<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1996
REGISTRATION NO. 333-507
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
TENNESSEE 6712 62-079975
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0700
(615) 748-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MARTIN E. SIMMONS, ESQ.
EXECUTIVE VICE PRESIDENT -- ADMINISTRATION, GENERAL COUNSEL, SECRETARY,
AND PRINCIPAL FINANCIAL OFFICER
FIRST AMERICAN CORPORATION
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0606
(615) 748-2049
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
CATHERINE COLLINS MCCOY, ESQ. BOB F. THOMPSON, ESQ.
ARNOLD & PORTER BASS, BERRY & SIMS
555 12TH STREET, N.W. 27TH FLOOR
WASHINGTON, D.C. 20004-1202 FIRST AMERICAN CENTER
(202) 942-5055 NASHVILLE, TN 37238-2700
(615) 742-6200
</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. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FIRST AMERICAN CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM OF FORM S-4 HEADING IN PROSPECTUS/PROXY STATEMENT
------------------------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................. Introduction
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................... Table of Contents; Available
Information; Incorporation of Certain
Documents by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.......................... Introduction; Proposal I -- The
Merger Summary
4. Terms of the Transaction......................... Introduction; Summary; Proposal
I -- The Merger
5. Pro Forma Financial Information.................. Not Applicable
6. Material Contracts with the Company Being
Acquired....................................... Proposal I -- The Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be
Underwriters................................... Not Applicable
8. Interests of Named Experts and Counsel........... Experts; Legal Opinions
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Undertakings
10. Information with Respect to S-3 Registrants...... Introduction; Available Information;
Proposal I -- The Merger
11. Incorporation of Certain Information by
Reference...................................... Available Information, Incorporation
of Certain Documents By Reference
12. Information with Respect to S-2 or S-3
Registrants.................................... Not Applicable
13. Incorporation of Certain Information by
Reference...................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants.................... Not Applicable
15. Information with Respect to S-3 Companies........ Not Applicable
16. Information with Respect to S-2 or S-3
Companies...................................... Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies........................... Information About First City Bancorp,
Inc.
18. Information if Proxies, Consents or
Authorizations are to be Solicited............. Introduction; Available Information
Summary; Meeting Information;
Proposal I -- The Merger
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or in an
Exchange Offer................................. Not Applicable
</TABLE>
<PAGE> 3
[FIRST CITY BANCORP INC. LOGO]
FEBRUARY , 1996
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting and Proxy
Statement for the Special Meeting of Shareholders (the "Meeting") of First City
Bancorp, Inc. ("First City") to be held on March 7, 1996, at 10:00 a.m., local
time, at the City Center, 201 South Church Street, Murfreesboro, Tennessee.
At the Meeting, you will be asked to consider and vote on an Agreement and
Plan of Merger, as amended (the "Agreement"), between First City and First
American Corporation ("First American"), a corporation organized under the laws
of the State of Tennessee and a registered bank holding company, pursuant to
which First City will be acquired by First American. The acquisition will be
accomplished by the merger ("Merger") of First City with and into First
American, with First American as the surviving entity. Immediately following the
Merger, First City Bank, Murfreesboro, Tennessee, and Citizens Bank, Smithville,
Tennessee, both of which are wholly owned subsidiaries of First City, will be
merged with and into First American National Bank, Nashville, Tennessee, a
wholly owned subsidiary of First American, with First American National Bank as
the survivor.
The Agreement provides for a tax-free exchange in which First City
shareholders will receive between 0.6000 and 0.8440 shares of common stock of
First American ("FAC Common Stock") for their shares of common stock of First
City ("FCBI Common Stock") and cash in lieu of any fractional share. The Merger
is subject to various conditions and the precise number of shares of FAC Common
Stock into which each share of FCBI Common Stock is converted (the "Exchange
Ratio") will depend on the average closing sale price (the "Average Closing
Price") of FAC Common Stock on The Nasdaq Stock Market (as reported in The Wall
Street Journal) for the twenty (20) consecutive trading days ending on and
including the third trading day immediately preceding, but not including the
closing. It is currently anticipated the closing will take place on March 8,
1996, and the last day of the period for determining the Exchange Ratio will be
March 5, 1996.
The FAC Common Stock is traded on The Nasdaq Stock Market under the symbol
"FATN". The closing price of FAC Common Stock in composite trading on February
, 1996, was $ per share, as reported in The Wall Street Journal. If the
Average Closing Price had been calculated on the basis of the 20 business days
preceding February , 1996, it would have been $ , the Exchange Ratio would
be and the value of the shares of FAC Common Stock to be received for
each share of FCBI Common Stock would be $ . However, there can be no
assurances as to what the actual Average Closing Price, Exchange Ratio and
market price of FAC Common Stock will be at the Effective Time. The actual value
of the shares of FAC Common Stock to be exchanged for each share of FCBI Common
Stock will depend on the Exchange Ratio and the market price of FAC Common Stock
at the Effective Time and may be lower or higher than $ .
Under the Agreement, each outstanding share of First City's Series A
Preferred Stock which has not been converted into FCBI Common Stock prior to the
Merger will be converted into the right to receive $6.00 cash per share, plus
any accumulated but unpaid dividends accrued prior to the Merger. Each
outstanding share of First City's Series C and Series D Preferred Stock will be
redeemed by First City for $100 per share, plus an amount equal to all
undeclared dividends (as defined in the Agreement), prior to the Merger. The
rights to acquire Units of First City's Series B Preferred Stock will be
redeemed by First City effective upon consummation of the Merger.
Consummation of the Merger is subject to certain conditions, including the
approval of the Agreement by the affirmative vote of the holders of a majority
of each of the outstanding shares of FCBI Common Stock and Series A Preferred
Stock entitled to vote thereon, and the approval of the Merger by various
regulatory agencies.
<PAGE> 4
In addition, at the Meeting you will be asked to approve the adjournment of
the Special Meeting to a later date, if necessary, to solicit additional proxies
in the event insufficient shares are present in person or by proxy to approve
the Agreement.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU PLAN TO ATTEND THE MEETING.
This will not prevent you from voting in person but will assure that your vote
is counted if you are unable to attend the Meeting. Please note that, because
approval of the Merger and the Agreement requires the affirmative vote of a
majority of each of the outstanding shares of FCBI Common Stock and the
outstanding shares of Series A Preferred Stock, failure to vote will have the
same effect as voting against the Merger and the Agreement.
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR approval of the Merger and the Agreement and FOR approval of the
adjournment of the Meeting under the circumstances specified above.
Sincerely,
<TABLE>
<S> <C>
/s/ Olin O. Williams /s/ William E. Rowland
- -------------------- ----------------------
Olin O. Williams, M.D. William E. Rowland
Chairman of the Board of Directors President and Chief Executive Officer
</TABLE>
<PAGE> 5
FIRST CITY BANCORP, INC.
201 SOUTH CHURCH STREET
MURFREESBORO, TENNESSEE 37130
(615) 898-1111
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 7, 1996
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of First City Bancorp, Inc. ("First City") will be held at the City
Center, 201 South Church Street, Murfreesboro, Tennessee, on Thursday, March 7,
1996, at 10:00 a.m., local time.
A Proxy Card and a Prospectus/Proxy Statement for the Meeting are enclosed.
The Meeting is being held for the purpose of considering and acting upon:
1. The approval of the Agreement and Plan of Merger, as amended, (the
"Agreement") by and between First City and First American Corporation
("First American") which provides for the merger of First City with and
into First American (the "Merger") pursuant to which (i) shareholders of
First City will receive for each share of First City's common stock, no par
value (the "FCBI Common Stock"), the number of shares of common stock of
First American, $5.00 par value ("FAC Common Stock"), determined in
accordance with the Agreement and cash in lieu of any fractional share; and
(ii) each outstanding share of First City's Series A Preferred Stock, which
has not been converted to FCBI Common Stock prior to the Effective Time,
will be converted into the right to receive $6.00 per share, plus any
accumulated but unpaid dividends accrued prior to the Merger.
2. The adjournment of the Meeting to a later date, if necessary, to
solicit additional proxies in the event insufficient shares are present in
person or by proxy at the Meeting to approve the Agreement.
A copy of the Agreement is attached to the Prospectus/Proxy Statement which
accompanies this Notice as Appendix A.
Any action may be taken on any one of the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which, by
original or later adjournment, the Meeting may be adjourned. Pursuant to the
Bylaws, the Board of Directors has fixed the close of business on December 31,
1995, as the record date for determination of the shareholders entitled to vote
at the Meeting and any adjournments thereof.
<PAGE> 6
Please fill in and sign the enclosed form of proxy (i.e., the Proxy Card)
which is solicited by the Board of Directors and mail it promptly in the
enclosed envelope. The proxy will not be used if you attend and vote at the
Meeting in person.
By Order of the Board of Directors
/s/ Robert B. Murfree
---------------------
ROBERT B. MURFREE
Secretary
Murfreesboro, Tennessee
February 7, 1996
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU INTEND TO
ATTEND THE MEETING, PLEASE EXECUTE THE ENCLOSED FORM OF PROXY TO ENSURE THAT
YOUR VOTE WILL BE COUNTED. THE PROMPT RETURN OF PROXIES WILL SAVE YOUR COMPANY
THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A
PRE-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
** PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME **
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.......................................................................... 1
AVAILABLE INFORMATION................................................................. 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 4
SUMMARY............................................................................... 6
Parties to the Reorganization....................................................... 6
The Meeting......................................................................... 7
The Proposed Merger................................................................. 7
Effective Time...................................................................... 9
Termination of the Agreement........................................................ 9
Accounting Treatment................................................................ 9
Recommendation of the First City Board of Directors................................. 9
Opinion of Financial Advisor........................................................ 9
Vote Required....................................................................... 10
Dissenters' Rights.................................................................. 10
Interests of Certain Persons in the Merger.......................................... 10
Conditions; Regulatory Approvals; Waiver; Damages................................... 11
Certain Federal Income Tax Consequences of the Merger............................... 11
Certain Differences in Rights of Shareholders....................................... 12
Market Prices and Dividends......................................................... 12
COMPARATIVE PER SHARE DATA............................................................ 14
SELECTED FINANCIAL DATA............................................................... 15
MEETING INFORMATION................................................................... 17
Date, Place and Time................................................................ 17
Record Date; Voting Rights.......................................................... 17
Voting and Revocation of Proxies.................................................... 17
Solicitation of Proxies............................................................. 18
PROPOSAL I -- THE MERGER.............................................................. 19
Background of the Merger............................................................ 19
Recommendation of the Board of Directors; Reasons for the Merger.................... 20
Opinion of Financial Advisor........................................................ 21
Terms of the Merger................................................................. 26
Conversion of Shares; Procedures for Exchange of Certificates....................... 27
Representations and Warranties; Conditions to the Merger; Waiver.................... 27
Regulatory Approvals................................................................ 28
Business Pending the Merger......................................................... 29
No Solicitation of Competing Transactions........................................... 29
Effective Time of the Merger; Termination; Damages.................................. 30
Management and Operations After the Merger.......................................... 31
Effect on Certain Employees and Benefit Plans....................................... 31
Interests of Certain Persons in The Merger.......................................... 32
Certain Federal Income Tax Consequences of the Merger............................... 34
Certain Differences in Rights of Shareholders....................................... 35
Resale of FAC Common Stock.......................................................... 43
Dividend Reinvestment and Stock Purchase Plan....................................... 43
Expenses............................................................................ 43
Accounting Treatment................................................................ 43
Dissenters' Rights.................................................................. 43
Nasdaq Authorization................................................................ 44
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN REGULATORY CONSIDERATIONS..................................................... 44
General............................................................................. 44
Capital............................................................................. 45
Acquisition and Expansion........................................................... 46
Bank Regulation..................................................................... 47
PROPOSAL II -- ADJOURNMENT OF THE SPECIAL MEETING..................................... 50
INFORMATION ABOUT FIRST CITY BANCORP, INC............................................. 51
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER ENTITIES........................... 55
EXPERTS............................................................................... 56
LEGAL OPINION......................................................................... 57
CONSOLIDATED FINANCIAL STATEMENTS OF FIRST CITY BANCORP, INC. AND SUBSIDIARIES........ F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER DATED JULY 5, 1995, AND AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER DATED FEBRUARY 2, 1996
APPENDIX B -- OPINION OF ATTKISSON, CARTER & AKERS
APPENDIX C -- TENNESSEE DISSENTERS' RIGHTS STATUTE
</TABLE>
ii
<PAGE> 9
FIRST CITY BANCORP, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 7, 1996
---------------------
FIRST AMERICAN CORPORATION
PROSPECTUS
UP TO 1,510,000 SHARES OF COMMON STOCK
(PAR VALUE $5.00 PER SHARE)
INTRODUCTION
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, no par value ("FCBI Common Stock"), of First City Bancorp, Inc.
("First City" or "FCBI") and the holders of First City's Series A Preferred
Stock in connection with the solicitation of proxies by the Board of Directors
of First City for use at a Special Meeting of Shareholders, and any adjournment
thereof, to be held at the time and place set forth in the accompanying notice
("Meeting"). It is anticipated that the mailing of this Prospectus/Proxy
Statement and the enclosed proxy card will commence on or about February 7,
1996.
At the Meeting, shareholders of First City will be asked to approve an
Agreement and Plan of Merger, dated as of July 5, 1995, and amended on February
2, 1996 providing for the acquisition of First City by First American
Corporation ("First American" or "FAC") by means of the merger ("Merger") of
First City with and into First American, with First American as the surviving
entity. First American is a Tennessee corporation and a registered bank holding
company. The Agreement and Plan of Merger and the amendment thereto are attached
to this Prospectus/Proxy Statement as Appendix A and are hereinafter referred to
as the "Agreement."
At the effective time of the Merger (the "Effective Time"), each share of
FCBI Common Stock issued and outstanding immediately prior to the Effective Time
will be converted into a number (the "Exchange Ratio") of shares of common stock
of First American, par value $5.00 per share ("FAC Common Stock") determined by
the average closing sale price ("Average Closing Price") per share of FAC Common
Stock on The Nasdaq Stock Market (as reported in The Wall Street Journal) for
the twenty (20) consecutive trading days ending on and including the third
trading day immediately preceding but not including the closing and cash in lieu
of any fractional share. The Agreement provides for the following Exchange
Ratios depending on the Average Closing Price:
(1) If the Average Closing Price is above $46.67, the Exchange Ratio
shall be fixed at 0.6, and therefore each share of FCBI Common Stock would
be exchanged for 0.6 shares of FAC Common Stock.
(2) If the Average Closing Price is between $44.06 and $46.67, the
Exchange Ratio shall be determined by dividing $28.00 by the Average
Closing Price, and would be between 0.6355 and 0.6, and therefore each
share of FCBI Common Stock would be exchanged for between 0.6355 and 0.6
shares of FAC Common Stock, depending on the Average Closing Price.
(3) If the Average Closing Price is between $41.70 and $44.06, the
Exchange Ratio shall be fixed at 0.6355, and therefore each share of FCBI
Common Stock would be exchanged for 0.6355 shares of FAC Common Stock.
(4) If the Average Closing Price is between $31.40 and $41.70, the
Exchange Ratio shall be determined by dividing $26.50 by the Average
Closing Price, and would be between 0.8440 and 0.6355, and therefore each
share of FCBI Common Stock would be exchanged for between 0.8440 and 0.6355
shares of FAC Common Stock, depending on the Average Closing Price.
<PAGE> 10
(5) If the Average Closing Price is below $31.40, the Exchange Ratio
shall be fixed at 0.8440, and therefore each share of FCBI Common Stock
would be exchanged for 0.8440 shares of FAC Common Stock.
The following table illustrates the possible Exchange Ratios and the values
of FAC Common Stock to be received for each share of FCBI Common Stock based on
variations in the Average Closing Price, applying the terms of the Agreement
described above. The market values in the "Value of FAC Common Stock Column Per
FCBI Share" column are calculated assuming that the market price per share of
FAC Common Stock at the Effective Time of the Merger is equal to the Average
Closing Price.
<TABLE>
<CAPTION>
VALUE OF FAC COMMON STOCK PER
FAC AVERAGE CLOSING PRICE EXCHANGE RATIO FCBI SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
$46.67 or more 0.6 $28.00 or more
$44.06-$46.67 Floats between $28.00
0.6000 and
0.6355 to achieve
fixed value of
$28.00
$41.70-$44.06 0.6355 $26.50-$28.00
$41.70-$31.40 Floats between $26.50
0.6355 and
0.8440 to achieve
fixed value of
$26.50
$31.40 or less 0.8440 $26.50 or less
</TABLE>
The FAC Common Stock is traded on The Nasdaq Stock Market under the symbol
"FATN". The closing price of FAC Common Stock in composite trading on February
, 1996, was $ per share, as reported in The Wall Street Journal.
If the Average Closing Price had been calculated on the basis of the 20 business
days preceding that date, it would have been $ , the Exchange Ratio
would be and the value of the shares of FAC Common Stock to be
received for each share of FCBI Common Stock would be $ . However,
there can be no assurances as to what the actual Average Closing Price, Exchange
Ratio and market price of FAC Common Stock will be at the Effective Time. The
actual value of the shares of FAC Common Stock to be exchanged for each share of
FCBI Common Stock will depend on the Exchange Ratio and the market price of FAC
Common Stock at the Effective Time and may be lower or higher than $ .
It is currently anticipated the closing will occur on March 8, 1996, and the
last day of the period for determination of the Exchange Ratio will be March 5,
1996.
If the outstanding shares of FAC Common Stock shall, prior to the Effective
Time, have been increased, decreased, changed into or exchanged for a different
number or kind of shares through a reorganization, reclassification, stock
dividend, stock split, reverse stock split or other similar change, applicable
adjustments shall be made to the Average Closing Price and the number of shares
of FAC Common Stock to be exchanged for each share of FCBI Common Stock.
Under the Agreement, each outstanding share of First City's Series A
Preferred Stock which has not been converted into FCBI Common Stock prior to the
Merger will be converted into the right to receive $6.00 cash per share, plus
any accumulated but unpaid dividends accrued prior to the Merger. Each
outstanding share of First City's Series C and Series D Preferred Stock will be
redeemed by First City for $100 per share, plus an amount equal to all
undeclared dividends (as defined in the Agreement), prior to the Merger. The
rights to acquire Units of First City's Series B Preferred Stock will be
redeemed by First City prior to the Merger. See "PROPOSAL I -- THE
MERGER -- Certain Differences in Rights of Shareholders -- Anti-Takeover
Provisions; Shareholder Rights Plan".
Immediately following the Merger, it is intended that First City Bank,
Murfreesboro, Tennessee ("FCB") and Citizens Bank, Smithville, Tennessee
("Citizens"), each of which is a wholly owned subsidiary
2
<PAGE> 11
of First City, will be merged (the "Bank Mergers") with and into First American
National Bank, Nashville, Tennessee ("FANB"), a wholly owned subsidiary of First
American, with FANB as the survivor.
THE FAC COMMON STOCK THAT WOULD BE ISSUED IN THE MERGER HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES AUTHORITY NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF FAC COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
FAC is a Nasdaq National Market company and the FAC Common Stock trades on
The Nasdaq Stock Market. FCBI Common Stock trades on The American Stock
Exchange. On July 3, 1995, the last business day prior to public announcement of
the execution of the Agreement, the last reported sales price per share of FAC
Common Stock was $35.875. The last reported sale price of FCBI Common Stock on
June 30, 1995, the last date on which FCBI Common Stock traded prior to the
public announcement of the Merger, was $14.375.
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 First City
since the date of this Prospectus/Proxy Statement.
The date of this Prospectus/Proxy Statement, which also constitutes the
prospectus of First American for up to 1,510,000 shares of FAC Common Stock to
be issued in connection with the Merger, is February 7, 1996.
3
<PAGE> 12
AVAILABLE INFORMATION
First American and First City are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder ("Exchange Act"), and, in accordance therewith, file
reports, proxy statements and other information with the Securities and Exchange
Commission ("Commission"). Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's regional offices located at: 7 World Trade Center, 13th Floor, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material can be obtained at prescribed
rates by writing to the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, materials filed by First American are
available for inspection at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006 and materials filed by First City are
available for inspection at the offices of The American Stock Exchange, 86
Trinity Place, New York, New York 10006-1881.
First American has filed with the Commission a registration statement under
the Securities Act of 1933, as amended ("Securities Act"), relating to the
shares of FAC Common Stock that may be issued in connection with the Merger
("Registration Statement"). This Prospectus/Proxy Statement also constitutes the
prospectus of First American filed as part of the Registration Statement and
does not contain all of the information set forth in the Registration Statement
and exhibits thereto. The Registration Statement and the exhibits thereto may be
inspected and copied, at prescribed rates, at the public reference facilities
maintained by the Commission at the addresses set forth above. All information
concerning First American and its subsidiaries contained in this
Prospectus/Proxy Statement has been furnished by First American, and all
information concerning First City and its subsidiaries has been furnished by
First City.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO FIRST
AMERICAN (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST TO CARROLL KIMBALL, DIRECTOR OF INVESTOR
RELATIONS, FIRST AMERICAN CORPORATION, FIRST AMERICAN CENTER, NASHVILLE,
TENNESSEE 37237-0708. TELEPHONE REQUESTS MAY BE DIRECTED TO (615) 748-2455.
DOCUMENTS RELATING TO FIRST CITY (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS)
ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO WILLIAM L. WEBB,
TREASURER, FIRST CITY BANCORP, INC., 201 SOUTH CHURCH STREET, MURFREESBORO,
TENNESSEE 37130. TELEPHONE REQUESTS MAY BE DIRECTED TO (615) 898-1111. IN ORDER
TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
FEBRUARY 29, 1996.
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. Quarterly Reports on Form 10-Q for the quarters ended March 30,
1995, June 30, 1995 (as amended by Form 10-Q/A filed September 22, 1995)
and September 30, 1995.
3. The description of the FAC Common Stock contained in the
Registration Statement on Form 8-A dated April 24, 1972, as amended January
31, 1983, May 14, 1986, and January 11, 1989, filed by First American to
register such securities under the Exchange Act, and any amendment or
report filed for the purpose of updating such description.
4. Current Reports on Form 8-K dated February 23, 1995, May 22, 1995,
July 7, 1995, August 15, 1995, October 3, 1995, October 13, 1995, November
15, 1995, December 6, 1995, and December 8, 1995.
4
<PAGE> 13
All documents filed by First American pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date hereof until the date of
the Meeting shall be deemed to be incorporated herein by reference and to be a
part hereof from the date of such filing. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus/Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus/Proxy Statement.
5
<PAGE> 14
SUMMARY
This summary is necessarily general and abbreviated and has been prepared
to assist shareholders in their review of this Prospectus/Proxy Statement. This
summary is not intended to be a complete explanation of the matters covered in
this Prospectus/Proxy Statement and is qualified in all respects by reference to
the more detailed information contained elsewhere in this Prospectus/Proxy
Statement, the Appendices hereto and the documents incorporated herein by
reference, which shareholders are urged to read carefully.
PARTIES TO THE REORGANIZATION
First American Corporation. First American is a Tennessee corporation
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended ("BHCA"), and as a savings and loan holding company under the Home
Owner's Loan Act, as amended ("HOLA"). Effective November 1, 1995, First
American completed its acquisition of Heritage Federal Bancshares, Inc.
("Heritage"). This acquisition was accounted for as a pooling of interests, and,
consequently, the following information has been restated to give retroactive
effect to the acquisition of Heritage. As of September 30, 1995, First American
had total consolidated assets of approximately $9.0 billion and shareholders'
equity of approximately $694.1 million. As of September 30, 1995, First American
ranked, on the basis of aggregate deposits held by FANB, First American's
principal subsidiary, as the third largest bank holding company headquartered in
Tennessee. First American completed its acquisition of Charter Federal Savings
Bank ("Charter") on November 30, 1995, in a transaction accounted for as a
purchase. On the dates of their acquisitions by First American, Heritage and
Charter had total consolidated assets of $526.8 million and $727.9 million,
respectively.
In addition to FANB, First American owns all of the capital stock of (i)
First American National Bank of Kentucky ("FANBKY"), a national banking
association headquartered in Bowling Green, Kentucky; (ii) First American
Federal Savings Bank ("FAFSB"), a federal savings bank headquartered in Roanoke,
Virginia; and (iii) First American Enterprises, Inc. First American derives its
income from interest, dividends and management fees received from its
subsidiaries.
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 acquisition of by First American of banks, such as First City, are
designed to complement First American's branch expansion strategy. First
American has determined that the acquisition of what it believes are
well-managed banks will help it to realize this strategy and enhance its ability
to compete with other financial institutions. First American was particularly
attracted to First City because it has a branch network servicing the needs of
retail customers which will enhance First American's ability to compete with
other financial institutions.
The mailing address of the principal executive offices of First American is
First American Center, Nashville, Tennessee 37237-0708, and the telephone number
is (615) 748-2000. For additional information concerning the business of First
American and its financial condition, reference should be made to the First
American documents incorporated herein by reference. See "AVAILABLE INFORMATION"
and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
First City. First City, a Tennessee corporation, serves as the holding
company for, and conducts its principal business through, its wholly-owned
subsidiaries, First City Bank and Citizens Bank. As of September 30, 1995, First
City had total consolidated assets of approximately $347.6 million and
shareholders' equity of approximately $20.3 million.
As a bank holding company, First City's principal business is that of its
wholly-owned subsidiaries, FCB, a Tennessee chartered bank with its principal
executive and administrative offices in Murfreesboro, Tennessee and Citizens
Bank, a Tennessee chartered bank with its principal executive and administrative
offices in Smithville, Tennessee. FCB and Citizens are full service commercial
banks, offering a variety of deposit and investment products as well as
commercial, consumer and real estate loans to customers in their respective
markets. In addition, FCB offers trust services and, through its wholly-owned
subsidiaries, First City Life Insurance and Tennessee Credit Corporation,
respectively, sells credit life insurance and engages in consumer
6
<PAGE> 15
finance activities. For additional information regarding First City, see
"AVAILABLE INFORMATION" and "INFORMATION ABOUT FIRST CITY BANCORP, INC."
The mailing address of the principal executive offices of First City is 201
South Church Street, Murfreesboro, Tennessee 37130, and its main telephone
number is (615) 898-1111.
THE MEETING
The Special Meeting of Shareholders of First City will be held on March 7,
1996, at 10:00 a.m., local time, at the City Center, 201 South Church Street,
Murfreesboro, Tennessee. The purpose of the Meeting is to consider and vote upon
a proposal to approve and adopt the Agreement and to approve the adjournment of
the Meeting if an insufficient number of votes to approve the Agreement is
received. Only holders of record of FCBI Common Stock and Series A Preferred
Stock at the close of business on December 31, 1995 (the "Record Date") will be
entitled to notice of and to vote at such Meeting. At such date, 1,370,266
shares of FCBI Common Stock and 333,704 shares of Series A Preferred Stock were
outstanding and entitled to vote. For additional information with respect to the
Meeting and the voting rights of shareholders, see "MEETING INFORMATION."
THE PROPOSED MERGER
Pursuant to the terms of the Agreement, First City will be merged with and
into First American, with First American as the surviving entity. At the
Effective Time of the Merger, each share of FCBI Common Stock issued and
outstanding immediately prior to the Effective Time will be converted into a
number (the "Exchange Ratio") of shares of FAC Common Stock determined by the
Average Closing Price per share of FAC Common Stock on The Nasdaq Stock Market
(as reported in The Wall Street Journal) for the twenty (20) consecutive trading
days ending on and including the third trading day immediately preceding but not
including the closing and cash in lieu of any fractional share. The Agreement
provides for the following Exchange Ratios depending on the Average Closing
Price:
(1) If the Average Closing Price is above $46.67, the Exchange Ratio
shall be fixed at 0.6, and therefore each share of FCBI Common Stock would
be exchanged for 0.6 shares of FAC Common Stock.
(2) If the Average Closing Price is between $44.06 and $46.67, the
Exchange Ratio shall be determined by dividing $28.00 by the Average
Closing Price, and would be between 0.6355 and 0.6, and therefore each
share of FCBI Common Stock would be exchanged for between 0.6355 and 0.6
shares of FAC Common Stock, depending on the Average Closing Price.
(3) If the Average Closing Price is between $41.70 and $44.06, the
Exchange Ratio shall be fixed at 0.6355, and therefore each share of FCBI
Common Stock would be exchanged for 0.6355 shares of FAC Common Stock.
(4) If the Average Closing Price is between $31.40 and $41.70, the
Exchange Ratio shall be determined by dividing $26.50 by the Average
Closing Price, and would be between 0.8440 and 0.6355, and therefore each
share of FCBI Common Stock would be exchanged for between 0.8440 and 0.6355
shares of FAC Common Stock, depending on the Average Closing Price.
(5) If the Average Closing Price is below $31.40, the Exchange Ratio
shall be fixed at 0.8440, and therefore each share of FCBI Common Stock
would be exchanged for 0.8440 shares of FAC Common Stock.
7
<PAGE> 16
The following table illustrates the possible Exchange Ratios and the values
of FAC Common Stock to be received for each share of FCBI Common Stock based on
variations in the Average Closing Price, applying the terms of the Agreement
described above. The market values in the "Value of FAC Common Stock Column Per
FCBI Share" are calculated assuming that the market price per share of FAC
Common Stock at the Effective Time of the Merger is equal to the Average Closing
Price.
<TABLE>
<CAPTION>
VALUE OF FAC COMMON STOCK PER
FAC AVERAGE CLOSING PRICE EXCHANGE RATIO FCBI SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
$46.67 or more 0.6 $28.00 or more
$44.06-$46.67 Floats between $28.00
0.6000 and
0.6355 to achieve
fixed value of
$28.00
$41.70-$44.06 0.6355 $26.50-$28.00
$41.70-$31.40 Floats between $26.50
0.6355 and
0.8440 to achieve
fixed value of
$26.50
$31.40 or less 0.8440 $26.50 or less
</TABLE>
The FAC Common Stock is traded on The Nasdaq Stock Market under the symbol
"FATN". The closing price of FAC Common Stock in composite trading on February
, 1996, was $ per share, as reported in The Wall Street Journal.
If the Average Closing Price had been calculated on the basis of the 20 business
days preceding that date, it would have been $ , the Exchange Ratio
would be and the value of the shares of FAC Common stock to be
received for each share of FCBI Common Stock would be $ . However,
there can be no assurances as to what the actual Average Closing Price, Exchange
Ratio and market price of FAC Common Stock will be at the Effective Time. The
actual value of the shares of FAC Common Stock to be exchanged for each share of
FCBI Common Stock will depend on the Exchange Ratio and the market price of FAC
Common Stock at the Effective Time and may be lower or higher than $ .
It is currently anticipated the closing will occur on March 8, 1996, and the
last day of the period for determination of the Exchange Ratio will be March 5,
1996.
If the outstanding shares of FAC Common Stock shall, prior to the Effective
Time, have been increased, decreased, changed into or exchanged for a different
number or kind of shares through a reorganization, reclassification, stock
dividend, stock split, reverse stock split or other similar change, applicable
adjustments shall be made to the Average Closing Price and the number of shares
of FAC Common Stock to be exchanged for each share of FCBI Common Stock.
Under the Agreement, each outstanding share of First City's Series A
Preferred Stock which has not been converted into FCBI Common Stock prior to the
Merger will be converted into the right to receive $6.00 cash per share, plus
any accumulated but unpaid dividends accrued prior to the Merger. See "PROPOSAL
I -- THE MERGER -- Terms of the Merger." Each outstanding share of First City's
Series C and Series D Preferred Stock will be redeemed by First City for $100
per share, plus an amount equal to all undeclared dividends, prior to
consummation of the Merger. The rights to acquire Units of First City's Series B
Preferred Stock will be redeemed by First City prior to the Merger. See
"PROPOSAL I -- THE MERGER -- Certain Differences in Rights of
Shareholders -- Anti-Takeover Provisions; Shareholder Rights Plan".
After the Merger, those persons serving as directors of First American
immediately prior to the Effective Time shall continue as directors of First
American. Those persons currently serving on the board of Directors of First
City are expected to be named to FANB's Advisory Board in Rutherford County,
Tennessee. The Agreement also contains provisions relating to, among other
things, employee benefits, indemnification of directors and officers, and
directors' and officers' liability insurance after the Merger. See "PROPOSAL
I --
8
<PAGE> 17
THE MERGER -- Management and Operations After the Merger" and "-- Effect on
Certain Employees and Benefit Plans."
EFFECTIVE TIME
In the event that all conditions to the Merger have been satisfied or
waived, the Effective Time shall take place on the date and at the time of
filing of Articles of Merger with the Secretary of State of Tennessee (or such
later time as set forth in such Articles). The parties currently intend that the
Effective Time shall be 12:01 a.m. March 11, 1996. The Merger will be
consummated at a closing to be held on the first business day following the
satisfaction of certain conditions precedent to the Merger, or at such other
time mutually agreed upon by First American and First City. The parties
currently anticipate that the closing of the Merger will occur on March 8, 1996.
See "PROPOSAL I -- THE MERGER -- Effective Time of the Merger; Termination;
Damages."
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Effective Time by
the mutual consent of First City and First American and by either of them
individually under certain specified circumstances, including if the Merger has
not been consummated by June 30, 1996. Under certain circumstances, if the
Agreement is terminated by First American or First City and the Board of
Directors of First City has taken certain actions regarding its recommendation
of the Merger to the First City shareholders or has taken certain actions
regarding a possible transaction with a third party which would result in such
third party acquiring a significant portion of the assets or securities of First
City, First City may be required to pay First American liquidated damages of
$3,000,000.
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 FIRST CITY BOARD OF DIRECTORS
First City's Board of Directors has unanimously approved the Merger and the
Agreement and has determined that the Merger is fair to, and in the best
interests of, First City and its shareholders. The Board of Directors therefore
unanimously recommends that First City's shareholders vote FOR approval of the
Merger and the Agreement. First City's Board of Directors believes that the
Merger will provide significant value to all First City shareholders in relation
to market value, book value and earnings per share of the FCBI Common Stock. See
"PROPOSAL I -- THE MERGER -- Background of the Merger" and "-- Reasons for the
Merger." In considering the recommendation of First City's Board of Directors,
shareholders should be aware that certain members of the Board of Directors and
the executive officers of First City have interests in the Merger in addition to
their interests as shareholders of First City generally. See "PROPOSAL I -- THE
MERGER -- Interests of Certain Persons in the Merger."
OPINION OF FINANCIAL ADVISOR
Attkisson, Carter & Akers, Incorporated ("Attkisson"), First City's
financial advisor, has rendered its opinion to First City's Board of Directors
that the consideration to be received by First City's shareholders in the Merger
is fair to them from a financial point of view. This opinion, which updates its
earlier opinion provided to First City's Board of Directors and is attached as
Appendix B to this Prospectus/Proxy Statement, should be read in its entirety
with respect to the assumptions made, matters considered, and limits of the
review undertaken by Attkisson in rendering such opinion. For its services as a
financial advisor, Attkisson received an advisory fee of $75,000 upon execution
of the Agreement. An additional fee equal to $225,000 plus 3% of the aggregate
market value of the consideration to be received by First City shareholders in
excess of $25.00 per share of FCBI Common Stock will be due to Attkisson upon
consummation of the Merger. Based upon an assumed Average Closing Price and
value of a share of FAC Common Stock at the Effective Time of
9
<PAGE> 18
the Merger of $ (the Closing Price of FAC Common Stock on February ,
1996), this additional fee would be approximately $ . First City has also
agreed to reimburse Attkisson for its reasonable out-of-pocket expenses and to
indemnify Attkisson against certain liabilities, including certain liabilities
under the federal securities laws. See "PROPOSAL I -- THE MERGER -- Opinion of
Financial Advisor."
VOTE REQUIRED
Approval of the Merger requires the affirmative vote of the holders of a
majority of each of the outstanding shares of FCBI Common Stock and the
outstanding shares of Series A Preferred Stock entitled to vote thereon.
Approval of an adjournment of the Meeting requires the affirmative vote of a
majority of the votes cast at the Meeting.
A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON AT
THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AGREEMENT.
SIMILARLY, ABSTENTIONS AND "BROKER NON-VOTES" WILL HAVE THE EFFECT OF VOTES
AGAINST THE AGREEMENT. FURTHER, A FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST APPROVAL OF THE AGREEMENT.
Directors and executive officers of First City and affiliates of such
persons had sole or shared voting power with respect to 532,337 shares of FCBI
Common Stock, representing 43.05% of the FCBI Common Stock outstanding as of the
Record Date. First American has entered into a Voting Agreement signed by each
member of the Board of Directors of First City, whereby each such person has
agreed to vote all shares of FCBI Common Stock that he or she is entitled to
vote in favor of the Agreement, subject to certain conditions set forth in the
Voting Agreements. Each such person also agreed not to solicit, encourage or
facilitate a proposal by any third party (other than First American or its
affiliates) to seek to acquire control of First City or its assets by tender
offer, merger or otherwise. Entering into the Voting Agreements by the directors
of First City was an inducement to First American to enter into the Agreement.
No such person received any form of compensation from First American for
entering in to the Voting Agreements beyond execution of the Agreement. Such
persons had sole or shared voting power with respect to 315,146 shares of FCBI
Common Stock, representing 23.00% of the FCBI Common Stock outstanding as of the
Record Date. See "MEETING INFORMATION -- Voting and Revocation of Proxies."
DISSENTERS' RIGHTS
The holders of shares of FCBI Common Stock will not have dissenters' rights
in connection with the Merger and the transactions contemplated by the
Agreement. Therefore, if the Agreement is approved by the affirmative vote of a
majority of the outstanding shares of FCBI Common Stock, and all other
conditions to consummation of the Merger are satisfied, all shareholders of
First City will receive the consideration provided for in the Agreement in
exchange for their shares of FCBI Common Stock. See "PROPOSAL I -- THE
MERGER -- Dissenters' Rights -- No Common Stock Dissenters' Rights." However,
under certain conditions, and by complying with specific procedures required by
statute and described herein, holders of Series A Preferred Stock will have the
right to dissent from the Merger, in which event, if the Merger is consummated,
they may be entitled to receive in cash the fair value of their shares of First
City Series A Preferred Stock. See "PROPOSAL I -- THE MERGER -- Dissenters'
Rights -- Series A Preferred Stock Dissenter's Rights." A copy of Tennessee's
Dissenters' Rights Statute is attached hereto as Appendix C.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First City's management and of the First City Board of
Directors have certain interests in the Merger that are in addition to their
interests as shareholders of First City generally. These interests include,
among others, provisions in the Agreement relating to liability insurance and
indemnification, possible membership on advisory boards of FANB and the
continuation of certain employee benefits. The Agreement provides that First
American may separately enter into certain employment agreements with William E.
Rowland and Robert B. Murfree, each providing an initial annual salary of
$131,600. As a result of the redemption of the Series A Preferred Stock in the
Merger, Messrs. Rowland, Murfree, Adams, Coleman,
10
<PAGE> 19
Hooper, Swanson, Williams and Woods, each of whom is a Director of First City,
would receive in cash approximately $220,236, $153,000, $23,202, $41,766,
$8,400, $164,250, $46,404 and $6,000, respectively, or approximately $650,000 in
the aggregate. Further, as a result of the conversion of First City's
Convertible Floating Rate Subordinated Debentures in the Merger, Messrs.
Rowland, Murfree, Adams, Coleman, Hooper, Swanson, Williams and Woods would
receive (assuming a 0.6355 Exchange Ratio) approximately 13,072, 11,199, 1,201,
2,163, 435, 8,932, 2,403 and 310 shares of FAC Common Stock, respectively,
having market values (assuming a $44.00 price per share of FAC Common Stock at
the Effective Time) of $575,168, $492,756, $52,844, $95,172, $19,140, $393,008,
$105,732 and $13,640, respectively, or approximately $1.7 million in the
aggregate. See "PROPOSAL I -- THE MERGER -- Interests of Certain Persons in the
Merger ."
The First City Board of Directors was aware of these interests and
considered them among other matters in approving the Agreement and the
transactions contemplated thereby. See "PROPOSAL I -- THE MERGER -- Interests of
Certain Persons in the Merger."
CONDITIONS; REGULATORY APPROVALS; WAIVER; DAMAGES
Consummation of the Merger is subject to satisfaction of a number of
conditions, including approval of the Agreement by the shareholders of First
City, the consent of at least 66 2/3 percent of the holders of First City's
convertible capital debentures to an amendment, to be effective upon
consummation of the Merger, accelerating the maturity date of the debentures to
immediately prior to the Effective Time and certain other amendments. First
American has obtained all required approvals of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") under the "BHCA" for the
Merger, and FANB has obtained all required approvals of the Office of the
Comptroller of the Currency ("OCC") under the Bank Merger Act for the Bank
Mergers. The Bank Merger Act provides that the Bank Mergers may not be
consummated until the 30th day after OCC approval is received, or, under certain
circumstances, the 15th day after OCC approval is received. All of the
applicable waiting periods in connection with the above-described approvals have
expired. See "PROPOSAL I -- THE MERGER -- Representations and Warranties;
Conditions to the Merger; Waiver" and "-- Regulatory Approvals."
The conditions to consummation of the Merger (except for required
shareholder, debenture holder and regulatory approvals and listing on The Nasdaq
Stock Market of the FAC Common Stock issued or subject to option as a result of
the Merger) may be waived at any time by the party for whose benefit they were
created. In addition, the Agreement may be terminated, either before or after
shareholder approval, under certain circumstances. See "PROPOSAL I -- THE
MERGER -- Representations and Warranties; Conditions to the Merger; Waiver" and
"-- Effective Time of the Merger; Termination; Damages."
The Agreement provides for payment of certain fees as liquidated damages
upon the occurrence of certain events leading to certain terminations of the
Agreement. See "PROPOSAL I -- THE MERGER -- Effective Time of the Merger;
Termination; Damages."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to be a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Generally, no gain or loss should be recognized for federal income tax purposes
by First City shareholders as a result of the Merger, except a gain or loss will
be recognized with respect to cash received by holders of Series A Preferred
Stock and in lieu of the receipt of fractional shares of FAC Common Stock. A
condition to the consummation of the Merger is the receipt by First American of
an opinion of KPMG Peat Marwick LLP as to the qualification of the Merger as a
tax-free reorganization and the receipt by First City of an opinion of Bass,
Berry & Sims as to the qualification of the Merger as a tax-free reorganization
and certain other federal income tax consequences of the Merger. See "PROPOSAL
I -- THE MERGER -- Certain Federal Income Tax Consequences of the Merger."
BECAUSE THE TAX CONSEQUENCES MAY VARY DEPENDING UPON A HOLDER'S INDIVIDUAL
CIRCUMSTANCES OR TAX STATUS, IT IS RECOMMENDED THAT EACH SHAREHOLDER OF FIRST
CITY CONSULT HIS OR HER TAX ADVISOR CONCERNING THE
11
<PAGE> 20
PARTICULAR FEDERAL (AND ANY APPLICABLE STATE, LOCAL OR OTHER) TAX CONSEQUENCES
OF THE MERGER TO SUCH SHAREHOLDER.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Upon completion of the Merger, shareholders of First City will become
shareholders of First American and their rights as such will be governed by
First American's charter and bylaws, and will continue to be governed by
Tennessee law. The rights of shareholders of First American are different in
certain respects from the rights of shareholders of First City. For a summary of
these differences, see "PROPOSAL I -- THE MERGER -- Certain Differences in
Rights of Shareholders."
MARKET PRICES AND DIVIDENDS
FAC Common Stock is traded on The Nasdaq Stock Market, under the symbol
"FATN" and FCBI Common Stock is traded on The American Stock Exchange under the
symbol "FCT". The information presented in the following table reflects (1) the
closing price for FAC Common Stock and the last reported sale price for FCBI
Common Stock on July 3, 1995, and June 30, 1995 the last trading days for FAC
Common Stock and FCBI Common Stock, respectively, preceding public announcement
of the proposed Merger, and on February , 1996, and (2) the FCBI Common Stock
equivalent per share basis, calculated by multiplying the closing price of FAC
Common Stock on such dates by the Exchange Ratio (as it would have been
calculated as of such dates, assuming an Average Closing Price of $35.875, or
the closing price of FAC Common Stock on such date and $ respectively). No
assurance can be given as to what the market price of FAC Common Stock or the
Exchange Ratio will be if and when the Merger is consummated.
<TABLE>
<CAPTION>
FIRST CITY
EQUIVALENT
PER SHARE
COMMON STOCK FIRST AMERICAN FIRST CITY BASIS
- ------------------------------------------------------------- -------------- ---------- -----------
<S> <C> <C> <C>
July 3, 1995 Market Value.................................... 35$7/8 14$3/8* $ 26.50
February , 1996 Market Value............................... $ $ $
</TABLE>
- ---------------
* Closing price on June 30, 1995. Trading in FCBI Common Stock was suspended
on July 1, 1995 at First City's request until announcement of the Merger.
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 fiscal years ended December 31, 1993, 1994, and 1995 and
during the first quarter of fiscal year 1996 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.
12
<PAGE> 21
<TABLE>
<CAPTION>
PRICE
CASH DIVIDEND ------------
PER SHARE HIGH LOW
------------- ---- ---
<S> <C> <C> <C>
1993
First Quarter.................................................... $0.10 30 1/4 25 1/4
Second Quarter................................................... 0.15 33 3/4 27
Third Quarter.................................................... 0.15 34 1/2 28 1/4
Fourth Quarter................................................... 0.15 34 1/8 28 1/8
1994
First Quarter.................................................... 0.21 32 29 1/8
Second Quarter................................................... 0.21 34 3/4 28 3/4
Third Quarter.................................................... 0.21 35 31
Fourth Quarter................................................... 0.25 33 1/8 26 1/8
1995
First Quarter.................................................... 0.25 34 1/2 26 7/8
Second Quarter................................................... 0.25 36 33
Third Quarter.................................................... 0.28 44 1/4 35 7/8
Fourth Quarter................................................... 0.28 50 1/8 45 1/2
1996
First Quarter (through February , 1996)........................ 0.28
</TABLE>
First City
On the Record Date there were approximately 993 record holders of FCBI
Common Stock and 1,370,266 shares of FCBI Common Stock issued and outstanding.
The following table sets forth the cash dividends declared by First City on
the FCBI Common Stock and the range of high and low prices of the FCBI Common
Stock during fiscal years ended December 31, 1993, 1994 and 1995, and during the
first quarter of calendar year 1996 based on information obtained by First City.
The table reflects high and low prices as quoted on The American Stock Exchange.
<TABLE>
<CAPTION>
PRICE
CASH DIVIDEND ------------
PER SHARE HIGH LOW
------------- ---- ---
<S> <C> <C> <C>
1993
First Quarter.................................................... $0.05 10 7/8 8 3/8
Second Quarter................................................... 0.05 11 10
Third Quarter.................................................... 0.05 12 1/8 10 3/4
Fourth Quarter................................................... 0.05 12 1/4 10 3/4
1994
First Quarter.................................................... $0.05 11 7/8 11 3/8
Second Quarter................................................... 0.05 11 3/8 10 1/2
Third Quarter.................................................... 0.05 12 3/8 10 1/8
Fourth Quarter................................................... 0.05 12 3/8 10 1/2
1995
First Quarter.................................................... $0.05 12 1/8 11 1/8
Second Quarter................................................... 0.05 14 3/8 12
Third Quarter.................................................... 0.05 24 1/8 23 3/4
Fourth Quarter................................................... 0.05 25 3/8 24
1996
First Quarter (through February , 1996)........................ 0.05 -- --
</TABLE>
13
<PAGE> 22
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 and FCBI Common
Stock, (ii) pro forma per share data for FAC Common Stock and (iii) pro forma
equivalent per share data for FCBI Common Stock. The First American pro forma
with First City data are presented using the purchase method of accounting and
the application of an assumed market price of $47.375 FAC Common Stock and an
Exchange Ratio of 0.6 shares of FAC Common Stock for each share of FCBI Common
Stock. If the Exchange Ratio, in accordance with the Agreement, were to differ
because of the FAC Common Stock Average Closing Price, the pro forma and
equivalent share data would differ from the data presented below. The First
American pro forma data with First City represents the effect of the Merger on a
share of FAC Common Stock. The First City pro forma equivalent data represents
the First American pro forma data with First City multiplied by the Exchange
Ratio and thereby reflects the effect of the Merger on a share of FCBI Common
Stock. The First American data has been restated to give retroactive effect to
the November 1, 1995 merger with Heritage accounted for using the
pooling-of-interests method.
<TABLE>
<CAPTION>
FAC
PRO FORMA FIRST
HISTORICAL WITH CITY
------------------- FIRST EQUIVALENT
FAC FIRST CITY CITY PRO FORMA
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Nine months ended September 30, 1995 -- primary........ $ 2.79 $ 0.44 $ 2.69 $ 1.61
Nine months ended September 30, 1995 -- full diluted... 2.79 0.44 2.69 1.61
Year ended December 31, 1994 -- primary................ 3.39 1.28 3.30 1.98
Year ended December 31, 1994 -- fully diluted.......... 3.39 1.20 3.30 1.98
CASH DIVIDENDS DECLARED PER COMMON SHARE
Nine months ended September 30, 1995................... $ 0.78 $ 0.15 $ 0.78 $ 0.47
Year ended December 31, 1994........................... 0.88 0.20 0.88 0.53
BOOK VALUE PER SHARE
At September 30, 1995.................................. $25.12 $10.69 $ 25.29 $ 15.17
At December 31, 1994................................... 23.24 8.58 23.30 13.98
</TABLE>
14
<PAGE> 23
SELECTED FINANCIAL DATA
The following tables set forth certain historical financial data for First
American and First City.
The selected financial data for the five years ended December 31, 1994 and
for the nine months ended September 30, 1994 and 1995, for First American and
First City are derived from the supplemental consolidated financial statements
of First American and the consolidated financial statements of First City,
respectively. The supplemental consolidated financial statements of First
American and the selected financial data of First American have been restated to
give retroactive effect to the November 1, 1995 merger with Heritage accounted
for using the pooling-of-interests method. This summary should be read in
connection with First American's supplemental consolidated financial statements
and First City's consolidated financial statements, and 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" and "CONSOLIDATED FINANCIAL
STATEMENTS OF FIRST CITY BANCORP, INC. AND SUBSIDIARIES."
FIRST AMERICAN CORPORATION
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30 AS OF 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..................... $232,490 $221,963 $298,242 $287,200 $268,197 $229,980 $239,621
Provision (credit) for loan losses...... 83 79 (9,919) (41,405) 39,249 53,066 194,301
Non-interest income..................... 78,134 73,319 87,598 88,928 77,325 82,914 111,219
Non-interest expense.................... 185,773 180,500 241,153 248,776 240,099 232,774 232,136
Income tax (benefit).................... 45,980 43,012 57,404 61,348 20,021 9,005 (13,619)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect
of changes in accounting principles... $ 78,788 $ 71,691 $ 97,202 $107,409 $ 46,153 $ 18,049 $(61,978)
======== ======== ======== ======== ======== ======== ========
End of Period Balance Sheet Items
(millions)
Assets.................................. $ 8,970 $ 7,880 $ 8,279 $ 7,708 $ 7,257 $ 6,884 $ 6,984
Total net loans......................... 5,745 4,869 5,043 4,533 3,876 3,990 4,413
Deposits................................ 6,724 6,218 6,308 6,151 6,019 5,816 6,039
Long-term debt.......................... 278 162 271 77 19 18 19
Shareholders' equity.................... 694 647 668 624 504 402 383
Per Share Data
Income (loss) before cumulative effect
of changes in accounting principles... $ 2.79 $ 2.50 $ 3.39 $ 3.79 $ 1.76(a) $ 0.73(b) $ (2.69)(b)
Cash dividends declared................. 0.78 0.63 0.88 0.55 0.20 0.00 0.31
Book value, end of period............... 25.12 22.53 23.24 22.34 17.86 16.47(b) 15.79 (b)
Shares Outstanding (thousands)
Average................................. 28,278 28,653 28,670 28,355 26,509 23,337(b) 23,224 (b)
End of period........................... 27,630 28,714 28,725 27,915 28,213 23,395(b) 23,311 (b)
</TABLE>
- ---------------
(a) Income (loss) before cumulative effect of changes in accounting principles
per common share for the year ended December 31, 1992, is computed by
dividing the sum of FAC net income for 1992 of $42.0 million and net income
of Heritage from the date of conversion from a mutual savings bank to a
capital stock savings bank on March 30, 1992, to the end of its fiscal year
on June 30, 1992, of $1.4 million by the sum of FAC's weighted average
number of shares outstanding from March 30, 1992 to June 30, 1992 (adjusted
for the number of days such shares were outstanding during fiscal year 1992
(.6 million shares)).
(b) Since Heritage was a mutual savings bank prior to March 30, 1992, income
(loss) before cumulative effect of changes in accounting principles per
common share, book value per common share, average shares outstanding and
end of period shares outstanding as of or for the years ended December 31,
1991 and 1990, were calculated based on FAC information only.
15
<PAGE> 24
FIRST CITY BANCORP, INC.
<TABLE>
<CAPTION> AS OF OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30 AS OF OR FOR THE YEAR ENDED DECEMBER 31
------------------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- ----------- ------- ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Data (Thousands)
Net interest income............ $ 8,793 $ 8,499 $11,485 $8,645 $6,781 $5,396 $4,168
Provision for loan losses...... 241 424 561 177 445 523 482
Non-interest income............ 2,375 2,331 3,096 1,538 1,503 1,607 1,139
Non-interest expense........... 9,356 8,157 10,730 7,849 5,838 5,065 4,346
Income tax..................... 659 742 1,151 721 726 512 148
----------- ----------- ------- ------ ------ ------ ------
Income before cumulative effect
of changes in accounting
principles.................. $ 912 $ 1,507 $ 2,139 $1,436 $1,275 $ 903 $ 331
========= ========= ======= ====== ====== ====== ======
End of Period Balance Sheet Items
(millions)
Assets......................... $ 348 $ 330 $ 336 $ 313 $ 220 $ 190 $ 167
Total net loans................ 171 158 151 155 92 82 76
Deposits....................... 301 286 295 274 190 163 142
Long-term debt................. 6 8 7 7 4 4 5
Shareholders' equity........... 20 17 17 17 15 12 12
Per Share Data
Income (loss) before cumulative
effect of changes in
accounting principles
-- primary................. $ 0.44 $ 0.89 1.28 $ 0.80 $ 0.86 $ 0.61 $ 0.23
-- fully diluted........... 0.44 0.84 1.20 0.76 0.82 0.61 0.23
Cash dividends declared........ 0.15 0.15 0.20 0.20 0.20 0.09 0.00
Book value, end of period...... 10.69 8.93 8.58 9.41 8.86 8.77 8.71
Shares Outstanding (thousands)
Average -- primary............. 1,484 1,421 1,418 1,465 1,358 1,471 1,444
Average -- fully diluted....... 1,649 1,586 1,584 1,631 1,525 1,471 1,444
End of period.................. 1,340 1,236 1,236 1,225 1,134 1,115 1,114
</TABLE>
16
<PAGE> 25
MEETING INFORMATION
DATE, PLACE AND TIME
The proxy card accompanying this Prospectus/Proxy Statement is solicited by
and on behalf of the Board of Directors of First City to be used at the Meeting,
which will be held at the City Center, 201 South Church Street, Murfreesboro,
Tennessee on Thursday, March 7, 1996, at 10:00 a.m., local time. The Meeting has
been called for the purpose of considering and voting upon (1) approval of the
Agreement and (2) approval of an adjournment of the Meeting to a later date, if
necessary, to solicit additional proxies if insufficient shares are present in
person or by proxy at the Meeting to approve the Agreement. The accompanying
Notice of Meeting and form of proxy and this Prospectus/Proxy Statement are
being first mailed to shareholders on or about February 7, 1996.
RECORD DATE; VOTING RIGHTS
The securities entitled to vote at the Meeting consist of the FCBI Common
Stock and the Series A Preferred Stock. Each share of the FCBI Common Stock
entitles the record holder to one vote on each matter presented at the Meeting.
Each share of FCBI Series A Preferred Stock also entitles the record holder to
one vote on each matter presented. The close of business on December 31, 1995
(the "Record Date") has been fixed by the Board of Directors of First City as
the record date for determining shareholders entitled to notice of and to vote
at the Meeting. As of the Record Date, First City had 1,370,266 shares of the
FCBI Common Stock issued and outstanding and approximately 993 shareholders of
record, and 333,704 shares of Series A Preferred Stock and approximately 332
Series A shareholders of record.
The affirmative vote of the holders of a majority of the outstanding shares
of FCBI Common Stock and a majority of the outstanding shares of Series A
Preferred Stock is necessary to approve the Agreement.
VOTING AND REVOCATION OF PROXIES
Proxies solicited by the Board of Directors of First City will be voted in
accordance with the directions given therein. Where no instructions are
indicated, proxies will be voted FOR approval of the Agreement and FOR approval
of an adjournment of the Meeting to solicit additional proxies if insufficient
shares are present in person or by proxy at the Meeting to approve the
Agreement. The proxy also confers discretionary authority on the persons named
therein to vote with respect to matters incident to the conduct of the Meeting.
Proxies marked as abstentions will not be counted as votes cast. In addition,
shares held in street name which have been designated by brokers on proxy cards
as not voted will not be counted as votes cast. Proxies marked as abstentions or
as broker no-votes, however, will be treated as shares present for purposes of
determining whether a quorum is present.
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by properly executed proxies in
the form enclosed herewith will be voted at the Meeting and all adjournments
thereof. Proxies may be revoked by sending written notice to the Secretary of
First City at the address shown above or by the filing of a later-dated proxy
prior to the closing of the polls at the Meeting. A proxy will not be voted if a
shareholder attends the Meeting and votes in person. The presence of a
shareholder alone at the Meeting will not revoke such shareholder's proxy.
The Board of Directors of First City is not aware of any other business to
be acted upon at the Meeting other than as described herein. It is not
anticipated that other matters will be brought before the Meeting. If, however,
other matters are duly brought before the Meeting, or any adjournment thereof,
the persons appointed as proxies will have discretion to vote or act thereon in
accordance with the determination of a majority of First City's Board of
Directors.
Directors and executive officers of First City and affiliates of such
persons had sole or shared voting power with respect to 532,337 shares of FCBI
Common Stock and 111,918 shares of Series A Preferred Stock, representing 43.05%
of the FCBI Common Stock outstanding and 33.51% of the Series A Preferred Stock
outstanding, each as of the Record Date. First American has entered into a
Voting Agreement signed by each
17
<PAGE> 26
member of the Board of Directors of First City, whereby each such person has
agreed to vote all shares of FCBI Common Stock that he or she is entitled to
vote in favor of the Agreement, subject to certain conditions set forth in the
Voting Agreements. Each such person also agreed not solicit, encourage or
facilitate a proposal by any third party (other than First American or its
affiliates) to seek to acquire control of First City or its assets by tender
offer, merger or otherwise. Entering into the Voting Agreements by the directors
of First City was an inducement to First American to enter into the Agreement.
No such person received any form of compensation from First American for
entering into the Voting Agreements beyond execution of the Agreement. Such
persons had sole or shared voting power with respect to 315,146 shares of FCBI
Common Stock, representing 23.00% of the FCBI Common Stock outstanding as of the
Record Date. The foregoing description sets forth the material aspects of the
Voting Agreements.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the Meeting will be borne by First City.
In addition to the use of the mails, proxies may be solicited personally or by
telephone or telegraph by directors, officers and other employees of First City
who will not be specifically compensated for their solicitation activities.
FIRST CITY SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
18
<PAGE> 27
PROPOSAL I -- THE MERGER
This section of the Prospectus/Proxy Statement describes the material terms
of the Agreement. The following description does not purport to be complete and
is qualified in its entirety by reference to the Agreement, which is attached as
Appendix A to this Prospectus/Proxy Statement and is incorporated herein by
reference. All shareholders are urged to read the Agreement in its entirety.
BACKGROUND OF THE MERGER
Prior to 1995, First City's strategic direction had been to remain
independent and to increase shareholder value through internal growth and
through acquisitions, such as the acquisition of Citizens in 1993. Although
senior management of First City from time to time had been approached by
regional bank holding company executives concerning their potential interest in
acquiring First City, no such proposal had been seriously pursued by First City
senior management.
In early 1995 senior management of First City determined to investigate
whether a change in First City's strategic direction was advisable as a result
of recent developments, including increasing consolidation among financial
institutions and the competitive conditions among financial institutions in
Rutherford County. In February 1995 management of First City met with a
representative of Attkisson to discuss the possibility of Attkisson assisting
First City in its review of its strategic alternatives. Attkisson performed a
detailed review of First City's financial condition and operations and in March
1995 presented First City senior management with an analysis of the valuation of
First City in an acquisition. In April 1995, a representative of Attkisson met
with the First City Board of Directors to discuss its valuation analysis,
developments in the merger and acquisition marketplace for community banks and
procedural steps should the First City Board of Directors determine to explore
the sale of control of First City. First City's Board, after extensive
discussions, instructed the management of First City, with the assistance of
Attkisson and First City's outside counsel, to explore the possible sale of
control of First City to certain large regional bank holding companies who could
expected to have, or had previously expressed, an acquisition interest in First
City. Following Board approval of this course of action, Attkisson contacted
nine regional bank holding companies concerning their interest in First City,
and furnished written information to six such institutions, including First
American. During May 1995 management of First City had various discussions and
meetings with personnel at four of the institutions that had been contacted by
Attkisson. First City requested all institutions to furnish First City by early
June with written proposals concerning any possible acquisition, including a
range of acquisition prices. Two institutions, including First American,
submitted written indications of interest to Attkisson, and three other
institutions expressed an acquisition interest orally.
On June 8, 1995, representatives of Attkisson again met with the First City
Board of Directors to discuss the status of Attkisson's exploratory process. At
that meeting, the representative of Attkisson discussed with First City's Board
the proposals submitted. The analysis focused on the two written proposals,
which were more detailed and proposed higher purchase prices than any of the
oral indications. Based on its review, the First City's Board determined to
permit First American and the other party submitting a written proposal to
conduct detailed due diligence in connection with the development of more
definitive acquisition proposals. In June 1995, First American and the other
party conducted a review of First City's books and records and interviewed
various members of First City management. In addition, First American and the
other party each furnished First City with proposed forms of definitive merger
agreements.
On June 28, 1995, First City received the final proposals from First
American and the other bank holding company. After reviewing the two proposals,
the Board of Directors of First City determined that the First American proposal
was superior, and authorized First City's senior management, with the assistance
of Attkisson and First City's outside counsel, to negotiate the terms of a
definitive acquisition agreement with First American. Following negotiation
between the parties, First City's Board of Directors approved the Agreement on
July 5, 1995.
