<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1998
REGISTRATION NO. 333-61781
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-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 its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 6711 62-079975
(State or other jurisdiction of Primary Standard Industrial (I.R.S. Employer
incorporation or organization) (Classification Code Number) Identification No.)
</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)
MARY NEIL PRICE, ESQ., GENERAL COUNSEL
FIRST AMERICAN CORPORATION
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0721
(615) 748-2049
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
CATHERINE COLLINS MCCOY, ESQ. JEFFREY GERRISH, ESQ.
ARNOLD & PORTER GERRISH & MCCREARY, P.C.
555 TWELFTH STREET, N.W. 700 COLONIAL ROAD
WASHINGTON, D.C. 20004-1202 MEMPHIS, TN 38117
(202) 942-5000 (901) 767-0900
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(2) SHARE(3) PRICE(3) REGISTRATION FEE
- -------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock(1) 927,836 $12.29 11,404,728 3,365
</TABLE>
(1) Also includes associated Rights to purchase shares of the Registrant's
Series A Junior preferred stock, which Rights are not currently separable
from shares of Common Stock and are not currently exercisable. See
"COMPARATIVE RIGHTS OF SHAREHOLDERS OF FIRST AMERICAN, CSB AND
BANK--Shareholder Rights Plan."
(2) Based upon the maximum number of shares that may be issued upon
consummation of the transaction described herein, and upon exercise of
securities exercisable for shares of common stock of First American.
(3) Estimated solely for the purpose of computing the registration fee.
Computed in accordance with Rule 457(f)(2) under the Securities Act of
1933, as amended, on the basis of the book value of $129.41 per share of
common stock, $1.00 par value, of CSB Financial Corporation, and on the
basis of the book value of $59.95 per share of common stock, par value
$1.00 per share, of Cheatham State Bank, both as of June 30, 1998. The
proposed maximum aggregate offering price per share has been determined by
dividing the proposed maximum aggregate offering price by the number of
shares being registered.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE> 2
[CSB LOGO]
August 27, 1998
Dear CSB Shareholder:
We are pleased to enclose your Notice of Special Meeting and
Prospectus/Proxy Statement for the Special Meeting of Shareholders of CSB
Financial Corporation ("CSB") to be held on September 25, 1998 at 10:30 a.m.,
local time, at the main office of Cheatham State Bank, 104 N. Kingston Springs
Road, Kingston Springs, Tennessee (the "CSB Special Meeting").
At the CSB Special Meeting you will be asked to consider and vote on a
proposed merger of CSB, a Tennessee corporation, with and into First American
Corporation ("First American"), a Tennessee corporation. By virtue of the
proposed merger of CSB with and into First American, each share of CSB common
stock, par value $1.00 per share ("CSB Common Stock"), outstanding immediately
prior to the time that such proposed merger is completed, except as provided in
the Agreement and Plan of Reorganization, dated as of June 9, 1998, by and
among First American Corporation, First American National Bank ("FANB"), CSB
Financial Corporation and Cheatham State Bank ("Bank") (the "Agreement"), will
be exchanged for 9.7071 shares of common stock of First American, par value
$2.50 per share ("First American Common Stock") (such proposed merger and share
exchange, collectively, are the "Holding Company Merger").
First American is headquartered in Nashville, Tennessee. As of June 30,
1988, First American had banking operations in Tennessee, Mississippi,
Louisiana, Arkansas, Virginia and Kentucky, and had consolidated assets of
about $19.1 billion, deposits of about $13.6 billion and shareholders' equity
of about $1.6 billion. First American Common Stock is listed and traded on the
New York Stock Exchange under the symbol "FAM." The closing price of First
American Common Stock in composite trading on August 24, 1998 was $40.69 per
share, as reported in The Wall Street Journal. CSB Common Stock is neither
listed nor publicly traded.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED HOLDING
COMPANY MERGER AND RECOMMENDS A VOTE "FOR" THE HOLDING COMPANY MERGER. The
proposed Holding Company Merger has been approved by the CSB Board of Directors
(the "CSB Board") as being in the best interest of CSB and its shareholders.
The CSB Board reached this decision after careful consideration of a number of
factors. The enclosed Prospectus/Proxy Statement contains more detailed
information concerning the CSB Board's decision and the Holding Company Merger.
We urge you to consider it carefully.
Approval of the Holding Company Merger is subject to certain conditions,
including the approval of the Holding Company Merger by various regulatory
agencies. In addition, the affirmative vote of the holders of a majority of
CSB Common Stock entitled to vote thereon (and with no more than 5% of such
holders dissenting pursuant to applicable Tennessee law) is required to approve
the Agreement. CSB and First American intend to consummate the Holding Company
Merger by October 1, 1998.
IT IS VERY IMPORTANT THAT YOUR SHARES ARE VOTED AT THE CSB SPECIAL MEETING,
REGARDLESS OF WHETHER YOU ATTEND IN PERSON. A FAILURE TO VOTE, EITHER BY NOT
RETURNING THE ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE
THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE AGREEMENT. PLEASE COMPLETE THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID, RETURN
ENVELOPE. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS TIME.
In order to make sure that your vote is represented, indicate your vote on
the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the meeting in person, you may revoke your proxy at
the CSB Special Meeting and vote in person.
Sincerely,
/s/ Gary Scott
Gary Scott
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS OR OTHER GOVERNMENTAL AGENCY HAVE APPROVED THE FIRST AMERICAN COMMON
STOCK TO BE ISSUED UNDER THIS PROSPECTUS/PROXY STATEMENT OR DETERMINED IF THIS
PROSPECTUS/PROXY STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus/Proxy Statement dated August 27, 1998 and first mailed to
shareholders on August 27, 1998.
<PAGE> 3
[BANK LOGO]
August 27, 1998
Dear Bank Shareholder:
We are pleased to enclose your Notice of Special Meeting and
Prospectus/Proxy Statement for the Special Meeting of Shareholders of Cheatham
State Bank ("Bank") to be held on September 25, 1998 at 11:30 a.m., local time,
at the main office of the Bank, 104 West Kingston Springs Road, Kingston
Springs, Tennessee (the "Bank Special Meeting").
At the Bank Special Meeting you will be asked to consider and vote on a
proposed merger of Bank, a Tennessee banking corporation, with and into First
American National Bank ("FANB"), a national banking association. In addition, by
virtue of the proposed merger of Bank with and into FANB, each share of Bank
common stock, par value $1.00 per share ("Bank Common Stock"), outstanding
immediately prior to the time that such proposed merger is completed, except as
provided in the Agreement and Plan of Reorganization, dated as of June 9, 1998,
by and among First American Corporation ("First American"), FANB, CSB Financial
Corporation and Bank (the "Agreement"), will be exchanged for 4.4653 shares of
common stock of First American, par value $2.50 per share ("First American
Common Stock") (such proposed merger and share exchange, collectively, are the
"Bank Merger").
First American is headquartered in Nashville, Tennessee. As of June 30,
1988, First American had banking operations in Tennessee, Mississippi,
Louisiana, Arkansas, Virginia and Kentucky, and had consolidated assets of about
$19.1 billion, deposits of about $13.6 billion and shareholders' equity of about
$1.6 billion. First American Common Stock is listed and traded on the New York
Stock Exchange under the symbol "FAM." The closing price of First American
Common Stock in composite trading on August 24, 1998 was $40.69 per share, as
reported in The Wall Street Journal. Bank Common Stock is neither listed nor
publicly traded.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED BANK MERGER
AND RECOMMENDS A VOTE "FOR" THE BANK MERGER. The proposed Bank Merger has been
approved by the Bank Board of Directors (the "Bank Board") as being in the best
interest of the Bank and its shareholders. The Bank Board reached this decision
after careful consideration of a number of factors. The enclosed
Prospectus/Proxy Statement contains more detailed information concerning the
Bank Board's decision and the Bank Merger. We urge you to consider it carefully.
Approval of the Bank Merger is subject to certain conditions, including the
approval of the Bank Merger by various regulatory agencies. In addition, the
affirmative vote of the holders of two thirds (2/3) of the Bank Common Stock
entitled to vote thereon (and with no more than 5% of such holders dissenting
pursuant to 12 U.S.C. Section 215a) is required to approve the Agreement. CSB
FINANCIAL CORPORATION OWNS APPROXIMATELY 96% OF THE OUTSTANDING SHARES OF BANK
COMMON STOCK AND WILL VOTE ITS SHARES IN FAVOR OF THE BANK MERGER, THUS ASSURING
THAT THE BANK MERGER WILL GET THE NEEDED APPROVAL OF THE BANK SHAREHOLDERS. Bank
and FANB intend to consummate the Bank Merger by October 1, 1998.
IT IS IMPORTANT THAT YOUR SHARES ARE VOTED AT THE BANK SPECIAL MEETING,
REGARDLESS OF WHETHER YOU ATTEND IN PERSON. A FAILURE TO VOTE, EITHER BY NOT
RETURNING THE ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE
THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE AGREEMENT. PLEASE COMPLETE THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID, RETURN
ENVELOPE. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS TIME.
In order to make sure that your vote is represented, indicate your vote on
the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the meeting in person, you may revoke your proxy at
the Bank Special Meeting and vote in person.
Sincerely,
/s/ Gary Scott
Gary Scott
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS OR OTHER GOVERNMENTAL AGENCY HAVE APPROVED THE FIRST AMERICAN COMMON
STOCK TO BE ISSUED UNDER THIS PROSPECTUS/PROXY STATEMENT OR DETERMINED IF THIS
PROSPECTUS/PROXY STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus/Proxy Statement dated August 27, 1998 and first mailed to
shareholders on August 27, 1998.
<PAGE> 4
CSB FINANCIAL CORPORATION
108 CUMBERLAND STREET
ASHLAND CITY, TN 37015
(615) 792-4337
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON SEPTEMBER 25, 1998
TO THE SHAREHOLDERS OF
CSB FINANCIAL CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of CSB Financial
Corporation ("CSB") will be held at the main office of Cheatham State Bank, 104
West Kingston Springs Road, Kingston Springs, Tennessee on September 25, 1998 at
10:30 a.m., local time, (the "CSB Special Meeting") for the purpose of
considering and voting upon the following matters:
1. Approval of the Holding Company Merger, which proposed transaction is
defined and described in the Agreement and Plan of Reorganization, dated as
of June 9, 1998, by and among First American Corporation ("First
American"), First American National Bank ("FANB"), CSB and Cheatham State
Bank ("Bank") (the "Agreement"), a copy of which is included as Appendix A
to the accompanying Prospectus/Proxy Statement and incorporated by
reference herein, and pursuant to which: (a) CSB, a Tennessee corporation,
will be merged with and into First American, a Tennessee corporation; (b)
each outstanding share of common stock of CSB ("CSB Common Stock"), par
value $1.00 per share, will be exchanged for 9.7071 shares of common stock
of First American, par value $2.50 per share ("First American Common
Stock"), plus an associated right to purchase shares of First American's
Series A Junior Preferred Stock, and cash in lieu of any fractional share
determined in accordance with the terms of the Agreement (such merger and
share exchange, collectively, are the "Holding Company Merger"); (c) Bank,
a Tennessee banking corporation, will be merged with and into FANB, a
national banking association; and (d) each outstanding share of common
stock of Bank, par value $1.00 per share, will be exchanged for 4.4653
shares of First American Common Stock, plus an associated right to purchase
shares of First American's Series A Junior Preferred Stock, and cash in
lieu of any fractional share determined in accordance with the terms of the
Agreement.
2. To transact such other business as may properly come before the CSB Special
Meeting or any adjournments or postponements thereof.
Only holders of record of CSB Common Stock at the close of business on August
21, 1998, are entitled to notice of and to vote at the CSB Special Meeting or
any adjournments or postponements of the CSB Special Meeting.
All shareholders are cordially invited to attend the CSB Special Meeting. To
ensure your representation at the CSB Special Meeting, please complete and
promptly mail your proxy in the return envelope enclosed. This will not prevent
you from voting in person, but will help to secure a quorum and avoid added
solicitation costs. Your proxy may be revoked at any time before it is voted.
Please review the Prospectus/Proxy Statement accompanying this notice for more
complete information regarding the Holding Company Merger and the CSB Special
Meeting.
Under Chapter 23 of the Tennessee Business Corporation Act (the "TBCA"),
holders of CSB Common Stock who comply with Chapter 23 of the TBCA will have
the right to dissent from the Holding Company Merger and to obtain payment of
the fair value of their shares. A copy of Chapter 23 of the TBCA is attached as
Appendix C to the accompanying Prospectus/Proxy Statement. Please see the
section entitled "ADDITIONAL INFORMATION--Dissenters' Appraisal Rights" in the
attached Prospectus/Proxy Statement for a discussion of the procedures to be
followed in asserting these dissenters' rights.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gary Scott
Gary Scott
President and Chief Executive Officer
August 27, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE CSB SPECIAL MEETING.
THE BOARD OF DIRECTORS OF CSB UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE HOLDING COMPANY MERGER.
<PAGE> 5
CHEATHAM STATE BANK
104 West Kingston Springs Road
Kingston Springs, TN 37082
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON SEPTEMBER 25, 1998
TO THE SHAREHOLDERS OF
CHEATHAM STATE BANK:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of Cheatham State
Bank ("Bank") will be held at the main office of Bank, 104 West Kingston
Springs Road, Kingston Springs, Tennessee on September 25, 1998 at 11:30 a.m.,
local time, (the "Bank Special Meeting") for the purpose of considering and
voting upon the following matters:
1. Approval of the Bank Merger, which proposed transaction is defined and
described in the Agreement and Plan of Reorganization, dated as of June 9,
1998, by and among First American Corporation ("First American"), First
American National Bank ("FANB"), CSB Financial Corporation ("CSB") and Bank
(the "Agreement"), a copy of which is included as Appendix A to the
accompanying Prospectus/Proxy Statement and incorporated by reference
herein, and pursuant to which: (a) Bank, a Tennessee banking corporation,
will be merged with and into FANB, a national banking association; (b) each
outstanding share of common stock of Bank ("Bank Common Stock"), par value
$1.00 per share, will be exchanged for 4.4653 shares of common stock of
First American, par value $2.50 per share ("First American Common Stock"),
plus an associated right to purchase shares of First American's Series A
Junior Preferred Stock, and cash in lieu of any fractional share determined
in accordance with the terms of the Agreement (such merger and share
exchange, collectively, are the "Bank Merger"); (c) CSB, a Tennessee
corporation, will be merged with and into First American, a Tennessee
corporation; and (d) each outstanding share of common stock of CSB, par
value $1.00 per share, will be exchanged for 9.7071 shares of First
American Common Stock, plus an associated right to purchase shares of First
American's Series A Junior Preferred Stock, and cash in lieu of any
fractional share determined in accordance with the terms of the Agreement.
2. To transact such other business as may properly come before the Bank
Special Meeting or any adjournments or postponements thereof.
Only holders of record of Bank Common Stock at the close of business on August
21, 1998, are entitled to notice of and to vote at the Bank Special Meeting or
any adjournments or postponements of the Bank Special Meeting.
All shareholders are cordially invited to attend the Bank Special Meeting. To
ensure your representation at the Bank Special Meeting, please complete and
promptly mail your proxy in the return envelope enclosed. This will not prevent
you from voting in person. Your proxy may be revoked at any time before it is
voted. Please review the Prospectus/Proxy Statement accompanying this notice
for more complete information regarding the Bank Merger and the Bank Special
Meeting.
Under 12 U.S.C. Section 215a ("Section 215a"), holders of Bank Common Stock
who comply with Section 215a will have the right to dissent from the Bank
Merger and to obtain payment of the fair value of their shares. A copy of
Section 215a is attached as Appendix D to the accompanying Prospectus/Proxy
Statement. Please see the section entitled "ADDITIONAL INFORMATION--Dissenters'
Appraisal Rights" in the attached Prospectus/Proxy Statement for a discussion
of the procedures to be followed in asserting these dissenters' rights.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Gary Scott
Gary Scott
President and Chief Executive Officer
August 27, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE BANK SPECIAL MEETING.
THE BOARD OF DIRECTORS OF BANK UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE BANK MERGER.
<PAGE> 6
QUESTIONS AND ANSWERS
ABOUT THE PROPOSED MERGERS
Q: WHY ARE CSB FINANCIAL CORPORATION ("CSB") AND CHEATHAM STATE BANK ("BANK")
CHOOSING TO COMBINE WITH FIRST AMERICAN CORPORATION ("FIRST AMERICAN") AND
FIRST AMERICAN NATIONAL BANK ("FANB")?
A: Today's financial marketplace imposes challenges and burdens. The squeeze
on net interest margins, competition in general (including availability of
new products and services from numerous nontraditional financial-service
providers), the need for management succession and demands for additional
capital to provide a fully competitive array of products and services were
all considered by CSB's and Bank's Boards of Directors in determining that
the transaction is in the best interest of CSB's and Bank's respective
shareholders, the depositors and loan customers of Bank in the marketplace.
The Boards of Directors of CSB and Bank believe that the terms of the
transaction are attractive by allowing shareholders of CSB and Bank to
become shareholders in First American, an institution whose stock is traded
on the New York Stock Exchange. Furthermore, the current and prospective
economic and regulatory environment and competitive constraints facing the
banking industry make a long-term affiliation with First American an
attractive alternative by providing additional financial size and strength
to aggressively compete in the changing environment.
Q: IF I AM A CSB SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER OF CSB AND
FIRST AMERICAN CORPORATION (THE "HOLDING COMPANY MERGER")?
A: You will have the right to receive 9.7071 shares of First American Common
Stock in exchange (the "CSB Exchange Ratio") for each share of CSB Common
Stock you own. However, First American won't issue any fractional shares.
Instead, you will receive an amount of cash for any fraction of a share
based on the market value of First American Common Stock over a period
close to the date the Holding Company Merger is completed.
Example: If you own one share of CSB Common Stock, upon completion of the
Holding Company Merger you'll have the right to receive nine shares of
First American Common Stock and a check for the market value of 0.7071 of
a share of First American Common Stock.
Q: IF I AM A BANK SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER OF BANK AND
FANB (THE "BANK MERGER")?
A: You will have the right to receive 4.4653 shares of First American Common
Stock in exchange for each share of Bank Common Stock you own. However,
First American won't issue any fractional shares. Instead, you will receive
an amount of cash for any fraction of a share based on the market value of
First American Common Stock over a period close to the date the Bank Merger
is completed.
Example: If you own one share of Bank Common Stock, upon completion of
the Bank Merger you'll have the right to receive four shares of First
American Common Stock and a check for the market value of 0.4653 of a
share of First American Common Stock.
Q: WHAT HAPPENS AS THE MARKET PRICE OF FIRST AMERICAN COMMON STOCK FLUCTUATES?
A: The CSB Exchange Ratio is fixed at 9.7071, and the Bank Exchange Ratio is
fixed at 4.4653. Since the market value of First American Common Stock will
fluctuate before and after the closing of the Mergers, the value of the
stock CSB shareholders and Bank shareholders will receive in the Mergers
will fluctuate as well and could decrease.
Q: WHAT HAPPENS TO MY DIVIDENDS IN THE FUTURE?
A: After the Mergers, First American expects to pay $.25 per share, the amount
First American has recently paid as a regular quarterly cash dividend to
its shareholders. While the board of directors of First American ("First
American Board") currently expects to pay those dividends, it can't assure
these payments. The First American Board will use its discretion to decide
whether and when to declare dividends and in what amount, and it will
consider all relevant factors in doing so.
Q: WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
A: We hope to complete the Mergers by October 1, 1998. In addition to the
approval of the CSB shareholders and the Bank shareholders, we must also
obtain regulatory approvals, which include approval of the Board of
Governors of
<PAGE> 7
the Federal Reserve System, the Office of the Comptroller of the Currency
and the Commissioner of Financial Institutions of the State of Tennessee.
Q: AS A CSB SHAREHOLDER OR A BANK SHAREHOLDER, WHAT ARE THE U.S. FEDERAL
INCOME TAX CONSEQUENCES TO ME?
A: We expect that for U.S. federal income tax purposes, your exchange of
shares of CSB Common Stock or Bank Common Stock, as the case may be, for
shares of First American Common Stock by virtue of the Mergers generally
will not cause you to recognize any gain or loss. You will, however, have
to recognize gain in connection with any cash received instead of
fractional shares. This tax treatment won't apply to you if you dissent
from the Holding Company Merger under Tennessee law or the Bank Merger
under the National Bank Act.
We provide a more detailed review of the U.S. federal income tax
consequences of the Mergers at page 31 of this document.
Q: AS A CSB SHAREHOLDER, DO I HAVE TO ACCEPT FIRST AMERICAN COMMON STOCK IN
EXCHANGE FOR MY CSB SHARES IF THE HOLDING COMPANY MERGER IS APPROVED?
A: No. If you are a CSB shareholder and you follow the procedures prescribed
by Tennessee law, you may dissent from the Holding Company Merger and have
the fair value of your stock appraised by a court and paid in cash. If you
follow those procedures, you won't receive First American Common Stock. The
fair value of your CSB Common Stock, determined in the manner prescribed by
Tennessee law, will be paid to you in cash. For a more complete description
of these dissenters' rights, see page 97 of this document.
Q: AS A BANK SHAREHOLDER, DO I HAVE TO ACCEPT FIRST AMERICAN COMMON STOCK IN
EXCHANGE FOR MY BANK SHARES IF THE BANK MERGER IS APPROVED?
A: No. If you are a Bank shareholder and you follow the procedures prescribed
by the National Bank Act, you may dissent from the Bank Merger and have the
fair value of your stock appraised and paid in cash. If you follow these
procedures, you won't receive First American Common Stock. The fair value
of your Bank Common Stock, determined in the manner prescribed by the
National Bank Act, will be paid to you in cash. For a more complete
description of these dissenters' rights, see page 98 of this document.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail
the proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the appropriate Special Meeting. If you
sign and send in your proxy but don't indicate how you want to vote, your
proxy will be counted as a vote in favor of the Holding Company Merger or
the Bank Merger, as appropriate. If you don't vote on the applicable Merger
or if you abstain, the effect will be a vote against the applicable Merger.
CSB shareholders: Tennessee law permits you to dissent from the Holding
Company Merger and to have the fair value of your stock appraised by a
court and paid to you in cash. To do this, you must follow certain
procedures, including filing certain notices with us and refraining from
voting your shares in favor of the Holding Company Merger. If you execute
a proxy card and desire to effect your appraisal rights, you must mark the
proxy card "Against" the proposal relating to the Holding Company Merger
because if the proxy card is left blank, it will be voted "For" the
proposal relating to the Holding Company Merger. If you dissent from the
Holding Company Merger, your shares of CSB Common Stock will not be
exchanged for shares of First American Common Stock in the Holding Company
Merger, and your only right will be to receive the appraised value of your
shares in cash. We provide more detailed instructions about dissenting
from the Holding Company Merger on page 97.
Bank shareholders: Federal law permits you to dissent from the Bank
Merger and to have the fair value of your stock appraised by a court and
paid to you in cash. To do this, you must follow certain procedures,
including the filing of certain notices and refraining from voting your
shares in favor of the Bank Merger. If you dissent from the Bank Merger,
your shares of Bank Common Stock will not be exchanged for shares of First
American Common Stock in the Bank Merger, and your only right will be to
receive the appraised value of your shares in cash. We provide more
detailed instructions about dissenting from the Bank Merger on page
98.
The CSB Special Meeting and the Bank Special Meeting will each take place
on September 25, 1998. You are invited to the applicable Special Meeting
to vote your shares in person, rather than signing and mailing your proxy
card. If you do sign your proxy card, you can take back your proxy up to
and including the date of your shareholders' meeting and either change
your vote or attend the applicable Special Meeting and vote in person. We
provide more detailed instructions about voting on pages 19 through 21.
<PAGE> 8
THE BOARD OF DIRECTORS OF CSB UNANIMOUSLY RECOMMENDS VOTING IN FAVOR OF
THE PROPOSED HOLDING COMPANY MERGER.
THE BOARD OF DIRECTORS OF BANK UNANIMOUSLY RECOMMENDS VOTING IN FAVOR OF
THE PROPOSED BANK MERGER.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Only if you provide instructions on how your broker should vote. You should
instruct your broker how to vote your shares, following the directions your
broker provides. Without instructions from you to your broker, your shares
will not be voted and this will effectively be a vote against the Holding
Company Merger or the Bank Merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. No one should send stock certificates in now.
