed herein are sufficient
for your purposes. We do not address any other federal income tax consequences
of the Merger or other matters of federal law and have not considered matters
(including state or local tax consequences) arising under the laws of any
jurisdiction other than matters of federal law arising under the laws of the
United States.
In particular, we express no opinion on the federal income tax consequences
of the Merger if any contingent consideration is paid with respect to the
Goodwill Litigation that consists of any property (including cash) other than
solely FAC Common Stock. The reason for this is that there are several federal
income tax questions presented in such circumstances that are not adequately
addressed by applicable statutes, regulations, court decisions or administrative
pronouncements. While arguments can be made that the Merger would qualify as a
"reorganization" within the meaning of section 368(a), in the event that the
contingent consideration is not FAC Common Stock, there is a substantial
likelihood that the Merger would not constitute a "reorganization" under such
circumstances. If the Merger does not constitute a "reorganization" within the
meaning of section 368(a) then gain or loss will be recognized by the Charter
shareholders on the exchange of their Charter Common Stock for FAC Common Stock
or any other consideration and FAC and Charter will not be parties to a
reorganization within the meaning of section 368(b).
Our opinion is based on the understanding that the relevant facts are, and
will be at the Effective Time, as set forth or referred to in this letter. If
this understanding is incorrect or incomplete in any respect, our opinion could
be affected.
Our opinion is also based on the Code, Treasury Regulations, case law, and
Internal Revenue Service rulings as they now exist, none of which squarely
addresses every precise factual circumstance present in connection with the
Merger but all of which, taken together, in our opinion provide a sufficient
legal basis for our opinions set forth herein. However, the possibility exists
that our opinion as to the proper application of the law to the facts of the
Merger would not be accepted by the Internal Revenue Service or would not
prevail in court. In addition, the authorities upon which we have relied are all
subject to change and such change may be made with retroactive effect. We can
give no assurance that after any such change, our opinion would not be
different.
<PAGE> 3
First American Corporation
October , 1995
Page 3
We undertake no responsibility to update or supplement our opinion. Our
opinion is directed to the Boards of Directors of FAC and Charter; provided,
however, that we have consented to the filing with the Securities and Exchange
Commission of this opinion as an exhibit to FAC's Registration Statement on Form
S-4 relating to shares of FAC Common Stock that may be issued in connection with
the Merger and to the reference to our firm under the headings
"Summary -- Certain Federal Income Tax Consequences" and "Certain Federal Income
Tax Consequences" in the Prospectus/Proxy Statement. In giving such consent, we
did not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
ARNOLD & PORTER
<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
October 25, 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
October 25, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Proxy Statement
constituting part of this Registration Statement on Form S-4 of First American
Corporation of our report dated August 11, 1995 appearing on page 101 of Charter
Federal Savings Bank's Annual Report on Form 10-K for the year ended June 30,
1995. We also consent to the reference to us under the headings "Experts" in
such Proxy Statement.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Atlanta, Georgia
October 25, 1995
<PAGE> 1
EXHIBIT 23.3
MCGLADREY & PULLEN, LLP
------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Amendment of the
Registration Statement originally filed August 16, 1995 on Form S-4 of our
report dated August 13, 1993 which appears in the annual report of Form 10-K of
Charter Federal Savings Bank and subsidiaries and to the reference of our firm
under the caption "Experts" for the year ended June 30, 1993.
MCGLADREY & PULLEN, LLP
/S/ MCGLADREY & PULLEN, LLP
Charlotte, North Carolina
October 25, 1995
<PAGE> 1
EXHIBIT 23.5
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the use in this Registration Statement on Form S-4 of
our draft letter to the Board of Directors of Charter Federal Savings Bank
included as Appendix B to the Prospectus/Proxy Statement that is a part of this
Registration Statement, and to the references to such letters and to our firm in
such Prospectus/Proxy Statement. In giving such consent we do not thereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933 or the rules and regulations of the
Securities and Exchange Commission thereunder.