Subsequent to the execution of the Agreement, the trading prices of FAC
Common Stock increased and have traded for several months in excess of $41.70,
the Average Closing Price at which First American had the right to terminate the
Agreement unless First City agreed to accept an Exchange Ratio equal to $26.50
19
<PAGE> 28
divided by the Average Common Price. The parties held discussions from time to
time concerning possible changes to the Exchange Ratio determination and the
elimination of each party's respective right to terminate the Merger on the
basis of the Average Closing Price. As a result of these discussions, the
parties agreed to the Amendment to the Agreement and Plan of Merger (the
"Amendment"), which was approved by First City's Board of Directors on February
1, 1996 and by First American's Board of Directors on February 2, 1996.
RECOMMENDATION OF THE BOARD OF DIRECTORS; REASONS FOR THE MERGER
The First City Board of Directors has determined that the Merger is in the
best interest of First City and its shareholders.
In evaluating the Merger, the Board of Directors considered the following
factors:
(i) The financial terms of the transaction. In approving the revised
financial terms reflected in the Amendment, the Board took into
consideration the previous financial terms, which provided that if the
Average Closing Price exceeded $41.70, the Exchange Ratio would be .6355,
but that First American could elect to terminate the Agreement, in which
event the consummation of the Merger could only be assured by First City
accepting a reduced Exchange Ratio equal to $26.50 divided by the Average
Closing Price. Had the Average Closing Price been calculated for the twenty
trading days ending January 31, 1996, it would have been $46.583 and the
Exchange Ratio determined by dividing $26.50 by 46.583 would have been
.5689. Under the revised financial terms, the minimum Exchange Ratio would
be .6000. At that Exchange Ratio the Merger results in an increase in
projected pro forma 1996 earnings per share to First City shareholders on
an equivalent per share basis of approximately 38%, an increase in tangible
book value per share was approximately 41% and an increase in dividends per
share of approximately 236%. Under both the original and the revised
financial terms, so long as the Average Closing Price exceeds $31.40, the
minimum market value of the shares of FAC Common Stock to be received by
First City shareholders would be approximately $26.50 (on a 20-trading day
average basis), which is approximately 84% higher than the highest trading
price of FCBI prior to the announcement of the Merger. Such approximate
market value was within the range of expected values to be received by
First City shareholders in a change of control transaction according to
Attkisson's Valuation Analysis. Under the revised financial terms, so long
as the Average Closing Price is $44.06 or higher, the minimum market value
of the shares of FAC Common Stock to be received by First City shareholders
would be approximately $28.00 (on a 20-trading day average basis). Such
approximate market value would be at approximately 250% of First City's
book value at December 31, 1995, which was above the median of price/book
value premiums for transactions since January 1995 involving southeastern
banks and thrifts with more than $100 million and less than $1 billion in
assets.
(ii) The effect on shareholder value of First City continuing as an
independent entity. The First City Board considered various matters
relating to the effect on shareholder value of First City continuing as an
independent entity, including the range of present values of FCBI Common
Stock estimated by Attkisson using projected dividends and earnings based
upon First City's business plan through fiscal 1999, and discount rates and
price-earnings multiples considered reasonable by Attkisson. The First City
Board noted that the Agreement provided value to the First City
shareholders in excess of the range of $21.45 to $23.40 per share which
resulted from this analysis.
(iii) Financial and other information concerning First American. The
First City Board considered publicly available financial information and
certain other information provided by First American concerning its
business and operations. The First City Board also considered additional
information concerning FAC Common Stock, including its relative performance
compared to the S & P Regional Bank Stock Index and its relative stock
price as a multiple of earnings per share on a historical and projected
basis, its relative appreciation over 30-day, 90-day, 180-day and 4-year
periods.
(iv) The process for soliciting indications of interest from other
bank holding companies. The First City Board also considered the process
which had been undertaken to solicit indications of interest from other
bank holding companies. Among the matters considered were that the merger
consideration
20
<PAGE> 29
from First American was the highest value in terms of market value of any
proposal received, and that a definitive agreement had been fully
negotiated and agreed to by both parties.
(v) The terms, other than the financial terms, of the Merger
Agreement. The First City Board also considered the other provisions of
the Agreement, including the covenants of First American contained therein,
the employment agreements that First American may require Messrs. Rowland
and Murfree to enter into, and the fact that the Merger would generally be
a tax-free transaction to First City and its shareholders. In considering
the Amendment, the Board considered the fact that the Amendment eliminated
either party's right to terminate on the basis of the Average Closing Price
and provided more certainty that the Merger would be consummated and a
smoother transition for First City's employees and customers.
(vi) The opinion of Attkisson. The First City Board also considered
the opinion of Attkisson, its financial advisor, that the consideration to
be received by the First City shareholders pursuant to the Agreement was
fair to them from a financial point of view and in adopting the Amendment,
the Board considered Atkinson's reaffirmation of that opinion in light of
the Amendment . See "-- Opinion of Financial Advisor."
OPINION OF FINANCIAL ADVISOR
First City has retained Attkisson to act as its financial advisor and to
render a fairness opinion in connection with the Merger. See "-- Background of
the Merger." As part of its engagement, Attkisson performed a valuation analysis
of First City based upon an acquisition. In March, 1995, Attkisson presented its
valuation analysis (the "Valuation Analysis") to First City's management. Based
upon the conclusions of this Valuation Analysis, on April 13, 1995, First City's
Board of Directors engaged Attkisson to determine the actual terms that might be
available to First City shareholders in an affiliation transaction. As a part of
its activities, Attkisson assisted First City management in compiling a
descriptive memorandum on First City which was distributed to prospective
acquirors of First City. Attkisson then represented First City in the
solicitation of acquisition proposals from these prospective acquirers. As a
result of these activities, on June 8, 1995, Attkisson reported to First City's
Board that First City had received detailed written indications of acquisition
interest from First American and one other party, these written proposals having
similar valuation levels and terms. Additionally, First City received three
other informal acquisition proposals which were at lower valuation levels than
the written proposals. First City's Board instructed management to permit both
First American and the other institution submitting a written proposal to
undertake their detailed on-site due diligence investigations of First City.
After these investigations were completed both institutions submitted final
acquisition proposals to First City. On June 28, 1995, Attkisson reviewed its
analysis of both proposals with First City's Board. After discussion and
deliberation concerning both proposals, First City's Board of Directors then
authorized First City's management, with the assistance of Attkisson and First
City's outside counsel, to commence negotiations with a view toward reaching a
definitive acquisition agreement with First American.
On July 5, 1995 Attkisson met with First City's Board of Directors to
review the terms of the definitive acquisition agreement which had been
negotiated with First American. At that time, Attkisson presented a report to
First City's Board of Directors summarizing the financial terms of the Merger
and containing updated market information with respect to bank mergers and
acquisitions. Attkisson also compared First American's offer to the valuation of
First City set forth in the Valuation Analysis and also analyzed the advantages
and disadvantages of the Merger. Attkisson further reported on its financial
analysis and on-site due diligence examination of First American.
Attkisson rendered its written opinion to First City's Board of Directors
to the effect that, as of that date, the consideration to be received by First
City's shareholders pursuant to the Agreement was fair to them from a financial
point of view. Attkisson has delivered an updated written opinion to First
City's Board of Directors as of the date of this Prospectus/Proxy Statement
stating that, as of the date hereof, and based on an Exchange Ratio of at least
0.6355 shares of FAC Common Stock for each share of FCBI Common Stock, the
consideration to be received by the shareholders of First City in the Merger is
fair to them from a financial
21
<PAGE> 30
point of view. The full text of Attkisson's opinion dated as of the date hereof
is attached as Appendix B to this Prospectus/Proxy Statement and is incorporated
herein by reference. The description of the opinion herein is qualified in its
entirety by reference to Appendix B. Holders of FCBI Common Stock are urged to
read the opinion in its entirety for a description of the procedures followed,
assumptions and qualifications made, matters consulted and limitations on the
reviews undertaken by Attkisson.
ATTKISSON'S OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF FIRST CITY
ONLY AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF
THE CONSIDERATION TO BE RECEIVED BY FIRST CITY'S SHAREHOLDERS BASED ON
CONDITIONS AS THEY EXISTED AND COULD BE EVALUATED AS OF THE DATE OF THE OPINION
AND IS BASED UPON AN EXCHANGE RATIO OF AT LEAST 0.6355 SHARES OF FAC COMMON
STOCK FOR EACH SHARE OF FCBI COMMON STOCK. ATTKISSON'S OPINION DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY FIRST CITY SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE FIRST CITY SPECIAL MEETING, NOR DOES ATTKISSON'S
OPINION ADDRESS THE UNDERLYING BUSINESS DECISION TO EFFECT THE MERGER. THIS
SUMMARY OF ATTKISSON'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
TEXT OF SUCH OPINION, WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS
APPENDIX B. SHAREHOLDERS ARE URGED TO READ ATTKISSON'S OPINION IN ITS ENTIRETY
FOR A DESCRIPTION OF THE ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS
ON THE REVIEW UNDERTAKEN IN RENDERING SUCH OPINION.
In connection with rendering its opinions, Attkisson reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) certain publicly
available information concerning First City, including the audited financial
statements of First City for each of the years in the three-year period ended
December 31, 1994 and the unaudited financial statements of First City for the
six months ended June 30, 1995; (iii) certain publicly available information
concerning First American, including the audited financial statements of First
American for each of the years in the three-year period ended December 31, 1994
and the unaudited financial statements of First American for the six months
ended June 30, 1995; (iv) certain other internal information, primarily
financial in nature, concerning the business and operations of First City and
First American furnished to Attkisson by First City and First American for
purposes of Attkisson's analysis; (v) certain information with respect to the
pricing and trading of FCBI Common Stock; (vi) certain information with respect
to the pricing and trading of FAC Common Stock; (vii) certain publicly available
information with respect to other companies that Attkisson believed to be
comparable to First City and First American and the trading markets for such
other companies' equity securities; and (viii) certain publicly available
information concerning the nature and terms of other acquisition transactions
that Attkisson considered relevant to its inquiry. Attkisson also met with
certain officers and employees of First City and First American to discuss the
foregoing, as well as other matters which it believed relevant to its inquiry.
In conducting its analyses and arriving at its opinions as expressed
herein, Attkisson considered such financial and other factors as it deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial condition and results of operations of
First City and First American, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest
expenses, earnings, dividends, book value, return on assets, return on equity,
capitalization, the amount and type of non-performing assets and the reserve for
loan losses; (ii) the business prospects of First City and First American; (iii)
the economies in First City's and First American's market areas; (iv) the
historical and current market for FCBI Common Stock and FAC Common Stock and for
the equity securities of certain other companies that Attkisson believed to be
comparable to First City and First American; and (v) the nature and terms of
certain other acquisition transactions that Attkisson believed to be relevant.
Attkisson also took into account its assessment of general economic, market,
financial and regulatory conditions and trends, as well as its knowledge of the
financial institutions industry, its experience in connection with similar
transactions, and its knowledge of securities valuation generally. Attkisson's
opinions necessarily were based upon conditions in existence and subject to
evaluation on the respective dates of its opinions. Attkisson's opinions are, in
any event, limited to the fairness, from a financial point of view, of the
22
<PAGE> 31
consideration to be received by the holders of FCBI Common Stock in the Merger
and does not address First City's underlying business decision to effect the
Merger.
In conducting its analysis and arriving at its opinion, Attkisson assumed
and relied upon, without independent verification, the accuracy and the
completeness of the information it reviewed for the purposes of the opinion.
Attkisson also relied upon the management of First City with respect to the
reasonableness and achievability of the financial forecast (and the assumptions
and bases underlying such forecast) provided to it. First City instructed
Attkisson that, for the purposes of its opinion, Attkisson should assume that
such forecast will be realized in the amounts and in the time periods currently
estimated by the management of First City. Attkisson also assumed, with First
City's consent, that the aggregate allowances for loan losses for each First
City and First American are adequate to cover such losses. Attkisson is not an
expert in the evaluation of allowances for loan losses and has not reviewed any
individual credit files. Attkisson did not make, nor was it furnished with,
independent valuations or appraisals of the assets or liabilities of either
First City or First American or any of their subsidiaries. Attkisson did not,
and was not asked to, express any opinion about what the value of FAC Common
Stock actually will be when issued to the holders of FCBI Common Stock pursuant
to the Merger or at the price at which FAC Common Stock will trade subsequent to
the Merger. Moreover, First City has informed Attkisson, and Attkisson has
assumed, that the Merger will be recorded utilizing purchase accounting under
generally accepted accounting principles.
No limitations were imposed by First City or its Board of Directors on the
scope of Attkisson's investigation or the procedures to be followed by Attkisson
in rendering its opinion.
The preparation of a fairness opinion involves various determinations of
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 summary description. In arriving
at its fairness opinion, Attkisson did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative judgments
about the significance and relevancy of each analysis and factor. None of the
analyses performed by Attkisson was assigned a greater significance by Attkisson
than any other. Accordingly, Attkisson believes that its analyses must be
considered as a whole and that a review of selected portions of such analyses
and the factors considered therein, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying its opinion. In its analyses, Attkisson made numerous assumptions
with respect to industry performance, general business and economic conditions,
and other matters, many of which are beyond First City and First American's
control. Any estimates contained in Attkisson's analyses are not necessarily
indicative of actual values or predictive of future results or values that may
be significantly more or less favorable than such estimates. Estimates of values
of companies do not purport to be appraisals or necessarily reflect the prices
at which companies or their securities actually may be sold. In addition, as
described above, Attkisson's opinion and presentation to the First City Board
was one of many factors taken into consideration by the First City Board in
making its determination to approve the Merger Agreement.
The following is a brief summary of analyses performed by Attkisson in
connection with its opinion delivered to the First City Board of Directors on
July 5, 1995.
Summary of Proposal. Attkisson described the terms of the proposed
transaction as reflected in the Agreement, including the terms of the exchange
ratio mechanism. Attkisson explained that each share of common stock of First
City will be converted into the right to receive shares of common stock of First
American generally providing approximately $26.50 in market value. Attkisson
noted that the Exchange Ratio would vary, based on the Average Closing Price of
FAC Common Stock for a defined 20 day period prior to the effective date of the
Merger, in a manner which would have the effect of providing First City
shareholders a per share value of approximately $26.50 so long as the Average
Closing Price of FAC Common Stock price was in the range of $31.40 to $41.70.
However, the Exchange Ratio cannot be more than .8440 or less than .6355.
Attkisson stated that based on the recent price of FAC Common Stock of $35.75,
an Exchange Ratio of .7413 shares of FAC Common Stock for each share of FCBI
Common Stock would provide First City shareholders a per share value of $26.50.
Further, Attkisson noted that termination rights to the Merger were available
(i) to First American if its Average Closing Price exceeded $41.70 per share and
(ii) to First City if
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the Average Closing Price of FAC Common Stock was less than $31.40. In the event
of exercise of either of these termination rights, (i) First City can require
First American to consummate the Merger by agreeing to accept a lower Exchange
Ratio providing approximately $26.50 in market value per share for each First
City common share or (ii) First American can require First City to consummate
the Merger by agreeing to offer a higher Exchange Ratio providing approximately
$26.50 in market value per share for each First City common share.
Possible Value of First City in a Sale of Control. In its original
Valuation Report, Attkisson estimated the potential value per share of FCBI
Common Stock in a sale of control transaction. For purposes of this analysis,
Attkisson reviewed the historical financial results and examined the internally
prepared financial projections of First City. Attkisson adjusted First City's
earnings to eliminate certain items of non operating or non recurring expense
and to reflect potential cost savings available should First City become part of
larger in-market institution. Attkisson then computed the value of First City
based on an analysis utilizing representative multiples of First City's
projected earnings for 1995 and 1996 and an analysis based upon representative
core deposit base premiums applied to First City's deposit base plus adjusted
shareholder's equity. Based upon these analyses and taking into account First
City estimated earnings in 1995 as an independent company prior to the closing
of its acquisition, Attkisson calculated an expected value to First City
shareholders in a sale of control transaction at between $25.00 and $27.50 per
share.
Indicated Value of First City as an Independent Company. Attkisson also
undertook an analysis addressing the range of potential values which would be
implied if First City were to remain an independent company. Attkisson computed
this range of values based on a discounted cash flow analysis, relying on
projections extrapolated from First City's 1995 budget, 1996 projection, and its
historical performance. In this analysis methodology, Attkisson assumed
shareholders received, in addition to the projected dividend stream, a terminal
valuation at December 31, 1999, based upon a 2.3 times multiple of December 31,
1999 stated book value and 14.9 times earnings for such year. These amounts were
discounted at rates ranging from 12% to 14% and indicated net present values to
First City shareholders on a per share basis ranging from $21.45 to $23.40.
Per Share Merger Consequences Analysis. Based upon an Exchange Ratio of
0.7413 shares of FAC Common Stock for each share of FCBI Common Stock (an
assumed Average Closing Price of $35.75) and using the earnings estimates for
First City prepared by First City management and earnings estimates for First
American prepared by independent securities analysts, Attkisson compared the
estimated 1996 earnings per share of FCBI Common Stock on a stand-alone basis to
the equivalent pro forma earnings of the shares of FAC Common Stock which would
be received in the Merger. Attkisson concluded that the Merger would result in
an earnings pickup of approximately 67% in 1996 for First City shareholders in
the combined company.
Attkisson also analyzed the impact of the Merger on the amount of tangible
book value represented by a share of FCBI Common Stock. Attkisson assumed
consummation of the Merger as of December 31, 1995 and utilized the above
described earnings estimates for First City and First American for the period
remaining in 1995. Attkisson concluded that the Merger would result in a pickup
of approximately 74% in tangible book value on an equivalent per share basis for
First City shareholders.
Finally, Attkisson compared the amount of dividends expected to be received
by a share of FCBI Common Stock before the Merger to the level expected to be
received on a pro forma basis reflecting the Merger. Attkisson concluded that
the Merger would result in an increase of 271% in dividends per share for First
City shareholders.
Analysis of Selected Bank Mergers Involving Southeastern Community
Banks. Attkisson reviewed eighteen mergers involving southeastern community
banks and bank holding companies announced between September 1993 and July 1995.
Attkisson noted in particular the prices paid in these mergers as a multiple of
earnings and book values and the transaction premiums paid in excess of tangible
book value as a percentage of core deposits. Attkisson also reviewed other data
in connection with each of these mergers, including the amount of total assets
and the capital level of the acquired institutions and the return on equity and
the return on assets of the acquired institutions. Attkisson then compared this
data to that of First City and to the value to be received by First City
shareholders in the Merger.
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This comparison yielded a range of transaction values as multiples of
latest twelve-months earnings per share of a low of 11.9 times and a high of
29.6 times and a median value of 16.5 times. The First City multiple of trailing
earnings was 21.3 times. The calculations yielded a range of transaction values
as multiples of book value per share of a low of 1.45 times to a high of 3.58
times and a median value of 2.44 times. The First City multiple of book value
was 2.68 times. Finally, the calculations yielded a range of deposit base
premiums paid from a low of 4.55% to a high of 25.40%, with a median value of
12.86%. The equivalent premium represented by the Per Share Price provided in
the Merger was 11.45%.
No company or transaction used in the above analyses as a comparison is
identical to First City, 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 to which they are being compared. Mathematical analysis (such as
determining the average or median) is not, in itself, a meaningful method of
using comparable company data.
In connection with its opinion dated the date of this Prospectus/Proxy
Statement, addressing the revised terms of the Merger provided for in the
Amendment, Attkisson confirmed the appropriateness of its reliance on the
analyses used to render its July 5, 1995 opinion and performed procedures to
update certain of such analyses and reviewed the assumptions on which such
analyses were based and the factors considered in light of the Amendment's
terms. In connection with this update, the significant increase in the market
price of FAC Common Stock, from $35.75 in early July, 1995 to the $47.00 to
$48.00 range in late January 1996 and the revised transaction terms required
that the assumptions utilized in the analysis described previously under "-- Per
Share Merger Consequences Analysis" reflect an Exchange Ratio in the range of
0.6355 to 0.6 shares of FAC Common Stock for each share of FCBI Common Stock
rather than the original estimate utilized in July 1995 of 0.7413. At the same
time, Attkisson updated its estimates of the earnings per share for the year
ended 1996, the tangible book value per share at December 31, 1995 and the
indicated annual dividends per share for each First City and First American. In
a manner consistent with its earlier analysis, Attkisson compared the estimated
1996 earnings per share of FCBI Common Stock on a stand-alone basis to the
equivalent pro forma earnings of the shares of FAC Common Stock which would be
received in the Merger. Attkisson concluded that, at the minimum Exchange Ratio
of 0.6, the Merger would result in an earnings pickup of approximately 38% in
1996 for First City shareholders in the combined company.
Attkisson also analyzed the impact of the Merger on the amount of tangible
book value represented by a share of FCBI Common Stock. Attkisson again assumed
consummation of the Merger as of December 31, 1995 and utilized the previously
described earnings estimates for First City and First American. Attkisson
concluded that the Merger would result in a pickup of 41% in tangible book value
on an equivalent per share basis for First City shareholders.
Finally, Attkisson compared the amount of dividends expected to be received
by a share of FCBI Common Stock before the Merger to the level expected to be
received on a pro forma basis reflecting the Merger. Attkisson concluded that
the Merger would result in an increase of 236% in dividends per share for First
City shareholders.
Attkisson, as part of its investment banking business is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, private placements, and valuations for estate, tax,
corporate and other purposes. Attkisson has extensive experience with the
valuation of financial institutions. First City's Board of Directors selected
Attkisson as its financial advisor because of First City management's previous
experience with Attkisson as a specialized investment banking firm having
considerable expertise in the financial institutions industry and because of
Attkisson's substantial experience in transactions similar to the Merger.
Attkisson is not affiliated with either First City or First American.
For its services as financial advisor including rendering its opinion
concerning the fairness of the terms of the Merger, Attkisson received from
First City a fee of $75,000 upon execution of the Agreement. An additional fee
equal to $225,000 plus 3% of the aggregate market value of the consideration to
be received by First City shareholders in excess of $25.00 per share will be
payable to Attkisson upon consummation of the Merger. Based upon an assumed
Average Closing Price and value of a share of FAC Common Stock at the
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Effective Time of the Merger of $ (the Closing Price of FAC Common Stock
on February , 1996), this additional fee would be approximately $ if the
Exchange Ratio were 0.6355. First City has also agreed to reimburse Attkisson
for its reasonable out-of-pocket expenses and to indemnify Attkisson against
certain liabilities, including certain liabilities under federal securities
laws.
TERMS OF THE MERGER
Pursuant to the terms of the Agreement, First City will be merged with and
into First American, with First American as the surviving entity. At the
Effective Time of the Merger, each share of FCBI Common Stock issued and
outstanding immediately prior to the Effective Time will be converted into a
number (the "Exchange Ratio") of shares of FAC Common Stock determined by the
Average Closing Price per share of FAC Common Stock on The Nasdaq Stock Market
(as reported in The Wall Street Journal) for the twenty (20) consecutive trading
days ending on and including the third trading day immediately preceding but not
including the closing and cash in lieu of any fractional share. The Agreement
provides for the following Exchange Ratios depending on the Average Closing
Price:
(1) If the Average Closing Price is above $46.67, the Exchange Ratio
shall be fixed at 0.6, and therefore each share of FCBI Common Stock would
be exchanged for 0.6 shares of FAC Common Stock.
(2) If the Average Closing Price is between $44.06 and $46.67, the
Exchange Ratio shall be determined by dividing $28.00 by the Average
Closing Price, and would be between 0.6355 and 0.6, and therefore each
share of FCBI Common Stock would be exchanged for between 0.6355 and 0.6
shares of FAC Common Stock, depending on the Average Closing Price.
(3) If the Average Closing Price is between $41.70 and $44.06, the
Exchange Ratio shall be fixed at 0.6355, and therefore each share of FCBI
Common Stock would be exchanged for 0.6355 shares of FAC Common Stock.
(4) If the Average Closing Price is between $31.40 and $41.70, the
Exchange Ratio shall be determined by dividing $26.50 by the Average
Closing Price, and would be between 0.8440 and 0.6355, and therefore each
share of FCBI Common Stock would exchanged for between 0.8440 and 0.6355
shares of FAC Common Stock, depending on the Average Closing Price.
(5) If the Average Closing Price is below $31.40, the Exchange Ratio
shall be fixed at 0.8440, and therefore each share of FCBI Common Stock
would be exchanged for 0.8440 shares of FAC Common Stock.
The FAC Common Stock is traded on The Nasdaq Stock Market under the symbol
"FATN." The closing price of FAC Common Stock in composite trading on February
, 1996, was $ per share, as reported in The Wall Street Journal. If the
Average Closing Price had been calculated on the basis of the 20 business days
preceding that date, it would have been $ , the Exchange Ratio would be
and the value of the shares of FAC Common Stock to be received for each
share of FCBI Common Stock would be $ . However, there can be no
assurances as to what the actual Average Closing Price, Exchange Ratio and
market price of FAC Common Stock will be at the Effective Time. The actual value
of the shares of FAC Common Stock to be exchanged for each share of FCBI Common
Stock will depend on the Exchange Ratio and the market price of FAC Common Stock
at the Effective Time and may be lower or higher than $ . It is currently
anticipated the closing will occur on March 8, 1996, and the last day of the
period for determination of the Exchange Ratio will be March 5, 1996.
If prior to the Effective Time, if the outstanding shares of FAC Common
Stock shall have been increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization, reclassification,
stock dividend, stock split, reverse stock split or other similar change,
applicable adjustments shall be made to the Average Closing Price and the
maximum and minimum number of shares of FAC Common Stock to be exchanged.
Under the Agreement, each outstanding share of First City's Series A
Preferred Stock which has not been converted into FCBI Common Stock prior to the
Merger will be converted into the right to receive $6.00
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cash per share, plus any accumulated but unpaid dividends accrued prior to the
Merger. Each outstanding share of First City's Series C and Series D Preferred
Stock will be redeemed by First City for $100 per share, plus an amount equal to
all undeclared dividends (as defined in the Agreement), prior to the Merger. The
rights to acquire Units of First City's Series B Preferred Stock will be
redeemed by First City prior to the Merger see ("PROPOSAL I -- THE
MERGER -- Certain Differences in Rights of Shareholders -- Anti-Takeover
Provisions; Shareholder Rights Plan").
First City has issued options for the purchase of FCBI Common Stock (the
"FCBI Options") pursuant to certain plans (the "FCBI Stock Plans"). At the
Effective Time, each FCBI Option issued pursuant to the FCBI Stock Plans and
outstanding immediately prior to the effective time will be converted into and
exchangeable for the right to receive cash equal to (i) the market value of FAC
Common Stock on the day immediately prior to the effective time (which shall be
the closing price of FAC Common Stock on the Nasdaq Stock Market as reported in
The Wall Street Journal for such date), multiplied by the number of shares of
FAC Common Stock which would have been received by the holder of the FCBI Option
if such FCBI Option had been exercised immediately prior to the Effective Time,
minus (ii) the exercise price of the FCBI Option. As of the Record Date, there
were outstanding under the FCBI Stock Plans options to acquire an aggregate of
10,000 shares of FCBI Common Stock at an exercise price of $11.125 per share.
None of the outstanding FCBI Options are held by the directors or executive
officers of First City.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, but in no event later than five business
days thereafter, the stock transfer agent of First American, acting in the
capacity of exchange agent, will mail to all holders of FCBI Common Stock a
letter of transmittal, together with instructions for the exchange of their FCBI
Common Stock certificates for certificates representing FAC Common Stock and a
check representing the amount paid in lieu of issuing any fractional share.
Until so exchanged, each certificate representing FCBI Common Stock outstanding
immediately prior to the Effective Time shall be deemed for all purposes to
evidence the right to receive upon such surrender the number of shares of FAC
Common Stock into which such shares have been converted and cash in lieu of any
fractional share.
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
FURTHER INSTRUCTIONS.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties by First City
regarding, among other things, its organization, capitalization, ownership and
capitalization of its subsidiaries, authority to enter into the Agreement,
filings with the Commission, certain information supplied or to be supplied to
First American, compliance with laws, pending and threatened litigation, tax
matters, certain material agreements, employee benefit plans, its subsidiaries,
regulatory matters, absence of material adverse changes, the vote required for
approval of the Merger, title to its assets, ownership of FAC Common Stock,
allowance for loan losses, transactions with affiliated persons, activities of
First City, FCB and Citizens and their subsidiaries, environmental matters and
certain provisions of First City's organizational documents and relevant state
anti-takeover laws. The Agreement also contains representations and warranties
by First American regarding, among other things, its organization,
capitalization, ownership and capitalization of FANB, authority to enter into
the Agreement, filings with the Commission, certain information supplied or to
be supplied to First City, compliance with laws, pending and threatened
litigation, absence of material adverse changes, the absence of an approval
requirement by holders of FAC Common Stock of the Merger, reservation of shares
of FAC Common Stock, regulatory matters, tax matters, title to its assets and
allowance for loan losses. These representations and warranties will not survive
the Effective Time.
The respective obligations of First American and First City to consummate
the Merger are conditioned upon, among other things: (i) approval of the
Agreement by the shareholders of First City; (ii) the consent of at least 66 2/3
percent of the holders of First City's convertible capital to an amendment
accelerating the maturity date of the debentures to immediately prior to the
Effective Time; (iii) that shares of FAC Common Stock to be issued in the Merger
shall have been approved for trading on The Nasdaq Stock Market; (iv) the
receipt of all authorizations, consents, orders or approvals of, or declarations
or filings from any governmental entity which are necessary for the consummation
of the Merger, and the expiration of all applicable waiting
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periods required after the granting of any such approvals; (v) the effectiveness
under the Securities Act of a registration statement relating to the FAC Common
Stock to be issued in connection with the Merger, the absence of any stop order
suspending the effectiveness of such registration statement or the initiation of
any proceedings seeking such a stop order; (vi) the absence of a restraining
order or injunction preventing the consummation of the Merger, or the pendency
of any proceeding by any governmental entity seeking a restraining order or
injunction, or the existence of an applicable statute, rule, regulation or order
making the consummation of the Merger illegal; (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 of the
other party as required to be performed by the other party at or prior to the
Effective Time by the parties to the Agreement; (ix) the receipt of the consent
or approval of each person (other than governmental entities) whose consent or
approval shall be required in order to permit the succession of First American
to any obligation, right or interest of First City or any subsidiary of First
City under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, individually or in the aggregate,
have a material adverse effect on First American and its subsidiaries taken as a
whole or upon the consummations contemplated by the Agreement; (x) the receipt
by First American of an opinion of First American's tax advisors, dated as of
the Effective Time, to the effect that the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code, and that each
of First City and First American will be a party to that reorganization pursuant
to Section 368(b) of the Code; (xi) receipt by First American of certain
opinions of legal counsel to First City, in form reasonably satisfactory to
First American; (xii) the receipt by First City of an opinion of First City's
legal counsel, dated as of the Effective Time, to the effect that the Merger
(including the Bank Merger) will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code, that First City
and First American will each be a party to that reorganization within the
meaning of Section 368(b) of the Code, that no gain or loss will be recognized
by First City shareholders who exchange their FCBI Common Stock solely for FAC
Common Stock in the Merger, and related matters; (xiii) the receipt by First
City of certain opinions of legal counsel to First American, in form reasonably
satisfactory to First City; (xiv) the conversion of First City's convertible
debt into not more than 165,143 shares of First City common stock; (xv) the
redemption of all outstanding First City shares of Series C Preferred and Series
D Preferred stock; (xvi) the absence of material adverse changes in the
business, financial condition, prospects or results of operations or prospects
of First City, in the case of First American, or the absence of such changes
with respect to First American, in the case of First City; (xvii) the receipt by
First American of certain agreements from the "affiliates" of First City;
(xviii) receipt by First American of a letter from Coopers & Lybrand, L.L.P.
dated as of the Effective Time, providing an agreed upon procedure report as to
certain of First City's financial information; (xix) receipt by First American
of a certificate from First City as to the capitalization of First City
immediately prior to the Effective Time; (xx) the execution and delivery of the
employment contracts with Messrs. Rowland and Murfree; (xxi) receipt by First
City of an opinion of Attkisson dated as of the date of the Agreement to the
effect that the consideration to be received by the holders of FCBI Common Stock
pursuant to the Agreement upon consummation of the Merger is fair to such
shareholders from a financial point of view; (xxii) receipt by First City of an
acknowledgment from First American's exchange agent that it is in receipt of the
consideration required to effect the Merger; and (xxiii) receipt by First City
of a letter from KPMG Peat Marwick LLP dated as of the Effective Time providing
an agreed upon procedure report as to certain First American financial
information.
Except with respect to obtaining the approval by First City's shareholders
of the Merger and the Agreement, the consent of First City's debenture holders
to an amendment, the approval for trading on The Nasdaq Stock Market of the
shares of FAC Common Stock issued in the Merger, and the receipt of all required
regulatory approvals, the conditions to consummation of the Merger may be waived
at any time by the party for whose benefit they were created.
REGULATORY APPROVALS
The Merger and the Bank Mergers are subject to certain regulatory
approvals. The Merger is subject to the approval of the Federal Reserve Board
under Section 3 of the BHCA.
The Bank Mergers are subject to approval by the OCC under the Bank Merger
Acts. The Bank Merger Act provides that the Merger may not be consummated until
the thirtieth day after approval by the OCC,
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during which time the United States Department of Justice ("DOJ") may challenge
the transaction on antitrust grounds; provided, however, that the OCC has the
discretion, upon request, to shorten the thirty day waiting period to 15 days in
the event the DOJ indicates to the OCC that it will not object to the
transaction on competitive grounds.
First American, FANB, First City, FCB and Citizens, as appropriate, have
received all of the foregoing regulatory approvals and all applicable waiting
periods for the Merger and the Bank Mergers have passed.
First American and First City are not aware of any other governmental
approvals or actions that are required for consummation of the Merger and the
Bank Mergers except as described above. Should any such approval or action be
required, it is presently contemplated that such approval or action would be
sought. There can be no assurance that any such approval or action, if needed,
could be obtained, would not delay consummation of the Merger and the Bank
Mergers and would not be conditioned in a manner that would cause First American
to abandon the Merger and the Bank Mergers.
BUSINESS PENDING THE MERGER
The Agreement contains negative and affirmative covenants that are
customary in similar transactions. In addition, the Agreement provides that,
except as otherwise specifically contemplated or permitted thereby, each of
First American and First City shall, and shall cause each of its respective
subsidiaries to, operate its business only in the usual, regular and ordinary
course and preserve intact its business organizations and assets and maintain
its rights and franchises, and take no action which would materially adversely
affect the ability of any party to perform its covenants in all material
respects and to consummate the Merger or prevent or impede the transactions
contemplated in the Agreement from qualifying as a reorganization under Section
368 of the Code; provided, however, that the foregoing generally does not
prevent First American or any of its subsidiaries from acquiring or disposing of
assets or businesses. Further, without the prior written consent of First
American, or as otherwise provided in the Agreement, First City generally may
not, and may not permit its subsidiaries to, incur new debt other than in the
ordinary course of business; declare or pay dividends other than a quarterly
dividend not in excess of $.20 per share; increase compensation or benefits of
employees, officers or directors except as specifically permitted in the
Agreement; or take certain other actions, other than in the ordinary course of
business or as described in the Agreement, that might impact the financial
condition or business of First City. The Agreement also contains certain other
provisions pursuant to which First City 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.
NO SOLICITATION OF COMPETING TRANSACTIONS
First City has agreed that it will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of First City or any subsidiary of First City
directly or indirectly to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any Competing Transaction (as defined
below). Further, First City has agreed not to authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of First City or any subsidiary of First City
directly or indirectly, (A) to cooperate with, or furnish or cause to be
furnished any non-public information concerning its business, properties or
assets to, any person or entity in connection with any Competing Transaction;
(B) to negotiate any Competing Transaction with any person or entity; or (C) to
enter into any agreement, letter of intent or agreement in principle as to any
Competing Transaction. First City has also agreed to promptly give written
notice to First American upon becoming aware of any Competing Transaction.
"Competing Transaction" is defined in the Agreement as one of the following
involving First City (other than the transactions contemplated by the
Agreement): (i) any merger, consolidation, share exchange, business combination,
or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 15% or more of the assets of First City in a
single transaction or series of transactions to the same person, entity or
group; or (iii) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
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If this particular covenant is breached by First City, or any of its
directors, officers, employees or agents, and the Agreement is terminated as a
result, under certain circumstances First City may be required to pay to First
American liquidated damages of $3,000,000. See "-- Effective Time of the Merger;
Termination; Damages."
EFFECTIVE TIME OF THE MERGER; TERMINATION; DAMAGES
After such time as the conditions to the closing of the Merger have been
satisfied or waived, the Merger shall become effective upon the filing of
Articles of Merger with the Secretary of State of Tennessee or at such time
thereafter as is provided in the Articles of Merger, but in any event the
parties currently intend that the Effective Time shall be 12:01 a.m. on March
11, 1996.
The Agreement may be terminated, whether before or after shareholder
approval, in writing: (i) by mutual consent of First American and First City;
(ii) by either party if the Merger shall not have been consummated on or before
June 30, 1996 (provided that the terminating party shall not have breached in
any material respect its obligations under the Agreement in a manner that
proximately contributed to the failure to consummate the Merger by such date);
(iii) by either party if any governmental regulatory body, the consent of which
is a condition to the obligations of First American and First City to consummate
the transactions contemplated by the Agreement, shall have determined not to
grant its consent and all appeals of such determination shall have been taken
and have been unsuccessful; (iv) by either party if any court of competent
jurisdiction shall have issued an order or judgment restraining, enjoining or
otherwise prohibiting the Merger and such order or judgment shall have become
final and unappealable; (v) by First American if any event shall have occurred
as a result of which certain conditions are no longer capable of being
satisfied, (vi) by First American if there has been a breach by First City of
any representation or warranty contained in the Agreement which would have or
would be reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or prospects
of First City and its subsidiaries taken as a whole, or there has been a
material breach by First City of a covenant or agreement set forth in the
Agreement which breach is not curable, or, if curable, is not cured within 20
days after written notice of such breach is given by First American; (vii) by
First American if First City or its Board of Directors shall have authorized,
recommended, proposed or publicly announced its intention to enter into a
Competing Transaction which has not been consented to in writing by First
American; (viii) by First American if First City's Board of Directors shall have
failed to make or shall have withdrawn or materially modified its recommendation
to the shareholders of First City with respect to the Merger or the Agreement;
(ix) by First City if any event shall have occurred as a result of which certain
conditions are no longer capable of being satisfied; or (x) by First City if
there has been a breach by First American of any representation or warranty
contained in the Agreement which would have or would be reasonably likely to
have a material adverse effect on the assets, liabilities, financial condition,
results of operations, business or prospects of First American and its
Subsidiaries taken as a whole, or there has been a material breach of any of the
covenants or agreements set forth in the Agreement on the part of First American
which breach is not curable or, if curable, is not cured within 20 days after
written notice of such breach is given by First City.
The Agreement provides that First City is required to pay liquidated
damages in the amount of $3,000,000 (the "Fee") to First American if (1) First
American terminates the Agreement by reason of a failure of First City to meet
certain conditions due to First City's knowing and intentional misrepresentation
or knowing and intentional breach of warranty or of any covenant or agreement,
and, between the date of the Agreement and the date of such event or breach,
First City or any subsidiary of First City made certain contacts regarding a
Competing Transaction; (2) if First American terminates the Agreement after the
Board of Directors of First City shall have withdrawn or materially modified its
authorization, approval or recommendation to the shareholders of First City with
respect to the Merger or the Agreement in a manner adverse to First American or
shall have failed to make a favorable recommendation to the shareholders of
First City regarding the Merger and the Agreement; (3) if First American
terminates the Agreement because, without first obtaining First American's
consent, First City or its Board of Directors shall have authorized,
recommended, proposed or publicly announced its intention to enter into a
Competing Transaction and within 12 months from the date of such termination a
Competing Transaction is consummated or First City shall
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<PAGE> 39
have entered into an agreement which if consummated would constitute a Competing
Transaction; or (4) if First City terminates the Agreement because the Agreement
did not receive the requisite vote of the First City shareholders and within 12
months from the date of such termination a Competing Transaction is consummated
or First City shall have entered into an agreement which if consummated would
constitute a Competing Transaction. If First American is entitled to the Fee,
First City is also obligated to pay to First American interest at the rate of 6%
per year on any amounts that are not paid when due, plus all costs and expenses
in connection with or arising out of the enforcement of the obligation of First
City to pay the Fee or such interest.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, First City will merge with and into First American,
and First City thereafter will cease to exist as a separate corporate entity. In
addition, FCB and Citizens will merge with and into FANB, and FCB and Citizens
thereafter will cease to exist as separate entities. Tennessee Credit
Corporation and First City Life Insurance Company will become separate
subsidiaries of FANB.
The Board of Directors of First American following the Merger shall consist
of those persons serving as directors immediately prior thereto. It is
anticipated that the current directors of First City will serve as members of
FANB's Advisory Board in Rutherford County, Tennessee, following the Bank
Mergers.
EFFECT ON CERTAIN EMPLOYEES AND BENEFIT PLANS
Employees. The Agreement provides that all First City employees who are
terminated within one year following the Merger as a result of the Merger will
be eligible for benefits available under First American's reduction in force
policy, which may include, among other benefits, certain notices, severance
payments, continuing paid health benefits, and outplacement assistance. First
American currently anticipates that in connection with the Merger approximately
55 First City positions will be eliminated by combining certain of First City's
branches with existing branches of FANB. However, First American has not
finalized its plans in this regard and this estimate is subject to change.
Employee Benefit Plans. The tax-qualified defined contribution and defined
benefit plans maintained by First City or its subsidiaries will be terminated by
First City on or before the Effective Time or as soon as may be practicable
thereafter (and First American and First City agree that participants in said
plans who become participants in the First American Corporation First Incentive
Reward Savings Thrift Plan (the "First Plan") shall be given the right to roll
over their accounts to the First Plan) and the benefits thereunder distributed
to participants to the extent permitted under the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). To the extent that
such benefits may not be distributed to participants such plans will be merged
into corresponding First American plans or will be maintained as separate plans.
No such distribution of benefits will be made before the receipt of an
appropriate favorable determination letter from the Internal Revenue Service
("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, First City or
its subsidiaries will, to the extent permitted by applicable funding rules under
the Code and ERISA, contribute to each First City 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
liabilities of such plan determined as of a date within thirty (30) days of the
Effective Time.
All welfare and other benefit plans maintained by First City or its
subsidiaries will be terminated by First City in a manner reasonably acceptable
to First City and First American on or before the Effective Time or as soon as
may be practicable thereafter. Employees of First City and its subsidiaries
shall be eligible to participate in the pension and welfare plans maintained by
First American after the Effective Time, subject to the eligibility requirements
of these plans. For purposes of determining eligibility to participate in the
qualified plans maintained by First American, employees of First City or its
subsidiaries shall be credited with service with First City and its subsidiaries
to the extent credited under the respective predecessor plans. Vesting service
under the First Plan will be in accordance with the rules of the First Plan
governing vesting service for employees of acquired employers and consistent
with the current policies of First American in that regard.
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<PAGE> 40
Employees of First City 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 First City and its subsidiaries for eligibility and vesting purposes, but
with no prior benefit service, under the Retirement Plan. Subject to the usual
rules applicable to the vacation and short-term disability programs of First
American, service with First City and its subsidiaries will be recognized in
determining the vacation and short-term disability benefits of employees of
First City and its subsidiaries after the Effective Time.
The tax qualified defined contribution and defined benefit plans of First
City or its subsidiaries shall be maintained separately from First American's
benefit plans through the date on which participants in said plans receive final
distributions of their benefits. First American and First City may agree on or
before the Effective Time to cause any benefit plan sponsored by First City or
its subsidiaries that is in effect at the Effective Time to remain in effect in
lieu of a benefit plan maintained by First American for an interim period in
order to coordinate the transition from such First City benefit plans to First
American plans in a fair, equitable and administratively reasonable manner.
Employee Stock Ownership Plan. The Agreement provides that First City and
First American will cooperate to cause the First City Bank Employee Stock
Ownership Plan and Trust (the "ESOP") to be amended (if necessary) and other
action taken in a manner reasonably acceptable to First City and First American
to provide that (i) at the Effective Time the current trustees of the ESOP shall
resign and First American shall appoint a successor trustee; (ii) immediately
after the Effective Time, the successor trustee will sell the shares of First
American Common Stock acquired by the ESOP in the Merger to First American at
the then current market price; (iii) the ESOP will be terminated as soon as
possible after the Effective Time, consistent with the requirements of Section
415 of the Code and other applicable tax provisions; and (iv) as soon as
practicable after the later of the Effective Time or the receipt of a favorable
determination letter from the IRS with respect to the qualification of the ESOP
upon its termination, First City and First American agree that the assets of the
ESOP will be distributed to the beneficiaries thereof and participants in the
ESOP who become participants in the First Plan shall be given the right to roll
over their accounts into the First Plan.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of First City have interests in
the Merger in addition to their interests as shareholders of FCBI Common Stock
generally. The First City Board was aware of these interests and considered
them, among other matters, in approving the Agreement and the transactions
contemplated thereby.
Employment Agreements. In order to maintain continuity of First City's
business operations after the Effective Time, First American may cause FANB to
enter into employment agreements, commencing as of the Effective Time, with each
of First City's two executive officers, providing that each such person would
serve as an employee of FANB on an exclusive and full-time basis. It is
currently anticipated that unless extended by mutual agreement of the parties or
earlier terminated, each of these agreements would be for a term extending to
March 1, 1998. Under the agreements, such officers would, among other things,
render such administrative, sales, marketing and other executive services to
FANB, its affiliates and its subsidiaries as FANB's Board of Directors or its
president or his designee may from time to time direct. For their services under
their respective agreements, it is anticipated that Messrs. Rowland and Murfree
would receive initial annual salaries of approximately $131,600.
Subordinated Debentures. First City has issued certain Convertible
Floating Rate Subordinated Debentures (the "Debentures") due April 1, 1999. As
of the Record Date, $1,350,584 in principal amount of Debentures were
outstanding. As a condition to the Merger, all outstanding Debentures must be
converted into shares of FCBI Common Stock prior to the Effective Time. Assuming
approval of the Merger at the Meeting, and assuming the consummation of the
Merger the Debentures will be converted into the number of shares of FCBI Common
Stock equal to the result (calculated to the nearest 1/100th of a share)
obtained by dividing the principal amount of the Debenture or portion thereof by
$8.18 per share. At the Effective time, each share of FCBI Common Stock issued
upon the conversion of the Debentures will be converted into shares of FAC
Common Stock in accordance with the terms of the Agreement. Assuming an Exchange
Ratio
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<PAGE> 41
of 0.6355, each of the directors and executive officers of First City would
receive the number of shares of FAC Common Stock indicated below as a result of
the conversion of the Debentures in the Merger:
<TABLE>
<S> <C>
Melvin Adams........................................................ 1,201
W. Kent Coleman..................................................... 2,163
Stan Hooper......................................................... 435
Robert B. Murfree................................................... 11,199
William E. Rowland.................................................. 13,072
Joseph M. Swanson................................................... 8,932
Olin O. Williams, M.D............................................... 2,403
J. Michael Woods.................................................... 310
</TABLE>
Series A Preferred Stock. Under the Agreement, each outstanding share of
First City's Series A Preferred Stock which has not been converted into FCBI
Common Stock prior to the Merger, will be converted into the right to receive
$6.00 cash per share, plus any accumulated by unpaid dividends accrued prior to
the Merger. As a result of the redemption of the Series A Preferred Stock in the
Merger, the directors and executive officers of First City would receive the
amounts indicated below:
<TABLE>
<S> <C>
Melvin Adams...................................................... $ 23,202
W. Kent Coleman................................................... 41,766
Stan Hooper....................................................... 8,400
Robert B. Murfree................................................. 153,000
William E. Rowland................................................ 220,236
Joseph M. Swanson................................................. 164,250
Olin O. Williams, M.D. ........................................... 46,404
J. Michael Woods.................................................. 6,000
</TABLE>
None of the directors or executive officers of First City will receive any
proceeds from the redemption of First City's Series C or Series D Preferred
Stock in the Merger.
Indemnification; Insurance. First American has agreed to indemnify, defend
and hold harmless each person who was, at the date of the Agreement or at any
time prior thereto, or who becomes prior to the Effective Time, an officer,
director or employee of First City or any of its subsidiaries (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees), liabilities or judgments, or amounts that are paid in
settlement with the approval of First American (which approval shall not be
unreasonably withheld), of or in connection with any claim, action, suit,
proceeding or investigation in which an Indemnified Party is, or is threatened
to be made a party or witness, based in whole or in part on or arising in whole
or in part out of the fact that such person is or was a director, officer or
employee of First City, or any subsidiary of First City, whether pertaining to
any matter existing or occurring at or prior to the Effective Time and whether
asserted or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), in each case to the full extent First City would have been
permitted under Tennessee or Federal law in effect as of the date of the
Agreement or as amended applicable to a time prior to the Effective Time, and
its charter and bylaws or the charter and bylaws of First City Bank or its
subsidiary, as applicable, to indemnify such person. Such indemnification shall
be limited to cover claims only to the extent that those claims are not
otherwise covered under First City's directors' and officers' liability
insurance coverage or such coverage obtained by First American for the benefit
of such directors and officers.
From and after the Effective Time and for a period of six years thereafter,
First American has also agreed in the Agreement to use its best efforts to
maintain in effect directors' and officers' liability insurance coverage which
is at least as advantageous as to coverage and amounts as maintained by First
City immediately prior to the Effective Time with respect to claims arising from
facts or events which occurred before the Effective Time. However, First
American is not obligated under the Agreement to make annual premium payments
for such insurance to the extent such premiums exceed $21,750, which is 1.5
times the premiums paid by First City for such insurance as of the date of the
Agreement. See also "-- Certain Differences in Rights of
Shareholders -- Liability of Directors; Indemnification."
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<PAGE> 42
Board Membership. First American has agreed to cause the persons who serve
as directors of First City immediately prior to the Effective Time to be
appointed as advisory directors of FANB's Advisory board in Rutherford County,
Tennessee after the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Set forth below is a discussion of the material federal income tax
consequences of the Merger to First City and to First City's shareholders who
are citizens or residents of the United States. THE FOLLOWING DISCUSSION DOES
NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS
RELEVANT TO A DECISION WHETHER TO VOTE IN FAVOR OR APPROVAL OF THE MERGER AND
THE TRANSACTIONS CONTEMPLATED THEREBY. FURTHER, THE DISCUSSION DOES NOT ADDRESS
THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR FIRST CITY SHAREHOLDER
SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS
DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS,
NON-UNITED STATES PERSONS AND SHAREHOLDERS WHO ACQUIRED THEIR SHARES AS
COMPENSATION, NOR ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY
OR FOREIGN JURISDICTION. THE DISCUSSION IS BASED UPON THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (I.E., THE CODE), TREASURY REGULATIONS THEREUNDER AND
ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE
FOREGOING ARE SUBJECT TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING
VALIDITY OF THIS DISCUSSION.
HOLDERS OF FCBI COMMON STOCK AND SERIES A PREFERRED STOCK ARE URGED TO
CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR EFFECT OF THEIR OWN PARTICULAR
FACTS AND CIRCUMSTANCES ON THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO
THEM, AND ALSO AS TO THE EFFECT OF ANY STATE, LOCAL, FOREIGN AND OTHER FEDERAL
TAX LAWS.
Under current federal income tax law, and based upon assumptions and
representations to be made by First City and First American, and assuming that
the Merger is consummated in the manner set forth in the Agreement, it is
anticipated that the following federal income tax consequences will result: (i)
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code, (ii) a shareholder of First City will recognize no gain or loss for
federal income tax purposes to the extent FAC Common Stock is received in the
Merger in exchange for FCBI Common Stock; (iii) the tax basis in the FAC Common
Stock received by a First City shareholder in the Merger will be the same as the
tax basis in the FCBI Common Stock surrendered in exchange therefor; (iv) the
holding period for FAC Common Stock received in exchange for FCBI Common Stock
will include the period during which the shareholder held the FCBI Common Stock
surrendered in the exchange, provided that the FCBI Common Stock was held as a
capital asset at the Effective Time; and (v) cash received by a First City
shareholder in lieu of a fractional share interest of FAC Common Stock or in
exchange for Series A Preferred shares will be treated as having been received
as a distribution in full payment in exchange for the fractional share interest
of FAC Common Stock (or Series A Preferred share) that such First City
shareholder would otherwise be entitled to receive.
A condition to the consummation of the Merger is the receipt by First
American of an opinion of KPMG Peat Marwick LLP as to the qualification of the
Merger as a tax-free reorganization and the receipt by First City of an opinion
of Bass, Berry & Sims, as to the qualification of the Merger as a tax-free
reorganization with the consequences set forth above. Each opinion will be
subject to various assumptions and qualifications, including that the Merger is
consummated in the manner and in accordance with the terms of the Agreement.
Both opinions would be based entirely upon the Code, regulations then in effect
or proposed thereunder, then-current administrative rulings and practice and
judicial authority, all of which would be subject to change, possibly with
retroactive effect. Assuming that certain representations to be made by First
City and First American are true as of the Effective Time, KPMG Peat Marwick LLP
will render its respective tax opinion to First American and Bass, Berry & Sims
will render its tax opinion to First City.
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<PAGE> 43
No ruling has been or will be requested from the IRS, including any ruling
as to federal income tax consequences of the Merger to First American, First
City or First City's shareholders. Unlike a ruling from the IRS, an opinion is
not binding on the IRS. There can be no assurance that the IRS will not take a
position contrary to the positions reflected in the tax opinions noted above or
that such opinions will be upheld by the courts if challenged.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
The present holders of FCBI Common Stock own voting common stock in a
Tennessee corporation subject to regulatory oversight by the Federal Reserve
Board. First American also is a Tennessee corporation, and shareholders of First
City who receive FAC Common Stock will continue to be subject to the privileges
and restrictions provided by the Tennessee Business Corporation Act ("TBCA"). In
addition, First American, like First City, is a bank holding company subject to
the supervision of the Federal Reserve Board under the BHCA and is subject to
certain of the state banking laws of each state in which its subsidiary banks
are located. First American is also subject to regulatory oversight of the OTS
under HOLA. Shareholders of First City 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
First City. 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 First City's charter and bylaws as well as the applicable statutes.
Authorized Common Stock. First American is authorized to issue 50,000,000
shares of FAC Common Stock, of which as of September 30, 1995, 25,346,884 shares
were outstanding, and 4,357,086 shares were reserved for issuance pursuant to
First American's Dividend Reinvestment and Stock Purchase Plan and various
employee benefit plans. First City is authorized to issue 5,000,000 shares of
FCBI Common Stock, 1,370,266 shares of which were issued and outstanding as of
the Record Date.
Authorized Preferred Stock. As of the Record Date, First American was
authorized to issue up to 2,500,000 shares of preferred stock, no par value
("FAC Preferred Stock"), none of which were issued or are outstanding. The
rights and preferences evidenced by shares of FAC Common Stock are limited or
qualified by the rights and preferences evidenced by shares of FAC Preferred
Stock. Information with respect to the relative rights and preferences of FAC
Common Stock and FAC Preferred Stock is included in the description of FAC
Common Stock incorporated herein by reference. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." As provided in First
American's charter, the Board of Directors of First American is expressly vested
with the authority to amend such charter to establish and designate additional
series of FAC Preferred Stock and to fix and determine the terms thereof,
without the necessity of obtaining the approval of First American's
shareholders.
As of the Record Date, First City was authorized to issue up to 1,000,000
shares of Preferred Stock, no par value. As of that date, First City's charter
provided for four different series of Preferred Stock as discussed below.
Series A Preferred Stock. As of the Record Date, First City was
authorized to issue up to 339,234 shares of its Series A Preferred Stock,
333,704 shares of which were issued and outstanding. Holders of Series A
Preferred Stock are not entitled to voting rights except as provided for by
Tennessee law and except that the vote or consent by the holders of a
majority of the shares of Series A Preferred Stock is required to (i)
increase the aggregate number of authorized shares of Series A Preferred
Stock; (ii) effect an exchange, reclassification or cancellation of all or
part of the shares of Series A Preferred Stock; (iii) effect an exchange,
or create a right of exchange of all or part of the shares of another class
or series into the shares of Series A Preferred Stock; (iv) create a class
or series of shares having rights, preferences or privileges prior to or on
a parity with the shares of Preferred Stock; or (v) change, alter, cancel
or amend the preferences or rights of the Series A Preferred Stock. Holders
of Series A Preferred Stock are entitled to, when, as and if declared by
the First City Board, out of funds legally available for distribution,
dividends payable quarterly in arrears equal to the weighted average prime
rate from time to
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<PAGE> 44
time announced by Manufacturers Hanover Trust Company multiplied by one
dollar per preferred share. Dividends on the Series A Preferred Stock are
cumulative from the date of original issue. In the event of any
liquidation, dissolution, distribution of assets or winding up of the
affairs of First City, the holders of shares of Series A Preferred Stock
are entitled to receive a preference amount of $6.00 per share plus any
accumulated but unpaid dividends accrued to the date fixed for final
distribution to such holders, whether or not such amount has been earned or
declared, prior to any payment or distribution to the holders of stock
ranking junior to the Series A Preferred Stock.
The holders of Series A Preferred Stock shall have the right, at their
option to convert each share of Series A Preferred Stock into shares of
FCBI Common Stock. The shares of Series A Preferred Stock are convertible
into FCBI Common Stock at a conversion price of $8.18 per share. The
conversion price is subject to adjustment if FCBI Common Stock is split or
combined. The number of shares of FCBI Common stock issuable upon such
conversion is equal to the result (calculated to the nearest 1/100th of a
share) obtained by diving the preference amount by the current conversion
price. Therefore, shares of Series A Preferred Stock would be entitled to
receive, upon conversion, 0.733333 shares of FCBI Common Stock for each
share of Series A Preferred Stock surrendered for conversion. Under the
Agreement, each outstanding share of Series A Preferred Stock that has not
been converted into FCBI Common Stock prior to the merger, will be
converted into the right to receive $6.00 cash per share, plus any
accumulated but unpaid dividends accrued prior to the merger. Holders of
Series A Preferred Stock will have the right to vote on the Merger, and the
affirmative vote of a majority of the holders of Series A Preferred Stock
is required for its approval. See "PROPOSAL I -- THE MERGER -- Terms of the
Merger."
Series B Preferred Stock. In connection with the adoption of its
Shareholder Rights Plan in August of 1990, First City amended its Charter
to provide for a Series B Junior Preferred Stock ("Series B Preferred
Stock"). As of the Record Date, First City was authorized to issue up to
150,000 shares of Series B Preferred Stock pursuant to the terms of a
Rights Agreement as discussed herein. See "-- Anti-Takeover Provisions;
Shareholder Rights Plan."
Series C Preferred Stock. As of the record date, First City was
authorized to issue up to 31,483 shares of its Series C Preferred Stock, of
which 31,483 shares were issued and outstanding. The Series C Preferred
Stock is entitled to receive non-cumulative dividends at an annual rate
equal to the interest rate designated as the weighted average, "New York
Prime Rate," as published in the Money Rates section of the Wall Street
Journal for the preceding quarter, provided that at no time shall the
dividend declared be at an annual rate less than six percent nor greater
that twelve percent. Shares of Series C Preferred Stock are junior in right
of liquidation and quarterly dividends to the prior payment in full on the
Series A Preferred Stock, but have a preference with respect to payment on
liquidation and dividends superior to all other equity securities of First
City, including the Series D Preferred Stock. Shares of Series C Preferred
Stock are redeemable at the option of First City at $100 per share plus an
amount equal to all dividends not paid as a result of First City's failure
to declare quarterly dividends on the Series C Preferred Stock. Each
outstanding share of Series C Preferred Stock will be redeemed by First
City for $100 per share, plus all undeclared dividends, prior to the
Merger.
Series D Preferred Stock. As of the record date, First City was
authorized to issue up to 50,000 shares of Series D Preferred Stock, of
which 8,867 shares were issued and outstanding. The Series D Preferred
Stock is entitled to receive non-cumulative dividends at an annual rate
equal to that paid on the Series C Preferred Stock, provided, however, that
with respect to the Series D Preferred Stock such rate may not be greater
than 10 percent nor less than 5 percent. The Series D Preferred Stock is
junior to the Series A and Series C Preferred Stock with respect to payment
on liquidation and dividends, but is otherwise superior to all other equity
securities of First City. Except for the differences in dividend rate and
liquidation preferences described, the Series D Preferred Stock generally
has the same rights, terms and preferences as the Series C Preferred Stock.
Each share of Series D Preferred Stock will be redeemed by the Company for
the amount of $100 per share prior to the Merger. See "PROPOSAL I -- THE
MERGER -- Terms of the Merger."
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<PAGE> 45
Issuance of Authorized Shares. The Board of Directors of First American
generally may authorize the issuance of authorized and unissued shares of common
stock and preferred stock upon a majority vote of the Board of Directors present
at a meeting at which a quorum is present. First American is 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) 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.
The Board of Directors of First City generally may authorize the issuance
of authorized and unissued shares of Common Stock and Preferred Stock upon a
majority vote of the Board of Directors present at a meeting at which a quorum
is present. First City is subject to certain rules of the American Stock
Exchange, Inc. applicable to companies with stock traded on that exchange, which
are generally similar to those to which First American is subject under the
rules of The Nasdaq Stock Market.
Number of Directors. First American's charter and bylaws provide that the
Board of Directors of First American shall consist of not less than nine nor
more than twenty-seven members, and shall be divided into three classes as
nearly equal in number as practicable. Currently the number of Directors of
First American is 21. The members of each class are elected for a term of three
years and each director remains on the Board for the term for which the director
was elected and until his successor has been elected and qualified.
First City's Bylaws provide that the Board of Directors of First City shall
consist of not less than one nor more than twenty-five (25) members with the
exact number of directors, within the minimum and maximum, or the range for the
size of the Board, or whether the size of the Board shall be fixed or a variable
range, may be fixed or changed from time to time by the First City Board of
Directors. Currently, the number of directors of First City is nine. First City
does not have a classified Board of Directors and each Director is elected at
the First City annual meeting of Shareholders and serves for a term of one year,
or the next annual meeting of shareholders, thereafter.
Director Nominations. 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 the Commission's Regulation 14A under the Exchange Act.