After the Mergers are completed, we'll send you written instructions on
how to exchange your shares for First American Common Stock.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the Mergers, you should contact:
CSB Financial Corporation or Cheatham State Bank
104 West Kingston Springs Road
Kingston Springs, TN 37082
Attention: Mr. Gary Scott
Phone Number: (615) 952-9143
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TABLE OF CONTENTS
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The Companies..................................................................... 1
First American Corporation................................................... 1
CSB Financial Corporation.................................................... 1
Cheatham State Bank.......................................................... 1
CSB's and Bank's Reasons for the Mergers.......................................... 1
The Shareholders' Meetings........................................................ 1
CSB's and Bank's Recommendations to Shareholders.................................. 1
Record Dates; Voting Power........................................................ 1
Votes Required.................................................................... 2
The Mergers....................................................................... 2
Conditions to Completion of the Mergers...................................... 2
Termination of the Agreement................................................. 2
Federal Income Tax Consequences.............................................. 2
Accounting Treatment......................................................... 3
Opinion of CSB's and Bank's Financial Advisor................................ 3
Board of Directors and Management of First American Following the Mergers.... 3
Interests of Other Persons in the Mergers That are Different from Yours...... 3
Dissenters' Appraisal Rights................................................. 3
Regulatory Approvals......................................................... 4
Termination Fee.............................................................. 4
Comparative Per Share Market Price Information............................... 4
Forward-Looking Statements May Prove Inaccurate.............................. 4
Comparative Unaudited Per Share Data.............................................. 5
Selected Financial Data........................................................... 8
Selected Historical Financial Data of First American......................... 8
Selected Historical Financial Data of CSB Financial Corporation.............. 9
Selected Historical Financial Data of Cheatham State Bank....................10
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Pro Forma Combined Condensed Balance Sheet........................................12
Pro Forma Combined Condensed Income Statements....................................13
Notes to Unaudited Pro Forma Combined Condensed Financial Information.............18
THE SPECIAL MEETINGS
CSB Special Meeting...............................................................19
General......................................................................19
Proxies......................................................................19
Solicitation of Proxies......................................................19
Record Date and Voting Rights................................................19
Dissenters' Rights...........................................................20
Recommendation of the CSB Board..............................................20
Bank Special Meeting..............................................................20
General......................................................................20
Proxies......................................................................20
Solicitation of Proxies......................................................21
Record Date and Voting Rights................................................21
Dissenters' Rights...........................................................21
Recommendation of the Bank Board.............................................21
THE MERGERS
Description of the Mergers........................................................22
Background of the Mergers.........................................................23
Reasons of CSB and Bank for the Mergers...........................................24
Opinion of CSB's and Bank's Financial Advisor.....................................24
The Effective Time................................................................25
Exchange of Certificates..........................................................26
Conduct of Business Prior to the Mergers and Other Covenants......................27
Conditions to the Mergers.........................................................28
Termination of the Agreement......................................................29
Termination Fee...................................................................30
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Expenses..........................................................................31
Certain Federal Income Tax Consequences...........................................31
Interests of Certain Persons in the Mergers.......................................32
Accounting Treatment..............................................................33
Regulatory Matters................................................................33
Restrictions on Resales by Affiliates.............................................34
INFORMATION ABOUT OUR COMPANIES
Information About First American..................................................35
General......................................................................35
Pending Acquisitions.........................................................35
Information About CSB.............................................................36
Information About Bank............................................................36
Management and Operations After the Mergers.......................................36
Price Range of Common Stock and Dividends.........................................36
Market Prices................................................................36
Dividends....................................................................37
Supervision and Regulation of First American, CSB and Bank........................37
General......................................................................37
Capital and Operational Requirements.........................................38
Enforcement Powers of the Banking Agencies...................................40
First American Capital Stock......................................................40
First American Common Stock..................................................40
First American Preferred Stock...............................................41
Comparative Rights of Shareholders of First American, CSB and Bank................41
Board of Directors...........................................................41
Business Combination Provisions..............................................42
Shareholder Rights Plan......................................................42
Shareholder Meetings.........................................................44
Dissenters' Appraisal Rights.................................................45
Consideration of Non-Shareholder Interests by Board of Directors.............45
Certain Purchases of the Corporation's Securities............................45
Indemnification..............................................................45
Amendments to Articles of Incorporation and Bylaws...........................47
ADDITIONAL INFORMATION ABOUT CSB FINANCIAL CORPORATION
General...........................................................................48
Regulation and Supervision of CSB.................................................48
Properties........................................................................49
Competition.......................................................................49
Recent Legislation and Other Changes..............................................49
Employees.........................................................................49
Legal Proceedings.................................................................49
Dividends.........................................................................50
Executive Officers and Directors..................................................50
Transactions with Management......................................................50
Ownership of CSB Common Stock.....................................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................51
Comparison of Six Months Ended June 30, 1998 and 1997........................51
Comparison of Years Ended December 31, 1997, 1996 and 1995...................55
Statistical Data for CSB..........................................................58
ADDITIONAL INFORMATION ABOUT CHEATHAM STATE BANK
General...........................................................................74
Regulation and Supervision of Bank................................................74
Properties........................................................................74
Competition.......................................................................74
Recent Legislation and Other Changes..............................................74
Employees.........................................................................75
Legal Proceedings.................................................................75
Dividends.........................................................................75
Executive Officers and Directors..................................................75
Transactions with Management......................................................75
Ownership of Bank Common Stock....................................................76
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................76
Comparison of Six Months Ended June 30, 1998 and 1997.......................76
Comparison of Years Ended December 31, 1997, 1996 and 1995..................79
Statistical Data for Bank.........................................................82
ADDITIONAL INFORMATION
Dissenters' Appraisal Rights......................................................97
Legal Opinion.....................................................................99
Experts...........................................................................99
Other Matters.....................................................................99
Where You Can Find More Information...............................................99
Cautionary Statement Concerning Forward-Looking Information......................101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CSB FINANCIAL CORPORATION
AND ITS SUBSIDIARIES...............................F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CHEATHAM STATE BANK
AND ITS SUBSIDIARIES..............................FF-1
APPENDICES
APPENDIX A Agreement and Plan of Reorganization.................................A-1
APPENDIX B Opinion of Southard Financial....................................... B-1
APPENDIX C Chapter 23 of the Tennessee Business Corporation
Act - Dissenters' Rights of CSB Shareholders.........................C-1
APPENDIX D 12 U.S.C. ss. 215a - Dissenters' Rights of Bank Shareholders.........D-1
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<PAGE> 11
SUMMARY
This summary highlights selected information from this document. It does not
contain all of the information that is important to you. You should carefully
read this entire document and the documents to which we have referred you in
order to understand fully the Mergers and to obtain a more complete description
of the legal terms of the Mergers. See "ADDITIONAL INFORMATION--Where You Can
Find More Information" (page 99). Each item in this summary includes a page
reference that directs you to a more complete description in this document of
the topic discussed.
THE COMPANIES (PAGE 35)
FIRST AMERICAN CORPORATION
First American Center
Nashville, Tennessee 37237-0700
(615) 748-2000
First American Corporation ("First American") is incorporated in Tennessee and
is a federal bank holding company. We provide banking and other financial
services. Our banking services are provided in Tennessee, Mississippi,
Louisiana, Arkansas, Virginia and Kentucky. First American's principal assets
are the stock of its subsidiaries. As of June 30, 1998, our total assets were
about $19.1 billion our deposits were about $13.6 billion and shareholders'
equity was about $1.6 billion
CSB FINANCIAL CORPORATION
108 Cumberland Street
Ashland City, Tennessee 37015
(615) 792-4337
CSB Financial Corporation ("CSB") is incorporated in Tennessee and is a federal
bank holding company. We are providing banking and other financial services.
Our banking services are provided in Cheatham County, Tennessee. CSB's
principal asset is the stock it holds in Cheatham State Bank. As of June 30,
1998, our total assets were about $144.9 million, our deposits were about
$131.7 million and shareholders' equity was about $11.0 million.
CHEATHAM STATE BANK
104 West Kingston Springs Road
Kingston Springs, Tennessee 37082
(615) 952-9143
Cheatham State Bank ("Bank") is a Tennessee state-chartered bank. CSB owns
over 96% of the capital stock of Bank. Bank operates four banking offices in
Cheatham County, Tennessee. As of June 30, 1998, our total assets were about
$144.5 million, our deposits were about $131.8 million and shareholders' equity
was about $10.7 million.
CSB'S AND BANK'S REASONS FOR THE MERGERS (PAGE 24)
Among the reasons for the CSB Board of Directors' ("CSB Board") and Bank Board
of Directors' ("Bank Board") approval and adoption of the Agreement included
each Board's belief that the financial terms of the agreement were attractive
based on the recent earnings performance of First American, each Board's
familiarity with and review of First American's business, operations, earnings
and financial condition, the current and prospective economic and regulatory
environment and competitive constraints facing the banking industry and
financial institutions in CSB's and Bank's market areas and each Board's belief
that First American was an attractive choice as a long term affiliation partner
for CSB and Bank.
To review the background of, and reasons for, the Mergers in greater detail,
please see pages 23 through 24.
THE SHAREHOLDERS' MEETINGS (PAGE 19 AND 20 )
The CSB Special Meeting will be held in Kingston Springs, Tennessee, on
September 25, 1998 at 10:30 a.m. At the CSB Special Meeting, CSB shareholders
will be asked to approve the proposed merger of CSB with and into First
American and the related share exchange (the "Holding Company Merger").
The Bank Special Meeting will be held in Kingston Springs, Tennessee, on
September 25, 1998 at 11:30 a.m. At the Bank Special Meeting, Bank
shareholders will be asked to approve the proposed merger of Bank with and into
First American National Bank, a national banking association and wholly-owned
subsidiary of First American, and the related share exchange (the "Bank
Merger").
CSB'S AND BANK'S RECOMMENDATION TO SHAREHOLDERS (PAGES 20 AND 21)
The CSB Board believes that the Holding Company Merger is fair to you and in
your best interests, and unanimously recommends that you vote "FOR" the proposal
to approve the Holding Company Merger.
The Bank Board believes that the Bank Merger is fair to you and in your best
interests, and unanimously recommends that you vote "FOR" the proposal to
approve the Bank Merger.
RECORD DATES; VOTING POWER (PAGES 20 AND 21)
You can vote at the CSB Special Meeting if you owned common stock of CSB ("CSB
Common Stock") as of the close of business on August 21, 1998, the CSB Record
Date. On that date, 84,947 shares of CSB Common Stock were outstanding and
therefore are allowed to vote at the CSB Special Meeting. You will be able to
cast one vote for each share of CSB Common Stock you owned on August 21 1998.
You can vote at the Bank Special Meeting if you owned common stock of Bank
("Bank Common Stock") as of the close of business on August 21, 1998, the Bank
Record Date. On that date, 178,154 shares of Bank Common Stock
1
<PAGE> 12
were outstanding and therefore are allowed to vote at the Bank Special Meeting.
You will be able to cast one vote for each share of Bank Common Stock you owned
on August 21, 1998.
VOTES REQUIRED (PAGES 20 AND 21 )
In order for the Holding Company Merger to be approved, CSB shareholders
holding a majority of the outstanding shares of CSB Common Stock on the CSB
Record Date must vote in favor of the Holding Company Merger.
All together, the directors and officers of CSB can cast less than 63% of the
votes entitled to be cast at the CSB Special Meeting. We expect that they will
vote all of their shares in favor of the Holding Company Merger.
In order for the Bank Merger to be approved, Bank shareholders holding at least
two-thirds of the outstanding shares of Bank Common Stock on the Bank Record
Date must vote in favor of the Bank Merger.
CSB owns approximately 96% of the outstanding shares of Bank Common Stock and
will vote its shares in favor of the Bank Merger, thus assuring that the Bank
Merger will get the needed approval of the Bank shareholders.
THE MERGERS (PAGE 22)
We have attached the Agreement and Plan of Reorganization, dated as of June 9,
1998, by and among First American Corporation, First American National Bank,
CSB Financial Corporation and Cheatham State Bank (the "Agreement") to this
Prospectus/Proxy Statement as Appendix A. We encourage you to read the
Agreement. It is the legal document that governs the Mergers.
CONDITIONS TO COMPLETION OF THE MERGERS (PAGE 28)
The completion of the Mergers depends on a number of conditions being met,
including the following:
1. CSB shareholders approving the Holding Company Merger and Bank
shareholders approving the Bank Merger;
2. The New York Stock Exchange (the "NYSE") having approved for listing the
shares First American will issue to CSB shareholders and Bank shareholders
by virtue of the Mergers;
3. receipt of all required regulatory approvals and the expiration of any
regulatory waiting periods;
4. the absence of any governmental order blocking completion of either
Merger, or of any proceedings by a government body trying to block either
Merger;
5. receipt by First American of an opinion of KPMG Peat Marwick LLP, and
receipt of an opinion by Gerrish & McCreary, P.C., that the U.S. federal
income tax treatment of CSB shareholders, Bank shareholders, CSB, Bank,
FANB and First American in the Mergers will generally be as we've described
it to you in this document; and
6. receipt of a letter from First American's independent public accountants
stating that the Mergers will qualify for "pooling of interests"
accounting treatment.
In cases where the law permits, a party to the Agreement could elect to waive a
condition that has not been satisfied and complete the Mergers although it is
entitled not to. We can't be certain whether or when any of the conditions
we've listed will be satisfied (or waived, where permissible), or that the
Mergers will be completed.
TERMINATION OF THE AGREEMENT (PAGE 29)
First American and CSB can mutually agree at any time to terminate the
Agreement without completing the Mergers, even if the CSB shareholders and/or
the Bank shareholders have already voted to approve the Holding Company Merger
or the Bank Merger. Also, First American can terminate the Agreement if the
CSB Board withdraws, or modifies in any way adverse to First American, its
recommendation that CSB shareholders approve the Holding Company Merger.
Moreover, either First American or CSB can terminate the Agreement in the
following circumstances:
1. after a final decision by a governmental authority to prohibit either
Merger, or after the rejection of an application for a governmental
approval required to complete either Merger;
2. if the Merger isn't completed by February 15, 1999, so long as the
terminating party did not materially breach its obligations under the
Agreement in a manner that caused either Merger not to be completed by
that date;
3. if the CSB shareholders don't approve the Merger; or
4. if the other party violates, in a significant way, any of its
representations, warranties or obligations under the Agreement.
Generally, a party can only terminate the Agreement in one of the preceding
four situations if that party isn't in violation of the Agreement or if its
violations of the Agreement aren't the cause of the event permitting
termination.
2
<PAGE> 13
FEDERAL INCOME TAX CONSEQUENCES (PAGE 31)
We have structured the transaction with the intent that First American, CSB,
FANB, Bank, CSB's shareholders and Bank's shareholders won't recognize any gain
or loss for U.S. federal income tax purposes in the Mergers, except in
connection with cash received instead of fractional shares by CSB shareholders
and Bank's shareholders. We have conditioned the Mergers on the receipt of a
legal opinion that this will be the case, but this opinion won't bind the
Internal Revenue Service, which could take a different view.
THIS TAX TREATMENT MAY NOT APPLY TO CERTAIN CSB SHAREHOLDERS AND BANK
SHAREHOLDERS, INCLUDING THE TYPES OF CSB SHAREHOLDERS AND BANK SHAREHOLDERS
DISCUSSED ON PAGE 31 AND WILL NOT APPLY TO ANY CSB SHAREHOLDER WHO DISSENTS
FROM THE HOLDING COMPANY MERGER UNDER TENNESSEE LAW AND ANY BANK SHAREHOLDER WHO
DISSENTS FROM THE BANK MERGER UNDER 12 U.S.C. Section 215A. DETERMINING THE
ACTUAL TAX CONSEQUENCES OF THE MERGERS TO YOU CAN BE COMPLICATED. THEY WILL
DEPEND ON YOUR SPECIFIC SITUATION AND MANY VARIABLES NOT WITHIN OUR CONTROL. YOU
SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE MERGERS' TAX
CONSEQUENCES.
ACCOUNTING TREATMENT (PAGE 33)
We expect the Mergers to qualify as a pooling of interests, which means that,
for accounting and financial reporting purposes, we will treat First American
and CSB as if they had always been one company. We have conditioned the Mergers
on the receipt of a letter from First American's independent public accountants
that the Mergers will qualify as a pooling of interests and a letter from CSB's
and Bank's independent accountants, indicating that they have examined certain
financial information with respect to CSB and Bank (as required by the terms of
the Agreement) and making such representations and giving such assurances as
are required by the terms of the Agreement.
OPINION OF CSB'S AND BANK'S FINANCIAL ADVISOR (PAGE 24)
In deciding to approve the Holding Company Merger and the Bank Merger, each of
the CSB Board and Bank Board, respectively, considered the opinion of its
financial advisor, Southard Financial ("Southard"), that as of the date of the
opinion the exchange ratios were fair from a financial point of view to CSB's
shareholders and Bank Shareholders. We have attached this opinion as Appendix B
to this document. You should read it carefully.
BOARD OF DIRECTORS AND MANAGEMENT OF FIRST AMERICAN FOLLOWING THE MERGER
(PAGE 36)
The Board of Directors and executive officers of First American immediately
prior to the Holding Company Merger shall continue to hold such positions
following the Holding Company Merger. The Board of Directors and executive
officers of FANB immediately prior to the Bank Merger shall continue to hold
such positions following the Bank Merger.
At the CSB Effective Time, CSB will merge with and into First American, with
First American as the surviving corporation. The articles and bylaws of First
American immediately following the Holding Company Merger shall be the articles
and bylaws of First American that were in effect immediately before the Holding
Company Merger, without change. At the Bank Effective Time, Bank will merge
with and into FANB, with FANB as the surviving bank. The articles of
association and bylaws of FANB immediately following the Bank Merger shall be
those articles of association and bylaws of FANB that were in place immediately
before the Bank Merger, without change.
INTERESTS OF OTHER PERSONS IN THE MERGERS THAT ARE DIFFERENT FROM YOURS
(PAGE 32)
All of CSB's and Bank's directors and executive officers own shares of CSB
Common Stock, all of which will be converted into shares of First American
Common Stock pursuant to the Mergers on the same terms and conditions as
applied to all other shares of CSB Common Stock and minority-held Bank Common
Stock.
None of these directors and executive officers have agreements for additional
compensation or any other rights which become effective upon a change in control
or which relate to the Mergers other than the employment contract of Gary Scott,
and the Retention Bonus Agreements of certain members of CSB's and Bank's
management. The employment contract of Gary Scott provides for the continued
employment of Mr. Scott following the transaction. The contract will run until
December 31, 2000 unless renewed or terminated and provides for a per annum base
salary consistent with Mr. Scott's current salary. The contract also provides
standard non-compete provisions for Mr. Scott for 12 months after the end of his
employment under terms of the contract within 30 miles of areas in which First
American engages in business. In certain circumstances, if Mr. Scott is
terminated without cause he will still be entitled to payments under the
contract.
The Retention Bonus Agreements are provided to ensure that key personnel remain
employed with CSB or the Bank up to the time of consummation of an acquisition.
The Retention Bonus Agreements provide for cash bonuses if an employee remains
employed with CSB or the Bank through the transition process. The Retention
Bonus Agreements include a non-competition provision that becomes effective if
the employee voluntarily terminates employment after receiving a retention
bonus.
Current retirement and health insurance plans available to employees of CSB and
the Bank will terminate as of the effective time of each respective Merger.
Those employees of CSB and the Bank who are retained following the Mergers will
be subject to existing employee plans and plan requirements of First American.
First American has agreed to provide employees of CSB and the Bank who are
employed following the effective time of each respective Merger with employee
benefits on substantially the same basis and applying the same eligibility
standards as other First American subsidiary employees.
3
<PAGE> 14
Members of the CSB Board, CSB's officers, members of the Bank Board and Bank's
officers also are entitled to indemnification and liability insurance under the
Agreement.
DISSENTERS' APPRAISAL RIGHTS (PAGE 97)
CSB shareholders: Tennessee law permits you to dissent from the Holding
Company Merger and to have the fair value of your stock appraised by a court
and paid to you in cash. To do this, you must follow certain procedures,
including the filing of certain notices with us and refraining from voting your
shares in favor of the Holding Company Merger. If you dissent from the Holding
Company Merger, your shares of CSB Common Stock will not be exchanged for
shares of First American Common Stock in the Holding Company Merger, and your
only right will be to receive the appraised value of your shares in cash.
Bank shareholders: Federal law permits you to dissent from the Bank Merger and
to have the fair value of your stock appraised by a court and paid to you in
cash. To do this, you must follow certain procedures, including the filing of
certain notices and refraining from voting your shares in favor of the Bank
Merger. If you dissent from the Bank Merger, your shares of Bank Common Stock
will not be exchanged for shares of First American Common Stock in the Bank
Merger, and your only right will be to receive the appraised value of your
shares in cash.
REGULATORY APPROVALS (PAGE 33)
We can't complete the Holding Company Merger unless we obtain the approval of
the Board of Governors of the Federal Reserve System. The U.S. Department of
Justice has input into the Federal Reserve Board's approval process. Federal law
requires us to wait for up to 30 days before completing the Holding Company
Merger after the Federal Reserve Board has approved it. As of the date of this
document, the Federal Reserve Board has approved the Holding Company Merger; and
the required waiting period will have expired before the Holding Company Merger
is completed.
The Bank Merger requires a notice filing with the Tennessee Department of
Financial Institutions (the "TDFI") and the approval of the Office of the
Comptroller of the Currency (the "OCC"). We have filed the required notice with
the TDFI. As of the date of this document, the OCC has approved the Bank Merger
and the required waiting period will have expired before the Merger is
completed.
TERMINATION FEE (PAGE 30)
Under certain circumstances, if First American terminates the Agreement by
reason of certain actions or omissions on the part of CSB or Bank, or if CSB or
Bank terminates the Agreement and 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 CSB or Bank, CSB
may be required to pay First American liquidated damages in the amount of $2
million.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 36)
Shares of First American are quoted on the NYSE. Shares of CSB and of Bank are
neither listed nor publicly traded. On June 8, 1998 the last full trading day
prior to the public announcement of the Mergers, First American stock closed at
$46.50 per share. On August 24, 1998, First American stock closed at $40.69
per share.
Based on the exchange ratio in the Holding Company Merger, which is 9.7071, the
market value of the consideration that CSB shareholders will receive in the
Holding Company Merger for each share of CSB Common Stock would be $451.38 based
on First American's June 8, 1998 closing price and $394.98 based on First
American's August 24, 1998 closing price. Based on the exchange ratio in the
Bank Merger, which is 4.4653, the market value of the consideration the Bank
shareholders will receive in the Bank Merger for each share of Bank Common
Stock would be $207.64 based on First American's June 8, 1998 closing price and
$181.69 based on First American's August 24, 1998 closing price. Of course, the
market price of First American Common Stock will fluctuate prior to and after
completion of the Mergers, while the exchange ratios are fixed. You should
obtain current stock price quotations for First American Common Stock.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 101)
We have each made forward-looking statements in this document (and in documents
to which we refer you in this document) that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of First American's operations or
performance after the Mergers. Also, when we use any of the words "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. Many possible events or factors could affect the future financial
results and performance of First American after the Mergers and could cause
those results or performance to differ materially from those expressed in our
forward-looking statements. These possible events or factors include the
following:
1. legal and regulatory risks and uncertainties;
2. economic, political and competitive forces affecting our businesses,
markets, constituencies or securities;
3. the risk that our analyses of these risks and forces could be incorrect,
or that the strategies we've developed to deal with them may not succeed.
4
<PAGE> 15
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information about our companies' income per
share, dividends per share and book value per share, and similar information
reflecting the Mergers and First American's acquisitions of Peoples Bank
("PEOPLES"), The Middle Tennessee Bank ("MTB") and Pioneer Bancshares, Inc.
("PIONEER") (collectively, the "PROPOSED TRANSACTIONS") (which is referred to
as "pro forma" information). In presenting the comparative pro forma
information for certain time periods, we assumed the Proposed Transactions were
completed at the beginning of those periods.
In connection with the Mergers, First American will exchange 9.7071 shares
of First American Common Stock for each of the 84,947 outstanding shares of CSB
Common Stock and 4.4653 shares of First American Common Stock for each of the
6,868 outstanding shares of Bank Common Stock not owned by CSB. In connection
with its acquisition of MTB, First American will exchange 7.768 shares of First
American Common Stock for each of the 150,000 outstanding shares of common stock
of MTB ("MTB COMMON STOCK"). In connection with its acquisition of Peoples,
First American will exchange 3.70 shares of First American Common Stock for each
of the 250,000 outstanding shares of common stock of Peoples ("PEOPLES COMMON
STOCK"). In connection with its acquisition of Pioneer, First American will
exchange 1.65 shares of First American Common Stock for each of the 3,735,848
outstanding shares of Pioneer ("PIONEER COMMON STOCK").
In presenting the comparative pro forma information, we also assumed that
we will treat the companies as if they had always been combined for accounting
and financial reporting purposes (a method which is referred to as the "pooling
of interests" method of accounting).
The information listed as "equivalent pro forma" was obtained by
multiplying the pro forma amounts by the exchange ratio of 9.7071 (with respect
to CSB) and by the exchange ratio of 4.4653 (with respect to Bank). It is
intended to reflect the fact that CSB shareholders and Bank Shareholders will
be receiving more than one share of First American Common Stock for each share
of CSB Common Stock or Bank Common Stock exchanged in the Mergers.
We expect that we will incur restructuring and merger-related expenses as
a result of the Proposed Transactions. We also anticipate that the Proposed
Transactions will provide financial benefits such as reduced operating expenses
and the opportunity to earn more revenue at branch locations. However, none of
these anticipated expenses or benefits has been factored into the pro forma
information. For that reason, the pro forma information, while helpful in
illustrating the financial attributes of the combined company under one set of
assumptions, doesn't attempt to predict or suggest future results. Also, the
information we've set forth for the six-month period ended June 30, 1998
doesn't indicate what the results will be for the full 1998 fiscal year.
The information in the following table is based on the historical
financial information of First American that has been presented in its prior
Securities and Exchange Commission filings, the historical financial
information of CSB and Bank that is included at the back of this
Prospectus/Proxy Statement and the historical financial information of Peoples,
MTB and Pioneer. First American's financial information has been incorporated
into this Prospectus/Proxy Statement by reference. See "ADDITIONAL
INFORMATION--Where You Can Find More Information" on page 99.
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AT OR FOR THE AT OR FOR THE YEARS ENDED
SIX MONTHS DECEMBER 31
ENDED ----------------------------
JUNE 30, 1998 1997(a) 1996(a) 1995(a)
------------- --------- --------- ---------
(unaudited)
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FIRST AMERICAN COMMON STOCK
Income from continuing operations per common share:
Basic:
Historical $ 0.77 $ 2.23 $ 1.96 $ 1.73
Equivalent Pro Forma - CSB(c) 0.77 2.22 1.96 1.73
Equivalent Pro Forma - Proposed Transactions (b) 0.78 2.19 1.93 1.70
Diluted:
Historical $ 0.75 $ 2.18 $ 1.93 $ 1.70
Equivalent Pro Forma - CSB(c) 0.76 2.18 1.93 1.70
Equivalent Pro Forma - Proposed Transactions (b) 0.77 2.15 1.91 1.67
Cash dividends declared per common share:
Historical (d) $ 0.34 $ 0.73 $ 0.61 $ 0.51
Equivalent Pro Forma - CSB(c) 0.33 0.72 0.60 0.51
Equivalent Pro Forma - Proposed Transactions (b) 0.33 0.71 0.60 0.50
Book value per common share as of end of period:
Historical $ 14.59 $ 14.56
Equivalent Pro Forma - CSB(c) 14.57 14.55
Equivalent Pro Forma - Proposed Transactions (b) 14.84 14.77
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEARS ENDED
SIX MONTHS DECEMBER 31
ENDED --------------------------------
JUNE 30, 1998 1997 1996 1995
------------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
CSB COMMON STOCK
Income from continuing operations per common share:
Basic:
Historical $ 10.59 $ 19.31 $ 17.75 $ 14.09
Equivalent Pro Forma - CSB(c) 7.47 21.55 19.03 16.79
Equivalent Pro Forma - Proposed Transactions (b) 7.57 21.26 18.73 16.50
Diluted:
Historical $ 10.41 $ 19.12 $ 17.69 $ 14.09
Equivalent Pro Forma - CSB(c) 7.38 21.16 18.73 16.50
Equivalent Pro Forma - Proposed Transactions (b) 7.47 20.87 18.54 16.21
Cash dividends declared per common share:
Historical $ - $ - $ - $ -
Equivalent Pro Forma - CSB(c) 3.20 6.99 5.82 4.95
Equivalent Pro Forma - Proposed Transactions (b) 3.20 6.89 5.82 4.95
Book value per common share as of end of period:
Historical $ 129.33 $ 119.38
Equivalent Pro Forma - CSB(c) 141.43 141.14
Equivalent Pro Forma - Proposed Transactions (b) 142.15 143.37
</TABLE>
(a) Historical data has been restated to reflect the acquisition of Deposit
Guaranty Corp. effective May 1, 1998 accounted for using the "pooling of
interests" method of accounting.
(b) First American will account for each of the proposed transactions using the
"pooling of interests" method of accounting.
(c) CSB equivalent pro forma amounts are computed by multiplying the First
American pro forma combined amounts by the exchange ratio of 9.7071.
(d) First American historical dividends are computed by combining dividends paid
by First American and Deposit Guaranty Corp. divided by the combined
weighted average outstanding for the period.