/s/ Wheat, First Securities, Inc.
--------------------------------------
WHEAT, FIRST SECURITIES, INC.
RICHMOND, VIRGINIA
OCTOBER 26, 1995
<PAGE> 1
EXHIBIT 23.6
October 26, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We hereby consent to the filing with the Securities and Exchange Commission
of the form of our opinion as Exhibit 8 to FAC's Registration Statement on Form
S-4 relating to shares of FAC Common Stock that may be issued in connection with
the Merger and to the reference to our firm under the headings
"Summary -- Certain Federal Income Tax Consequences" and "Certain Federal Income
Tax Consequences" in the Prospectus/Proxy Statement. In giving such consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Arnold & Porter
--------------------------------------
ARNOLD & PORTER
<PAGE> 1
EXHIBIT 99.1
REVOCABLE PROXY -- CHARTER FEDERAL SAVINGS BANK
ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 30, 1995
10:00 A.M.
The undersigned hereby appoints the Board of Directors of Charter Federal
Savings Bank, with full power of substitution, to act as attorneys and proxies
for the undersigned, and to vote all shares of common stock of Charter Federal
Savings Bank, which the undersigned is entitled to vote only at the Annual
Meeting of Stockholders, to be held at Electro-Mechanical Corporate Centre, 2310
Highway 421, Bristol, Virginia, on November 30, 1995, at 10:00 a.m., and at any
and all adjournments thereof, as follows:
The Board of Directors recommends a vote "FOR" each of the listed proposals.
1. The approval and adoption of the Agreement and Plan of Reorganization, as
amended, between Charter Federal Savings Bank and First American Corporation,
a bank holding company organized under the laws of the State of Tennessee,
and a related Agreement and Plan of Merger and Combination.
/ / FOR / / AGAINST / / ABSTAIN
2. The election of all nominees listed below for terms of three years each or
until the proposed merger transaction is consummated (except as marked to the
contrary below).
Mr. E.L. Byington, Jr., Ms. Lois A. Clarke, and Messrs. Clifford R. Quesenberry,
Sr. and John G. Wampler.
/ / FOR / / VOTE WITHHELD
INSTRUCTION: To withhold your vote for any individual nominee, strike through
that nominee's name on the line above. YOU ARE ALLOWED TO CUMULATE VOTING FOR
THE NOMINEES. In voting for directors, a stockholder is entitled to four votes
for each share of common stock held, one for each of the four nominees. A
shareholder may cast his/her votes evenly for all nominees or may cumulate such
votes and cast all for one nominee or distribute them among the four nominees.
To cumulate votes for any nominee, write the nominee's name and the number of
votes cast in his favor on the line below.
- --------------------------------------------------------------------------------
3. The ratification of the appointment of Price Waterhouse LLP as independent
auditors for Charter Federal Savings Bank for the fiscal year ending June 30,
1996, or if earlier, until the effective time of the Merger.
/ / FOR / / AGAINST / / ABSTAIN
(CONTINUED ON OTHER SIDE)
(CONTINUED FROM OTHER SIDE)
4. The approval of the adjournment of the Annual Meeting for up to 29 days, if
necessary, in order to solicit proxies if shareholders holding two-thirds of
the votes eligible to be cast at the Annual Meeting do not submit proxies
voting in favor of Proposal 1.
/ / FOR / / AGAINST / / ABSTAIN
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS
ARE SPECIFIED, THIS SIGNED PROXY WILL BE VOTED "FOR" THE PROPOSALS LISTED. IF
ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED
BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE
BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL
MEETING.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned acknowledges receipt from Charter Federal Savings Bank prior
to the execution of this proxy of a Notice of Annual Meeting and of a Proxy
Statement/Prospectus dated October , 1995.
Dated:
------------------------------
------------------------------
Signature of Shareholder
------------------------------
Signature of Shareholder
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 MAY SIGN BUT ONLY ONE
SIGNATURE IS REQUIRED.