Such notice also must set forth certain information about the person submitting
the notice, including the name and address of the shareholder and the class and
number of shares of First American capital stock which are beneficially owned by
such shareholder. The Chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the procedures set forth in
the bylaws.
First City's Bylaws do not establish specific procedures for shareholder
nominations of persons for election to its Board of Directors. Like First
American, however, First City is subject to the provisions of Regulation 14(a)
under the Exchange Act.
Director Vacancies. First American's bylaws provide that, subject to the
rights of the holders of any series of FAC Preferred Stock then outstanding,
newly created directorships resulting from any increase in the authorized number
of directors or any vacancies on the Board of Directors shall be filled only by
a majority vote of the directors then in office, though less than a quorum, and
a director so chosen shall hold office for the unexpired term of his or her
predecessor, or if there is no such predecessor, until the next annual meeting
of the shareholders. In addition, no decrease in the number of authorized
directors constituting the entire Board of Directors of First American shall
shorten the term of any incumbent director.
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First City's Bylaws provide that, if a vacancy occurs on the Board of
Directors, including a vacancy resulting from an increase in the number of
Directors or a vacancy resulting from the removal of a Director, either the
shareholders or the Board of Directors may fill the vacancy. If the Directors
remaining in office constitute fewer than a quorum of the Board, they may fill
the vacancy by the affirmative vote of a majority of all of the Directors so
remaining.
Removal of Directors. 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 do not apply in respect of the removal of the director or
directors so elected, and the vote of the holders of that voting group and the
rights of the holders of such shares shall be as set forth in the charter.
First City's Bylaws provide that the shareholders may remove one or more
directors with or without cause. If a Director is elected by a voting group of
shareholders, only the shareholders of that voting group may participate in the
vote to remove the director without cause. A director may be removed by the
shareholders only if the number of votes cast to remove the director exceeds the
number of votes cast not to remove the director. A director may be removed only
at a meeting called for the purpose of removing the director and the meeting
notice must state that the purpose, or one of the purposes, of the meeting is
the removal of one or more directors.
Shareholder Proposals. First American's bylaws provide that, in order for
a proposal to be submitted to a vote of the shareholders of First American at an
annual meeting of shareholders, such proposal must be made by a shareholder
delivering written notice to the Secretary of First American not less than 120
calendar days in advance of the date of First American's proxy statement
released to security-holders in connection with the previous year's annual
meeting. The shareholder proposal notice must comply with the Commission's Rule
14a-8 under the Exchange Act and must set forth: (i) a brief description of the
proposal and the reasons for its submission; (ii) the name and address of the
shareholder, as they appear on First American's books; (iii) the classes and
number of shares of First American stock owned by the shareholder; and (iv) any
financial interest of the shareholder in such proposal. The Chairman of the
meeting will, if the facts warrant, determine that any proposal was not properly
submitted in accordance with the provisions prescribed by the bylaws and the
defective proposal will not be submitted to the meeting for a vote of the
shareholders.
First City's Bylaws contain no similar provisions with respect to
shareholder proposals.
Special and Annual Shareholders Meetings. Pursuant to the bylaws of First
American, written notices of the annual meeting of the shareholders of First
American are required to be mailed not less than ten (10) days nor more than
sixty (60) days before the meeting.
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.
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First City's Bylaws provide that annual meetings of shareholders shall be
held on a date as determined by the Board of Directors and that the business to
be transacted at such meetings shall be the election of Directors and such other
businesses may properly be brought before the meeting.
A special meeting of First City shareholders may be called at any time by
the Board of Directors, or, if the holders of at least ten percent of all the
votes entitled to be cast upon any issue to be considered at the proposed
special meeting, sign, date and deliver to First City's secretary one or more
written demands for the meeting describing a purpose or purposes for which such
special meeting is to be held. Only business within the purpose or purposes
described in the meeting notice may be conducted at a special meeting of
shareholders.
For both special and annual meetings of shareholders, the Board may
designate any place, either in or outside the State of Tennessee as the place of
the meeting. If no place is determined by the Board of Directors, the meeting is
held at the principal office of First City. A notice outlining the date, time
and place of each annual and special meeting, and, in the case of a special
meeting the purpose or purposes for which the meeting is called, is required to
be given no fewer than ten day and no more than two months before the date of
the meeting, provided that shareholders may waive any notice requirement in the
First City Bylaws or charter either before or after the date and time stated in
the notice.
Amendment of Charter. 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.
Similarly, an amendment to First City's Charter generally requires the
recommendation of the Board of Directors of First City, and the approval of a
majority of all shareholders entitled to vote on the amendment. The amendment of
First City's Charter is also subject to the TBCA and is subject to the same
statutory provisions as is First American's Charter. First City's Charter does
not contain, however, any super majority voting provisions.
Amendment of Bylaws. 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.
First City's Bylaws provide that they may be altered, amended or appeals,
and new bylaws may altered amended or appealed, and new bylaws may be adopted at
any meeting of shareholders by a majority of the voting stock represented at the
meeting, or by the majority vote of the Board of Directors present at any
regular or special meeting. Any amendment to the bylaws changing the number of
directors, however, if adopted by the Board of Directors, requires the
affirmative vote of a majority of the members of the entire First City Board.
Acquisition of Capital Stock. Both First American and First City are
subject to the Tennessee Control Share Acquisitions Act, which restricts the
voting powers of shares acquired by a party once a specific level of control is
acquired, unless certain conditions are met.
Antitakeover Provisions; Shareholder Rights Plan. The charter and bylaws
of First American, and certain provisions of the TBCA applicable to First
American, contain provisions that may have the effect of discouraging a change
in control that is not supported by First American's Board of Directors or of
making such a transaction more difficult to accomplish, even if such a
transaction is desired by a simple majority of First American's shareholders.
First City's charter and bylaws contain certain similar provisions.
First American has in place a Rights Agreement, dated December 14, 1988,
(the "Rights Agreement") under which holders of FAC Common Stock are issued
certain rights ("Rights") the effect of which may be
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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 FAC 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 Rights Agreement, to purchase
from First American one one-hundredth of a share (a "Unit") of Series A Junior
Preferred Stock (the "Preferred Stock"), at a purchase price of $80.00 per Unit,
subject to adjustment. The Rights attach to all certificates representing shares
of outstanding FAC Common Stock, and no separate Rights Certificates have been
issued. The Rights will separate from the FAC Common Stock, and the Distribution
Date will occur, upon the earlier of: (i) 10 days following public announcement
(the date of the announcement being the "Stock Acquisition Date") that a person
or group of affiliated or associated persons (other than First American , any
subsidiary of First American or any employee benefit plan of First American or
such subsidiary) has acquired, obtained the right to acquire, or otherwise
obtained the beneficial ownership of 20% or more of the then outstanding shares
of the FAC Common Stock, or (ii) 10 days following the commencement of a tender
or exchange offer that would result in a person or group beneficially owning 20%
or more of the then outstanding shares of the FAC Common Stock. As soon as
practicable after the Distribution Date, Rights Certificates would be mailed to
holders of record of the FAC Common Stock as of the close of business on the
Distribution Date and, thereafter, the separate Rights Certificates alone would
represent the Rights.
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 FAC Common
Stock.
The Rights Agreement also provides shareholders certain Rights in the
following situations. In the event that (i) a person becomes the beneficial
owner of 20% or more of the then outstanding shares of FAC Common Stock or (ii)
during the pendency of any tender or exchange offer for FAC Common Stock or
prior to the expiration of 20 business days (or such later date as a majority of
the independent directors may determine) after the date such tender or exchange
offer is terminated or expires, a person becomes the beneficial owner of 10% or
more of the then outstanding shares of FAC Common Stock (unless the 10%
beneficial ownership results from certain circumstances specified in the Rights
Agreement), then in each case, each holder of a Right will thereafter have the
right to receive, upon exercise, FAC Common Stock having a value equal to two
times the exercise price of the Right.
In addition, in the event that, at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or other business combination
transition (other than a merger described in the preceding paragraph) and First
American is not the surviving corporation, (ii) any person effects a share
exchange or merger First American and all or part of the FAC Common Stock is
converted or exchanged for securities, cash or property of any other person, or
(iii) 50% or more of First American's assets or earning power is sold or
transferred, each holder of a Right (except Rights which previously have been
voided pursuant to the "Beneficial Ownership" provision of the Rights Agreement)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring person having a value equal to two times the exercise price of the
Right.
Similarly, First City has in place a Rights Agreement, dated August 24,
1990, (the FCBI Rights Agreement") under which holders of FCBI Common Stock are
issued certain rights ("FCBI Rights") the
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effect of which may be to discourage coercive or abusive takeover tactics.
Pursuant to the FCBI Rights Agreement the Board of Directors of First City
authorized and declared a distribution of one FCBI Right for each outstanding
share of FCBI Common Stock to shareholders of record at the close of business on
September 4, 1990, (the "FCBI Record Date") and for each share of FCBI Common
Stock issued by First City after the FCBI Record Date but prior to the FCBI
Distribution Date (described below). Each FCBI Right entitles the registered
holder, subject to the terms of the FCBI Rights Agreement, to purchase from
First City 1/100th of a share (a "FCBI Unit") of First City's Series B Preferred
Stock, at a purchase price of $20.00 per FCBI Unit, subject to adjustment. The
FCBI Rights attached to all certificates representing a share of outstanding
FCBI Common Stock, and no separate FCBI Rights certificates have been issued.
The FCBI Rights are designed to separate from the shares of FCBI Common Stock
and the Distribution Date will occur, upon the earlier of: (i) ten days
following the public announcement (the date of the announcement being the "FCBI
Stock Acquisition Date") that a person or group of affiliated or associated
persons (other than First City, any subsidiary of First City or any employee
benefit plan of First City or such subsidiary) has acquired, obtained the right
to acquire, or otherwise obtained the beneficial ownership of twenty percent or
more of the then outstanding shares of FCBI Common Stock, or (ii) ten days
following the commencement of a tender or exchange offer that would result in a
person or group beneficially owning twenty percent or more of the then
outstanding shares of FCBI Common Stock. As soon as practical after the FCBI
Distribution Date, FCBI Rights certificates would be mailed to holders of record
of FCBI Common Stock as of the close of business on the Distribution Date and,
thereafter, the separate FCBI Rights Certificates alone would represent the FCBI
Rights.
Until an FCBI Right is exercised, the holder thereof has no rights as a
shareholder of First City, including, among other things, the right to vote or
to receive dividends. Once the FCBI Right is exercised, however, each Unit of
Series B Preferred Stock will have one vote, voted together with the First City
Common Stock.
Rights are not exercisable until the Distribution Date and will expire at
the close of business on September 4, 2000 (the "FCBI Final Expiration Date")
unless earlier redeemed by First City. They may be redeemed by First City at its
option, by action of a majority of the First City independent directors, at any
time prior to the earlier of (i) the close of business on the FCBI Final
Expiration Date, or (ii) the close of business on the tenth day following the
FCBI Stock Acquisition Date. The FCBI Rights may only be redeemed in whole, not
in part, at a price of $.01 per FCBI Right, subject to adjustment (the "FCBI
Redemption Price"), payable, at the election of such majority of independent
directors, in cash or shares of FCBI Common Stock.
The FCBI Rights Agreement also provides shareholders certain rights in the
following situations. In the event that (i) a person becomes the beneficial
owner of twenty percent or more of the then outstanding shares of FCBI Common
Stock, or (ii) during the pendency of any tender or exchange offer for FCBI
Common Stock or prior the expiration of twenty 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 ten percent or more of the then outstanding shares of FCBI
Common Stock, (unless the ten percent beneficial ownership result from certain
circumstances specified in the FCBI Rights Agreement) then in each case, each
holder of a FCBI Right will thereafter have the right to receive, upon exercise
FCBI Common stock having a value equal two times the exercise price of the FCBI
Right.
The Board of Directors of First City, including all of the independent
directors, have adopted resolutions calling for the redemption of the FCBI
Rights, and termination of the Rights Agreement subject to (i) the affirmative
vote of the FCBI Shareholders at the Special Meeting approving the Merger and
(ii) the consummation of the Merger. The FCBI Rights will be redeemed for $.01
per share payable on or before the closing date of the Merger.
Certain Business Combinations. The First American charter provides that
the affirmative vote of not less than 75% of the outstanding shares of all
voting stock and the affirmative vote of a majority of the outstanding shares of
voting stock held by shareholders other than an Interested Shareholder, as
defined below, is required for approval of any merger consolidation, the sale,
lease, exchange or other disposition of assets of First American with a value of
more than $1,000,000, the issuance of any securities of First American
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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.
Liability of Directors; Indemnification. The Agreement provides that, from
and after the Effective Time, First American will indemnify each person who is,
was, or prior to the Effective Time, becomes, an employee, officer or director
of First City or any of its subsidiaries against liabilities based or arising in
whole or in part out of the fact that such person is or was an employee, officer
or director of First City or any of this subsidiaries. In addition, for a period
of six years after the Effective Time, First American will use its best efforts
to, or to cause First City to, maintain in effect directors' and officers'
liability insurance which is at least as advantageous as to coverage and amounts
as was maintained by First City immediately prior to the Effective Time with
respect to claims arising from facts or events occurring prior to the Effective
Time; provided, however, that First American shall not be obligated to pay
annual premiums on such insurance to the extent such premiums exceed 1.5 times
the premiums paid as of the date hereof by First City for such insurance.
The charter of First American provides for the discretionary
indemnification of directors and officers in accordance with and to the full
extent permitted by law as in effect at the time of such indemnification. The
bylaws of First American provide that no indemnification of an officer or
director shall be made by First American (i) if a judgment or other final
adjudication adverse to such person establishes his liability for intentional
misconduct or knowing violation of the law or for unlawful distributions, (ii)
if a judgment or other final adjudication adverse to such person for breach of a
duty of loyalty to First American is based upon such person's gaining in fact
personal profit or advantage to which he was not entitled; (iii) in a proceeding
by or in the right of the corporation, for any amounts if such person is
adjudged liable to the corporation, or for any amounts paid to First American in
settlement of such a proceeding by such person and (iv) in a proceeding by First
American directly for expenses, unless such proceeding is brought after a change
in control of First American. First American has purchased directors' and
officers' liability insurance covering certain liabilities which may be incurred
by the officers and directors of First American in connection with the
performance of their duties.
The First City Bylaws provide for the mandatory indemnification of and
advancement of expenses to each director and officer of First City, or any
person who may have served at First City's request as a director or officer of
another company to the full extent allowed by Tennessee laws in effect at the
time of indemnification. In addition, the First City bylaws provide that First
City may indemnify and advance expenses to any employee or agent of First City
who is not an officer or director to the same extent as to an Officer or
Director, if the Board of Directors of First City determines that it is in the
best interest of First City.
Both First City and First American are subject to the provisions of the
TBCA which provides that a corporation may indemnify any of its directors and
officers against liability incurred in connection with the preceding if (i) the
director or office acted in good faith, (ii) in the case of conduct in his or
her official capacity with the corporation, the director or officer reasonably
believed such conduct was in the corporation's best interest, (iii) in all other
cases the director or officer reasonably believed that his or her conduct was
not opposed to the best interest of the corporation and (iv) in connection with
any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if the director or officer was adjudged liable to the corporation. In
cases where the officer or director is wholly successful, on the merits or
otherwise, in the defense of any proceeding instigated because of his or her
status as an officer or director of a corporation, the TBCA mandates that the
corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. The TBCA also provides that in connection with any
proceeding charging improper personal benefit to an officer or director, no
indemnification may be made if such officer or director is adjudged liable on
the basis that personal benefit was improperly received.
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Notwithstanding the foregoing the TBCA provides that a court of competent
jurisdiction, upon application, may order that an officer or director be
indemnified for reasonable expenses if, in consideration of all relevant
circumstances, the Court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met.
RESALE OF FAC COMMON STOCK
The shares of FAC Common Stock issuable to shareholders of First City upon
consummation of the Merger have been registered under the Securities Act. It is
a condition to consummation of the Merger that such shares will be approved for
trading on The Nasdaq Stock Market. Such shares may be traded freely by those
shareholders not deemed to be affiliates of First City 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, First City, and for purposes hereof could be deemed to include all
executive officers, directors and 10% shareholders of First City.
FAC Common Stock received and beneficially owned by those shareholders who
are deemed to be affiliates of First City 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.
The Agreement provides that First City shall use its reasonable efforts to
cause each person identified by First City as an affiliate of First City to
deliver to First American, prior to the Meeting, a written agreement providing
that such person will not dispose of FCBI Common Stock, or any FAC Common Stock
received in the Merger, except in compliance with the Securities Act and the
rules and regulations promulgated thereunder.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
First American has a Dividend Reinvestment and Stock Purchase Plan, which
provides, for those FAC shareholders of record who elect to participate, that
dividends on FAC Common Stock may be invested in additional shares of FAC Common
Stock at a five percent (5%) discount from the then-current market price without
payment of brokerage commissions, fees or service charges. The plan also permits
participants to invest voluntary cash payments, within certain dollar
limitations, in additional shares of FAC Common Stock at the then-current market
price. It is anticipated that, after the Effective Time, First American will
continue to offer such a Dividend Reinvestment and Stock Purchase Plan and
shareholders of First City who receive FAC Common Stock in the Merger will have
the right to participate therein if they are shareholders of record.
EXPENSES
All expenses incurred in connection with the Agreement and the transactions
contemplated thereby are to be paid by the party incurring such expenses, except
that First American and First City shall bear equally all expenses associated
with the printing and mailing of the Registration Statement and this
Prospectus/Proxy Statement.
ACCOUNTING TREATMENT
First American anticipates that it will account for the Merger using the
purchase method of accounting. Accordingly, at the Effective Time, all assets
and liabilities of First City will be marked to market and recorded on First
American's books at fair market value.
DISSENTERS' RIGHTS
No Common Stock Dissenters' Rights. The TBCA provides that the holders of
shares of FCBI Common Stock will not have dissenters' rights in connection with
the Merger and the transactions
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contemplated by the Agreement. Therefore, if the Agreement is approved by the
affirmative vote of a majority of the outstanding shares of FCBI Common Stock
and a majority of the outstanding shares of Series A Preferred Stock, and all
other conditions to consummation of the Merger are satisfied, all shareholders
of FCBI will receive the consideration provided for in the Agreement in exchange
for their FCBI Common Stock.
Series A Preferred Stock Dissenters' Rights. The TBCA provides that with
respect to any class of securities not listed on a national stock exchange and
that is not a "National Market System Security", the shareholders of such
security are entitled to dissent from and obtain payment of the fair value of
their shares in the event of certain corporate actions including the
consummation of a Plan of Merger to which the Corporation is a party. If the
proposed corporate action creating dissenters' rights is submitted to a vote at
a shareholders meeting, the shareholder who wishes to assert dissenters' rights
must (i) prior to the time the vote is taken, provide the corporation with
written notice of his or her intent to demand payment for the shares if the
proposed action is effectuated, and (ii) not vote his or her shares in favor of
the proposed action. After receipt of the shareholders notice of intent to
demand payment, the corporation must deliver a written dissenter's notice to the
shareholder stating where the payment demand must be sent and where certificates
for certificated shares must be deposited. As soon as the proposed corporate
action is taken or upon receipt of a payment demand, the corporation must pay
each dissenter who complied with the procedural requirements the amount the
corporation estimates to the fair value of the shares, plus accrued interest.
The shares of FCBI Series A Preferred are entitled to vote as a class on the
Merger. Such shares are not "National Market System Securities" and are not
listed on a National Stock Exchange. Shareholders of such stock will therefore
have the right to dissent from, and obtain payment for the fair value of their
shares of Series A Preferred Stock. A copy of Tennessee's Dissenters' Rights
Statute is attached hereto as Appendix C.
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
authorized for trading on The Nasdaq Stock Market prior to the Effective Time.
CERTAIN REGULATORY CONSIDERATIONS
First American and its subsidiaries are subject to extensive regulation
under state and federal statutes and regulations. The discussion in this
section, which summarizes certain of such statutes and regulations, does not
purport to be complete and is qualified in its entirety by reference to such
statutes and regulations, and in certain circumstances, proposed regulations.
GENERAL
First American is a bank holding company subject to the supervision of the
Federal Reserve Board under the BHCA and, as a result of the Charter acquisition
(which resulted in First American's ownership of FAFSB), a savings and loan
holding company subject to the supervision of the Office of Thrift Supervision
under HOLA. FANB and FANBKY are national banks and, as such, are subject to the
supervision of, and are regularly examined by, the OCC. FAFSB is a federal
savings bank and, as such, is subject to the supervision of, and is regularly
examined by, the OTS. Each of First American's depository institution
subsidiaries is also insured by, and subject to the regulations of, the Federal
Deposit Insurance Corporation (the "FDIC"), and is also affected significantly
by the actions of the Federal Reserve Board by virtue of its role in regulating
money supply and credit availability, as well as by the U.S. economy in general.
Areas subject to regulation by federal authorities include loan loss reserves,
investments, loans, mergers, issuance of securities, payment of dividends,
establishment and closing of branches, product offering and other aspects of
operations.
First American's non-banking subsidiaries are subject to the supervision of
the Federal Reserve Board, and other non-banking subsidiaries may be subject to
the supervision of other regulatory agencies including the Commission, the
National Association of Securities Dealers, Inc. and state securities
regulators.
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There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under Federal Reserve Board policy, First American is expected to
serve as a source of financial and managerial strength to each of its subsidiary
banks and to commit resources to support each of them. This support may be
required at times when First American would not otherwise be inclined to provide
it.
Under the "cross guarantee" provisions of the Federal Deposit Insurance Act
("FDIA"), any FDIC-insured subsidiary of First American can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured subsidiary
or (ii) any assistance provided by the FDIC to any commonly controlled
FDIC-insured subsidiary "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF"), or both. The FDIC's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any of the bank subsidiaries of First American.
CAPITAL
The Federal Reserve Board and the OCC have adopted substantially similar
risk-based capital and leverage guidelines applicable to U.S. banking
organizations. The minimum guideline for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8.00%. At least half of the
Total Capital must be composed of common shareholders' 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 September 30, 1995 (restated to give
retroactive effect to the acquisition of Heritage), First American's Tier 1
risk-based capital and total risk-based capital ratios were 10.03% and 12.02%,
respectively, and its Tier 1 leverage capital ratio at September 30, 1995 was
7.81%, each of which exceeded the minimum ratios established by the Federal
Reserve Board. On a pro forma basis assuming consummation of the Merger, as of
September 30, 1995, First American's Tier 1 risk-based capital and total
risk-based capital ratios would be 9.26% and 11.96%, and its Tier 1 leverage
capital ratio would be 7.15%, also in excess of Federal Reserve Board minimums.
At September 30, 1995, FANB's Tier 1 risk-based, total risk-based and Tier
1 leverage capital ratios were 9.46%, 10.72% and 7.65%, respectively and
FANBKY's were 17.21%, 18.10% and 9.96%, respectively, all of which exceeded the
minimum ratios established by the OCC.
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FAFSB is subject to capital requirements adopted by the OTS, which are
similar but not identical to those issued by the Federal Reserve Board and the
OCC. Under the OTS' capital guidelines, a savings bank 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 September 30, 1995, FAFSB's tangible
ratio was 6.30%, its core (leverage) capital ratio was 6.30%, Tier 1 capital
ratio was 13.00% of risk-weighted assets and its total risk-based capital ratio
was 14.23%.
FCB and Citizens are also subject to the capital requirements of the FDIC.
At September 30, 1995, FCB's Tier 1 risk-based, total risk-based and Tier 1
leverage capital ratios were 12.23%, 13.28% and 6.91%, respectively, and
Citizens' ratios were 14.40%, 15.65% and 7.29%, respectively.
As a result of a federal law enacted in 1991 that required each federal
banking agency to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities, each of the federal banking
agencies has revised the risk-based capital guidelines described above to take
account of concentration of credit risk and risk of nontraditional activities.
In addition, the Federal Reserve Board, the FDIC and the OCC recently adopted a
new rule that amends, effective September 1, 1995, the capital standards to
include explicitly a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor to be considered in
evaluating a bank's capital adequacy. This rule does not codify a measurement
framework for assessing the level of a bank's interest rate exposure. Such
agencies have issued for comment a joint policy statement that describes the
process to be used to measure and assess the exposure of a bank's net economic
value to changes in interest rates. These agencies have indicated that in the
second step of this regulation process they intend to issue a proposed rule that
would propose to establish an explicit minimum capital charge for interest rate
risk based on the level of a bank's measured interest rate exposure. The
agencies intend to implement the second step after the agencies and the banking
industry have had more experience with the proposed supervisory and measurement
process. Neither First American nor First City believes that these recent
proposals and revisions to the capital guidelines will materially impact its
operations.
The OTS regulatory capital requirements which are applicable to FAFSB
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 form a hypothetical 200 basis
point increase or decrease in interest rates, divided by 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 form capital until an appeals
process is developed for the measurement of an institution's interest rate risk.
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 December 31, 1995, it held less than 11% of all such
deposits in Tennessee, less than 1.0% of all such deposits in Kentucky and less
than 1.0% of all such deposits in Virginia. 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
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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 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. Tennessee has enacted a interstate branching
law in response to the federal law which is effective June 1, 1997.
BANK REGULATION
Payment of Dividends. First American is a legal entity separate and
distinct from its subsidiary banks and its nonbank subsidiaries. First
American's revenues (on a parent company only basis) result, in part, from
dividends paid to First American by its subsidiaries. The right of First
American, and consequently the right of creditors and shareholders of First
American, to participate in any distribution of the assets or earnings of any
subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of banking subsidiaries), except to the extent that
claims of First American in its capacity as a creditor may be recognized.
There are statutory and regulatory restrictions applicable to the payment
of dividends by subsidiary banks to First American. National banks are required
to obtain the prior approval of the OCC for the payment of dividends if the
total of all dividends declared in any year exceeds the total of (i) such bank's
net profits (as defined by the OCC) for that year plus (ii) the retained net
profits (as defined by the OCC) for the preceding two years, less any required
transfers to surplus. In addition, national banks may only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed statutory bad debts. In accordance with these regulations, at September
30, 1995, FANB had approximately $198.6 million and FANBKY had approximately
$2.0 million available for distribution as dividends to First American without
the prior approval of the OCC.
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 FAFSB. Under these regulations, a savings bank,
such as FAFSB, 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 September 30,
1995, FASB had approximately $14.3 million available to distribution as
dividends to shareholders.
First American is further restricted in paying dividends to shareholders by
the terms of its $70,000,000 revolving credit facility, for which Chemical Bank
serves as agent. Under the most restrictive debt covenant in
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effect during 1995 (contained in the revolving credit agreement), approximately
$82.1 million of First American's retained earnings were available to pay
dividends on September 30, 1995.
In addition to the foregoing, under the FDIA, insured depository
institutions, such as FANB, FANBKY, FAFSB and FCB and Citizens, are prohibited
from making capital distributions, including the payment of dividends, if, after
making such distribution, the institutions would become "undercapitalized" (as
such term is used in the statute). Based on the current financial condition of
these institutions, First American does not expect that this provision will have
any impact on its ability to obtain dividends from its bank subsidiaries.
FDIC Insurance. First American's subsidiary depository institutions and
FCB and Citizens are subject to FDIC deposit insurance assessments. The FDIC has
promulgated risk-based deposit insurance assessment regulations which became
effective in 1993. Under these regulations, insured institutions (whether
members of BIF or SAIF) are assigned assessment risk classifications based upon
capital levels and supervisory evaluations. Based on this system, the assessment
rate for insured institutions for the first semi-annual period in 1995 ranged
from 0.23% to 0.31%, depending on the institution's assessment risk
classification. Under these regulations, FANB's, FANBKY's and FAFSB's assigned
assessment rate for the first semi-annual period of 1995 was 0.23%. FCB's and
Citizens' assigned assessment rate for the same period was also 0.23%.
With the exception of deposits attributable to the acquisition of Heritage,
First Fidelity Bank, FSB (a SAIF-insured institution acquired by FANB in 1994
for approximately $6.5 million), and certain branches of Charter acquired on
December 1, 1995, FANB pays its premiums at the BIF rate. As a savings
association an a former savings and loan association, FANBKY pays its premiums
at the SAIF rate. As a federal savings bank, FAFSB pays its premiums at the SAIF
rate. Thus, First American's overall deposit insurance premium expenses are
affected by changes in both the BIF and the SAIF assessment rate. On August 8,
1995, the SFDIC reduced the assessment rates paid by the best-rated BIF-insured
institutions for the second half of 1995 to 0.044% of insured deposits, but
retained the prior assessment rates applicable for SAIF members. In November
1995, the FDIC further reduced the BIF assessment for the 1996 fiscal year to
the legal minimum of $2,000 a year for the best rated institutions and 0.27% of
insured deposits for the worst-rated institutions, because the BIF reserve ratio
exceeds the 1.25% of insured deposits required by federal law.
In contrast, current federal law requires that the SAIF assessment rate may
not be less than 0.18% of insured deposits through December 31, 1997 (the rate
currently ranges from 0.23% to 0.31% of insured deposits). After December 31,
1997, the SAIF assessment rate may not be less than 0.15%, or such rate as is
appropriate to increase the SAIF reserve ratio to 1.25% of insured deposits.
Congress has proposed legislation that would, among other things, recapitalize
the SAIF to 1.25% of insured deposits by imposing a special one-time assessment
on SAIF-insured insured deposits. It cannot be predicted whether or when this or
any other legislation addressing recapitalization of the SAIF will be enacted.
Community Reinvestment Act. First American's subsidiary depository
institutions, as well as FCB and Citizens, 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 going into effect in stages from July 1995 to
January 1997. First American does not believe
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that the new CRA regulations will substantially change its programs and policies
designed to meet the needs of its communities.
Certain Transactions with Affiliates. Provisions of the Federal Reserve
Act impose restrictions on the type, quantity and quality of transactions
between affiliates of an insured bank (including FAC and its nonbank
subsidiaries) and the insured bank (or savings institution) itself. Under these
restrictions, an insured bank (or savings institution) and its subsidiaries are,
among other things, limited in engaging in "covered transactions" with any one
affiliate to no more than 10% of the capital stock and surplus of the insured
bank (or savings institution); and with all affiliates in the aggregate, to no
more than 20% of the capital stock and surplus of the bank (or savings
institution). "Covered transactions" are defined by statute to include a loan or
extension of credit, as well as a purchase of securities issued by an affiliate,
a purchase of assets (unless otherwise exempted by the Federal Reserve Board),
the acceptance of securities issued by the affiliate as collateral for a loan
and the issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. In addition, any transaction with an affiliate, including loans,
contractual arrangements and purchases, must be on terms and conditions that are
substantially the same or at least as favorable to the bank (or savings
institution) as those prevailing at the time for comparable transactions with
non-affiliated companies. The purpose of these restrictions is to prevent the
misuse of the resources of the bank by its uninsured affiliates. An exception to
the quantitative restrictions is provided for transactions between two insured
banks or savings institutions that are within the same holding company structure
where the holding company owns 80% or more of each institution.
Transactions with Insiders. Any loans made by First American's depository
institution subsidiaries or by First City's bank subsidiaries to their
respective executive officers, directors or 10% shareholders, as well as
entities such persons control, are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment, and are subject to individual and aggregate
limits depending on the person involved. Further, provisions of the BHCA
prohibit a bank holding company and its subsidiaries from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
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. Under these rules, independent auditors must
attest to and report separately on assertions in management's reports concerning
the effectiveness of the internal control structure over financial reporting and
compliance with such laws and regulations, using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal banking
agencies has issued regulations and interagency guidelines implementing these
standards. The regulations and guidelines set forth general operational and
managerial standards in the areas of internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Recently proposed
rules would add asset quality and earnings standards to the guidelines. The
current rules contemplate that each federal agency would determine compliance
with these standards through the examination process, and if necessary to
correct weaknesses, require an institution to file a written safety and
soundness compliance plan.
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PROPOSAL II -- ADJOURNMENT OF THE SPECIAL MEETING
Approval of the Agreement requires the affirmative vote of at least a
majority of the votes entitled to be cast by the holders of FCBI Common Stock
and a majority of the votes entitled to be cast by holders of Series A Preferred
Stock. In the event there is an insufficient number of shares present in person
or by proxy at the Meeting to approve the Agreement, the Board of Directors
intends to adjourn the Meeting to a later date. The place and date to which the
Meeting would be adjourned would be announced at the Meeting. Under First City's
Bylaws, it shall not be necessary to give any notice of the time and place of
the adjourned meeting other than by an announcement at the Meeting.
The effect of any such adjournment would be to permit First City to solicit
additional proxies for approval of the Agreement. While such an adjournment
would not invalidate any proxies previously filed, including those filed by
shareholders voting against the Agreement, it would give First City the
opportunity to solicit additional proxies in favor of the Agreement. Approval of
the adjournment requires the affirmative vote of the holders of a majority of
the shares of FCBI Common Stock present in person or by proxy at the Meeting or
the vote of a majority of the shares of any voting group (including the Series A
Preferred Stock) entitled to vote at the Meeting for which a quorum is not
present.
THE BOARD OF DIRECTORS OF FIRST CITY RECOMMENDS A VOTE "FOR" APPROVAL OF
THE ADJOURNMENT UNDER THE CIRCUMSTANCES DESCRIBED HEREIN.
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INFORMATION ABOUT FIRST CITY BANCORP, INC.
BUSINESS OF FIRST CITY
General. First City was organized in 1988, and that year became a bank
holding company as a result of its acquisition of FCB, a Tennessee banking
corporation and wholly-owned subsidiary of First City. On October 4, 1993, First
City completed the purchase of all the outstanding shares of Citizens
headquartered in Smithville, Tennessee. First City had total assets of
approximately $336.0 million on December 31, 1994.
FCB opened for business in January 1986 in Murfreesboro, the county seat of
Rutherford County, Tennessee. It is the only independent bank headquartered in
Rutherford County. FCB offers a wide range of commercial banking services,
including checking, savings, money market deposit accounts, certificates of
deposit, and loans for consumer, commercial and real estate purposes. FCB
considers its primary markets for loans and deposits to be individuals,
professionals and small- and medium-size businesses. FCB's main office is in
Murfreesboro, and it has six other banking offices. In Rutherford County, FCB's
primary market, two full-service branches and one limited service branch are
located in Murfreesboro, and one full-service branch is located in Smyrna. Other
full-service branches are located in the Metropolitan Nashville-Davidson County
suburb of Bellevue, and in Columbia in Maury County. Each full-service branch,
except for the Smyrna Branch, is equipped with an automated teller machine
("ATM") for 24-hour banking. FCB also has four free-standing ATM's in
Murfreesboro and one near the Hickory Hallow Mall in Nashville. FCB is a member
of the CIRRUS and MOST ATM networks. FCB expanded its services through the
establishment of a consumer finance company in December 1991, Tennessee Credit
Corporation ("TCC"). TCC presently has nine offices located in Murfreesboro,
Dickson, Lebanon, Cookeville, Franklin, Lewisburg, Nashville, McMinnville and
Tullahoma. As of December 31, 1994, the total assets of the FCB were
approximately $231.4 million, and total deposits were approximately $200.3
million.
Citizens is a Tennessee state bank headquartered in Smithville, Tennessee
in DeKalb County and also operated under the name "Bank of Ardmore" in offices
located in Ardmore and Elkton, Tennessee in Giles County. As of December 31,
1994 the total assets of Citizens were approximately $103.8 million, and total
deposits were approximately $95.3 million.
Competition. First City and its subsidiaries have locations in eleven
Middle Tennessee Counties. In five of these counties, FCB and Citizens maintain
branches and compete for deposits and loans. In the other six counties, TCC
competes for consumer loans.
First City's largest market is Rutherford County with a population of
approximately 120,000 according to the 1990 U.S. Census. This includes
Murfreesboro, headquarters for FCB, and Smyrna where a branch of FCB is located.
There are twelve financial institutions in Murfreesboro including FCB. These
include seven other commercial banks which are members of bank holding companies
larger than First City. Three of these holding companies are based in Tennessee
and two are based in North Carolina. The other two are located in Georgia and
Alabama. In addition, there are two thrifts in Murfreesboro - one is mutual
based in Murfreesboro and the other is a member of a Kentucky holding company.
There are also two credit unions in Murfreesboro. Smyrna has four commercial
banks and one mutual thrift in addition to FCB. Each of these institutions in
Smyrna also has locations in Murfreesboro. In Maury County, there are six
financial institutions, including the FCB. Two of these are larger
Columbia-based institutions that have been in the market over sixty years. The
other three are newer institutions owned by large holding companies. The FCB has
one location in southwest Davidson County in the fast-growing suburb of
Bellevue. Currently there are seventeen other financial institutions in Davidson
County.
TCC has locations in nine Middle Tennessee counties, two of which have
branches of FCB. Since TCC does not compete directly with commercial banks for
loans, there is not a market overlap. TCC seeks consumer finance loans and
competes with other consumer finance companies in the areas. Citizens competes
with two other banks in Smithville in DeKalb County. One of these banks is part
of a large statewide Tennessee holding company and the other is owned by a
holding company in an adjacent county. In Giles County, Citizens has locations
in Ardmore and Elkton. There are two other banks are located in Ardmore and no
other financial institutions in Elkton. One of the banks in Ardmore is owned by
a holding company based in
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Pulaski in Giles County while the other was a thrift recently acquired by an
Alabama-based holding company and converted to a bank.
Loans. First City offers various types of secured and unsecured
commercial, consumer and real estate loans. The subsidiary banks' current
policies are to make loans only to borrowers who maintain depository
relationships with First City or reside or work in First City's market areas.
Real estate loans usually are made only when such loans are secured by real
property located in Rutherford, Maury, Davidson, DeKalb, Giles and Lincoln
Counties of Middle Tennessee or in Limestone and Madison Counties of North
Alabama.
First City also is an originator of conventional, FHA and VA mortgage
loans. In addition, First City purchases some sales finance contracts for motor
vehicles.
First City provides each leading officer with written loan guidelines.
Lending authority is delegates by the Board of Directors to loan officers, each
of whom has limited authority to extend secured and unsecured credit. All
credits are reviewed bi-weekly by the Loan Committees of the Boards of Directors
(the "Loan Committees") of FCB and Citizens, which consist of both management
and non-management directors of the FCB, and any credit in excess of $125,000
must have the approval of the Loan Committees. All unsecured loans in excess
$5,000 must receive, prior to the insurance of any loan commitment, the approval
of a senior lending officer.
FCB expanded in the consumer lending area through the opening of TCC in
1991. TCC is incorporated under the Tennessee Industrial Loan and Thrift
Companies Act and specializes in consumer finance loans.
Loan Review. First City continually reviews its loan portfolios to
determine deficiencies and the corrective action to be taken. Several full-time
loan review employees, who do not have loan origination responsibilities,
conduct periodic reviews of all borrowers with aggregate indebtedness in excess
of $125,000. All new loans are reviewed within one month of origin. The loan
review employees also review all maturing loans and advise as to the quality and
structure of such loans and the renewability of the loan. Past due loans are
reviewed at least weekly by the loan review employees, and a summary report of
such loans is reviewed monthly by the Loan Committees.
Asset/Liability Management. A committee composed of senior FCB officers is
charged with managing First City's assets and liabilities (the "Asset/Liability
Committee"). The Asset/Liability Committee's task is to provide reasonable
growth of assets, earnings, net interest margin and return on equity capital, as
well as adequate liquidity and capital. To meet these objectives while
maintaining prudent management of risks, the Asset/Liability Committee directs
First City's overall acquisition and allocation of funds. At its monthly
meetings, the Asset/Liability Committee reviews and discusses the monthly asset
and liability funds budget in relation to the actual flow of funds, as well as
peer group comparisons; the ratio of the amount of rate sensitive assets to the
amount of rate sensitive liabilities; and such variables as expected loan
demand, investment opportunities, core deposit growth within specified
categories, regulatory changes, monetary policy adjustments and current economic
conditions. First City intends to monitor the gap between rate sensitive assets
and rate sensitive liabilities based on the rate environment on effect from time
to time.
SUPERVISION AND REGULATION
General. First City, FCB and Citizens are subject to extensive regulation
under state and federal statutes and regulations. The discussion in this
section, which briefly summarizes certain of such statutes, does not purport to
be complete, and is qualified in its entirety by reference to such statutes.
Other state and federal legislation and regulations directly and indirectly
affecting banks and other financial institutions may be enacted or implemented
in the future; however, such legislation and regulations and their effect on the
business of First City, the FCB and Citizens cannot be predicted.
First City Bancorp, Inc. First City is a bank holding company subject to
the supervision of Federal Reserve Board under the BHCA. As a bank holding
company, First City is required to file annual reports with, and is subject to
examination by, the Federal Reserve Board.
52
<PAGE> 61
FCB and Citizens Bank. FCB and Citizens are incorporated under the banking
laws of the State of Tennessee, and as such, are subject to the provisions of
the Tennessee Banking Act and the supervision of and regular examination by the
Tennessee Department of Financial Institutions (the "Department"). FCB and
Citizens are members of the FDIC and, therefore, also are subject to the
provisions of the FDIA and to supervision and examination by the FDIC.
Tennessee Credit Corporation. Tennessee Credit Corporation ("TCC"), a
wholly-owned subsidiary of FCB, is registered under Tennessee's Industrial Loan
and Thrift Companies Act. TCC is subject to the supervision of, and regular
examination by the Department.
Payment of Dividends. First City is a legal entity separate and distinct
from FCB and Citizens. The principal source of First City's revenues, however,
is from dividends declared by FCB and Citizens. Under Tennessee law, FCB and
Citizens can only pay dividends out of their undivided profits, which at
December 31, 1994 were approximately $3,082,000 and $4,994,000, respectively.
This amount will he increased by the FCB's and Citizens' net earnings and
decreased by any loses. Any transfer from FCB's and Citizens' surplus accounts
to undivided profits requires the prior approval of the Commissioner of the
Department. FCB's and Citizens' ability to pay dividends also may depend on
their ability to meet recommended capital levels established from time to time
by FDIC.
Under Tennessee law, First City may pay common stock dividends if, after
giving effect to the dividends, First City can pay its debts as they become due
in the ordinary course of business and First City's total assets exceed its
total liabilities plus the amount needed to satisfy the preferences of
outstanding shares of preferred stock. The payment of dividends by First City
also may be affected or limited by certain factors, such as the requirements to
maintain adequate capital above regulatory guidelines. In addition, if, in the
opinion of the applicable regulatory authority, a bank holding company or a bank
under its jurisdiction is engaged or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such authority may take various supervisory actions
to prevent such action, including a cease and desist order prohibiting such
practice.
Capital. As discussed above under "CERTAIN REGULATORY
CONSIDERATIONS -- Capital," the Federal Reserve Board has adopted final
risk-based and leverage capital guidelines for United States banking
organizations. At September 30, 1995, First City's risk-based Tier 1 Capital and
total risk-based capital ratios were 9.98% and 11.85%, respectively, and its
leverage ratio was 5.45%.
The leverage ratio, risk-based Tier 1 Capital and total risk-based ratios
for FCB at September 30, 1995 were 6.91%, 12.23% and 13.28%, respectively. The
leverage ratio, risk-based Tier 1 capital and risk-based capital ratios for
Citizens at September 30, 1995 were 7.29%, 14.40% and 15.65%, respectively.
Capital adequacy regulations and guidelines of the FDIC established a
minimum level of leverage ratio of 4% For banks such as FCB and Citizens, and a
minimum risk-based capital ratio of 8.0% of which 4.0% must be Tier 1 capital.
First City's Support of the FCB and Citizens. Under Federal Reserve Board
policy, First City is expected to act as a source of financial strength and to
commit resources to the FCB and Citizens. Such support may be required at times
when, absent such Federal Reserve Board policy, First City may not be inclined
to provide it. First City and its subsidiaries are also subject to the
cross-guarantee liability provisions of the FDIA, described above under "CERTAIN
REGULATORY CONSIDERATIONS -- General."
Acquisition and Expansion. First City and its subsidiaries are subject to
rules and regulations regarding acquisitions and expansion described above under
"CERTAIN REGULATORY CONSIDERATIONS -- Acquisition and Expansion."
Certain Transactions by First City with its Affiliates. First City and its
nonbank subsidiaries are subject to the various legal restrictions on the extent
to which they can borrow or otherwise obtain credit from First City's bank
subsidiaries as described above under "CERTAIN REGULATORY CONSIDERATIONS -- Bank
Regulation -- Certain Transaction with Affiliate."
53
<PAGE> 62
FDIC Insurance Assessments. FCB and Citizens are subject to FDIC deposit
insurance assessments as discussed above under "CERTAIN REGULATORY
CONSIDERATIONS -- Bank Regulation -- FDIC Insurance." Under the revised rate
structure that became effective on a retroactive basis as of June 1, 1995, FCB
and Citizens were assessed at a rate of 0.04%. As a result of the revised
structure, First City received a refund of $189,025 in the third quarter of
1995. On November 14, 1995, the FDIC further reduced the rate structure for the
BIF starting in January 1996. Under the new rate structure, the best-rated banks
will pay only the statutory annual minimum assessment of $2,000, while the
weakest banks will pay a rate of 0.27%. Under the new rate structure, FCB and
Citizens will each pay the statutory minimum annual assessment of $2,000.
Interest Rate Limitations. The maximum permissible rates of interest on
most commercial and consumer loans made by the FCB and TCC are governed by
Tennessee's general usury law and the Tennessee Industrial Loan and Thrift
Companies Act ("Industrial Loan Act"). Certain other usury laws affect limited
classes of loans, but the laws referenced above are by far the most significant.
Tennessee's general usury law authorizes a floating rate of 4% per annum over
the average prime or bases commercial loan rate, as published by the Federal
Reserve Board from time to time, subject to an absolute 24% per annum limit. The
Industrial Loan Act authorizes an interest rate of 24% per annum and also allows
certain loan charges, generally on a more liberal basis than does the general
usury law.
Effect of Government Policies. The earnings and business of First City are
and will be affected by the policies of various regulatory authorities of the
United States, especially by the Federal Reserve Board. The Federal Reserve
Board, among other functions, regulates the supply of credit and deals with
general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve Board for these purposes
influence in various ways the overall level of investments, loans, other
extensions of credit and deposits, and the interest rates paid on liabilities
and received on assets.
In 1994, the Congress enacted legislation that will generally ease the
ability of adequately or well-capitalized banks holding companies to acquire
existing banks across state lines, subject to state restrictions on entry by
acquisition and concentration limits. The legislation will also permit bank
holding companies having subsidiary banks located in more than one state to
combine any or all of the interstate banks into a single branch network across
the state lines (except in states that have elected to "opt out" of interstate
banking). Finally, after a phase-in period, banks that are adequately or
well-capitalized and have sufficient management resources may branch across
state lines through the acquisition of existing banks or branches, subject to
concentration limits, unless a state takes action to "opt out" of interstate
branching.
54
<PAGE> 63
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER ENTITIES
The following table sets forth, as of the Record Date, certain information
as to the FCBI Common Stock beneficially owned by (i) any FCBI person or group
of persons who is known to First City to be the beneficial owner of more than 5%
of the FCBI Common Stock, and (ii) each of First City's directors, each of First
City's executive officers who are not directors and by all of First City's
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OWNED OF CLASS
- ----------------------------------------------------------------- ------------ --------
<S> <C> <C>
Directors and Executive Officers:
William E. Rowland............................................. 387,610(1)(2)(3) 27.34
Robert B. Murfree.............................................. 369,505(1)(2)(4) 26.31
Melvin R. Adams................................................ 8,391(1) *
Thomas E. Batey................................................ 701(5) *
W. Kent Coleman................................................ 235,154(1)(2)(3) 17.06
Stan Hooper.................................................... 10,900(1) *
Joseph M. Swanson.............................................. 78,074(1)(6) 5.56
Preston Sweeney................................................ 1,332 *
Olin O. Williams, M.D.......................................... 16,784(1) 1.22
J. Michael Woods............................................... 2,687(1) *
All directors and officers as a group (10 persons)............... 676,822 44.68
Other Significant Shareholders:
First City Bank Employee Stock Ownership Trust................. 217,191(7) 15.85
Richard F. LaRoche, Jr......................................... 94,989(1) 6.60
W. Andrew Adams................................................ 92,373(1)(8) 6.46
</TABLE>
- ---------------
* Less than one percent.
(1) Includes the following shares which are not currently outstanding but which
the named individuals are entitled to acquire upon the conversion of the
Series A Preferred Stock and/or First City's Floating Rate Convertible
Subordinated Capital Debentures ("Capital Debentures"). Mr.
Rowland -- 47,485 shares; Mr. Murfree -- 36,247 shares; Mr.
Coleman -- 8,507 shares; Mr. Melvin R. Adams -- 4,725 shares; Mr.
Hooper -- 1,710 shares; Mr. Swanson -- 35,138 shares; Dr. Williams -- 9,452
shares; Mr. Woods -- 1,221 shares; and all directors and
officers -- 144,485 shares; Mr. LaRoche -- 69,989 shares; Mr. W. Andrew
Adams -- 59,863 shares. The shares described in this note are deemed to be
outstanding for the purpose of computing the percentage of outstanding FCBI
Common Stock owned by such persons individually but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes 217,191 shares held by the Trust for which Messrs. Rowland, Murfree
and Coleman are co-trustees. Mr. Coleman expressly disclaims beneficial
ownership of these shares. Messrs. Rowland and Murfree expressly disclaim
beneficial ownership of shares not allocated to their individual ESOP
accounts.
(3) Includes 1,455 shares held by Mr. Rowland's children and 125,657 shares as
trustee in two trusts for the benefit of his children.
(4) Includes 137,561 shares held individually, 891 shares held by his wife, 600
shares held by a family trust, 7,468 shares held as custodian or trustee
for Mr. Murfree's minor children, 500 shares held jointly with his wife and
5,822 shares held by his children.
(5) Includes 330 shares hold by Mr. Thomas E. Batey's wife.
(6) Includes 1,790 shares held by Mr. Swanson's son.
(7) All assets of the First City Bank Employee Stock Ownership Plan (the "Plan")
are held in the First City Bank Employee Stock Ownership Trust (the
"Trust"). The Trust currently owns 217,191 shares of FCBI Common Stock. At
January 12, 1996, 19,250.162 of these shares were allocated to participants
pursuant to First City's previous 401(k) plan and the remaining 197,940.838
shares were allocated to participants
55
<PAGE> 64
under the employee stock ownership feature of the Plan. Individual
participants are entitled to instruct the co-trustees of the Trust, W. Kent
Coleman, Robert B. Murfree and William E. Rowland, as to how shares
allocated to their accounts are to be voted. The co-trustees must abstain
from voting any such shares as to which no written voting instructions are
received from participants. Shares not yet allocated to the ESOP Accounts
are required to be voted in the same proportion as the allocated shares.
(8) Includes 47,441 shares held by the Adams Christian Trust for which Mr. Adams
and his wife serve as co-trustees.
EXPERTS
The consolidated financial statements of First American at December 31,
1994 and 1993 and for each of the three years in the period ended December 31,
1994 included in the Annual Report on Form 10-K of First American for the fiscal
year ended December 31, 1994, and the supplemental consolidated financial
statements of First American at December 31, 1994 and 1993 and for each of the
three years in the period ended December 31, 1994 included in First American's
Current Report on Form 8-K dated December 6, 1995, each incorporated by
reference into this Prospectus/Proxy Statement have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their reports thereon
included therein and incorporated herein by reference. The supplemental
consolidated financial statements give retroactive effect to First American's
November 1, 1995 merger with Heritage. The reports of KPMG Peat Marwick LLP
covering the December 31, 1994 consolidated financial statements and the
December 31, 1994 supplemental consolidated financial statements contain 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 and supplemental 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, June 30, 1995 and 1994,
and September 30, 1995 and 1994, incorporated by reference, KPMG Peat Marwick
LLP, the independent certified public accountants have reported that they
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports included in the
First American's quarterly reports on Form 10-Q for the quarters ended March 31,
1995 and September 30, 1995, and on 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 reports or such information should
be restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their report on the unaudited interim financial
information because that report is not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act.
The consolidated balance sheets of First City as of December 31, 1994 and
1993 and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1994, have been included in this Prospectus/Proxy Statement in reliance on
the report which includes 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, and No. 115, Accounting for
Certain Investments in Debt and Equity Securities, of Coopers & Lybrand LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Documents incorporated herein by reference in the future will include
financial statements, related schedules (if required) and auditors' reports,
which financial statements and schedules will have been audited to the extent
and for the periods set forth in such reports by the firm or firms rendering
such reports, and, to
56
<PAGE> 65
the extent so audited and consent to incorporation by reference is given, will
be incorporated herein by reference in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
LEGAL OPINION
A legal opinion to the effect that the issuance of the shares of FAC Common
Stock offered hereby, when issued in accordance with the terms of the Agreement,
will be validly issued, fully paid and nonassessable, has been rendered by
Martin E. Simmons, Esquire, Executive Vice President -- Administration,
Secretary, General Counsel and Principal Financial Officer of First American. As
of January 26, 1996, Mr. Simmons held options granted under stock option plans
covering 24,900 shares of FAC Common Stock, 9,060 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.
57
<PAGE> 66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
FIRST CITY BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of September 30, 1995, December 31, 1994 and December
31, 1993........................................................................... F-3
Consolidated Income Statements for the nine months ended September 30, 1995 and
September 30, 1994 and for the years ended December 31, 1994, 1993 and 1992........ F-4
Consolidated Statement of Changes in Shareholders' Equity for the nine months ended
September 30, 1995 and for the years ended December 31, 1994, 1993 and 1992........ F-5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1995
and September 30, 1994 and for the years ended December 31, 1994, 1993 and 1992.... F-7
Notes to Consolidated Financial Statements as of and for the years ended December 31,
1994, 1993 and 1992................................................................ F-9
Notes to Consolidated Financial Statements as of and for the nine months ended
September 30, 1995 and 1994........................................................ F-35
Managements' Discussion and Analysis of Financial Condition and Results of Operations
for the years ended December 31, 1994, 1993 and 1992............................... F-37
Managements' Discussion and Analysis of Financial Condition and Results of Operations
for the nine months ended September 30, 1995 and 1994.............................. F-56
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
First City Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the accompanying consolidated balance sheets of First City
Bancorp, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial condition of First City
Bancorp, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for income taxes and securities
available for sale in 1993.
COOPERS AND LYBRAND L.L.P.
Lexington, Kentucky
January 24, 1995
F-2
<PAGE> 68
FIRST CITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and demand balances due from banks.................................... $ 12,887,801 $ 11,855,493 $ 7,914,991
Interest-bearing deposits with other financial institutions................ 501,180 758,395 700,054
Securities available for sale.............................................. 46,393,606 39,296,075 80,025,558
Investment securities held to maturity..................................... 102,755,260 102,464,075 42,973,768
Federal funds sold......................................................... 150,000 15,309,000 10,300,000
Loans, net of unearned interest and fees................................... 172,652,851 152,824,172 156,755,069
Less: Allowance for loans losses........................................... (2,107,106) (2,201,101) (2,016,042)
------------ ------------ ------------
Net loans.......................................................... 170,545,745 150,623,071 154,739,027
------------ ------------ ------------
Interest receivable........................................................ 2,452,255 2,228,136 2,564,050
Premises and equipment..................................................... 11,036,498 11,248,755 11,452,500
Other real estate.......................................................... 75,279 91,785 378,837
Goodwill................................................................... 0 0 1,075,261
Other assets............................................................... 808,631 2,172,684 1,113,514
------------ ------------ ------------
TOTAL ASSETS....................................................... $ 347,606,255 $336,047,469 $313,237,560
============ ============ ============
LIABILITIES
Noninterest-bearing demand deposits........................................ $ 30,413,380 $ 32,890,043 $ 35,011,705
Interest-bearing transaction accounts...................................... 43,872,913 44,257,233 43,573,458
Savings and other time deposits............................................ 46,345,101 55,363,948 51,401,522
Certificates of deposit less than $100,000................................. 128,046,439 116,266,917 93,663,131
Certificates of deposit of $100,000 or more................................ 52,242,259 46,500,836 50,837,124
------------ ------------ ------------
Total Deposits..................................................... 300,920,092 295,278,977 274,486,940
------------ ------------ ------------
Securities sold under agreement to repurchase.............................. 17,931,493 13,968,420 10,109,398
Accrued interest........................................................... 1,240,326 1,003,125 824,075
Other accrued taxes, expenses and liabilities.............................. 983,304 1,212,835 3,189,907
Short-term borrowings...................................................... 0 750,000 0
Long-term debt............................................................. 6,227,367 7,107,121 7,303,650
------------ ------------ ------------
TOTAL LIABILITIES.................................................. 327,302,582 319,320,478 295,913,970
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Series A Cumulative Convertible Preferred Stock, no par value, 333,704,
338,132 and 339,134 shares, authorized, issued and outstanding at
September 30, 1995, and December 31, 1994 and 1993....................... 2,002,686 2,029,254 2,034,804
Series C Non-Cumulative Preferred Stock, no par value, 30,863, 31,483 and
31,483 shares authorized, issued and outstanding at September 30, 1995,
and December 31, 1994 and 1993........................................... 3,086,300 3,148,300 3,148,300
Series D Non-Cumulative Preferred Stock Subscribed, no par value, 0, 1,385
and 6,067 shares subscribed at September 30, 1995, December 31, 1994 and
1993..................................................................... 0 138,500 606,700
Series D Non-Cumulative Preferred Stock, no par value, 8,867, 7,978 and 0
shares issued and outstanding at September 30, 1995, and December 31,
1994 and 1993............................................................ 886,700 797,800 0
Common Stock, no par value, 5,000,000 shares authorized; 1,340,233,
1,236,443 and 1,225,407 shares issued and outstanding at September 30,
1995, and December 31, 1994 and 1993..................................... 11,867,423 10,316,008 10,274,561
Less: Unearned shares related to ESOP...................................... (445,398) (823,113) (925,000)
Less: Notes receivable from officers related to exercise of stock
options.................................................................. (654,854) (669,941) (645,961)
Unrealized gain (loss) on securities available for sale, net of deferred
tax asset (liability) of $462,700, $1,301,806 and $(241,140) at September
30, 1995 and December 31, 1994 and 1993.................................. (754,928) (2,148,344) 393,437
Retained earnings.......................................................... 4,315,744 3,938,527 2,436,749
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY......................................... 20,303,673 16,726,991 17,323,590
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 347,606,255 $336,047,469 $313,237,560
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 69
FIRST CITY BANCORP, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
-------------------------- -----------------------------------------
1995 1994 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Interest and fees on loans............................ $12,224,749 $10,346,744 $14,161,407 $ 9,820,861 $ 8,200,410
Interest on investment securities:
Taxable............................................. 6,608,441 5,222,190 7,433,848 5,745,396 5,961,854
Exempt from federal income taxes.................... 91,684 114,718 135,145 66,093 10,351
Other Interest Income................................. 305,068 299,557 329,150 150,314 148,563
----------- ----------- ----------- ----------- -----------
Total Interest Income:........................ 19,229,942 15,983,209 22,059,550 15,782,664 14,321,178
----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest-bearing transaction accounts, savings and
other time deposits................................. 1,970,933 1,925,474 2,562,813 1,268,354 1,172,992
Certificates of Deposit............................... 7,532,745 4,745,540 6,896,647 5,298,449 5,736,618
----------- ----------- ----------- ----------- -----------
Total Interest Expense on Deposits............ 9,503,678 6,671,014 9,459,460 6,566,803 6,909,610
----------- ----------- ----------- ----------- -----------
Interest on federal funds purchased and securities
sold under agreement to repurchase.................. 416,966 386,680 525,543 210,506 255,359
Other interest expense................................ 0 0 265,740 3,259 10,953
Interest on long-term debt............................ 516,599 426,763 323,788 357,069 364,166
----------- ----------- ----------- ----------- -----------
Total Interest Expense........................ 10,437,243 7,484,457 10,574,531 7,137,637 7,540,088
----------- ----------- ----------- ----------- -----------
Net Interest Income................................... 8,792,699 8,498,752 11,485,019 8,645,027 6,781,090
Provision for loan losses............................. 241,474 424,475 561,899 176,346 444,611
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses... 8,551,225 8,074,277 10,923,120 8,468,681 6,336,479
----------- ----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposit accounts................. 1,177,769 1,195,791 1,613,983 1,213,388 891,388
Other service charges and fees...................... 95,238 113,446 636,423 260,908 177,215
Net investment securities gains (losses)............ 38,618 196,732 199,532 (1,428) 376,558
Gain on sale of loans............................... 0 0 433,428 0 0
Other non-interest income........................... 1,063,462 825,545 212,814 65,123 57,694
----------- ----------- ----------- ----------- -----------
Total Non-Interest Income..................... 2,375,087 2,331,514 3,096,180 1,537,991 1,502,855
----------- ----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits...................... 4,596,164 3,755,958 4,998,556 3,791,932 2,670,783
Occupancy expenses.................................. 978,577 957,750 1,243,784 1,016,110 814,950
Furniture and equipment expenses.................... 919,060 924,208 1,225,476 892,243 594,484
Other non-interest expenses......................... 2,861,698 2,518,712 3,261,926 2,149,048 1,757,825
----------- ----------- ----------- ----------- -----------
Total Non-Interest Expense.................... 9,355,499 8,156,628 10,729,742 7,849,333 5,838,042
----------- ----------- ----------- ----------- -----------
Net income before income taxes and cumulative effect
of change in accounting principle................... 1,570,813 2,249,163 3,289,558 2,157,339 2,001,292
Income tax expense.................................... 658,916 742,121 1,150,631 721,280 726,252
----------- ----------- ----------- ----------- -----------
Net income before cumulative effect of change in
accounting principle................................ 911,897 1,507,042 2,138,927 1,436,059 1,275,040
Cumulative effect of change in accounting principle... 0 0 0 100,000 0
----------- ----------- ----------- ----------- -----------
NET INCOME.................................... $ 911,897 $ 1,507,042 $ 2,138,927 $ 1,536,059 $ 1,275,040
=========== =========== =========== =========== ===========
Weighted-average primary common share equivalents
outstanding......................................... 1,483,731 1,420,666 1,418,090 1,464,503 1,357,784
Primary earnings per common share equivalent before
cumulative effect of change in accounting
principle........................................... $ 0.44 $ 0.89 $ 1.28 $ .80 $ .86
Cumulative effect of change in accounting principle... 0.00 0.00 0.00 0.07 0.00
----------- ----------- ----------- ----------- -----------
Primary earnings per common share equivalent.......... $ 0.44 $ 0.89 $ 1.28 $ 0.87 $ 0.86
=========== =========== =========== =========== ===========
Weighted-average fully diluted common share
equivalents outstanding............................. 1,648,901 1,586,465 1,583,821 1,630,930 1,525,382
Fully diluted earnings per common share equivalent
before cumulative effect of change in accounting
principle........................................... $ 0.44 $ 0.84 $ 1.20 $ 0.76 $ 0.82
Cumulative effect of change in accounting principle... 0.00 0.00 0.00 0.06 0.00
----------- ----------- ----------- ----------- -----------
Fully diluted earnings per common share equivalent.... $ 0.44 $ 0.84 $ 1.20 $ 0.82 $ 0.82
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 70
FIRST CITY BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D
CUMULATIVE NON- NON- UNEARNED
CONVERTIBLE CUMULATIVE CUMULATIVE SHARES
PREFERRED PREFERRED PREFERRED COMMON RELATED TO
STOCK STOCK STOCK STOCK ESOP
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991.......................... $2,035,404 $ 0 $ 0 $ 9,008,717 $ (450,000)
---------- ---------- -------- ----------- ---------
Dividends on common stock ($.20 per share)..........