6
<PAGE> 17
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEARS ENDED
SIX MONTHS DECEMBER 31
ENDED -------------------------------
JUNE 30, 1998 1997 1996 1995
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
BANK COMMON STOCK(c)
Income from continuing operations per common share:
Basic:
Historical Bank $ 5.51 $ 9.58 $ 8.64 $ 6.92
Equivalent Pro Forma - Bank(b) 3.44 9.91 8.75 7.73
Equivalent Pro Forma - Proposed Transactions (a) 3.48 9.78 8.62 7.59
Diluted:
Historical Bank $ 5.51 $ 9.58 $ 8.64 $ 6.92
Equivalent Pro Forma - Bank(b) 3.39 9.73 8.62 7.59
Equivalent Pro Forma - Proposed Transactions (a) 3.44 9.60 8.53 7.46
Cash dividends declared per common share:
Historical Bank $ 1.00 $ 2.00 $ 2.00 $ 2.00
Equivalent Pro Forma - Bank(b) 1.47 3.26 2.68 2.19
Equivalent Pro Forma - Proposed Transactions (a) 1.47 3.17 2.68 2.23
Book value per common share as of end of period:
Historical Bank $59.95 $55.75
Equivalent Pro Forma - Bank(b) 65.06 64.97
Equivalent Pro Forma - Proposed Transactions (a) 66.27 65.95
</TABLE>
(a) First American will account for each of the Proposed Transactions using the
"pooling of interests" method of accounting.
(b) Bank equivalent pro forma amounts are computed by multiplying the First
American pro forma combined amounts by the exchange ratio of 4.4653.
(c) Computations assume the exchange of all outstanding shares of Bank.
7
<PAGE> 18
SELECTED FINANCIAL DATA
The following tables show summarized unaudited historical financial data
for First American, CSB and Bank. The information we've set forth for the
six-month period ended June 30, 1998 doesn't indicate what the results will be
for the full 1998 fiscal year.
The information in the following tables is based on the historical
financial information of First American that has been presented in its prior
filings with the Securities and Exchange Commission and the historical
financial information of CSB and Bank that is attached at the back of this
Prospectus/Proxy Statement. All of the summary financial information provided
in the following tables should be read in connection with this historical
financial information. See "ADDITIONAL INFORMATION--Where You Can Find More
Information" on page 99.
SELECTED HISTORICAL FINANCIAL DATA OF FIRST AMERICAN
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30
---------------------------
1998 1997(a)
------------ ------------
<S> <C> <C>
CONDENSED INCOME DATA (THOUSANDS):
Net interest income $ 342,487 $ 325,282
Provision for loan losses 11,000 3,750
Non-interest income 228,211 188,506
Non-interest expense 427,186 330,323
Income tax expense 51,408 65,802
------------ ------------
Income before cumulative effect of changes
in accounting principles, net of tax 81,104 113,913
------------ ------------
Cumulative effect of changes in accounting
principles, net of tax -- --
------------ ------------
Net income $ 81,104 $ 113,913
============ ============
END OF PERIOD BALANCE SHEET ITEMS (THOUSANDS):
Assets $ 19,059,601 $ 17,088,911
Loans, net of unearned discount and
net deferred loan fees 11,099,030 11,318,111
Deposits 13,641,535 14,104,456
Long-term debt 600,125 417,053
Shareholders' equity 1,557,043 1,473,771
PER SHARE DATA:
Income Per Share:
Basic $ 0.77 $ 1.06
Diluted 0.75 1.04
Cash dividends declared (b) 0.45 0.36
Book value, end of period 14.59 13.84
SHARES OUTSTANDING (THOUSANDS):
Basic - Average 105,275 107,330
Diluted - Average 107,645 109,642
End of period 106,732 106,435
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
<C> <C> <C> <C> <C> <C>
CONDENSED INCOME DATA (THOUSANDS)
Net interest income $ 662,123 $ 593,261 $ 539,053 $ 477,623 $ 458,383
Provision for loan losses 12,500 5,340 2,243 (14,669) (57,405)
Non-interest income 395,761 303,749 203,005 181,224 166,617
Non-interest expense 669,731 571,663 463,900 419,317 419,794
Income tax expense 137,901 114,825 100,215 89,867 88,650
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of changes
in accounting principles, net of tax 237,752 205,182 175,700 164,332 173,961
------------ ------------ ------------ ------------ ------------
Cumulative effect of changes in accounting
principles, net of tax -- -- -- -- (84)
------------ ------------ ------------ ------------ ------------
Net income $ 237,752 $ 205,182 $ 175,700 $ 164,332 $ 173,877
============ ============ ============ ============ ============
END OF PERIOD BALANCE SHEET ITEMS (THOUSANDS):
Assets $ 17,834,436 $ 16,806,010 $ 15,727,890 $ 13,416,988 $ 12,612,944
Loans, net of unearned discount and
net deferred loan fees 11,641,732 10,632,665 9,999,637 8,027,142 7,085,384
Deposits 13,405,457 12,848,368 12,180,187 10,354,439 10,082,265
Long-term debt 596,218 430,562 421,791 271,473 77,053
Shareholders' equity 1,543,977 1,449,973 1,334,585 1,111,222 1,019,450
PER SHARE DATA:
Income Per Share:
Basic $ 2.23 $ 1.96 $ 1.73 $ 1.67 $ 1.77
Diluted 2.18 1.93 1.70 1.64 1.75
Cash dividends declared (b) 0.76 0.61 0.53 0.44 0.53
Book value, end of period 14.56 13.79 12.78 11.27 10.49
SHARES OUTSTANDING (THOUSANDS):
Basic - Average 106,745 104,533 101,593 98,683 98,011
Diluted - Average 108,950 106,092 103,300 100,180 99,349
End of period 106,032 105,109 104,428 98,583 97,172
</TABLE>
(a) Data has been restated to reflect the aquisition of Deposit Guaranty
effective May 1, 1998 accounted for using the "pooling of interests" method
of accounting.
(b) Cash dividends declared represents the dividends declared by First American
without any effect given to the acquisition of Deposit Guaranty Corp.
8
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA OF CSB FINANCIAL CORPORATION
(UNAUDITED)
<TABLE>
<CAPTION>
As of or for the
six months ended
June 30, As of and for the year ended December 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME DATA (THOUSANDS):
Net interest income 3,069 2,715 5,615 5,113 4,364 3,518 3,067
Provision for loan losses 162 86 232 222 172 165 270
Non-interest income 806 857 1,497 1,127 854 828 954
Non-interest expense 2,337 2,197 4,352 3,837 3,248 2,687 2,422
--------- --------- -------- -------- -------- -------- --------
Income before income tax expense
and minority interest 1,376 1,289 2,528 2,181 1,798 1,494 1,329
Income tax expense 439 410 822 670 616 498 447
--------- -------- -------- -------- -------- -------- --------
Income before minority interest 937 879 1,706 1,511 1,182 996 882
Minority interest 38 34 66 60 49 45 41
--------- -------- -------- -------- -------- -------- --------
Net income $ 899 845 1,640 1,451 1,133 951 841
========= ======== ======== ======== ======== ======== ========
END OF PERIOD BALANCE SHEET ITEMS (THOUSANDS):
Assets $ 144,861 127,663 134,988 115,535 103,372 89,146 76,693
Loans, net of unearned discount and
net deferred loan fees 82,352 69,850 76,600 67,061 53,614 44,554 40,290
Deposits 131,679 116,839 122,878 104,850 94,735 83,145 70,348
Long-term debt -- -- -- -- 585 835 1,085
Stockholders' equity 10,993 9,140 10,147 8,296 6,682 4,122 4,288
PER SHARE DATA:
Income per share:
Basic $ 10.59 9.95 19.31 17.75 14.09 11.83 10.47
Diluted 10.41 9.89 19.12 17.69 14.09 11.83 10.47
Cash dividend declared and paid -- -- -- -- -- -- --
Book value, end of period 129.33 107.53 119.38 97.60 83.53 51.53 53.60
SHARES OUTSTANDING (THOUSANDS):
Basic -- average 85 85 85 82 80 80 80
Diluted -- average 86 85 86 82 80 80 80
End of period 85 85 85 82 80 80 80
</TABLE>
9
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA OF CHEATHAM STATE BANK
(UNAUDITED)
<TABLE>
<CAPTION>
As of or for the
six months ended
June 30, As of and for the year ended December 31,
--------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME DATA (THOUSANDS):
Net interest income 3,040 2,701 5,583 5,129 4,426 3,564 3,113
Provision for loan losses 162 86 232 222 172 165 270
Non-interest income 806 857 1,497 1,127 848 871 977
Non-interest expense 2,234 2,178 4,313 3,806 3,220 2,781 2,492
--------- -------- -------- -------- -------- -------- --------
Income before income tax expense 1,450 1,294 2,535 2,228 1,882 1,489 1,328
Income tax expense 469 415 828 689 649 449 400
--------- -------- -------- -------- -------- -------- --------
Net income $ 981 879 1,707 1,539 1,233 1,040 928
========= ======== ======== ======== ======== ======== ========
END OF PERIOD BALANCE SHEET ITEMS (THOUSANDS):
Assets $ 144,505 127,475 134,519 115,479 103,316 88,532 76,637
Loans, net of unearned discount and
net deferred loan fees 82,352 69,850 76,600 67,061 53,614 44,554 40,290
Deposits 131,787 116,952 123,006 104,994 94,771 83,165 70,349
Long-term debt -- -- -- -- -- -- --
Shareholders' equity 10,680 9,066 9,932 8,365 7,473 5,085 5,571
PER SHARE DATA:
Income per share:
Basic $ 5.51 4.93 9.58 8.64 6.92 5.84 5.21
Diluted 5.51 4.93 9.58 8.64 6.92 5.84 5.21
Cash dividend declared and paid 1.00 1.00 2.00 2.00 2.00 2.00 2.10
Book value, end of period 59.95 50.89 55.75 46.95 41.95 28.54 31.27
SHARES OUTSTANDING (THOUSANDS):
Basic -- average 178 178 178 178 178 178 178
Diluted -- average 178 178 178 178 178 178 178
End of period 178 178 178 178 178 178 178
</TABLE>
10
<PAGE> 21
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as of
June 30, 1998, combines the historical consolidated balance sheet of First
American, the historical consolidated balance sheet of CSB, the historical
consolidated balance sheet of Peoples, the historical consolidated balance
sheet of MTB and the historical consolidated balance sheet of Pioneer as if the
Proposed Transactions had been effective on June 30, 1998, after giving effect
to certain adjustments described in the attached Notes to Unaudited Pro Forma
Combined Condensed Financial Information.
The following Unaudited Pro Forma Combined Condensed Income Statements for
the six months ended June 30, 1998 and 1997, and the years ended December 31,
1997, 1996 and 1995, present the combined results of operations of First
American, CSB, Peoples, MTB and Pioneer as if the Proposed Transactions had
been effective at the beginning of each period presented therein, after giving
effect to certain adjustments described in the attached Notes to Unaudited Pro
Forma Combined Condensed Financial Information.
The unaudited pro forma combined condensed financial information and
accompanying notes reflect the application of the "pooling of interests" method
of accounting for the Proposed Transactions. Under this method of accounting,
the recorded assets, liabilities, shareholders' equity, income and expenses of
First American, CSB, Peoples, MTB and Pioneer are combined and reflected at
their historical amounts.
While no assurance can be given, it is expected that the combined company
will achieve significant merger benefits in the form of operating cost savings
and revenue enhancements. The pro forma earnings, which do not reflect any
direct costs, potential savings, or revenue enhancements expected to result from
the consolidation of First American, CSB, Peoples, MTB and Pioneer are not
indicative of the results of future operations. No assurances can be given with
respect to the ultimate level of expense savings or revenue enhancements.
The pro forma condensed financial information does not include the effects
prior to the date of acquisition of Hartsville Bancshares, Inc. which was
completed on January 1, 1997, the acquisition of Jefferson Guaranty Bancorp
which was completed on January 3, 1997, the acquisition of First Capital Bancorp
which was completed on March 31, 1997, the acquisition of NBC Financial
Corporation which was completed on June 30, 1997, the acquisition of CitiSave
Financial Corporation which was completed on July 31, 1997, and the acquisition
of Victory Bancshares, Inc. which was completed on March 23, 1998. These
acquisitions are not significant to the historical financial position or results
of operations of First American, either individually or in the aggregate.
11
<PAGE> 22
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The following unaudited pro forma combined condensed balance sheet combines
the consolidated historical balance sheets of First American, CSB, Peoples, MTB
and Pioneer assuming the companies had been combined as of June 30, 1998 on a
"pooling of interests" accounting basis.
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------------------
First Pro Forma
(Dollars in thousands) American CSB(6) Adjustments Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash and due from other banks $ 1,004,527 $ 4,501 $ -- $ 1,009,028
Time deposits with other banks 4,910 -- -- 4,910
Securities: -- -- -- --
Held to maturity 985,792 3,597 -- 989,389
Available for sale 4,906,133 48,807 -- 4,954,940
------------ ------------ ------------ ------------
Total securities 5,891,925 52,404 -- 5,944,329
------------ ------------ ------------ ------------
Federal funds sold and securities purchased
under agreements to resell 104,250 -- -- 104,250
Trading account securities 109,577 -- -- 109,577
Total loans 11,111,109 82,431 -- 11,193,540
Unearned discount and net deferred loan fees 12,079 79 -- 12,158
------------ ------------ ------------ ------------
Loans, net of unearned discount and net
deferred loan fees 11,099,030 82,352 -- 11,181,382
Allowance for loan losses 180,138 1,060 -- 181,198
------------ ------------ ------------ ------------
Total net loans 10,918,892 81,292 -- 11,000,184
Premises and equipment, net 340,994 3,280 -- (3) 344,274
Other assets 684,526 3,384 642 (3) 688,552
------------ ------------ ------------ ------------
Total assets $ 19,059,601 $ 144,861 $ 642 $ 19,205,104
------------ ------------ ------------ ------------
Liabilities
Deposits $ 13,641,535 $ 131,679 $ -- $ 13,773,214
Short-term borrowings 2,786,341 -- -- 2,786,341
Long-term debt 600,125 630 -- 600,755
Other liabilities 474,557 1,559 1,893 (3) 478,009
------------ ------------ ------------ ------------
Total liabilities 17,502,558 133,868 1,893 17,638,319
------------ ------------ ------------ ------------
Shareholders' equity
Common stock 266,829 85 1,883 (2) 268,797
Additional paid in capital 142,586 1,639 (1,883)(2) 142,342
Retained earnings 1,171,319 8,912 (1,251)(3) 1,178,980
Other (33,543) -- -- (33,543)
------------ ------------ ------------ ------------
Realized shareholders' equity 1,547,191 10,636 (1,251) 1,556,576
Net unrealized gains on securities
available for sale, net of tax 9,852 357 -- 10,209
------------ ------------ ------------ ------------
Total shareholders' equity 1,557,043 10,993 (1,251) 1,566,785
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 19,059,601 $ 144,861 $ 642 $ 19,205,104
------------ ------------ ------------ ------------
<CAPTION>
At June 30, 1998
-----------------------------------------------------------------------------
Pro Forma
(Dollars in thousands) Peoples MTB Pioneer Adjustments Combined
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from other banks $ 5,210 $ 9,630 $ 59,835 $ -- $ 1,083,703
Time deposits with other banks -- 1,179 250 -- 6,339
Securities: -- -- -- -- --
Held to maturity -- -- 32,912 -- 1,020,301
Available for sale 46,832 101,224 176,117 -- 5,279,113
------------ ------------ ------------ ------------ ------------
Total securities 46,832 101,224 267,029 -- 6,299,414
------------ ------------ ------------ ------------ ------------
Federal funds sold and securities purchased
under agreements to resell 2,400 10,500 175 -- 117,325
Trading account securities -- -- -- -- 109,577
Total loans 75,259 96,868 702,348 -- 12,068,010
Unearned discount and net deferred loan fees 31 93 1,908 -- 14,190
------------ ------------ ------------ ------------ ------------
Loans, net of unearned discount and net
deferred loan fees 75,228 96,775 700,435 -- 12,053,820
Allowance for loan losses (4) 968 1,335 9,141 -- 192,642
------------ ------------ ------------ ------------ ------------
Total net loans 74,260 95,440 691,294 -- 11,861,178
Premises and equipment, net 4,147 4,603 23,125 (1,294)(3) 374,855
Other assets 2,818 2,751 22,843 4,469 (3) 721,433
------------ ------------ ------------ ------------ ------------
Total assets $ 135,667 $ 225,327 $ 1,004,551 $ 3,175 $ 20,573,824
------------ ------------ ------------ ------------ ------------
Liabilities
Deposits $ 118,019 $ 189,523 $ 804,213 $ -- $ 14,884,969
Short-term borrowings -- -- 68,592 -- 2,854,933
Long-term debt -- 3,188 20,000 -- 623,943
Other liabilities 841 2,064 8,622 15,661 (3) 505,197
------------ ------------ ------------ ------------ ------------
Total liabilities 118,860 194,775 901,427 15,661 18,869,042
------------ ------------ ------------ ------------ ------------
Shareholders' equity
Common stock 500 1,500 38 18,598 (2) 289,433
Additional paid in capital 500 1,500 65,170 (18,598)(2) 190,934
Retained earnings 15,689 26,800 38,124 (12,486)(3) 1,247,107
Other -- -- (1,164) -- (34,707)
------------ ------------ ------------ ------------ ------------
Realized shareholders' equity 16,689 29,800 102,188 (12,486) 1,692,769
Net unrealized gains on securities
available for sale, net of tax 118 752 936 -- 12,015
------------ ------------ ------------ ------------ ------------
Total shareholders' equity 16,807 30,552 103,124 (12,486) 1,704,782
------------ ------------ ------------ ------------ ------------
Total liabilities and shareholders'
equity $ 135,667 $ 225,327 $ 1,004,551 $ 3,175 $ 20,573,824
============ ============ ============ ============ ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
12
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
The following unaudited pro forma combined condensed statement of income
presents the combined statements of income of First American, Peoples, MTB,
Pioneer, and CSB assuming the companies had been combined as of the beginning
of the period presented on a "pooling of interests" accounting basis.
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
--------------------------------------------------------------
First Pro Forma
American CSB(6) Adjustments Total
------------ ------------ ------------ ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $479,844 $4,149 $ -- $483,993
Interest and dividends on
securities 151,601 1,570 -- 153,171
Other interest income 5,029 70 -- 5,099
-------- ------ ----- --------
Total interest income 636,474 5,789 -- 642,263
-------- ------ ----- --------
Interest expense
Interest on deposits 222,923 2,701 -- 225,624
Interest on short-term borrowings 52,534 2 -- 52,536
Interest on long-term debt 18,530 17 -- 18,547
-------- ------ ----- --------
Total interest expense 293,987 2,720 -- 296,707
Net interest income 342,487 3,069 -- 345,556
Provision for loan losses 11,000 162 -- 11,162
-------- ------ ----- --------
Net interest income after
provision for loan losses 331,487 2,907 -- 334,394
-------- ------ ----- --------
Noninterest income 225,068 799 -- 225,867
Net realized gain on sales
of securities 3,143 7 -- 3,150
-------- ------ ----- --------
Total noninterest income 228,211 806 -- 229,017
Noninterest expense 427,186 2,375 -- 429,561
Income from continuing operations -------- ------ ----- --------
before income tax expense 132,512 1,338 -- 133,850
Income tax expense 51,408 439 -- 51,847
-------- ------ ----- --------
Net income $ 81,104 $899 $ -- $ 82,003
-------- ------ ----- --------
Net income per common share:
Basic $ 0.77 $10.59 $ -- $ 0.77
Diluted 0.75 10.41 -- 0.76
Weighted-average common shares
outstanding:
Basic - Average 105,275 85 771 106,131
Diluted - Average 107,645 86 771 108,502
For the Six Months Ended June 30, 1998
-----------------------------------------------------------------------------
Pro Forma
Peoples MTB Pioneer Adjustments Combined
------------ ------------ ------------ ------------ ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $4,010 $4,601 $30,556 $ -- $523,160
Interest and dividends on
securities 1,333 3,534 5,872 -- 163,910
Other interest income 74 286 586 -- 6,045
------ ------ ------- ------ --------
Total interest income 5,417 8,421 37,014 -- 693,115
------ ------ ------- ------ --------
Interest expense
Interest on deposits 2,443 3,604 14,298 -- 245,969
Interest on short-term borrowing 2 -- 2,307 -- 54,845
Interest on long-term debt -- 82 -- -- 18,629
------ ------ ------- ------ --------
Total interest expense 2,445 3,686 16,605 -- 319,443
Net interest income 2,972 4,735 20,409 -- 373,672
Provision for loan losses -- 145 2,275 -- 13,582
------ ------ ------- ------ --------
Net interest income after
provision for loan losses 2,972 4,590 18,134 -- 360,090
------ ------ ------- ------ --------
Noninterest income 1,160 635 5,621 -- 233,283
Net realized gain on sales
of securities 169 5 8 -- 3,332
------ ------ ------- ------ --------
Total noninterest income 1,329 640 5,629 -- 236,615
Noninterest expense 2,143 3,630 16,393 -- 451,727
------ ------ ------- ------ --------
Income from continuing operations
before income tax expense 2,158 1,600 7,370 -- 144,978
Income tax expense 637 544 2,440 -- 55,468
------ ------ ------- ------ --------
Net income $1,521 $1,056 $ 4,930 $ -- $ 89,510
------ ------ ------- ------ --------
Net income per common share:
Basic $ 6.08 $ 7.04 $ 1.31 $ -- $ 0.78
Diluted 6.08 7.04 1.31 -- 0.77
Weighted-average common shares
outstanding:
Basic - Average 250 150 3,734 4,117 114,381
Diluted - Average 250 150 3,732 4,117 116,750
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
13
<PAGE> 24
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
------------------------------------------------------------------------------
First Pro Forma
American(5) CSB(6) Adjustments Total
----------- ------- ----------- -------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $460,485 $ 3,554 $ -- $464,039
Interest and dividends on
securities 136,565 1,462 -- 138,027
Other interest income 5,453 34 -- 5,487
-------- -------- ----- --------
Total interest income 602,503 5,050 -- 607,553
-------- -------- ----- --------
Interest expense
Interest on deposits 223,604 2,318 -- 225,922
Interest on short-term
borrowings 40,563 10 -- 40,573
Interest on long-term debt 13,054 7 -- 13,061
-------- -------- ----- --------
Total interest expense 277,221 2,335 -- 279,556
Net interest income 325,282 2,715 -- 327,997
Provision for loan losses 3,750 86 -- 3,836
-------- -------- ----- --------
Net interest income after
provision for loan losses 321,532 2,629 -- 324,161
-------- -------- ----- --------
Noninterest income 187,114 846 -- 187,960
Net realized gain on sales
of securities 1,392 11 -- 1,403
-------- -------- ----- --------
Total noninterest income 188,506 857 -- 189,363
Noninterest expense 330,323 2,231 -- 332,554
-------- -------- ----- --------
Income from continuing
operations before income tax expense 179,715 1,255 -- 180,970
-------- -------- ----- --------
Income tax expense 65,802 410 -- 66,212
-------- -------- ----- --------
Net income $113,913 $ 845 $ -- $114,758
-------- -------- ----- --------
Net income per common share:
Basic $ 1.06 $ 9.95 $ -- $ 1.06
Diluted 1.04 9.89 -- 1.04
Weighted-average common shares
outstanding:
Basic- Average 107,330 85 740 108,185
Diluted - Average 109,642 85 740 110,497
For the Six Months Ended June 30, 1997
-----------------------------------------------------------------------------
Pro Forma
Peoples MTB Pioneer Adjustments Combined
----------- --------- -------- ----------- ---------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 3,932 $ 3,951 $ 24,325 $ -- $496,247
Interest and dividends on
securities 1,293 3,892 7,179 -- 150,391
Other interest income 43 95 349 -- 5,974
-------- -------- -------- ------ --------
Total interest income 5,268 7,938 31,853 -- 652,612
-------- -------- -------- ------ --------
Interest expense
Interest on deposits 2,200 3,495 12,781 -- 244,398
Interest on short-term
borrowings 3 -- 1,365 -- 41,941
Interest on long-term debt -- 75 341 -- 13,477
-------- -------- -------- ------ --------
Total interest expense 2,203 3,570 14,487 -- 299,816
Net interest income 3,065 4,368 17,366 -- 352,796
Provision for loan losses 76 163 1,621 -- 5,696
-------- -------- -------- ------ --------
Net interest income after
provision for loan losses 2,989 4,205 15,745 -- 347,100
-------- -------- -------- ------ --------
Noninterest income 777 496 4,229 -- 193,462
Net realized gain on sales
of securities 20 26 62 -- 1,511
-------- -------- -------- ------ --------
Total noninterest income 797 522 4,291 -- 194,973
Noninterest expense 2,068 3,149 13,638 -- 351,409
-------- -------- -------- ------ --------
Income from continuing
operations before income tax expense 1,718 1,578 6,398 -- 190,664
-------- -------- -------- ------ --------
Income tax expense 484 610 1,690 -- 68,996
-------- -------- -------- ------ --------
Net income $ 1,234 $ 968 $ 4,708 $ -- $121,668
-------- -------- -------- ------ --------
Net income per common share:
Basic $ 4.94 $ 6.46 $ 1.25 $-- $ 1.04
Diluted 4.94 6.46 1.25 -- 1.02
Weighted-average common shares
outstanding:
Basic- Average 250 150 3,737 4,152 116,444
Diluted - Average 250 150 3,737 4,152 118,756
</TABLE>
See accompanying Notes to Unaudited Combined Condensed Pro Forma Combined
Condensed Financial Statements.