Dividends on Series A Preferred Stock ($.19 per
share)............................................
Dividends on Series C Preferred Stock ($2.14 per
share)............................................
10% common stock dividend (10,458 shares)........... 728,321
Repurchase of common stock (79,443 shares).......... (604,423)
Reduction of debt related to ESOP................... 50,000
Issuance of Series C Preferred stock (28,438
shares)........................................... 2,843,800
Series C Preferred Stock Subscribed (3,045
shares)........................................... 304,500
Issuance costs of preferred stock................... (111,000)
Exercise of stock options by officers through loan
from Company (99,000 shares)...................... 539,550
Tax benefit from stock options exercise.............
Net income..........................................
---------- ---------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1992.......................... 2,035,404 3,148,300 0 9,561,165 (400,000)
---------- ---------- -------- ----------- ---------
Dividends on common stock ($0.20 per share).........
Dividends on Series A preferred stock ($0.24 per
share)............................................
Dividends on Series C preferred stock ($8.52 per
share)............................................
Incurrence of additional debt related to ESOP....... (600,000)
Issuance of common stock to ESOP (70,588 shares).... 600,000
Reduction of debt related to ESOP................... 75,000
Conversion of Series A Preferred Stock (100 shares)
into common stock (73 shares)..................... (600) 597
Conversion of Subordinated Convertible Capital
Debentures ($400) into common stock (48 shares)... 393
Series D Preferred Stock Subscribed (6,067
shares)........................................... 606,700
Exercise of stock options by officers through loan
from Company (19,525 shares)...................... 106,411
Unrealized gain on securities available for sale,
net of deferred tax liability of $241,140.........
Exercise of stock options (1,100 shares)............ 5,995
Tax benefit from stock options exercise.............
Net income..........................................
---------- ---------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1993.......................... 2,034,804 3,148,300 606,700 10,274,561 (925,000)
---------- ---------- -------- ----------- ---------
<CAPTION>
UNREALIZED
REDUCTION GAIN (LOSS)
FOR NOTES ON
RECEIVABLE SECURITIES TOTAL
FROM AVAILABLE RETAINED SHAREHOLDERS'
OFFICERS FOR SALE EARNINGS EQUITY
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991.......................... $ 0 $ 0 $1,226,478 $11,820,599
--------- --------- ---------- -----------
Dividends on common stock ($.20 per share).......... (204,913) (204,913)
Dividends on Series A Preferred Stock ($.19 per
share)............................................ (84,819) (84,819)
Dividends on Series C Preferred Stock ($2.14 per
share)............................................ (106,126) (106,126)
10% common stock dividend (10,458 shares)........... (731,183) (2,862)
Repurchase of common stock (79,443 shares).......... (604,423)
Reduction of debt related to ESOP................... 50,000
Issuance of Series C Preferred stock (28,438
shares)........................................... 2,843,800
Series C Preferred Stock Subscribed (3,045
shares)........................................... 304,500
Issuance costs of preferred stock................... (111,000)
Exercise of stock options by officers through loan
from Company (99,000 shares)...................... (539,550) 0
Tax benefit from stock options exercise............. 56,843 56,843
Net income.......................................... 1,275,040 1,275,040
--------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1992.......................... (539,550) 0 1,431,320 15,236,639
--------- --------- ---------- -----------
Dividends on common stock ($0.20 per share)......... (240,938) (240,938)
Dividends on Series A preferred stock ($0.24 per
share)............................................ (81,405) (81,405)
Dividends on Series C preferred stock ($8.52 per
share)............................................ (268,304) (268,304)
Incurrence of additional debt related to ESOP....... (600,000)
Issuance of common stock to ESOP (70,588 shares).... 600,000
Reduction of debt related to ESOP................... 75,000
Conversion of Series A Preferred Stock (100 shares)
into common stock (73 shares)..................... (3)
Conversion of Subordinated Convertible Capital
Debentures ($400) into common stock (48 shares)... 393
Series D Preferred Stock Subscribed (6,067
shares)........................................... 606,700
Exercise of stock options by officers through loan
from Company (19,525 shares)...................... (106,411) 0
Unrealized gain on securities available for sale,
net of deferred tax liability of $241,140......... 393,437 393,437
Exercise of stock options (1,100 shares)............ 5,995
Tax benefit from stock options exercise............. 60,017 60,017
Net income.......................................... 1,536,059 1,536,059
--------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1993.......................... (645,961) 393,437 2,436,749 17,323,590
--------- --------- ---------- -----------
</TABLE>
F-5
<PAGE> 71
FIRST CITY BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
SERIES A SERIES C SERIES D
CUMULATIVE NON- NON- UNEARNED
CONVERTIBLE CUMULATIVE CUMULATIVE SHARES
PREFERRED PREFERRED PREFERRED COMMON RELATED TO
STOCK STOCK STOCK STOCK ESOP
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Dividends on common stock ($.20 per share)..........
Dividends on Series A preferred stock ($0.29 per
share)............................................
Dividends on Series C preferred stock ($8.50 per
share)............................................
Dividends on Series D preferred stock ($7.22 per
share)............................................
Series D Preferred Stock Subscribed (3,296
shares)........................................... 329,600
Unrealized loss on securities available for sale net
of deferred tax asset of $1,542,946...............
Exercise of stock options (10,266 shares)........... 55,949
Release of common stock to the ESOP................. 16,644 51,887
Reduction of debt related to ESOP................... 50,000
Conversion of Series A Preferred Stock (1,002
shares) into Common Stock (734 shares)............ (5,550) 5,546
Conversion of Subordinated Convertible Capital
Debentures (1,200 shares) into Common Stock (147
shares)........................................... 1,193
Issuance cost of preferred stock.................... (37,885)
Officer stock option loan for purchase of Common
Stock.............................................
Tax benefit from stock options exercise.............
Net income..........................................
---------- ---------- -------- ----------- ---------
BALANCE, DECEMBER 31, 1994.......................... 2,029,254 3,148,300 936,300 10,316,008 (823,113)
---------- ---------- -------- ----------- ---------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Dividends on Common Stock ($0.15 per share).........
Dividends on Series A Preferred Stock ($0.27 per
share)............................................
Dividends on Series C Preferred Stock ($6.68 per
share)............................................
Dividends on Series D Preferred Stock ($6.08 per
share)............................................
Unrealized gain on securities available for sale,
net of deferred tax asset of $462,700.............
Exercise of stock options (100,000 shares).......... 1,202,500
Release of common stock to the ESOP................. 318,217
Reduction of debt related to ESOP................... 377,715
Conversion of Series A Preferred Stock (4,428
shares) into Common Stock (3,161 shares).......... (26,568) 26,544
Conversion of Subordinated Convertible Capital
Debentures (1,200 shares) into Common Stock (147
shares)........................................... 4,154
Redemption of Series C Preferred Stock (620
shares)........................................... (62,000)
Redemption of Series D Preferred Stock (496
shares)........................................... (49,600)
Officer stock option loan payments..................
Net income..........................................
---------- ---------- -------- ----------- ---------
BALANCE, SEPTEMBER 30, 1995 (UNAUDITED)............. $2,002,686 $3,086,300 $886,700 $11,867,423 $ (445,398)
========== ========== ======== =========== =========
<CAPTION>
UNREALIZED
REDUCTION GAIN (LOSS)
FOR NOTES ON
RECEIVABLE SECURITIES TOTAL
FROM AVAILABLE RETAINED SHAREHOLDERS'
OFFICERS FOR SALE EARNINGS EQUITY
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
Dividends on common stock ($.20 per share).......... (251,453) (251,453)
Dividends on Series A preferred stock ($0.29 per
share)............................................ (96,700) (96,700)
Dividends on Series C preferred stock ($8.50 per
share)............................................ (267,554) (267,554)
Dividends on Series D preferred stock ($7.22 per
share)............................................ (57,634) (57,634)
Series D Preferred Stock Subscribed (3,296
shares)........................................... 329,600
Unrealized loss on securities available for sale net
of deferred tax asset of $1,542,946............... (2,541,781) (2,541,781)
Exercise of stock options (10,266 shares)........... 55,949
Release of common stock to the ESOP................. 68,531
Reduction of debt related to ESOP................... 50,000
Conversion of Series A Preferred Stock (1,002
shares) into Common Stock (734 shares)............ (4)
Conversion of Subordinated Convertible Capital
Debentures (1,200 shares) into Common Stock (147
shares)........................................... 1,193
Issuance cost of preferred stock.................... (37,885)
Officer stock option loan for purchase of Common
Stock............................................. (23,980) (23,980)
Tax benefit from stock options exercise............. 36,192 36,192
Net income.......................................... 2,138,927 2,138,927
--------- --------- ---------- -----------
BALANCE, DECEMBER 31, 1994.......................... (669,941) (2,148,344) 3,938,527 16,726,991
--------- --------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Dividends on Common Stock ($0.15 per share)......... (185,769) (185,769)
Dividends on Series A Preferred Stock ($0.27 per
share)............................................ (88,793) (88,793)
Dividends on Series C Preferred Stock ($6.68 per
share)............................................ (206,167) (206,167)
Dividends on Series D Preferred Stock ($6.08 per
share)............................................ (53,951) (53,951)
Unrealized gain on securities available for sale,
net of deferred tax asset of $462,700............. 1,393,416 1,393,416
Exercise of stock options (100,000 shares).......... 1,202,500
Release of common stock to the ESOP................. 318,217
Reduction of debt related to ESOP................... 377,715
Conversion of Series A Preferred Stock (4,428
shares) into Common Stock (3,161 shares).......... (24)
Conversion of Subordinated Convertible Capital
Debentures (1,200 shares) into Common Stock (147
shares)........................................... 4,154
Redemption of Series C Preferred Stock (620
shares)........................................... (62,000)
Redemption of Series D Preferred Stock (496
shares)........................................... (49,600)
Officer stock option loan payments.................. 15,087 15,087
Net income.......................................... 911,897 911,897
--------- --------- ---------- -----------
BALANCE, SEPTEMBER 30, 1995 (UNAUDITED)............. $(654,854) $ (754,928) $4,315,744 $20,303,673
========= ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 72
FIRST CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> NINE MONTHS ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................... $ 911,897 $ 1,507,042 $ 2,138,927 $ 1,536,059 $ 1,275,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................... 241,474 424,475 561,899 176,346 444,611
Provision for losses on other real estate.... 0 0 0 0 34,500
Compensation costs related to ESOP........... 383,108 26,748 37,531 0 0
Depreciation and amortization................ 854,909 712,681 936,249 829,294 612,695
Provision for (recovery of) loss on
securities held for sale................... 0 0 0 (99,860) 99,860
Accretion of investment security discounts... (98,881) (96,164) (148,579) (221,314) (37,270)
Amortization of investment security
premiums................................... 347,520 558,790 202,742 472,453 265,299
Gains on investment securities held to
maturity................................... 0 0 0 (44,487) (417,252)
(Gains) losses on sales of securities
available for sale......................... (38,618) (196,732) (199,532) 145,775 (59,166)
(Gains) losses on sales of other real
estate..................................... (22,023) (3,410) (3,410) (5,961) 16,856
Deferred income taxes........................ 0 0 167,733 8,500 5,100
Losses on sales of assets.................... 1,050 0 0 0 0
Gains from sales of loans.................... (218,335) 0 (433,428) 0 0
Net (increase) decrease in interest
receivable................................. (224,119) 381,141 335,914 (263,683) 320,733
Net increase (decrease) in interest
payable.................................... 237,201 (17,866) 179,050 (16,289) (229,225)
Net increase in other assets................. 0 0 (170,273) 0 0
Net decrease in other liabilities............ (229,531) (2,310,326) 21,560 616,483 (309,344)
------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. 2,145,652 986,379 3,626,383 3,133,316 2,022,437
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for
sale......................................... 31,351,040 3,782,525 12,575,053 31,968,106 9,030,938
Proceeds from calls and maturities of
securities held to maturity.................. 6,906,632 5,859,160 15,097,567 5,048,433 40,889,133
Proceeds from maturities of securities
available for sale........................... 1,695,755 10,477,185 9,588,251 2,891,006 0
Purchases of investment securities............. (48,907,302) (42,187,327) 0 (31,328,027) (88,598,579)
Purchases of investment securities held to
maturity..................................... 0 0 (46,164,864) 0 0
Purchases of securities available for sale..... 0 0 (13,401,019) 0 0
Proceeds from sales of investment securities
held to maturity............................. 0 0 0 8,980,444 26,171,219
Net (increase) decrease in short-term
investments.................................. 15,159,000 9,729,000 (5,009,000) (4,025,000) (4,800,000)
Proceeds from sales of other real estate....... 191,562 312,757 290,462 328,651 494,357
Proceeds from sales of loans................... 0 0 28,571,522 0 0
Net increase in loans.......................... (19,922,674) (2,818,762) (25,017,465) (11,153,999) (11,381,066)
Net decrease in stock option loans............. 15,087 0 0 0 0
Net decrease (increase) in other assets........ 513,546 (1,197,862) (96,271) (892,282) (153,609)
Purchases of financial institutions, net of
cash and cash equivalents acquired........... 0 0 0 (3,720,384) 0
Purchases of premises and equipment............ (462,782) (347,452) (732,504) (691,158) (1,344,064)
------------ ------------ ------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES.... (13,460,136) (16,390,776) (24,298,268) (2,594,210) (29,691,671)
</TABLE>
F-7
<PAGE> 73
FIRST CITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts
and savings accounts......................... $ (8,487,160) $ (5,811,796) $ 2,524,539 $ 16,875,698 $ 11,677,904
Net increase in certificates of deposit........ 17,520,945 17,588,354 18,267,498 (22,860,120) 16,043,522
Payments on long-term debt..................... (713,471) (196,307) (114,329) (714,329) (96,652)
Payments on short-term borrowings.............. (850,000) 0 0 0 0
Proceeds from short-term borrowings............ 100,000 750,000 0 0 0
Net increase in federal funds purchased and
securities sold under agreement to
repurchase................................... 3,963,073 7,328,784 3,859,022 1,583,918 (361,615)
Net proceeds from sale of preferred stock...... 0 191,100 291,715 606,700 3,037,300
Sale of common stock from stock options
exercised.................................... 1,202,500 40,962 31,969 5,995 0
Repurchase of common stock..................... 0 0 0 0 (604,423)
Proceeds from long-term debt................... 0 0 750,000 3,250,000 600,000
Net decrease in short-term borrowings.......... 0 0 0 0 (531,250)
Net decrease in other liabilities.............. 0 0 (325,779) 0 0
Sale of common stock to employee benefit
plan......................................... 0 0 0 600,000 0
Payments on redemption of preferred stock...... (111,600) 0 0 0 0
Payment for fractional shares.................. (30) 0 (11) 0 (2,862)
Cash dividends on common stock................. (185,769) (161,527) (251,453) (240,938) (204,913)
Cash dividends on preferred stock.............. (348,911) (310,680) (398,635) (349,709) (109,479)
Tax benefit from exercise of stock options..... 0 0 36,192 60,017 56,843
------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................. 12,089,577 19,418,890 24,670,728 (1,182,768) 29,504,375
------------ ------------ ------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS............ 775,093 4,014,493 3,998,843 (643,662) 1,835,141
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD......................................... 12,613,888 8,615,045 8,615,045 9,258,707 7,423,566
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 13,388,981 $ 12,629,538 $ 12,613,888 $ 8,615,045 $ 9,258,707
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid.................................. $ 10,200,042 $ 7,466,591 $ 10,395,481 $ 7,153,926 $ 7,769,313
Income taxes paid.............................. $ 521,000 $ 390,000 $ 790,000 $ 833,000 $ 1,007,499
</TABLE>
- ---------------
Supplemental schedule of non-cash investing and financing activities:
Additional debt and repayment of debt of ESOP of $600,000 and $75,000 in
1993.
Transfers of loans to other real estate were $190,610 in the nine months
ended September 30, 1995, $20,000 in the nine months ended September 30, 1994,
$65,000 in 1994, $0 in 1993 and $538,410 in 1992.
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 74
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(A) ACCOUNTING POLICIES
The accounting principles followed by First City Bancorp, Inc. (the
"Company") and the methods of applying those principles conform to generally
accepted accounting principles and to general practices in the banking industry.
The significant policies are summarized as follows:
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, First City Bank (the "Bank") and Citizens
Bank ("Citizens"). All material intercompany balances and transactions have been
eliminated in consolidation. On December 16, 1991, the Bank opened a finance
company, Tennessee Credit Corporation ("TCC") which is a wholly-owned subsidiary
of the Bank. The Company acquired Citizens on October 4, 1993. This transaction
was accounted for as a purchase. Results of operations of Citizens have been
included in the consolidated financial statements from the date of acquisition
(see Note T).
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash
equivalents as cash and demand balances due from banks and interest-bearing
deposits with other financial institutions.
INVESTMENT SECURITIES
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that all
investments in debt securities and all investments in equity securities that
have readily determinable fair values be classified into three categories. Debt
securities that management has the positive intent and ability to hold until
maturity will be classified as held to maturity. Securities that are bought and
held specifically for the purpose of selling them in the near term will be
classified as trading securities. All other securities will be classified as
available for sale. Securities are designated as available for sale if
management intends to use such securities in its asset/liability management
strategy and therefore such securities may be sold in response to changes in
interest rates and prepayment risk. Securities classified as trading and
available for sale will be carried at market value. Unrealized holding gains and
losses for trading securities will be included in current income. Unrealized
holding gains and losses for available for sale securities will be reported as a
net amount in a separate component of shareholders' equity until realized.
Investments classified as held to maturity will be carried at amortized cost.
Realized gains and losses on any sales of securities are computed on the basis
of specific identification of the adjusted cost of each security and included in
noninterest income. Investments categorized as available for sale had an
estimated fair value in excess of carrying value of $634,577 at December 31,
1993. The Company reported the cumulative effect of that change in accounting
principle in the 1993 consolidated statement of stockholders' equity by
increasing shareholders equity by $393,437 which is net of tax effect of
$241,140.
LOANS
The Bank computes interest income on commercial and most installment loans
based on the daily principal loan amounts outstanding.
Loan fees and costs are accounted for under the provisions of Statement of
Financial Accounting Standards No. 91 ("SFAS 91"), "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." The provisions of SFAS 91 state that loan origination
F-9
<PAGE> 75
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fees, commitment fees, if the commitment is exercised, and certain direct loan
origination costs are to be deferred and the net fee amortized as an adjustment
of the related loan's yield.
The designation "non-accrual loans" identifies those loans which management
recognizes as collection problems, but as yet have not been identified as
losses. Commercial and real estate loans are placed on a non-accrual basis when
payments of interest and/or principal have remained delinquent for a period of
over 90 days, unless the loan is both well-secured and in the process of
collection, or management's evaluation indicates probable default prior to the
90-day delinquency period.
The decision to charge off a loan is based upon the borrower's continued
failure to pay principal or interest when due, or circumstances indicating the
payments will not or cannot be made, along with evaluation of any collateral
securing the loan. Consumer loans generally are charged off when contractually
delinquent 120 days or more, or when five payments have been missed and there is
no recent record of regular payment.
ALLOWANCE FOR LOAN LOSSES ("ALLOWANCE")
The allowance for loan losses is based upon management's evaluation of the
loan portfolio under current economic conditions and other factors that deserve
current recognition in estimation of possible loan losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
The provision for depreciation is computed substantially on the straight-line
method over the estimated useful lives of the assets, which are as follows:
buildings and leasehold improvements -- 10 to 40 years; furniture and
equipment -- 3 to 15 years; automobiles -- 3 years. Costs of major additions and
improvements are capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from dispositions of property
are charged to operations and the asset accounts and related allowances for
depreciation are reduced.
OTHER REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of (1) cost or (2) fair
value minus estimated costs to sell.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") and has
reported the cumulative effect of that change in accounting principle in the
1993 Consolidated Statements of Income.
Under SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to the temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their tax bases. Deferred tax expense or benefit is then recognized for the
change in deferred tax liabilities or assets between periods.
RECLASSIFICATIONS
Certain accounts for 1993 and 1992 have been reclassified to conform with
classifications adopted in 1994 with no effect on previously reported results of
operations, shareholders' equity or cash flows.
F-10
<PAGE> 76
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments". This statement extends the existing fair value
disclosure practices for some instruments by requiring all entities to disclose
the fair value of financial instruments (as defined), both assets and
liabilities recognized and not recognized in the balance sheet, for which it is
practicable to estimate fair value. This statement became effective for
financial statements issued for years ending after December 15, 1992.
There are inherent limitations in determining fair value estimates as they
relate only to specific data based on relevant information at that time. As a
significant percentage of the Company's financial instruments do not have an
active trading market, fair value estimates are necessarily based on future
expected cash flows, credit losses and other related factors. Such estimates are
accordingly, subjective in nature, judgmental and involve imprecision. Future
events will occur at levels different from that in the assumptions, and such
differences may significantly affect the estimates.
The Statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
Additionally, the tax impact of the unrealized gains or losses has not been
presented or included in the estimates of fair value.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and short-term instruments approximate
those assets' fair values.
Securities Available for Sale and Investment Securities Held to
Maturity (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. No active market exists for the
Federal Home Loan Bank capital stock. The carrying value is estimated to be
fair value; if the Bank withdraws membership in the Federal Home Loan Bank,
the stock must be redeemed for face value.
Loans: For variable-rate loans that reprice frequently, fair values
are based on carrying values less estimated credit risks. Other loans are
segregated into loan groups with similar financial characteristics, and
fair values are estimated using discounted cash flow analyses using
interest rates currently being offered for such loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
Off-Balance Sheet Instruments: Fair values for the Company's
off-balance sheet instruments (letters of credit and lending commitments)
are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Deposit Liabilities: The fair values disclosed for deposits without
stated maturity dates (e.g., interest and noninterest bearing checking,
savings, and certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts for variable-rate, fixed-term money
market accounts and certificates of deposits that reprice frequently
approxi mate their fair values at the reporting date. Fair values for other
deposit accounts are estimated using a discounted cash flow calculation
that applies interest rates
F-11
<PAGE> 77
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currently being offered on such deposits to a schedule of aggregated
expected monthly maturities on such deposits.
Short-term Borrowings: The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings approximate their fair values.
Long-term Borrowings: The fair values of the Company's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." This statement addresses accounting by creditors for
impairment of certain loans. The statement requires that impaired loans be
measured based on the present value of the loan's expected future cash flows
discounted at the loan's effective interest rate. If the present value is less
than the recorded investment in the loan, an impairment will be recognized. The
statement is effective for financial statements for fiscal years beginning after
December 15, 1994. The statement is not expected to have a material impact on
the consolidated financial statements.
In October 1994, the FASB issued SFAS No. 119 "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". SFAS No. 119
addresses the disclosure of derivative financial instruments including the face
amount, nature and terms. The statement is effective for fiscal years ending
after December 15, 1994. The Company has no derivative financial instruments,
therefore, the statement had no impact on the consolidated financial statements
other than to require fair value disclosures of all financial instruments to be
presented together in a single footnote.
(B) SECURITIES AVAILABLE FOR SALE
The following sets forth the composition of securities available for sale
which are carried at estimated fair value:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 3,723,921 $0 $ 161,905 $ 3,562,016
Mortgage-backed securities............. 36,780,429 0 2,590,770 34,189,659
----------- -- ---------- -----------
Total debt securities
available for sale......... 40,504,350 0 2,752,675 37,751,675
----------- -- ---------- -----------
Federal Home Loan Bank stock (15,444
shares).............................. 1,544,400 0 0 1,544,400
----------- -- ---------- -----------
Total securities available
for sale................... $42,048,750 $0 $2,752,675 $39,296,075
========== ======== ========= ==========
</TABLE>
F-12
<PAGE> 78
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $12,844,709 $ 83,531 $ 47,351 $12,880,889
Obligations of State and political
subdivisions........................... 238,584 4,239 0 242,823
Mortgage-backed securities............... 64,991,788 664,500 70,342 65,585,946
----------- ---------- ---------- -----------
Total debt securities available
for sale..................... 78,075,081 752,270 117,693 78,709,658
----------- ---------- ---------- -----------
Federal Home Loan Bank stock (13,159
shares)................................ 1,315,900 0 0 1,315,900
----------- ---------- ---------- -----------
Total securities available for
sale......................... $79,390,981 $ 752,270 $ 117,693 $80,025,558
========== ======== ======== ==========
</TABLE>
Prior to December 31, 1993, the Company reflected securities available for
sale at the lower of cost or market with unrealized gains and losses reflected
as a component of income from operations. Net unrealized losses at December 31,
1992 were $99,860.
The Bank joined the Federal Home Loan Bank ("FHLB") in 1991. Citizens
joined the FHLB in 1994. As members of this system, the Bank and Citizens are
required to maintain an investment in capital stock of the Federal Home Loan
Bank of Cincinnati in an amount equal to the greater of 1% of the total of
residential mortgage loans and mortgage-backed securities, or 0.3% of total
assets of the Bank. The Bank's balance of FHLB capital stock at December 31,
1994 and 1993 was $1,392,700 and $1,315,900, respectively; no additional stock
is required to be purchased in 1995. Citizen's balance of FHLB capital stock at
December 31, 1994 was $151,700. Citizen's FHLB stock requirements have not yet
been met and will require additional purchases of approximately $170,000 during
1995. No ready market exists for the stock, and it has no quoted market value,
but may be redeemed for face value from the FHLB if the Bank withdraws its
membership.
The amortized cost and estimated fair value of debt securities at December
31, 1994, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less......................................... $ 0 $ 0
Due after one year through five years........................... 3,723,921 3,562,016
Due after five years through ten years.......................... 0 0
Due after ten years............................................. 0 0
Mortgage-backed securities...................................... 36,780,429 34,189,659
----------- -----------
Total investment debt securities...................... $40,504,350 $37,751,675
========== ==========
</TABLE>
Securities sold during 1994 that had been in the available for sale
portfolio resulted in net proceeds of $12,575,053. Securities sold during 1994
that had been in the available for sale portfolio resulted in gross gains of
$238,179 and gross losses of $38,647. Securities sold during 1993 that had been
in the available for sale portfolio resulted in net proceeds of $31,968,046,
gross gains of $24,321, and gross losses of $170,096. Securities sold during
1992 that had been in the available for sale portfolio resulted in net proceeds
of $9,030,938 and a net gain of $59,166.
F-13
<PAGE> 79
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(C) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated fair values of investment securities held
to maturity are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 35,105,784 $ 241 $1,744,007 $33,362,018
Obligations of state and political
subdivisions.................... 3,618,834 874 143,337 3,476,371
Mortgage-backed securities........ 63,739,457 1,512 3,339,385 60,401,584
------------ -------- ---------- -----------
Total investment
securities............ $102,464,075 $ 2,627 $5,226,729 $97,239,973
============ ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $ 25,304,896 $ 137,478 $ 102,949 $25,339,425
Obligations of state and political
subdivisions.................... 4,821,675 34,871 33,556 4,822,990
Mortgage-backed securities........ 12,847,197 71,237 87,996 12,830,438
------------ -------- ---------- -----------
Total investment
securities............ $ 42,973,768 $ 243,586 $ 224,501 $42,992,853
============ ======== ========== ===========
</TABLE>
As of October 1, 1994, management transferred securities that were
available for sale, having book values totaling approximately $40,884,000, to
the held to maturity category. These securities were required to be transferred
at their fair market values, which at October 1, 1994, totaled approximately
$40,355,000. These securities' book values exceeded their market values at that
time by approximately $529,000, and as a result of this transfer, the unrealized
loss, net of deferred taxes, remains as a reduction of shareholders' equity. At
December 31, 1994 this net unrealized loss was $441,687. This net unrealized
loss is amortized over the lives of the transferred securities.
The amortized cost and estimated fair value of debt securities held to
maturity at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ -----------
<S> <C> <C>
Due in one year or less............................................ $ 4,302,496 $ 4,273,412
Due after one year through five years.............................. 27,722,735 26,305,797
Due after five years through ten years............................. 6,465,998 6,047,730
Due after ten years................................................ 233,389 211,450
Mortgage-backed securities......................................... 63,739,457 60,401,584
------------ -----------
Total investment debt securities......................... $102,464,075 $97,239,973
=========== ==========
</TABLE>
Proceeds from calls and maturities of investment securities during 1994
were $15,092,567. Proceeds from sales and calls and maturities of investment
securities during 1993 and 1992 were $5,048,433 and $40,889,133,
F-14
<PAGE> 80
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Gross losses on sales of securities during 1993 and 1992 were
$7,056 and $32,353, respectively. Gross gains on sales of securities for 1993
and 1992 were $51,543 and $449,605, respectively.
Securities carried at $51,448,595 and $60,521,006 at December 31, 1994 and
1993, respectively, were required to be pledged to secure deposits with account
balances of $46,771,450 and $55,019,097 at December 31, 1994 and 1993,
respectively, and for other purposes as required or permitted by law.
(D) LOANS
The following table summarizes loans at carrying value at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Commercial and industrial................................. $ 15,197,723 $ 14,404,745
Consumer.................................................. 44,377,299 52,473,456
Real estate -- mortgage................................... 81,975,241 79,175,646
Real estate -- construction............................... 6,507,278 7,053,347
Other..................................................... 6,776,184 4,784,747
------------ ------------
Total Loans..................................... 154,833,725 157,891,941
Less: Unearned interest and loan fees..................... (2,009,553) (1,136,872)
Allowance for loan losses........................... (2,201,101) (2,016,042)
------------ ------------
Net loans....................................... $150,623,071 $154,739,027
=========== ===========
</TABLE>
In the normal course of business, the Company's banking subsidiaries have
made loans to related parties ("Related Parties") which include directors and
executive officers (and their affiliates) of the Company and directors and
executive officers and their associates of the Bank and Citizens during 1994 and
1993. Loans to directors, executive officers and their associates at December
31, 1994 and 1993 totaled $3,679,546 and $3,115,160, respectively. There were
outstanding lines of credit and loans to one individual director and his
associates (included above) which exceeded 5% ($835,600)of the shareholders'
equity at December 31, 1994 totaling $1,145,646. Those lines of credit which
exceeded 5% ($866,179) of shareholders' equity at December 31, 1993 totaled
$1,240,971.
The Board of Directors approves the lines of credit for each director in
compliance with Regulation O of the Federal Reserve Bank which requires all
director loans to be approved by the full Board of Directors. These lines of
credit represent maximum amounts in which the Loan Committee and management are
not to exceed. Any director requesting a specific loan or a line in which to
draw upon, must request prior approval by the Loan Committee. The maximum
approved total lines of credit that may be extended to all directors of the Bank
was $9,830,000 and $6,505,000 at December 31, 1994 and 1993, respectively. The
maximum approved total lines of credit that may be extended to all directors of
Citizens was $1,375,000 at December 31, 1994.
A summary of transactions with all directors, executive officers and their
associates for the year ended December 31, 1994 follows:
<TABLE>
<S> <C>
Balance at December 31, 1993............................................ $ 3,115,160
New loans and advances during 1994...................................... 2,625,913
Repayments during 1994.................................................. (2,061,527)
-----------
Balance at December 31, 1994............................................ $ 3,679,546
==========
</TABLE>
F-15
<PAGE> 81
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(E) ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance at the beginning of year........................... $2,016,042 $1,275,000 $1,040,000
Allowance from purchase of Citizens Bank................... 0 786,269 0
Provision charged to operations............................ 561,899 176,345 444,611
Loan losses:
Loans charged-off........................................ (638,688) (432,564) (481,733)
Recoveries on loans previously charged-off............... 261,848 210,992 272,122
---------- ---------- ----------
Net loan losses.................................. (376,840) (221,572) (209,611)
---------- ---------- ----------
Balance at end of year..................................... $2,201,101 $2,016,042 $1,275,000
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCE INTEREST PER INTEREST
NON-PERFORMING LOANS: AT DECEMBER 31, ORIGINAL TERMS REALIZED
- --------------------------------------------------------- ----------------- -------------- --------
<S> <C> <C> <C>
1994
Loans renegotiated at a reduced interest rate............ $ 0 $ 0 $ 0
Loans not accruing interest.............................. $ 471,056 $ 39,266 $ 25,780
1993
Loans renegotiated at reduced interest rate.............. $ 0 $ 0 $ 0
Loans not accruing interest.............................. $ 276,329 $ 42,973 $ 25,974
1992
Loans renegotiated at a reduced interest rate............ $ 0 $ 0 $ 0
Loans not accruing interest.............................. $ 147,745 $ 17,023 $ 13,065
</TABLE>
Loans past due 90 or more days on which interest was still accruing were
$7,661, $224,824 and $0 for the years ended December 31, 1994, 1993 and 1992,
respectively.
Non-performing loans (which include loans not accruing interest, loans
renegotiated at a reduced interest rate and loans past due ninety or more days
on which loans were still accruing interest) as a percent of total loans (net of
unearned interest and loan fees) were 0.31%, 0.31% and 0.16%.
(F) PREMISES AND EQUIPMENT
Premises and equipment components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
Land........................................................ $ 1,477,575 $ 1,477,575
Buildings................................................... 6,987,095 6,846,143
Furniture and equipment..................................... 5,440,151 5,221,221
Leasehold improvements...................................... 501,058 407,155
Construction in progress.................................... 382,019 103,300
----------- -----------
14,787,898 14,055,394
Less accumulated depreciation............................... (3,539,143) (2,602,894)
----------- -----------
Total premises and equipment...................... $11,248,755 $11,452,500
=========== ===========
</TABLE>
F-16
<PAGE> 82
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in buildings and accumulated depreciation above is the following
related to capital leases:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Buildings..................................................... $2,158,300 $2,158,300
Accumulated depreciation...................................... (301,264) (247,306)
----------- -----------
$1,857,036 $1,910,994
=========== ===========
</TABLE>
(G) SHORT-TERM BORROWINGS
The Company has lines of credit with two correspondent commercial banks
totaling $1,750,000. The interest rate charged is a variable index relating to
the lender's prime rate. As of December 31, 1994, $750,000 was drawn on the
lines of credit.
In addition, the Bank has unsecured lines at four commercial banks of
$8,900,000 for the overnight purchase of federal funds (with the largest amount
at any one bank being $3,500,000). The lines are for short-term use (usually up
to two weeks) and carry an interest rate below prime rate. No balance was drawn
on any of these lines at December 31, 1994 nor 1993. Normally, these lines are
renewed annually.
The Bank can also borrow short-term from the Federal Reserve Bank of
Atlanta's Discount Window at the Federal Reserve's discount rate. The borrowings
are normally for a maximum of two weeks and the amount borrowed has never
exceeded $2,000,000. There were no such borrowings at December 31, 1994 nor
1993.
As a member of the Federal Home Loan Bank of Cincinnati, the Bank can
borrow short-term or can initiate long-term borrowings by collateralizing the
borrowings with residential mortgage loans held in the Bank's loan portfolio. By
pledging the residential mortgage loans as collateral, the Bank may borrow funds
up to 20 years at either fixed or variable rates. The rate charged is normally
lower than prime rate and the maximum that may be borrowed based upon the
December 31, 1994 financial data is $27,414,000. There were no such borrowings
at December 31, 1994 or 1993.
(H) INCOME TAXES
As discussed in Note A, the Company adopted the provisions of SFAS No. 109
in 1993. The cumulative effect of adopting SFAS No. 109 was an increase in net
income of $100,000 or $0.06 per share, and is separately disclosed in the
Consolidated Statements of Income for the year ended December 31, 1993. The
financial statements for prior years have not been restated to apply the
provisions of SFAS No. 109.
Federal and state income tax expense consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................... $ 837,055 $578,422 $598,894
State................................................. 145,843 134,358 122,258
---------- -------- --------
982,898 712,780 721,152
Deferred:
Federal............................................... 141,191 7,600 4,300
State................................................. 26,542 900 800
---------- -------- --------
167,733 8,500 5,100
---------- -------- --------
Total....................................... $1,150,631 $721,280 $726,252
========= ======== ========
</TABLE>
F-17
<PAGE> 83
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax and financial statement purposes. The sources
(reductions) of those timing differences and their tax effect were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1993 1992
-------- --------- --------
<S> <C> <C> <C>
Provision for loan losses............................. $ 22,450 $ (17,113) $(34,267)
Accelerated depreciation.............................. 38,672 52,820 60,000
Loan cost............................................. 40,463 64,228 8,047
FHLB stock dividends.................................. 30,110 22,065 21,268
Other, net............................................ (30,992) 8,919 (10,004)
Purchase accounting adjustments....................... 67,030 (162,363) 0
Provision for loss on securities held for sale........ 0 39,944 (39,944)
-------- --------- --------
$167,733 $ 8,500 $ 5,100
======== ========= ========
</TABLE>
The following is a reconciliation of the provision for income taxes as
shown in the consolidated income statements with that which would be computed by
applying the statutory federal income tax rate to net income before income
taxes:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992
---------------------- -------------------- --------------------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax..... $1,118,450 34.0% $733,495 34.0% $680,439 34.0%
Increases (reductions) in
taxes resulting from:
State taxes, net of
federal income tax
benefit................ 113,774 3.6 89,270 4.1 80,690 4.0
Tax exempt interest
income................. (73,297) (2.3) (121,132) (5.6) (35,016) (1.7)
Other, net................ (8,296) (0.3) 19,647 0.9 139 0.0
---------- ---- -------- ---- -------- ----
Actual tax.................. $1,150,631 35.0% $721,280 33.4% $726,252 36.3%
========== ==== ======== ==== ======== ====
</TABLE>
F-18
<PAGE> 84
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994 and 1993, the net deferred income tax (asset)
liability in the accompanying consolidated balance sheets includes the following
amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1994 1993
---------- -----------
<S> <C> <C>
Deferred tax assets charged to operations:
Allowance for loan losses.................................. $ 451,997 $ 474,447
Noncompete amortization.................................... 38,592 7,600
Purchase accounting adjustments............................ 66,430 133,460
---------- -----------
557,019 615,507
---------- -----------
Deferred tax liabilities charged to operations:
Depreciation on premises and equipment..................... 705,972 667,300
FHLB stock dividends....................................... 85,117 55,007
Deferred loan fees and costs............................... 111,967 71,504
---------- -----------
903,056 793,811
---------- -----------
Net deferred tax liabilities charged to operations........... (346,037) (178,304)
Deferred tax asset (liability) on unrealized gain/loss on
securities available for sale.............................. 1,301,806 (241,140)
Deferred tax liabilities on purchase accounting adjustment
subsequently eliminated (Note T)........................... 0 (1,115,142)
---------- -----------
Net deferred tax asset (liability)........................... $ 955,769 $(1,534,586)
========== ===========
</TABLE>
(I) LONG-TERM DEBT
The long-term debt of the Company and its subsidiaries is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Long-term capital lease....................................... $1,657,785 $1,772,114
Convertible capital debentures................................ 1,355,336 1,356,536
Other long-term debt.......................................... 3,250,000 3,250,000
Debt related to ESOP.......................................... 844,000 925,000
---------- ----------
Total long-term debt........................................ $7,107,121 $7,303,650
========== ==========
</TABLE>
The Company has a long-term lease agreement relating to its main office
location. For accounting purposes, the lease is treated as a capital lease.
Beginning January 20, 1993, the interest rate charged was 6.75% for five years.
On April 1, 1987, $1,356,936 of convertible capital debentures were issued
which are due on April 1, 1999. The interest rate is 150% of the weighted
average prime rate of Manufacturers Hanover Trust Company, a division of
Chemical Bank, New York, New York ("Manufacturers Hanover") for the quarter, and
interest payments are made quarterly on January 1, April 1, July 1, and October
1. The capital debentures are convertible at $8.18 principal amount per share of
the common stock, after adjustment for the 1992 stock dividend. A holder of
convertible capital debentures will not be paid in cash at maturity, but
instead, the convertible capital debentures will automatically convert into
common stock of the Company with a fair value equal to the principal amount of
the convertible capital debentures. The convertible capital debentures are
subordinated to all senior indebtedness of the Company as defined in the
indenture.
During 1993, $400 of the capital debentures were converted into 48 shares
of common stock and $7.00 in cash was paid for the fractional shares. During
1994, $1,200 of debentures were converted into 147 shares of common stock and
$7.00 in cash was paid for the fractional shares.
F-19
<PAGE> 85
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the other long term debt consisted of $3,250,000
incurred by the Company in its purchase of Citizens Bank. The common stock of
Citizens Bank is pledged as collateral and interest is at 8.5% payable
quarterly. Annual principal payments are due beginning in January 1995.
The Company entered into specific covenants during the loan term in
connection with the $3,250,000 long-term debt. Return on average assets for the
Company must equal or exceed 0.5% and also average 0.65% for any two consecutive
years. Return on average assets for Citizens must equal or exceed 0.7%. Both the
Company and Citizens must maintain a Tier I risk-weighted ratio of 6.0%, total
capital risk-weighted ratio of 10.0% and a leverage ratio of 5.0%. In addition,
the allowance for possible loan losses as a percent of total loans must equal or
exceed 0.9% for Citizens, and the nonperforming loans and other real estate as a
percent of total loans plus other real estate for Citizens must not exceed 2.5%.
No additional covenants were entered into concerning the new debt incurred
during 1994.
See Note J for disclosure of the debt related to the ESOP.
Maturities under these long-term debt obligations for 1995-99, and
thereafter, excluding the amounts deemed to be interest payments, are as
follows:
<TABLE>
<CAPTION>
PARENT PARENT PARENT DEBT
LONG-TERM CONVERTIBLE OTHER RELATED
CAPITAL CAPITAL LONG-TERM TO
YEAR LEASE DEBENTURES DEBT ESOP TOTAL
------------------------------ ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1995.......................... $ 111,527 $ 0 $ 250,000 $ 87,000 $ 448,527
1996.......................... 119,292 0 266,000 93,000 478,292
1997.......................... 127,598 0 282,000 100,000 509,598
1998.......................... 136,482 0 300,000 107,000 543,482
1999.......................... 145,985 1,355,336 317,000 114,000 1,932,321
Thereafter.................... 1,016,901 0 1,835,000 343,000 3,194,901
---------- ---------- ---------- -------- ----------
Total............... $1,657,785 $1,355,336 $3,250,000 $844,000 $7,107,121
========== ========== ========== ======== ==========
</TABLE>
(J) EMPLOYEE BENEFIT PLANS
The Bank has a leveraged Employee Stock Ownership Plan and Trust ("ESOP")
for full-time employees and officers, who have served continuously for one year
and who have attained the age of 21. Participants may contribute up to 8% of
their annual salaries, under the 401(k) feature of the ESOP. All dividends
received by the ESOP are added to participant accounts. As debt is repaid,
shares are released from collateral and allocated to active employees based on
the proportion of debt service paid in the year.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 93-6 "Employers' Accounting for Employee
Stock Ownership Plans." This statement is effective for fiscal years beginning
after December 15, 1993, and prospective application of the guidance in the SOP
is required for shares acquired by ESOP's after December 31, 1992 but not yet
committed to be released as of the beginning of the year in which the SOP is
adopted. This statement changes the way employers report transactions with a
leveraged employee stock ownership plan ("ESOP"). It requires, among other
things, that: (1) for ESOP shares committed to be released in a period to
compensate employees directly, employers should recognize compensation cost
equal to the average fair value of the shares committed to be released, (2)
dividends on unallocated shares credited to participant accounts are recorded as
compensation expense for financial statement purposes, (3) for
earnings-per-share computations, ESOP shares that have been committed to be
released should be considered outstanding; ESOP shares that have not been
committed to be released should not be considered outstanding. The Company's
ESOP shares acquired in 1993 are subject to the provisions of the SOP. The
statement allowed companies who had acquired ESOP shares prior to December 31,
1992 to use the accounting principles in effect prior to the issuance of SOP
93-6. As a result,
F-20
<PAGE> 86
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company elected to apply the prior accounting standards to unallocated
shares acquired prior to December 31, 1992. Under prior accounting standards (1)
ESOP shares released in a period are expensed at their historical cost to the
ESOP, (2) dividends on both allocated and unallocated shares are reported as
dividends for financial statement purposes and (3) both committed and
uncommitted (unallocated) ESOP shares are considered outstanding for earnings
per share computations.
The ESOP purchased 107,830 common shares of First City Bancorp, Inc. in
1990, and the purchase was funded by a loan of $500,000 with principal payments
of $50,000 due annually, which began on October 17, 1991 and will continue for
ten years. The balance of the loan was $300,000 and $350,000 at December 31,
1994 and 1993, respectively. Interest expense in relation to this loan was
$23,132, $23,708, and $27,875 in 1994, 1993 and 1992, respectively. Interest is
at prime and is payable quarterly. The loan is guaranteed by the Company and is
recorded as a liability and as a reduction of shareholders' equity. The ESOP is
to be funded by contributions made by the Bank. The Bank presently expects to
contribute an amount annually to fund the principal and interest on the loan.
The cost basis of shares released and charged to expense was approximately
$50,000, $75,000 and $50,000 for 1994, 1993 and 1992, respectively.
On January 12, 1993, the ESOP purchased an additional 70,588 shares of
common stock at a purchase price of $600,000. This purchase was also funded by a
loan and is guaranteed by the Company. Interest is payable quarterly with the
first payment being due on March 31, 1993. The interest rate charged is one-half
percent over the lender's prime rate. Principal payments are due annually
beginning October 17, 1993, and the final payment is due October 17, 2002. The
balance of the loan was $544,000 and $575,000 at December 31, 1994 and 1993,
respectively. Interest expense in relation to this loan was $38,938 and $37,779
in 1994 and 1993, respectively. As discussed above, shares acquired in 1993 are
subject to the provisions of SOP 93-6. The related loan is recorded as a
liability and the shares pledged as collateral are reported as unearned ESOP
shares in the consolidated balance sheets. The Company reports compensation
expense for shares committed to be released equal to the current market price of
the shares, and the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as
compensation expense. The fair market value of shares committed to be released
and charged to operations for 1994 totaled approximately $68,531. Dividends on
unallocated shares charged to operations for 1994 totaled $11,700.
The following table shows ESOP shares as of December 31, 1994:
<TABLE>
<CAPTION>
SHARES
SHARES ACQUIRED
ACQUIRED BEFORE
IN 1993 1993
-------- -------
<S> <C> <C>
Allocated shares.................................................. 5,218 60,355
Shares released for allocation.................................... 7,000 12,000
Unreleased shares................................................. 58,370 72,173
-------- -------
Total ESOP shares....................................... 70,588 144,528
======== =======
Fair value of unreleased shares................................... $612,885
======== =======
</TABLE>
For a schedule of the contractual loan principal repayments, see Note I.
Citizens has a 401(k) plan and a defined contribution profit sharing plan.
Employees become eligible for participation under these plans after reaching the
age of 19 and having been employed for one year. The employees participating in
the 401(k) plan may elect to have up to 15% of their current salary deferred. In
addition, Citizens makes matching contributions to the employees' contributions
at a rate of 50% of the employees' contribution up to a maximum of 3% of the
employees' annual salary. The expense for the 401(k)
F-21
<PAGE> 87
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan (including administration) for 1994 and for the period from acquisition
through December 31, 1993 was $11,450 and $5,683, respectively.
The contributions to the profit sharing plan are fixed annually by the
Board of Directors of Citizens. Expenses relating to this plan for 1994 and for
the period from acquisition through December 31, 1993 were $41,100 and $23,175.
Participation in the above plans was frozen as of June 30, 1994 when the
First City Bancorp Stock Bonus and Savings Plan (a defined contribution plan)
became effective. Participation in the Stock Bonus and Savings Plan is for
full-time employees and officers of any subsidiary who have served continuously
for one year and who have attained the age of 21 and who do not participate in
the above plans previously described. Under the 401(k) provisions of this plan,
participants can contribute up to 8% of their compensation. Discretionary
contributions are made by the subsidiaries. The expense for the Stock Bonus and
Savings Plan for 1994 was $45,826.
(K) COMMITMENTS, CONTINGENCIES AND RESERVE REQUIREMENTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank of Atlanta. The average amount of those reserve balances for the
years ended December 31, 1994 and 1993 was approximately $490,000 and $488,000,
respectively.
Citizens does not maintain balances at the Federal Reserve Bank of Atlanta;
however, Citizens is required to maintain average reserve balances at a
correspondent bank. During 1994, the average amount of that reserve balance was
approximately $656,000.
From time to time the Company and/or its subsidiaries are named as
defendant in suits arising from the ordinary conduct of its affairs. In the
opinion of management, the ultimate outcome of any litigation to which the
Company and/or its subsidiaries may be a party at December 31, 1994 will not
adversely affect its financial condition.
(L) DIVIDENDS AND CAPITAL RESTRICTIONS
The Company's principal sources of funds are dividends received from the
Bank and Citizens. Under applicable banking laws, the Bank and Citizens may not
declare dividends except out of retained earnings; however, management of the
Company has committed to regulatory authorities, in conjunction with the
Citizens acquisition, to have a leverage capital ratio for the Bank and Citizens
of 6.50% by June 30, 1994. Under this commitment, the subsidiaries of the
Company (the Bank and Citizens) could pay out an additional $2,679,000 at
December 31, 1994 in the form of dividends. This amount will be increased in
1995 by net income less any payments out of retained earnings.
Regulatory agencies measure capital adequacy with a framework that makes
capital requirements sensitive to the risk profiles of individual banking
companies. The guidelines define capital as either Tier 1 (primarily common
shareholders' equity, non-cumulative preferred stock and a limited amount of
cumulative preferred stock) or Tier 2 (certain debt instruments and a portion of
the reserve for loan losses). The Company and its subsidiary banks are subject
to a minimum Tier 1 capital to risk-weighted assets ratio of 4% and a total
capital (Tier 1 plus Tier 2) to risk-weighted assets ratio of 8%. The Federal
Reserve Board ("Board") has also established an additional capital adequacy
guideline referred to as the Tier 1 leverage ratio that measures the ratio of
Tier 1 capital to average quarterly assets. The most highly rated bank holding
companies will be required to maintain a minimum Tier 1 leverage ratio of 3%.
The required ratio will be based on the Board's assessment of the individual
bank holding company's asset quality, earnings performance, interest-rate risk
and liquidity. Bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets.
F-22
<PAGE> 88
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires the establishment of a capital-based supervisory system of prompt
corrective action for all depository institutions. The Board's implementation of
FDICIA defines "well capitalized" institutions as those whose capital ratios
equal or exceed the following minimum ratios: Tier 1 Capital Ratio of 6%, Total
Risk-Based Ratios of 10%, and a Tier 1 Leverage Ratio of 5%. At December 31,
1994, the Company's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios were 10.74%, 12.77% and 5.59%, respectively. At December 31, 1993, these
ratios for the Company were 9.37%, 11.23% and 5.40%.
The Bank's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios at December 31, 1994 were 13.80%, 14.94% and 7.17%, respectively,
compared to December 31, 1993 ratios of 11.21%, 12.25% and 6.46%, respectively.
For Citizens, the Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios at December 31, 1994 were 14.72%, 16.23% and 7.64%, respectively.
(M) PREFERRED STOCK
On April 1, 1987, 339,234 shares of Series A cumulative convertible
preferred stock (the "Series A Preferred Stock") were issued along with a
related issuance of convertible subordinated capital debentures (the "Capital
Debentures") as discussed in Note I above. The units (one share of Series A
Preferred Stock and $4.00 in principal amount of Capital Debentures) were
offered in a rights offering to the shareholders of record as of January 31,
1987, at a subscription price of $10.00 per unit. The Series A Preferred Stock
has no par value and is convertible at a rate of one share of the Company's
Common Stock for each one and one-half shares of Series A Preferred Stock,
subject to adjustment. The Series A Preferred Stock will automatically convert
on April 1, 1999 into that number of shares of the Company's common stock which,
at the then-market value of the Common Stock, equals the liquidation preference
of the Series A Preferred Stock. The liquidation preference of the Series A
Preferred Stock equals $6.00 per share. Dividends are payable quarterly on
January 1, April 1, July 1 and October 1. The dividend rate equals 66 2/3% of
the weighted average prime rate of Manufacturers Hanover Trust Company during
such quarter, multiplied by one-fourth of the liquidation preference ($1.50).
During 1994, 1002 shares of the Series A Preferred Stock were converted into 734
shares of Common Stock. During 1993, 100 shares of the Series A Preferred Stock
were converted into 73 shares of Common Stock with $3.00 paid for the fractional
shares. At December 31, 1994, there were 338,132 shares of the Series A
Preferred Stock outstanding with a liquidation preference of $2,029,254.
The Company commenced an offering of Series C non-cumulative preferred
stock (the "Series C Preferred Stock") on May 26, 1992. The Series C Preferred
Stock has no par value and pays a rate of 8.5% through December 31, 1994. After
that time, the rate paid will be equal to the quarterly weighted average of the
New York Prime Rate (with a minimum rate of 6% and a maximum rate of 12%). The
payments are made quarterly on January 1, April 1, July 1 and October 1 of each
year. The stock is redeemable at the option of the Company for the stated value
paid for the stock ($100 per share) plus all accrued and unpaid dividends. At
December 31, 1994, 31,483 shares of Series C Preferred Stock with a liquidation
preference of $3,148,300 was issued and outstanding.
The Company commenced an offering of Series D non-cumulative preferred
stock (the "Series D Preferred Stock") on October 18, 1993. The Series D
Preferred Stock has no par value and pays a rate of 8.0% through December 31,
1995. After that time, the rate paid will be equal to the quarterly weighted
average of the New York Prime Rate (with a minimum rate of 5% and a maximum rate
of 10%). The payments are made quarterly on January 1, April 1, July 1 and
October 1 of each year. The stock is redeemable at the option of the Company for
the stated value paid for the stock ($100 per share) plus all accrued and unpaid
dividends. Series D Preferred Stock subscriptions totaling 6,067 shares for
gross proceeds of $606,700 had been received at December 31, 1993 to be issued
in 1994. As of December 31, 1994, 7,978 shares of Series D non-cumulative
preferred stock with a liquidation preference of $797,800 were issued and
outstanding and additional subscriptions totaling 1,385 shares for gross
proceeds of $138,500 had been received.
F-23
<PAGE> 89
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(N) STOCK OPTIONS
Unissued common shares of the Company are reserved for issuance to certain
employees as authorized by the Board of Directors. Options are forfeited three
months after an employee leaves the Company. The options are generally currently
exercisable and expire as detailed below.
For the Stock Option Plan expiring December 31, 1994: On October 8, 1991,
the Board of Directors adjusted the exercise price of all outstanding options to
the fair market value of common shares on that date and changed the expiration
date to December 31, 1994. The options were also adjusted for the May 30, 1992
11-for-10 stock split in the form of a 10% stock dividend. Accordingly, all
options had an exercise price of $5.45 per share. A total of 129,891 options had
been exercised as of December 31, 1994. The exercise of the 129,891 options was
financed with loans from the Company to officers in the amount of $539,550,
$106,411 and $23,980 during 1992, 1993 and 1994, respectively. Therefore,
capital at December 31, 1992, 1993 and 1994 has not been increased by those
options exercised through loans.
On April 21, 1994 shareholders of the Company approved the 1994 Employee
Stock Incentive Plan. Under this new plan, 150,000 shares are authorized to be
issued. During 1994, 125,000 shares were granted to officers and employees at
exercise prices ranging for $11.25 to $12.25 per share. No options were
exercised during 1994. The options expire in April 2004.
A summary of option activity follows:
<TABLE>
<CAPTION>
PLAN EXPIRING PLAN EXPIRING
APRIL 21, 2004 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Outstanding, December 31, 1991........................... 0 132,366
Forfeited during 1992.................................. 0 (1,375)
Exercised during 1992.................................. 0 (99,000)
------- -------
Outstanding, December 31, 1992........................... 0 31,991
Exercised during 1993.................................. 0 (20,625)
------- -------
Outstanding, December 31, 1993........................... 0 11,366
Granted during 1994.................................... 125,000 0
Forfeited during 1994.................................. (5,000) 0
Exercised during 1994.................................. 0 (10,266)
Expired, December 31, 1994............................. 0 (1,100)
------- -------
Outstanding, December 31, 1994........................... 120,000 0
======= =======
</TABLE>
(O) CAPITAL STOCK
During 1992, the Company repurchased 79,443 common shares of stock at a
cost of $604,423. In addition, the Company declared an 11-for-10 stock split in
the form of a 10% stock dividend on May 29, 1992 payable to shareholders of
record of May 30, 1992. Fractional shares were paid in cash based upon the price
of $7.25 per share. The Company paid $2,862 to shareholders for fractional
shares and transferred $728,321 from retained earnings to common stock. On
January 14, 1993, the ESOP purchased 70,588 shares of unissued stock at a total
cost of $600,000. During 1993, 100 shares of cumulative convertible Preferred
Stock were converted into 73 shares of common stock and cash in the amount of
$3.00 was paid for the fractional shares. Also, $400 of the subordinated
convertible capital debentures were converted into 48 shares of common stock
with cash in the amount of $7.00 being paid for the fractional shares.
In 1990 the Board of Directors declared a distribution of one Junior
Preferred Stock Purchase Right ("Right") for each outstanding share of First
City Bancorp, Inc. ("Common Stock"). The distribution of the Rights is designed
to deter coercive takeover tactics and help prevent partial tender offers and
other abusive tactics to gain control of the Company without dealing with all
shareholders on a fair and equal basis. Each
F-24
<PAGE> 90
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Right entitles shareholders, under alternative circumstances, to buy either
securities of the Company or securities of the acquiring company (depending on
the form of the transaction) at an exercise price that will be half the market
value of such securities at that time. The Rights can be exercised only if
certain persons or groups acquire 20 percent or more of the Company's
outstanding Common Stock or launch a tender or exchange offer that would result
in ownership of 20 percent or more of the Company's outstanding Common Stock. At
any time prior to a person's acquiring 20 percent or more of its Common Stock
and for a period of ten days following the public announcement of such
acquisition, the Company will be entitled to redeem the Rights at one cent per
Right. The Rights will expire on September 4, 2000.
(P) EARNINGS PER SHARE
The Series A Cumulative Convertible Preferred Stock is a common stock
equivalent and is included in both the primary and fully diluted earnings per
common stock equivalent. The convertible capital debentures were antidilutive
and, therefore, were not included for 1991; however, they became dilutive for
fully diluted earnings per share purposes in 1992 and are included as common
stock equivalents for 1993 and 1994. For 1993 and 1994, both the primary and
fully diluted earnings per common share have been computed after reduction for
dividends on the Series C and Series D Preferred Stock.
Primary earnings per share is computed based on the weighted average shares
of common stock equivalents (common stock and Preferred Stock) outstanding,
assuming that the Series A preferred shares issued on April 1, 1987 were
converted for each period. Stock options are dilutive common stock equivalents.
There were no other dilutive common stock equivalents as of December 31, 1994,
1993 or 1992. Earnings and dividends per share calculations for all periods
presented have been adjusted to reflect the 11-for-10 stock split as disclosed
in Note O.
ESOP shares that were acquired after December 31, 1992 that have not been
committed to be released at December 31, 1994 are not considered outstanding for
earnings per share purposes.
(Q) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------
1994 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................ $5,901,566 $ 5,638,393 $5,539,722 $4,979,869
Interest expense............................... 3,090,074 2,720,293 2,510,785 2,253,379
---------- ---------- ---------- ----------
Net interest income.................. 2,811,492 2,918,100 3,028,937 2,726,490
Provision for possible loan losses............. 137,424 127,651 123,411 173,413
Non-interest income............................ 939,441 679,654 778,015 699,070
Non-interest expenses.......................... 2,573,114 2,704,708 2,838,647 2,613,273
---------- ---------- ---------- ----------
Net income before income taxes................. 1,040,395 765,395 844,894 638,874
Income tax expense............................. 408,510 262,611 288,329 191,181
---------- ---------- ---------- ----------
Net income..................................... $ 631,885 $ 502,784 $ 556,565 $ 447,693
========== ========== ========== ==========
Weighted average primary common share
equivalents outstanding...................... 1,419,462 1,423,088 1,420,503 1,418,491
Primary earnings per common share equivalent... $ 0.39 $ 0.30 $ 0.33 $ 0.26
========== ========== ========== ==========
Weighted average fully-diluted common share
equivalents outstanding...................... 1,585,104 1,588,923 1,586,302 1,584,138
Fully-diluted earnings per common share
equivalent................................... $ 0.36 $ 0.28 $ 0.31 $ 0.25
========== ========== ========== ==========
</TABLE>
F-25
<PAGE> 91
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------
1993 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................ $4,990,004 $ 3,472,117 $3,591,395 $3,729,148
Interest expense............................... 2,218,912 1,577,742 1,644,555 1,696,428
---------- ---------- ---------- ----------
Net interest income.................. 2,771,092 1,894,375 1,946,840 2,032,720
Provision for possible loan losses............. 0 52,500 25,684 98,162
Non-interest income............................ 458,136 366,195 368,971 344,689
Non-interest expenses.......................... 2,805,538 1,716,664 1,667,250 1,659,881
---------- ---------- ---------- ----------
Net income before income taxes and cumulative
effect of change in accounting principle..... 423,690 491,406 622,877 619,366
Income tax expense............................. 96,088 166,520 221,948 236,724
---------- ---------- ---------- ----------
Net income before cumulative effect of change
in accounting principle...................... 327,602 324,886 400,929 382,642
Cumulative effect of change in accounting
principle.................................... 0 0 0 100,000
---------- ---------- ---------- ----------
Net income..................................... $ 327,602 $ 324,886 $ 400,929 $ 482,642
========== ========== ========== ==========
Weighted average primary common share
equivalents outstanding...................... 1,474,634 1,463,448 1,462,972 1,452,525
Primary earnings per common share equivalent
before cumulative effect of change in
accounting principle......................... $ 0.18 $ 0.18 $ 0.23 $ 0.22
Cumulative effect of change in accounting
principle.................................... 0.00 0.00 0.00 0.07
---------- ---------- ---------- ----------
Primary earnings per common share equivalent... $ 0.18 $ 0.18 $ 0.23 $ 0.29
========== ========== ========== ==========
Weighted average fully-diluted common share
equivalents outstanding...................... 1,640,537 1,630,106 1,629,287 1,618,864
Fully-diluted earnings per common share
equivalent before cumulative effect of change
in accounting principle...................... $ 0.17 $ 0.17 $ 0.22 $ 0.21
Cumulative effect of change in accounting
principle.................................... 0.00 0.00 0.00 0.06
---------- ---------- ---------- ----------
Fully-diluted earnings per common share
equivalent................................... $ 0.17 $ 0.17 $ 0.22 $ 0.27
========== ========== ========== ==========
</TABLE>
F-26
<PAGE> 92
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------
1992 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- ----------------------------------------------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income................................ $3,695,071 $3,341,528 $3,561,851 $3,722,728
Interest expense............................... 1,636,260 1,806,057 1,962,774 2,134,997
---------- ---------- ---------- ----------
Net interest income.......................... 2,058,811 1,535,471 1,599,077 1,587,731
Provision for possible loan losses............. 89,430 104,583 96,070 154,528
Non-interest income............................ 397,009 376,256 348,249 381,341
Non-interest expenses.......................... 1,743,977 1,264,208 1,444,379 1,385,478
---------- ---------- ---------- ----------
Income before taxes.......................... 622,413 542,936 406,877 429,066
Income tax expense............................. 203,870 204,985 153,616 163,781
---------- ---------- ---------- ----------
Net income................................... $ 418,543 $ 337,951 $ 253,261 $ 265,285
========== ========== ========== ==========
Weighted average primary common share
equivalents outstanding...................... 1,335,288 1,321,355 1,389,995 1,469,716
Primary earnings per common share equivalent... $ 0.27 $ 0.22 $ 0.18 $ 0.18
========== ========== ========== ==========
Weighted average fully diluted common share
equivalent outstanding....................... 1,501,955 1,487,193 1,555,843 1,635,564
Fully-diluted earnings per common share
equivalent................................... $ 0.25 $ 0.20 $ 0.17 $ 0.18
========== ========== ========== ==========
</TABLE>
The 1992 quarterly financial data has been restated to reflect $55,000 of
investment income reported in the second quarter that should have been reported
in the third quarter.
F-27
<PAGE> 93
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(R) CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1994 1993
----------- -----------
<S> <C> <C>
ASSETS:
Cash.............................................................. $ 174,684 $ 659,956
Investments in subsidiaries....................................... 22,590,129 21,953,152
Due from subsidiaries............................................. 0 239,004
Organizational costs (unamortized)................................ 37,261 39,997
Income tax benefit................................................ 327,211 136,899
Other assets...................................................... 182,556 305,606
Premises and equipment -- net..................................... 672 770
----------- -----------
Total assets.............................................. $23,312,513 $23,335,384
=========== ===========
LIABILITIES:
Accrued interest.................................................. $ 99,978 $ 79,002
Dividends payable on preferred stock.............................. 111,208 87,955
Other liabilities................................................. 175,000 313,301
Note payable...................................................... 3,250,000 3,250,000
Short-term borrowings............................................. 750,000 0
Convertible capital debentures.................................... 1,355,336 1,356,536
Debt related to ESOP.............................................. 844,000 925,000
----------- -----------
Total liabilities......................................... 6,585,522 6,011,794
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock -- Series A....................................... 2,029,254 2,034,804
Preferred stock -- Series C....................................... 3,148,300 3,148,300
Preferred stock -- Series D....................................... 797,800 0
Preferred stock subscribed -- Series D............................ 138,500 606,700
Common stock...................................................... 10,316,008 10,274,561
Reduction for debt related to ESOP................................ (823,113) (925,000)
Less: Notes receivable from officers related to exercise of stock
options..................................................... (669,941) (645,961)
Retained earnings................................................. 3,938,527 2,436,749
Unrealized gain (loss) on securities available for sale........... (2,148,344) 393,437
----------- -----------
Total shareholders' equity................................ 16,726,991 17,323,590
----------- -----------
Total liabilities and shareholders' equity................ $23,312,513 $23,335,384
=========== ===========
</TABLE>
F-28
<PAGE> 94
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Dividends received from subsidiaries..................... $ 328,995 $6,683,556 $ 523,739
Interest income from subsidiaries........................ 0 0 0
Rent income.............................................. 0 48,074 89,994
Interest income.......................................... 38,431 32,383 2,698
Miscellaneous income..................................... 45,000 0 0
---------- ---------- ----------
412,426 6,764,013 616,431
EXPENSES
Interest expense on debentures........................... 145,384 121,010 127,881
Other interest expense................................... 265,252 66,122 42,709
Organizational expenses.................................. 2,736 2,052 2,736
Shareholder communications............................... 44,519 37,117 92,617
Legal and accounting fees................................ 14,729 9,747 17,503
Occupancy expenses....................................... 10,805 37,747 49,862
Transfer agent fees...................................... 508 4,131 16,902
Compensation cost for ESOP............................... 68,531 0 0
Other miscellaneous expenses............................. 106,071 44,602 16,482
---------- ---------- ----------
658,535 322,528 366,692
---------- ---------- ----------
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiaries................... (246,109) 6,441,485 249,739
Income tax benefit......................................... 169,148 94,773 106,244
---------- ---------- ----------
Income (loss) before equity in undistributed earnings of
subsidiaries............................................. (76,961) 6,536,258 355,983
Equity in undistributed (distributed) earnings of
subsidiaries............................................. 2,215,888 (5,000,199) 919,057
---------- ---------- ----------
Net income................................................. $2,138,927 $1,536,059 $1,275,040
========== ========== ==========
</TABLE>
F-29
<PAGE> 95
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................ $ 2,138,927 $ 1,536,059 $ 1,275,040
Adjustments to reconcile net income to cash provided
by operating activities:
Earnings from subsidiaries -- (undistributed)
distributed...................................... (2,215,888) 5,000,199 (919,057)
Compensation cost related to ESOP.................. 37,531 0 0
Depreciation expense............................... 98 13,441 27,792
Amortization of organizational costs............... 2,736 2,052 2,736
(Increase) decrease in interest receivable......... 0 (12,051) (1,126)
(Increase) decrease in income tax benefit.......... (190,312) (23,226) (107,133)
Net increase (decrease) in interest payable........ 20,976 41,184 55,481
Net increase (decrease) in other liabilities....... (138,301) 311,951 (80,616)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... (344,233) 6,869,609 253,117
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital contributed to subsidiaries................... (962,870) (900,000) (2,122,300)
Purchase (sale) of premises and equipment............. 0 1,202,138 (1,375)
Purchase of subsidiary financial institution net of
cash and cash equivalents received................. 0 (9,741,630) 0
(Increase) decrease in due from subsidiaries.......... 239,004 (130,635) (42,440)
(Increase) decrease in other assets................... 123,050 (299,852) (2,683)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES......... (600,816) (9,869,979) (2,168,798)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net decrease in short-term borrowings................. 0 0 (531,250)
Proceeds from incurrence of long-term and short-term
debt............................................... 750,000 3,250,000 600,000
Payments on long-term debt............................ 0 (600,000) 0
Net proceeds from sale of preferred stock............. 291,715 606,700 3,037,300
Repurchase of common stock............................ 0 0 (604,423)
Sale of common stock from stock options............... 31,969 5,995 0
Sale of common stock to employee benefit plans........ 0 600,000 0
Payment for fractional shares......................... (11) 0 (2,862)
Cash dividends on common stock........................ (251,453) (240,938) (204,913)
Cash dividends on preferred stock..................... (398,635) (349,709) (109,479)
Tax benefit from exercise of stock options............ 36,192 60,017 56,843
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 459,777 3,332,065 2,241,216
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (485,272) 331,695 325,535
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 659,956 328,261 2,726
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 174,684 $ 659,956 $ 328,261
========== ========== ==========
</TABLE>
F-30
<PAGE> 96
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental disclosure of cash flow information:
<TABLE>
<S> <C> <C> <C>
Interest paid................................... $ 389,660 $ 79,826 $ 171,716
Income taxes paid (received).................... 0 (160,115) 0
</TABLE>
(S) OFF-BALANCE SHEET RISK
During the normal course of business, the Company, the Bank and Citizens
are party to financial instruments with off-balance sheet risk. This is done to
meet the financing needs of customers and to reduce the Company's, the Bank's
and Citizens' exposure to fluctuations in interest rate risk. These financial
instruments include commitments to extend credit, letters of credit, unadvanced
loan principal, home equity lines of credit and commitments to purchase
financial instruments at pre-determined prices. Those instruments contain, to
varying degrees, elements of credit and market risk in excess of the amounts
recognized in the consolidated balance sheets. The credit risk relates to the
possibility that a loss may occur from the failure of another party to perform
according to the terms of a contract. The market risk relates to the possibility
that future changes in market prices may make a financial instrument less
valuable or more onerous.
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have variable rates, fixed expiration dates and
may require payment of a fee. The variable rates are tied to the Bank's index
rate limiting the Company's market risk. Commitments and unadvanced loan
principal by the Bank totaled $6,458,000 and $5,339,000 at December 31, 1994 and
1993, respectively. Commitments and unadvanced loan principal by Citizens at
December 31, 1994 totaled approximately $2,387,000. These balances do not
necessarily represent actual future cash requirements since many of the
commitments are expected to expire without being drawn upon. The Company, for a
majority of the commitments, evaluates each customer's credit worthiness on a
case-by-case basis, and collateral is obtained if deemed necessary. Collateral
includes accounts and notes receivable, inventory, fixed assets, marketable
securities, and mortgages.
Home equity lines represent collateralized equity in single family
residences. The undrawn home equity lines of credit for the Bank totaled
$595,000 and $2,319,000 at December 31, 1994 and 1993, respectively. Undrawn
home equity lines of credit for Citizens totaled approximately $688,000 and
$345,000 at December 31, 1994 and 1993, respectively.
Letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. These guarantees
are primarily issued to support public and private borrowing arrangements, the
purchase of domestic and international goods, required developer improvements to
construction sites, and utility deposits. Since most letters of credit are not
expected to be drawn upon, the total contract amounts do not necessarily
represent actual future cash requirements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers. When deemed necessary, the Bank obtains marketable securities as
collateral supporting these letters of credit. Letters of credit for the Bank
totaled $235,400 and $216,000 at December 31, 1994 and 1993, respectively.
Letters of credit for Citizens totaled approximately $779,000 and $665,000 at
December 31, 1994 and 1993, respectively.
The Company's exposure to credit loss from non-performance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contract amount of those instruments. The
Company uses the same credit policies in making commitments and letters of
credit as it does for on-balance sheet instruments. The Company has controls in
place to monitor the credit risk of any commitments to purchase financial
instruments at predetermined prices. Unless otherwise noted, the Company does
not require collateral or other security to support financial instruments with
off-balance sheet credit risk.
F-31
<PAGE> 97
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Neither the Bank nor Citizens have any significant concentrations of credit
risk with any individual counterparty to originate loans. The Bank's and
Citizens' lending is concentrated primarily in real estate in the local Middle
Tennessee market. The mortgage-backed securities held by the Bank consist of
GNMA pass-through securities which are backed by the full faith and credit of
the United States Government and both FNMA and FHLMC pass-through securities.
The fair values for the Company's off-balance sheet financial instruments
at December 31, 1994 are estimated to approximate the contract values, as the
related loan will have an interest rate that reprices frequently, the credit
worthiness of the counter parties is presently considered in the commitments,
and the original fees charged do not vary significantly from the fee structure
at December 31, 1994.
(T) ACQUISITIONS
On October 4, 1993, the Company acquired 100% of the outstanding capital
stock of Citizens Bank of Smithville, Tennessee. Citizens Bank has branch
locations in Ardmore and Elkton, Tennessee. The acquisition was accounted for
under the purchase accounting method. Accordingly, the purchase price of
approximately $9,800,000 was allocated to assets and liabilities based on their
estimated fair values as of the date of the acquisition. The cost in excess of
net assets acquired was approximately $1,085,000 and was being amortized on a
straight-line basis over fifteen years. Citizens Bank's results of operations
have been included in the Company's consolidated financial statements beginning
October 1, 1993. Total assets of Citizens Bank at the acquisition date were
approximately $97,400,000. During the second quarter of 1994 it was determined
by both parties to the acquisition that it would be beneficial to jointly file
an election with the Internal Revenue Service to treat the acquisition of the
stock of Citizens Bank as though it were an asset acquisition for tax purposes.
The election was filed in July, 1994; therefore, financial statements of the
Company as of December 31, 1994 reflect certain adjustments for the accounting
of the tax election. The primary effect of the adjustments was to eliminate the
remaining balance of the cost in excess of net assets acquired originally
recorded at the acquisition date of $1,085,000 and to reduce income tax
liabilities (primarily deferred income tax liabilities) by a corresponding
amount. The impact of the adjustments on the consolidated statement of income
for 1994 was not material.
On December 30, 1993, the Bank purchased all of the outstanding shares of
Harrison Life Insurance Company, an Arizona credit life and credit accident and
health insurance company, for approximately $150,000. The purchase price was
approximately equal to the net asset value of Harrison Life. The purchase was
effective as of October 1, 1993, and the results of operations are included in
the Company's consolidated financial statements beginning October 1, 1993. Total
assets at the acquisition date were approximately $225,000. Subsequent to the
acquisition, the insurance company's name was changed to First City Life
Insurance Company.
The following unaudited pro forma information summarizes the effect of the
acquisition assuming consummation of the transactions on January 1, 1992. The
unaudited pro forma results are not necessarily
F-32
<PAGE> 98
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
representative of the actual results that would have occurred or may occur in
the future if the transactions had been effected on the dates indicated.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
YEARS ENDED
DECEMBER 31,
-------------------
1993 1992
------- -------
<S> <C> <C>
(IN THOUSANDS)
Net interest income.................................................... $12,672 $10,447
------- -------
Non-interest income.................................................... $ 2,218 $ 2,207
------- -------
Net income............................................................. $ 1,984 $ 1,898
------- -------
Earnings per share (in dollars):
Income before cumulative effect of change in accounting principle.... $ 1.10 $ 1.31
------- -------
Net income per common share.................................. $ 1.17 $ 1.31
------- -------
</TABLE>
(U) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of financial instruments at December 31,
1994 and 1993, which should be read in conjunction with Note S and certain other
notes to the consolidated financial statements presented elsewhere herein, is
set forth below.
<TABLE>
<CAPTION>
1994 1993
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and demand balances due from
banks.............................. $11,840,493 $11,840,493 $ 7,914,991 $ 7,914,991
Interest-bearing deposits with other
financial institutions............. 758,395 758,395 700,054 700,054
Securities available for sale......... 39,296,075 39,296,075 80,025,558 80,025,558
Securities held to maturity........... 102,464,075 98,784,373 42,973,768 44,308,753
Federal funds sold................. 15,309,000 15,309,000 10,300,000 10,300,000
Loans, net of unearned income......... 152,824,172 149,771,596 156,755,069 157,177,028
Allowance for loan losses.......... (2,201,101) 0 (2,016,042) 0
------------ ------------ ------------ ------------
Loans, net....................... 150,623,071 149,771,596 154,739,027 157,177,028
Financial Liabilities:
Deposits:
Noninterest-bearing deposits....... $32,890,043 $32,890,043 $35,011,705 $35,011,705
Interest-bearing deposits:
Interest-bearing transaction
accounts...................... 44,257,233 44,257,233 43,573,458 43,573,458
Savings and other time
deposits...................... 55,363,948 55,363,948 51,401,522 51,401,522
Certificates of deposit less than
$100,000...................... 116,266,917 116,141,040 93,663,131 94,041,553
Certificates of deposit of
$100,000 or more.............. 46,500,836 46,686,489 50,837,124 51,284,036
------------ ------------ ------------ ------------
Total deposits................ 295,278,977 295,338,753 274,486,940 275,312,274
Securities sold under agreement to
repurchase......................... 13,968,420 13,968,420 10,109,398 10,109,398
Other liabilities..................... 233,370 233,370 3,189,907 3,189,907
Long-term debt........................ $ 7,857,121 $ 8,065,124 $ 7,303,650 $ 7,488,498
============ ============ ============ ============
</TABLE>
F-33
<PAGE> 99
FIRST CITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1993
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Off-balance sheet instruments:
Commitments to extend credit.......... $ 0 $ 0 $ 0 $ 0
Home equity lines..................... $ 0 $ 0 $ 0 $ 0
Letters of credit..................... $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
</TABLE>
The fair value of noninterest-bearing deposits, savings and NOW accounts,
and money market accounts is the amount payable on demand at December 31, 1994
and 1993. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets and premises and equipment. In addition,
the tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
F-34
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(1) PRESENTATION
The accounting principles followed by First City Bancorp, Inc. (the
"Company") and the methods of applying those principles conform to generally
accepted accounting principles and to general practices in the banking industry.
The significant policies are summarized as follows:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, First City Bank (the "Bank") and Citizens
Bank ("Citizens"). All material intercompany balances and transactions have been
eliminated in consolidation. On December 16, 1991, the Bank opened a finance
company, Tennessee Credit Corporation ("TCC") which is a wholly owned subsidiary
of the Bank. All intercompany transactions between the Bank and TCC have been
eliminated and the financial statements presented contain consolidated financial
data of TCC. The Company purchased Citizens on October 4, 1993. This transaction
was accounted for as a purchase. Results of operations of Citizens have been
included in the consolidated financial statements from the date of acquisition.
The accompanying consolidated financial statements as of September 30, 1995
and 1994, are unaudited and reflect all adjustments which, in the opinion of
management, are necessary for the fair presentation of the financial position
and operating results of the periods presented.
As discussed in the 1994 Annual Report to Shareholders, the Company
acquired 100% of the outstanding capital stock of Citizens Bank of Smithville,
Tennessee on October 4, 1993. During the second quarter of 1994 it was
determined by both parties to the acquisition that it would be beneficial to
jointly file an election with the Internal Revenue Service to treat the
acquisition of the stock of Citizens Bank as though it were an asset acquisition
for tax purposes. The election was filed in July 1994, therefore the financial
statements of the Company in 1994 reflect certain adjustments for the accounting
of the tax election. The primary effect of the adjustments was to eliminate the
remaining balance of the cost in excess of net assets acquired originally
recorded at the acquisition date of $1,085,000 and to reduce income tax
liabilities (primarily deferred income tax credits) by a corresponding amount.
The impact of the adjustments on the consolidated statement of income for 1994
was not material.
(2) CHANGE IN ACCOUNTING PRINCIPLE AND NEW ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement addresses accounting by
creditors for impairment of certain loans. The statement requires that an
impaired loan be measured based on the present value of the loan's expected
future cash flows discounted at the loan's effective interest rate. The
statements became effective for financial statements for fiscal years beginning
after December 15, 1994. The statement did not have a material impact on the
financial statements for the first nine months of 1995.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
addresses the disclosure of derivative financial instruments including the face
amount, nature and terms. The statement is effective for fiscal years ending
after December 15, 1994. The Company has no derivative financial instruments,
therefore, the statement had no impact on the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages companies to recognize compensation
expense in the income statement based on the fair value of the underlying common
stock at the date the awards are granted. However, it will permit continued
accounting under APB Opinion 25, "Accounting for Stock Issued to Employees,"
accompanied by a disclosure of the pro forma effects on net income and earnings
per share had the new accounting rules been applied. The statement is effective
for fiscal years ending after December 15, 1995. The Company has not yet
determined the impact the statement will have on its financial statements.
F-35
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) EMPLOYEE BENEFIT PLANS
During 1994, new accounting requirements became effective for leveraged
Employee Stock Ownership Plans ("ESOP's") which had acquired shares of the
sponsor's common stock after December 31, 1992. First City Bancorp's ESOP shares
acquired in 1993 are subject to these new accounting provisions. These
provisions require that, as the Company makes contributions to the ESOP to repay
the ESOP's debt, the Company must recognize compensation expense based on the
fair market value of the common shares that are committed to be release by the
contribution, ratably over the period of time ESOP participants perform
services. After reviewing the long-term potential impact of these new accounting
requirements, the Board of Directors decided to repay a $544,000 loan during
1995 related to the shares acquired in 1993. The loan balance was paid in full
during the third quarter of 1995.
The additional compensation expense that is being recognized as a result of
the prepayment of this loan is being prorated over each quarter of 1995. The
increase in net after-tax expense for first nine months of 1995, as a result of
the acceleration of the ESOP debt payment, was $403,999. There will be a similar
increase in compensation expense for the remaining quarter of 1995, the amount
of which will be dictated by the average market price of First City Bancorp's
common stock during the quarter.
(4) PROPOSED BUSINESS COMBINATION
On July 5, 1995, First City Bancorp, Inc. entered into a definitive Merger
Agreement by which First American Corporation will acquire all of the
outstanding shares of First City Bancorp common stock. The merger will be
effected through a tax-free exchange of $26.50 in First American common stock
(subject to certain limitations set forth in the Agreement) for each share of
First City Bancorp common stock. The merger is subject to certain regulatory
approvals and to the approval of First City Bancorp's shareholders. Assuming
such approvals are obtained, the merger is expected to be completed during the
first quarter of 1996.
F-36
<PAGE> 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The Company derives substantially all of its revenues from the Bank and
Citizens. The following discussion provides certain information concerning the
Company's consolidated financial condition and results of operations and should
be read in conjunction with the "Selected Consolidated Financial Data" and the
consolidated financial statements and accompanying notes presented elsewhere
herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Net Interest Income
Net interest income represents the amount by which interest income exceeds
interest expense, principally interest paid to the Company's depositors on
interest-bearing accounts. The following table includes interest income on
earning assets and related average yields for the years ended December 31, 1994,
1993 and 1992. It also includes interest expense on interest-bearing liabilities
and related average rates paid. In addition, the table includes the net interest
spread and net interest margin.
<TABLE>
<CAPTION>
YEAR ENDED 12/31/94 YEAR ENDED 12/31/93 YEAR ENDED 12/31/92
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Interest-earning assets:
Loans, net of unearned interest
(1)............................. $159,615 $ 14,161 8.87 % $111,394 $ 9,881 8.87% $ 83,176 $ 8,257 9.93%
Securities:
Taxable......................... 130,971 7,434 5.67 % 107,148 5,735 5.35% 94,669 5,962 6.30%
Tax exempt (2).................. 3,689 205 5.64 % 1,432 127 8.87% 177 14 7.91%
Fed funds sold and securities
purchased under agreement to
resell.......................... 6,706 287 4.27 % 3,588 150 4.18% 3,692 148 4.01%
Time deposits in other banks...... 786 42 5.36 % 175 11 6.29% 0 0 N/A
-------- ------- ----- -------- ------- ----- -------- ------- ------
Total interest-earning
assets (2)................ 301,767 22,129 7.33 % 223,737 15,904 7.11% 181,714 14,381 7.91%
Cash and due from banks............. 11,946 6,962 5,463
Premises and equipment, net......... 11,297 9,855 7,694
Other assets........................ 5,091 2,759 3,167
Allowance for loan losses........... (2,174) (1,523) (1,029)
-------- -------- --------
Total assets................ $327,927 $241,790 $197,009
======== ======== ========
Interest-bearing liabilities:
Savings & interest-bearing
deposits........................ $101,191 $ 2,563 2.53 % $ 57,071 $ 1,268 2.22% $ 39,711 $ 1,173 2.95%
Time deposits..................... 157,178 6,897 4.39 % 136,167 5,298 3.89% 119,203 5,737 4.81%
Fed funds purchased and securities
sold under agreement to
repurchase...................... 14,017 526 3.75 % 8,759 214 2.44% 6,350 255 4.02%
Other short-term borrowings....... 0 0 N/A 0 0 N/A 200 11 5.50%
Long-term debt:
Convertible debentures............ 1,356 145 10.69 % 1,357 121 8.92% 1,357 128 9.43%
Long-term capital lease........... 1,719 116 6.77 % 1,835 108 5.89% 1,943 176 9.06%
Debt related to ESOP.............. 915 62 6.78 % 980 62 6.33% 440 28 6.36%
Other long-term debt.............. 3,630 265 7.31 % 1,087 66 6.07% 400 32 8.00%
-------- ------- ----- -------- ------- ----- -------- ------- ---- -
Total interest-bearing
liabilities............... 280,006 10,574 3.78 % 207,256 7,137 3.44% 169,604 7,540 4.45%
Demand deposits..................... 29,699 17,040 12,539
Other liabilities................... 1,117 1,881 1,512
-------- -------- --------
Total liabilities................... 310,822 226,177 183,655
Total shareholders' equity.......... 17,105 15,613 13,354
-------- -------- --------
Total liabilities and shareholders'
equity............................ $327,927 $241,790 $197,009
======== ======== ========
Net interest income (2)............. $ 11,555 $ 8,767 $ 6,841
======= ======= =======
Net interest margin (3)............. 3.83 % 3.92% 3.76%
Net interest spread (4)............. 3.55 % 3.66% 3.46%
===== ===== =====
</TABLE>
F-37
<PAGE> 103
- ---------------
(1) For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding.
(2) Yields on tax-exempt securities are stated on tax-equivalent basis, assuming
a tax rate of 34%. The adjustments made to convert to a tax-equivalent
basis were $70,000, $121,000, and $60,000 for 1994, 1993 and 1992,
respectively. The interest income on tax-exempt securities and net interest
income have been adjusted to a tax-equivalent basis, and these amounts are
higher than those reported on the consolidated statements of income.
(3) The net interest margin is net interest income on a tax-equivalent basis as
a percentage of total average interest-earning assets.
(4) The net interest spread is the difference in the tax-equivalent rate earned
on total interest-earning assets and the rate paid on total
interest-bearing liabilities.
Of the tax equivalent net interest income increase of $2,788,000,
approximately $3,572,000 was the result of an increased volume of net
interest-earning assets, and approximately $784,000 was the result of an
increase in rates paid on net interest-bearing liabilities, primarily rates on
interest-bearing deposits. An increase in volume on earning assets resulted in
an increase of approximately $5,881,000 which was offset by an increase in
volume in interest-bearing liabilities of approximately $2,309,000. An increase
in rates earned on interest-earning assets increased interest income by
approximately $344,000 while an increase in the rates of interest-bearing
liabilities decreased interest income by approximately $1,128,000. The net
interest spread (difference in rates earned on loans and investments versus
rates paid on deposits, borrowings and long-term debt) decreased 11 basis points
in 1994 to 3.55% from 3.66% earned in 1993. Tax equivalent net interest income
increased in 1993 by approximately $1,926,000 from 1992. Approximately
$3,375,000 of this increase was attributed to an increased volume of interest
earning assets while approximately $465,000 was the result of a decline in rates
paid on interest-bearing deposits. The net interest spread in 1993 showed an
increase of 20 basis points to 3.66% from a 1992 rate of 3.46%. The net interest
margin for 1994 decreased 11 basis points to 3.83% from 3.92% in 1993. The 1993
net interest spread represented a 16 basis point increase from 3.76% in 1992.
The net interest margin (defined as net interest income as a percentage of
average interest-earning assets) is a key measure in determining the Company's
income performance. The Company's net interest margin was 3.83% for 1994
compared to 3.92% for 1993 and 3.76% in 1992. The 1994 decrease was due to an
increase of the prime interest rate, to which most of the Company's long-term
debt is indexed. Interest rates also rose for time deposits as competition
increased in the markets which the Bank and Citizens compete. The average
earning assets in 1994 were approximately $301,767,000 as compared to
$223,737,000 and $181,714,000 for 1993 and 1992, respectively. Average total
assets for 1994 were approximately $327,927,000 as compared to approximately
$241,790,000 for 1993 and $197,009,000 for 1992. The addition of Citizens
increased the 1994 balance by approximately $103,318,000. Tax equivalent
interest income increased by approximately $6,225,000, or 39.1%, in 1994 from
1993, and interest expense increased approximately $3,437,000, or 48.2%, during
the same period.
F-38
<PAGE> 104
The average balances in the preceding table were increased in 1994 by the
purchase of Citizens in the fourth quarter of 1993. The following table shows
the impact of the purchased bank on the average balance sheet in 1994 as
compared to 1993, and in 1993 compared to 1992, for the major categories of
average interest-earning assets, average interest-bearing liabilities and
noninterest-bearing demand deposits:
<TABLE>
<CAPTION>
1994 COMPARED TO 1993 1993 COMPARED TO 1992
-------------------------- --------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
NET ATTRIBUTED TO NET ATTRIBUTED TO
INCREASE PURCHASE OF INCREASE PURCHASE OF
(DECREASE) CITIZENS BANK (DECREASE) CITIZENS BANK
---------- ------------- ---------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned interest........ $ 48,221 $37,953 $ 28,218 $13,226
Investment securities:
Taxable............................. 23,823 23,899 12,479 7,722
Tax-exempt.......................... 2,257 2,257 1,255 1,182
Federal funds sold and securities
purchased under agreement to
resell.............................. 3,118 4,256 (104) 571
Time deposits:
Domestic............................ 611 536 175 175
--------- ---------- --------- ----------
Total interest-earning
assets....................... $ 78,030 $68,901 $ 42,023 $22,876
======== ========== ======== ==========
Interest-bearing liabilities:
Savings & interest-bearing demand
deposits............................ $ 44,120 $33,951 $ 17,990 $10,390
Time deposits.......................... 21,011 29,158 16,964 9,435
Federal funds purchased and securities
sold under agreement to
repurchase.......................... 5,258 0 2,409 0
Other short-term debt.................. 0 0 (200) 0
Long-term debt:
Convertible debentures.............. (1) 0 0 0
Long-term capital lease............. (116) 0 (108) 0
Debt related to ESOP................ (65) 0 540 0
Other long-term debt................ 2,543 0 687 0
--------- ---------- --------- ----------
Total interest-bearing
liabilities.................. $ 72,750 $63,109 $ 38,282 $19,825
======== ========== ======== ==========
Non-interest-bearing demand deposits..... $ 12,659 $10,117 $ 4,501 $ 3,012
======== ========== ======== ==========
</TABLE>
F-39
<PAGE> 105
The following table shows changes in interest income and interest expense
resulting from changes in volume in various categories of interest-earning
assets and interest-bearing liabilities and changes in interest rates for these
categories. The change in interest due to both rate and volume has been
allocated to changes in average volume and changes in average rates in
proportion to the relationship of absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
12/31/94 COMPARED TO 12/31/93 12/31/93 COMPARED TO 12/31/92
---------------------------------------- ----------------------------------------
INCREASE INCREASE NET INCREASE INCREASE NET
(DECREASE) (DECREASE) INCREASE (DECREASE) (DECREASE) INCREASE
DUE TO VOLUME DUE TO RATE (DECREASE) DUE TO VOLUME DUE TO RATE (DECREASE)
------------- ----------- ---------- ------------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans............................ $ 4,278 $ 2 $4,280 $ 2,370 $ (746) $1,624
Investment securities:
Taxable........................ 1,336 363 1,699 799 (1,026) (227)
Tax-exempt..................... 102 (24) 78 199 (86) 113
Federal funds sold and securities
purchased under agreement to
resell......................... 133 4 137 (4) 6 2
Time deposits:
Domestic....................... 32 (1) 31 11 0 11
------ ------ ------ ------ ------- ------
Total interest-earning
assets................... $ 5,881 $ 344 $6,225 $ 3,375 $(1,852) $1,523
====== ====== ====== ====== ======= ======
Interest paid on:
Savings & interest-bearing demand
deposits....................... $ 1,096 $ 199 $1,295 $ (14) $ 109 $ 95
Time deposits.................... 875 724 1,599 20 (459) (439)
Federal funds purchased and
securities sold under agreement
to repurchase.................. 165 147 312 (4) (37) (41)
Other short-term debt............ 0 0 0 (11) 0 (11)
Long-term debt:
Convertible debentures......... 0 24 24 0 (7) (7)
Long-term capital lease........ (6) 14 8 (3) (65) (68)
Debt related to ESOP........... (4) 4 0 34 0 34
Other long-term debt........... 183 16 199 40 (6) 34
------ ------ ------ ------ ------- ------
Total interest bearing
liabilities.............. $ 2,309 $ 1,128 $3,437 $ 62 $ (465) $ (403)
====== ====== ====== ====== ======= ======
Net interest earned........ $ 3,572 $ (784) $2,788 $ 3,313 $(1,387) $1,926
====== ====== ====== ====== ======= ======
</TABLE>
An important aspect of achieving satisfactory levels of net interest income
is the management of the composition and maturities of rate-sensitive assets and
liabilities. For liquidity purposes, the Company normally maintains a
significant portion of its available for sales securities portfolio in variable
rate instruments that reprice at intervals of annually or more frequently.
Approximately 55% of the total securities at December 31, 1994, were priced at
variable rates. Most of the fixed rate instruments have a maturity of five years
or less. Approximately 28% of the total securities at December 31, 1994, were
fixed rate securities with a remaining maturity of less than five years. In
order to be sensitive to changes in rates, approximately 41% of the loan
portfolio bore variable rates while another 30% of the loan portfolio consisted
of fixed rate loans that matured within one year. Less than 2% of the loan
portfolio matures after five years. Temporary investments are usually invested
in federal funds overnight in correspondent banks and reprice on a daily basis.
As to the liability side of the balance sheet, most all of the demand
deposits and savings deposits reprice immediately or in periods less than one
year. Most of the time deposits are for periods of up to five years in maturity
with 90 day maturities being management's desired maturity. Other borrowed funds
are usually in the form of federal funds purchased from a correspondent bank or
securities sold under agreement to repurchase. These funds reprice daily. With
one exception, the long-term debt is at variable rates. Only one long-term debt
instrument is at a fixed rate and will mature in less than five years.
The following table sets forth the Company's interest rate sensitivity at
December 31, 1994, and describes, at various cumulative maturity periods, the
interest sensitivity gap (the difference between rate
F-40
<PAGE> 106
sensitive assets and rate sensitive liabilities) for those assets and
liabilities that management considers rate sensitive:
<TABLE>
<CAPTION>
ASSETS AND LIABILITIES MATURING OR REPRICING WITHIN
----------------------------------------------------
OVER OVER
3 MONTHS 1 YEAR
3 MONTHS THROUGH THROUGH OVER
OR LESS 12 MONTHS 5 YEARS 5 YEARS TOTAL
-------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Loans................................ $ 44,188 $ 33,956 $ 72,367 $ 2,313 $152,824
Investment securities................ 64,416 16,130 38,231 22,983 141,760
Temporary investments................ 15,309 0 0 0 15,309
-------- -------- -------- ------- --------
Total interest-earning
assets................... 123,913 50,086 110,598 25,296 309,893
Savings, interest-bearing demand and
time deposits...................... 170,245 49,560 29,627 12,957 262,389
Other borrowed funds................. 13,968 0 0 0 13,968
Long-term debt....................... 6,199 0 1,658 0 7,857
-------- -------- -------- ------- --------
Total interest-bearing
liabilities.............. 190,412 49,560 31,285 12,957 284,214
-------- -------- -------- ------- --------
Interest sensitivity gap
(negative)......................... $(66,499) $ 526 $ 79,313 $12,339 $ 25,679
======== ======== ======== ======= ========
Cumulative interest sensitivity gap
(negative)......................... $(66,499) $ (65,973) $ 13,340 $25,679 $ 25,679
======== ======== ======== ======= ========
Percent of total interest-earning
assets............................. (21.46)% (21.29)% 4.30% 8.29% 8.29%
======== ======== ======== ======= ========
</TABLE>
At December 31, 1994, the Company's asset/liability mix through one year
reflected a liability-sensitive balance sheet -- rate-sensitive liabilities
exceeded rate-sensitive assets. If the balance sheet is liability-sensitive
during a period of increasing interest rates, the Company's interest expense
could increase at a faster rate than its interest income if the mix of
rate-sensitive assets and rate-sensitive liabilities does not change during the
period. Likewise, in a period of decreasing interest rates, the Company's net
income could be positively affected if the balance sheet were
liability-sensitive.
Beyond one year, the Company's asset/liability mix reflected an
asset-sensitive balance sheet -- rate-sensitive assets exceeded rate-sensitive
liabilities. If the balance sheet is asset-sensitive during a period of
increasing interest rates, the Company's interest income could increase at a
rate faster than its interest expense if the mix of rate-sensitive assets and
rate-sensitive liabilities does not change during the period. Likewise, in a
period of decreasing interest rates, the Company's net income could be
negatively affected if the balance sheet were asset-sensitive.
Provision for Loan Losses
The Company maintains an allowance for loan losses to absorb losses in the
loan portfolio. The level is determined by internally generated credit quality
ratings of the loan portfolio, general economic conditions of the Company's
markets, historical loan losses and anticipated problems that may occur in the
future. The Company's commitment to maintaining strong allowances and the early
recognition of possible problem loans require a continuing review for possible
credit weaknesses.
The provision for loan losses increased in 1994 by approximately $386,000
from the amount in 1993. Net loan charge-offs (charge-offs minus recoveries) as
a percentage of average loans outstanding increased to 0.24% for 1994 as
compared to 0.20% in 1993 and 0.25% in 1992. The provisions were necessary after
net charge-offs to raise the allowance for loan losses to a level deemed
adequate by management to provide for potential losses in the loan portfolio.
F-41
<PAGE> 107
The following table summarizes loan balances at the end of each period and
daily averages. It also summarizes changes in allowance for loan losses arising
from loans charged off and recoveries of loans previously charged off, by loan
category. In addition, it shows the allowance resulting from the purchase of
Citizens Bank and additions to the allowance in the form of provisions charged
to expense.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Amount of loans outstanding at end of period, net of unearned
interest and fees.......................................... $152,824 $156,755 $ 93,211
Daily average amount on loans................................ 159,615 111,394 83,176
Balance of allowance for loan losses at beginning of
period..................................................... 2,016 1,275 1,040
Loans charged off:
Commercial, financial and agricultural..................... 60 20 24
Real estate -- construction................................ 0 0 1
Real estate -- mortgage.................................... 30 84 152
Installment................................................ 548 329 305
-------- -------- -------
Total loans charged off............................ 638 433 482
-------- -------- -------
Recoveries of loans previously charged off:
Commercial, financial and agricultural..................... 21 47 24
Real estate -- construction................................ 0 0 2
Real estate -- mortgage.................................... 47 93 101
Installment................................................ 193 71 145
-------- -------- -------
Total recoveries................................... 261 211 272
-------- -------- -------
Net loans charged off........................................ 377 222 210
Allowance purchased from Citizens Bank....................... 0 787 0
Additions to allowance charged to expense.................... 562 176 445
-------- -------- -------
Balance at end of period..................................... $ 2,201 $ 2,016 $ 1,275
======== ======== =======
Ratio of net charge-offs during period to average loans
outstanding................................................ 0.24% 0.20% 0.25%
Ratio of allowance for loan losses at end of period to
outstanding loans at end of period (net of unearned
interest and fees)......................................... 1.44% 1.29% 1.37%
</TABLE>
Non-Interest Income
The following table sets forth the components of non-interest income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Service charges on deposit accounts.................................. $1,614 $1,213 $ 891
Other service charges and fees....................................... 636 261 177
Net gain (loss) on investment securities............................. 200 (1) 377
Gain on sale of loans................................................ 433 0 0
Rental income........................................................ 134 65 58
Other non-interest income............................................ 79 0 0
------ ------ ------
Total non-interest income.................................. $3,096 $1,538 $1,503
====== ====== ======
</TABLE>
Non-interest income amounted to approximately 0.92% of average assets for
the year ending December 31, 1994, as compared to approximately 0.64% and 0.76%
for the years ending December 31, 1993, and 1992, respectively. The main reasons
for this increase in 1994 were the significant increase in service charges, the
gains from the sales of loans, and the gains on investment securities. If the
gains on loans and the gains on securities during 1994, 1993 and 1992 are
excluded from non-interest income, then non-interest
F-42
<PAGE> 108
income as a percentage of average assets would have been 0.73%, 0.64% and 0.57%,
respectively. Service charges on deposit accounts increased $401,000, or 33.1%
during 1994 as compared to an increase of approximately $322,000, or 36.1% in
1993. Of the increase in 1994, approximately $255,000 was the result of the
purchase of Citizens Bank, and approximately $146,000 was the result of the
Bank's growth in core deposits. Management expected this increase in 1994 as the
income from Citizens during 1993 represented only one quarter. Other service
charges and fees increased approximately $375,000 during 1994, or 143.7%. This
compares to an increase of approximately $84,000, or 47.5% in 1993. This
increase is due primarily to the increase in insurance revenues at the Bank's
subsidiary, First City Life Insurance Company. Management expects this
increasing trend to continue, but not quite to the extent of 1994's increase.
The Company had a net gain on securities transactions in 1994 of approximately
$200,000 as compared to a net security loss of approximately $1,000 in 1993 and
a net gain of $377,000 in 1992. Although the Company presently has a net
unrealized loss on securities available for sale of approximately $1,707,000 at
December 31, 1994, management cannot predict the gain or loss that will be
recognized in 1995 since the market values may change depending upon when the
securities are sold. Also during 1994, approximately $433,000 was recorded for
gains from the sales of loans. Approximately $408,000 of these gains were from
sales of student loans by the Bank. The remaining gain was from mortgage loan
sales at Citizens. Rental income increased during 1994 by approximately $69,000,
or 106.2%, as compared to an increase of approximately $7,000, or 12.1% in 1993.
The Company decreased available lease space in 1994 with the expansion of one
tenant's lease space and the sale of two pieces of other real estate that had
previously been leased during 1994. Due to those sales, rental income should
decrease during 1995.
Non-Interest Expenses
The following table sets forth the components of non-interest expenses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Salaries and employee benefits.............................. $ 4,999 $3,792 $2,671
Occupancy expenses.......................................... 1,244 1,016 815
Furniture and equipment expenses............................ 1,225 892 595
FDIC assessments............................................ 609 482 368
Computer service fees....................................... 76 74 195
Supplies.................................................... 374 300 222
Other non-interest expenses................................. 2,203 1,293 972
------- ------ ------
Total non-interest expenses....................... $10,730 $7,849 $5,838
======= ====== ======
</TABLE>
Non-interest expenses totaled approximately 3.27% of average assets for the
year ended December 31, 1994, as compared to 3.25% and 2.96% for the years ended
December 31, 1993, and 1992, respectively. Non-interest expenses totaled
approximately $10,730,000 for the year ended December 31, 1994, as compared to
approximately $7,849,000 and $5,838,000 for the years ended December 31, 1993,
and 1992, respectively. Salaries and employee benefits increased approximately
$1,207,000, or 31.8%, during 1994 as compared to increases of approximately
$1,121,000, or 41.2% in 1993 and approximately $388,000, or 17.0% in 1992. The
purchase of Citizens increased salaries and benefits by approximately $968,000,
while the Bank experienced an increase of approximately $239,000 from growth and
expansion, annual increase in salaries and additional costs of benefits.
Occupancy expenses increased approximately $228,000, or 22.4%, in 1994 as
compared to an approximate increase of $201,000, or 24.7%, in 1993, and an
increase of approximately $61,000, or 8.1%, in 1992. Approximately $49,000 of
the 1994 increase can be attributed to the purchase of Citizens while growth of
both the Bank and Tennessee Credit Corporation brought an increase of
approximately $179,000. Furniture and equipment expenses increased approximately
$333,000, or 37.3% in 1994 as compared to an approximate increase of $297,000,
or 49.9%, in 1993 and an increase of approximately $145,000, or 32.2%, in 1992.
The purchase of Citizens increased furniture and equipment expenses by
approximately $165,000, while the Bank and Tennessee Credit Corporation
experienced an increase of approximately $168,000 due to growth and
F-43
<PAGE> 109
expansion of one new Tennessee Credit Corporation office and the relocation of
one automated teller machine. In addition, as the number and age of the Bank's
automated teller machines grow, the amount of maintenance expenses related to
those machines will continue to increase as these types of expenses did during
1994. FDIC assessments increased approximately $127,000, or 26.3%, during 1994
as compared to an approximate increase of $114,000, or 31.0%, during 1993. The
purchase of Citizens increased this expense approximately $141,000, while the
Bank actually experienced a decrease of approximately $14,000 due to the
decrease in deposits. In 1992, FDIC insurance premiums increased approximately
$80,000 or 27.8%, due to the growth of the Bank. Supplies expenses increased
approximately $74,000, or 24.6%, during 1994 as compared to approximately
$78,000, or 35.6%, during 1993. The 1994 increase was due to the purchase of
Citizens (approximately $102,000), while the Bank was able to reduce its supply
expenses by approximately $29,000. Computer service fees during 1994 increased
by approximately $2,000, or 2.7%, as compared with the decrease of approximately
$121,000, or 62.1%, during 1993. The 1993 reduction was due to Bank's purchasing
an in-house computer system during the second half of 1992. Other non-interest
expense increased approximately $910,000, or 70.4%, as compared to an
approximate increase of $321,000, or 33.0%, in 1993 and increases of
approximately $5,000, or 4.9%, in 1992. Of the 1994 increase, approximately
$436,000 was attributed to the purchase of Citizens while the remaining $474,000
was attributed to First City Life Insurance Company (FCLIC), a wholly-owned
subsidiary of the Bank that was purchased in the fourth quarter of 1993. During
1994, FCLIC experienced an increase in expenses related to benefits paid on life
insurance claims and accident and health claims. Those claims paid also caused
an increase in the policy reserve requirements at FCLIC. The expenses attributed
to the purchase of Citizens during 1993 represented only one quarter and were
expected to increase in 1994. In future years, these expenses should develop
more of a trend.
Income Taxes
The percentage of income tax expense to net income increased to
approximately 35.0% in 1994 as compared to approximately 33.4% in 1993 and 36.3%
in 1992. The effective rate paid in 1995 should increase somewhat as Citizens'
investment portfolio no longer contains a significant amount of tax-free
securities.
FINANCIAL CONDITION
Loans
The Company's loan portfolio decreased during 1994 by approximately
$3,931,000, or 2.5% compared to a 1993 increase of approximately $63,545,000, or
68.2%. Citizens' net loans decreased by approximately $3,791,000 while the
Bank's net loans decreased approximately $140,000. The decrease in Citizens'
loans is due to the amortization of purchase accounting write-ups during 1994.
The decrease in the Bank's loans can be attributed to an increase in student
loans and residential mortgage loans offset by sales of large blocks of student
loans during the year. Tennessee Credit Corporation, a subsidiary of the Bank
that specializes in consumer loans, increased its net loans during 1994 by
approximately $2,257,000, or 64.0%. During 1993, Tennessee Credit increased its
net loans by approximately $2,765,000. The Company seeks to minimize its
long-term interest rate risk exposure by making primarily adjustable rate or
balloon payment mortgage loans. Most of these loans have a maturity of three to
five years with an amortization schedule not in excess of twenty years. As these
loans mature, the Company has the option of refinancing the remaining balloon
balance, calling the loan or requesting additional collateral. This allows the
Company to closely monitor these loans and to minimize credit risk (as well as
interest rate risk). If the loan is refinanced, it undergoes the same
underwriting policies in use for new loans. Management of the Company believes
that the loan portfolio is adequately diversified and does not believe that
there is any concentration of loans in any specific industry or to related
borrowers that present undue risks. Of the loan portfolio outstanding at
December 31, 1994, approximately 40.2% of the Company's loans were priced at
variable rates, and another 29.3% of the Company's loans consist of fixed rate
loans that mature within one year. Therefore, approximately 71% of the portfolio
either is variable rate or matures within one year at December 31, 1994, as
compared to 68% at December 31, 1993, and 44% at December 31, 1992.
F-44
<PAGE> 110
The amounts of loans outstanding at the indicated dates are shown in the
following table according to the type of loan:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
-------------------------- -----------------------------
1994 1993 1992 1994 1993 1992
------ ------ ------ -------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other....... 14.19% 12.15% 16.38% $ 21,975 $ 19,190 $15,384
Real estate -- construction.... 4.20% 4.47% 3.47% 6,507 7,053 3,258
Real estate -- mortgage........ 52.95% 50.15% 48.27% 81,975 79,176 45,331
Installment.................... 28.66% 33.23% 31.88% 44,377 52,473 29,946
------ ------ ------ -------- -------- -------
Total (1)............ 100.00% 100.00% 100.00% $154,834 $157,892 $93,919
====== ====== ====== ======== ======== =======
</TABLE>
- ---------------
(1) Includes $2,010, $1,137, and $708 of unearned interest and fees for 1994,
1993 and 1992, respectively.
Other than as indicated in the above table, the Company does not have any
concentration of loans in any category exceeding 10% of total loans.
There were no foreign loans outstanding during any of the reporting
periods.
The following table shows the amounts of loans (excluding real estate
mortgage loans and installment loans) outstanding as of December 31, 1994 which,
based on remaining scheduled payments of principal, are due in the periods
indicated.
<TABLE>
<CAPTION>
MATURING
----------------------------------------
AFTER 1
WITHIN BUT WITHIN AFTER 5
1 YEAR 5 YEARS YEARS TOTAL
------- ---------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Commercial, financial, agricultural and other..... $15,467 $6,081 $ 427 $21,975
Real estate -- construction....................... 6,507 0 0 6,507
------- ------ ---- -------
Total................................... $21,974 $6,081 $ 427 $28,482
======= ====== ==== =======
</TABLE>
The sensitivity to changes in interest rates of loans due after one year
are set forth below:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
--------------------------
FIXED VARIABLE
RATE RATE TOTAL
------ -------- ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Due after one year but within five years..................... $5,767 $314 $6,081
Due after five years......................................... 427 0 427
------ ---- ------
$6,194 $314 $6,508
====== ==== ======
</TABLE>
The allowance for loan losses is discussed above under "Provision for Loan
Losses."
The Company maintains its allowance for loan losses at an amount deemed by
management to be adequate to provide for the possibility of losses in the loan
portfolio. The appropriate level of the allowance is based on several factors.
On a quarterly basis, the levels of risk inherent in the loan portfolio, loan
volume, expected growth, economic trends, historical charge-off percentages and
the perceived exposure of all classified loans are examined to determine the
adequacy of the allowance. At December 31, 1994, the allowance for loan losses
was 1.44% of total loans outstanding, as compared to 1.29% at December 31, 1993.
F-45
<PAGE> 111
The Company has allocated the allowance for loan losses according to the
amount deemed by management to be reasonably necessary at each period-end to
provide for the possibility of losses being incurred within the categories of
loans set forth in the table below:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Commercial, financial and agricultural............................... $ 218 $ 302
Real estate -- construction.......................................... 101 50
Real estate -- mortgage.............................................. 950 672
Real estate -- commercial............................................ 230 202
Installment.......................................................... 372 488
Unallocated.......................................................... 330 302
------ ------
Total...................................................... $2,201 $2,016
====== ======
</TABLE>
The following table sets forth the amounts of outstanding balances of
non-performing loans, other real estate, total net loans and the percentage of
non-performing loans for each of the three years ended December 31, 1994, 1993
and 1992. Non-performing loans consist of loans which are contractually past due
90 days or more as to interest or principal payments ("past due loans"),
renegotiated loans and loans accounted for on a non-accrual basis.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1993 1992
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Non-accrual loans............................................ $ 471 $ 276 $ 147
Past due loans of 90 days or more............................ 7 225 0
Renegotiated loans........................................... 0 0 0
-------- -------- -------
Total non-performing loans......................... 478 501 147
Other real estate............................................ 92 379 255
======== ======== =======
Total non-performing loans and other real estate... $ 570 $ 880 $ 402
======== ======== =======
Loans, net of unearned interest and loan fees................ $152,824 $156,755 $93,211
======== ======== =======
Non-performing loans to net loans............................ 0.31% 0.32% 0.16%
Non-performing loans and other real estate to total assets... 0.17% 0.28% 0.18%
</TABLE>
The designation "non-accrual loans" means those loans which management has
identified as collection problems, but which as yet have not been identified as
losses. Commercial and real estate loans are placed on a non-accrual basis when
payment of interest and/or principal has remained delinquent for a period of
over 90 days, unless the loan is both well secured and in the process of
collection, or management's evaluation indicates probable default prior to the
90-day delinquency. The decision to charge off a loan is based upon the
borrower's continued failure to pay principal or interest when due, or
circumstances indicating the payments will not or cannot be made, along with an
evaluation of any collateral securing the loan. Consumer loans generally are
charged off when contractually delinquent 120 days or more, or when five
payments have been missed and there is no recent record of regular payment. The
gross interest income that would have been recorded if the above loans had been
current in accordance with their original terms was approximately $39,266 in
1994, $42,973 in 1993, and $17,023 in 1992. The amount of interest income
recorded for such loans was approximately $25,780 in 1994, $25,974 in 1993, and
$13,065 in 1992.
As part of its on-going credit management, the Company monitors loans that
are currently performing but which require special attention and which
management is uncertain as to the ability of the borrowers to comply with the
present loan repayment terms and which may become non-performing in the future.
At December 31, 1994, the Bank had approximately $5,653,000 of such loans
compared to approximately $4,476,000 at December 31, 1993. Such loans are
subject to continuing management attention and are
F-46
<PAGE> 112
considered by management in determining the level of the allowance for loan
losses. The components of these loans by type are:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------ ------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
Commercial, financial and agricultural............................... $ 205 $ 57
Real estate -- construction.......................................... 309 323
Real estate -- mortgage.............................................. 3,830 3,333
Real estate -- commercial............................................ 485 230
Installment.......................................................... 824 533
------ ------
Total...................................................... $5,653 $4,476
====== ======
</TABLE>
Securities Available for Sale
The following sets forth the composition of securities available for sale
which are carried at estimated fair value:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 3,723,921 $ 0 $ 161,905 $ 3,562,016
Obligations of State and political
subdivisions......................... 0 0 0 0
Mortgage-backed securities............. 36,780,429 0 2,590,770 34,189,659
----------- -------- ---------- -----------
Total debt securities
available for sale......... 40,504,350 0 2,752,675 37,751,675
Federal Home Loan Bank stock (15,444
shares).............................. 1,544,400 0 0 1,544,400
----------- -------- ---------- -----------
Total securities available
for sale................... $42,048,750 $ 0 $2,752,675 $39,296,075
=========== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $12,844,709 $ 83,531 $ 47,351 $12,880,889
Obligations of State and political
subdivisions......................... 238,584 4,239 0 242,823
Mortgage-backed securities............. 64,991,788 664,500 70,342 65,585,946
----------- -------- ---------- -----------
Total securities available
for sale................... 78,075,081 752,270 117,693 78,709,658
Federal Home Loan Bank stock (13,159
shares).............................. 1,315,900 0 0 1,315,900
----------- -------- ---------- -----------
Total securities available
for sale................... $79,390,981 $ 752,270 $ 117,693 $80,025,558
=========== ======== ========== ===========
</TABLE>
The Bank joined the Federal Home Loan Bank ("FHLB") in 1991. As a member of
this system, the Bank is required to maintain an investment in capital stock of
the Federal Home Loan Bank of Cincinnati in an amount equal to the greater of 1%
of the total of residential mortgage loans and mortgage-backed securities, or
0.3% of total assets of the Bank. The Bank's balance of FHLB capital stock at
December 31, 1994 and 1993 was $1,392,700 and $1,315,900, respectively; no
additional stock is required to be purchased in 1994. Citizens' balance of FHLB
capital stock at December 31, 1994 was $151,700. Citizens' FHLB stock
requirements have not yet been met and will require additional purchases of
approximately $170,000 during
F-47
<PAGE> 113
1995. No ready market exists for the stock, and it has no quoted market value,
but may be redeemed for face value from the FHLB if the Bank withdraws its
membership.
The amortized cost and estimated market value of securities available for
sale at December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................................. $ 0 $ 0
Due after one year through five years............................... 3,723,921 3,562,016
Due after five years through ten years.............................. 0 0
Due after ten years................................................. 0 0
Mortgage-backed securities.......................................... 36,780,429 34,189,659
----------- -----------
Total investment debt securities.......................... $40,504,350 $37,751,675
=========== ===========
</TABLE>
Securities sold during 1994 that had been in the available for sale
portfolio resulted in net proceeds of $12,575,053. Securities sold during 1994
that had been in the available for sale portfolio resulted in gains of $238,179
and losses of $38,647. Securities sold during 1993 that had been in the
available for sale portfolio resulted in net proceeds of $31,968,046, gross
gains of $24,321 and gross losses of $170,096. Securities sold during 1992 that
had been in the available for sale portfolio resulted in net proceeds of
$9,030,938 and a net gain of $59,166.
As of December 31, 1994, investments available for sale had a carrying
value in excess of estimated fair value of $2,752,675, which reduced
shareholders' equity by $1,706,658 after giving effect to deferred taxes of
$1,046,017.
The weighted average yield on the securities available for sale at December
31, 1994 was 5.72%. The following table sets forth the securities available for
sale held by the Company at December 31, 1994 and the weighted average yield of
such securities by repricing:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 5 YEARS
BUT WITHIN 5 BUT WITHIN 10
WITHIN 1 YEAR YEARS YEARS AFTER 10 YEARS TOTAL
--------------- -------------- -------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
U.S. Treasury and Federal
agencies................. $34,190 5.69% $3,562 6.06% $0 N/A $0 N/A $37,752 5.72%
Obligations of states and
political subdivisions
(1)...................... 0 N/A 0 N/A 0 N/A 0 N/A 0 N/A
Other...................... 0 N/A 0 N/A 0 N/A 0 N/A 0 N/A
-- --
------- ----- ------- ----- --- --- ------- -----
$34,190 5.69% $3,562 6.06% $0 N/A $0 N/A $37,752 5.72%
======= ===== ======= ===== == === == === ======= =====
</TABLE>
- ---------------
(1) Rates for tax-exempt states and political subdivisions are tax-equivalent
assuming a 34% tax rate.
As of October 1, 1994 management transferred securities that were available
for sale, having book values totaling approximately $40,872,000, to the held to
maturity portfolio. These securities were required to be transferred at their
fair market values, which at October 1, 1994, totaled approximately $40,148,000.
These securities' book values exceeded their market values at that time by
approximately $724,000 before consideration for income tax effect, and as a
result of this transfer, the net unrealized loss remains as a reduction of
shareholders' equity as of December 31, 1994, amounting to approximately
$442,000 after recording the income tax effect of the net unrealized loss. This
net unrealized loss is amortized over the lives of the transferred securities.
All securities that were transferred to the held to maturity category were
floating rate securities that were U.S. Government Agency securities and
Collateralized Mortgage Obligations (CMO's) that were indexed to
F-48
<PAGE> 114
the 10-year Constant Maturity Treasury (10-year CMT) and had a final maturity
date of 15 years or less. The lifetime interest caps (the maximum rate that
could be earned) on these securities averaged approximately 10%. This type of
floating rate instrument was fairly new to the security market as they had been
issued with any volume only in the last two to three years. This type of
security had not previously been monitored during a steep increasing interest
rate environment until 1994. As a result of observing the characteristics of
these securities and how they reacted to the increasing rate environment,
management was able to conclude that with a small shift within the Company's
balance sheet, the Company would have adequate liquidity to not require the
holding of these securities as available for sale for liquidity purposes.
Observation of the characteristics of these securities during an increasing
interest rate environment reflected that the lifetime interest caps on these
securities, coupled with the securities' other characteristics, would allow the
Company to hold these securities to maturity. At October 1, 1994, these
securities were prepaying at their slowest possible speed, and therefore, in the
future it will be impossible for these securities' average lives to lengthen
materially. An increase in prepayment speed will cause these securities to
prepay in an extremely shorter period of time. The characteristics of these
securities that allow the Company to hold them until maturity coupled with the
sufficient liquidity in the available for sale security portfolio without this
block of 10-year CMT securities, allowed management to transfer all CMO
securities tied to the 10-year CMT in the portfolio to the held to maturity
portfolio.
Securities Held to Maturity
The amortized cost and estimated market values of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ -------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $ 35,105,784 $ 241 $1,744,007 $33,362,018
Obligations of states and political
subdivisions........................ 3,618,834 874 143,337 3,476,371
Mortgage-backed securities............ 63,739,457 1,512 3,339,385 60,401,584
------------ -------- ---------- -----------
Total investment
securities................ $102,464,075 $2,627 $5,226,729 $97,239,973
============ ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $25,304,896 $137,478 $102,949 $25,339,425
Obligations of states and political
subdivisions........................... 4,821,675 34,871 33,556 4,822,990
Mortgage-backed securities............... 12,847,197 71,237 87,996 12,830,438
------------ -------- ---------- -----------
Total investment securities.... $42,973,768 $243,586 $224,501 $42,992,853
============ ======== ========== ===========
</TABLE>
The amortized cost and estimated market value of securities held to
maturity at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
F-49
<PAGE> 115
The calculation of the weighted average interest yields for each maturity
category is based on yield, weighted by the respective costs of securities.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ -----------
<S> <C> <C>
Due in one year or less............................................ $ 4,302,496 $ 4,273,412
Due after one year through five years.............................. 27,722,735 26,305,797
Due after five years through ten years............................. 6,465,998 6,047,730
Due after ten years................................................ 233,389 211,450
------------ -----------
Mortgage-backed securities......................................... 63,739,457 60,401,584
------------ -----------
Total investment debt securities......................... $102,464,075 $97,239,973
============ ===========
</TABLE>
Proceeds from maturities and calls of investment securities during 1994,
1993 and 1992 were $15,097,567, $5,048,433 and $40,889,133, respectively.
Proceeds from sales of investment securities during 1994, 1993 and 1992 were $0,
$8,980,444 and $26,171,219, respectively. Gross losses from maturities and calls
of securities during 1994, 1993 and 1992 were $0, $7,056 and $32,353,
respectively. Gross gains on maturities and calls of investment securities for
1994, 1993 and 1992 were $0, $51,543 and $449,605, respectively.
Securities carried at $51,448,595 and $60,521,006 at December 31, 1994 and
1993, respectively, were required to be pledged to secure deposits with account
balances of $46,771,450 and $55,019,097 at December 31, 1994 and 1993,
respectively, and for other purposes as required or permitted by law.