14
<PAGE> 25
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------------------
First Pro Forma
American (5) CSB(6) Adjustments Total
---------- ----------- ------------ -----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 949,676 $ 7,465 $ -- $ 957,141
Interest and dividends on
securities 271,441 3,047 -- 274,488
Other interest income 11,014 60 -- 11,074
---------- ---------- ---------- ----------
Total interest income 1,232,131 10,572 -- 1,242,703
---------- ---------- ---------- ----------
Interest expense
Interest on deposits 451,980 4,915 -- 456,895
Interest on short-term
borrowings 90,067 22 -- 90,089
Interest on long-term debt 27,961 20 -- 27,981
---------- ---------- ---------- ----------
Total interest expense 570,008 4,957 -- 574,965
---------- ---------- ---------- ----------
Net interest income 662,123 5,615 -- 667,738
Provision for loan losses 12,500 232 -- 12,732
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 649,623 5,383 -- 655,006
---------- ---------- ---------- ----------
Noninterest income 391,527 1,305 -- 392,832
Net realized gain on sales
of securities 4,234 192 -- 4,426
---------- ---------- ---------- ----------
Total noninterest income 395,761 1,497 -- 397,258
Noninterest expense 669,731 4,418 -- 674,149
---------- ---------- ---------- ----------
Income from continuing
operations before income tax expense 375,653 2,462 -- 378,115
Income tax expense 137,901 822 -- 138,723
---------- ---------- ---------- ----------
Net income $ 237,752 $ 1,640 $ -- $ 239,392
---------- ---------- ---------- ----------
Net income per common share:
Basic $ 2.23 $ 19.31 $ -- $ 2.22
Diluted 2.18 19.12 -- 2.18
Weighted-average common shares outstanding:
Basic - Average 106,745 85 771 107,601
Diluted - Average 108,950 85 771 109,806
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------------------------------
Pro Forma
Peoples MTB Pioneer Adjustments Combined
------------ ---------- ---------- ----------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 8,194 $ 8,467 $ 53,107 $ -- $1,026,909
Interest and dividends on
securities 2,763 7,539 13,348 -- 298,138
Other interest income -- 226 781 -- 12,081
---------- ---------- ---------- ---------- ----------
Total interest income 10,957 16,232 67,236 -- 1,337,128
---------- ---------- ---------- ---------- ----------
Interest expense
Interest on deposits 4,634 7,087 26,378 -- 494,994
Interest on short-term
borrowings -- -- -- -- 90,089
Interest on long-term debt -- 148 3,821 -- 31,950
---------- ---------- ---------- ---------- ----------
Total interest expense 4,634 7,235 30,199 -- 617,033
---------- ---------- ---------- ---------- ----------
Net interest income 6,323 8,997 37,037 -- 720,095
Provision for loan losses 284 537 3,609 -- 17,162
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 6,039 8,460 33,428 -- 702,933
---------- ---------- ---------- ---------- ----------
Noninterest income 1,696 1,077 9,578 -- 405,183
Net realized gain on sales
of securities 52 -- 294 -- 4,772
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,748 1,077 9,872 -- 409,955
Noninterest expense 4,458 6,481 29,373 -- 714,461
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income tax expense 3,329 3,056 13,927 -- 398,427
Income tax expense 952 998 4,165 -- 144,838
---------- ---------- ---------- ---------- ----------
Net income $ 2,377 $ 2,058 $ 9,762 $ -- $ 253,589
---------- ---------- ---------- ---------- ----------
Net income per common share:
Basic $ 9.51 $ 13.72 $ 2.60 $ -- $ 2.19
Diluted 9.51 13.72 2.60 2.15
Weighted-average common
shares outstanding:
Basic - Average 250 150 3,760 4,133 115,894
Diluted - Average 250 150 3,762 4,133 118,101
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
15
<PAGE> 26
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
----------------------------------------------------
First Pro Forma
American (5) CSB(6) Adjustments Total
------------ ------- ----------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 867,897 $ 6,487 $ -- $ 874,384
Interest and dividends on
securities 243,853 2,684 -- 246,537
Other interest income 21,550 74 -- 21,624
---------- ---------- ---------- ----------
Total interest income 1,133,300 9,245 -- 1,142,545
---------- ---------- ---------- ----------
Interest expense
Interest on deposits 434,116 4,084 -- 438,200
Interest on short-term borrowings 76,839 21 -- 76,860
Interest on long-term debt 29,084 27 -- 29,111
---------- ---------- ---------- ----------
Total interest expense 540,039 4,132 -- 544,171
---------- ---------- ---------- ----------
Net interest income 593,261 5,113 -- 598,374
Provision for loan losses 5,340 222 -- 5,562
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 587,921 4,891 -- 592,812
---------- ---------- ---------- ----------
Noninterest income 301,164 1,227 -- 302,391
Net realized gain (loss)
on sales of securities 2,585 (100) -- 2,485
---------- ---------- ---------- ----------
Total noninterest income 303,749 1,127 -- 304,876
Noninterest expense 571,663 3,897 -- 575,560
---------- ---------- ---------- ----------
Income from continuing operations
before income tax expense 320,007 2,121 -- 322,128
---------- ---------- ---------- ----------
Income tax expense 114,825 670 -- 115,495
---------- ---------- ---------- ----------
Net income $ 205,182 $ 1,451 $ -- $ 206,633
---------- ---------- ---------- ----------
Net Income per common share:
Basic $ 1.96 $ 17.75 $ -- $ 1.96
Diluted 1.93 17.69 -- 1.93
Weighted-average common
shares outstanding:
Basic - Average 104,533 82 745 105,360
Diluted - Average 106,092 82 745 106,919
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------------------------
Pro Forma
Peoples MTB Pioneer Adjustments Combined
--------- ---------- ---------- ----------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 7,032 $ 7,445 $ 41,069 $ -- $ 929,930
Interest and dividends on
securities 2,402 8,064 15,409 -- 272,412
Other interest income -- 321 486 -- 22,431
---------- ---------- ---------- ---------- ----------
Total interest income 9,434 15,830 56,964 -- 1,224,773
---------- ---------- ---------- ---------- ----------
Interest expense
Interest on deposits 3,937 7,249 23,670 -- 473,056
Interest on short-term borrowings -- -- 2,585 -- 79,445
Interest on long-term debt -- 158 -- -- 29,269
---------- ---------- ---------- ---------- ----------
Total interest expense 3,937 7,407 26,255 -- 581,770
---------- ---------- ---------- ---------- ----------
Net interest income 5,497 8,423 30,709 -- 643,003
Provision for loan losses 269 323 1,097 -- 7,251
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 5,228 8,100 29,612 -- 635,752
---------- ---------- ---------- ---------- ----------
Noninterest income 1,427 1,044 7,881 -- 312,743
Net realized gain (loss)
on sales of securities 56 -- 297 -- 2,838
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,483 1,044 8,178 -- 315,581
Noninterest expense 3,784 5,906 25,739 -- 610,989
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income
tax expense 2,927 3,238 12,051 -- 340,344
---------- ---------- ---------- ---------- ----------
Income tax expense 805 1,160 3,054 -- 120,514
---------- ---------- ---------- ---------- ----------
Net income $ 2,122 $ 2,078 $ 8,997 $ -- $ 219,830
---------- ---------- ---------- ---------- ----------
Net Income per common share:
Basic $ 8.49 $ 13.85 $ 2.39 $ -- $ 1.93
Diluted 8.49 13.85 2.39 -- 1.91
Weighted-average common
shares outstanding:
Basic - Average 250 150 3,760 4,090 113,610
Diluted - Average 250 150 3,760 4,090 115,169
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
16
<PAGE> 27
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
---------------------------------------------------
First Pro Forma
American (5) CSB (6) Adjustments Total
--------- ---------- ------------- ----------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 754,662 $ 5,505 $ -- $ 760,167
Interest and dividends on
securities 250,437 2,498 -- 252,935
Other interest income 14,775 57 -- 14,832
---------- ---------- ---------- ----------
Total interest income 1,019,874 8,060 -- 1,027,934
---------- ---------- ---------- ----------
Interest expense
Interest on deposits 382,307 3,617 -- 385,924
Interest on short-term borrowings 78,543 15 -- 78,558
Interest on long-term debt 19,971 64 -- 20,035
---------- ---------- ---------- ----------
Total interest expense 480,821 3,696 -- 484,517
---------- ---------- ---------- ----------
Net interest income 539,053 4,364 -- 543,417
Provision for loan losses 2,243 172 -- 2,415
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 536,810 4,192 -- 541,002
---------- ---------- ---------- ----------
Noninterest income 201,349 1,083 -- 202,432
Net realized gain (loss) on
sales of securities 1,656 (229) -- 1,427
---------- ---------- ---------- ----------
Total noninterest income 203,005 854 -- 203,859
Noninterest expense 463,900 3,297 -- 467,197
---------- ---------- ---------- ----------
Income from continuing operations
before income tax expense 275,915 1,749 -- 277,664
Income tax expense 100,215 616 -- 100,831
---------- ---------- ---------- ----------
Net income $ 175,700 $ 1,133 $ -- $ 176,833
---------- ---------- ---------- ----------
Net income per common share:
Basic $ 1.73 $ 14.09 $ -- $ 1.73
Diluted 1.70 14.09 -- 1.70
Weighted-average common shares
outstanding:
Basic - Average 101,593 80 728 102,401
Diluted - Average 103,300 80 728 104,108
<CAPTION>
For the Year Ended December 31, 1995
--------------------------------------------------------------
Pro Forma
Peoples MTB Pioneer Adjustments Combined
---------- ---------- ---------- ------------- ----------
(in thousands except per share amounts)
<C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 5,708 $ 7,224 $ 31,572 $ -- $ 804,671
Interest and dividends on
securities 2,223 8,091 15,941 -- 279,190
Other interest income -- 401 1,460 -- 16,693
---------- ---------- ---------- ---------- ----------
Total interest income 7,931 15,716 48,973 -- 1,100,554
---------- ---------- ---------- ---------- ----------
Interest expense
Interest on deposits 3,422 7,006 21,233 -- 417,585
Interest on short-term borrowings -- -- 1,749 -- 80,307
Interest on long-term debt -- 164 -- -- 20,199
---------- ---------- ---------- ---------- ----------
Total interest expense 3,422 7,170 22,982 -- 518,091
---------- ---------- ---------- ---------- ----------
Net interest income 4,509 8,546 25,991 -- 582,463
Provision for loan losses 25 170 619 -- 3,229
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,484 8,376 25,372 -- 579,234
---------- ---------- ---------- ---------- ----------
Noninterest income 1,046 943 6,771 -- 211,192
Net realized gain (loss) on
sales of securities 40 -- 211 -- 1,678
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,086 943 6,982 -- 212,870
Noninterest expense 3,236 5,353 22,848 -- 498,634
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income tax expense 2,334 3,966 9,506 -- 293,470
Income tax expense 701 1,323 2,424 -- 105,279
---------- ---------- ---------- ---------- ----------
Net income $ 1,633 $ 2,643 $ 7,082 $ -- $ 188,191
---------- ---------- ---------- ---------- ----------
Net income per common share:
Basic $ 6.53 $ 17.62 $ 1.89 $ -- $ 1.70
Diluted 6.53 17.62 1.89 -- 1.67
Weighted-average common shares
outstanding:
Basic - Average 250 150 3,760 4,133 110,694
Diluted - Average 250 150 3,760 4,133 112,401
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
17
<PAGE> 28
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(1) The unaudited pro forma information presented herein is not necessarily
indicative of the results of operations or the combined financial position
that would have resulted had the acquisitions been consummated at the
beginning of the applicable periods presented, nor is it necessarily
indicative of the results of operations in future periods or the future
financial position of the combined entities. See "ADDITIONAL INFORMATION
-- Cautionary Statement Concerning Forward-Looking Information."
(2) Each of the Proposed Transactions will be accounted for on a pooling of
interests accounting basis, and accordingly the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 9.7071
shares of First American Common Stock for each of the 84,947 shares of CSB
Common Stock which were outstanding at June 30, 1998, an exchange ratio of
3.70 shares of First American Common Stock for each the 250,000 shares of
common stock of Peoples ("Peoples Common Stock") which were outstanding at
June 30, 1998, an exchange ratio of 7.768 shares of First American for
each of the 150,000 shares of common stock of MTB ("MTB Common Stock")
which were outstanding at June 30, 1998, and an exchange ratio of 1.65
shares of First American Common Stock for each of the 3,735,848 shares of
common stock of Pioneer ("Pioneer Common Stock") which were outstanding at
June 30, 1998.
As a result, information was adjusted for the Proposed Transactions by the
(i) addition of 9,109,000 shares of First American Common Stock amounting
to $22,800,000; (ii) elimination of 84,947 shares of CSB Common Stock,
250,000 shares of Peoples Common Stock, 150,000 shares of MTB Common Stock
and 3,735,848 shares of Pioneer Common Stock; and (iii) recording the
difference of $20,480,000 as a decrease to additional paid-in capital. In
addition, 30,708 shares of First American Common Stock will be exchanged
for 6,868 shares of Cheatham State Bank that are not owned by CSB.
As of June 30, 1998, First American, Pioneer and CSB had 24,400,824,
200,000 and 7,684 shares of common stock reserved for issuance, primarily
for stock option plans, respectively, which are not included in the
unaudited pro forma financial information presented herein. MTB, Peoples,
and Cheatham State Bank have no shares of common stock reserved for
issuance.
(3) In connection with the Proposed Transactions, the companies expect to incur
certain restructuring and merger-related costs, including investment
banking, legal, accounting, and other related transaction costs and fees.
Additionally, the companies expect to incur other restructuring and
merger-related costs associated with the integration of the separate
companies and institution of efficiencies anticipated as a result of the
Proposed Transactions. Based on information currently available, the total
amount of restructuring and merger-related charges to be recognized in
connection with the Proposed Transactions is estimated to be approximately
$13.7 million, after tax. The following is a breakdown of estimated
restructuring and merger-related costs by entity:
<TABLE>
<CAPTION>
PEOPLES MTB PIONEER CSB TOTAL
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Severance $ 227 $ 295 $ 2,675 $ 800 $ 3,997
Systems conversion 227 1,854 2,640 357 5,078
Investment banker and legal expenses -- -- 4,850 -- 4,850
Other 999 795 2,393 736 4,923
------ ------ ------- ------ -------
Estimated restructuring and merger-related costs 1,453 2,944 12,558 1,893 18,848
Income tax effect 492 989 2,988 642 5,111
------ ------ ------- ------ -------
Total $ 961 $1,955 $ 9,570 $1,251 $13,737
------ ------ ------- ------ -------
</TABLE>
(4) Certain insignificant reclassifications have been included herein to
conform statement presentations. Transactions conducted in the ordinary
course of business between First American, CSB, Peoples, MTB and Pioneer
are immaterial, and accordingly, have not been eliminated.
(5) On May 1, 1998, Deposit Guaranty Corporation was merged with and into First
American. The transaction was accounted for using the pooling of interest
method. Historical results of First American have been restated to reflect
the impact of the transaction.
(6) For CSB, amounts include the minority interest.
18
<PAGE> 29
THE SPECIAL MEETINGS
THE CSB SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is first being mailed to the holders (the
"CSB SHAREHOLDERS") of shares of common stock, par value $1.00 ("CSB COMMON
STOCK"), of CSB Financial Corporation ("CSB") on or about August 27, 1998, and
is accompanied by the Notice of Special Meeting and a form of proxy that is
solicited by the Board of Directors of CSB (the "CSB BOARD") for use at the
Special Meeting of CSB Shareholders to be held on September 25, 1998, at 10:30
a.m., local time, in Kingston Springs, Tennessee, and at any adjournments or
postponements thereof (the "CSB SPECIAL MEETING"). At the CSB Special Meeting,
CSB Shareholders will consider and vote upon a proposal to approve the proposed
merger of CSB with and into First American Corporation ("FIRST AMERICAN") and
related share exchange (collectively, the "HOLDING COMPANY MERGER") as
contemplated in the Agreement and Plan of Reorganization, dated as of June 9,
1998, by and among First American, CSB, First American National Bank and
Cheatham State Bank (the "AGREEMENT"). The CSB Shareholders may also be asked
to vote upon a proposal to adjourn or postpone the CSB Special Meeting, which
adjournment or postponement could be used for the purpose, among others, of
allowing additional time for the soliciting of additional votes to approve the
Holding Company Merger.
PROXIES
A CSB Shareholder may use the accompanying proxy if such CSB Shareholder
is unable to attend the CSB Special Meeting in person or wishes to have his or
her shares voted by proxy even if such shareholder does attend the meeting. A
shareholder may revoke any proxy given pursuant to this solicitation by
delivering to the Secretary of CSB, prior to the taking of the vote at the CSB
Special Meeting, a written notice revoking the proxy or a duly executed proxy
relating to the same shares bearing a later date or by attending the meeting
and electing to vote in person; however, attendance at the CSB Special Meeting
will not in and of itself constitute a revocation of a proxy. All written
notices of revocation and other communications with respect to the revocation
of CSB proxies should be addressed to CSB Financial Corporation, Mr. Gary
Scott, 104 West Kingston Springs Road, Kingston Springs, Tennessee 37082. For
such notice of revocation or later proxy to be valid, however, it must actually
be received by CSB prior to the vote of the CSB Shareholders at the CSB Special
Meeting. All shares represented by valid proxies received pursuant to this
solicitation, and not revoked before they are exercised, will be voted in the
manner specified therein. If no specification is made, the proxies will be
voted in favor of approval of the Holding Company Merger. The CSB Board is
unaware of any other matters that may be presented for action at the CSB
Special Meeting. If other matters do properly come before the CSB Special
Meeting, however, it is intended that shares represented by proxies in the
accompanying form will be voted (or not voted) by the persons named in the
proxies in their discretion, provided that no proxy that is voted against
approval of the Holding Company Merger will be voted in favor of any
adjournment or postponement of the CSB Special Meeting for the purpose of
soliciting additional proxies to approve the Holding Company Merger.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies from the CSB Shareholders will be
borne by CSB, except that CSB and First American will each bear half of the
expenses associated with the printing and mailing of this Prospectus/Proxy
statement and the registration statement and all filing fees in connection
therewith. In addition to the solicitation of proxies by mail, CSB will request
banks, brokers and other record holders to send proxies and proxy material to
the beneficial owners of the stock and secure their voting instructions, if
necessary. CSB will reimburse such record holders for their reasonable expenses
in so doing. If necessary, CSB may also use several of its regular employees,
who will not be specially compensated, to solicit proxies from CSB Shareholders,
either personally or by telephone, telegram, facsimile or special delivery
letter.
RECORD DATE AND VOTING RIGHTS
The CSB Board has fixed August 21, 1998 as the record date (the "CSB
RECORD DATE") for the determination of the CSB Shareholders entitled to receive
notice of and to vote at the CSB Special Meeting. Accordingly, only CSB
Shareholders of record at the close of business on the CSB Record Date will be
entitled to notice of and to vote at the CSB Special Meeting. At the close of
business on the CSB Record Date, there were 84,947 shares of CSB Common Stock
entitled to vote at the CSB Special Meeting held by approximately 36 holders of
record. The presence, in person or by proxy, of shares of CSB Common Stock
representing a majority of the votes entitled to be cast on the Agreement and
the transactions contemplated thereby on the CSB Record Date is necessary to
constitute a quorum at the CSB Special Meeting. Each share of CSB Common Stock
outstanding on the CSB Record Date entitles its holder to one vote as to the
approval of the Holding Company Merger and any other proposal that may properly
come before the CSB Special Meeting.
CSB will count shares of CSB Common Stock present in person at the CSB
Special Meeting but not voting, and shares of CSB Common Stock for which it has
received proxies but with respect to which holders of such shares have
abstained, as present at the CSB Special Meeting for purposes of determining
the presence or absence of a quorum for the
19
<PAGE> 30
transaction of business. In addition, shares represented by proxies returned by
a broker holding such shares in nominee or "street" name will be counted for
purposes of determining whether a quorum exists, even if such shares are not
voted in matters where discretionary voting by the broker is not allowed
("BROKER NON-VOTES"). Under applicable rules of the New York Stock Exchange,
Inc. (the "NYSE"), brokers who hold shares of CSB Common Stock in "street" name
for customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote shares held for such customers with respect to the
matters to be considered and voted upon at the CSB Special Meeting without
specific instructions from such customers.
UNDER THE TENNESSEE BUSINESS CORPORATION ACT (THE "TBCA"), APPROVAL OF THE
HOLDING COMPANY MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF ALL VOTES ENTITLED TO BE CAST ON THE HOLDING COMPANY MERGER AT THE
CSB SPECIAL MEETING. BECAUSE APPROVAL OF THE HOLDING COMPANY MERGER REQUIRES
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF OUTSTANDING SHARES OF CSB
COMMON STOCK, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS
NEGATIVE VOTES. ACCORDINGLY, THE CSB BOARD URGES CSB SHAREHOLDERS TO COMPLETE,
DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE.
As of the CSB Record Date, approximately 53,416 shares of CSB Common Stock,
or approximately 62.88% of the shares entitled to vote at the CSB Special
Meeting, were beneficially owned by directors and executive officers of CSB. It
is currently expected that each such director and executive officer of CSB will
vote the shares of CSB Common Stock beneficially owned by him or her for
approval of the Holding Company Merger and the transactions contemplated
thereby. In addition, as of the CSB Record Date, the bank and trust subsidiaries
of First American held no shares of CSB Common Stock, and the bank and trust
subsidiaries of CSB held no shares of CSB Common Stock.
For additional information with respect to beneficial ownership of CSB
Common Stock by individuals and entities owning more than 5% of such stock and
more detailed information with respect to beneficial ownership of CSB Common
Stock by directors and executive officers of CSB, see "ADDITIONAL INFORMATION
ABOUT CSB FINANCIAL CORPORATION--Ownership Common Stock."
DISSENTERS' RIGHTS
Under Chapter 23 of the TBCA, each CSB Shareholder who dissents from the
Holding Company Merger has the right to have the fair value of such CSB
Shareholder's shares appraised and paid to such CSB Shareholder in cash. See
"ADDITIONAL INFORMATION--Dissenters' Appraisal Rights."
RECOMMENDATION OF THE CSB BOARD
The CSB Board has unanimously approved the Holding Company Merger and the
transactions contemplated thereby. The CSB Board believes that the Holding
Company Merger is fair to and in the best interests of CSB and the CSB
Shareholders and unanimously recommends that the CSB Shareholders vote "FOR"
approval of the Holding Company Merger. See "THE MERGERS--Reasons of CSB and
Bank for the Mergers."
20
<PAGE> 31
THE BANK SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is first being mailed to the holders (the
"BANK SHAREHOLDERS") of shares of common stock, par value $1.00 ("BANK COMMON
STOCK"), of Cheatham State Bank ("BANK") on or about August 27, 1998, and is
accompanied by the Notice of Special Meeting and a form of proxy that is
solicited by the Board of Directors of Bank (the "BANK BOARD") for use at the
Special Meeting of Bank Shareholders to be held on September 25, 1998, at 11:30
a.m., local time, in Kingston Springs, Tennessee, and at any adjournments or
postponements thereof (the "BANK SPECIAL MEETING"). At the Bank Special Meeting,
Bank Shareholders will consider and vote upon a proposal to approve the proposed
merger of Bank with and into First American National Bank ("FANB") and related
share exchange (collectively, the "BANK MERGER") as contemplated in the
Agreement. The Bank Shareholders may also be asked to vote upon a proposal to
adjourn or postpone the Bank Special Meeting, which adjournment or postponement
could be used for the purpose, among others, of allowing additional time for the
soliciting of additional votes to approve the Agreement.
PROXIES
A Bank Shareholder may use the accompanying proxy if such Bank Shareholder
is unable to attend the Bank Special Meeting in person or wishes to have his or
her shares voted by proxy even if such shareholder does attend the meeting. A
shareholder may revoke any proxy given pursuant to this solicitation by
delivering to the Secretary of Bank, prior to the taking of the vote at the
Bank Special Meeting, a written notice revoking the proxy or a duly executed
proxy relating to the same shares bearing a later date or by attending the
meeting and electing to vote in person; however, attendance at the Bank Special
Meeting will not in and of itself constitute a revocation of a proxy. All
written notices of revocation and other communications with respect to the
revocation of Bank proxies should be addressed to Cheatham State Bank, Mr. Gary
Scott, 104 West Kingston Springs Road, Kingston Springs, Tennessee 37082. For
such notice of revocation or later proxy to be valid, however, it must actually
be received by Bank prior to the vote of the Bank Shareholders at the Bank
Special Meeting. All shares represented by valid proxies received pursuant to
this solicitation, and not revoked before they are exercised, will be voted in
the manner specified therein. If no specification is made, the proxies will be
voted in favor of approval of the Bank Merger. The Bank Board is unaware of
any other matters that may be presented for action at the Bank Special Meeting.
If other matters do properly come before the Bank Special Meeting, however, it
is intended that shares represented by proxies in the accompanying form will be
voted (or not voted) by the persons named in the proxies in their discretion,
provided that no proxy that is voted against approval of the Bank Merger will
be voted in favor of any adjournment or postponement of the Bank Special
Meeting for the purpose of soliciting additional proxies to approve the Bank
Merger.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies from the Bank Shareholders will be
borne by Bank, except that Bank and First American will each bear half of the
expenses associated with the printing and mailing of this Prospectus/Proxy
statement and the registration statement and all filing fees in connection
therewith. In addition to the solicitation of proxies by mail, Bank will
request banks, brokers and other record holders to send proxies and proxy
material to the beneficial owners of the stock and secure their voting
instructions, if necessary. Bank will reimburse such record holders for their
reasonable expenses in so doing. If necessary, Bank may also use several of
its regular employees, who will not be specially compensated, to solicit
proxies from Bank Shareholders, either personally or by telephone, telegram,
facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
The Bank Board has fixed August 21, 1998 as the record date (the "BANK
RECORD DATE") for the determination of the Bank Shareholders entitled to
receive notice of and to vote at the Bank Special Meeting. Accordingly, only
Bank Shareholders of record at the close of business on the Bank Record Date
will be entitled to notice of and to vote at the Bank Special Meeting. At the
close of business on the Bank Record Date, there were 178,154 shares of Bank
Common Stock entitled to vote at the Bank Special Meeting held by approximately
52 holders of record. The presence, in person or by proxy, of shares of Bank
Common Stock representing a majority of the votes entitled to be cast on the
Agreement and the transactions contemplated thereby on the Bank Record Date is
necessary to constitute a quorum at the Bank Special Meeting. Each share of
Bank Common Stock outstanding on the Bank Record Date entitles its holder to
one vote as to the approval of the Bank Merger and any other proposal that may
properly come before the Bank Special Meeting.
Bank will count shares of Bank Common Stock present in person at the Bank
Special Meeting but not voting, and shares of Bank Common Stock for which it
has received proxies but with respect to which holders of such shares have
abstained, as present at the Bank Special Meeting for purposes of determining
the presence or absence of a quorum for the transaction of business. In
addition, shares represented by proxies returned by a broker holding such
shares in nominee or "street" name will be counted for purposes of determining
whether a quorum exists, even if such shares are not voted in matters where
discretionary voting by the broker is not allowed ("BROKER NON-VOTES"). Under
applicable rules of the New York Stock Exchange, Inc. (the "NYSE"), brokers who
hold shares of Bank Common Stock in "street" name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote
shares held for such customers with
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respect to the matters to be considered and voted upon at the Bank Special
Meeting without specific instructions from such customers.
UNDER THE NATIONAL BANK ACT AND TENNESSEE LAW, APPROVAL OF THE BANK MERGER
REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS (2/3) OF ALL VOTES
ENTITLED TO BE CAST ON THE BANK MERGER AT THE BANK SPECIAL MEETING. BECAUSE
APPROVAL OF THE BANK MERGER REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF
TWO-THIRDS (2/3) OF OUTSTANDING SHARES OF BANK COMMON STOCK, ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. ACCORDINGLY, THE
BANK BOARD URGES BANK SHAREHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. CSB OWNS
APPROXIMATELY 96% OF THE OUTSTANDING SHARES OF BANK COMMON STOCK AND WILL VOTE
ITS SHARES IN FAVOR OF THE BANK MERGER, THUS ASSURING THAT THE BANK MERGER WILL
GET THE NEEDED APPROVAL OF THE BANK SHAREHOLDERS.
DISSENTERS' RIGHTS
Pursuant to 12 U.S.C. Section 215a, each Bank Shareholder who dissents
from the Bank Merger has the right to have the fair value of such Bank
Shareholder's shares appraised and paid to such Bank Shareholder in cash. See
"ADDITIONAL INFORMATION--Dissenters' Appraisal Rights."
RECOMMENDATION OF THE BANK BOARD
The Bank Board has unanimously approved the Bank Merger and the
transactions contemplated thereby. The Bank Board believes that the Bank Merger
is fair to and in the best interests of Bank and the Bank Shareholders and
unanimously recommends that the Bank Shareholders vote "FOR" approval and
adoption of the Bank Merger and the transactions contemplated thereby. See "THE
MERGER--Reasons of CSB and Bank for the Mergers."
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THE MERGERS
THE FOLLOWING SUMMARY OF CERTAIN TERMS AND PROVISIONS OF THE AGREEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT, WHICH IS INCORPORATED
HEREIN BY REFERENCE, AND, WITH THE EXCEPTION OF CERTAIN EXHIBITS THERETO, IS
ATTACHED AS APPENDIX A TO THIS PROSPECTUS/PROXY STATEMENT.
DESCRIPTION OF THE MERGERS
Subject to the terms and conditions of the Agreement, CSB, a Tennessee
corporation, will be merged with and into First American, a Tennessee
corporation (together with the related share exchange as described below, the
"HOLDING COMPANY MERGER"), and Bank, a Tennessee banking corporation, will be
merged with and into FANB, a national banking association (together with the
related share exchange as described below, the "BANK MERGER" and collectively
with the Holding Company Merger, the "MERGERS"). As a result of the proposed
merger of CSB and First American, the separate corporate existence of CSB will
cease and First American will be the surviving corporation (the "SURVIVING
CORPORATION") and will continue to exist as a Tennessee corporation. As a
result of the proposed merger of Bank and FANB, the separate legal existence of
Bank will cease, and FANB will be the surviving bank (the "SURVIVING BANK") and
will continue to exist as a national banking association. Subject to the
satisfaction or waiver of certain conditions set forth in the Agreement and
described more fully in "--Conditions to the Mergers," the proposed merger of
CSB and First American will become effective ("THE CSB EFFECTIVE TIME") upon
the filing of articles of merger (the "CSB ARTICLES OF MERGER") in the offices
of the Secretary of State of the State of Tennessee in accordance with the TBCA
and the proposed merger of Bank and FANB will become effective upon the filing
of the Articles of Merger ("BANK ARTICLES OF MERGER") in the offices of the
Office of the Comptroller of the Currency (the "COMPTROLLER") in accordance
with the National Bank Act (the "BANK EFFECTIVE TIME").
At and after the CSB Effective Time, the proposed merger of CSB and First
American will have the effects set forth in Section 48-21-108 of the TBCA, and
the charter and bylaws of the Surviving Corporation at the CSB Effective Time
shall be the charter and bylaws of First American in effect immediately prior
to the CSB Effective Time. At and after the Bank Effective Time, the proposed
merger of Bank and FANB will have the effect set forth in Section 215a of the
National Bank Act, and the charter and bylaws of the Surviving Bank at the Bank
Effective Time shall be the charter and bylaws of FANB in effect immediately
prior to the Bank Effective Time.
The directors of First American immediately following the proposed merger
of CSB and First American shall be those directors of First American
immediately prior to the proposed merger of CSB and First American without
change. The directors of FANB immediately following the proposed merger of
Bank and FANB shall be those directors of FANB immediately prior to the
proposed merger of Bank and FANB without change.
At the CSB Effective Time, automatically by virtue of the proposed merger
of CSB and First American and without any action on the part of any party or
CSB Shareholder, each share of CSB Common Stock (excluding shares of CSB Common
Stock with respect to which dissenters' rights have been properly demanded in
accordance with Chapter 23 of the TBCA ("CSB DISSENTING SHARES"), or held by
CSB or any of its subsidiaries or by First American or any of its subsidiaries,
in each case, other than Trust Account Shares (as defined herein) or shares
held in respect of a debt previously contracted) issued and outstanding
immediately prior to the Effective Time will become and be converted into the
right to receive 9.7071 (the "CSB EXCHANGE RATIO") shares of common stock, par
value $2.50 per share of First American ("FIRST AMERICAN COMMON STOCK") (which
CSB Exchange Ratio is subject to potential adjustment as described under
"--Termination of the Agreement"), together with those corresponding number of
rights associated with the First American Common Stock pursuant to the Rights
Agreement, dated as of December 14, 1988, between First American Corporation
and First American Trust Company, N.A. (the "FIRST AMERICAN RIGHTS AGREEMENT")
and cash in lieu of any fractional share (the "HOLDING COMPANY MERGER
CONSIDERATION"). If, before the CSB Effective Time, the shares of First
American Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization (but not a merger
where First American is the surviving corporation), reclassification, stock
dividend, stock split, reverse stock split or other similar change, the CSB
Exchange Ratio will be adjusted accordingly.
As of the CSB Effective Time, by virtue of the Holding Company Merger and
without any action on the part of the holder of any shares of CSB Common Stock,
each option to purchase a share of CSB Common Stock issued and outstanding
immediately prior to the CSB Effective Time shall be converted into and
exchangeable for the right to receive the number of shares of First American
Common Stock equal to the CSB Exchange Ratio on a pro rata basis.
Immediately following the Holding Company Merger, the Bank Effective Time
will occur, and at that time, each share of Bank Common Stock (excluding shares
held by CSB, which shall be canceled, or shares with respect to which
dissenters' rights have been properly demanded in accordance with 12 U.S.C.
Section 215a ("BANK DISSENTING SHARES")) issued and outstanding immediately
prior to the Bank Merger will become and be converted into the right to receive
4.4653 (the "BANK EXCHANGE RATIO") shares of First American Common Stock (which
Bank Exchange Ratio is subject to potential adjustment as described under
"--Termination of the Agreement"), together with the corresponding number of
rights
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<PAGE> 34
associated with the First American Common Stock pursuant to the First American
Rights Agreement and cash in lieu of any fractional share (the "BANK MERGER
CONSIDERATION"). If, before the Bank Effective Time, the shares of First
American Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization (but not a merger
where First American is the surviving corporation), reclassification, stock
dividend, stock split, reverse stock split or other similar change, the Bank
Exchange Ratio will be adjusted accordingly.
It is expected that the market price of First American Common Stock will
fluctuate between the date of this Prospectus/Proxy Statement and the date on
which the Mergers are consummated and thereafter. Because the CSB Exchange
Ratio and the Bank Conversion Ratio are fixed (subject to possible adjustment
in the circumstances described under "--Termination of the Agreement") and
because the market price of First American Common Stock is subject to
fluctuation, the value of the shares of First American Common Stock that
holders of CSB Common Stock and Bank Common Stock will receive in the Mergers
may increase or decrease prior to the Mergers. For further information
concerning the historical market prices of First American Common Stock, CSB
Common Stock and Bank Common Stock, see "INFORMATION ABOUT OUR COMPANIES--Price
Range of Common Stock and Dividends--Market Prices." No assurance can be given
concerning the market price of First American Common Stock before or after the
Effective Time. Under certain circumstances and depending in part upon the
price of First American Common Stock during a specified period prior to
approval of the Board of Governors of the Federal Reserve System (the "FEDERAL
RESERVE BOARD") of the Mergers, CSB may elect to terminate the Agreement,
subject to First American's right to elect to increase the CSB Exchange Ratio
and the Bank Conversion Ratio pursuant to the provisions of the Agreement. See
"--Termination of the Agreement."
As of the CSB Effective Time and the Bank Effective Time, respectively, by
virtue of the Holding Company Merger and without any action on the part of the
CSB Shareholders or the Bank Shareholders, all shares of CSB Common Stock and
Bank Common Stock that are owned by CSB or its subsidiaries or by First
American or any subsidiary of First American (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 First
American or other consideration shall be delivered in exchange therefor. All
shares of First American Common Stock that are owned by CSB or Bank (other than
Trust Account Shares) shall become authorized but unissued stock of First
American, and all other shares of First American Common Stock outstanding as of
the Effective Time will remain outstanding. Further, CSB Dissenting Shares
will not be converted into the right to receive, or be exchangeable for, First
American Common Stock; instead, the holders of CSB Dissenting Shares will be
entitled to payment of the appraised value of the Dissenting Shares if they
deliver a written demand therefor to CSB in accordance with Chapter 23 of the
TBCA. Notwithstanding the foregoing: (a) if any holder of CSB Dissenting
Shares subsequently delivers a written withdrawal of such holder's demand for
appraisal thereof, or (b) if any such holder fails to establish such holder's
entitlement to dissenters' rights under Chapter 23 of the TBCA, or (c) if no
holder of CSB Dissenting Shares has filed a petition demanding a determination
of the value of all Dissenting Shares within the time provided in Chapter 23 of
the TBCA, such holder or holders will forfeit the right to appraisal and such
shares will be deemed to have been converted into the right to receive, and to
have become exchangeable for, First American Common Stock. Likewise, Bank
Dissenting Shares will not be converted into the right to receive, or be
changeable for, First American Common Stock; instead, the holder of Bank
Dissenting Shares will be entitled to the appraised value of the Bank
Dissenting Shares in accordance with 12 U.S.C. Section 215a. See "ADDITIONAL
INFORMATION--Dissenters' Appraisal Rights."
BACKGROUND OF THE MERGERS
During the early part of 1998, the CSB Board and Bank Board (the "BOARDS")
began exploring the possibility of selling CSB and Bank as a result of the
tremendous market premiums that recently have been offered for community banks
and in the spirit of constantly trying to maximize the value of CSB and Bank
for their respective shareholders. CSB and Bank retained special counsel to
assist in the exploration of strategic alternatives available to CSB and Bank.
The Boards concluded that a sale of CSB and the Bank would maximize shareholder
value and instructed special counsel to formulate a marketing process that
would result in the sale of CSB and Bank. Prior to finally adopting a formal
marketing process, CSB received an indication from First American that First
American would be willing to make a very attractive offer for CSB and Bank. By
letter dated May 15, 1998, First American made a preliminary offer to CSB and
Bank. That offer was reviewed in detail by the Boards of CSB and Bank and
senior management and special counsel were instructed by the Boards to meet
with First American and negotiate the offer. On May 23, 1998, the parties met
to further discuss and negotiate the offer. Following those negotiations, a
revised offer from First American was delivered to CSB and Bank that formed the
basis for each Board's approval of the Mergers on or about June 2, 1998.
Independent community banks are operating in increasingly more competitive
environments in recent years. Institutions like CSB and Bank face increasing
competition from the metropolitan and larger regional banks as well as from
many nonbanking organizations seeking to capture the traditional customer base
of community financial institutions. Because these competitive issues raise
concerns about future management and financial and technological resources to
effectively compete, community institutions like CSB and Bank often consider
acquisition by or merger with larger institutions such as First American as a
means to most effectively maximize shareholder value to continue to provide
quality community banking service in its market. That was the decision
ultimately reached by management of CSB and Bank in approving the Mergers.
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REASONS OF CSB AND BANK FOR THE MERGERS
In reaching its determination to approve and adopt the Agreement, the CSB
Board and Bank Board consulted with CSB's and Bank's management, respectively,
and their financial and legal advisors, and considered a number of factors.
The following include all of the material factors considered thereby:
a. Each Board's familiarity with and review of First American's
business, operations, earnings and financial condition and future
capital requirements;
b. Each Board's belief that the financial terms of the Agreement
are attractive based on the recent earnings performance of First
American and that the Agreement allows the shareholders to become
shareholders in an institution whose stock is traded on the New York
Stock Exchange;
c. First American's wide range of banking products and services
and its dividend payout history;
d. Each Board's belief, based upon the analysis of the anticipated
financial effects of the merger, that upon consummation of the
Mergers, CSB and its banking subsidiaries would be well-capitalized
institutions, the financial positions of which will be in excess of
all applicable regulatory requirements;
e. The current and prospective economic and regulatory environment
and competitive constraints facing the banking industry and financial
institutions in CSB's and Bank's market areas;
f. Each Board's belief that in light of the reasons discussed
above, First American was an attractive choice as a long-term
affiliation partner of CSB and Bank; and
g. The expectation that the Mergers would generally be tax-free
transactions to CSB, Bank and their respective shareholders.
In reaching their determination to approve and recommend the principal terms of
the Agreement, the Boards did not assign relative or specific weights to the
foregoing factors and individual directors may have assigned such factors
differently.
THE CSB BOARD AND BANK BOARD BELIEVE THE MERGERS ARE FAIR TO, AND IN THE
BEST INTERESTS OF, CSB AND THE CSB SHAREHOLDERS, AND BANK AND THE BANK
SHAREHOLDERS, RESPECTIVELY. THE BOARDS UNANIMOUSLY RECOMMEND THAT THE
SHAREHOLDERS OF EACH OF CSB AND BANK VOTE FOR THE APPROVAL OF THE HOLDING
COMPANY MERGER AND THE BANK MERGER, RESPECTIVELY, EACH AS CONTEMPLATED IN THE
AGREEMENT.
OPINION OF CSB'S AND BANK'S FINANCIAL ADVISOR
CSB and Bank jointly retained Southard Financial, a Memphis, Tennessee
financial valuation consulting firm, to render its opinion as to the fairness
from a financial point of view to the holders of CSB Common Stock and Bank
Common Stock of the consideration to be paid in the Mergers. In connection with
this engagement, Southard evaluated the financial terms of the Mergers, but was
not asked to, and did not recommend the exchange ratio formula between First
American and CSB and Bank's respective Common Stocks and did not assist in the
negotiations of the Mergers. The ratio of exchange formula was determined by
First American and CSB and Bank after arm's length negotiations. CSB, Bank and
Bank's subsidiaries did not place any limitations on the scope of Southard's
investigation or review.
Southard provided the CSB and Bank Boards with a fairness opinion letter
and supporting documentation. That fairness opinion letter and the full text
of the opinion letter of Southard, dated June 1, 1998, excluding the
attachments thereto, which sets forth certain assumptions made, matters
considered and limitations on the review performed is attached as Appendix B
and is incorporated herein by reference. The summary of the opinion of Southard
set forth in this Prospectus/Proxy Statement is qualified in its entirety by
reference to the opinion.
In arriving at its opinion, Southard conducted interviews with officers of
First American, CSB and CSB's subsidiaries and reviewed the documents indicated
in the fairness letter. Southard did not independently verify the accuracy
and/or the completeness of the financial and other information reviewed in
rendering its opinion. Southard did not, and was not requested to, solicit
third party indications of interest in acquiring any or all of the assets of
CSB or Bank.
In connection with rendering its opinion, Southard performed a variety of
financial analyses which are summarized below. Southard believes that its
analyses must be considered as a whole and that considering only selected
factors could create an incomplete view of the analyses and the process
underlying the opinion. In its analyses, Southard made numerous assumptions,
many of which are beyond the control of CSB, Bank, and First
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<PAGE> 36
American. Any estimates contained in the analyses prepared by Southard are not
necessarily indicative of future results or values, which may vary
significantly from such estimates. Estimates of value of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
or their securities may actually be sold. None of the analyses performed by
Southard was assigned a greater significance than any other.
The summary of Southard's analysis set forth below is based on an assumed
exchange ratio of First American Common Stock for shares of CSB Common Stock
and Bank Common Stock. Under the Agreement, CSB shareholders are to receive
9.7071 shares of First American Common Stock, while Bank shareholders are to
receive 4.4653 shares of First American Common Stock. Outstanding options to
purchase shares of CSB will be converted to options of First American, with the
option exercise price derived by dividing the CSB exercise price by 9.7071.
The analysis below is based upon a price for First American Common Stock of
$48.50.
Based upon the terms of the Mergers, CSB and Bank shareholders will receive
about 386% of fully diluted book value at March 31, 1998, 24.6 times reported
1997 diluted earnings, 22.5 times estimated fully diluted 1998 earnings, and
31.5% of Bank assets at March 31, 1998. Based upon the review conducted by
Southard, the pricing multiples for the Mergers are at or above the average
multiples seen in recent bank acquisitions. Southard's conclusion was that the
terms of the proposed Mergers pursuant to the Agreement are fair, from a
financial viewpoint, to the shareholders of CSB and Bank.
In conjunction with the Fairness Opinion, Southard also provided CSB
shareholders with the following analyses:
DIVIDEND YIELD ANALYSIS: In evaluating the impact of the proposed Mergers
on the shareholders of CSB and Bank, Southard reviewed the dividend paying
histories of CSB and First American. Based upon this review, given the
dividend payout at First American, the impact of the Mergers on the dividends
received by CSB shareholders will be positive.
EARNINGS YIELD ANALYSIS: In evaluating the impact of the proposed Mergers
on the shareholders of CSB and Bank, Southard determined that, based upon the
assumed exchange ratio, the shareholders of CSB and Bank would have seen an
increase in their share of earnings during 1997 and a projected increase for
1998.
BOOK VALUE ANALYSIS: In evaluating the impact of the proposed Mergers on
the shareholders of CSB and Bank, Southard determined that the shareholders of
CSB and Bank would have seen an increase in the book value of their investment
had the Mergers been consummated on December 31, 1997 or March 31, 1998.
FUNDAMENTAL ANALYSIS: Southard reviewed the financial characteristics of
CSB, Bank and First American with respect to profitability, capital ratios,
liquidity, asset quality, and other factors. Southard compared CSB, Bank and
First American to a universe of publicly traded banks and bank holding
companies and to peer groups prepared by the Federal Financial Institutions
Examination Council (FFIEC). Southard found that the post-merger combined
entity would have capital ratios and profitability ratios near those of the
public peer group and the FFIEC peer group.
LIQUIDITY: Unlike the shares of CSB and Bank, First American shares were
traded on the Nasdaq National Market under the ticker symbol "FATN" (and as of
the date of this Prospectus/Proxy Statement are traded on the NYSE under the
ticker symbol "FAM"). The stock is actively traded, has several institutional
holders, and is followed by several investment analysts. Finally, except in the
case of certain officers, directors, and significant shareholders of CSB and
Bank ("AFFILIATES"), First American shares received will be freely tradable with
no restrictions.
ALTERNATIVES: During 1997, the Boards of CSB and Bank began to consider
alternatives relative to the possible sale of CSB and Bank. After deciding to
investigate the possible sale of CSB and Bank, outside professionals were
engaged to assist in the process. Several potential acquirors were identified
and materials were prepared for the marketing of CSB and Bank. However, prior
to contacting possible acquirors, First American contacted CSB and Bank and
entered into negotiations which ultimately resulted in the proposed Mergers.
The pricing offered by First American was higher than initially expected,
reflecting the attractiveness of Bank's market to First American. This fact is
a key consideration in the fairness opinion
Southard is a financial valuation consulting firm specializing in the
valuation of closely-held companies and financial institutions. Since its
founding in 1987, Southard has provided approximately 2,000 valuation opinions
for clients in 43 states. Further, Southard provides valuation services for
approximately 120 financial institutions annually. For rendering its opinion,
Southard received a fee of $15,000 plus reasonable out-of-pocket expenses.
Southard has never been engaged previously by CSB, Bank or First American, and
neither Southard nor its principals own an interest in the securities of CSB,
Bank or First American.
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THE EFFECTIVE TIMES
The Holding Company Merger will become effective upon the filing of the
CSB Articles of Merger with the Secretary of State of the State of Tennessee or
at such time thereafter as is provided in the CSB Articles of Merger, but in
any event, CSB and First American intend that the CSB Effective Time shall be
12:01 a.m. of the first calendar day of the month immediately following the
month in which the date of the closing of the Mergers occurs (the "CLOSING
DATE"). The parties currently anticipate that the Closing Date will occur
during the last week of September 1998 and at least two business days after the
satisfaction or waiver of the conditions described under "-- Conditions to the
Mergers," and that the CSB Effective Time will occur on October 1, 1998.
At the CSB Effective Time, CSB Shareholders (other than those who perfect
dissenters' rights under the TBCA--see "ADDITIONAL INFORMATION--Dissenters'
Appraisal Rights") will cease to be, and will have no rights as, CSB
Shareholders, other than to receive (i) any dividend or other distribution with
respect to CSB Common Stock with a record date occurring prior to the CSB
Effective Time which may have been declared or made by CSB on such shares of
CSB Common Stock in accordance with the terms of the Agreement on or prior to
the CSB Effective Time and which remain unpaid at the CSB Effective Time; and
(ii) the Holding Company Merger Consideration. There will be no transfers on
the stock transfer books of the Surviving Corporation of shares of CSB Common
Stock which were outstanding immediately prior to the CSB Effective Time. If,
after the CSB Effective Time, Certificates (as defined herein) with respect to
CSB Common Stock are presented to CSB for any reason, they will be cancelled
and exchanged for certificates representing shares of First American Common
Stock as provided in the Agreement.
The Bank Merger will become effective upon the filing of the Bank Articles
of Merger with the Tennessee Department of Financial Institutions ("TDFI"), the
Secretary of State of the State of Tennessee and the OCC on the date and time
agreed to with the OCC, or at such time thereafter as is provided in the Bank
Articles of Merger, but in any event, Bank and First American intend that the
Bank Effective Time shall occur immediately following the CSB Effective Time.
At the Bank Effective Time, Bank Shareholders (other than those who
perfect dissenters' rights under 12 U.S.C. Section 215a -- see "ADDITIONAL
INFORMATION--Dissenters' Appraisal Rights") will cease to be, and will have no
rights as, Bank Shareholders, other than to receive (i) any dividend or other
distribution with respect to Bank Common Stock with a record date occurring
prior to the Bank Effective Time which may have been declared or made by Bank
on such shares of Bank Common Stock in accordance with the terms of the
Agreement on or prior to the Bank Effective Time and which remain unpaid at the
Bank Effective Time; and (ii) the Bank Merger Consideration. There will be no
transfers on the stock transfer books of the Surviving Bank of shares of Bank
Common Stock which were outstanding immediately prior to the Bank Effective
Time. If, after the Bank Effective Time, Certificates (as defined herein) with
respect to Bank Common Stock are presented to Bank for any reason, they will be
cancelled and exchanged for certificates representing shares of First American
Common Stock as provided in the Agreement.
EXCHANGE OF CERTIFICATES
As of the CSB Effective Time, First American will deposit, or will cause
to be deposited, with First Chicago Trust Company of New York or its successor
(the "EXCHANGE AGENT"), for the benefit of the holders of shares of CSB Common
Stock and Bank Common Stock, for exchange in accordance with the Agreement,
certificates representing the shares of First American Common Stock (together
with any dividends or distributions with respect thereto, the "EXCHANGE FUND"),
issuable in connection with each Merger, and cash to be paid in lieu of
fractional shares.
As soon as reasonably practicable after the CSB Effective Time and the
Bank Effective Time, the Exchange Agent shall mail to each holder of record of
a certificate or certificates which immediately prior to the CSB Effective Time
or the Bank Effective Time represented outstanding shares of CSB Common Stock
or Bank Common Stock, respectively (the "CERTIFICATES"), whose shares were
converted into shares of First American Common Stock pursuant to the Agreement
(as applicable), (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 First American and CSB may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of First
American 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 First American Common Stock which such holder has the right
to receive in respect of the Certificate surrendered pursuant to the provisions
of the Agreement (after taking into account all shares of CSB Common Stock or
Bank 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 CSB Common Stock which is not registered in
the transfer records of the Bank or CSB, a certificate representing the proper
number of shares of First American Common Stock may be issued to a transferee
if the Certificate representing such CSB Common Stock or Bank 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 the terms
of the Agreement, each Certificate shall be deemed at any time after the
applicable Effective Time to represent only the right to
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receive upon such surrender the certificate representing shares of First
American Common Stock and cash in lieu of any fractional shares of First
American Common Stock as contemplated by the terms of the Agreement.
No dividends or other distributions declared or made after the CSB
Effective Time or Bank Effective Time, as the case may be, with respect to
First American Common Stock with a record date after the applicable Effective
Time, shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of First American Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to the terms of the Agreement 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 First American 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
First American Common Stock to which such holder is entitled pursuant to the
terms of the Agreement and the amount of dividends or other distributions with
a record date after the applicable Effective Time theretofore paid with respect
to such whole shares of First American Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the applicable Effective Time but prior to surrender and a
payment date subsequent to surrender payable with respect to such whole shares
of First American Common Stock.
All shares of First American Common Stock issued upon conversion of shares
of CSB Common Stock or Bank Common Stock in accordance with the terms of the
Agreement (including any cash paid in lieu fractional shares in accordance with
the terms of the Agreement) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of CSB Common Stock or
Bank Common Stock, subject, however, to the Surviving Corporation's or
Surviving Bank's (as the case may be) obligation to pay any dividends or make
any other distributions with a record date prior to the applicable Effective
Time which may have been declared or made by CSB on such shares of CSB Common
Stock or Bank on such shares of Bank Common Stock in accordance with the terms
of the Agreement on or prior to the applicable Effective Time and which remain
unpaid at the applicable Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of CSB Common Stock or Bank Common Stock which were
outstanding immediately prior to the applicable Effective Time. If, after the
CSB Effective Time or the Bank Effective Time, as the case may be, Certificates
are presented to the Surviving Corporation Surviving Bank for any reason, they
shall be canceled and exchanged as provided for in the Agreement.
No certificates or scrip representing fractional shares of First American
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 First American including without
limitation the right to receive dividends. Each holder of CSB Common Stock or
Bank Common Stock who would otherwise have been entitled to receive a fraction
of a share of First American 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
First American Common Stock multiplied by the market value of one share of
First American Common Stock which shall be the closing price of such stock on
the NYSE (as reported in The Wall Street Journal, or if not reported thereby,
any other authoritative source) on the last trading day preceding the CSB
Effective Time or the Bank Effective Time, as the case may be. As soon as
practicable after the determination of the amount of cash, if any, to be paid
to holders of CSB Common Stock or Bank Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts to such holders of CSB Common Stock or Bank Common Stock subject to and
in accordance with the terms of the Agreement.
Any portion of the Exchange Fund which remains undistributed to the
stockholders of CSB or Bank for one year after the applicable Effective Time
shall be delivered to First American, upon demand, and any stockholders of CSB
or Bank who have not theretofore complied with the above procedures, as set
forth in the Agreement, shall thereafter look only to First American for
payment of their claim for First American Common Stock, any cash in lieu of
fractional shares of First American Common Stock and any dividends or
distributions with respect to First American Common Stock.
Neither First American, FANB, Bank nor CSB shall be liable to any holder
of shares of CSB Common Stock, Bank Common Stock or First American 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.
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
The Agreement contains negative and affirmative covenants that are
customary in transactions of this nature. In addition, the Agreement provides
that, except as specifically contemplated or permitted thereby, each of CSB and
First American 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 it 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 to
consummate the Mergers or prevent or impede the transactions contemplated by
the Agreement from qualifying as a reorganization under Section 368 of the Code
or the Merger qualifying as a pooling of interests; provided, however, that the
foregoing generally does not prevent First American or any of its subsidiaries
from acquiring or disposing of assets or businesses if such action does not
adversely affect First American's ability to consummate the Mergers or have a
material
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adverse effect on First American. Further, without the prior written consent of
First American, or as otherwise provided in the Agreement, CSB generally may
not, and may not permit its subsidiaries to, incur new debt other than in the
ordinary course of business; declare or pay any dividends; 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 CSB. The Agreement also contains certain
other provisions pursuant to which CSB has agreed to take, and to cause its
subsidiaries to take, certain actions relating to their lending, environmental
and other policies with the purpose of coordinating such policies with those of
First American in anticipation of the completion of the transactions
contemplated by the Agreement.
In the Agreement, CSB has agreed that it will not authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of CSB or any 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
"--Termination of Agreement" below). CSB will not authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of CSB or any 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. CSB will promptly give written notice to First American upon
becoming aware of any Competing Transaction.
In the event this covenant relating to Competing Transactions is breached
by CSB or Bank, or any of their directors, officers, employees or agents, and
the Agreement is terminated as a result, under certain circumstances CSB may be
required to pay to First American liquidated damages of $2,000,000. See
"--Termination Fee."