The weighted average yield on the investment securities held to maturity at
December 31, 1994 was 6.35%. The following table sets forth the investment
securities held by the Company at December 31, 1994 and the weighted average
yield of such securities by repricing:
<TABLE>
<CAPTION>
AFTER 1 YEAR AFTER 5 YEARS AFTER
BUT WITHIN BUT WITHIN 10
WITHIN 1 YEAR 5 YEARS 10 YEARS YEARS TOTAL
--------------- --------------- --------------- -------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- ------ ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Federal
agencies......................... $42,501 6.91 % $33,638 5.55 % $20,400 6.80 % $2,307 6.72 % $ 98,846 6.42 %
Obligations of states and political
subdivisions (1)................. 782 3.30 % 1,402 4.58 % 1,201 4.53 % 233 6.24 % 3,618 4.39 %
Other.............................. 0 N/A 0 N/A 0 N/A 0 N/A 0 N/A
------- ---- ------- ---- ------- ---- ------ ---- -------- ----
$43,283 6.85 % $35,040 5.52 % $21,601 6.67 % $2,540 6.67 % $102,464 6.35 %
======= ==== ======= ==== ======= ==== ====== ==== ======== ====
</TABLE>
- ---------------
(1) Rates for tax-exempt states and political subdivisions are tax-equivalent
assuming a 34% tax rate.
The calculation of the weighted average interest yields for each maturity
category is based on yield, weighted by the respective costs of securities.
Deposits
The Company's primary source of funds is deposits from the local markets of
the subsidiary banks. The Company has targeted the local consumers,
professionals and small businesses as its clientele. Deposit instruments in the
form of demand deposits (both non-interest bearing and interest bearing),
savings accounts (including money market savings) and certificates of deposit
are offered customers to establish a core deposit base. Management believes
Rutherford County is a vibrant economic market and offers an environment for
continued growth for the Company. Increasing competition could make it difficult
to increase the Company's market share. The Company has competed for several
years with several larger bank holding companies (both state and regional) and
has managed to maintain its market share. The Davidson County and Maury County
markets offer the opportunity to attract more deposits for the Bank. The
addition of Citizens Bank brings in two new markets for the Company. Smithville
is located in DeKalb County, is more rural and has not experienced the rapid
growth of the areas surrounding Nashville; however, the Ardmore branch in Giles
County adds an ideal market. Ardmore is located on the Tennessee-Alabama State
line and is approximately
F-50
<PAGE> 116
twenty miles from Huntsville, Alabama. Huntsville has experienced prosperous
growth during the past decade through its high-tech industry. Many people who
live in the Ardmore area are employed in Huntsville.
During 1994, the Company's deposits grew by approximately $20,792,000, or
8%. Of this increase, certificates of deposit increased by approximately
$18,267,000 while noninterest-bearing demand deposits decreased by approximately
$2,122,000. In addition, savings and other time deposits composed approximately
$3,962,000 of the increase. The markets served by the Bank and Citizens
experienced a considerable amount of increased competition specifically in
relation to certificates of deposit. Many banks were trying to lure deposits
away by offering special rate and term certificates. Both the Bank and Citizens
experienced growth in non-public deposits, increasing those deposits by
approximately $29,040,000. Public funds of the Bank and Citizens combined
decreased by approximately $8,248,000.
The average daily amounts of deposits are summarized for the periods
indicated in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1993 1992
------------------ ------------------ ------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits..................... $ 29,699 N/A $ 17,040 N/A $ 12,539 N/A
Interest-bearing demand deposits.... 55,031 2.38% 32,358 2.28% 21,001 3.52%
Savings deposits.................... 46,160 3.52 24,713 2.63 18,710 2.31
Time deposits (excluding
certificates of deposit of
$100,000 or more)................. 97,537 3.69 61,682 3.79 66,417 5.08
Time certificates of deposit of
$100,000 or more.................. 59,641 4.85% 74,486 3.81% 52,786 4.48%
-------- ----- -------- ----- -------- -----
Total deposits............ $288,068 3.21% $210,279 3.12% $171,453 4.03%
======== ===== ======== ===== ======== =====
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at December 31, 1994 are summarized as follows (in thousands of dollars):
<TABLE>
<S> <C>
3 months or less........................................................... $30,028
Over 3 months through 6 months............................................. 5,291
Over 6 months through 12 months............................................ 3,267
Over 12 months............................................................. 7,915
-------
Total............................................................ $46,501
=======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Regulatory agencies measure capital adequacy with a framework that makes
capital requirements sensitive to the risk profiles of individual banking
companies. The guidelines define capital as either Tier 1 (primarily common
shareholders' equity, non-cumulative preferred stock and a limited amount of
cumulative preferred stock) or Tier 2 (certain debt instruments and a portion of
the allowance for loan losses). The Company and its subsidiary banks are subject
to a minimum Tier 1 capital to risk-weighted assets ratio of 4% and a total
capital (Tier 1 plus Tier 2) to risk-weighted assets ratio of 8%. The Federal
Reserve Board ("Board") has also established an additional capital adequacy
guideline referred to as the Tier 1 leverage ratio that measures the ratio of
Tier 1 capital to average quarterly assets. The most highly rated bank holding
companies will be required to maintain a minimum Tier 1 leverage ratio of 3%.
The required ratio will be based on the Board's assessment of the individual
bank holding company's asset quality, earnings performance, interest-rate risk
and liquidity. Bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets.
F-51
<PAGE> 117
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires the establishment of a capital-based supervisory system of prompt
corrective action for all depository institutions. The Board's implementation of
FDICIA defines "well capitalized" institutions as those whose capital ratios
equal or exceed the following minimum ratios: Tier 1 Capital Ratio of 6%, Total
Risk-Based Ratios of 10%, and a Tier 1 Leverage Ratio of 5%. At December 31,
1994, the Company's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios were 10.74%, 12.77% and 5.59%, respectively. At December 31, 1993, these
ratios for the Company were 9.37%, 11.23% and 5.40%.
The Bank's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios at December 31, 1994, were 13.80%, 14.94% and 7.17% respectively,
compared to December 31, 1993, ratios of 11.21%, 12.25% and 6.46%, respectively.
For Citizens, the Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios at December 31, 1994, were 14.72%, 16.23% and 7.64% respectively,
compared to December 31, 1993, ratios of 12.17%, 13.45% and 6.95%, respectively.
Since the Company adopted of Statement of Financial Accounting Standard
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," effective December 31, 1993, the Company's equity was negatively
impacted by increasing interest rates during 1994. The Company's equity has
decreased by approximately $2,541,000 due to the decrease in market values
related to securities in the available for sale portfolio. This trend is not
expected to increase at this time as interest rates have seemingly leveled off.
Management expects the current rate environment to continue at this leveled
plane or expects rates to decline during 1995, thereby increasing market values
of securities in the available for sale portfolio and increasing the Company's
equity.
The Company's capital mix is expected to remain fairly constant over the
next few years although the Company's Series A Preferred Stock and capital
debentures will convert to Common Stock in the future. The Company's Series A
Preferred Stock and convertible capital debentures will automatically convert to
Common Stock on April 1, 1999. Until that time, owners of these instruments may
elect to convert their holdings to Common Stock as some have already chosen to
do, but the quantity converted is not expected to materially impact the
Company's capital mix until closer to these instruments' conversion dates.
During 1994, the Company's capital resource costs increased moderately due
to increases in the prime lending rate as established by the Federal Reserve
Board. During 1994, the prime lending rate increased by 2.50%, thereby
increasing the rates the Company paid on its convertible debentures and two
series of its preferred stocks. This did not significantly impact the Company's
ability to fund its costs related to capital in 1994, nor is it expected to
significantly impact the Company's ability to fund such costs of capital in the
future as the prime lending rate is expected to either remain stable or decrease
during 1995.
Liquidity
Liquidity is the ability to meet cash flow requirements for deposit
withdrawals and maturities, debt service, demand for new loans and satisfaction
of loan commitments and any attractive investment opportunities that may arise.
The subsidiary banks' primary source of liquidity is a stable core deposit base.
In addition, short-term investments as well as loan payments and maturities and
investment security maturities, interest payments and principal repayments
provide a secondary source. The Bank's core deposit base has continued to grow
during the past eight years. Net cash provided (used) by financing activities of
the Company was $24,655,728, ($1,182,768) and $29,504,375 for the years ended
December 31, 1994, 1993 and 1992, respectively. The subsidiary banks currently
have unsecured lines to purchase federal funds with unrelated commercial banks
totaling $8,900,000.
The liquidity of the Company depends primarily on the dividends paid to it
as the sole shareholder of the subsidiary banks. At December 31, 1994, the
subsidiary banks could pay common stock dividends of approximately $2,679,000
without approval by bank regulatory authorities. (See Note L to Consolidated
Financial Statements.) The Company uses the payments from these Bank dividends
to fund the interest payments on its Capital Debentures, which are the Company's
principal expense on a non-consolidated basis and the dividend payments on its
Preferred Stocks and Common Stock. Other sources of liquidity for the Company
are the sale of equity securities and the borrowing of funds.
F-52
<PAGE> 118
An important component of net cash provided by operating activities is net
income. Over the three year period ended December 31, 1994, the Company has had
earnings in excess of dividends paid. Net cash provided by operating activities
was $3,626,383, $3,133,316 and $2,022,437 for the years ended December 31, 1994,
1993 and 1992, respectively. Dividends paid amounted to $673,341, $590,647 and
$314,392 for the years ended December 31, 1994, 1993 and 1992, respectively.
The Company uses cash in its investing activities. The majority of net cash
used in investing activities is the purchases of investment securities and the
funding of loans to customers. Net cash used in investing activities was
$24,298,268, $2,594,210 and $29,691,671 for the years ended December 31, 1994,
1993 and 1992, respectively.
Although the following liquidity needs have never arisen, other liquidity
needs could include possible litigation settlements, adverse litigation
judgments and funds needed in the event of acquisition of other financial
institutions. Although management cannot be certain of the exact future
liquidity needs, management believes that the Company, the Bank and Citizens
have adequate liquidity to meet their funding needs.
Short-term Borrowings
The Company has short-term borrowings in five major forms: 1) federal funds
purchased from various commercial correspondent banks, 2) borrowings from the
Federal Reserve Bank discount window, 3) securities sold under agreement to
repurchase, 4) borrowings from the Federal Home Loan Bank, and 5) lines of
credit from two unrelated banks.
In addition, the subsidiary banks have unsecured lines at four commercial
banks totaling $8,900,000 for the overnight purchase of federal funds (with the
largest line at any one bank being $3,500,000). The lines are for short-term use
(usually up to two weeks) and carry an interest rate below prime rate. No amount
was drawn on these lines at December 31, 1994. Normally, these lines are renewed
annually. The weighted average interest rate paid during 1994 was 4.88%, and the
average amount outstanding during 1994 was approximately $2,212,000. The maximum
outstanding at any month's end during the year was approximately $3,700,000 at
January 31, 1994.
The Bank also can borrow short-term funds from the Federal Reserve Bank of
Atlanta's discount window at the Federal Reserve's discount rate. The borrowings
are normally for a maximum of two weeks, and the amount borrowed has never
exceeded $2,000,000. There were no such funds borrowed at December 31, 1994. The
weighted average interest rate paid on these borrowings during 1994 was 5.49%,
and the average amount outstanding during 1994 was approximately $14,000. Any
borrowings during 1994 were used overnight only.
Securities sold under agreement to repurchase are securities pledged
against funds placed with the Bank. These funds are not insured by the FDIC;
however, the funds entitle the lender to take title to the security pledged in
the event the Bank cannot repay the funds. The funds are invested with the Bank
on a daily basis, and the rate normally paid is approximately 1% below the
federal funds rate. During 1994, the average amount of securities sold under
agreement to repurchase approximated $10,781,000, and the weighted average
interest paid was 3.61%. The balance at December 31, 1994, was approximately
$13,968,000, which is the maximum amount outstanding at any month's end during
the year. The weighted average interest rate at December 31, 1994, was 4.29%.
As a member of the Federal Home Loan Bank of Cincinnati ("FHLB"), the
subsidiary banks can borrow short-term funds or can initiate long-term
borrowings by securing the borrowings with residential mortgage loans. By
pledging the residential mortgage loans as collateral, the Bank may borrow funds
up to twenty years at either fixed or variable rates. The rate charged is
normally lower than the prime rate. The maximum that may be borrowed based upon
the financial data at December 31, 1994, is $27,414,000. The average borrowed
funds from the FHLB during 1994 was approximately $2,231,000, and the weighted
average interest rate paid was 4.49%. The maximum amount outstanding at any
month's end was approximately $6,050,000 at September 30, 1994.
F-53
<PAGE> 119
The Company has two lines of credit totaling $1,750,000 with two unrelated
commercial banks. One of the lines is for $1,250,000, and the other line is for
$500,000. The interest rate charged is a variable index related to the lender's
prime rate. A total of $750,000 was drawn on these lines at December 31, 1994.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to daily
average total assets, dividend payout ratio and equity to total assets are as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Return on Assets:
Percentage of net income to average total assets.......... 0.65% 0.64% 0.65%
Return on Equity:
Percentage of net income to average total shareholders'
equity (2)............................................. 12.50 9.84 9.55
Percentage of net income less dividends on preferred stock
to average common shareholders' equity (3)............. 15.52 11.38 10.76
Dividend Payout Ratio:
Dividends declared per common share to net income per
share (1).............................................. 15.63 22.99 20.22
Equity to Assets:
Percentage of average total shareholders' equity to
average total assets (2)............................... 5.22 6.46 6.78
Percentage of average common shareholders' equity to
average total assets (3)............................... 3.37 4.31 5.12
</TABLE>
- ---------------
(1) The Company paid dividends of $0.20 per share in 1994, 1993 and 1992.
(2) Average total shareholders' equity includes the Series A Convertible
Preferred Stock.
(3) Average common shareholders' equity excludes the Series A Cumulative,
Convertible Preferred Stock, Series C Non-cumulative Preferred Stock and
Series D Non-cumulative Preferred Stock.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." This statement addresses accounting by creditors for
impairment of certain loans. The statement requires that impaired loans be
measured based on the present value of the loan's expected future cash flows
discounted at the loan's effective interest rate. If the present value is less
than the recorded investment in the loan, an impairment will be recognized. The
statement is effective for financial statements for fiscal years beginning after
December 15, 1994. The statement is not expected to have a material adverse
impact on the consolidated financial statements.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 93-6 "Employers' Accounting for Employee
Stock Ownership Plans." This statement is effective for fiscal years beginning
after December 15, 1993. Prospective application of the guidance in the SOP is
required for shares acquired by ESOP's after December 31, 1992, but not yet
committed to be released as of the beginning of the year in which the SOP is
adopted. This statement changes the way employers report transactions with a
leveraged employee stock ownership plan ("ESOP"). It requires, among other
things, that: (1) for ESOP shares committed to be released in a period to
compensate employees directly, employers should recognize compensation cost
equal to the average fair value of the shares committed to be released, (2)
dividends on unallocated shares credited to participant accounts are recorded as
compensation expense for financial statement purposes, and (3) for
earnings-per-share computations, ESOP shares that have been committed to be
released should be considered outstanding. ESOP shares that have not been
committed to be released should not be considered outstanding. The Company's
ESOP shares acquired in 1993 will be subject to the provisions of the SOP. The
Statement allowed companies who had acquired ESOP shares prior to December 31,
1992, to use the accounting principles in effect prior to the issuance of SOP
93-6. As a result, the Company elected to apply the prior accounting standards
to unallocated shares acquired prior to
F-54
<PAGE> 120
December 31, 1992. Under prior accounting standards: (1) ESOP shares released in
a period are expensed at their historical cost to the ESOP, (2) dividends on
both allocated and unallocated shares are reported as dividends for financial
statement purposes and (3) both committed and uncommitted (unallocated) ESOP
shares are considered outstanding for earnings-per-share computations.
Compensation expense was increased by $16,644 as a result of using the fair
market value of the common stock to measure compensation cost versus the
historical cost to the ESOP, as previously used. A total of 58,370 shares that
had not been committed to be released at December 31, 1994, were excluded from
the earnings-per-share calculation.
In October 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
addresses the disclosure of derivative financial instruments including the face
amount, nature and terms. The statement is effective for fiscal years ending
after December 15, 1994. The Company has no derivative financial instruments,
therefore, the statement had no impact on the consolidated financial statements
other than to require fair value disclosures of all financial instruments to be
presented together in a single footnote.
EFFECTS OF INFLATION
In recent years the stabilization of the purchasing power of the consumer
has given the Company a stable environment in which to operate. During 1994, the
Federal Reserve Board, sensing that inflation was on the rise, raised its prime
rate from 6.00% to 8.50%. These increases caused the market value of the
investment securities of the Bank and Citizens to decline. These market value
declines had no recognizable affect on the securities that were classified as
held to maturity. These declines did cause a significant equity impact for the
securities that were classified as available for sale. As a result, the equity
of the Company declined by approximately $2,542,000 from unrealized losses from
securities available for sale. This trend is expected to continue into 1995, but
management expects interest rate increases to be less significant than the
increases of 1994. Other than the aforementioned impacts on the Company's equity
due to rising rates, the inflation rate is immaterial when reviewing the
Company's reported results of operations.
FOREIGN TRANSACTIONS
The Company, the Bank nor Citizens had any investment securities, loans or
deposits of any foreign governments, corporations or other entities.
F-55
<PAGE> 121
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994
The Company derives substantially all of its income from the Bank and
Citizens. The following discussion provides certain information concerning the
Company's consolidated financial condition and results of operations and should
be read in conjunction with the Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Net Interest Income
Net interest income represents the amount by which interest income exceeds
interest expense, principally interest paid to the Company's depositors on
interest-bearing accounts. The following table includes for the nine months
ended September 30, 1995 and 1994, interest income on earning assets and related
average yields, as well as interest expense on interest-bearing liabilities and
related average rates paid.
<TABLE>
<CAPTION>
THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1995 1994
---------------------------- ----------------------------
AVERAGE ACTUAL YIELD/ AVERAGE ACTUAL YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------ -------- -------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned interest(1)....... $163,324 $ 12,225 10.01% $158,385 $ 10,347 8.73%
Securities:
Taxable............................... 141,076 6,608 6.26 128,305 5,222 5.44
Tax-exempt(2)......................... 2,727 139 6.81 3,804 174 6.11
Fed funds sold and repos................... 6,913 279 5.40 6,046 268 5.93
Time deposits w/other institutions......... 600 26 5.79 700 32 6.19
-------- ------- ------ -------- ------- ------
Total interest-earning
assets(2)...................... 314,640 19,277 8.19% 297,240 16,043 7.22%
Cash and due from banks.................... 13,135 11,929
Premises and equipment, net................ 11,228 11,257
Other assets............................... 4,664 4,646
Allowance for loan losses.................. (2,186) (2,187)
-------- ------- ------ -------- ------- ------
Total assets..................... $341,481 $322,885
======== ======= ====== ======== ======= ======
</TABLE>
F-56
<PAGE> 122
<TABLE>
<CAPTION>
THE NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
AVERAGE ACTUAL YIELD/ AVERAGE ACTUAL YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------- ------ -------- ------- ------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Savings & interest-bearing deposits...... $ 96,390 $ 1,971 2.73% $101,541 $ 1,925 2.54%
Time deposits............................ 172,883 7,533 5.83 152,273 4,745 4.17
Fed funds and repos...................... 12,799 417 4.36 14,653 387 3.53
Other short-term borrowings.............. 667 43 8.62 0 0 0.00
Long-term debt:
Convertible debentures................... 1,352 134 13.25 1,357 104 10.25
Long-term capital lease.................. 1,615 84 6.95 1,733 89 6.87
Debt related to ESOP..................... 699 45 8.61 925 52 7.52
Other long-term debt..................... 3,041 210 9.23 3,505 182 6.94
-------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities.................... 289,446 10,437 4.82 275,987 7,484 3.63
Demand deposits............................ 31,862 28,355
Other liabilities.......................... 1,683 1,077
-------- ------- ------ -------- ------- ------
Total liabilities................ 322,991 305,419
Total capital.............................. 18,490 17,466
-------- ------- ------ -------- ------- ------
Total liabilities & capital................ $341,481 $322,885
======== ======= ====== ======== ======= ======
Net interest income........................ $ 8,840 $ 8,559
======== ======= ====== ======== ======= ======
Net interest margin(3)..................... 3.76% 3.85%
======== ======= ====== ======== ======= ======
Net interest spread(4)..................... 3.37% 3.59%
======== ======= ====== ======== ======= ======
</TABLE>
- ---------------
(1) For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding.
(2) Yields on tax-exempt securities are stated on a tax-equivalent basis,
assuming a tax rate of 34%. The adjustments made to convert to a
tax-equivalent basis are $47,000 and $59,000 for the first nine months of
1995 and 1994, respectively.
(3) The net interest margin is net interest income on a tax-equivalent basis as
a percentage of total average interest-earning assets.
(4) The net interest spread is the difference in the tax-equivalent rate earned
on total interest-earning assets and the rate paid on total interest-bearing
liabilities.
The net interest margin (defined as net interest income as a percentage of
average interest-earning assets) is a key measure in determining the Company's
income performance. The Company's net interest margin was 3.76% for the first
nine months of 1995 compared to 3.85% for the first nine months of 1994. Net
interest income increased by 3.3% during the first nine months of 1995, and the
average interest-earning assets increased by 5.9%.
F-57
<PAGE> 123
The following table shows changes in interest income and interest expense
resulting from changes in volume in various categories of interest-earning
assets and interest-bearing liabilities and changes in interest rates for these
categories. The change in interest due to both rate and volume has been
allocated to changes in average volume and average rates in proportion to the
relationship of absolute dollar amounts of change in each category.
RATE VOLUME ANALYSIS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
COMPARED TO SEPTEMBER 30, 1994
--------------------------------------------
INCREASE INCREASE NET
(DECREASE) (DECREASE) INCREASE
DUE TO VOLUME DUE TO RATE (DECREASE)
------------- ----------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Interest earned on:
Loans.............................................. $ 331 $ 1,547 $1,878
Investment securities
Taxable......................................... 551 835 1,386
Tax-exempt...................................... (59) 24 (35)
Fed funds sold and securities purchased with
agreements to resell............................ 29 (18) 11
Time deposits...................................... (4) (2) (6)
---- ------ ------
Total interest-earning assets.............. 848 2,386 3,234
---- ------ ------
Interest paid on:
Savings and interest-bearing demand deposits....... (84) 130 46
Time deposits...................................... 708 2,080 2,788
Federal funds purchased and securities sold under
agreement to repurchase......................... 49 (19) 30
Other short-term debt.............................. 43 0 43
Long-term debt:
Convertible debentures.......................... 0 30 30
Long-term capital lease......................... (6) 1 (5)
Debt related to ESOP............................ (17) 10 (7)
Other long-term debt............................ (19) 47 28
---- ------ ------
Total interest-bearing liabilities......... 674 2,279 2,953
---- ------ ------
Net interest earnings...................... $ 174 $ 107 $ 281
==== ====== ======
</TABLE>
An important aspect of achieving satisfactory levels of net interest income
is the management of the composition and maturities of rate-sensitive assets and
liabilities. For liquidity purposes, the Company normally maintains a
significant portion of its securities portfolio in investment securities having
a maturity of less than three years and/or a repricing in one year or less.
At September 30, 1995, the Company's asset/liability mix through five years
reflected a liability-sensitive balance sheet; rate-sensitive liabilities
exceeded rate-sensitive assets. If the balance sheet is liability sensitive
during a period of increasing interest rates, the Company's interest expense
could increase at a faster rate than its interest income if the mix of
rate-sensitive assets and rate-sensitive liabilities does not change during the
period. Likewise, in a period of decreasing interest rates, the Company's net
income could be positively affected if the balance sheet were liability
sensitive.
Over five years, the Company's asset/liability mix reflected an
asset-sensitive balance sheet; rate-sensitive assets exceeded rate-sensitive
liabilities. If the balance sheet is asset sensitive during a period of
increasing interest rates, the Company's interest income could increase at a
rate faster than its interest expense if the mix of rate-sensitive assets and
rate-sensitive liabilities does not change during the period. Likewise, in a
F-58
<PAGE> 124
period of decreasing interest rates, the Company's net income could be
negatively affected if the balance sheet were asset sensitive.
The following table sets forth the Company's interest rate sensitivity at
September 30, 1995 and describes, at various cumulative maturity periods, the
interest rate sensitivity gap (the difference between rate-sensitive assets and
rate-sensitive liabilities) for those assets and liabilities that management
considers rate sensitive:
<TABLE>
<CAPTION>
ASSETS AND LIABILITIES MATURING OR REPRICING WITHIN
-----------------------------------------------------------------------
1 YR.
0-90 91-180 181 DAYS TO 5 OVER
DAYS DAYS TO 1 YR. YRS. 5 YRS. TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans................. $ 49,350 $ 14,426 $ 22,347 $ 84,453 $ 2,077 $172,653
Securities............ 62,093 1,000 2,500 51,493 32,564 149,650
Temporary
investments......... 150 0 0 0 0 150
-------- -------- -------- -------- -------- --------
Total
interest-
earning
assets.... $111,593 $ 15,426 $ 24,847 $135,946 $ 34,641 $322,453
======== ======== ======== ======== ======== ========
LIABILITIES
Savings,
interest-bearing
demand and time
deposits............ $158,418 $ 40,953 $ 40,478 $ 30,658 $ 0 $270,507
Other borrowed
funds............... 17,931 0 0 0 0 17,931
Long-term debt........ 4,651 0 0 1,576 0 6,227
-------- -------- -------- -------- -------- --------
Total
interest-
bearing
liabilities... $181,000 $ 40,953 $ 40,478 $ 32,234 $ 0 $294,665
======== ======== ======== ======== ======== ========
Interest sensitivity
gap (negative)...... $(69,407) $(25,527) $(15,631) $103,712 $ 34,641 $ 27,788
======== ======== ======== ======== ======== ========
Cumulative interest
sensitivity gap
(negative).......... $(69,407) $(94,934) $(110,565) $ (6,853) $ 27,788 $ 27,788
======== ======== ======== ======== ======== ========
Percent of total
interest-earning
assets.............. (21.52)% (29.44)% (34.29)% (2.13)% 8.62% 8.62%
======== ======== ======== ======== ======== ========
</TABLE>
Provision for Loan Losses
The Company maintains its allowance for loan losses at an amount deemed by
management to be adequate to provide for the possibility of losses in the loan
portfolio. Consistent with that statement, the provision for loan losses
decreased during the first nine months of 1995 by approximately $183,000, or
43.16%, from the amount expensed in the first nine months of 1994. Net loan
charge-offs (charge-offs less recoveries) as a percent of average loans
increased to 0.21% during the first nine months of 1995 compared to 0.16% during
the first nine months of 1994.
F-59
<PAGE> 125
The following table summarizes loan balances at the end of each nine month
period and daily averages; changes in the allowance for loan losses arising from
loans charged off and recoveries of loans previously charged off, by loan
category; and additions to the allowance which have been charged to the expense:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1994
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Amount of loans outstanding at end of period, net of unearned
interest and fees........................................... $172,653 $159,794
Daily average amount of loans................................. 163,324 158,385
Balance of allowance for loan losses at beginning of period... 2,201 2,016
Loans charged off:
Commercial, financial and agricultural...................... 58 0
Real estate -- construction................................. 0 0
Real estate -- mortgage..................................... 90 29
Installment................................................. 384 366
-------- --------
Total loans charged off............................. 532 395
-------- --------
Recoveries of loans previously charged off:
Commercial, financial and agricultural...................... 18 9
Real estate -- construction................................. 21 0
Real estate -- mortgage..................................... 47 20
Installment................................................. 111 115
-------- --------
Total recoveries.................................... 197 144
-------- --------
Net loans charged off......................................... 335 251
Additions to allowance charged to expense..................... 241 424
-------- --------
Balance at end of period...................................... $ 2,107 $ 2,189
======== ========
Ratio of net charge-offs during period to average loans
outstanding................................................. 0.21% 0.16%
Ratio of allowance for loan losses at end of period to
outstanding loans at end of period (net of unearned interest
and fees)................................................... 1.22% 1.37%
======== ========
</TABLE>
Non-Interest Income
The following table sets forth the components of non-interest income:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
----------------- -----------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Service charges on deposit accounts................. $ 1,178 $ 1,196
Other service charges and fees...................... 95 113
Rental income....................................... 95 99
Net gain on sales or maturities of investment
securities........................................ 39 197
Other non-interest income........................... 968 727
------- -------
Total non-interest income................. $ 2,375 $ 2,332
============== ==============
</TABLE>
Non-interest income amounted to approximately 0.69% of average assets for
the nine months ending September 30, 1995 compared to approximately 0.78% for
the nine months ending September 30, 1994. The Company's service charge income
decreased by approximately $18,000, or 1.5% in comparison with the same period
during 1994. Other service charges and fees decreased approximately $18,000, or
15.9% during the first nine months of 1995 as compared to the first nine months
of 1994. This decrease can be attributed to the Bank's other commissions
received from miscellaneous activities, e.g., discount brokerage, being lower
than
F-60
<PAGE> 126
the previous year. Rental income decreased by approximately $4,000, or 4.0% due
mainly to some rental property sold by Citizens toward the end of 1994. The
Company also had a net gain on the sales of investment securities of
approximately $39,000 during the first nine months of 1995 compared to a net
gain of $197,000 during the first nine months of 1994. During the second quarter
of 1995, management decided to divest itself of some of the more undesirable
securities in the available for sale portfolio. The result of the divestiture
reduced the net gains the Company had previously recognized and impacted the
unrealized loss in available for sale securities that was negatively impacting
the Company's shareholders' equity. Other non-interest income increased by
approximately $241,000, or 33.1%, during the first nine months of 1995.
Approximately $113,000 of this increase can be attributed to: (1) $39,000 in ATM
interchange income increases; (2) $14,000 in merchant credit card discount
interchange increases; (3) $20,000 due to gains from the sales of other real
estate; and (4) $40,000 in increased gains from the sales of student loans. The
remainder of the increase is attributed to sales of level life insurance and
decreasing life insurance premiums written in conjunction with loans made by
Citizens and Tennessee Credit Corporation.
Non-Interest Expenses
The following table sets forth the components of non-interest expenses:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
----------------- -----------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Salaries and employee benefits.................. $ 4,596 $ 3,756
Occupancy expenses.............................. 979 958
Furniture and equipment expenses................ 919 924
FDIC insurance premiums......................... 317 451
Supplies expense................................ 326 267
Other non-interest expenses..................... 2,218 1,801
------ ------
Total non-interest expenses........... $ 9,355 $ 8,157
====== ======
</TABLE>
Non-interest expenses totaled approximately 2.74% of average assets for the
nine months ending September 30, 1995 compared to approximately 2.53% of average
assets for the nine months ending September 30, 1994. The Company's salaries and
benefits increased approximately $840,000, or 22.4%, during the first nine
months of 1995 as compared to the corresponding period in 1994. Of the increase,
$641,000 is attributed to the compensation expenses related to the ESOP debt
acceleration, and the remainder is attributed to the normal annual salary
increases awarded to employees of the company. Occupancy expenses increased
approximately $21,000, or 2.2% during the first nine months of 1995 as compared
to the first nine months of 1994 due to the addition of a new TCC office and the
expansion of one of the Bank's existing branch buildings during 1995. Furniture
and equipment expenses decreased approximately $5,000, or 0.5% during the nine
months period ended September 30, 1995 as compared to the corresponding period
in 1994. FDIC insurance premiums decreased during this period by approximately
$134,000, or 29.7%, and is attributed to refunds received by the Bank and
Citizens from the FDIC to reimburse the banks for their portion of the
overcapitalization of the Bank Insurance Fund (BIF). The FDIC assessment rate
was originally $0.23 per $100 in deposits at the Bank and Citizens. Due to the
recapitalization of the BIF, the rate was changed to $0.04 per $100 in deposits
for both banks based on the supervisory category to which the banks belong. This
rate was retroactively applied to the period June 1, 1995, through September 30,
1995, and will continue from this point forward. Supplies expense increased
approximately $59,000, or 22.1%, during the period. The significant increase in
the price of paper, more than doubling during the first half of 1995 is the main
contributing factor to this increase. Finally, other non-interest expenses
increased approximately $417,000, or 23.2%, due to the following: (1) $175,000
due to expenses incurred in connection with the Company's impending merger; (2)
$22,000 due to increased advertising efforts; (3) $23,000 due to miscellaneous
losses recovered in 1994 related to the Bank's subsidiary, Tennessee Credit
Corporation; (4) $39,000 due to increase in postage expense and (5) $12,000 due
to increase in insurance claims paid by
F-61
<PAGE> 127
the Bank's subsidiary, First City Life Insurance Company. The remainder is
attributable to the growth of the Bank and Citizens.
Income Taxes
The percentage of income tax expense to net income increased to
approximately 41.9% during the first nine months of 1995 from approximately
33.0% during the first nine months of 1994. The increase is attributed to the
fact that only part of the ESOP-related compensation costs being tax deductible
and the fact that none of the merger-related expenses incurred were tax
deductible.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders' equity and to daily
average total assets, dividend payout ratio and equity to total assets are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTERS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Return on Assets:
Percentage of net income to average
total assets.................... 0.36% 0.62% 0.38% 0.62%
Return on Equity:
Percentage of net income to average
total shareholders' equity
(1)............................. 6.58 11.48 7.07 11.50
Percentage of net income less
dividends on preferred stock to
average common shareholders'
equity (2)...................... 6.45 14.23 5.92 13.63
Dividend Payout Ratio:
Dividends declared per common share
to net income per share (3)..... 34.09 16.85 33.33 16.67
Equity to Assets:
Percent of average total
shareholders' equity to average
total assets (1)................ 5.41 5.42 5.33 5.41
Percent of average common
shareholders' equity to average
total assets (2)................ 3.48 3.59 3.59 3.57
</TABLE>
- ---------------
(1) Average total shareholders' equity includes the Series A Convertible
Preferred Stock, Series C Non-Cumulative Preferred Stock and Series D
Non-Cumulative Preferred Stock.
(2) Average common shareholders' equity excludes the Series A Convertible
Preferred Stock, Series C Non-Cumulative Preferred Stock and Series D
Non-Cumulative Preferred Stock.
(3) The company paid a dividend of $0.05 per share in January, April and July of
1995 and 1994.
FINANCIAL CONDITION
Loans
The Company's loan portfolio increased during the first nine months of 1995
by approximately $19,829,000. This increase is attributed to the growth of
Tennessee Credit coupled with an increase in real estate mortgage loans during
the first nine months of 1995. The increase was offset by the Bank's selling of
approximately $16,000,000 in student loans during the first three quarters of
1995. The Company seeks to minimize its long-term exposure by making primarily
adjustable rate and/or balloon payment mortgage loans, preferably with a
repricing or maturity of three to five years. When these loans mature, the
Company has the option of refinancing the remaining balloon balance, calling the
loan or requesting additional collateral. If a loan is refinanced, it undergoes
the same underwriting policies in use for new loans. Installment loans are
F-62
<PAGE> 128
usually at a maturity not to exceed three years. These policies allow the
Company to closely monitor its loan portfolio and reduce credit risk and
interest rate risk. Approximately 56.7% of the portfolio consists of real estate
mortgage loans while installment loans comprise approximately 26.4% of the
portfolio. Approximately 70.8% of the loan portfolio is either priced at
variable rates or matures within one year of September 30, 1995, as compared to
approximately 71.0% at December 31, 1994.
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1995 1994 1995 1994
------------- ------------ ------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Commercial, financial, agricultural
and other........................... 16.84% 14.19% $ 29,531 $ 21,975
Real estate -- construction........... 4.19 4.20 7,357 6,507
Real estate -- mortgage............... 52.54 52.95 92,136 81,975
Installment........................... 26.43 28.66 46,353 44,377
------ ------ -------- --------
Total (1)................... 100.00% 100.00% $ 175,377 $154,834
====== ====== ======== ========
</TABLE>
- ---------------
(1) Includes $2,724 and $2,010 of unearned interest and fees for September 30,
1995,and December 31, 1994, respectively.
Management of the Company believes that the loan portfolio is adequately
diversified and does not believe that there are any concentrations of loans in
any specific industry or to related borrowers that presents undue risks. There
were no foreign loans outstanding during any of the reporting periods. Other
than as indicated in the above table, the Company does not have concentrations
of loans in any category exceeding 10% of total loans.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Non-accrual loans............................................ $ 434 $ 471
Past due loans of 90 days or more............................ 1 7
Renegotiated loans........................................... 0 0
-------- --------
Total non-performing loans......................... 435 478
Other real estate............................................ 75 92
-------- --------
Total non-performing loans and other real estate... $ 510 $ 570
======== ========
Loans, net of unearned interest and loan fees................ $ 172,653 $152,824
Non-performing loans to net loans............................ 0.25% 0.31%
Non-performing loans and other real estate to total assets... 0.15% 0.17%
</TABLE>
The designation "non-accrual loans" means those loans which management has
identified as collection problems, but which as yet have not been identified as
losses. Commercial and real estate loans are placed on a non-accrual basis when
payment of interest and/or principal have remained delinquent for a period of
over 90 days, unless the loan is both well secured and in the process of
collection, or management's evaluation indicates probable default prior to the
90-day delinquency. The decision to charge off a loan is based upon the
borrower's continued failure to pay principal or interest when due, or
circumstances indicating the payments will not or cannot be made, along with an
evaluation of any collateral securing the loan. Consumer loans generally are
charged-off when contractually delinquent 120 days or more, or when five
payments have been missed and there is no recent record of regular payment.
F-63
<PAGE> 129
Securities Available for Sale
The following sets forth the composition of securities available for sale
which are carried at estimated fair value:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies............ $15,700,673 $ 34,678 $ 5,800 $15,729,551
Obligations of state and political
subdivisions......................... 0 0 0 0
Mortgage-backed securities............. 30,209,872 57,475 650,992 29,616,355
----------- ------- -------- -----------
Total debt securities available for
sale................................. 45,910,545 92,153 656,792 45,345,906
Federal Home Loan Bank (10,477
shares).............................. 1,047,700 0 0 1,047,700
----------- ------- -------- -----------
Total securities available
for sale................... $46,958,245 $ 92,153 $ 656,792 $46,393,606
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies............ $ 3,723,921 $ 0 $ 161,905 $ 3,562,016
Obligations of state and political
subdivisions......................... 0 0 0 0
Mortgage-backed securities............. 36,780,429 0 2,590,770 34,189,659
----------- ------- -------- -----------
Total debt securities available for
sale................................. 40,504,350 0 2,752,675 37,751,675
Federal Home Loan Bank (15,444
shares).............................. 1,544,400 0 0 1,544,400
----------- ------- -------- -----------
Total securities available
for sale................... $42,048,750 $ 0 $2,752,675 $39,296,075
=========== ======= ======== ===========
</TABLE>
The Bank joined the Federal Home Loan Bank ("FHLB") in 1991, and Citizens
joined the FHLB during the second quarter of 1994. As members of this system,
the Bank and Citizens are required to maintain an investment in capital stock of
the Federal Home Loan Bank of Cincinnati in an amount equal to the greater of 1%
of the total of residential mortgage loans and mortgage-backed securities, or
0.3% of the total assets of each bank. The Bank's balance of FHLB capital stock
at September 30, 1995 and December 31, 1994 was $743,900 and $1,392,700,
respectively. Citizens' balance of FHLB capital stock at September 30, 1995 was
$303,800. No ready market exists for the stock, and it has no quoted market
value but may be redeemed for face value from the FHLB if the Bank withdraws its
membership.
The amortized cost and estimated market value of securities available for
sale at September 30, 1995 by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less..................................... $ 0 $ 0
Due after one year through five years....................... 15,700,673 15,729,551
Due after five years through ten years...................... 0 0
Due after ten years......................................... 0 0
Mortgage-backed securities.................................. 30,209,872 29,616,355
----------- -----------
Total............................................. $45,910,545 $45,345,906
=========== ===========
</TABLE>
Securities sold during the first nine months of 1995 that had been in the
available for sale portfolio resulted in net proceeds of $31,351,040 with gross
gains of $213,908 and gross losses of $175,290. Securities sold during the first
nine months of 1994 that had been in the available for sale portfolio resulted
in net proceeds of $3,782,525 with gross gains of $232,578 and gross losses of
$38,647. The average tax-equivalent
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<PAGE> 130
yield on the securities available for sale at September 30, 1995 was 6.54%
compared to 5.72% at December 31, 1994.
Investment Securities Held to Maturity
The amortized cost and estimated fair value of investment securities held
to maturity are as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies.......... $ 30,041,665 $ 112,777 $ 475,390 $ 29,679,052
Obligations of states and political
subdivisions....................... 2,660,046 8,957 26,583 2,642,420
Mortgage-backed securities........... 70,053,549 336,203 2,316,993 68,072,759
------------ ---------- ---------- ------------
Total investment
securities............... $102,755,260 $ 457,937 $2,818,966 $100,394,231
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies.......... $ 35,105,784 $ 241 $1,744,007 $ 33,362,018
Obligations of states and political
subdivisions....................... 3,618,834 874 143,337 3,476,371
Mortgage-backed securities........... 63,739,457 1,512 3,339,385 60,401,584
------------ ---------- ---------- ------------
Total investment securities
held to maturity......... $102,464,075 $ 2,627 $5,226,729 $ 97,239,973
=========== ======== ========= ===========
</TABLE>
The amortized cost and estimated market value of debt securities at
September 30, 1995 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less................................... $ 3,947,665 $ 4,118,582
Due after one year through five years..................... 25,740,695 25,213,982
Due after five years through ten years.................... 2,889,688 2,879,308
Due after ten years....................................... 123,663 109,600
Mortgage-backed securities................................ 70,053,549 68,072,759
------------ ------------
Total investment debt securities................ $102,755,260 $100,394,231
=========== ===========
</TABLE>
Securities carried at $45,875,319 and $60,521,006 at September 30, 1995 and
December 31, 1994, respectively, were required to be pledged to secure deposits
with account balances of $41,704,836 and $55,019,097 at September 30, 1995 and
December 31, 1994, respectively. The weighted average tax-equivalent yield on
the investment securities held to maturity at September 30, 1995 was 6.05%
compared to 6.40% at December 31, 1994.
F-65
<PAGE> 131
Deposits
The Company's primary source of funds is deposits in the local markets of
the subsidiary banks. The Company has targeted the local consumers,
professionals and small businesses as its clientele. Deposit instruments in the
form of demand deposits (both non-interest bearing and interest bearing),
savings accounts (including money market savings) and certificates of deposit
are offered customers to establish a core deposit base. Management believes
Rutherford County is a vibrant economic market and offers an environment for
continued growth for the Company. Increasing competition could make it difficult
to increase the Company's market share; however, the Company has for several
years competed with several larger bank holding companies (both state and
regional) and has managed to maintain its market share. The Davidson County and
Maury County markets offer the opportunity to attract more deposits for the
Bank. The addition of Citizens Bank brings in two new markets for the Company.
Smithville, located in DeKalb County, is more rural and has not experienced the
rapid growth of the areas surrounding Nashville; however, the Ardmore branch in
Giles County adds an ideal market. Ardmore is located on the Tennessee-Alabama
State line and is approximately twenty miles from Huntsville, Alabama.
Huntsville has experienced prosperous growth during the past decade through its
high-tech industry. Many people who live in the Ardmore area are employed in
Huntsville.
During the first nine months of 1995, deposits of the Company increased by
approximately $5,641,000, or 1.91%. The average daily amount of deposits is
summarized in the following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------- -------------------
AVERAGE INTEREST AVERAGE INTEREST
BALANCE RATE BALANCE RATE
-------- -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Demand deposits................................... $ 31,862 N/A $ 29,699 N/A
Interest-bearing demand deposits.................. 48,847 2.67% 55,031 3.52%
Savings and other time deposits................... 47,543 3.80 46,160 2.38
Time deposits (excluding certificates of deposit
$100,000 or more)............................... 122,609 5.72 97,537 3.69
Time certificates of deposit of $100,000 or
more............................................ 50,274 5.82 59,641 4.85
-------- -------- -------- --------
Total Deposits.......................... $301,135 4.33% $288,068 3.31%
======== ===== ======== =====
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding
at September 30, 1995 are summarized as follows (in thousands of dollars):
<TABLE>
<S> <C>
3 months or less......................................................... $23,278
Over 3 months through 6 months........................................... 10,355
Over 6 months through 12 months.......................................... 10,856
Over 12 months........................................................... 7,753
-------
Total.......................................................... $52,242
=======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
Regulatory agencies measure capital adequacy with a framework that makes
capital requirements sensitive to the risk profiles of individual banking
companies. The guidelines define capital as either Tier 1 (primarily common
shareholders' equity, non-cumulative preferred stock and a limited amount of
cumulative preferred stock) or Tier 2 (certain debt instruments and a portion of
the allowance for loan losses). The Company and its subsidiary banks are subject
to a minimum Tier 1 capital to risk-weighted assets of 4% and a total capital
(Tier 1 plus Tier 2) to risk-weighted assets ratio of 8%. The Federal Reserve
Board (the "Board") has also established an additional capital adequacy
guideline referred to as the Tier 1 leverage ratio that measures the ratio of
Tier 1 capital to average quarterly assets. The most highly rated bank holding
F-66
<PAGE> 132
companies will be required to maintain a minimum Tier 1 leverage ratio of 3%.
The required ratio will be based on the Board's assessment of the individual
bank holding company's asset quality, earnings performance, interest-rate risk
and liquidity. Bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets.
The Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires
the establishment of a capital-based supervisory system of prompt corrective
action for all depository institutions. The Board's implementation of FDICIA
defines "well capitalized" institutions as those whose capital ratios equal or
exceed the following minimum ratios: Tier 1 capital ratio of 6%, Total
risk-based ratio of 10%, and a Tier 1 leverage ratio of 5%. At September 30,
1995, the Company's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios were 9.98%, 11.85% and 5.45%, respectively. At December 31, 1994, the
Company's Tier 1 capital, total risk-based capital and Tier 1 leverage ratios
were 10.74%, 12.77% and 5.59%, respectively.
The Bank's Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios at September 30, 1995 were 12.23%, 13.28%, and 6.91%, respectively,
compared to ratios of 13.80%, 14.94% and 7.17%, respectively, at December 31,
1994. For Citizens, the Tier 1 capital, total risk-based capital and Tier 1
leverage ratios at September 30, 1995 were 14.40%, 15.65% and 7.29%,
respectively, compared to ratios of 14.72%, 16.23% and 7.64%, respectively, at
December 31, 1994.
Liquidity
Liquidity is the ability to meet cash flow requirements for deposit
withdrawals and maturities, debt service, demand for new loans and satisfaction
of loan commitments and any attractive investment opportunities that may arise.
The Bank's primary source of liquidity is a stable core deposit base. In
addition, short-term investments as well as loan payments and maturities and
investment security maturities, interest payments and principal repayments
provide a secondary source. The Bank's core deposit base has continued to grow
during the past seven years. Net cash provided by financing activities was
$12,407,794 and $19,418,890 for the nine months ending September 30, 1995 and
1994, respectively. The Bank currently has unsecured lines to purchase federal
funds with unrelated commercial banks totaling $7,900,000.
The liquidity of the Company depends primarily on the dividends paid to it
as the sole shareholder of the subsidiary banks. The Company uses the payments
from these Bank dividends to fund the interest payments on its Capital
Debentures, which are the Company's principal expense on a non-consolidated
basis and the dividend payments on its Preferred Stock, Series D Preferred Stock
and Common Stock. Other sources of liquidity for the Company are the sale of
equity securities and the borrowing of funds.
An important component of net cash provided by operating activities is net
income. Over the nine months ending September 30, 1995 and 1994, the Company has
had earnings in excess of dividends paid. Net cash provided by operating
activities was $2,463,869 and $986,379 for the nine months ended September 30,
1995 and 1994, respectively. Dividends paid amounted to $534,680 and $472,207
for the nine months ended September 30, 1995 and 1994, respectively.
The Company uses cash in its investing activities. The majority of net cash
used in investing activities is the purchases of investment securities and the
funding of loans to customers. Net cash used by investing activities was
$14,096,570 and $16,390,776 for the nine months ended September 30, 1995 and
1994, respectively.
Although the following liquidity needs have never arisen, other liquidity
needs could include possible litigation settlements, adverse litigation
judgments and funds needed in the event of acquisition of other financial
institutions. Although management cannot be certain of the exact future
liquidity needs, management believes that the Company and Bank have adequate
liquidity to meet their funding needs.
Short Term Borrowings
The Company has short-term borrowings in five major forms: 1) federal funds
purchased from various commercial correspondent banks; 2) borrowings from the
Federal Reserve Bank Discount Window;
F-67
<PAGE> 133
3) securities sold under agreement to repurchase; 4) borrowings from the Federal
Home Loan Bank; and 5) lines of credit from two unrelated banks.
In addition, the Bank has unsecured lines at three commercial banks of
$7,900,000 for the overnight purchase of federal funds (with the largest line at
any one bank being $3,000,000). The lines are for short-term use (usually up to
two weeks) and carry an interest rate below prime rate. The balance outstanding
at September 30, 1995, was $4,250,000, and the rate paid on that date was 6.20%.
Normally, these lines are renewed annually.
The Bank also can borrow short-term from the Federal Reserve Bank of
Atlanta's discount window at the Federal Reserve's discount rate. The borrowings
are normally for a maximum of two weeks and the amount borrowed has never
exceeded $2,000,000. There were no such funds borrowed at September 30, 1995.
Securities sold under agreement to repurchase are securities pledged
against funds placed with the Bank. These funds are not insured by the FDIC;
however, the funds entitle the owner to the security pledged in the event the
Bank cannot repay the funds. The funds are invested with the Bank on a daily
basis, and the rate normally paid is approximately 1% below the federal funds
rate. The balance outstanding at September 30, 1995 was approximately
$12,881,000, and the rate paid on that date was 4.55%.
As a member of the Federal Home Loan Bank of Cincinnati ("FHLB"), the Bank
can borrow short-term or can initiate long-term borrowings by securing the
borrowings with residential mortgage loans. By pledging residential mortgage
loans as collateral, the Bank may borrow funds up to twenty years at either
fixed or variable rates. The rate charged is normally lower than prime rate, and
the maximum that may be borrowed based on the most recent financial data was
$26,000,000. There were no such funds borrowed at September 30, 1995.
The Company has two lines of credit totaling $1,750,000 with two unrelated
commercial banks. One of these lines is for $1,250,000 and the other line is for
$500,000. The interest rate charged is a variable index related to the lender's
prime rate, which was 8.75% at September 30, 1995. There were no such funds
borrowed at September 30, 1995.
Effects of New Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement addresses accounting by
creditors for impairment of certain loans. The statement requires that an
impaired loan be measured based on the present value of the loan's expected
future cash flows discounted at the loan's effective interest rate. The
statements in effective for financial statements for fiscal years beginning
after December 15, 1994. The statement did not have a material impact on the
financial statements for the first nine months of 1995.
In October 1994, the FASB issued SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119
addresses the disclosure of derivative financial instruments including the face
amount, nature and terms. The statement is effective for fiscal years ending
after December 15, 1994. The Company has no derivative financial instruments,
therefore, the statement had no impact on the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages companies to recognize compensation
expense in the income statement based on the fair value of the underlying common
stock at the date the awards are granted. However, it will permit continued
accounting under APB Opinion 25, "Accounting for Stock Issued to Employees,"
accompanied by a disclosure of the pro forma effects on net income and earnings
per share had the new accounting rules been applied. The statement is effective
for fiscal years ending after December 15, 1995. The Company has not yet
determined the impact the statement will have on its financial statements.
F-68
<PAGE> 134
Effects of Inflation
In recent years the stabilization of the purchasing power of the consumer
has given the Company a stable environment in which to operate. During 1994, the
Federal Reserve Board, sensing that inflation was on the rise, raised its prime
rate from 6.00% to 8.50%. Since the beginning of 1995, the prime rate has
increased to 9.00%, but has declined since the end of the second quarter to
8.75%. The prime rate may decline even further during 1995. In response to the
expected stabilization and possible decline, the unrealized losses in securities
available for sale that caused the equity of the Company to decline during 1994
have begun to rebound. During the first nine months of 1995, the equity of the
Company increased by approximately $1,393,000 as a result of increasing market
values of securities in the available for sale portfolios of the Bank and
Citizens. Other than these impacts on the Company's equity due to interest
rates, the inflation rate is immaterial when reviewing the Company's reported
results of operation.
Foreign Transactions
The Company, the Bank, nor Citizens had any investment securities, loans or
deposits of any foreign governments, corporations or other entities.
PROPOSED BUSINESS COMBINATION
On July 5, 1995, First City Bancorp, Inc. entered into a definitive Merger
Agreement by which First American Corporation will acquire all of the
outstanding shares of First City Bancorp common stock. The merger will be
effected through a tax-free exchange of $26.50 in First American common stock
(subject to certain limitations set forth in the Agreement) for each share of
First City Bancorp common stock. The merger is subject to certain regulatory
approvals and to the approval of First City Bancorp's shareholders. Assuming
such approvals are obtained, the merger is expected to be completed during the
first quarter of 1996.
F-69
<PAGE> 135
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 5, 1995
BETWEEN
FIRST AMERICAN CORPORATION
AND
FIRST CITY BANCORP, INC.
<PAGE> 136
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE I
The Merger............................................................................... A-1
1.1 Effective Time of the Merger.................................................. A-1
1.2 Closing....................................................................... A-1
1.3 Effects of the Merger......................................................... A-1
ARTICLE II
Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange of
Certificates........................................................................... A-2
2.1 Effect on Capital Stock....................................................... A-2
2.2 Exchange of Certificates...................................................... A-3
ARTICLE III
Representations and Warranties........................................................... A-5
3.1 Representations and Warranties of FCBI........................................ A-5
3.2 Representations and Warranties of FAC......................................... A-12
ARTICLE IV
Covenants Relating to Conduct of Business................................................ A-16
4.1 Covenants of Both Parties..................................................... A-16
4.2 Covenants of FCBI............................................................. A-16
4.3 Covenants of FAC.............................................................. A-18
4.4 Adverse Changes in Condition.................................................. A-18
4.5 Reports....................................................................... A-18
4.6 Affirmative Covenants of FCBI................................................. A-18
4.7 No Solicitation............................................................... A-19
ARTICLE V
Additional Agreements.................................................................... A-19
5.1 Preparation of S-4 and the Proxy Statement.................................... A-19
5.2 Letter of FCBI's Accountants.................................................. A-20
5.3 Letter of FAC's Accountants................................................... A-20
5.4 Access to Information......................................................... A-20
5.5 FCBI Stockholders' Meeting.................................................... A-20
5.6 Legal Conditions to Merger.................................................... A-20
5.7 Affiliates.................................................................... A-21
5.8 NASDAQ Listing................................................................ A-21
5.9 Transition of Certain Employee Benefit Plans; Employment Matters.............. A-21
5.10 Shareholder Rights............................................................ A-22
5.11 Expenses...................................................................... S-22
5.12 Brokers or Finders............................................................ A-22
5.13 Indemnification: Directors' and Officers' Insurance........................... A-23
5.14 Coordination of Dividends..................................................... A-23
5.15 FCBI Accruals and Reserves.................................................... A-23
5.16 Bank Merger................................................................... A-24
5.17 Additional Agreements......................................................... A-24
5.18 Enforcement of Agreements..................................................... A-24
5.19 Cooperation Generally......................................................... A-24
ARTICLE VI
Conditions Precedent..................................................................... A-24
6.1 Conditions to Each Party's Obligation to Effect the Merger.................... A-24
</TABLE>
i
<PAGE> 137
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
6.2 Conditions to Obligations of FAC.............................................. A-25
6.3 Conditions to Obligations of FCBI............................................. A-28
ARTICLE VII
Termination and Amendment................................................................ A-30
7.1 Termination................................................................... A-30
7.2 Rights and Obligations upon Termination....................................... A-32
7.3 Fees and Expenses............................................................. A-32
7.4 Effect of Termination......................................................... A-32
ARTICLE VIII
General Provisions....................................................................... A-33
8.1 Nonsurvival of Representations, Warranties, and Agreements.................... A-33
8.2 Notices....................................................................... A-33
8.3 Interpretation................................................................ A-33
8.4 Counterparts.................................................................. A-33
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership........... A-33
8.6 Governing Law................................................................. A-34
8.7 Injunctive Relief; Limitations on Remedies.................................... A-34
8.8 Publicity..................................................................... A-34
8.9 Assignment.................................................................... A-34
8.10 Consents...................................................................... A-34
8.11 Disclosures................................................................... A-34
</TABLE>
ii
<PAGE> 138
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER dated as of July 5, 1995 (the
"Agreement"), between First American Corporation, a Tennessee corporation
("FAC") and First City Bancorp, Inc., a Tennessee corporation ("FCBI").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of FAC and FCBI have approved, and deem it
advisable and in the best interests of their respective stockholders to
consummate, the business combination transaction provided for herein in which
FCBI would merge with and into FAC (the "Merger"); and
WHEREAS, FAC and FCBI desire to make certain representations, warranties
and agreements in connection with the Merger and also to prescribe various
conditions to the Merger; and
WHEREAS, as soon as practicable after the execution and delivery of this
Agreement, it is contemplated that First American National Bank, a national bank
and a wholly owned subsidiary of FAC ("FANB") and First City Bank of
Murfreesboro ("FCB") and Citizens Bank of Smithville ("Citizens"), both
Tennessee state chartered banks and wholly owned subsidiaries of FCBI (the
"Subsidiary Banks") will enter into a bank plan of merger of the Subsidiary
Banks with and into FANB (the "Bank Plan of Merger"), and it is intended that
the Bank Plan of Merger will be consummated immediately after consummation of
the Merger; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
and the Bank Plan of Merger shall qualify as a reorganization under the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, articles of merger (the "Articles of Merger") including a plan of
merger consistent with this Agreement shall be duly prepared, executed and
acknowledged by the Surviving Corporation (as defined in Section 1.3(b)) and
thereafter delivered to the Secretary of State of the State of Tennessee, for
filing, as provided in the Tennessee Business Corporation Act (the "TBCA"), as
soon as practicable on or after the Closing Date (as defined in Section 1.2).
The Merger shall become effective upon the filing of the Articles of Merger with
the Secretary of State of the State of Tennessee or at such time thereafter as
is provided in the Articles of Merger (the "Effective Time"), but in either
event the parties intend that the Effective Time shall be 12:01 a.m. of the
first calendar day of the month immediately following the month in which the
Closing occurs.
1.2 Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. Central Time on the first day which is (a) the last business day of
February 1996, or succeeding calendar months thereafter and (b) at least two
business days after satisfaction (or waiver) of each of the conditions set forth
in Sections 6.1, 6.2 and 6.3 (other than the delivery of the officers'
certificate referred to in Sections 6.2(b) and 6.3(b) (provided that the other
closing conditions set forth in Article VI have been met or waived as provided
in Article VI at or prior to the Closing (the "Closing Date"), at the offices of
FAC, First American Center, Nashville, Tennessee 37237, unless another time,
date or place is agreed to in writing by the parties hereto.
1.3 Effects of the Merger. (a) At the Effective Time, (i) the separate
existence of FCBI shall cease and FCBI shall be merged with and into FAC, (ii)
the Subsidiary Banks would be merged directly with and into FANB, (iii)
Tennessee Credit Corporation ("TCC") and First City Life Insurance Company
("First City") would remain separate subsidiaries, either of FAC or FANB, (iv)
the charter of FAC as in effect immediately prior to the Effective Time shall be
the charter of the Surviving Corporation and (iii) the By-laws of FAC as in
effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation.
A-1
<PAGE> 139
(b) As used in this Agreement, "Constituent Corporation" shall mean FAC and
FCBI and "Surviving Corporation" shall mean FAC.
(c) At and after the Effective Time, the Merger will have the effects set
forth in Section 48-21-108 of the TBCA.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of FCBI
Common Stock or Series A Preferred:
(a) Cancellation of Stock. All shares of the no par value common
stock of FCBI (the "FCBI Common Stock") that are owned by FAC or any
Subsidiary of FAC (other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third
parties (any such shares, "trust account shares")) shall be canceled and
retired and shall cease to exist and no stock of FAC or other consideration
shall be delivered in exchange therefor. All shares of $5.00 par value
common stock of FAC (the "FAC Common Stock") that are owned by FCBI or any
Subsidiary (other than trust account shares) shall become authorized but
unissued stock of FAC. As used in this Agreement, the word "Subsidiary"
when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
or any other Subsidiary of such party is a general partner or of which at
least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect to such corporation or
other organization is directly or indirectly owned or controlled by such
party and/or by any one or more of its Subsidiaries.
(b) Conversion of FCBI Common Stock. Subject to Section 2.2(a), each
issued and outstanding share of FCBI Common Stock (other than shares to be
canceled in accordance with Section 2.1(a)) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be
converted into and exchangeable for the right to receive, if the Average
Closing Price is between $31.40 and $41.70, the number of fully paid and
nonassessable shares of FAC Common Stock rounded to the nearest thousandth
of a share, determined by dividing $26.50 by the Average Closing Price, as
defined below (the "Exchange Ratio") including the corresponding number of
rights associated with the FAC Common Stock pursuant to the FAC Rights
Agreement (as defined in Section 3.2(b)) provided, that except as set forth
below, the Exchange Ratio shall not exceed .8440 shares of FAC Common per
share of FCBI Common and shall not be less than .6355 shares of FAC Common
per share of FCBI Common. The Average Closing Price shall mean the average
closing sale price per share of FAC Common Stock on the NASDAQ national
market system (as reported in The Wall Street Journal, or if not reported
thereby, any other authoritative source) for the twenty (20) consecutive
trading days ending on and including the fifth day immediately preceding
closing (the "Measurement Period").
If the Average Closing Price is greater than $41.70, then FAC shall
have the right to notify FCBI on the first day following the end of the
Measurement Period of its election to terminate the Agreement effective
three days thereafter unless the Exchange Ratio is reduced to $26.50
divided by the Average Closing Price, and in that event this Agreement will
terminate at the close of business on such third day unless prior thereto
FCBI shall have agreed to such reduction in the Exchange Ratio. If the
Average Closing Price is less than $31.40, then FCBI shall have the right
to notify FAC on the first day following the end of the Measurement Period
of its election to terminate this Agreement effective three days thereafter
unless the Exchange Ratio is increased to $26.50 divided by the Average
Closing Price, and in that event this Agreement will terminate at the close
of business on such third day unless prior thereto FAC shall have agreed to
such increase in the Exchange Ratio. In the event that prior to the
Effective Time the outstanding shares of FAC Common Stock have been
increased, decreased, changed into or exchanged for a different number or
kind of shares through a reorganization, reclassification, stock
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dividend, stock split, reverse stock split or other similar change
applicable adjustments shall be made to the Average Closing Price and the
maximum and minimum number of shares to be exchanged.