CONDITIONS TO THE MERGER
The obligations of First American and CSB to consummate the Holding
Company Merger and of FANB and Bank to consummate the Bank Merger are subject
to the satisfaction (or waiver, where legally allowed), at or prior to the CSB
Effective Time, of a number of conditions set forth in the Agreement,
including: (i) approval of the Holding Company Merger by the affirmative vote
of the holders of not less than a majority of CSB Common Stock entitled to vote
thereon and with no more than 5% of shares of CSB Common Stock dissenting
pursuant to the applicable provisions of the Agreement and the TBCA and
approval of the Bank Merger by the affirmative vote of the holders of not less
than two-thirds of Bank Common Stock entitled to vote thereon and with no more
than 5% of the shares of Bank Common Stock voting against the Bank Merger; (ii)
approval for listing on the NYSE of the shares of First American Common Stock
to be issued in the Mergers; (iii) the receipt of 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 Mergers, other than
Consents the failure to obtain which would have no material adverse effect on
the consummation of the Mergers or on First American and its subsidiaries,
taken as a whole, (all such permits, approvals, filings and consents and the
lapse of all such waiting periods being referred to as the "REQUISITE
REGULATORY APPROVALS"); (iv) the Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order; (v) the absence of any order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition (an "INJUNCTION") preventing the
consummation of the Mergers, and the absence of any statute, rule, regulation,
order, injunction or decree having been enacted, entered, enforced or deemed
applicable to the Mergers that would render consummation of the Mergers
illegal; and (vi) the absence of any proceeding initiated by any governmental
entity seeking an Injunction.
The obligations of First American and FANB to effect the Mergers are
subject to the satisfaction of the following additional conditions unless
waived in writing by First American or FANB: (i) the representations and
warranties of CSB and Bank set forth in the Agreement shall be true and correct
in all material respects as of the date of the 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; (ii) CSB and
Bank shall have performed in all material respects all obligations required to
be performed by it under the Agreement at or prior to the Closing Date; (iii)
prior to or on the Closing Date, CSB shall have obtained the consent or
approval of each person (other than those the failure to obtain which would not
have a material adverse effect upon the consummation of the Mergers or on First
American or its subsidiaries) whose consent or approval shall be required in
order to permit the succession by First American after the Effective Time to
any obligation, right or interest of CSB 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 or approvals would not
have a material adverse effect on First American and its subsidiaries taken as
a whole or upon consummation of the Mergers; (iv) First American also shall
have received the opinion of the law firm of Gerrish & McCreary, P.C., counsel
to CSB and Bank, dated as of the Closing Date, in form reasonably satisfactory
to First American, which shall cover the matters set forth in the Agreement;
(v) there shall have been no material adverse change in the business, financial
condition, prospects or results of operations or prospects of CSB or Bank
Shareholder from that reflected in the documents provided to First American
pursuant to the terms of the Agreement and neither CSB nor any of its
subsidiaries shall 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 CSB or its subsidiaries to conduct
their business and operations except for such changes permitted by the
Agreement; (vi) First
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American shall have received written affiliates agreements as provided for in
the Agreement; (vii) First American shall have received a letter from Maggart &
Associates, P.C., dated as of the Closing Date, in form and substance
satisfactory to First American, addressing certain matters regarding the
financial statements of CSB set forth in the Agreement; (viii) First American
shall have received a certificate of the President and Chief Executive Officer
of CSB and the Bank certifying to First American immediately prior to the
Effective Time (a) the number of shares of CSB Common Stock and Bank Common
Stock issued and outstanding; (b) the number of options for CSB Common Stock
outstanding and that no options for Bank Common Stock were outstanding; (c) 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 CSB or the
Bank are outstanding; (d) that 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 CSB and the
Bank or any subsidiary thereof to issue any shares of capital stock or
securities convertible into or evidencing the right to purchase such stock; and
(e) no shares of CSB stock are held by CSB in treasury; and (ix) First American
shall have received the opinion of KPMG Peat Marwick LLP to the effect that the
Mergers shall be accounted for as "pooling-of-interests."
The obligations of CSB and the Bank to effect the Mergers is subject to
the satisfaction of the following additional conditions unless waived by CSB:
(i) the representations and warranties of First American set forth in the
Agreement shall be true and correct in all material respects as of the date of
the 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 the Agreement; (ii) First American
and FANB shall have performed in all material respects all obligations required
to be performed by it under the Agreement at or prior to the Closing Date;
(iii) First American and FANB shall have obtained the consent or approval of
each person (other than the governmental entities referred to in the Agreement,
whose consent or approval shall be required in connection with the transactions
contemplated in the Agreement 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 in the Agreement; (iv) CSB and
the Bank shall have received the opinion of the law firm of Gerrish & McCreary,
P.C., dated as of the Closing Date, to the effect that the Mergers will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and that First American, FANB, CSB and the Bank
will each be a party to that reorganization within the meaning of Section
368(b) of the Code and that (a) the shareholders of CSB and the Bank will not
recognize any gain or loss to the extent that such shareholders exchange shares
of CSB Common Stock or Bank Common Stock solely for shares of First American
Common Stock in the Mergers; (b) the basis of the First American Common Stock
received by a CSB Shareholder or Bank Shareholder who exchanges CSB Common
Stock or Bank Common Stock solely for First American Common Stock will be the
same as the basis of the CSB Common Stock surrendered therefor (subject to any
adjustments required as a result of the receipt of cash in lieu of fractional
shares); (c) the holding period of the First American Common Stock received by
a CSB Shareholder or Bank Shareholder receiving First American Common Stock
will include the period during which the CSB Common Stock; (d) surrendered in
exchange therefor was held (provided that the CSB Common Stock or Bank Common
Stock was held as a capital asset at the CSB Effective Time or Bank Effective
Time, as applicable); and (e) cash received by a CSB Shareholder or Bank
Shareholder in lieu of a fractional First American Common Stock share will be
treated as having been received as a distribution in full payment in exchange
for such fractional share interest.; (v) CSB shall have received the opinion of
Mary Neil Price, Esq., General Counsel to First American, dated as of the
Closing Date, in form reasonably satisfactory to CSB, which shall cover the
matters set forth in the Agreement; (vi) the Exchange Agent shall acknowledge
in writing to CSB and the Bank that it is in receipt of certificates
representing the aggregate number of shares of First American Common Stock to
be issued to the shareholders of CSB and the Bank pursuant to the Holding
Company Merger and the Bank Merger and sufficient cash to pay for fractional
shares as provided herein; (vii) there shall have been no material adverse
change in the business, financial condition, prospects or results of operations
or prospects of First American from that reflected in the SEC filings of First
American as were provided to CSB by First American in accordance with the terms
of the Agreement and First American 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 First American or its subsidiaries to conduct their business and
operations except for such changes permitted by the Agreement; and (viii) the
Board of Directors of CSB and the Bank shall have received the opinion of
Southard Financial dated as of the date of the Agreement to the effect that the
Holding Company Merger, the Bank Merger and the transactions contemplated by
the Agreement are fair to the CSB Shareholders and the Bank Shareholders.
No assurance can be provided as to if or when the Requisite Regulatory
Approvals will be obtained or whether all of the other conditions precedent to
the Mergers will be satisfied or, where legally permitted, waived by the party
permitted to do so.
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval by the shareholders of CSB: (a) by mutual
consent of First American and CSB; or (b) by either First American or CSB if
(i) the Mergers shall not have been consummated on or before February 15, 1999
(the "TERMINATION DATE"), provided 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 Holding
Company Merger or Bank Merger by such date; (ii) any
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governmental or regulatory body, the consent of which is a condition to the
obligations of First American and CSB 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; 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
Holding Company Merger or Bank Merger and such order, judgment or decree shall
have become final and nonappealable.
The Agreement may be terminated by First American at any time prior to the
Effective Time, whether before or after approval by the shareholders of CSB: (i)
if any event shall have occurred as a result of which any condition of First
American's and FANB's obligations to effect the Mergers, as set forth in the
Agreement is no longer capable of being satisfied; (ii) if there has been a
breach by CSB or the Bank of any representation or warranty contained in the
Agreement, which would or would be reasonably likely to have a material adverse
effect on the assets, liabilities, financial condition, results of operations or
prospects of CSB 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 CSB or the Bank, 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 to CSB; (iii) if CSB or the Bank (or their 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 First American and FANB; or (iv) if the Board of
Directors of CSB or the Bank shall have withdrawn or materially modified its
authorization, approval or recommendation to the stockholders of CSB or the Bank
with respect to the Holding Company Merger, the Bank Merger or the Agreement or
shall have failed to make the favorable recommendation required by the terms of
the Agreement.
The term "COMPETING TRANSACTION" means any of the following involving CSB
or the Bank (other than the transactions contemplated by the Agreement): (x) any
merger, consolidation, share exchange, business combination, or other similar
transaction; (y) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the capital stock or assets of CSB or the Bank in
a single transaction or series of transactions to the same person, entity or
group; or (z) 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.
The Agreement may also be terminated at any time prior to the Effective
Time, whether before or after approval by the shareholders of CSB: (i) if any
event shall have occurred as a result of which any one of certain conditions any
certain condition of CSB's and the Bank's obligations to effect the Mergers, as
set forth in the Agreement is no longer capable of being satisfied; or (ii) if
there has been a breach by First American or FANB 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
FANB, 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
or FANB, which breach is not curable or, if curable, is not cured within 20 days
after written notice of such breach is given by CSB to First American or FANB.
The Agreement provides that it could have been terminated by CSB within two
business days following the date the Federal Reserve Board approved the Holding
Company Merger (the "DETERMINATION DATE") if the average of the last reported
sale prices per share of First American Common Stock as reported on the NYSE (as
reported in The Wall Street Journal or, if not reported therein, in another
mutually agreed upon authoritative source) for the twenty (20) consecutive
trading days on the NYSE ending at the close of trading on the Determination
Date (the "AVERAGE CLOSING PRICE") had been less than $38.80. Because the
Average Closing Price as measured on the Determination Date (which was August
6, 1998) was in excess of $38.80, CSB may not terminate the Agreement on this
basis.
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In the event of termination of the Agreement pursuant to its terms the
Agreement will become void and have no effect, except with respect to those
provisions of the Agreement which by their terms expressly survive the
termination of the Agreement, and except with respect to the provisions of the
Agreement relating to publicity, fees and expenses and the parties' rights and
obligations upon termination and except that termination will not relieve or
release a breaching party from liability or damages for its willful breach of
the Agreement.
TERMINATION FEE
In recognition of the fact that First American and FANB have spent, and
will be required to spend, substantial time and effort in examining business,
properties, affairs, financial condition and prospects of CSB, Bank and Bank's
subsidiaries, have incurred, and will continue to incur, substantial fees and
expenses in connection with such examination, the preparation of the Agreement
and the accomplishment of the transactions contemplated thereunder, 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, the Agreement provides that CSB shall pay to First
American a fee in the amount of $2 million (the "FEE"), which amount is
inclusive of the First American expenses, not as a penalty but as full and
complete liquidated damages: (a) if First American terminates the Agreement:
(i) by reason of the failure of CSB or Bank to meet certain conditions set
forth in the Agreement due to CSB's or Bank's knowing and intentional
misrepresentation or knowing and intentional breach of warranty or breach of
any covenant or agreement, and within twelve (12) months from the date of
termination a Competing Transaction is consummated or CSB or Bank 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) after the Board of Directors of
CSB or Bank shall have withdrawn or materially modified its authorization,
approval or recommendation to the shareholders of CSB or the shareholders of
Bank, as the case may be, with respect to the applicable Merger or the
Agreement or shall have failed to make the favorable recommendation required by
the terms of the Agreement; or (iii) because CSB or Bank (or the Board of
Directors of either) shall have authorized, recommended, proposed or publicly
announced its intention to enter into a Competing Transaction which shall not
have been consented in writing by First American or FANB, and within twelve
(12) months from the date of termination a Competing Transaction is consummated
or CSB or Bank shall have entered into an agreement which if consummated would
constitute a Competing Transaction; or (b) if CSB or Bank terminates the
Agreement pursuant to the termination right of either under the Agreement
because the Agreement did not receive the requisite vote of CSB Shareholders or
Bank Shareholders and within twelve (12) months from the date of termination a
Competing Transaction is consummated or CSB shall have entered into an
agreement which if consummated would constitute a Competing Transaction. Any
Fee required to be paid shall be paid as promptly as practicable, and 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 First
American. In the event that First American is entitled to the Fee, CSB shall
also pay to First American interest at the rate of 8% 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 CSB to pay the Fee or such
interest.
EXPENSES
Whether or not the Mergers are consummated, all costs and expenses
incurred in connection with the Agreement and the transactions contemplated
thereby and thereby shall be paid by the party incurring such expense; provided
that First American and CSB shall equally share all expenses connected with the
printing and mailing of this Prospectus/Proxy Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated U.S. federal income
tax consequences of the Holding Company Merger to CSB Shareholders who hold CSB
Common Stock as a capital asset and of the Bank Merger to Bank Shareholders who
hold Bank Common Stock as a capital asset. The summary is based on the Code,
Treasury regulations thereunder, and administrative rulings and court decisions
in effect as of the date hereof, all of which are subject to change at any
time, possibly with retroactive effect. This summary is not a complete
description of all of the consequences of the Merger and, in particular, may
not address U.S. federal income tax considerations applicable to stockholders
subject to special treatment under U.S. federal income tax law (including, for
example, non-U.S. persons, financial institutions, dealers in securities,
insurance companies, tax-exempt entities, holders who acquired CSB Common Stock
or Bank Common Stock pursuant to the exercise of an employee stock option or
right or otherwise as compensation, and holders who hold CSB Common Stock as
part of a hedge, straddle or conversion transaction). In addition, no
information is provided herein with respect to the tax consequences of the
Merger under applicable foreign, state or local laws. CSB SHAREHOLDERS AND BANK
SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX
CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE EFFECTS OF U.S. FEDERAL,
STATE AND LOCAL, FOREIGN, AND OTHER TAX LAWS.
In connection with the filing of the Registration Statement, First
American has received an opinion of KPMG Peat Marwick LLP, as of August 14,
1998, addressing the U.S. federal income tax consequences of the Mergers
described below. Such opinion has been rendered on the basis of facts,
representations and assumptions set forth or referred to in such opinion
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which are consistent with the expected state of facts existing at the CSB
Effective Time and the Bank Effective Time. In rendering this opinion, KPMG Peat
Marwick LLP, has required and relied upon representations and covenants,
including those contained in certificates of officers of First American, FANB,
CSB and Bank.
The parties' obligations to effect the Mergers are conditioned upon their
receipt of an opinion of the law firm of Gerrish & McCreary, P.C., counsel to
CSB, in the case of CSB and Bank, and receipt of an opinion of KPMG Peat Marwick
LLP, independent auditor for First American, in the case of First American and
FANB, each dated as of the Closing Date, to the effect that the Mergers will be
treated for federal income tax purposes as reorganizations within the meaning of
Section 368(a) of the Code, and that First American, FANB, CSB and Bank will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. In addition, CSB and Bank shall have received an opinion from Gerrish
& McCreary, P.C., to the foregoing effect and to the effect that (i) the
shareholders of CSB and Bank will not recognize any gain or loss to the extent
that such shareholders exchange shares of CSB Common Stock or Bank Common Stock
solely for shares of First American Common Stock in the Mergers; (ii) the basis
of the First American Common Stock received by a CSB Shareholder or Bank
Shareholder who exchanges CSB Common Stock or Bank Common Stock solely for First
American Common Stock will be the same as the basis of the CSB Common Stock or
Bank Common Stock surrendered therefor (subject to any adjustments required as a
result of the receipt of cash in lieu of fractional shares); (iii) the holding
period of the First American Common Stock received by a CSB Shareholder or Bank
Shareholder receiving First American Common Stock will include the period during
which the CSB Common Stock or Bank Common Stock surrendered in exchange therefor
was held (provided that the CSB Common Stock or Bank Common Stock was held as a
capital asset at the Effective Time); and (iv) cash received by a CSB
Shareholder or Bank Shareholder in lieu of a fractional First American Common
Stock share will be treated as having been received as a distribution in full
payment in exchange for such fractional share interest.
None of the tax opinions to be delivered to the parties in connection with
the Mergers as described herein are binding on the Internal Revenue Service
(the "IRS") or the courts, and the parties do not intend to request a ruling
from the IRS with respect to the Mergers. Accordingly, there can be no
assurance that the IRS will not challenge the conclusions reflected in such
opinions or that a court will not sustain such challenge.
Based upon the current ruling position of the IRS, cash received by a CSB
Shareholder or Bank Shareholder in lieu of a fractional share interest in First
American Common Stock will be treated as having been received in redemption of
such fractional share interest, and a CSB Shareholder or Bank Shareholder
should generally recognize capital gain or loss for federal income tax purposes
measured by the difference between the amount of cash received and the portion
of the tax basis of the share of CSB Common Stock or Bank Common Stock
allocable to such fractional share interest. Such gain or loss should be a
long-term capital gain or loss if the holding period for such share of CSB
Common Stock or Bank Common Stock is greater than one year at the CSB Effective
Time or Bank Effective Time. The holding period of a share of First American
Common Stock received in the Mergers (including a fractional share interest
deemed received and redeemed as described above) will include the holder's
holding period in the CSB Common Stock or Bank Common Stock surrendered in
exchange therefor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of CSB's management and the CSB Board, and Bank's
management and the Bank Board, may be deemed to have certain interests in the
Mergers that are in addition to their interests generally as CSB Shareholders
and Bank Shareholders, respectively. The CSB Board and Bank Board were aware
of these interests and considered them, among other matters, in approving the
Agreement and the transactions contemplated thereby.
All of CSB's and Bank's respective directors own shares of CSB Common
Stock or Bank Common Stock which will be converted into shares of First
American Common Stock through the Agreement on the same terms and conditions as
applied to all other shareholders. As of the CSB Record Date, the directors of
CSB, certain persons affiliated with them and certain other shareholders, as a
group, beneficially held approximately 53.69% of the outstanding shares of CSB
Common Stock entitled to vote at the CSB Special Meeting and have indicated
their intentions to vote in favor of the Agreement. Similarly, as of the Bank
Record Date, the directors of Bank, certain persons affiliated with them and
certain other shareholders, as a group, beneficially held approximately 96.15%
of the outstanding shares of Bank Common Stock entitled to vote at the Bank
Special Meeting and have indicated their intentions to vote in favor of the
Agreement.
In considering the recommendations of the Boards of Directors of CSB and
Bank with respect to the Agreement, shareholders should be aware that certain
executive officers of CSB and/or Bank may have interests in the Agreement being
approved that are in addition to the interests of shareholders generally. On or
prior to the consummation of the Mergers, it is expected that Mr. Gary Scott
will enter into an employment agreement (the "EMPLOYMENT AGREEMENT") with First
American to provide for his continued employment by Bank (or its successor)
following the Mergers. The employment contract of Gary Scott provides for the
continued employment of Mr. Scott following the Mergers. The contract will run
until December 31, 2000 unless renewed or terminated and provides for a per
annum base salary consistent with Mr. Scott's current salary. The contract also
provides standard non-compete provisions for Mr. Scott for 12 months after the
end of his employment under terms of the contract within 30 miles of areas in
which First American engages in business. In certain
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<PAGE> 45
circumstances, if Mr. Scott is terminated without cause he will still be
entitled to payments under the contract. In addition, he will be entitled to
participate in bonus and salary incentive compensation programs or other
employee benefits as may be made available to similarly situated managers in the
First American system from time to time during employment with First American.
During the past several years, CSB and the Bank have had transactions in
the ordinary course of business with some of their respective directors,
executive officers and principal shareholders or their affiliates. Such
transactions, including borrowings and loan commitments, are on substantially
the same terms, including interest rates and collateral as applicable as
those prevailing at the time of the transaction for comparable transactions.
In the opinion of the management of CSB and Bank, such transactions did not
involve more than a normal risk of collectibility nor did they present
significant unfavorable features.
Change of Control Bonus Agreements. Certain members of CSB's and Bank's
management have entered into retention bonus agreements ("RETENTION BONUS
AGREEMENTS"). The purpose of these agreements is to ensure that key personnel
remain employed with CSB or the Bank up to the time of consummation of an
acquisition. The Retention Bonus Agreements provide for cash bonuses if an
employee remains employed with CSB or the Bank through the transition process.
The aggregate cost of all such retention bonuses is $504,000. The Retention
Bonus Agreements include a noncompetition provision that becomes effective if
the employee voluntarily terminates employment after receiving a retention
bonus. The noncompete provision will be effective for two to six months
depending on the size of the retention bonus paid.
Severance Arrangements. From and after the CSB Effective Time and Bank
Effective Time, all CSB and Bank employees who are terminated as the result of
the Mergers or within one year of the consummation thereof will be eligible for
benefits available under First American's reduction in force policy previously
provided to CSB.
Indemnification; Insurance. The Agreement provides that, from and after
the CSB Effective Time, First American shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date of
the Agreement or who becomes prior to the CSB Effective Time, an officer,
director or employee of CSB 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 CSB or any subsidiary of CSB, whether pertaining to any matter
existing or occurring at or prior to the CSB Effective Time and whether
asserted or claimed prior to, or at or after, the CSB Effective Time
("INDEMNIFIED LIABILITIES"), in each case to the full extent CSB 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 CSB Effective Time,
and its charter and by-laws or the charter and by-laws of the CSB 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 CSB
Effective Time), (i) any counsel retained by the Indemnified Parties for any
period after the CSB Effective Time shall be reasonably satisfactory to First
American; (ii) after the CSB Effective Time, First American 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 CSB Effective Time, First American will use
all reasonable efforts to assist in the vigorous defense of any such matter,
provided that First American 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 these provisions of the Agreement, upon learning of any
such claim, action, suit, proceeding or investigation, shall notify First
American (but the failure so to notify First American shall not relieve it from
any liability which it may have under these provisions of the Agreement except
to the extent such failure materially prejudices First American). 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.
First American has also agreed, from and after the CSB Effective Time and
for a period of two years thereafter, 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 CSB immediately
prior to the CSB Effective Time with respect to claims arising from facts or
events which occurred before the CSB Effective Time; provided, however, that
First American 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 CSB for such insurance. Notwithstanding anything to the
contrary contained in the Agreement, First American's agreement set forth above
shall be limited to cover claims only to the extent that those claims are not
covered under CSB's directors' and officers' insurance policies (or any
substitute policies permitted by the terms of the Agreement).
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<PAGE> 46
ACCOUNTING TREATMENT
It is intended that the Mergers will each be accounted for as a "pooling
of interests" under generally accepted accounting principles ("GAAP"), and the
receipt of a letter from First American's independent accountants to the effect
that the Mergers will qualify for such accounting treatment is a condition to
First American's obligation to consummate the Mergers.
REGULATORY MATTERS
Federal Reserve Board. The Holding Company Merger is subject to prior
approval by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the "BHCA"). The BHCA requires the Federal Reserve Board, when
approving the merger of two bank holding companies, to take into consideration
the financial and managerial resources (including the competence, experience and
integrity of officers, directors and principal shareholders) and future
prospects of the existing and proposed institutions and the convenience and
needs of the communities to be served. In considering financial resources and
future prospects, the Federal Reserve Board will, among other things, evaluate
the adequacy of the capital levels of the parties to a proposed transaction.
The BHCA prohibits the Federal Reserve Board from approving a merger if it
would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or to attempt to monopolize the business of banking in
any part of the United States, or if its effect in any section of the country
would be substantially to lessen competition or to tend to create a monopoly,
or if it would in any other manner result in a restraint of trade, unless the
Federal Reserve Board finds that the anti-competitive effects of a merger are
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served. In addition, under the Community Reinvestment Act of 1977, as amended,
the Federal Reserve Board must take into account the record of performance of
the existing institutions in meeting the credit needs of the entire community,
including low- and moderate-income neighborhoods, served by such institutions.
Applicable U.S. federal law provides for the publication of notice and
public comment on applications or notices filed with the Federal Reserve Board
and authorizes such agency to permit interested parties to intervene in the
proceedings. If an interested party is permitted to intervene, such
intervention could delay the regulatory approvals required for consummation of
the Holding Company Merger.
The Holding Company Merger generally may not be consummated until 30 days
(which may be shortened to 15 days with the consent of the U.S. Department of
Justice) following the date of Federal Reserve Board approval, during which
time the U.S. Department of Justice may challenge the Holding Company Merger on
antitrust grounds. The commencement of an antitrust action by the U.S.
Department of Justice, if it occurred, would stay the effectiveness of the
Federal Reserve Board's approval unless a court specifically ordered otherwise.
OCC. The Bank Merger is subject to the prior approval of the OCC under the
Bank Merger Act (the "BMA"). The BMA requires the OCC to make the same
determinations regarding financial and managerial resources, public convenience
and needs, antitrust considerations and satisfaction of community credit needs
with respect to the Bank Merger that the Federal Reserve Board is required to
make with respect to the Holding Company Merger, as described above. The OCC's
regulations also provide public notice and opportunity for comment and to
request a hearing. In addition, the Bank Merger may not be consummated until 30
days (which may be shortened to 15 days with consent of the U.S. Department of
Justice) following the date of OCC's approval, during which time the U.S.
Department of Justice may challenge the merger on antitrust grounds. The
commencement of an antitrust action by the U.S., if it occurred, would stay the
effectiveness of the OCC's approval unless a court specifically ordered
otherwise.
State Authorities. In connection with the Holding Company Merger and the
Bank Merger, a notice filing with the Tennessee Department of Financial
Institutions (the "TDFI") is required. As of the date of this document, such
notice has been filed.
Status of Regulatory Approvals and Other Information. The Federal Reserve
Board approved the Holding Company Merger on August 6, 1998, and the OCC
approved the Bank Merger on August 20, 1998. All required waiting periods in
connection with the Mergers will have expired before the Mergers are completed.
The Agreement provides that the obligation of each of First American, FANB,
CSB and the Bank to consummate the Mergers is conditioned upon the receipt of
all Requisite Regulatory Approvals. First American, FANB, CSB and the Bank are
not aware of any governmental approvals or actions that may be required for
consummation of the Merger other than as described above. Should any other
approval or action be required, the parties to the Agreement currently
contemplate that such approval of action would be sought.
First American, FANB, CSB and the Bank are not aware of any governmental
approvals or actions that may be required for consummation of the Merger other
than as described above. Should any other approval or action be required, the
parties to the Agreement currently contemplate that such approval of action
would be sought.
See "--The Effective Time," "--Conditions to the Mergers" and
"--Termination of the Agreement."
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<PAGE> 47
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of First American Common Stock issuable to CSB Shareholders and
Bank Shareholders upon consummation of the Mergers have been registered under
the Securities Act. Such securities may be traded freely without restriction by
those shareholders who are not deemed to be "affiliates" of First American, CSB
or Bank, as that term is defined in the rules promulgated under the Securities
Act.
Shares of First American Common Stock received and beneficially owned by
those CSB Shareholders or Bank Shareholders who are deemed to be affiliates of
CSB or Bank at the time of the CSB Special Meeting or Bank Special Meeting may
be resold without registration under the Securities Act only as permitted by
Rule 145 under the Securities Act or as otherwise permitted thereunder.
Commission guidelines regarding qualifying for the "pooling of interests" method
of accounting also limit sales of shares of the acquiring and acquired company
by affiliates of either company in a business combination. Commission guidelines
also indicate that the "pooling of interests" method of accounting generally
will not be challenged on the basis of sales by affiliates of the acquiring or
acquired company if such affiliates do not dispose of any of the shares of the
corporation they own, or shares of a corporation they receive in connection with
a merger, during the period beginning 30 days before the merger is consummated
and ending when financial results covering at least 30 days of post-merger
operations of the combined companies have been published.
CSB has agreed in the Agreement to use its reasonable best efforts to
cause each person who is an affiliate (for purposes of Rule 145 under the
Securities Act and for purposes of qualifying each of the Mergers for "pooling
of interests" accounting treatment) of CSB or Bank to deliver to First American
a written agreement, in the form attached to the Agreement, intended to ensure
compliance with the Securities Act and to preserve the ability of each of the
Mergers to be accounted for as a "pooling-of-interests."
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<PAGE> 48
INFORMATION ABOUT OUR COMPANIES
INFORMATION ABOUT FIRST AMERICAN
GENERAL
First American was incorporated in Tennessee in 1968 and is registered as
a bank holding company under the BHCA. First American owns all of the capital
stock of First American National Bank, a national banking association
headquartered in Nashville, Tennessee ("FANB"); Deposit Guaranty National Bank,
a national banking association headquartered in Jackson, Mississippi ("DGNB");
First American Federal Savings Bank, a federal savings bank headquartered in
Roanoke, Virginia; and First American Enterprises, Inc., a Tennessee
corporation headquartered in Nashville, Tennessee. First American anticipates
that DGNB will be merged into FANB effective September 1, 1998. First
American's subsidiary banks engage in lending in the following areas:
commercial, consumer (amortizing mortgages and other consumer loans) and real
estate (construction, commercial mortgages and other real estate loans).
FANB owns 98.75% of the issued and outstanding capital stock of IFC
Holdings, Inc. (formerly INVEST Financial Corporation), a Delaware corporation
headquartered in Tampa, Florida, which is engaged in the distribution of
securities, other investment products, and insurance, and 49% of the capital
stock of The SSI Group, Inc., a Florida corporation headquartered in Mobile,
Alabama, which is engaged in health care claims processing.
First American coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
controls that allow coordination of selected policies and activities. First
American derives its income from interest, dividends and management fees
received from its subsidiaries.
As of June 30, 1998, First American had total assets of approximately
$19.1 billion, total deposits of approximately $13.6 billion and shareholders'
equity of approximately $1.6 billion. The mailing address of the principal
executive offices of First American is First American Center, Nashville,
Tennessee 37237-0700, and the telephone number is (615) 748-2000.
PENDING ACQUISITIONS
In addition to the Merger, First American has pending three other proposed
acquisitions of financial institutions to be accounted for as
pooling-of-interests:
First American has entered into an Agreement and Plan of Merger dated April
21, 1998 to acquire Peoples Bank, Dickson, Tennessee ("PEOPLES"). As of June
30, 1998, Peoples operated six branches in Dickson and Houston Counties,
Tennessee, and had approximately $136 million in assets, $118 million in deposit
liabilities and $16.8 million in stockholders' equity. This transaction is
expected to be consummated by the beginning of the fourth quarter of 1998.
First American has entered into a Bank Merger Agreement dated May 26, 1998
to acquire The Middle Tennessee Bank, Columbia, Tennessee ("MTB"). As of June
30, 1998, MTB operated seven branches in Maury County, Tennessee, and had
approximately $225 million in assets, $190 million in deposit liabilities and
$30 million in stockholders' equity. This transaction is expected to be
consummated by the beginning of the fourth quarter of 1998.
First American has entered into an Agreement and Plan of Merger dated May
28, 1998 to acquire Pioneer Bancshares, Inc ("PIONEER"). As of June 30, 1998,
Pioneer operated through its depository institution subsidiaries 34 branches in
the Chattanooga, Tennessee metropolitan area and Northern Georgia, and had
approximately $1.006 billion in consolidated assets, $804 million in
consolidated deposit liabilities and $103 million in stockholders' equity. This
transaction is expected to be consummated during the fourth quarter of 1998.
INFORMATION ABOUT CSB
CSB is a one-bank holding company which owns about 96% of the outstanding
shares of Bank Common Stock. CSB was incorporated under Tennessee law on
August 21, 1986, for the purpose of acquiring the outstanding stock of Bank and
for related purposes. CSB acquired its ownership in Bank's stock by means of
an exchange offer to Bank's shareholders, which was consummated in March 1987.
Bank is CSB's only subsidiary.
CSB is headquartered at 108 Cumberland Street, Ashland City, Cheatham
County, Tennessee. Cheatham County is located in Middle Tennessee and is part
of the Nashville metropolitan statistical area (MSA), which is experiencing
substantial economic growth. Ashland City is the county seat of Cheatham
County.
CSB has 84,947 common shares issued and outstanding, which are owned by 36
shareholders. CSB has 200,000 shares of common stock authorized, with a par
value of $1.00 per share. The CSB Board owns or controls 64,480 shares or 76%
of the outstanding stock. CSB Common Stock is not actively traded and
management knows of no market quotations by securities dealers.
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CSB has earned satisfactory ratings concerning the bank holding company
inspection from its primary regulator, the Federal Reserve Board.
CSB (through the operations of Bank) has four bank subsidiary offices and
five ATMs in excellent locations to take advantage of the continued expansion
of the Nashville MSA. With locations in all municipalities within Cheatham
County, CSB and Bank have a market share in excess of 60% of deposits in
Cheatham County. See "ADDITIONAL INFORMATION ABOUT CSB."
INFORMATION ABOUT BANK
Bank was organized under Tennessee law on September 13, 1910 as The Bank of
Kingston Springs. In 1983, after several name changes, Bank's name was changed
to Cheatham State Bank. The purpose of Bank is to serve the banking needs of
Cheatham County. Bank's deposits are insured by the Federal Deposit Insurance
Corporation's Bank Insurance Fund. Bank is not a member of the Federal Reserve
System.
Bank is engaged in the general retail banking business and provides
financial products and services to individuals, and small to medium-size
businesses. These financial products and services include conventional checking
and savings accounts; Money Market accounts; certificates of deposit; debit
cards; business loans; mortgage loans; Master Card, VISA, and other
consumer-oriented financial services; and safe deposit and night depository
facilities. Bank has four staffed offices in Cheatham County. Bank also has
five automated teller machines ("ATMS"), which provide 24-hour banking services
to its customers. Bank has installed video teleconferencing equipment at its
Pleasant View Branch that links directly with its mortgage loan division. In
1996, the Tennessee Department of Financial Institutions (the "TDFI") granted
Bank the power to engage in full-service brokerage activities and financial
planning. Brokerage services are provided through BFP Financial Partners, Inc.
and its parent company, Legg Mason Financial Services, Inc. In addition to
insurance products and services, fixed-rate annuities, variable rate annuities,
mutual funds, and investment securities as well as financial planning services
are offered to its customers.
The Bank operates three wholly-owned subsidiaries. Community Finance
Company was incorporated under Tennessee law on January 4, 1994 as an industrial
loan and thrift company to provide financing for mobile home sales from the
Cunningham Company and to specialize in mobile home paper in Cheatham County.
CSB Insurance Services, Inc. was incorporated under Tennessee law on
January 10, 1994 for the purpose of providing financial planning and insurance
products to customers in Bank's service area.
CSB Acceptance Corporation was incorporated under Tennessee law on January
19, 1996 as an industrial loan and thrift company to provide lease financing to
customers in Bank's service area and to engage in lease financing paper
activities.
Bank has received satisfactory regulatory ratings from both the TDFI and
the Federal Deposit Insurance Corporation ("FDIC") concerning safety and
soundness issues. Bank received satisfactory ratings concerning its information
technology, consumer compliance, and Community Reinvestment Act ("CRA")
activities. Neither CSB nor Bank is under any type of bank regulatory
administrative action. See "ADDITIONAL INFORMATION ABOUT BANK."
MANAGEMENT AND OPERATIONS AFTER THE MERGERS
Following the consummation of the Holding Company Merger, the current
directors and executive officers of First American will continue to be the
directors and executive officers of First American. Following the consummation
of the Bank Merger, the current directors and executive officers of FANB will
continue to be the directors and executive officers of FANB.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
MARKET PRICES
First American Common Stock is listed on the NYSE under the symbol "FAM."
Prior to July 1, 1998, First American Stock was authorized for quotation on the
Nasdaq National Market System ("NASDAQ") under the trading symbol "FATN." As of
August 25, 1998, First American Common Stock was held of record by approximately
15,371 persons. The following table sets forth the high and low closing sale
prices of the First American Common Stock as reported by the NYSE or Nasdaq.
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<PAGE> 50
<TABLE>
<CAPTION>
FIRST AMERICAN CLOSING SALES PRICES
-----------------------------------
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter $24.25 $21.19
Second Quarter 22.81 21.06
Third Quarter 24.13 20.38
Fourth Quarter 29.38 23.88
YEAR ENDED DECEMBER 31, 1997:
First Quarter 34.63 28.00
Second Quarter 40.00 29.63
Third Quarter 50.13 38.00
Fourth Quarter 55.38 43.75
YEAR ENDED DECEMBER 31, 1998:
First Quarter 49.00 44.00
Second Quarter 54.31 43.44
Third Quarter (through August 24, 1998) 50.75 40.25
</TABLE>
CSB Common Stock is not listed or quoted on any securities exchange or any
quotation system and there is currently no established trading market for such
securities. Due to the lack of an active trading market, CSB does not have the
available information to furnish specific high and low sales prices for all
transactions in the stock or the range of high and low bid quotations for its
stock. Management is not aware of any trades of CSB Common Stock over the past
two years.
Bank Common Stock is not listed or quoted on any securities exchange or
quotation system and there is currently no established trading market for such
securities. Due to the lack of an active trading market, Bank does not have
the available information to furnish specific high and low sales prices for all
transactions in the stock or the range of high and low bid quotations for its
stock. Management is not aware of any trades in Bank Common Stock over the
past two years.
DIVIDENDS
The following table sets forth dividends declared per share of First
American Common Stock and CSB Common Stock and Bank Common Stock, respectively,
for the periods indicated. The ability of either First American, CSB or Bank to
pay dividends to its respective shareholders is subject to certain
restrictions. See "--Supervision and Regulation of First American, CSB and
Bank."
<TABLE>
<CAPTION>
FIRST AMERICAN
DIVIDENDS(a) CSB DIVIDENDS BANK DIVIDENDS
--------- ------------- --------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter $.140 $ 1.00
Second Quarter .155 --
Third Quarter .155 1.00
Fourth Quarter .155 --
YEAR ENDED DECEMBER 31, 1997:
First Quarter .155 1.00
Second Quarter .200 --
Third Quarter .200 1.00
Fourth Quarter .200 --
YEAR ENDED DECEMBER 31, 1998:
First Quarter .200 1.00
Second Quarter .250 --
Third Quarter .250(b) 1.00
</TABLE>
(a) Cash dividends declared represents the dividends declared by First American
without any effect given to the acquisition of Deposit Guaranty Corp.
(b) This dividend will be paid on August 31, 1998 to holders of First American
Common Stock on August 14, 1998.
SUPERVISION AND REGULATION OF FIRST AMERICAN, CSB AND BANK
GENERAL
As registered bank holding companies, First American and CSB are subject to
the supervision of, and to regular inspection by, the Federal Reserve Board.
Bank is a Tennessee state chartered bank, subject to regulation, supervision
and examination by the TDFI. The bank subsidiaries of First American are
organized as national banking associations, which are subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
(the "OCC"). First American owns a federal savings bank subject to supervision,
regulation and examination by the Official Thrift Supervision (the "OTS"). The
deposits of each of the banking subsidiaries of First American and of CSB,
including Bank, are insured, up to applicable limits, by the FDIC, which
maintains back-up enforcement authority over each institution. In
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<PAGE> 51
addition to banking laws, regulations and regulatory agencies, First American,
CSB and Bank and their subsidiaries and affiliates are subject to various other
laws and regulations and supervision and examination by other regulatory
agencies, all of which, directly or indirectly, affect the operations and
management of First American, CSB and Bank and their ability to make
distributions. The following discussion summarizes certain aspects of those laws
and regulations that affect First American, CSB and Bank. To the extent
statutory or regulatory provisions or proposals are described, the description
is qualified in its entirety by reference to the particular statutory or
regulatory provision or proposal. Supervision and regulation of bank holding
companies and their subsidiaries are intended primarily for the protection of
depositors, the deposit insurance funds of the FDIC and the banking system as a
whole, not for the protection of bank holding company shareholders or creditors.
Further information on the supervision and regulation of First American and its
subsidiaries may be found in First American's Annual Report on Form 10-K for the
year ended December 31, 1997, as amended. See "ADDITIONAL INFORMATION--Where You
Can Find More Information."
The activities of First American and CSB and those of companies which
First American or CSB control or in which either holds more than 5% of the
voting stock are limited to banking, managing or controlling banks, furnishing
services to or performing services for their subsidiaries or any other activity
which the Federal Reserve Board determines to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve Board is required to consider whether
the performance of such activities by a bank holding company or its
subsidiaries can reasonably be expected to produce benefits to the public such
as greater convenience, increased competition or gains in efficiency that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Generally, bank holding companies, such as First American, are
required to obtain prior approval of the Federal Reserve Board to engage in any
new activity or to acquire more than 5% of any class of voting stock of any
company. The activities of Bank generally are limited to the business of
banking as defined by Tennessee banking laws and applicable federal laws and
regulations.
Bank holding companies like First American and CSB are also required to
obtain the prior approval of the Federal Reserve Board before acquiring more
than 5% of any class of voting stock of any bank that is not already
majority-owned by the bank holding company. Under the Tennessee Bank Structure
Act, no bank holding company, whether incorporated in Tennessee or elsewhere,
may acquire any bank in Tennessee that has been in operation for 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
Tennessee law pertaining to bank mergers, banks in separate counties in
Tennessee that have been in operation for at least five years may merge. Banks
with principal offices in the same county may merge without regard to the
five-year aging requirement. Under these provisions, First American could in
the future acquire banks in Tennessee that have been in operation for five
years, but may not form or acquire a new bank in any Tennessee county other
than Davidson County, in which the main office of First American National Bank
is located. Bank has been in existence more than five years.
Pursuant to the Riegle-Neal Banking and Branching Efficiency Act of 1994
(the "INTERSTATE BANKING AND BRANCHING ACT") bank holding companies generally
can acquire banks in states other than their home states without regard to the
permissibility of such acquisitions under state law. The Interstate Banking and
Branching Act also authorizes banks with different home states to merge across
state lines, unless the home state of a participating institution has passed
legislation prior to June 1, 1997 explicitly prohibiting interstate branching
within that state. No states in which First American's banking subsidiaries are
located passed such legislation.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such proposals or bills being enacted and the impact they might have on First
American, CSB and their subsidiaries cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve Board, the OCC, the OTS and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States bank holding companies and federally insured depository
institutions. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels,
whether because of its financial condition or actual or anticipated growth. The
Federal Reserve Board risk-based guidelines applicable to bank holding companies
define a two-tier capital framework. Tier 1 capital generally consists of common
and qualifying preferred shareholders' equity, less goodwill, certain
intangibles and other adjustments. Tier 2 capital consists of subordinated and
other qualifying debt, and the allowance for credit losses up to 1.25% of
risk-weighted assets. The sum of Tier 1 and Tier 2 capital less investments in
unconsolidated subsidiaries represents qualifying total capital, at least 50% of
which must consist of Tier 1 capital. Risk-based capital ratios are calculated
by dividing Tier 1 and total capital by risk-weighted assets. For purposes of
calculating risk-weighted assets, assets and off-balance sheet exposures are
assigned to one of four categories of risk weights, based primarily on relative
credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. First American's Tier 1 and total
risk-based capital ratios under these guidelines at June 30, 1998 were 9.52%
and 11.49%, respectively, and CSB's were 12.6% and 13.8%, respectively.
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The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. First American's leverage ratio at June 30, 1998 was 7.49%.
First American Federal Savings Bank is subject to similar capital requirements
adopted by the OTS. Under the OTS capital guidelines, a savings association is
required to maintain tangible capital of at least 1.5% of tangible assets, core
(leverage) capital of at least 3% of the association's adjusted total assets and
risk-based capital of at least 8% of risk-weighted assets.
The other U.S. federal banking agencies have established risk-based and
leverage capital guidelines for federally-insured banks and thrifts that are
substantially similar to the Federal Reserve Board's capital guidelines for
bank holding companies. At June 30, 1998, CSB and each of the depository
institution subsidiaries of First American were in compliance with these
applicable federal capital adequacy guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective U.S. federal regulatory agencies
to implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan in order for
the capitalization plan to be accepted by the appropriate bank regulator. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5% of the bank's assets at the time it became "undercapitalized"
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and soundness related generally to operations and management, asset
quality and executive compensation and permits regulatory action against a
financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized, including, in the most severe cases, placing an institution
into conservatorship or receivership. Under the regulations, a "well
capitalized" institution must have a Tier 1 capital ratio of at least 6%, a
total capital ratio of at least 10% and a leverage ratio of a least 5% and not
be subject to a capital directive order. An "adequately capitalized"
institution must have a Tier 1 capital ratio of at least 4%, a total capital
ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases.
Under these guidelines, Bank and each of the banking subsidiaries of First
American was considered well capitalized as of June 30, 1998.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies have adopted final regulations
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance sheet position) in the determination of a bank's
capital adequacy.
Distributions. First American and CSB derive funds for cash distributions
to their shareholders from a variety of sources, including cash and temporary
investments. The primary source of such funds, however, is dividends received
from its banking subsidiaries. Under applicable law, the national banking
subsidiaries of First American may not pay a dividend, without the prior
approval of the OCC, if the total of all dividends declared in any calendar year
exceeds the total of its net profits of the preceding two calendar years, less
any required transfers to surplus or to a fund for the retirement of any
preferred stock. In addition, federal savings associations must provide the OTS
with at least 30 days' notice prior to declaring a dividend and are subject to
other OTS regulations governing capital distributions. As a Tennessee-chartered
bank, Bank's ability to pay dividends is subject to the rules and regulations of
the TDFI governing the amount of dividends which may be paid to shareholders,
the manner in which dividends are paid, and the methods, if any, by which
capital stock and surplus may be retired and reduced. Each of the banking
subsidiaries of First American and Bank is prohibited from paying a dividend if
thereafter such entity would fail to maintain capital within regulatory
minimums. The appropriate U.S. federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of the
bank or bank holding company that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof.
Federal Reserve Board policy provides that, as a matter of prudent
banking, a bank holding company generally should not maintain a rate of cash
dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears to be consistent with the holding company's capital needs,
asset quality and overall financial condition.
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In addition to the foregoing, the ability of CSB, First American, and their
banking subsidiaries to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established under
FDICIA, as described above. The right of First American, CSB, their respective
shareholders and their respective creditors to participate in any distribution
of the assets or earnings of their respective subsidiaries is further subject to
the prior claims of creditors of the respective subsidiaries.
"Source of Strength" Policy; Cross-Guarantee Liability. According to
Federal Reserve Board policy, bank holding companies are expected to act as a
source of financial strength to each subsidiary bank and to commit resources to
support each such subsidiary. This support may be required at times when a bank
holding company may not be able to provide such support. Under the
cross-guarantee provisions of the Federal Deposit Insurance Act, in the event
of a loss suffered or anticipated by the FDIC--either as a result of default of
a banking or thrift subsidiary of a bank holding company such as First American
or CSB or related to FDIC assistance provided to a subsidiary in danger of
default--the other banking subsidiaries of such bank holding company may be
assessed for the FDIC's loss, subject to certain exceptions.
ENFORCEMENT POWERS OF THE BANKING AGENCIES
The U.S. federal and state banking agencies have broad enforcement powers
over bank holding companies and their subsidiaries, as well as over banks that
are not part of a holding company structure and the subsidiaries of such banks,
including, in the case of the federal agencies, the power to terminate deposit
insurance, impose substantial fines and other civil penalties and, in the most
severe cases, to appoint a conservator or receiver for a depository
institution. Failure to maintain adequate capital or to comply with applicable
laws, regulations and supervisory agreements could subject First American, CSB
or their subsidiaries to these enforcement provisions.
FIRST AMERICAN CAPITAL STOCK
FIRST AMERICAN COMMON STOCK
General. First American is authorized to issue 200,000,000 shares of First
American Common Stock, of which 106,870,073 shares were outstanding as of August
26, 1998. First American Common Stock is listed on the NYSE under the symbol
"FAM." As of August 26, 1998, 24,395,790 shares of First American Common Stock
were reserved for issuance under various employee benefit plans of First
American or otherwise, pursuant to the First American Dividend Reinvestment and
Stock Purchase Plan and pursuant to that certain agreement (the "CHARTER FEDERAL
AGREEMENT") by and between First American and Charter Federal Savings Bank in
connection with certain litigation with the U.S. Government with respect to the
treatment of supervisory goodwill. After taking into account the shares reserved
as described above and the number of shares expected to be issued in the
Proposal Transactions, the number of authorized shares of First American Common
Stock available for other corporate purposes as of August 26, 1998 was
approximately 59,234,137.
Voting and Other Rights. The holders of First American Common Stock are
entitled to one vote per share, and, in general, assuming the presence of a
quorum, a majority of votes cast with respect to a matter is sufficient to
authorize action upon routine matters. Directors are elected by a plurality of
the votes cast, and each First American Shareholder entitled to vote in such
election is entitled to vote each share of stock for as many persons as there
are directors to be elected. In elections for directors, such shareholders do
not have the right to cumulate their votes (unless action is taken to provide
otherwise by charter amendment, which action management does not currently
intend to propose). In general, (i) amendments to the First American Charter
must be approved by each voting group entitled to vote separately thereon by a
majority of the votes entitled to be cast by that voting group, if the
amendment would create dissenter's appraisal rights as to that group, and
otherwise by a majority of the votes cast thereon; (ii) a merger or share
exchange required to be approved by the First American Shareholders must be
approved by each voting group entitled to vote separately thereon by a majority
of the votes entitled to be cast by that voting group; and (iii) the
dissolution of First American, or the sale of all or substantially all of the
property of First American other than in the usual and regular course of
business, must be approved by a majority of all votes entitled to be cast
thereon.
In the event of liquidation, holders of First American Common Stock would
be entitled to receive pro rata any assets legally available for distribution
to First American Shareholders with respect to shares held by them, subject to
any prior rights of any First American preferred stock (as described below)
then outstanding.
First American Common Stock does not have any preemptive rights,
redemption privileges, sinking fund privileges or conversion rights. All the
outstanding shares of First American Common Stock are, and upon issuance the
shares of First American Common Stock to be issued to CSB Shareholders will be,
validly issued, fully paid and nonassessable.
First American Corporation Shareholder Services department acts as
transfer agent and registrar for First American Common Stock.
Distributions. The holders of First American Common Stock are entitled to
receive such dividends or distributions as the First American Board may declare
out of funds legally available for such payments. The payment of distributions
by
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First American is subject to the restrictions of Tennessee law applicable to the
declaration of distributions by a business corporation. A corporation generally
may not authorize and make distributions if, after giving effect thereto, it
would be unable to meet its debts as they become due in the usual course of
business or if the corporation's total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if it were to be
dissolved at the time of distribution, to satisfy claims upon dissolution of
shareholders who have preferential rights superior to the rights of the holders
of its common stock. In addition, the payment of distributions to shareholders
is subject to any prior rights of outstanding preferred stock. Share dividends,
if any are declared, may be paid from authorized but unissued shares.
The ability of First American to pay distributions is affected by the
ability of its banking subsidiaries to pay dividends. The ability of such
banking subsidiaries, as well as of First American, to pay dividends in the
future currently is, and could be further, influenced by bank regulatory
requirements and capital guidelines. See "INFORMATION ABOUT OUR
COMPANIES--Supervision and Regulation of First American and CSB."
FIRST AMERICAN PREFERRED STOCK
First American has authorized 2,500,000 shares of preferred stock, without
par value, and may issue such preferred stock in one or more series, each with
such preferences, limitations, designations, conversion rights, voting rights
(not to exceed one vote per share), distribution rights, voluntary and
involuntary liquidation rights and other rights as it may determine. First
American has designated 300,000 shares of First American $2.375 Cumulative
Preferred Stock and 1,250,000 shares of First American Series A Junior
Preferred Stock. As of the date of this Prospectus/Proxy Statement, no shares
of either such series of First American preferred stock were outstanding.
COMPARATIVE RIGHTS OF SHAREHOLDERS OF FIRST AMERICAN, CSB AND BANK
First American and CSB are Tennessee corporations subject to the
provisions of the TBCA, and the Tennessee Greenmail Act (the "TGA"). Bank is a
Tennessee state chartered bank subject to the provisions of the Tennessee
Banking Act (the "TBA") and, to the extent not inconsistent with the TBA, the
TBCA.
BOARD OF DIRECTORS
Size. The First American Charter and the First American Bylaws provide
that the size of the First American Board shall consist of not fewer than nine
nor more than 27 directors, the exact number to be determined from time to time
by the First American Board pursuant to a resolution adopted by a majority of
the First American Board. The Charter and Bylaws of CSB provide that the size
of the CSB Board shall consist of not fewer than three nor more than ten
directors and the Charter and Bylaws of Bank provide that the size of the Bank
Board shall consist of not less than five directors. Following the Mergers,
the CSB Board and Bank Board will cease to exist.
Cumulative Voting. The TBCA provides that shareholders do not have the
right to cumulate their votes unless the corporation's charter provides
otherwise.
Pursuant to the First American Bylaws, First American Shareholders may not
cumulate their votes in the election of directors. Shareholders of CSB and
Bank do not have cumulative voting rights. As a result, it could be more
difficult, in certain circumstances, for a shareholder to gain representation
on the First American Board than on the CSB Board.
Qualification of Directors. The First American Bylaws provide that no
person may be elected or re-elected a director after reaching the age of 70
unless the First American Board deems that election or re-election (which may
be for a single additional term only) is in the best interests of First
American or unless the person owns greater than 1% of the issued and
outstanding shares of First American. Directors of CSB are not subject to any
specific qualifications and Bank directors are not subject to specific
qualifications other than the holding of qualifying shares.
Vacancies. The TBCA provides that vacancies on a board of directors may
be filled by shareholders or the board of directors unless the articles of
incorporation provide otherwise.
The First American Charter and the First American Bylaws provide that any
vacancy on the First American Board is to be filled only by a majority vote of
directors then in office, such appointee to serve for the unexpired term of his
or her predecessor or, if there is no predecessor, until the next annual
meeting of shareholders. The Bylaws of CSB and Bank provide that vacancies on
the Board of Directors may be filled by the directors then in office.
Removal. The First American Charter and the First American Bylaws provide
for removal of directors only for cause, only at a meeting called for that
purpose and only upon a vote for removal of at least 75% of the votes entitled
to be cast by all holders
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of voting stock voting together as a single class at a meeting called for such
purpose. The Bylaws of CSB provide that directors may be removed by shareholders
with or without cause. Accordingly, it could be more difficult for shareholders
of CSB to remove board members of First American than otherwise with the CSB
Board. No provision is made for the removal of bank directors under the Bank's
Charter or Bylaws.