All such shares of FCBI Common Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist,
and each certificate previously representing any such shares shall
thereafter represent the shares of FAC Common Stock into which FCBI Common
Stock has been converted and the right to cash payment for fractional
shares, if any. Certificates previously representing shares of FCBI Common
Stock shall be exchanged for certificates representing whole shares of FAC
Common Stock issued in consideration therefor and cash for fractional
shares, if any, upon the surrender of such certificates in accordance with
Section 2.2.
(b) Conversion of FCBI Series A Preferred Stock. Each issued and
outstanding share of Series A Preferred shall, by virtue of this Agreement
and without any action on the part of the holder thereof, be converted into
and exchangeable for the right to receive $6.00 cash per share of Series A
Preferred, plus any accumulated but unpaid dividends accrued to the
Effective Time, and from and after the Effective Time, all shares of FCBI
Series A Preferred shall no longer be outstanding and shall be canceled and
retired and shall cease to exist, and each certificate previously
representing any such shares shall thereafter represent the right to such
cash payment. Certificates previously representing shares of Series A
Preferred shall be exchanged for the foregoing cash payment upon the
surrender of such certificates in accordance with Section 2.2.
(c) Conversion of FCBI Stock Options. Each option to purchase shares
of FCBI Common Stock ("Options") issued and outstanding immediately prior
to the Effective Time shall be converted into and exchangeable for the
right to receive cash equal to (A) the market value of a share of FAC
Common Stock (computed in accordance with Section 2.2(e)), multiplied by
the number of shares of FAC Common Stock which would be received by the
Option holder if the Option were exercised immediately prior to the
Effective Time, minus (B) the exercise price of the Option, and from and
after the Effective Time, all such Options shall be canceled and shall no
longer be outstanding.
(d) No Dissenters Rights. Pursuant to Section 48-23-102 of the TBCA,
holders of FCBI 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.
(e) Shares of FAC Common Stock. Each share of FAC Common Stock
outstanding immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
2.2. Exchange of Certificates. (a) Exchange Agent. As of the Effective
Time, FAC shall deposit, or shall cause to be deposited, with an exchange agent
selected by FAC and reasonably acceptable to FCBI, (the "Exchange Agent"), for
the benefit of the holders of shares of FCBI Common Stock, for exchange in
accordance with this Article II, through the Exchange Agent, certificates
representing the shares of FAC Common Stock (such certificates for shares of FAC
Common Stock together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.1 in exchange for outstanding shares of FCBI Common Stock and cash for
fractional shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, but in no event later than five (5) business days thereafter,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of FCBI Common Stock (the "Certificates") whose shares were
converted into shares of FAC Common Stock pursuant to Section 2.1, (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as FAC and FCBI may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of FAC Common Stock and cash for fractional shares, if any.
Upon surrender of a Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of FAC Common Stock which such holder has the right
to receive in respect of the Certificate
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surrendered pursuant to the provisions of this Article II (after taking into
account all shares of FCBI Common Stock then held by such holder), and cash for
fractional shares, if any, and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of FCBI Common Stock which is
not registered in the transfer records of FCBI, a certificate representing the
proper number of shares of FAC Common Stock may be issued to a transferee if the
Certificate representing such FCBI Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive upon such surrender the certificate representing shares of FAC Common
Stock and cash in lieu of any fractional shares of FAC Common Stock as
contemplated by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
FAC Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of FAC
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.2(e) until the
holder of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of the certificates representing whole shares of FAC
Common Stock issued in exchange therefor, without interest, (i) at the time of
such surrender, the amount of any cash payable with respect to a fractional
share of FAC Common Stock to which such holder is entitled pursuant to Section
2.2(e) and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
FAC Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of FAC Common Stock.
(d) No Further Ownership Rights in FCBI Common Stock. All shares of FAC
Common Stock issued upon conversion of shares of FCBI Common Stock and all cash
tendered upon conversion of shares of Series A Preferred Stock in accordance
with the terms hereof (including any cash paid pursuant to Section 2.2) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of FCBI Common Stock or Series A Preferred Stock as the case may be,
subject, however, to the Surviving Corporation's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by FCBI on such shares of FCBI Common Stock
in accordance with the terms of this Agreement on or prior to the Effective Time
and which remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of FCBI Common Stock or Series A Preferred Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of FAC Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of FAC including
without limitation the right to receive dividends. Each holder of FCBI Common
Stock who would otherwise have been entitled to receive a fraction of a share of
FAC Common Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of FAC Common Stock multiplied by the
market value of one share of FAC Common Stock on the day immediately prior to
the Effective Time. The market value of one share of FAC Common Stock on the day
immediately prior to the Effective Time shall be the closing price of such stock
on the NASDAQ national market system (as reported in The Wall Street Journal, or
if not reported thereby, any other authoritative source) on the last trading day
preceding the Effective Time. As soon as practicable after the determination of
the amount of cash, if any, to be paid to holders of FCBI Common Stock with
respect to any fractional share interests, the Exchange Agent shall make
available such amounts to such holders of FCBI Common Stock subject to and in
accordance with the terms of Section 2.2(b).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the stockholders of FCBI for one year after the
Effective Time shall be delivered to FAC, upon demand, and
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any stockholders of FCBI who have not theretofore complied with this Article II
shall thereafter look only to FAC for payment of their claim for FAC Common
Stock, any cash in lieu of fractional shares of FAC Common Stock and any
dividends or distributions with respect to FAC Common Stock.
(g) No Liability. Neither FAC nor FCBI shall be liable to any holder of
shares of FCBI Common Stock, Series A Preferred Stock or FAC Common Stock, as
the case may be, for such shares (or dividends or distributions with respect
thereto) delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of FCBI. FCBI represents and warrants
to FAC as follows:
(a) Organization, Standing and Power. FCBI is a Tennessee corporation
and a bank holding company registered under the Bank Holding Company Act.
FCB and Citizens are Tennessee chartered state banks and are wholly owned
subsidiaries of FCBI, and TCC, a Tennessee industrial loan and thrift
company, and First City, an Arizona credit life and credit accident and
health insurance company, are wholly owned subsidiaries of FCB (the
"Subsidiaries"). Each of FCBI and its Subsidiaries is a state bank or
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is duly
qualified and in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties
makes such qualification necessary other than in such jurisdictions where
the failure to so qualify would not have a material adverse effect on FCBI.
As used in this Agreement, (i) any reference to any event, change or
effect being "material" with respect to any entity means an event, change
or effect which is material in relation to the financial condition,
properties, assets, liabilities, businesses, or results of operations of
such entity and its Subsidiaries taken as a whole, or upon the continued
operation or prospects of any entity or any Subsidiary thereof, and (ii)
the term "material adverse effect" means, with respect to FCBI or FAC, a
material adverse effect on the business, assets, results of operations or
financial condition of such party and its Subsidiaries taken as a whole or
on the ability of such party to perform its obligations hereunder, or upon
the continued operation or prospects of any entity or any Subsidiary
thereof.
(b) Capital Structure. (i) As of the date hereof, the authorized
capital stock of FCBI consists of 5,000,000 shares of FCBI Common Stock, no
par value ("FCBI Common Stock"), 1,000,000 shares of preferred stock, no
par value, consisting of Series A preferred stock ("Series A Preferred")
which, at the option of the holder thereof is convertible into 244,772
shares of FCBI Common Stock, 1,335,140 shares of Series B Junior Preferred
Stock ("Series B Junior Preferred") which are issuable pursuant to the
terms of the Series B preferred stock purchase rights ("Series B Rights"),
Series C preferred stock ("Series C Preferred") and Series D preferred
stock ("Series D Preferred"), which are redeemable by FCBI for $100.00 per
share plus an amount equal to all Undeclared Dividends, . At the close of
business on June 30, 1995, 1,335,140 shares of FCBI Common Stock, together
with a like number of Series B Rights, were outstanding, 333,781 shares of
Series A Preferred were outstanding (which were convertible at the option
of the holder thereof into 244,772 shares of FCBI Common Stock and
automatically convertible into shares of FCBI Common Stock on April 1,
1999), no shares of Series B Junior Preferred were issued or outstanding,
31,053 shares of Series C Preferred were outstanding, 8,930 shares of
Series D were outstanding, options for 40,000 shares of FCBI Common Stock
were outstanding, 40,000 shares of FCBI Common Stock were reserved for
issuance upon the exercise of outstanding stock options and for restricted
stock awards and no shares of FCBI Common Stock were held by FCBI in
treasury or by its Subsidiaries. All outstanding shares of FCBI capital
stock are validly issued, fully paid and nonassessable and not subject to
preemptive rights.
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(ii) Except for the floating rate convertible subordinated capital
debentures issued April 1, 1987 and due April 1, 1999, (the "Convertible
Debentures") which are currently convertible at the option of the holders
thereof into 165,143 shares of FCBI Common Stock (and which are also
payable at maturity for shares of FCBI Common Stock with a market value
equal to the principal amount thereof) and of which $1,351,172 were
outstanding as of June 30, 1995, 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 FCBI were
issued or outstanding. The maturity date of the Convertible Debentures may
be accelerated with the requisite vote or consent of the holders thereof.
(iii) As of the date of this Agreement, except for this Agreement, the
1994 First City Bancorp Stock Bonus and Savings Plan and except as
described in subparagraphs (i) and (ii) above, there are no options,
warrants, calls, rights, commitments or agreements of any character to
which FCBI or any Subsidiary of FCBI is a party or by which it is bound
obligating FCBI or any Subsidiary of FCBI to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock
or any Voting Debt of FCBI or of any Subsidiary of FCBI or obligating FCBI
or any Subsidiary of FCBI to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. After the Closing Date,
there will be no other option, warrant, call, right or agreement obligating
FCBI or any Subsidiary of FCBI to issue, deliver or sell, or cause to be
issued, delivered or sold, any shares of capital stock or any Voting Debt
of FCBI or any Subsidiary of FCBI, or obligating FCBI or any Subsidiary of
FCBI to grant, extend or enter into any such option, warrant, call, right
or agreement. As of the date hereof, except as set forth in this section,
there are no outstanding contractual obligations of FCBI or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of FCBI or any of its Subsidiaries.
(iv) Since June 30, 1995, except as permitted by this Agreement, FCBI
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 FCBI or any of its Subsidiaries, other than pursuant to and as required
by the terms of any FCBI Stock Options or FCBI Stock Plans; (B)
repurchased, redeemed or otherwise acquired, directly or indirectly through
one or more of its subsidiaries, any shares of capital stock of FCBI 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 FCBI
dividends or other distributions on the outstanding shares of capital stock
of FCBI, other than dividends required under the terms of outstanding
preferred stock and regular quarterly cash dividends on FCBI Common Stock
at a rate not in excess of the regular quarterly cash dividends most
recently declared by FCBI prior to the date hereof and as set forth in
Section 4.2(c) below.
(c) Authority. (i) FCBI has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the stockholders of FCBI, to consummate the transactions
contemplated hereby. The Subsidiary Banks have all requisite corporate
power and authority to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of FCBI, subject in the case of this Agreement
to such approval of this Agreement by the stockholders of FCBI. This
Agreement has been duly executed and delivered by FCBI and constitutes the
valid and binding obligation of FCBI, enforceable in accordance with its
terms.
(ii) Except as disclosed in the FCBI Disclosure Schedule, the
execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, (A) conflict with, or result
in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
the creation of a lien, pledge, security interest, charge or other
encumbrance on assets (any such conflict, violation, default, right of
termination, cancellation or acceleration, loss or creation, a "Violation")
pursuant to, any provision of the charter or By-laws of FCBI or any
Subsidiary of FCBI or (B) subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declarations and filings
referred to in paragraph (iii) below, result in any Violation of any loan
or credit agreement, note, mortgage, indenture, lease, Benefit Plan (as
defined in Section 3.1(j)) or other
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agreement, obligation, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to FCBI or any Subsidiary of FCBI or their respective properties
or assets which Violation would have a material adverse effect on FCBI and
its Subsidiaries taken as a whole.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency
or commission or other governmental authority or instrumentality (a
"Governmental Entity"), is required by or with respect to FCBI or any
Subsidiary of FCBI in connection with the execution and delivery of this
Agreement and the transactions contemplated hereby the failure to obtain
which would have a material adverse effect on FCBI or any Subsidiary
thereof, except for (A) the filing of applications with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the
BHC Act and the Federal Deposit Insurance Act ("FDIA") and with the U. S.
Comptroller of the Currency (the "OCC") and approval of same, (B) the
filing with the SEC of (1) a proxy statement in definitive form relating to
the meeting of FCBI's stockholders to be held in connection with the Merger
(the "Proxy Statement") and (2) such reports under Sections 13(a), 13(d),
13(g) and 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement and
the transactions contemplated hereby and the obtaining from the SEC of such
orders as may be required in connection therewith, (C) the filing of
Articles of Merger with the Secretary of State of the State of Tennessee
and appropriate documents with the relevant authorities of other states in
which FCBI is qualified to do business, (D) the filing of such
applications, filings, authorizations, orders and approvals as may be
required under Tennessee banking laws, and with and of state banking
authorities and approval of same ("State Banking Approval") and pursuant to
state takeover or change in control laws ("State Takeover Approval"), (E)
consents, authorizations, approvals, filings or exemptions in connection
with compliance with the applicable provisions of federal and state
securities laws relating to the regulation of broker-dealers or investment
advisers, and federal commodities laws relating to the regulation of future
commission merchants and the rules and regulations thereunder and of any
applicable industry self-regulatory organization, and the rules of NASDAQ,
or which are required under consumer finance, mortgage banking an other
similar laws, (F) notices under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (G) such filings,
notifications and approvals as are required in order to terminate the ESOP
and other FCBI Benefit Plans as hereinafter defined and described, and (I)
filings, notifications and approvals under state insurance laws and
regulations.
(d) SEC Documents. FCBI has made available to FAC a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by FCBI with the SEC (other than reports filed pursuant to
Section 13(d) or 13(g) of the Exchange Act) since December 31, 1994
including the Form 10-QSB for the quarter ended March 31, 1995 (the "FCBI
First Quarter 10-QSB") (as such documents have since the time of their
filing been amended, the "FCBI SEC Documents"), which are all the documents
(other than preliminary material and reports required pursuant to Section
13(d) or 13(g) of the Exchange Act) that FCBI was required to file with the
SEC since such date. FCBI has made available to FAC true and complete
copies of the most recent annual and quarterly Consolidated Report of
Condition and Income ("Call Reports") of FCB and Citizens filed with the
FDIC and the Tennessee Department of Financial Institutions (the
"Department"). As of their respective dates, the FCBI SEC Documents
complied in all material respects with the requirements of the Securities
Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable
to such FCBI SEC Documents, and none of the FCBI SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The consolidated financial statements of FCBI included in the FCBI SEC
Documents comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Form 10-QSB of the
SEC or normal recurring year-end
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adjustments) and fairly present the consolidated financial position of FCBI
and its consolidated Subsidiaries at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended. All
material agreements, contracts and other documents required to be filed as
exhibits to any of the FCBI SEC Documents have been so filed. Except as set
forth in the FCBI Disclosure Schedule, FCBI has no off-balance sheet
financial instruments including but not limited to letters of credit,
unfunded commitments and derivative financial instruments. To FCBI's
knowledge, there are no unasserted claims that are not disclosed in the
FCBI SEC Documents that would reasonably be expected to have, individually
or in the aggregate, a material adverse effect on FCBI and its
Subsidiaries, taken as a whole.
(e) Information Supplied. None of the information supplied pursuant
to this Agreement or to be supplied by FCBI for inclusion or incorporation
by reference in (i) the registration statement on Form S-4 (or other
applicable form) to be filed with the SEC by FAC in connection with the
issuance of shares of FAC Common Stock in the Merger (the "S-4") will, at
the time the S-4 is filed with the SEC and at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the Proxy
Statement will, at the date of mailing to stockholders and at the times of
the meeting of stockholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Proxy Statement (except for such portions thereof
that relate only to FAC) will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
(f) Compliance with Applicable Laws. FCBI and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are material to the operation of the businesses
of FCBI and its Subsidiaries, taken as a whole (the "FCBI Permits"). FCBI
and its Subsidiaries are in compliance with the terms of the FCBI Permits,
except where the failure as to comply would not have a material adverse
effect on FCBI and its Subsidiaries, taken as a whole. Except as disclosed
in the FCBI SEC Documents filed prior to the date of this Agreement, the
businesses of FCBI and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity
except for possible violations which individually or in the aggregate do
not, and, insofar as reasonably can be foreseen, in the future will not,
have a material adverse effect on FCBI and its Subsidiaries, taken as a
whole. Except for routine examinations by Federal or state Governmental
Entities charged with the supervision or regulation of banks or bank
holding companies or engaged in the insurance of bank deposits ("Bank
Regulators"), as of the date of this Agreement, to the knowledge of FCBI,
no investigation by any Governmental Entity with respect to FCBI or any of
its Subsidiaries is pending or threatened.
(g) Litigation. As of the date of this Agreement, except as disclosed
in the FCBI SEC Documents filed prior to the date of this Agreement there
is no suit, action or proceeding pending or, to the knowledge of FCBI,
threatened, against or affecting FCBI or any Subsidiary of FCBI that would
reasonably be expected to have, individually or in the aggregate, a
material adverse effect on FCBI and its Subsidiaries, taken as a whole, nor
is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against FCBI or any
Subsidiary of FCBI having, or which would reasonably be expected to have
any such effect.
(h) Taxes. FCBI and each of its Subsidiaries have filed all tax
returns required to be filed by any of them and have paid (or FCBI has paid
on their behalf), or have set up an adequate reserve for the payment of,
all taxes required to be paid as shown on such returns, and the most recent
consolidated financial statements contained in the FCBI SEC Documents
reflect an adequate provision for current and deferred taxes payable by
FCBI and its Subsidiaries accrued through the date of consolidated such
financial statements, except in each case where a failure to do so would
not have a material adverse effect on FCBI. No deficiencies for any taxes
have been proposed, asserted or assessed against FCBI or any of its
Subsidiaries that are not adequately reserved for, except for deficiencies
that would not have a material
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adverse effect on FCBI. Except with respect to claims for refund, the
Federal income tax returns of FCBI and each of its Subsidiaries
consolidated in such returns have been examined by and settled with the
United States Internal Revenue Service (the "IRS"), or the statute of
limitations with respect to such years has expired (and no waiver extending
the statute of limitations has been requested or granted), for all years
through 1990. No Federal income tax returns of FCBI and each of its
Subsidiaries consolidated are currently under examination by the IRS. For
the purpose of this Agreement, the term "tax" (including, with correlative
meaning, the terms "taxes" and "taxable") shall include, except where the
context otherwise requires, all Federal, state, local and foreign income,
profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, occupancy and other taxes, duties or
assessments of any nature whatsoever, together with all interest, penalties
and additions imposed with respect to such amounts.
(i) Certain Agreements. Except as set forth in the FCBI Disclosure
Schedule, and except for this Agreement, as of the date hereof, neither
FCBI nor any of its Subsidiaries is a party to any oral or written
agreement not terminable on 30 days' or less notice or involving the
payment of more than $25,000 per annum.
(j) Benefit Plans. Neither FCBI nor any of its Subsidiaries maintains
for the benefit of its employees any "employee benefit plans" (each a "FCBI
Benefit Plan"), as defined in sec.3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or other profit-sharing,
deferred compensation, bonus stock option, stock purchase, employee benefit
plans or arrangements, except as set forth in the FCBI Disclosure Schedule.
FCBI has made available to FAC a true and complete copy of each FCBI
Benefit Plan and any related funding agreements, including all amendments,
supplements, and modifications thereto, all of which are legally valid and
binding and in full force and effect, and not in default in any respect.
FCBI will also make available to FAC a true and complete copy of the most
recent annual report (Form 5500) and actuarial report, if any, for each
FCBI Benefit Plan, and the most recent IRS determination letter, if any,
for each FCBI Benefit Plan. All contributions required to be made to each
FCBI Benefit Plan under the terms of that FCBI Benefit Plan, ERISA, or
other applicable law have been timely made. Except as set forth in the FCBI
Disclosure Schedule, in the case of each FCBI Benefit Plan that is subject
to Title I, subtitle B, part 3 of ERISA, the net fair market value of the
assets held to fund that FCBI Benefit Plan exceed the actuarial present
value (based on the actuarial assumptions used by FCBI and its Subsidiaries
for funding) of all accrued benefits, both vested and nonvested under that
FCBI Benefit Plan. To the knowledge of FCBI, each FCBI Benefit Plan
complies currently, and has complied in the past, in form and operation,
with the applicable provisions of ERISA, the Internal Revenue Code of 1986,
as amended (the "Code"), and other applicable law in all material respects.
Each FCBI Benefit Plan intended to be a qualified plan and exempt trust
under the provisions of Sections 401 and 501 of the Code has been the
subject of an IRS determination letter to that effect and except as set
forth on the FCBI Disclosure Schedule FCBI knows of no facts or
circumstances that are likely to adversely affect the qualified status of
any FCBI Benefit Plan. FCBI will make any amendments required to be made to
each FCBI Benefit Plan to comply with applicable legislation or regulations
prior to the Effective Time. To the knowledge of FCBI, there have been no
"prohibited transactions" (as defined in Section 4975(c)(1) of the Code or
Section 406 of ERISA) that would subject any of the FCBI Benefit Plans, any
fiduciary thereof or any party dealing with the FCBI Benefit Plans to the
tax on prohibited transactions imposed by Section 4975 of the Code or to a
civil penalty imposed by Section 502 of ERISA. No amount is due or owing
from FCBI and or any of its Subsidiaries to the Pension Benefit Guaranty
Corporation under Title IV of ERISA for any reason. To the knowledge of
FCBI, no event which constitutes a "reportable event" as defined in Section
4043 of ERISA has occurred with respect to any FCBI Benefit Plan that is
covered by ERISA. Since September 2, 1974, FCBI has not terminated any
employee benefit plan subject to Title IV of ERISA for which a Notice of
Sufficiency has not been issued by the Pension Benefit Guaranty
Corporation. To the knowledge of FCBI, there are no issues or disputes with
respect to any FCBI Benefit Plan, or the administration thereof, currently
existing between any trustee or other fiduciary thereunder, FCBI or any of
its Subsidiaries and any governmental agency, employee, former employee or
beneficiary of any employee or former employee of FCBI or any of its
Subsidiaries. Except as set forth in the FCBI
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Disclosure Schedule, neither FCBI nor any of its Subsidiaries has
previously, currently or will prior to the Effective Time (i) participate
in or contribute to any multiemployer plan as such term is defined in
Section 4001(a) of ERISA or (ii) agree to provide any post-retirement
welfare benefits to its former employees. All group health plans of FCBI
and its Subsidiaries have been operated in good faith compliance with the
applicable requirements for group health plan continuation coverage of
Section 4980B of the Code.
(k) Subsidiaries. Exhibit 21 to FCBI's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, includes all the Subsidiaries
of FCBI as of the date of this Agreement and indicates for each such
Subsidiary, except for First City Life Insurance Company, which is
chartered under the laws of the State of Arizona, as of such date the
jurisdiction of incorporation. Except as set forth on such Exhibit, neither
FCBI nor any Subsidiary of FCBI owns any equity interest in any other
corporation, association, partnership or other entity. FCB and Citizens are
the only Subsidiaries of FCBI that are depository institutions and both FCB
and Citizens are an "insured depository institution" as defined in the FDIA
and applicable regulations thereunder. All of the shares of capital stock
of each of the Subsidiaries held by FCBI or by another Subsidiary of FCBI
are fully paid and nonassessable and are owned by FCBI or a Subsidiary of
FCBI free and clear of any claim, lien or encumbrance.
(l) Agreement with Bank Regulators. As of the date of this Agreement,
neither FCBI nor any Subsidiary of it is a party to any written agreement
or memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any condition imposed in writing,
order or directive by, or is a recipient of any extraordinary supervisory
letter from, any Bank Regulator which restricts materially the conduct of
its business, or in any manner relates to its capital adequacy, its credit
policies or its management, nor has FCBI been advised by any Bank Regulator
that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree,
condition, agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter or similar submission.
(m) Absence of Certain Changes or Events. Except as disclosed in the
FCBI SEC Documents filed prior to the date of this Agreement, since
[December 31 1994], FCBI and its Subsidiaries have not incurred any
material liability, except in the ordinary course of their business
consistent with their past practices, nor has there been any change, nor
has there occurred any event involving a prospective change, in the
business, assets, financial condition or results of operations of FCBI or
any of its Subsidiaries which has had, or is reasonably likely to have, a
material adverse effect on FCBI (other than as a result of changes in
banking or thrift laws or regulations of general applicability or
interpretations thereof, changes in generally accepted accounting
principles or regulatory accounting practices or interpretations thereof,
changes in general economic conditions including but not limited to changes
in interest rates, and changes that could, under the circumstances,
reasonably have been anticipated in light of disclosures made in writing by
FCBI to FAC prior to execution of this Agreement, changes effected on FAC's
request pursuant to Section 5.16 hereof or the settlement or disposition of
any litigation pending as of the date hereof and set forth on the FCBI
Disclosure Schedule by FCBI or any Subsidiary).
(n) Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of FCBI Common Stock entitled to vote thereon and
the affirmative vote of the holders of a majority of the outstanding shares
of Series A Preferred are the only votes of the holders of any class or
series of FCBI capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
(o) Properties. Except as disclosed in the FCBI SEC Documents filed
prior to the date of this Agreement, FCBI or one of its Subsidiaries (i)
has good, clear and marketable title to all the properties and assets which
are material to FCBI's business on a consolidated basis and are reflected
in the latest audited consolidated balance sheet included in the FCBI SEC
Documents as being owned by FCBI or one of its Subsidiaries or acquired
after the date thereof (except properties sold or otherwise disposed of
since the date thereof), free and clear of all claims, liens, charges,
security interests or encumbrances of any nature whatsoever except (A)
statutory liens securing payments not yet due, (B) liens on assets of
Subsidiaries of FCBI incurred in the ordinary course of their business and
(C) such imperfections or
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irregularities of title, claims, liens, charges, security interests or
encumbrances as do not affect the use of the properties or assets subject
thereto or affected thereby or otherwise materially impair business
operations at such properties, in either case in such a manner as to have a
material adverse effect on FCBI and its Subsidiaries, taken as a whole and
(ii) is the lessee of all leasehold estates which are material to FCBI's
business on a consolidated basis and are reflected in the latest audited
consolidated financial statements included in the FCBI SEC Documents or
acquired after the date thereof (except for leases that have expired by
their terms or as to which FCBI has agreed to terminate since the date
thereof) and is in possession of the properties purported to be leased
thereunder, and each such lease is valid without default thereunder by the
lessee or, to FCBI's knowledge, the lessor, other than defaults that do not
or would not have a material adverse effect on FCBI.
(p) Ownership of FAC Common Stock. As of the date hereof, neither
FCBI nor, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (i) beneficially owns, directly or indirectly, or
(ii) are parties to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares
of capital stock of FAC, which in the aggregate, represent 10% or more of
the outstanding shares of capital stock of FAC entitled to vote generally
in the election of directors (other than trust account shares).
(q) Allowance for Possible Loan Losses. The allowance for possible
loan losses shown on the statement of financial condition of FCBI as of
March 31, 1995 was in the opinion of management of FCBI, consistent with
applicable regulations and adequate in all material respects to provide for
all known and reasonably anticipated possible losses, net of recoveries
relating to loans previously charged off, on loans and leases outstanding
and accrued interest receivable on non-performing loans as of March 31,
1995, and as of June 30, 1995, and as of the Effective Time will be in the
opinion of management of FCBI, consistent with applicable regulations and
adequate in all material respects to provide for all known and reasonably
anticipated possible losses, net of recoveries relating to loans previously
charged off, on loans and leases outstanding and accrued interest
receivable on non-performing loans as of the Effective Time.
(r) Certain Transactions with Affiliated Persons. Except as disclosed
in the FCBI Disclosure Schedule, there are no transactions to which FCBI or
any Subsidiary was a party in which any officer or director of FCBI or any
Subsidiary or any other entity controlled by, under common control with or
in control of FCBI had a direct or indirect interest.
(s) Permissible Activities. Except as set forth in the FCBI
Disclosure Schedule, all of the business activities conducted by FCBI and
its Subsidiaries as of the date hereof are business activities in which a
bank holding company is permitted to engage under the federal Bank Holding
Company Act of 1956, as amended, and Regulation Y promulgated thereunder
and all business activities conducted by FCBI as of the date hereof are
business activities in which national banks are permitted to engage under
the rules and regulations of the OCC.
(t) Environmental Matters. Except as set forth in the FCBI Disclosure
Schedule:
(i) The operations of FCBI and its Subsidiaries have been in the
past and are now to its knowledge in compliance in all material respects
with all federal, state and local laws, rules and regulations and other
governmental restrictions relating to pollution or protection of the
environment or public or employee health and safety (collectively, the
"Environmental Laws") including, without limitation, those relating to
the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 42 U.S.C. sec. 9601 et seq. ("CERCLA"); the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. sec. 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. sec. 6901
et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
sec. 1251 et seq., the Safe Water Drinking Act, 42 U.S.C.
sec. 300f-300j; the Clean Air Act, 42 U.S.C. sec. 7401 et seq.; and the
Occupational Safety and Health Act.
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(ii) Neither FCBI 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
FCBI 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 common
law theory of liability involving environmental or health and safety
matters.
(iii) To the knowledge of FCBI, no use, disposal, releases, burial
or placement of any material regulated under or defined by any
Environmental Law, including without limitation, asbestos (collectively,
"Hazardous Materials") has occurred on, in, at, under or about any of
the property owned, leased or operated at any time by FCBI or any
Subsidiary.
(iv) To the knowledge of FCBI, there has been no disposal, release,
burial or placement of Hazardous Materials on any real property not
owned, leased or operated by FCBI or any Subsidiary which may result or
has resulted in contamination of or beneath the property owned, leased
or operated at any time by FCBI or any Subsidiary.
(v) All of the above-ground and underground storage tanks presently
on any real property owned, leased or operated by FCBI or any Subsidiary
have been properly registered.
(vi) No audit or investigation has been conducted as to
environmental matters relating to any property owned, leased or operated
by FCBI or any Subsidiary by any governmental agency.
(vii) There are no civil or criminal actions, suits or proceedings,
or demands, claims, notices or investigations (including, without
limitation, notices, demand letters or requests for information from any
environmental agency) instituted or pending, or threatened relating to
the liability of any properties owned or operated by FCBI or any
Subsidiary under any Environmental Law.
(u) Charter Provisions and State Anti-Takeover Laws. FCBI and each of
its Subsidiaries has taken or will take all actions necessary so that the
entering into this Agreement and the consummation of the transactions
contemplated hereby (i) are exempt from any applicable state takeover law
and (ii) do not and will not result in the grant of any rights to any
person under the charter, bylaws or other governing instrument of FCBI or
any Subsidiary thereof or restrict or impair the right of FAC to vote or
otherwise to exercise the rights of a shareholder with respect to shares of
FCBI or any Subsidiary thereof that may be acquired or controlled by FAC
pursuant to this Agreement or the consummation of the transactions
contemplated hereby.
For purposes of this Agreement, the term "knowledge" as used with respect
to any person shall mean the knowledge after due inquiry of the chairman,
president, chief financial officer, chief credit officer, or general counsel.
The term "person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
3.2. Representations and Warranties of FAC. FAC represents and warrants to
FCBI as follows:
(a) Organization, Standing and Power. FAC is a Tennessee corporation
and a bank holding company registered under the Bank Holding Company Act.
First American National Bank ("FANB") is a national banking association and
a wholly owned Subsidiary of FAC. Each of FAC and its Subsidiaries is a
national bank, corporation or partnership duly organized, validly existing
and, in the case of banks or corporations, in good standing under the laws
of its jurisdiction of incorporation or organization, has all requisite
corporate power and authority to own, lease and operate its properties and
to carry on its business as now being conducted, and is duly qualified and
in good standing to do business in each jurisdiction in which the nature of
its business or the ownership or leasing of its properties makes such
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qualification necessary other than in such jurisdictions where the failure
so to qualify would not have a material adverse effect on FAC and its
Subsidiaries, taken as a whole.
(b) Capital Structure. (i) As of the date hereof, the authorized
capital stock of FAC consists of 50,000,000 shares of FAC Common Stock
$5.00 par value ("FAC Common Stock") and 2,500,000 shares of preferred
stock without par value (the "FAC Preferred"). As of the close of business
on June 30, 1995, (A) 25,755,355 shares of FAC Common Stock were
outstanding, no shares of FAC Preferred Stock were outstanding, and (B)
780,660 shares of FAC Common Stock were reserved for issuance pursuant to
FAC's Dividend Reinvestment and Stock Purchase Plan, 2,999,192 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 (sec. 401(k) Plan (the "FIRST Plan")) and 2,500,000
shares of FAC Preferred were reserved for issuance under the First American
Shareholder Rights Plan dated December 14, 1988 (the "FAC Rights
Agreement").
(ii) As of the date hereof, no Voting Debt of FAC was issued or
outstanding. All outstanding shares of FAC capital stock are, and the
shares of FAC Common Stock (A) to be issued pursuant to or as specifically
contemplated by this Agreement and (B) when issued in accordance with this
Agreement upon exercise of the FCBI Stock Options, as the case may be, will
be validly issued, fully paid and nonassessable and not subject to
preemptive rights.
(iii) As of the date of this Agreement, except for this Agreement, FAC
Stock Plans, the FAC Rights Agreement, the Agreement and Plan of Merger
between FAC and Heritage Federal Bancshares, Inc., and the Agreement and
Plan of Reorganization by and between Charter Federal Savings Bank and FAC,
there are no options, warrants, calls, rights, commitments or agreements of
any character to which FAC or any Subsidiary of FAC is a party or by which
it is bound obligating FAC or any Subsidiary of FAC to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of
capital stock or any Voting Debt of FAC or of any Subsidiary of FAC or
obligating FAC or any Subsidiary of FAC to grant, extend or enter into any
such option, warrant, call, right, commitment or agreement.
(c) Authority. (i) FAC has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. FANB has all requisite corporate power and authority
to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of FAC. This Agreement has been duly executed and
delivered by FAC and constitutes a valid and binding obligation of FAC,
enforceable in accordance with its terms.
(ii) The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, (A) conflict
with, or result in any Violation pursuant to any provision of the charter
or By-laws of FAC, FANB or any other Subsidiary of FAC or (B) subject to
obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in paragraph (iii)
below, result in any Violation of any loan or credit agreement, note,
mortgage, indenture, lease, Benefit Plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to FAC, FANB
or any other Subsidiary of FAC or their respective properties or assets
which Violation would have a material adverse effect on FAC and its
Subsidiaries, taken as a whole.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to FAC, FANB or any other Subsidiary of FAC in
connection with the execution and delivery of this Agreement or the
consummation by FAC of the transactions contemplated hereby, the failure to
obtain which would have a material adverse effect on FAC, except for (A)
the filing of applications with the Federal Reserve under the BHC Act and
the FDIA and with the OCC and approval of same, (B) the filing with the SEC
of the S-4 in connection with
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this Agreement and the transactions contemplated hereby and the obtaining
from the SEC of such orders as may be required in connection therewith, (C)
such filings and approvals as are required to be made or obtained under the
securities or blue sky laws of various states in connection with the
transactions contemplated by this Agreement, (D) the filing of the Articles
of Merger with the Secretary of State of the State of Tennessee and
appropriate documents with the relevant authorities of other states in
which FAC is qualified to do business, (E) the State Banking Approvals and
State Takeover Approvals, (F) consents, authorizations, approvals, filings
or exemptions in connection with compliance with the applicable provisions
of federal and state securities laws relating to the regulation of
broker-dealers or investment advisers and federal commodities laws relating
to the regulation of futures commission merchants and the rules and
regulations thereunder and of any applicable industry self-regulatory
organization, and the rules of NASDAQ, or which are required under consumer
finance, mortgage banking and other similar laws, and (G) filings,
notifications and approvals under state insurance laws and regulations.
(d) SEC Documents. FAC has made available to FCBI a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by FAC with the SEC (other than reports filed pursuant to
Section 13(d) or 13(g) of the Exchange Act) since December 31, 1993 (the
"FAC SEC Documents"), which are all the documents (other than preliminary
material and reports required pursuant to Section 13(d) or 13(g) of the
Exchange Act) that FAC was required to file with the SEC since such date.
FAC has made available to FCBI true and complete copies of the most recent
annual and quarterly Consolidated Reports of Condition and Income ("Call
Reports") of FAC filed with the OCC. As of their respective dates, the Call
Reports complied in all material respects with the applicable regulatory
requirements (including regulatory accounting practices). As of their
respective dates, the FAC SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC thereunder applicable
to such FAC SEC Documents, and none of the FAC SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
The consolidated financial statements of FAC included in the FAC SEC
Documents comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Form 10-Q of the SEC
or normal recurring year-end adjustments) and fairly present the
consolidated financial position of FAC and its consolidated Subsidiaries as
at the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended. All material agreements, contracts
and other documents required to be filed as exhibits to any of the FAC SEC
Documents have been so filed. To FAC's knowledge, there are no unasserted
claims that are not disclosed in the FAC SEC Documents that would
reasonably be expected to have, individually or in the aggregate, a
material adverse effect on FAC.
(e) Information Supplied. None of the information supplied pursuant
to this Agreement or to be supplied by FAC for inclusion or incorporation
by reference in the S-4 (or other applicable form) will, at the time the
S-4 is filed with the SEC, at the time it becomes effective under the
Securities Act, at the time it is mailed to the shareholders of FCBI in
connection with the meeting of shareholders to vote on the Merger and at
all times subsequent to such mailing up to and including the time of such
meeting, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The S-4 will comply as to form with all
applicable requirements.
(f) Compliance with Applicable Laws. FAC and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are material to the operation of the businesses
of FAC and its Subsidiaries, taken as a whole (the "FAC Permits"). FAC and
its Subsidiaries are in compliance with the terms of the FAC Permits and
all applicable laws and regulations, except where the failure so to comply
would not have a material adverse effect on FAC.
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Except as disclosed in the FAC SEC Documents filed prior to the date
hereof, the businesses of FAC and its Subsidiaries are not being conducted
in violation of any law, ordinance or regulation of any Governmental
Entity, except for possible violations which individually or in the
aggregate do not, and, insofar as reasonably can be foreseen, in the future
will not, have a material adverse effect on FAC. Except for routine
examinations by Bank Regulators, as of the date of this Agreement, to the
knowledge of FAC, no investigation by any Governmental Entity with respect
to FAC or any of its Subsidiaries is pending or threatened, other than, in
each case, those the outcome of which, as far as reasonably can be
foreseen, will not have a material adverse effect on FAC.
(g) Litigation. As of the date of this Agreement, except as disclosed
in the FAC SEC Documents filed prior to the date of this Agreement, there
is no suit, action or proceeding pending or, to the knowledge of FAC,
threatened, against or affecting FAC or any Subsidiary of FAC that would
reasonably be expected to have, individually or in the aggregate, a
material adverse effect on FAC, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator
outstanding against FAC or any Subsidiary of FAC having, or which would
reasonably be expected to have, any such effect.
(h) Absence of Certain Changes or Events. Except as disclosed in the
FAC SEC Documents filed prior to the date of this Agreement, since December
31, 1994 there has not been any change or any event involving a prospective
change, in the business, assets, financial condition, prospects or results
of operations of FAC or any of its Subsidiaries which has had, or is
reasonably likely to have, a material adverse effect on FAC (other than as
a result of changes in banking laws or regulations of general applicability
or interpretations thereof, changes in generally accepted accounting
principles or regulatory accounting practices or interpretations thereof,
changes in general economic conditions including but not limited to,
changes in interest rates, and changes that could, under the circumstances,
reasonably have been anticipated in light of disclosures made in writing by
FAC to FCBI prior to execution of this Agreement).
(i) No Vote Required. Under Section 48-21-103 of the TBCA, no vote of
the stockholders of FAC is required in order to enter into this Agreement
or to consummate the Merger.
(j) Consideration. FAC has reserved or will reserve for issuance
sufficient shares of FAC Common Stock for issuance in the Merger; FAC
reserves the right to repurchase up to 100% of such number of shares prior
to or substantially concurrent with the consummation of the Merger pursuant
to Rule 10b-18 of the SEC and in a manner which does not prohibit FAC from
entering into pooling transactions within two years from such repurchases.
(k) Governmental Approvals and Other Conditions. FAC is unaware of
any reason why (i) the Requisite Regulatory Approvals (as defined in
Section 6.1(c) that are required to be obtained by FAC in connection with
the transactions contemplated herein should not be granted, or (ii) such
Requisite Regulatory Approvals should be subject to a condition which would
have a material adverse effect on FAC as contemplated in Section 6.2 (e) or
(iii) any of the conditions precedent as specified in Article VI to the
obligations of either FAC or FCBI to consummate the transactions
contemplated herein are unlikely to be fulfilled within the applicable time
period or periods required for satisfaction of such condition or
conditions.
(l) Taxes. FAC and each of its Subsidiaries have filed all tax
returns required to be filed by any of them and have paid (or FAC has paid
on their behalf), or have set up an adequate reserve for the payment of,
all taxes required to be paid as shown on such returns, and the most recent
financial statements contained in the FAC SEC Documents reflect an adequate
provision for current and deferred taxes payable by FAC and its
Subsidiaries accrued through the date of such financial statements, except
in each case where a failure to do so would not have a material adverse
effect on FAC. No deficiencies for any taxes have been proposed, asserted
or assessed against FAC or any of its Subsidiaries that are not adequately
reserved for, except for deficiencies that would not have a material
adverse effect on FAC. Except with respect to claims for refund, the
Federal income tax returns of FAC and each of its Subsidiaries consolidated
in such returns have been examined by and settled with the IRS, or the
statute of limitations with respect to such years has expired (and no
waiver extending the statute of limitations
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has been requested or granted), for all years through 1990. The Federal
income tax returns of FAC and each of its Subsidiaries consolidated in such
returns for the years 1991 through 1993 are subject to audit by the IRS.
(m) Agreements with Bank Regulators. As of the date of this
Agreement, neither FAC nor any Subsidiary of it is a party to any written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is subject to any condition imposed in
writing, or is subject to any order or directive by, or is a recipient of
any extraordinary supervisory letter from, any Bank Regulator which
restricts materially the conduct of its business, or in any manner relates
to its capital adequacy, its credit policies or its management, nor has FAC
been advised by any Bank Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, condition, agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter or similar submission.
(n) Allowance for Possible Loan Losses. The allowance for possible
loan losses shown on the statement of financial condition of FANB as of
March 31, 1995, is in the opinion of management of FAC consistent with
applicable regulations and adequate in all material respects to provide for
possible losses, net of recoveries relating to loans previously charged
off, on loans and leases outstanding, accrued interest receivable on
nonperforming loans as of March 31, 1995, and as of June 30, 1995, and as
of the Effective Time will be in the opinion of management of FCBI,
consistent with applicable regulations and adequate in all material
respects to provide for all known and reasonably anticipated possible
losses, net of recoveries relating to loans previously charged off, on
loans and leases outstanding and accrued interest receivable on
non-performing loans as of the Effective Time.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of Both Parties. Unless prior written consent of the other
party shall have been obtained, and except as otherwise expressly contemplated
herein, prior to the Effective Time each of FAC and FCBI shall and shall cause
each of its Subsidiaries to (a) operate its business only in the usual, regular,
and ordinary course, (b) preserve intact its business organizations and assets
and maintain its rights and franchises, and (c) take no action which would
materially (i) adversely affect the ability of any party to obtain any consents
required for the transactions contemplated hereby, or (ii) adversely affect the
ability of any party to perform its covenants and agreements under this
Agreement in all material respects and to consummate the Merger; or (iii)
prevent or impede the transactions contemplated herein from qualifying as a
reorganization under Section 368 of the Code; provided, that the foregoing shall
not prevent FAC or any of its Subsidiaries from acquiring additional assets or
businesses or discontinuing or disposing of any of its assets or businesses if
such action is, in the judgment of FAC, desirable in the conduct of the business
of FAC and its Subsidiaries so long as any of such actions does not materially
delay receipt of the Requisite Regulatory Approvals (as defined herein) or
adversely affect FAC's ability to consummate the Merger or have a material
adverse effect on FAC. Neither FAC nor FCBI shall intentionally take or cause to
be taken any action, that would disqualify the Merger as a "reorganization"
within the meaning of Section 368(a) of the Code.
4.2 Covenants of FCBI. From the date of this Agreement until the earlier
of the Effective Time or the termination of this Agreement, FCBI covenants and
agrees that it will not do or agree or commit to do, or permit any of its
Subsidiaries to do or agree or commit to do, any of the following without the
prior written consent of the chief executive officer of FAC or the president of
FANB (which consent shall not be unreasonably withheld):
(a) amend the Charter, Bylaws, or other governing instruments of FCBI
or any Subsidiary; or
(b) incur, guarantee, or otherwise become responsible for, any
additional debt obligation or other obligation for borrowed money (other
than indebtedness of a FCBI or any Subsidiary thereof to another
Subsidiary) except in the ordinary course of the business of FCBI and its
Subsidiaries consistent with past practices, or impose or suffer the
imposition, on any share of capital stock held by FCBI or any
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Subsidiary of any lien or encumbrance or except to the extent such liens or
encumbrances exist on the date hereof, permit any such lien or encumbrance
to exist; or
(c) except for the redemption of the Series C Preferred and the Series
D Preferred, the conversion of the Series A Preferred to FCBI Common, the
modification of the maturity date of the convertible capital debentures and
the payment thereof, repurchase, redeem, or otherwise acquire or exchange,
directly or indirectly, any shares, or any securities convertible into any
shares, of the capital stock of any FCBI or any Subsidiary, or declare or
pay any dividend or make any other distribution in respect of FCBI's
capital stock other than regular quarterly cash dividends not in excess of
$0.20 per share of FCBI Common Stock; provided that in the event that the
Closing does not occur on or before February 29, 1996 if as the result of
action or inaction on the part of FAC, FCBI may (to the extent allowable
under applicable law) accrue, declare and pay as a special dividend on
shares of FCBI Common Stock, an amount equal to the difference between the
FCBI dividend paid in the first and succeeding calendar quarters of 1996
and the dividend which would have been declared during the first and
succeeding calendar quarters of 1996 by FAC on the shares of FAC Common
Stock which would have been issuable in exchange for shares FCBI Common
Stock had Closing occurred on February 29, 1996; or
(d) except for this Agreement, or pursuant to the exercise of stock
options outstanding as of the date hereof, or pursuant to the conversion of
convertible securities outstanding as of the date hereof and pursuant to
the terms thereof in existence on the date hereof in amounts not to exceed
205,143 shares of FCBI Common Stock between the date hereof and the
Effective Time, issue, sell, pledge, encumber, authorize the issuance of,
enter into any contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional
shares of FCBI Common Stock or any other capital stock of any FCBI or any
Subsidiary, or any stock appreciation rights, or any option, warrant,
conversion, or other right to acquire any such stock, or any security
convertible into any such stock; or
(e) adjust, split, combine, or reclassify any capital stock of FCBI or
any Subsidiary or issue or authorize the issuance of any other securities
in respect of or in substitution for shares of FCBI capital stock (other
than as permitted under Section 4.2(d) or sell, lease, mortgage, or
otherwise dispose of or otherwise encumber any shares of capital stock of
any FCBI Subsidiary or any assets other than in the ordinary course of
business for reasonable and adequate consideration; or
(f) acquire direct or indirect control over, or invest in equity
securities of, any person, other than in connection with foreclosures in
the ordinary course of business; or
(g) except as contemplated by this Agreement grant any increase in
compensation or benefits to the employees or officers of FCBI or any
Subsidiary except as required by law or except as is consistent with FAC's
current matrix for salary increases a copy of which has been provided to
FCBI, pay any bonus except pursuant to the provisions of any applicable
program or plan adopted by its Board of Directors prior to the date of this
Agreement, enter into or amend any severance agreements with officers of
FCBI or any Subsidiary, grant any increase in fees or other increases in
compensation or other benefits to directors of any FCBI or any Subsidiary;
or
(h) enter into or amend any employment contract between FCBI or any
Subsidiary and any person that FCBI or any Subsidiary does not have the
unconditional right to terminate without liability at any time on or after
the Effective Time; or
(i) adopt any new employee benefit plan or program or make any
material change in or to any existing employee benefit plans or programs of
any FCBI or any Subsidiary except as required by law, or except in
accordance with prior practice, make any discretionary matching
contributions or discretionary contributions to any employee benefit plan
of FCBI or any Subsidiary thereof; provided, however, that this clause (i)
shall not prevent FCBI from making a contribution to the ESOP (as
hereinafter defined) with respect to 1994, 1995 and (to the extent not in
excess of the remaining ESOP loan balance) 1996 in the maximum amount
allowed under the Code as long as such contribution is applied to the
prepayment of the ESOP's outstanding loans from FANB; or
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(j) commence any litigation other than in accordance with past
practice, settle any litigation involving any liability of FCBI or any
Subsidiary for money damages in excess of $5,000 or restrictions upon the
operations of FCBI or any Subsidiary, or, except in the ordinary course of
business, modify, amend, or terminate any material contract or waive,
release, compromise, or assign any material rights or claims; or
(k) enter into or terminate any material contract or make any change
in any material lease or contract, other than renewals of leases and
contracts without material adverse changes of terms or pursuant to Sections
4.2(g), (h), or (i) of this Agreement; or
(l) except as contemplated by Section 5.15, change its methods of
accounting in effect at December 31, 1994, except as required by changes in
generally accepted accounting principles concurred in by FCBI's independent
auditors or change its fiscal year; or
(m) issue any letters of credit or incur any unfunded commitments
other than in the ordinary course of business or acquire any off-balance
sheet or derivative financial instruments.
4.3 Covenants of FAC. From the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement, FAC covenants and
agrees that it will not, without the prior written consent of the chief
executive officer of FCBI, amend the Charter or Bylaws of FAC or the FAC Rights
Agreement or other applicable governing documents, in each case, in any manner
which is adverse to, and discriminates against, the holders of FCBI Common
Stock.
4.4 Adverse Changes in Condition. Each of FCBI and FAC agrees to give
written notice promptly to the other party upon becoming aware of the occurrence
or impending occurrence of any event or circumstance relating to it or any of
its Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a material adverse effect on it or (ii) would cause or constitute a
material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
4.5 Reports. Each of FAC and FCBI and its Subsidiaries shall file all
reports required to be filed by it with Regulatory Authorities between the date
of this Agreement and the Effective Time and shall deliver to the other party
copies of all such reports promptly after the same are filed. If financial
statements are contained in any such reports filed with the SEC or any other
Regulatory Authority, such financial statements will fairly present the
consolidated financial position of the entity filing such statements as of the
dates indicated and the consolidated results of operations, changes in
shareholders' equity, and cash flows for the periods then ended in accordance
with GAAP (subject in the case of interim financial statements to normal
recurring year-end adjustments that are not material). As of their respective
dates, such reports filed with Regulatory Authorities will comply in all
material respects with the securities laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with laws, rules and regulations applicable to such
reports.
4.6 Affirmative Covenants of FCBI. FCBI agrees to take or cause to be
taken commencing as soon as practicable following the execution of this
Agreement, and continuing thereafter as appropriate, the following affirmative
actions prior to the Effective Time:
(a) FCBI agrees to cooperate and coordinate with FAC in good faith to
adopt and implement policies and procedures pursuant to action plans
acceptable to FAC with respect to CRA and compliance consistent with those
of FAC and FAC's affiliates and in accordance with guidelines previously
provided by FAC to FCBI and First City's recent report of examination by
the FDIC as included in the FCBI Disclosure Schedule.
(b) FCBI at its cost and expense agrees to obtain and provide to FAC a
Phase I environmental assessment of all branches owned by FCBI or the
Subsidiary Banks and all branches leased by any of them which FAC would
operate following the Closing. Such assessments will include a
recommendation
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as to whether a Phase II assessment should be prepared. If any of the Phase
I assessments recommends the undertaking of a Phase II assessment, FCBI
agrees to obtain and provide to FAC such Phase II assessments as promptly
as practicable at FCBI's cost and expense. Should the cost of taking all
remedial and corrective actions and measures required by applicable law,
health or safety concerns exceed an amount which would have a material
adverse effect on FCBI, or if the cost of such actions and measures cannot
be reasonably estimated with any reasonable degree of certainty that they
would not exceed an amount which would have such an effect on FCBI, FAC
shall have the right to terminate this Agreement upon written notice to
FCBI.
(c) FCBI agrees to maintain in effect all existing insurance coverage
including without limitation such coverage with respect to existing or
threatened litigation.
Within ten (10) days after the end of each month commencing July 1, 1995
and continuing to the Effective Time, FCBI will provide a brief written
description of the actions taken during the preceding month, together with its
then current estimate of the out-of-pocket costs and expenses incurred or
reasonably accruable to accomplish the above items and the status of all
existing or threatened litigation.
4.7 No Solicitation. FCBI will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of FCBI or any FCBI Subsidiary, directly or
indirectly, to initiate contact with any person or entity in an effort to
solicit, initiate or encourage any Competing Transaction (as defined in Section
7.3 herein). FCBI will not authorize or permit any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of FCBI or any FCBI Subsidiary, directly or indirectly, (A) to
cooperate with, or furnish or cause to be furnished any non-public information
concerning its business, properties or assets to, any person or entity in
connection with any Competing Transaction; (B) to negotiate any Competing
Transaction with any person or entity; or (C) to enter into any agreement,
letter of intent or agreement in principle as to any Competing Transaction. FCBI
will promptly give written notice to FAC upon becoming aware of any Competing
Transaction.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of S-4 and the Proxy Statement. (a) For purposes of (i)
holding the FCBI shareholders' meeting to on vote on the Merger and other
matters contemplated herein, and (ii) registering the FAC Common Stock in
connection with the Merger with the SEC and with applicable state authorities,
the parties hereto shall cooperate in the preparation of the S-4, including the
prospectus/proxy statement satisfying all applicable requirements of applicable
state laws, and of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
(b) FAC shall furnish such information concerning FAC as is necessary in
order to cause the proxy statement, insofar as it relates to FAC to comply with
Section 5.1(a) hereof. FAC agrees promptly to advise FCBI if at any time prior
to the Effective Time any information provided by FAC in the proxy statement
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct such inaccuracy or omission. FAC shall furnish
FCBI with such supplemental information as may be necessary in order to cause
such proxy statement, insofar as it relates to FAC, to comply with Section
5.1(a).
(c) FCBI shall furnish FAC with such information concerning FCBI as is
necessary in order to cause the S-4, insofar as it relates to the FCBI, to
comply with Section 5.1(a) hereof. FCBI agrees promptly to advise FAC if at any
time prior to the Effective Time any information provided by FCBI in the S-4
becomes incorrect or incomplete in any material respect and to provide FAC with
the information needed to correct such inaccuracy or omission. FCBI shall
furnish FAC with such supplemental information as may be necessary in order to
cause the S-4, insofar as it relates to FCBI, to comply with Section 5.1(a).
FCBI may include the opinion referred to in Section 6.3(e), updated to a date
within three days of the date of the proxy statement, in the proxy statement.
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(d) FCBI shall file with the SEC the Proxy Statement and FAC shall file
with the SEC the S-4, in which the Proxy Statement will be included. FAC shall
use all reasonable efforts to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. FAC shall also take
any action (other than qualifying to do business in any jurisdiction in which it
is now not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of FAC Common Stock in the
Merger, and FCBI shall furnish all information concerning FCBI and the holders
of FCBI Common Stock as may be reasonably requested in connection with any such
action. FAC shall advise FCBI promptly when the S-4 has become effective and of
any supplements or amendments thereto, and FAC shall furnish FCBI with copies of
all such documents.
5.2 Letter of FCBI's Accountants. FCBI shall use all reasonable efforts to
cause to be delivered to FAC a consent letter of Coopers & Lybrand LLP, FCBI's
independent auditors, dated a date within two business days before the date on
which the S-4 shall become effective and addressed to FAC, in form and substance
reasonably satisfactory to FAC, and in scope and substance consistent with
applicable professional standards for letters delivered by independent public
accountants in connection with registration statements similar to the S-4.
5.3 Letter of FAC's Accountants. FAC shall use all reasonable efforts to
cause to be delivered to FCBI a consent letter of KPMG Peat Marwick LLP, FAC's
independent auditors, dated a date within two business days before the date on
which the S-4 shall become effective and addressed to FCBI, in form and
substance reasonably satisfactory to FCBI, and in scope and substance consistent
with applicable professional standards for letters delivered by independent
public accountants in connection with registration statements similar to the
S-4.
5.4 Access to Information. Upon reasonable notice, FCBI and FAC shall each
(and shall cause each of their respective Subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, each of FCBI and FAC shall (and shall cause each of
their respective Subsidiaries to) make available to the other (a) a copy of each
report, schedule, registration statement and other document filed or received by
it during such period pursuant to the requirements of Federal securities laws or
Federal or state banking laws (other than reports or documents which such party
is not permitted to disclose under applicable law) and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. The parties will hold any or other such information which is
nonpublic in confidence to the extent required by, and in accordance with the
Confidentiality Agreement dated April 26, 1995, and accepted May 3, 1995,
between FCBI through its agent Attkisson, Carter & Akers, Incorporated and FAC
(the "Confidentiality Agreement"). FCBI agrees to hold, and to cause its agents
and representatives to hold, all such information obtained with respect to FAC
and/or its Subsidiaries in confidence to the same degree as required of FAC
under the Confidentiality Agreement. No investigation by either FAC or FCBI
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. FCBI agrees to work with
FAC from the execution of this Agreement until Closing to develop plans,
financial and otherwise, to afford maximum effectiveness in the transition
contemplated by this Agreement with respect to their FCBI's customers,
employees, communities and shareholders.
5.5 FCBI Stockholders' Meeting. FCBI shall call a meeting of its
stockholders to be held as promptly as practicable on a mutually agreeable date
for the purpose of voting upon the approval of this Agreement. FCBI will,
through its Board of Directors, recommend to its stockholders (subject to the
receipt of a fairness opinion as provided herein), and each of the Directors has
individually agreed to vote his shares for, approval of this Agreement and all
related matters necessary to the consummation of the transactions contemplated
hereby. FCBI and FAC shall coordinate and cooperate with respect to the timing
of such meeting and FCBI shall use its best efforts to hold such meeting as soon
as practicable after the date on which the S-4 becomes effective.
5.6 Legal Conditions to Merger. Each of FCBI and FAC shall, and shall
cause its Subsidiaries to, use all reasonable efforts (i) to take, or cause to
be taken, all actions necessary to comply promptly with all legal
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requirements which may be imposed on such party or its Subsidiaries with respect
to the Merger and to consummate the transactions contemplated by this Agreement,
subject to the appropriate vote of stockholders of FCBI, and (ii) to obtain (and
to cooperate with the other party to obtain) any consent, authorization, order
or approval of, or any exemption by, any Governmental Entity and or any other
public or private third party which is required to be obtained or made by such
party or any of its Subsidiaries in connection with the Merger, and the
transactions contemplated by this Agreement. Each of FCBI and FAC will promptly
cooperate with and furnish information to the other in connection with any such
burden suffered by, or requirement imposed upon, any of them or any of their
Subsidiaries in connection with the foregoing. FAC shall, as soon as practicable
following execution of this Agreement, prepare and file with the appropriate
authorities such documents as may be necessary in order to consummate the
transactions contemplated hereby. FAC agrees to use its best efforts to file
such documents within 45 days of the execution of this Agreement. FCBI shall
cooperate with FAC in the preparation, execution and filing of such documents
and in responding to any comments made by any governmental authorities with
respect to any such document. In this connection, FCBI agrees to provide
comments to FAC (through counsel) regarding such documents or in response to
such comments within three business days following receipt of such documents or
comments.
5.7 Affiliates. Prior to the FCBI shareholders meeting regarding the
Merger, FCBI shall deliver to FAC a letter identifying all persons who are, at
the time this Agreement is submitted for approval to the stockholders of FCBI,
"affiliates" of FCBI for purposes of Rule 145 under the Securities Act. FCBI
shall use all reasonable efforts to cause each person named in the letter
delivered by it to deliver to the other party prior to the shareholders meeting
a written "affiliates" agreement, in the form attached hereto as Exhibit C,
restricting the disposition by such person of the FAC Common Stock to be
received by such person in the Merger.
5.8 NASDAQ Listing. FAC shall use all reasonable efforts to cause the
shares of FAC Common Stock to be issued in the Merger to be approved for listing
on the NASDAQ national market system prior to the Closing Date.
5.9 Transition of Certain Employee Benefit Plans; Employment Matters. (a)
As soon as practicable after the execution of this Agreement and Plan of Merger,
FCBI and FAC will cooperate to cause the First City Bank Employee Stock
Ownership Plan and Trust (the "ESOP") to be amended (if necessary) and other
action taken in a manner reasonably acceptable to FCBI and FAC to provide that
(i) at the Effective Time the current trustees of the ESOP shall resign and FAC
shall appoint a successor trustee; (ii) immediately after the Effective Time,
the successor trustee will sell the shares of FAC Common Stock acquired by the
ESOP in the Merger to FAC at the then current market price; (iii) the ESOP will
be terminated as soon as possible after the Effective Time, consistent with the
requirements of Section 415 of the Code and other applicable tax provisions; and
(iv) as soon as practicable after the later of the Effective Time or the receipt
of a favorable determination letter from the IRS with respect to the
qualification of the ESOP upon its termination, FCBI and FAC agree that the
assets of the ESOP will be distributed to the beneficiaries thereof and
participants in the ESOP who become participants in the FIRST Plan shall be
given the right to roll over their accounts into the FIRST Plan.
(b) The other tax-qualified defined contribution and defined benefit plans
maintained by FCBI or its Subsidiaries will be terminated by FCBI on or before
the Effective Time or as soon as may be practicable thereafter (and FAC and FCBI
agree that participants in said plans who become participants in the FIRST Plan
shall be given the right to roll over their accounts to the FIRST Plan) and the
benefits thereunder distributed to participants to the extent permitted under
the Code and ERISA. To the extent that such benefits may not be distributed to
participants such plans will be merged into corresponding FAC plans or will be
maintained as separate plans. No such distribution of benefits will be made
before the receipt of an appropriate favorable determination letter from the IRS
as to the effect of the termination of the plan on the qualification of the plan
involved. At or immediately prior to the Effective Time, FCBI or its
Subsidiaries will, to the extent permitted by applicable funding rules under the
Code and ERISA, contribute to each FCBI 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 liabilities of
such plan determined as of a date within thirty (30) days of the Closing Date.
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All welfare and other benefit plans maintained by FCBI or its Subsidiaries
will be terminated by FCBI in a manner reasonably acceptable to FCBI and FAC on
or before the Effective Time or as soon as may be practicable thereafter.
Employees of FCBI and its Subsidiaries shall be eligible to participate in the
pension and welfare plans maintained by FAC after the Effective Time, subject to
the eligibility requirements of these plans. For purposes of determining
eligibility to participate in the qualified plans maintained by FAC, employees
of FCBI or its Subsidiaries shall be credited with service with FCBI and its
Subsidiaries to the extent credited under the respective predecessor plans.
Vesting service under the FIRST Plan will be in accordance with the rules of the
FIRST Plan governing vesting service for employees of acquired employers and
consistent with the current policies of FAC in that regard copies of which have
been provided to FCBI prior to the date hereof. Employees of FCBI 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 FCBI and its Subsidiaries
for eligibility and vesting purposes, but with no prior benefit service, under
the Retirement Plan. Subject to the usual rules applicable to the vacation and
short-term disability programs of FAC, service with FCBI and its Subsidiaries
will be recognized in determining the vacation and short-term disability
benefits of employees of FCBI and its Subsidiaries after the Effective Time.
The tax qualified defined contribution and defined benefit plans of FCBI or
its Subsidiaries shall be maintained separately from FAC's Benefit Plans through
the date on which participants in said plans receive final distributions of
their benefits. FAC and FCBI may agree on or before the Effective Time to cause
any FCBI 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 FCBI Benefit Plans to FAC plans in a fair,
equitable and administratively reasonable manner.
FAC, FCBI and FCBI's Subsidiaries and the executive officers of FAC, FCBI
or FCBI's Subsidiaries will communicate with employees of FCBI or its
Subsidiaries concerning the matters set forth in this Section 5.9 only through
mutually agreed upon communications. The actions prescribed by this Section 5.9
are all contingent upon obtaining appropriate determinations and rulings from
the IRS and, if necessary, other governmental agencies as to the effect of such
actions on the qualification of the plans involved and the compliance of such
actions with other applicable law. If appropriate determinations or rulings
satisfactory to the parties cannot be obtained, FCBI and FAC will adopt an
alternative course of action which, as nearly as practicable, achieves the same
economic results as the actions outlined herein and for which appropriate
approval may be obtained.
(c) From and after the Effective Time, all FCBI employees who are
terminated as the result of the Merger within one year of the consummation
thereof will be eligible for benefits available under FAC's reduction in force
policy which currently include: (i) 30 days' notice, (ii) severance based on
years of service (less than 1 year -- one week's pay; 1-10 years -- one week's
pay plus one week's pay for every year of service; more than 10 years -- 12
weeks' pay), (iii) continued paid health benefits (less than 1 year -- none,
1-10 years -- three months, more than 10 years -- six months), and (iv)
outplacement assistance.
5.10 Shareholder Rights. FCBI agrees to take such action as may be
necessary to cause the Series B Rights not to be triggered or issued as the
result of the Merger.
5.11 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby and thereby shall be paid by the party incurring such
expense, except that expenses incurred in connection with printing and mailing
the Proxy Statement and the S-4 shall be shared equally by FAC and FCBI.
5.12 Brokers or Finders. Except as disclosed to the other party prior to
the date hereof, each of FAC and FCBI represents, as to itself, its Subsidiaries
and its affiliates, that no agent, broker, investment banker, financial advisor
or other firm or person is or will be entitled to any broker's or finder's fee
or any other commission or similar fee in connection with any of the
transactions contemplated by this Agreement, except Attkisson, Carter & Akers,
Incorporated, whose fees and expenses will be paid and expensed by FCBI prior to
the Effective Time in accordance with FCBI's agreement with such firm (a copy of
which has been delivered by FCBI to FAC prior to the execution of this
Agreement), and each party agrees to indemnify the other
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party and hold the other party harmless from and against any and all claims,
liabilities or obligations with respect to any other fees, commissions or
expenses asserted by any person on the basis of any act or statement alleged to
have been made by such first party or its affiliate.
5.13 Indemnification: Directors' and Officers' Insurance. (a) From and
after the Effective Time, FAC shall indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or who
becomes prior to the Effective Time, an officer, director or employee of FCBI or
any of its Subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses (including attorneys' fees), liabilities or judgments,
or amounts that are paid in settlement with the approval of FAC (which approval
shall not be unreasonably withheld), of or in connection with any claim, action,
suit, proceeding or investigation in which an Indemnified Party is, or is
threatened to be made a party or witness, based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer or employee of FCBI or any Subsidiary of FCBI, whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), in each case to the full extent FCBI would have
been permitted under Tennessee or federal law in effect as of the date hereof or
as amended applicable to a time prior to the Effective Time, and its charter and
By-laws or the charter and by-laws of the FCBI Subsidiary, as applicable, to
indemnify such person. Without limiting the foregoing, in the event any such
claim, action, suit, proceeding or investigation is brought against any
Indemnified Party (whether arising before or after the Effective Time), (i) any
counsel retained by the Indemnified Parties for any period after the Effective
Time shall be reasonably satisfactory to FAC; (ii) after the Effective Time, FAC
shall pay all reasonable fees and expenses of such counsel and such other fees
and expenses as are reasonable for the Indemnified Parties promptly as
statements therefor are received; and (iii) after the Effective Time, FAC will
use all reasonable efforts to assist in the vigorous defense of any such matter,
provided that FAC shall not be liable for any settlement of any claim effected
without its written consent, which consent, however, shall not be unreasonably
withheld. Any Indemnified Party wishing to claim indemnification under this
Section 5.13, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify FAC (but the failure so to notify FAC shall not
relieve it from any liability which it may have under this Section 5.13 except
to the extent such failure materially prejudices FAC). The Indemnified Parties
as a group may retain only one law firm to represent them with respect to each
such matter unless there is, under applicable standards of professional conduct,
a conflict on any significant issue between the positions of any two or more
Indemnified Parties.
(b) From and after the Effective Time and for a period of six years
thereafter, FAC shall use its best efforts to maintain in effect directors' and
officers' liability insurance coverage which is at least as advantageous as to
coverage and amounts as maintained by FCBI immediately prior to the Effective
Time with respect to claims arising from facts or events which occurred before
the Effective Time; provided, however, that FAC shall not be obligated to make
annual premium payments for such insurance to the extent such premiums exceed
1.5 times premiums paid as of the date hereof by FCBI 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 FCBI's directors' and officers'
insurance policies (or any substitute policies permitted by this Section
5.13(b)).
(c) The provisions of this Section 5.13 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, and each Indemnified
Party's heirs and representatives.
5.14 Coordination of Dividends. FCBI shall coordinate with FAC the
declaration of any dividends in respect of FCBI Common Stock and the record
dates and payment dates relating thereto, it being the intention of FCBI and FAC
that holders of FCBI Common Stock shall not receive two dividends, or fail to
receive one dividend, for any single calendar quarter with respect to their
shares of FCBI Common Stock and any shares of FAC Common Stock any such holder
received in exchange therefor in the Merger.
5.15 FCBI Accruals and Reserves. Prior to the Closing Date, FCBI 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
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Corporation's plans with respect to the conduct of FCBI'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, FCBI also will adjust loan loss and OREO reserves as
may be appropriate, consistent with GAAP and the accounting rules, regulations
and interpretations of the SEC and its staff, in light of the then anticipated
post-Closing disposition of certain FCBI assets. The parties agree to cooperate
in preparing for the implementation of the adjustments contemplated by this
Section 5.15. Notwithstanding the foregoing, FCBI shall not be obligated to take
in any respect any such action pursuant to this Section 5.15 (other than
pursuant to the preceding sentence) unless and until FAC acknowledges in writing
that all conditions to its obligation to consummate the Merger have been
satisfied. But, upon such acknowledgement and on the Closing Date, FCBI will
take such actions as are necessary to complete the payments, expenses and
adjustments contemplated by this Section.
5.16 Bank Merger. The parties agree to use their reasonable efforts
between the date of this Agreement and the Closing to take all actions necessary
or desirable, including the filing of any regulatory applications, so that the
merger (the "Bank Merger") of FCB and Citizens with and into FANB, with FANB
being the surviving depository institution, will occur as soon as possible after
the Effective Time. As soon as practicable after the execution and delivery of
this Agreement, FCBI shall cause Citizens and FCB and FAC shall cause FANB to
enter into a Bank Plan of Merger, mutually agreeable to the parties.
5.17 Additional Agreements. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party to
this Agreement shall take all such necessary action.
5.18 Enforcement of Agreements. Prior to the Effective Time, FCBI agrees
to take any action that may be necessary, including seeking injunctive or
equitable relief, to enforce the provisions of certain agreements between FCBI
(and/or Attkisson, Carter & Akers, Incorporated as agent for FCBI) and third
parties which agreements are substantially similar to the Confidentiality
Agreement. FAC is hereby recognized as a third party beneficiary under such
agreements.
5.19 Cooperation Generally. Between the date of this Agreement and the
Effective Time, FAC, FCBI and their Subsidiaries shall use their best efforts,
and to take all actions necessary or appropriate, to consummate the Merger and
the other transactions contemplated by this Agreement at the earliest
practicable date.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) FCBI Stockholder Approval. This Agreement shall have been
approved and adopted by the affirmative vote of the holders of a majority
of the outstanding shares of FCBI Common Stock entitled to vote thereon and
(if applicable) by the affirmative vote of the holders of a majority of the
outstanding shares of Series A Preferred.
(b) FCBI Debenture Holders Consents. At least 66 2/3% of the holders
of FCBI's convertible capital debentures shall have consented to an
amendment accelerating the maturity date of the debentures to immediately
prior to the Effective Time.
(c) NASDAQ Listing. The shares of FAC Common Stock issuable to FCBI
stockholders pursuant to this Agreement and such other shares required to
be reserved for issuance in connection with the Merger shall have been
authorized for listing on the NASDAQ national market system.
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(d) Other Approvals. Other than the filing provided for by Section
1.1, all authorizations, consents, orders or approvals of, or declarations
or filings with, and all expirations of waiting periods imposed by, any
Governmental Entity (all the foregoing, "Consents") which are necessary for
the consummation of the Merger, other than Consents the failure to obtain
which would have no material adverse effect on the consummation of the
Merger or on the Surviving Corporation and its Subsidiaries, taken as a
whole, shall have been filed, occurred or been obtained (all such permits,
approvals, filings and consents and the lapse of all such waiting periods
being referred to as the "Requisite Regulatory Approvals") and all such
Requisite Regulatory Approvals shall be in full force and effect. FAC shall
have received all state securities or blue sky permits and other
authorizations necessary to issue the FAC Common Stock in exchange for FCBI
Common Stock and to consummate the Merger.
(e) S-4. The S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a
stop order.
(f) No Injunctions or Restraints: Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition (an "Injunction") preventing the consummation of the Merger
shall be in effect, nor shall any proceeding by any Governmental Entity
seeking any of the foregoing be pending. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger which makes the consummation of the
Merger illegal.
6.2 Conditions to Obligations of FAC. The obligation of FAC to effect the
Merger is subject to the satisfaction of the following conditions unless waived
by FAC:
(a) Representations and Warranties: The representations and
warranties of FCBI set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement, and FAC shall have received a
certificate signed on behalf of FCBI by the President and Chief Executive
Officer and by the Chief Financial Officer of FCBI to such effect.
(b) Performance of Obligations of FCBI. FCBI shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date (including without
limitation those of Section 5.17), and FAC shall have received a
certificate signed on behalf of FCBI by the President and Chief Executive
Officer and by the Chief Financial Officer of FCBI to such effect.
(c) Consents Under Agreements. FCBI shall have obtained the consent
or approval of each person (other than the Governmental Entities referred
to in Section 6.1(c)) whose consent or approval shall be required in order
to permit the succession by the Surviving Corporation pursuant to the
Merger to any obligation, right or interest of FCBI or any Subsidiary of
FCBI under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, individually or in the
aggregate, have a material adverse effect on the Surviving Corporation and
its Subsidiaries taken as a whole or upon the consummation of the
transactions contemplated hereby.
(d) Opinions. FAC shall have received the opinion of KPMG Peat
Marwick LLP, FAC's independent auditors, dated as of the Effective Time, to
the effect that the Merger will be treated for Federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code, and
that FAC and FCBI will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. FAC also shall have received the
opinions of Bass, Berry & Sims, counsel to FCBI, dated as of the Effective
Time, in form reasonably satisfactory to FAC, which shall cover the
following matters:
(i) FCBI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee;
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(ii) FCB and Citizens are Tennessee chartered state banks duly
incorporated, organized, validly existing, and in good standing under
the banking laws of the state of Tennessee;
(iii) TCC is duly registered, validly existing, and in good
standing under Tennessee's Industrial Loan and Thrift Company Act and
under the laws of the State of Tennessee;
(iv) First City is a company duly organized, validly existing and
in good standing under the laws of the State of Arizona;
(v) The Agreement and Plan of Merger has been duly and validly
authorized, executed and delivered by FCBI (assuming that this Agreement
is a binding obligation of FAC) constitutes a valid and binding
obligation of FCBI enforceable in accordance with its terms, subject as
to enforceability to applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors'
rights generally and to the application of equitable principles and
judicial discretion;
(vi) The execution and delivery of this Agreement and the
consummation of the Merger and the Bank Merger have been duly and
validly authorized by the Boards of Directors of FCBI, FCB and Citizens
and no other corporate action is necessary to authorize the Agreement or
to consummate the Merger and the Bank Merger by FCBI or any Subsidiary
thereof. To the actual knowledge of such counsel, no consent or
approval, which has not already been obtained, from any governmental
authority is required for execution and delivery by FCBI of the
Agreement or any of the documents to be executed and delivered by FCBI
in connection therewith and the consummation of the Merger and the Bank
Merger;
(vii) Immediately prior to the Effective Time (1) the authorized
capital stock of FCBI consists of 5,000,000 shares of FCBI Common Stock
(2) to the actual knowledge of such counsel, there are no agreements or
understandings by FCBI with respect to the voting, sale or transfer of
any shares of capital stock of FCBI or any Subsidiary other than as
contemplated by this Agreement; (3) FCBI and each other Subsidiary of
FCBI is wholly owned by FCBI, directly or indirectly; (4) except for the
shares of FCBI Common Stock and options therefore and FCBI Series A
Preferred Stock convertible into FAC Common Stock or cash by virtue of
the Merger, there are no shares of capital stock or securities
convertible into or evidencing the right to purchase shares of FCBI
capital stock outstanding; and (5) all shares of FCBI Common Stock
outstanding were duly authorized, and nonassessable and were free of the
preemptive right of any shareholder;
(viii) Neither the execution, delivery and performance of this
Agreement by FCBI nor the consummation of the Merger and the Bank Merger
nor the redemption of the Series C and Series D Preferred nor the
conversion of the Series A Preferred or the Convertible Debentures will
(a) conflict with or result in a breach of any provision of the
respective charters, articles of incorporation or bylaws of FCBI or any
Subsidiary (b) constitute or result in the breach of any term,
condition, provision of or constitute a default under, or give rise to
any right of termination, cancellation, or acceleration with respect to,
or result in the creation of any lien, charge or encumbrance upon, any
property or assets of FCBI or any Subsidiary thereof pursuant to any
note, bond, mortgage, indenture, license, agreement, lease or other
instrument or obligation included in the FCBI Disclosure Schedule to
which FCBI or any Subsidiary thereof is a party or by which FCBI or any
Subsidiary thereof is bound or to which any of their properties or
assets may be subject, or (c) violate any order, judgment or decree to
which FCBI or any Subsidiary thereof is a party or by which any of them
or any of their properties or assets is bound;
(ix) Except as set forth in the FCBI Disclosure Schedule, to the
actual knowledge of such counsel, there is no litigation, proceeding or
governmental investigation pending or threatened against FCBI or any
Subsidiary thereof, their properties, businesses or assets that would
reasonably be expected to have, individually or in the aggregate, a
material adverse effect of FCBI or its Subsidiaries and neither FCBI nor
any Subsidiary thereof has received any notification by any regulatory
agency asserting that it is not in compliance with any applicable laws,
statutes or
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regulations (where such non-compliance would reasonably be expected to
have, individually or in the aggregate, a material adverse effect on
FCBI or its Subsidiaries or that seeks to revoke any license, franchise,
permit or other governmental authorization which is necessary to conduct
their businesses as presently conducted.
Such opinion may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of FCBI, FCB or Citizens or
appropriate government officials and (ii) incorporate, be guided by, and be
interpreted in accordance with, the Legal Opinion Accord of the ABA Section
of Business Law (1991).
(e) Conversion to FCBI Common Stock. Prior to the Closing Date, all
convertible debt of FCBI shall have been converted into not more than
165,143 shares of FCBI Common Stock either upon conversion into or upon
payment in shares of FCBI Common Stock at the amended maturity date of such
convertible debt.
(f) Redemption of Preferred Stock. At or prior to the Closing Date,
all currently outstanding shares of Series C Preferred and Series D
Preferred shall be redeemed for cash at their stated values of $3,148,300
and $936,300 respectively plus all accrued and unpaid dividends thereon.
(g) No Material Adverse Change. There shall have been no material
adverse change in the business, financial condition, prospects or results
of operations or prospects of FCBI from that reflected in the FCBI SEC
Documents or the FCBI Disclosure Schedule and FCBI or any of its
Subsidiaries shall not have suffered any substantial loss or damage to
their respective properties, or assets whether or not insured that would
materially adversely affect or impair the ability of FCBI or its
Subsidiaries to conduct their business and operations except for such
changes that result from (i) changes in banking laws or regulations of
general applicability or interpretations thereof, (ii) changes in generally
accepted accounting principles or regulatory accounting principles or
interpretations thereof (iii) changes in general economic conditions
including changes in the general level of interest rates, or (iv) changes
contemplated by this Agreement.
(h) Affiliate Agreements. FAC shall have received written
"affiliates" agreements as provided in Section 5.7 hereof.
(i) Accountants' Letter. FAC shall have received a letter from
Coopers & Lybrand LLP, dated the Closing Date, in form and substance
satisfactory to FAC, stating in effect in respect of FCBI and its
Subsidiaries that: (1) they have examined the consolidated financial
statements of FCBI as of December 31, 1994, and December 31, 1993 and for
each of the years then ended and have made a limited review in accordance
with the standards established by the American Institute of Certified
Public Accountants of the latest available unaudited consolidated interim
financial statements of FCBI available after December 31, 1995; (2) on the
basis of reading the latest available unaudited consolidated interim
financial statements of FCBI; reading the minutes of the meetings of the
stockholders and the Board of Directors and committees thereof of FCBI for
the period from December 31, 1994 to the Closing Date, and inquiries of
officers of FCBI having responsibility for financial and accounting matters
as to whether the unaudited consolidated financial statements referred to
in (1) above are stated on a basis substantially consistent with that of
the audited consolidated financial statements as of December 31, 1994 and
December 31, 1993 and for the years then ended, nothing came to their
attention which caused them to believe that during the period from December
31, 1994 to a date specified not more than three days prior to the date of
the letter there were any changes in the capital stock or the long term
debt of FCBI or any decreases in revenues, net earnings or net assets of
FCBI have occurred or are expected to occur (except for changes or
decreases resulting from securities portfolio gains or losses, the effect
of transaction costs and other costs incurred upon consummation of the
Merger (such as severance payments and costs incurred pursuant to Section
5.15), the effect of the prepayment of the ESOP indebtedness pursuant to
Section 4.2(i), and changes resulting from the issuance of shares or
payment of cash pursuant to options, the conversion of convertible
securities or the redemption of redeemable securities contemplated by this
Agreement); and (3) on the basis of (i) reading the latest available
interim consolidated financial statements which are referred to above and
(ii) inquiries of certain officials of FCBI having responsibility
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for financial and accounting matters concerning whether the unaudited
consolidated interim financial statements referred to in (1) above are
presented fairly, nothing came to their attention which caused them to
believe that the latest available consolidated interim financial statements
are not fairly presented in conformity with generally accepted accounting
principles ("GAAP") applied on a basis consistent with that followed in the
audited consolidated financial statements dated December 31, 1994 and
December 31, 1993 and for the years then ended.
(j) FAC shall have received a certificate of the chief executive
officer of FCBI certifying to FAC immediately prior to the Effective Time
(1) the number of shares of FCBI Common Stock and FCBI Preferred Stock
issued and outstanding; (2) the number of options for FCBI Common Stock
outstanding and (3) that no other shares of capital stock or securities
convertible into or evidencing the right to purchase or subscribe for any
shares of capital stock of FCBI are outstanding and that except for the
Series B Rights (which shall terminate at the Effective Time) there are no
other outstanding warrants, calls, subscriptions, rights, commitments,
stock appreciation rights, phantom stock or similar rights or any other
agreements of any character obligating FCBI or any Subsidiary thereof to
issue any shares of capital stock or securities convertible into or
evidencing the right to purchase such stock; and (4) no shares of FCBI
Common Stock are held by FCBI in treasury or by its Subsidiaries.
(k) The employment contracts with (a) William E. Rowland, President
and Chief Executive Officer of FCBI, and/or (b) Robert B. Murfree,
Executive Vice President of FCBI, substantially in the forms attached
hereto as Exhibits A and B respectively shall have been executed and
delivered respectively by Messrs. Rowland and Murfree.
6.3 Conditions to Obligations of FCBI. The obligation of FCBI to effect
the Merger is subject to the satisfaction of the following conditions unless
waived by FCBI:
(a) Representations and Warranties. The representations and
warranties of FAC set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and FCBI shall have received a certificate
signed on behalf of FAC by the Chairman or the President or a Vice Chairman
and by the Chief Accounting Officer of FAC to such effect.
(b) Performance of Obligations of FAC. FAC shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date, and FCBI shall have
received a certificate signed on behalf of FAC by the Chairman, President
and Chief Executive Officer or a Vice Chairman and by the Chief Accounting
Officer of FAC to such effect.
(c) Consents Under Agreements. FAC shall have obtained the consent or
approval of each person (other than the Governmental Entities referred to
in Section 6.1(c)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or
credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument, except those for which failure to obtain such
consents and approvals would not, individually or in the aggregate, have a
material adverse effect on the Surviving Corporation and its Subsidiaries,
taken as a whole, or upon the consummation of the transactions contemplated
hereby.
(d) Opinions. FCBI shall have received the opinion of and Bass, Berry
& Sims, counsel to FCBI, dated the Closing Date, to the effect that (i) the
Merger (including the Bank Merger) will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code, and that FAC and FCBI will each be a party to that reorganization
within the meaning of Section 368(b) of the Code; (ii) the shareholders of
FCBI will not recognize any gain or loss to the extent that such
shareholders exchange shares of FCBI Common Stock solely for shares of FAC
Common Stock in the Merger, (iii) the basis of the FAC Common Stock
received by an FCBI shareholder who exchanges FCBI Common Stock solely for
FAC Common Stock will be the same as the basis of the FCBI Common Stock
surrendered in exchange therefor (subject to any adjustments required as
the result of receipt of cash in lieu of a fractional share of FAC Common
Stock ), (iv) the holding period of the FAC
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Common Stock received by a FCBI shareholder receiving FAC Common Stock will
include the period during which the FCBI Common Stock surrendered in
exchange therefor was held (provided that the FCBI Common Stock of such
FCBI shareholder was held as a capital asset at the Effective Time), and
(v) cash received by a FCBI shareholder in lieu of a fractional share
interest of FAC Common Stock will be treated as having been received as a
distribution in full payment in exchange for the fractional share interest
of FAC Common Stock which such shareholder would otherwise be entitled to
receive. FCBI also shall have received the opinions of Martin E. Simmons,
Esq., General Counsel to FAC and of outside counsel to FAC, dated as of the
Effective Time, in form reasonably satisfactory to FCBI, which shall cover
the following matters:
(i) FAC is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee;
(ii) FANB is a national banking association duly organized, validly
existing, and in good standing under the laws of the United States of
America;
(iii) The Agreement and Plan of Merger has been duly and validly
authorized, executed and delivered by FAC (assuming that this Agreement
is a binding obligation of FCBI) constitutes a valid and binding
obligation of FAC enforceable in accordance with its terms, subject as
to enforceability to applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors'
rights generally and to the application of equitable principles and
judicial discretion;
(iv) The execution and delivery of this Agreement and the
consummation of the Merger and the Bank Merger have been duly and
validly authorized by the joint Board of Directors of FAC and FANB and
no other corporate action is necessary to authorize the Agreement or to
consummate the Merger and the Bank Merger by FAC or any Subsidiary
thereof. To the actual knowledge of such counsel, no consent or
approval, which has not already been obtained, from any governmental
authority is required for execution and delivery by FAC of the Agreement
or any of the documents to be executed and delivered by FAC in
connection therewith and the consummation of the Merger and the Bank
Merger;
(v) Immediately prior to the Effective Time (1) the authorized
capital stock of FAC consists of 50,000,000 shares of FAC Common Stock
and 2,500,000 shares of FAC Preferred Stock; and there were sufficient
shares of FAC Common Stock reserved for issuance to FCBI shareholders
upon consummation of the Merger and the Bank Merger; and the shares of
FAC Common Stock to be issued to the holders of FCBI Common Stock
pursuant hereto have been duly authorized and when issued will be
non-assessable; and
(vi) Neither the execution, delivery and performance of this
Agreement by FAC nor the consummation of the Merger and the Bank Merger
will (a) conflict with or result in a breach of any provision of the
respective charters, articles of incorporation or bylaws of FAC or any
Subsidiary (b) constitute or result in the breach of any term,
condition, provision of or constitute a default under, or give rise to
any right of termination, cancellation, or acceleration with respect to,
or result in the creation of any lien, charge or encumbrance upon, any
property or assets of FAC or any Subsidiary thereof pursuant to any
note, bond, mortgage, indenture, license, agreement, lease or other
instrument or obligation to which FAC or any Subsidiary thereof is a
party or by which FAC or any Subsidiary thereof is bound or to which any
of their properties or assets may be subject, or (c) violate any order,
judgment or decree to which FAC or any Subsidiary thereof is a party or
by which any of them or any of their properties or assets is bound.
Such opinion may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of FAC or FANB or
appropriate government officials and (ii) incorporate, be guided by, and be
interpreted in accordance with, the Legal Opinion Accord of the ABA Section
of Business Law (1991).
(e) Fairness Opinion. FCBI shall have received an opinion of
Attkisson, Carter & Akers, Incorporated dated as of the date of the
approval of this Agreement by the FCBI Board of Directors to
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the effect that the consideration to be received by the holders of FCBI
Common Stock pursuant to this Agreement upon the consummation of the Merger
is fair to such shareholders from a financial point of view.
(f) Receipt of Consideration. The Exchange Agent shall acknowledge in
writing to FCBI that it is in receipt of (i) certificates representing the
aggregate number of shares of FAC Common Stock to be issued to the
shareholders of FCBI hereunder and (ii) sufficient cash to pay for
fractional shares and restricted FCBI stock as provided herein.
(g) No Material Adverse Change. There shall have been no material
adverse change in the business, financial condition, prospects or results
of operations or prospects of FAC from that reflected in the FAC SEC
Documents and FAC or any of its Subsidiaries shall not have suffered any
substantial loss or damage to their respective properties, or assets
whether or not insured that would materially adversely affect or impair the
ability of FAC or its Subsidiaries to conduct their business and operations
except for such changes that result from (i) changes in banking or thrift
laws or regulations of general applicability or interpretations thereof,
(ii) changes in generally accepted accounting principles or regulatory
accounting principles or interpretations thereof or (iii) changes in
general economic conditions including changes in the general level of
interest rates.
(h) Accountants' Letter. FCBI shall have received a letter from Peat
Marwick LLP, dated the Closing Date, in form and substance satisfactory to
FCBI, stating in effect in respect of FAC and its Subsidiaries that: (1)
they have examined the consolidated financial statements of FAC as of
December 31, 1994, and December 31, 1993 and for each of the years then
ended and have made a limited review in accordance with the standards
established by the American Institute of Certified Public Accountants of
the latest available unaudited consolidated interim financial statements of
FAC available after December 31, 1995; (2) on the basis of reading the
latest available unaudited consolidated interim financial statements of
FAC; reading the minutes of the meetings of the stockholders and the Board
of Directors and committees thereof of FAC for the period from December 31,
1994 to the Closing Date, and inquiries of officers of FAC having
responsibility for financial and accounting matters as to whether the
unaudited consolidated financial statements referred to in (1) above are
stated on a basis substantially consistent with that of the audited
consolidated financial statements as of December 31, 1994 and December 31,
1993 and for the years then ended, nothing came to their attention which
caused them to believe that during the period from December 31, 1994 to a
date specified not more than three days prior to the date of the letter
there were any changes in the capital stock or the long term debt of FAC or
any material decreases in revenues, net earnings or net assets of FAC have
occurred or are expected to occur (except for changes resulting from the
transactions contemplated by this Agreement, or changes resulting from the
anticipated acquisitions by FAC of Heritage Federal Bancshares, Inc. and
Charter Federal Savings Bank) ; and (3) on the basis of (i) reading the
latest available consolidated interim financial statements which are
referred to above and (ii) inquiries of certain officials of FAC having
responsibility for financial and accounting matters concerning whether the
unaudited consolidated interim financial statements referred to in (1)
above are presented fairly, nothing came to their attention which caused
them to believe that the latest available consolidated interim financial
statements are not fairly presented in conformity with GAAP applied on a
basis consistent with that followed in the audited consolidated financial
statements dated December 31, 1994 and December 31, 1993 and for the years
then ended.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the shareholders of FCBI:
(1) by mutual consent of FAC and FCBI; or
(2) by either FAC or FCBI if (i) the Merger shall not have been
consummated on or before June 30, 1996 (the "Termination Date") provided
the terminating party shall not have breached in any
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material respect its obligations under this Agreement in a manner that
proximately contributed to the failure to consummate the Merger by such
date, (ii) any governmental or regulatory body, the consent of which is a
condition to the obligations of FAC and FCBI to consummate the transactions
contemplated hereby or by the Merger Plan, shall have determined not to
grant its consent and all appeals of such determination shall have been
taken and have been unsuccessful, or (iii) any court of competent
jurisdiction in the United States or any State shall have issued an order,
judgment or decree (other than a temporary restraining order) restraining,
enjoining or otherwise prohibiting the Merger and such order, judgment or
decree shall have become final and nonappealable.
(3) By FAC:
(a) if any event shall have occurred as a result of which any
condition set forth in Sections 6.1 or 6.2 is no longer capable of being
satisfied; or
(b) if there has been a breach by FCBI of any representation or
warranty contained in this Agreement which would have or would be
reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or
prospects of FCBI and its Subsidiaries taken as a whole, or there has
been a material breach of any of the covenants or agreements set forth
in this Agreement on the part of FCBI, which breach is not curable, or,
if curable, is not cured within 20 days after written notice of such
breach is given by FAC to FCBI; or
(c) If FCBI (or its Board of Directors) shall have authorized,
recommended, proposed or publicly announced its intention to enter into
a Competing Transaction (as herein defined) which has not been consented
to in writing by FAC; or
(d) if the Board of Directors of FCBI shall have withdrawn or
materially modified its authorization, approval or recommendation to the
stockholders of FCBI with respect to the Merger or this Agreement in a
manner adverse to FAC or shall have failed to make the favorable
recommendation required by Section 5.5; or
(e) if the Average Closing Price exceeds $41.70 upon the giving of
notice as provided in Section 2.1(b) hereof provided that FCBI shall not
have agreed to the reduction in the Exchange Ratio as therein provided;
or
(f) as provided in Section 4.6(b).
(4) By FCBI:
(a) if any event shall have occurred as a result of which any
condition set forth in Sections 6.1 or 6.3 is no longer capable of being
satisfied (provided that nothing herein shall require FCBI to hold more
than one meeting at which a quorum is present pursuant to Section 5.5
herein); or
(b) if there has been a breach by FAC of any representation or
warranty contained in this Agreement which would have or would be
reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or
prospects of FAC and its Subsidiaries taken as a whole, or there has
been a material breach of any of the covenants or agreements set forth
in this Agreement on the part of FAC which breach is not curable or, if
curable, is not cured within 20 days after written notice of such breach
is given by FCBI to FAC; or
(c) if the Average Closing Price is less than $31.40 upon the
giving of notice as provided in Section 2.1(b) and if FAC shall not have
agreed to the increase in the Exchange Ratio as therein provided.
For purposes of this Agreement, the term "Competing Transaction" means any
of the following involving FCBI (other than the transactions contemplated by
this Agreement): (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets of
FCBI in a single transaction or series of transactions to the same person,
entity or group; or (iii) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
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7.2 Rights and Obligations upon Termination. If this Agreement is
terminated as provided herein, each party will redeliver all documents, work
papers, and other materials of any other party relating to the transactions
contemplated hereby, whether obtained before or after the execution hereof, to
the party furnishing the same including using its best efforts to obtain and
redeliver all such documents, work papers and materials, except to the extent
previously delivered to third parties in connection with the transactions
contemplated hereby, and all information received by any party hereto with
respect to the business of any other party shall not at any time be used for the
advantage of, or disclosed to third parties by, such party to the detriment of
the party furnishing such information; provided, however, that this Section 7.2
shall not apply to any documents, work papers, material, or information which is
a matter of public knowledge or which heretofore has been or hereafter is
published in any publication for public distribution or filed as public
information with any governmental agency.
7.3 Fees and Expenses. FCBI acknowledges that FAC has spent, and will be
required to spend, substantial time and effort in examining the business,
properties, affairs, financial condition and prospects of FCBI and its
Subsidiaries, has incurred, and will continue to incur, substantial fees and
expenses in connection with such examination, the preparation of this Agreement
and the accomplishment of the transactions contemplated hereunder, and will be
unable to evaluate and, possibly, make investments in or acquire other entities
due to the limited number of personnel available for such purpose and the
constraints of time. Therefore, to induce FAC to enter this Agreement,
(a) If FAC terminates this Agreement pursuant to:
(i) Section 7.1(3)(a) or (3)(b) by reason of the failure to meet
any condition contained in Section 6.2(a) or (b) due to FCBI's knowing
and intentional misrepresentation or knowing and intentional breach of
warranty or breach of any covenant or agreement and within 12 months
from the date of termination a Competing Transaction is consummated or
FCBI shall have directly or indirectly solicited bids for a Competing
Transaction or shall have entered into an agreement or an agreement in
principle which if consummated would constitute a Competing Transaction;
(ii) Section 7.1(3)(d);
(iii) Section 7.1(3)(c) and within 12 months from the date of
termination a Competing Transaction is consummated or FCBI shall have
entered into an agreement which if consummated would constitute a
Competing Transaction; or
(b) if FCBI terminates this Agreement pursuant to Section 7.1(4)
because this Agreement did not receive the requisite vote of the FCBI
stockholders and within 12 months from the date of termination a Competing
Transaction is consummated or FCBI shall have entered into an agreement
which if consummated would constitute a Competing Transaction; then FCBI
shall pay to FAC a fee in the amount of $3 million (the "Fee"), which
amount is inclusive of the FAC Expenses, not as a penalty but as full and
complete liquidated damages. Upon payment of the Fee, FCBI shall have no
further liability to FAC at law or equity. The Fee shall be payable to FAC
notwithstanding that any action taken by the Board of Directors of FCBI
which may give rise to the obligation to pay the Fee may have been taken in
accordance with the fiduciary duties of the Board of Directors. Any payment
required pursuant to this Section 7.3 shall be made as promptly as
practicable, but in no event later than two business days after the date
due and shall be made by wire transfer of immediately available funds to an
account designated by FAC. In the event that FAC is entitled to the Fee,
FCBI shall also pay to FAC interest at the rate of 6% per year on any
amounts that are not paid when due, plus all costs and expenses in
connection with or arising out of the enforcement of the obligation of FCBI
to pay the Fee or such interest.
7.4 Effect of Termination. Except for such provisions of this Agreement
which by their terms expressly survive the termination hereof and the provisions
of Sections 5.13, 8.8, 7.2, 7.3 and this Section 7.4, which shall survive any
termination of this Agreement. In the event of a termination of this Agreement
pursuant to Section 7.1, this Agreement shall forthwith become void and have no
further effect.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties, and Agreements. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those agreements and covenants which by their terms apply or
are intended to be performed in whole or in part after the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to FAC, to
First American Corporation
615 First American Center
Nashville, Tennessee 37237-0615
Attention: Dennis C. Bottorff, Chairman and Chief Executive
Officer
with a copy to
Martin E. Simmons, Esq.
Executive Vice President -- Administration,
General Counsel and Secretary
606 First American Center
Nashville, Tennessee 37237-0606
and
(b) if to FCBI, to
First City Bancorp, Inc.
201 South Church Street
Murfreesboro, Tennessee 37130
Attention: William E. Rowland, President and Chief Executive
Officer
with a copy to
Bass, Berry & Sims
2700 First American Center
Nashville, Tennessee 37238-2700
Attention: Bob F. Thompson, Esq.
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement, "the date hereof" and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to July 5, 1995.
8.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (including the documents and the instruments referred
to herein) (a) constitutes the entire agreement and supersedes all
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prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof other than the Confidentiality
Agreement which shall remain in full force and effect, and (b) except as
expressly provided herein, is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder. The parties hereby
acknowledge that, except as hereinafter agreed upon in writing, no party shall
have the right to acquire or shall be deemed to have acquired shares of common
stock of the other party pursuant to the Merger until consummation thereof.
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Tennessee, without regard to any
applicable conflicts of law.
8.7 Injunctive Relief; Limitations on Remedies. The parties hereto
acknowledge and agree that since a remedy at law for any breach or attempted
breach of the provisions hereof shall be inadequate, the parties shall be
entitled to specific performance and injunctive or other equitable relief in
case of any such breach or attempted breach, in addition to whatever other
remedies may exist at law. The parties hereto also waive any requirement for the
securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief. Each party further agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable, or order any party to take any action
inconsistent herewith or not to take any action required herein, the other party
shall not be entitled to specific performance of such provision or part hereof
or thereof or to any other remedy, including but not limited to money damages,
for breach hereof or thereof or of any other provision of this Agreement or
parts hereof as a result of such holding or order. This provision is not
intended to render null or unenforceable any obligation hereunder that would be
valid and enforceable if this provision were not in this Agreement.
8.8 Publicity. Except as otherwise required by law or the rules of NASDAQ,
so long as this Agreement is in effect, neither FCBI nor FAC shall, or shall
permit any of its Subsidiaries to, issue or cause the publication of any press
release or other public announcement with respect to the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
8.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.10 Consents. For purposes of any provision of this Agreement requiring,
permitting or providing for the consent of FAC or FCBI, the written consent of
the Chief Executive Officer of FAC or FCBI, as the case may be, shall be
sufficient to constitute such consent.
8.11 Disclosures. No fact or event shall be deemed to have been disclosed
by one party to the other party for purposes of this Agreement unless such fact
or event is disclosed in a writing delivered to such party.
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IN WITNESS WHEREOF, FAC and FCBI have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of June , 1995.
FIRST AMERICAN CORPORATION
By /s/ DALE W. POLLEY
------------------------------------
Dale W. Polley
Vice Chairman
ATTEST:
- --------------------------------------
Title:
- --------------------------------------
FIRST CITY BANCORP, INC.
By /s/ WILLIAM E. ROWLAND
------------------------------------
William E. Rowland
President and Chief Executive
Officer
ATTEST:
- --------------------------------------
Title:
- --------------------------------------
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<PAGE> 173
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This AMENDMENT (the "Amendment") to the AGREEMENT AND PLAN OF MERGER dated
as of July 5, 1995 (the "Agreement"), between First American Corporation, a
Tennessee corporation ("FAC") and First City Bancorp, Inc., a Tennessee
corporation ("FCBI") is made and entered as of February 2, 1996.
WITNESSETH:
WHEREAS, the parties hereto have heretofore entered into the Agreement and
desire to amend the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
1. Section 2.1(b) entitled "Conversion of FCBI Common Stock" is hereby
amended by substituting "third trading" for "fifth" in the sixteenth line
thereof.
Section 2.1(b) entitled "Conversion of FCBI Common Stock" is hereby amended
to delete the following:
"If the Average Closing Price is greater than $41.70, then FAC shall
have the right to notify FCBI on the first day following the end of the
Measurement Period of its election to terminate the Agreement effective
three days thereafter unless the Exchange Ratio is reduced to $26.50
divided by the Average Closing Price, and in that event this Agreement
will terminate at the close of business on such third day unless prior
thereto FCBI shall have agreed to such reduction in the Exchange Ratio.
If the Average Closing Price is less than $31.40, then FCBI shall have
the right to notify FAC on the first day following the end of the
Measurement Period of its election to terminate this Agreement effective
three days thereafter unless the Exchange Ratio is increased to $26.50
divided by the Average Closing Price, and in that event this Agreement
will terminate at the close of business on such third day unless prior
thereto FAC shall have agreed to such increase in the Exchange Ratio."
Section 2.1(b) entitled "Conversion of FCBI Common Stock" is hereby amended
to add the following:
"Notwithstanding the foregoing, if the Average Closing Price is greater
than $44.06, then the Exchange Ratio shall be determined by dividing
$28.00 by the Average Closing Price; provided that in such event the
Exchange Ratio shall not be less than .6200 shares of FAC Common Stock
per share of FCBI Common."
so that Section 2.1(b) shall read in its entirety as follows:
(b) Conversion of FCBI Common Stock. Subject to Section 2.2(a), each
issued and outstanding share of FCBI Common Stock (other than shares to
be canceled in accordance with Section 2.1(a)) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be
converted into and exchangeable for the right to receive, if the Average
Closing Price is between $31.40 and $41.70, the number of fully paid and
nonassessable shares of FAC Common Stock rounded to the nearest
thousandth of a share, determined by dividing $26.50 by the Average
Closing Price, as defined below (the "Exchange Ratio") including the
corresponding number of rights associated with the FAC Common Stock
pursuant to the FAC Rights Agreement (as defined in Section 3.2(b))
provided, that except as set forth below, the Exchange Ratio shall not
exceed .8440 shares of FAC Common per share of FCBI Common and shall not
be less than .6355 shares of FAC Common per share of FCBI Common. The
Average Closing Price shall mean the average closing sale price per
share of FAC Common Stock on the NASDAQ national market system (as
reported in The Wall Street Journal, of it not reported thereby, any
other authoritative source) for the twenty (20) consecutive trading days
ending on and including the third trading day immediately preceding
closing (the "Measurement Period").
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Notwithstanding the foregoing, if the Average Closing Price is greater
than $44.06, then the Exchange Ratio shall be determined by dividing
$28.00 by the Average Closing Price; provided that in such event the
Exchange Ratio shall not be less than .6000 shares of FAC Common Stock
per share of FCBI Common.
In the event that prior to the Effective Time the outstanding shares of
FAC Common Stock have been increased, decreased, changed into or
exchanged for a different number or kind of shares through a
reorganization, reclassification, stock dividend, stock split, reverse
stock split or other similar change applicable adjustments shall be made
to the Average Closing Price and the maximum and minimum number of
shares to be exchanged.
2. Sections 2.1(b), (c), (d) and (e), respectively entitled Conversion of
FCBI Series A Preferred Stock, Conversion of FCBI Stock Options, No Dissenters
Rights and Shares of FAC Common Stock are hereby renumbered Sections 2.1(c),
(d), (e) and (f), respectively.
3. The following language is hereby deleted from Section 4.2(c):
"provided that in the event that the Closing does not occur on or before
February 29, 1996 if as the result of action or inaction on the part of
FAC, FCBI may (to the extent allowable under applicable law) accrue,
declare and pay as a special dividend on shares of FCBI Common Stock, an
amount equal to the difference between the FCBI dividend paid in the
first and succeeding calendar quarters of 1996 and the dividend which
would have been declared during the first and succeeding calendar
quarter of 1996 by FAC on the shares of FAC Common Stock which would
have been issuable in exchange for shares of FCBI Common Stock had
Closing occurred on February 29, 1996;"
4. Section 7.1(3)(e) is hereby deleted in its entirety.
5. Section 7.1(4)(c) is hereby deleted in its entirety.
6. Capitalized terms, not specifically defined herein shall have the
meanings ascribed to them in the Agreement.
7. This Amendment shall become effective retroactively to the execution of
the Agreement. Except as expressly provided above, all of the terms and
conditions of the Agreement shall remain unchanged and in full force and effect.
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IN WITNESS WHEREOF, FAC and FCBI have caused this Amendment to be signed by
their respective officers thereunto duly authorized, all as of February 2, 1996.
FIRST AMERICAN CORPORATION
By:
-----------------------------
Dennis C. Bottorff
Chairman and Chief Executive
Officer
Attest:
-------------------------
Title:
--------------------------
FIRST CITY BANCORP, INC.
By:
-----------------------------
William E. Rowland
President and Chief Executive
Officer
Attest:
-------------------------
Title:
--------------------------
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APPENDIX B
February , 1996
Board of Directors
First City Bancorp, Inc.
One City Center
201 South Church Street
Murfreesboro, Tennessee 37130
Dear Members of the Board:
You have asked us to advise you with respect to the fairness to the
shareholders of First City Bancorp, Inc. (the "Company"), from a financial point
of view of the consideration to be received by such shareholders (the
"Consideration") as provided for in the Agreement and Plan of Merger (the
"Merger Agreement") dated as of July 5, 1995, and as amended on February 2,
1996, between the Company and First American Corporation ("First American"). The
Merger Agreement provides for a merger (the "Merger") of the Company and First
American pursuant to which each share of common stock of the Company will be
converted into the right to receive shares of common stock of First American.
The exchange ratio ("Exchange Ratio") of the number of First American common
shares to be provided for each share of Company common stock will adjust, as
described in the Agreement, based upon the average closing price of First
American for a defined 20 day period prior to the effective date of the Merger
(the "Average Closing Price"), from a maximum of 0.8440 shares to a minimum of
0.6000 shares. If the Average Closing Price is between $31.40 and $41.70, the
Exchange Ratio will be equal to $26.50 divided by the Average Closing Price. If
the Average Closing Price is between $41.70 and $44.06, the Exchange Ratio will
be 0.6355. If the Average Closing Price is between $44.06 and $46.67, the
Exchange Ratio will be equal to $28.00 divided by the Average Closing Price. In
the event the Average Closing Price is greater than $46.67, the Exchange Ratio
will be 0.6000.
On January 31, 1996 the closing price of First American common stock was
.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to First American and the Company.
We have also reviewed certain other information, including financial forecasts,
provided to us by First American and the Company, and have met with First
American's and the Company's managements to discuss the business and prospects
of First American and the Company.
We have also considered certain financial and stock market data of First
American and the Company and we have compared that data with similar data for
other publicly held bank holding companies and we have considered the financial
terms of certain other comparable transactions which have recently been
effected. We also considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not independently verified any of
the foregoing information and have relied on its being complete and accurate in
all material respects. With respect to the financial forecasts we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of First American's and the Company's
managements as to the future financial performance of First American and the
Company. In addition, we have not made an independent evaluation or appraisal of
the assets of First American or the Company. We were requested to and did
solicit third party indications of interest in acquiring the Company. The
results of this solicitation were taken into consideration in arriving at our
opinion.
It should be noted that this opinion is based on market conditions and
other circumstances existing on the date hereof, and this opinion does not
represent our opinion as to what the value of the First American common stock
necessarily will be when the First American common stock is issued to the
stockholders of the Company upon consummation of the Merger.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger.
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It is understood that this opinion may be included in its entirety in any
communication by the Company or the Board of Directors to the shareholders of
the Company. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof, the Consideration to be received by the common shareholders of the
Company provided for by the Merger is fair from a financial point of view.
Very truly yours,
ATTKISSON, CARTER & AKERS, INC.
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<PAGE> 178
APPENDIX C
TENNESSEE CODE ANNOTATED
TITLE 48. CORPORATIONS AND ASSOCIATIONS
FOR-PROFIT BUSINESS CORPORATIONS
CHAPTER 23. DISSENTERS' RIGHTS
PART 1.
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101. DEFINITIONS
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under sec. 48-23-102 and who exercises that right when and
in the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date
of payment, at the average auction rate paid on United States treasury
bills with a maturity of six (6) months (or the closest maturity thereto)
as of the auction date for such treasury bills closest to such effective
date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
48-23-102. RIGHT TO DISSENT
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If shareholder approval is required for the merger by
sec. 48-21-104 or the charter and the shareholder is entitled to vote on
the merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under sec. 48-21-105;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to
the shareholders within one (1) year after the date of sale;
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(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares of other securities with similar voting
rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for cash
under sec. 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the charter, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under sec. 6 of the Securities Exchange Act of
1934, as amended, or is a "national market system security," as defined in rules
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
48-23-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the record shareholder asserts dissenters' rights.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the partial dissenter dissents and the partial dissenter's
other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares of
any one (1) or more classes held on the beneficial shareholder's behalf only if
the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) Does so with respect to all shares of the same class of which the
person is the beneficial shareholder or over which the person has power to
direct the vote.
48-23-201. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under
sec. 48-23-102 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenter' rights under sec. 48-23-102 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in sec. 8-23-203.
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(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
48-23-202. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under
sec. 48-23-102 is submitted to a vote at a shareholder's meeting, a shareholder
who wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed action.
No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provided the notice required
by sec. 48-23-101.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
48-23-203. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under
sec. 48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of sec. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders of effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person asserting dissenters'
rights acquired beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more that two (2)
months after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant to
sec. 48-23-201.
48-203-204. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in sec. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to sec. 48-23-203(B)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
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(d) A demand for payment filed by a shareholder may not be withdrawn unless
the corporation with which it was filed, or the surviving corporation, consents
thereto.
48-23-205. SHARE RESTRICTIONS
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effectuated or the restrictions released under sec. 48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed corporate
action.
48-23-206. PAYMENT
(a) Except as provided in sec. 48-23-208, as soon as the proposed corporate
action is effectuated, or upon receipt of a payment demand, whichever is later,
the corporation shall pay each dissenter who complied with sec. 48-23-204 the
amount the corporation estimates to be the fair value of each dissenter's
shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more that sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
sec. 48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent
a copy of this chapter to the shareholder pursuant to sec. 48-23-201 or
sec. 48-23-203.
48-23-207. FAILURE TO TAKE ACTION
(a) If the corporation does not effectuate the proposed action that gave
rise to the dissenters' rights within two (2) months after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under sec. 48-23-203 and repeat the payment demand
procedure.
48-23-208. AFTER-ACQUIRED SHARES
(a) A corporation may elect to withdraw payment required by sec. 48-23-206
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice to news media or to
shareholders of the principal terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interests, and shall pay
this amount to each dissenters who agrees to accept it in full satisfaction of
the dissenter's demand. The corporation shall send with its offer a statement of
its estimate of the fair value of the shares, an explanation of how the interest
was calculated, and a statement of the dissenter's right to demand payment under
sec. 48-23-209.
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48-23-209. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(a) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate (less any payment under
sec. 48-23-206), or reject the corporation's offer under sec. 48-23-208 and
demand payment of the fair value of the dissenter's shares and interest due, if:
(1) The dissenter believes that the amount paid under sec. 48-23-206
or offered under sec. 48-23-208 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under sec. 48-23-206 within
two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after
the date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection (a) within one (1) month after the corporation made
or offered payment for the dissenter's shares.
48-23-301. COURT ACTION
(a) If a demand for payment under sec. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the two-month period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommended decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus accrued interest, exceeds the amount paid by
the corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment.
48-23-302. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under sec. 48-23-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some
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of the dissenters, in amounts the court finds equitable, to the extent the court
finds the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under sec. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable against:
(1) The corporation and in favor of any of all dissenters if the court
finds the corporation did not substantially comply with the requirements of
part 2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be asserted against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
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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 mandatory indemnification of
directors and officers in accordance with and to the full extent permitted by
the laws of Tennessee as in effect at the time of such indemnification. The
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; and (iii) in a
proceeding by or in the right of the corporation, for any amounts if such person
is adjudged liable to the corporation, or for any amounts paid to First American
in settlement of such a proceeding by such person. First American has purchased
directors' and officers' liability insurance covering certain liabilities which
may be incurred by the officers and directors of First American in connection
with the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
An index of exhibits appears at page II-7.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act").
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate
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offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Proxy
Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to supply means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act and of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement (File No. 33-30507) to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on the 2nd day of February, 1996.
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
Post-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
PRINCIPAL OFFICERS:
/s/ DENNIS C. BOTTORFF Chairman, President, Chief February 2, 1996
- --------------------------------------------- Executive Officer and
Dennis C. Bottorff Director
(Principal Executive
Officer)
/s/ MARTIN E. SIMMONS Executive Vice President -- February 2, 1996
- --------------------------------------------- Administration, General
Martin E. Simmons Counsel, Secretary and
Principal Financial Officer
/s/ M. JACK VANNATTA Executive Vice President and February 2, 1996
- --------------------------------------------- Principal Accounting Officer
M. Jack Vannatta
DIRECTORS:
/s/ SAM H. ANDERSON, JR.* February 2, 1996
- ---------------------------------------------
Sam H. Anderson, Jr.
- ---------------------------------------------
Samuel E. Beall, III
/s/ DENNIS C. BOTTORFF February 2, 1996
- ---------------------------------------------
Dennis C. Bottorff
/s/ EARNEST W. DEAVENPORT, JR.* February 2, 1996
- ---------------------------------------------
Earnest W. Deavenport, Jr.
/s/ REGINALD D. DICKSON* February 2, 1996
- ---------------------------------------------
Reginald D. Dickson
</TABLE>
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<PAGE> 187
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ T. SCOTT FILLEBROWN, JR.* February 2, 1996
- ---------------------------------------------
T. Scott Fillebrown, Jr.
/s/ JAMES A. HASLAM II* February 2, 1996
- ---------------------------------------------
James A. Haslam II
/s/ MARTHA R. INGRAM* February 2, 1996
- ---------------------------------------------
Martha R. Ingram
/s/ WALTER G. KNESTRICK* February 2, 1996
- ---------------------------------------------
Walter G. Knestrick
/s/ GENE C. KOONCE* February 2, 1996
- ---------------------------------------------
Gene C. Koonce
/s/ JAMES R. MARTIN* February 2, 1996
- ---------------------------------------------
James R. Martin
/s/ ROBERT A. MCCABE, JR. February 2, 1996
- ---------------------------------------------
Robert A. McCabe, Jr.
- ---------------------------------------------
William O. McCoy
/s/ DALE W. POLLEY February 2, 1996
- ---------------------------------------------
Dale W. Polley
/s/ ROSCOE R. ROBINSON, M.D.* February 2, 1996
- ---------------------------------------------
Roscoe R. Robinson, M.D.
/s/ JAMES F. SMITH, JR.* February 2, 1996
- ---------------------------------------------
James F. Smith, Jr.
/s/ CAL TURNER, JR.* February 2, 1996
- ---------------------------------------------
Cal Turner, Jr.
/s/ TED H. WELCH* February 2, 1996
- ---------------------------------------------
Ted H. Welch
- ---------------------------------------------
David K. Wilson
</TABLE>
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<PAGE> 188
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ TOBY S. WILT* February 2, 1996
- ---------------------------------------------
Toby S. Wilt
/s/ WILLIAM S. WIRE II* February 2, 1996
- ---------------------------------------------
William S. Wire II
*By: /s/ MARTIN E. SIMMONS February 2, 1996
- ---------------------------------------------
Martin E. Simmons
Attorney in Fact
</TABLE>
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<PAGE> 189
INDEX OF EXHIBITS
<TABLE>
<S> <C> <C> <C>
Exhibit 2.1 -- Agreement and Plan of Merger and Amendment to the Agreement and Plan of
Merger, included as Appendix A to the Prospectus/Proxy Statement and
incorporated herein by reference.
Exhibit 3.1 -- Charter of First American, as amended, incorporated herein by reference
to Exhibit 1 to First American's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991 (Commission File No. 0-6198).
Exhibit 3.2 -- Bylaws of First American, as amended incorporated herein by reference to
Exhibit 3.2 to First American's Annual Report on Form 10-K for the year
ended December 31, 1994 (Commission File No. 0-6198).
Exhibit 4.1 -- Rights Agreement, dated December 14, 1988, between First American
Corporation and First American Trust Company, N.A. (previously filed as
Exhibit 1 to First American's Current Report on Form 8-K dated December
14, 1988, and incorporated herein by reference).
Exhibit 5 -- Opinion of Martin E. Simmons, Esq., regarding validity of FAC Common
Stock being registered (previously filed).
Exhibit 8 -- Opinion of Bass, Berry & Sims as to certain tax consequences of the
Merger (previously filed).
Exhibit 11 -- Calculation of earnings per share (previously filed as Exhibit 11 to
First American's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference).
Exhibit 15 -- Letter of KPMG Peat Marwick LLP Regarding Unaudited interim Financial
Information for First American, filed herewith.
Exhibit 23.1 -- Consent of KPMG Peat Marwick LLP, independent accountants for First
American, filed herewith.
Exhibit 23.2 -- Consent of Coopers & Lybrand LLP, independent auditors for First City,
filed herewith.
Exhibit 23.3 -- Consent of Martin E. Simmons, Esq., contained in the opinion filed as
Exhibit 5 (previously filed).
Exhibit 23.4 -- Consent of Attkisson, Carter & Akers Incorporated filed herewith.
Exhibit 23.5 -- Consent of Bass, Berry & Sims contained in the opinion filed as Exhibit
8 (previously filed).
Exhibit 24 -- Powers of Attorney of certain directors and officers of First American
(previously filed).
Exhibit 99.1 -- Form of Proxy relating to FCBI Common Stock and Series A Preferred
Stock, filed herewith.
Exhibit 99.2 -- Form of Opinion of Attkisson, Carter & Akers Incorporated, included as
Appendix B to the Prospectus/Proxy Statement and incorporated herein by
reference.
</TABLE>
<PAGE> 1
EXHIBIT 15
The Board of Directors
First American Corporation:
With respect to this Post-Effective Amendment No. 1 to Form S-4, we acknowledge
our awareness of the use therein of our report dated April 20, 1995, our report
dated July 20, 1995, except for Note 6, as to which the date is September 22,
1995, and our report dated October 19, 1995, except for the fifth paragraph of
Note 5, as to which the date is November 1, 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,
KPMG Peat Marwick LLP
Nashville, Tennessee
February 1, 1996
<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, contained in First American
Corporation's 1994 Annual Report on Form 10-K incorporated herein by reference,
and to the use of our audit report dated December 4, 1995 on the supplemental
consolidated financial statements of First American Corporation as of December
31, 1994 and 1993, and for each of the years in the three-year period ended
December 31, 1994, contained in First American Corporation's Current Report on
Form 8-K dated December 6, 1995 incorporated herein by reference. The
supplemental consolidated financial statements give retroactive effect to First
American Corporation's merger with Heritage Federal Bancshares, Inc. effective
November 1, 1995. Our reports dated January 20, 1995 and December 4, 1995 each
contain 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, Employer's Accounting for
Postemployment Benefits; and No. 115, Accounting for Certain Investments in
Debt and Equity Securities. We also consent to the reference to our firm under
the heading "Experts" in this Post-Effective Amendment No. 1 to Form S-4.
KPMG Peat Marwick LLP
Nashville, Tennessee
February 1, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this post-effective amendment No. 1 to the
registration statement of First American Corporation on Form S-4 of our report,
which includes 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 and No. 115, Accounting for Certain Investments
in Debt on Equity Securities, dated January 24, 1995 on our audits of the
consolidated financial statements of First City Bancorp, Inc. and Subsidiaries.
We also consent to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
Lexington, Kentucky
February 2, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ATTKISSON, CARTER & AKERS, INC.
We hereby consent to the inclusion of our opinion dated February 1, 1996,
as ANNEX B to the Proxy Statement/Prospectus filed as part of Post-Effective
Amendment No. 1 to Registration Statement on Form S-4, of First American
Corporation and to the references to our firm as Financial Advisor to First City
Bancorp, Inc. and to our opinion contained in said Proxy Statement/Prospectus.
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.
ATTKISSON, CARTER & AKERS, INC.
February 1, 1996
<PAGE> 1
REVOCABLE PROXY FIRST CITY BANCORP, INC. EXHIBIT 99.1
SPECIAL MEETING OF SHAREHOLDERS
MARCH 7, 1996
The undersigned hereby appoints William E. Rowland of First City Bancorp,
Inc. ("First City") or any successors, with full powers of substitution, to act
as attorneys and proxies for the undersigned to vote all shares of the Common
Stock and/or Series A Preferred Stock of First City which the undersigned is
entitled to vote at the Special Meeting of Shareholders (the "Meeting"), to be
held at the City Center, 201 South Church Street, Murfreesboro, Tennessee, on
Thursday, March 7, 1996, at 10:00 a.m. and at any and all adjournments thereof,
as follows:
1. The approval of the Agreement and Plan of Merger, as amended (the
"Agreement"), by and between First City and First American Corporation ("First
American") which provides for the merger of First City with and into First
American (the "Merger") pursuant to which (i) shareholders of First City will
receive for each share of First City's common stock, no par value (the "FCBI
Common Stock"), the number of shares of common stock of First American; $5.00
par value ("FAC Common Stock"), determined in accordance with the Agreement and
cash in lieu of any fractional share; and (ii) each outstanding share of First
City's Series A Preferred Stock, which has not been converted to FCBI Common
Stock prior to the Effective Time, will be converted into the right to receive
$6.00 per share, plus any accumulated but unpaid dividends accrued prior to the
Merger.
<TABLE>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
2. The adjournment of the Meeting to a later date, if necessary, to solicit
additional proxies in the event insufficient shares are present in person or by
proxy at the Meeting to approve the Agreement, all as more fully described in
the Prospectus/Proxy Statement herewith.
<TABLE>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSITIONS.
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT THE MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF THE
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN ACCORDANCE
WITH THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT
TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE
MEETING.
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at any
adjournment thereof and after notification to the Secretary of First City at the
Meeting of the shareholder's decision to terminate this proxy, then the power of
said attorneys and proxies shall be deemed terminated and of no further force
and effect.
The undersigned acknowledges receipt from First City prior to the execution of
this proxy of the Notice of Meeting and the Prospectus/Proxy Statement. The
undersigned hereby revokes any and all proxies heretofore given, with respect to
the undersigned's shares of FCBI Common Stock and/or Series A Preferred Stock.
Dated: , 1996
----------------------
---------------------------------
Print Name 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 should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