Nomination of Directors. Pursuant to the First American Bylaws,
nominations of directors by First American Shareholders must be made in writing
and given to the Secretary of First American not later than (i) 210 days in
advance of an annual meeting of First American Shareholders if the election is
to be held at such meeting or (ii) the close of business on the 10th day
following the day on which notice is first given to First American Shareholders
of a CSB Special Meeting held to elect such directors. The Charter and Bylaws
of both CSB and Bank make no provision for the manner in which to nominate
directors. Accordingly, it could be more difficult, in certain circumstances,
for a shareholder to nominate directors for the First American Board than
currently exist for the CSB or Bank Boards.
BUSINESS COMBINATION PROVISIONS
The Tennessee Business Combination Act provides that a party beneficially
owning 10% or more of the voting power of any class or series of then
outstanding shares entitled to vote generally in the election of directors of a
corporation (an "INTERESTED SHAREHOLDER") cannot engage in a business
combination with the corporation for a period of five years following such
Interested Shareholder's share acquisition date, and may only engage in such
business combination after the five-year period if the transaction either (i)
is approved by at least two-thirds of the voting stock of the corporation not
beneficially owned by such Interested Shareholder at a meeting called for such
purpose no earlier than five years after such Interested Shareholder's share
acquisition date or (ii) satisfies certain fairness criteria specified in the
TBCA. The Tennessee Business Combination Act exempts transactions with
Interested Shareholders if the transaction is approved by the corporation's
board of directors prior to the time when the person became an Interested
Shareholder. The Tennessee Business Combination Act also exempts transactions
with Interested Shareholders if the corporation enacts a charter amendment or
bylaw by a majority vote of shareholders who have held shares for more than one
year prior to the vote removing the corporation from the coverage of the Act,
in which case the business combination can take effect two years after such
vote. First American has not adopted a charter or bylaw amendment removing
First American from the coverage of the Tennessee Business Combination Act. CSB
has not adopted a charter or bylaw amendment removing CSB from the coverage of
the Tennessee Business Combination Act. As a state chartered bank, Bank is not
subject to the Business Combination Act.
The First American Charter and the First American Bylaws contain
substantially similar provisions, except that the First American Charter and
the First American Bylaws require the affirmative vote of at least 75% of the
votes entitled to be cast by all holders of capital stock entitled to vote in
the election of directors (including the Interested Shareholder) and a majority
of the votes entitled to be cast by all holders of capital stock entitled to
vote in the election of directors, other than the shares beneficially owned by
the Interested Shareholder.
SHAREHOLDER RIGHTS PLAN
First American has a Rights Agreement between First American and First
American Trust Company, N.A. (the "FIRST AMERICAN RIGHTS AGREEMENT"), under
which holders of First American Common Stock have been and are issued certain
rights (the "FIRST AMERICAN RIGHTS"), the effect of which may be to discourage
certain coercive or abusive takeover tactics. Pursuant to the First American
Rights Agreement, the First American Board authorized and declared a
distribution of one First American Right for each outstanding share of First
American Common Stock to First American Shareholders of record at the close of
business on December 27, 1988 (the "RIGHTS RECORD DATE") and for each share of
First American Common Stock issued by First American after the Rights Record
Date but prior to the Distribution Date (as defined and described below).
Accordingly, a First American Right will attach to each share of First American
Common Stock issued in the Merger. Each First American Right entitles the
registered holder, subject to the terms of the First American Rights Agreement,
to purchase from First American one one-hundredth of a share (a "UNIT") of
Series A Junior Preferred Stock of First American (the "PREFERRED STOCK"), at a
purchase price of $80.00 per Unit, subject to adjustment. The First American
Rights attach to all certificates representing shares of outstanding First
American Common Stock, and no separate First American Rights certificates have
been issued. The First American Rights will separate from the First American
Common Stock, and the distribution date for the First American Rights (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 First American 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
First American Common Stock. As soon as practicable after the Distribution Date,
First American Rights certificates would be mailed to holders of record of the
First American Common Stock as of the close of business on the Distribution Date
and, thereafter, the separate First American Rights certificates alone would
represent the First American Rights.
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Until a First American Right is exercised, the holder thereof has no
rights as a shareholder of First American, including the right to vote or to
receive dividends. Once the First American Right is exercised, however, each
Unit of Preferred Stock will have one vote, voting together as a single class
with the First American Common Stock.
The First American Rights Agreement also provides First American
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 First American Common Stock or (ii) during the pendency of any tender
or exchange offer for First American 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 First American Common Stock (unless the 10% beneficial
ownership results from certain limited circumstances specified in the First
American Rights Agreement), then, in each case, each holder of a First American
Right will thereafter have the right to receive, upon exercise, First American
Common Stock having a value equal to two times the exercise price of the First
American Right.
In addition, in the event that, at any time following the Stock Acquisition
Date, (i) First American is acquired in a merger or other business combination
transaction (with certain limited exceptions specified in the First American
Rights Agreement) and First American is not the surviving corporation; (ii) any
person effects a share exchange or merger of First American and all or part of
the First American 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 First American Right
(except First American Rights which previously have been voided pursuant to the
"Beneficial Ownership" provision of the First American 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
First American Right.
The First American 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 First American Right
(the "REDEMPTION PRICE"), payable, at the election of such majority of
independent directors, in cash or shares of First American Common Stock.
On July 16, 1998, the First American Board of Directors authorized a new
Rights Agreement to provide for new First American Rights (the "New First
American Rights") pursuant to a new First American Rights Agreement (the "New
First American Rights Agreement") between First American and First Chicago Trust
Company, as Rights Agent. Under the New First American Rights Agreement, one
right ("New Right") will be distributed for each share of First American Common
Stock outstanding to First American stockholders of record on the close of
business on December 28, 1998. One New Right will also be distributed for each
share of First American Common Stock issued after December 28, 1998 until the
distribution date for the New First American Rights ("New Rights Agreement
Distribution Date"). The New Rights Agreement Distribution Date will occur upon
the earliest of (i) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of First American Common Stock (the "Stock Acquisition
Date"), (ii) 10 business days following the commencement of a tender offer or
exchange offer that would if consummated result in a person or group
beneficially owning 20% or more of such outstanding shares of First American
Common Stock, subject to certain limitations (or, if later, the date of receipt
of any required regulatory approvals or approvals of the stockholders of such
person or group for such tender or exchange offer), or (iii) 10 business days
after the Board of Directors of First American shall declare any Person to be an
"Adverse Person," upon a determination that such person, alone or together with
its affiliates and associates, has or will become the beneficial owner of 10% or
more of the outstanding shares of Common Stock (provided that any such
determination shall not be effective until such Person has become the beneficial
owner of 10% or more of the outstanding shares of First American Common Stock),
including consultation with such persons as such directors shall deem
appropriate, that (a) such beneficial ownership by such person is intended to
cause, is reasonably likely to cause or would cause First American to change its
strategic direction under circumstances where the Board of Directors believes
that such change is not in the best interest of First American and its
stockholders, employees, customers, suppliers or other constituencies of First
American and its subsidiaries, or (b) such beneficial ownership by such person
is intended to cause, is reasonably likely to cause or will cause pressure on
First American to take action or enter into a transaction or series of
transactions including by causing a transaction with such person or other
person, intended to provide such person with short-term financial gain under
circumstances where the Board of Directors determines that the best long-term
interests of First American and its stockholders would not be served by taking
such action or entering into such transactions or series of transactions at that
time or (c) such beneficial ownership is causing or is reasonably likely to
cause a material adverse impact (including, but not limited to, impairment of
relationships with customers or impairment of First American's ability to
maintain its competitive position) on the business or prospects of First
American or (d) such beneficial ownership otherwise is determined to be not in
the best interests of First American and its stockholders, employees, customers,
suppliers, or other constituencies of CSB or its subsidiaries.
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Until the New First American Rights Agreement Distribution Date, (i) the
New Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after December 28, 1998 will contain a notation
incorporating the New First American Rights Agreement by reference and (iii)
the surrender for transfer of any certificates for Common Stock outstanding
will also constitute the transfer of the Rights associated with the Common
Stock represented by such certificate.
The New Rights are not exercisable until the New First American Rights
Agreement Distribution Date and will expire at the close of business on December
31, 2008, subject to extension by the Board of Directors, or unless earlier
redeemed by First American as described below.
As soon as practicable after the New First American Rights Agreement
Distribution Date, Rights Certificates will be mailed to holders of record of
the Common Stock as of the close of business on the New First American Rights
Agreement Distribution Date and, thereafter, the separate Rights Certificates
alone will represent the New Rights. Except for certain issuances in
connection with outstanding options and convertible securities and as otherwise
determined by the Board of Directors, only shares of Common Stock issued prior
to the New First American Rights Agreement Distribution Date will be issued
with New Rights.
In the event that the Board of Directors determines that a person is an
Adverse Person or, at any time following the New First American Rights
Agreement Distribution Date, a person becomes the beneficial owner of 20% or
more of the then-outstanding shares of Common Stock, each holder of a Right
will thereafter have the right to receive at the time specified in the New
First American Rights Agreement, (x) upon exercise and payment of the exercise
price, Common Stock (or, in certain circumstances, cash, property or other
securities of First American) having a value equal to two times the exercise
price of the New Right or (y) at the discretion of the Board of Directors, upon
exercise and without payment of the exercise price, First American Common Stock
(or, in certain circumstances, cash, property or other securities of First
American) having a value equal to the difference between the exercise price of
the New Right and the value of the consideration which would be payable under
clause (x). Notwithstanding any of the foregoing, following the occurrence of
any of the events set forth in this paragraph, all New Rights that are, or
(under certain circumstances specified in the New First American Rights
Agreement) were, beneficially owned by any Acquiring Person or Adverse Person
will be null and void. However, Rights are not exercisable following the
occurrence of either of the events set forth above until such time as the New
Rights are no longer redeemable by First American as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
First American is acquired in a merger, statutory share exchange or other
business combination transaction in which First American is not the surviving
corporation, or (ii) 50% or more of First American's assets or earning power is
sold or transferred, each holder of a New Right (except New Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the New Right.
In general, First American may redeem the New Rights in whole, but not in
part, at a price of $0.01 per New Right, at any time until 10 business days
following the Stock Acquisition Date. Moreover, redemption would not be
permitted after 10 business days following the effective date of any
declaration by the Board of Directors that any person is an Adverse Person.
After the redemption period has expired, the First American's right of
redemption may be reinstated if an Acquiring Person or Adverse Person reduces
his beneficial ownership to less than 10% of the outstanding shares of First
American Common Stock in a transaction or series of transactions not involving
First American and there are no other Acquiring Persons or Adverse Persons.
Immediately upon the action of the Board of Directors ordering redemption of
the New Rights, the New Rights will terminate and the only right of the holders
of New Rights will be to receive the $0.01 redemption price.
SHAREHOLDER MEETINGS
Shareholder Action without a Meeting. Under the TBCA, shareholders may
act by written consent if all the shareholders entitled to vote on the action
consent to taking such action without a meeting. Under the TBCA, the
affirmative vote of the number of shares that would be necessary to authorize
or take such action at a meeting is the act of the shareholders.
Special Meetings of Shareholders. The TBCA provides that a special meeting
of shareholders may be called by a corporation's board of directors or by the
persons authorized to call special meetings under the corporation's articles of
incorporation and bylaws or, unless the articles of incorporation provide
otherwise, by written demand of the shareholders having at least 10% of all the
votes entitled to be cast on an issue to be considered at the proposed special
meeting. Shareholders of Bank may only call a special meeting by the holders of
50% or more of the outstanding stock.
Notice of Meeting. The TBCA requires a corporation to notify its
shareholders with respect to each annual or special meeting no fewer than 10 and
no more than 60 days before the meeting date (notice generally need be given
only to shareholders entitled to vote at such meeting). Such notice need not
include a description of the purpose of the annual meeting, but must include
such a description if the meeting is a special meeting. Annual and special
meetings of CSB Shareholders may be called upon notice of not less than 10 nor
more than 50 days. Notice of meetings of Bank Shareholders
47
<PAGE> 58
must be given at least 10 days prior to the date of the meeting. CSB and Bank
Shareholders are entitled to notification of the purposes for a special meeting
to the same extent as First American Shareholders.
DISSENTERS' APPRAISAL RIGHTS
Under the TBCA, CSB Shareholders have dissenters' rights as described in
"ADDITIONAL INFORMATION - Dissenters' Appraisal Rights" and Appendix C to this
Prospectus/Proxy Statement. Under 12 U.S.C. Section 215a, Bank Shareholders have
dissenters' rights as described in "ADDITIONAL INFORMATION -- Dissenters'
Appraisal Rights" and Appendix D to this Prospectus/Proxy Statement. Because
First American is listed on the NYSE, First American Shareholders currently do
not have dissenters' appraisal rights.
CONSIDERATION OF NON-SHAREHOLDER INTERESTS BY BOARD OF DIRECTORS
The First American Charter requires the First American Board to consider
all relevant factors when evaluating whether certain proposed business
combinations or certain dispositions of all or substantially all of First
American or of any First American subsidiary, any offer to purchase any or all
of First American's securities, any solicitation of proxies for election of
directors of First American, or any similar transaction is in the best interests
of First American and First American Shareholders, including: the consideration
being offered in the proposed transaction in relation to the then-current market
price, in relation to the then-current value of First American in a freely
negotiated transaction and in relation to the First American Board's
then-current estimate of the future value of First American as an independent
entity; the social and economic effects on the employees, customer, suppliers
and other constituents of First American and its subsidiaries and on the
communities in which First American and its subsidiaries operate or are located;
and the desirability of maintaining First American's independence from other
entities.
Neither the Charter or Bylaws of CSB nor the Charter or Bylaws of Bank
require the Boards of those institutions to consider other such factors in
evaluating business combinations or similar proposals. Accordingly, the
inclusion of these factors by First American might prevent the Board of First
American from recommending a transaction to shareholders that current
shareholders of CSB and Bank otherwise might have a right to consider and vote
upon.
CERTAIN PURCHASES OF THE CORPORATION'S SECURITIES
The TGA provides that it is unlawful for any Tennessee corporation which
has a class of voting stock registered or traded on a national securities
exchange or registered with the Commission pursuant to Section 12(g) of the
Exchange Act or any subsidiary of such corporation to purchase, directly or
indirectly, any of its shares at a price above the market value of such shares
from any person who holds more than 3% of the class of the securities to be
purchased if such person has held such shares for less than two years, unless
the purchase has been approved by the affirmative vote of a majority of the
outstanding shares of each class of voting stock of the corporation, or,
alternatively, unless the corporation makes an offer of at least equal value
per share to all holders of such class. The TGA applies to purchases of First
American Common Stock.
Since neither CSB nor Bank has a class of voting stock registered or
traded on a national securities exchange or registered with the Commission
pursuant to Section 12(g) of the Exchange Act, the TGA does not apply to those
institutions. Accordingly, First American is more restricted than either CSB
or Bank to purchase shares from shareholders at a price above market value.
INDEMNIFICATION
CSB. The Bylaws of CSB provide that any person that is made a party to
any action, suit or proceeding, by reason of the fact that he, his testator, or
intestate representative, is or was a director, officer or employee of CSB,
shall be indemnified by CSB against reasonable expenses, including attorneys
fees, actually and necessarily incurred by him in connection with the defense
of such action, suit or proceeding, or in connection with any appeal therein,
except in relation to matters as to which it shall be judged in such action,
suit or proceeding, or in connection with any appeal therein that such officer,
director or employee is liable for negligence or misconduct in the performance
of his duties. The indemnification provided in the Charter of CSB is not
deemed to be exclusive of other rights to which the officer or director or
employee may be entitled and the amount of indemnity to which any officer,
director may be entitled shall be fixed by the CSB Board, except that in any
case where there is not a disinterested majority of the CSB Board available,
the amount shall be fixed by arbitration pursuant to the then existing rules of
the American Arbitration Association.
Bank. The Bylaws of Bank provide that, to the extent not inconsistent
with the laws of the State of Tennessee as in effect from time to time, every
person (and their heirs, executors and administrators of such person) who is a
director or officer of Bank shall, in accordance with the provisions of the
Bylaws, be indemnified by Bank against any and all liability and reasonable
expense that may be incurred by him in connection with or resulting from any
claim, action, suit or proceeding provided, however, that such person (or his
heirs, executors, or administrators) is wholly successful with respect thereto
or such director or officer acted in good faith in what he reasonably believed
to be the best interest of Bank and in addition, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his conduct was
unlawful.
48
<PAGE> 59
The termination of any claim, action, suit, or proceeding by judgment settlement
(whether with or without court approval) or conviction or upon a plea of guilty
or nolo contendere, or its equivalent, shall not create a presumption that a
director or officer did not meet the standards of conduct set forth in the
Bylaws.
The Bylaws of Bank define certain terms of the indemnification paragraph
and further provide that every person (and the heirs, executors, and
administrators of such person) who has been wholly successful with respect to
any claim, action, suit or proceeding shall be entitled to indemnification.
Every other person claiming indemnification under provisions of the Bylaws (and
the heirs, executors and administrators of such person) is entitled to
indemnification if independent legal counsel, other than regular counsel for
Bank, or other disinterested person or persons, in either case elected and
compensated by the Bank Board, whether or not a disinterested quorum exist (such
counsel or person or persons being hereinafter called the referee) shall deliver
to Bank his handwritten finding that such director or officer has met the
standards of conduct set forth in the Bylaws. The person claiming
indemnification shall, at the request of the referee, appear before him and
answer questions which the referee deems relevant and shall be given ample
opportunity to present to the referee evidence upon which he relies for
indemnification. Bank shall, at the request of the referee, make available to
him facts, opinions or other evidence in any way relevant to his finding which
are within the possession or control of Bank.
Expenses incurred with respect to any claim, action, suit or proceeding may
be advanced by Bank (by action of Bank Board, whether or not a disinterested
quorum exist) prior to the final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such amount unless he
becomes entitled to indemnification under the Bylaws.
The right to indemnification provided in the Bylaws is in addition to any
rights to which such director or officer may otherwise be entitled by contract
or as a matter of law. Persons who are not directors or officers of Bank but
are or were employees of Bank or any subsidiary (or the heirs, executors, or
administrators of such person) may be indemnified to the extent authorized at
any time or from time to time by the Bank Board. Notwithstanding other
provisions of the Bylaws, the Bank Board may at any time or from time to time
approve indemnification of directors, officers or other persons to the full
extent permitted by the provisions of the laws of the State of Tennessee at the
same time in effect, with respect to past transactions.
First American. The First American Charter provides that indemnification
to the full extent permitted by law for directors, officers, employees and
agents of First American may be provided either directly or through insurance,
and that no director of First American shall be personally liable to First
American or its shareholders for monetary damages for breach of any fiduciary
duty as a director to the full extent permitted by law.
The First American Bylaws provide that First American will indemnify any
Defendant in any Proceeding (other than a Proceeding by or in the right of
First American) by reason of serving or having served as a director of First
American (or counsel to the First American Board), an advisory director, or an
officer of First American, or serving or having served at the request of the
corporation in such a capacity with another entity against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding, including any appeal, if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interest of First American, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
The First American Bylaws provide, however, that no indemnification shall
be made (i) if a judgment or other final disposition adverse to the Defendant
establishes his liability for intentional misconduct or knowing violation of
the law or for an unlawful distribution under Tennessee law, (ii) if a judgment
or other final adjudication adverse to the Defendant for breach of the
Defendant's duty of loyalty to First American is based upon such Defendant
gaining personal benefit or advantage to which he was not entitled, (iii) for
any amounts if the Defendant is adjudged liable to First American or for any
amounts paid to First American in settlement of a proceeding by or in the right
of First American, or (iv) in a proceeding by First American directly (and not
derivatively) for expenses, unless such proceeding is brought after a change in
control of First American.
The First American Bylaws provide that First American shall indemnify a
Defendant pursuant to the Bylaws unless a determination is made that the
Defendant did not meet the standard of conduct therein specified. Determination
of the propriety of indemnification shall be made by the First American Board
acting by a quorum consisting of disinterested directors, by independent legal
counsel if such a quorum is not obtainable, or, even if obtainable, if the
majority of a quorum of disinterested directors so directs, or by the First
American Shareholders.
The First American Bylaws provide that, subject to certain procedural
requirements, First American shall pay expenses reasonably incurred in any
Proceeding (other than a Proceeding brought by First American directly unless
that action follows a change in control) in advance of the final disposition of
the matter if the Defendant undertakes to repay such amount in the event that
such Defendant is ultimately determined not to be entitled to indemnification,
unless a quorum of disinterested directors or independent legal counsel
directed by the First American Board (in the event that such a quorum is not
obtainable) reasonably and promptly determines in a written opinion that
indemnity is not proper under the terms of the First American Bylaws.
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<PAGE> 60
The First American Bylaws provide that the indemnity provision contained
therein are additional to, and not limitations on, any other rights to which a
Defendant seeking indemnification may be entitled under law, agreement,
insurance policy, or otherwise. The First American Bylaws provide that the
corporation may indemnify and advance expenses to any employee or agent of First
American who is not a director or officer (and his heirs, executors and
administrators) to the same extent as to a director or officer if the First
American Board determines that to do so is in First American's best interests.
The First American Bylaws provide that First American may purchase insurance
coverage for the purpose of indemnifying the directors, officers, employees and
agents of First American and its subsidiaries regardless of whether such entity
would have had the power or the obligation to indemnify such person against such
liability under the provisions discussed above.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
The First American Charter provides that altering, amending or repealing
the provisions of the First American Charter relating to (including changes to
provisions that would have the effect of permitting action inconsistent with or
in circumvention of such provisions relating to) the First American Board
(including, with respect to directors, the number, term length, classification,
removal and procedure for filling vacancies) and certain business combinations
with Interested Shareholders requires (i) the affirmative vote of at least 75%
of the votes entitled to be cast by all holders of voting stock voting as a
single class and (ii) a majority of the votes entitled to be cast by all
holders of voting stock, other than shares of voting stock which are
beneficially owned by an Interested Shareholder, if any.
Neither the Charter or Bylaws of CSB nor the Charter or Bylaws of Bank
require any supermajority vote (such as a 75% vote) of shareholders to make any
amendments. As a result, because the charter of First American provides certain
supermajority voting in some circumstances, former shareholders of CSB and Bank
will have less power to make such amendments and a minority of shareholders may
be able to prevent certain amendments from occurring.
50
<PAGE> 61
ADDITIONAL INFORMATION ABOUT CSB FINANCIAL CORPORATION
GENERAL
CSB was organized and incorporated under the laws of the State of
Tennessee in 1986, for the purpose of becoming a bank holding company. CSB has
one subsidiary, Bank, headquartered in Kingston Springs, Tennessee. CSB has no
other subsidiaries. CSB is registered as a bank holding company under Bank
Holding Company Act of 1956, as amended. Bank is chartered by the State of
Tennessee and is insured under the Federal Deposit Insurance Act, with deposits
insured up to the applicable limits thereof.
Bank provides a wide range of retail banking services, including
checking and savings accounts; certificates of deposit; individual retirement
accounts; commercial, real estate, and consumer loans; safe deposit boxes; and
trust services. There is no individual customer or group of customers the loss
of which will have a material adverse effect on the operations of its banks. No
significant portion of CSB's subsidiary bank loans is concentrated within a
single industry or group of related industries.
REGULATION AND SUPERVISION OF CSB
CSB is a bank holding company subject to supervision and regulation by
the Federal Reserve Board. Federal laws subject bank holding companies to
particular restrictions on the types of activities in which they may engage and
to an array of supervisory requirements and activities including regulatory
enforcement actions for violations of laws and policies.
The Federal Reserve Board monitors the capital adequacy of bank holding
companies. The Federal Reserve Board uses a combination of risk-based guidelines
and leverage ratios to evaluate capital adequacy. The Federal Reserve Board has
adopted a system using internationally consistent risk-based capital adequacy
guidelines to evaluate the capital adequacy of bank holding companies. Under the
risk-based capital guidelines, different categories of assets are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. Certain off-balance sheet items, which
previously were not expressly considered in capital adequacy computations, are
added to the risk-weighted asset base by converting them to a balance sheet
equivalent and assigning to them the appropriate risk weight. Total capital is
defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2"
being limited to 100% of "Tier 1." For bank holding companies, "Tier 1" capital
includes, with certain restrictions, common stockholders' equity, perpetual
preferred stock and minority interests in consolidated subsidiaries less certain
intangibles. "Tier 2" capital includes, with certain limitations, certain forms
of perpetual preferred stock, as well as maturing capital instruments and the
reserve for possible loan losses and specified levels of certain intangibles.
However, for bank holding companies with less than $150 million in consolidated
assets (like CSB), the capital elements are determined on a "bank only" basis.
In addition to the risk-based capital guidelines, the Federal Reserve
Board has adopted the use of a leverage ratio as an additional tool to evaluate
the capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted total assets.
The leverage ratio adopted by the federal banking agencies requires a 3.0% "Tier
1" capital to adjusted total assets ratio for institutions with a CAMEL rating
of 1. Institutions which are not CAMEL 1 rated will be expected to maintain a
100 to 200 basis point cushion; i.e., these institutions will be expected to
maintain a leverage ratio of 4.0% to 5.0%, and institutions planning
acquisitions are expected to maintain higher ratios.
The following table sets forth the current regulatory requirements for
capital ratios of bank holding companies as compared with CSB's capital ratios
at June 30, 1998.
<TABLE>
<CAPTION>
-------------------------- ------------------------- -------------------------
TIER 1 CAPITAL TO TOTAL CAPITAL TO
LEVERAGE RISK-WEIGHTED RISK-WEIGHTED
RATIO(1) ASSETS(2) ASSETS(3)
---------------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
REGULATORY MINIMUM 4.00-5.00% 4.00% 8.00%
---------------------------------- -------------------------- ------------------------- -------------------------
CSB AT JUNE 30, 1998 7.6% 12.6% 13.8%
---------------------------------- -------------------------- ------------------------- -------------------------
</TABLE>
(1) The leverage ratio is defined as the ratio of Tier 1 capital
(using final 1992 risk-based capital guidelines to define Tier 1
capital) to average assets, net of goodwill. Federal Reserve Board
Guidelines provide that all bank holding companies (other than
those that meet certain criteria) maintain a minimum leverage
ratio of 3%, plus an additional cushion of 100 to 200 basis
points. The guidelines also state that banking organizations
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.
(2) Shareholders' equity less goodwill (Tier 1 capital) divided by
risk-weighted assets.
(3) Tier 1 capital plus reserve for possible loan losses (limited to
1.25% of total risk-weighted assets) plus qualified subordinated
and convertible debt (Tier 2 capital) divided by risk-weighted
assets.
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Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However, management is unable to predict whether and when higher capital
requirements would be imposed and, if so, at what levels and on what schedule.
PROPERTIES
CSB has no properties in use in its business other than those used by
Bank and Bank's subsidiaries. Bank currently operates out of its main office
located in Kingston Springs, Tennessee. Bank also operates 3 branches in the
Cheatham County area. Each of the properties on which branches or offices of
CSB's banks are located is owned or leased by Bank or Bank's subsidiaries.
COMPETITION
Bank accepts checking and savings deposits and makes commercial real
estate, and consumer loans. Bank also offers many customary services, including
but not limited to cashier's checks, bank-by-mail, automatic check deposit and
traveler's checks. The banking business in Tennessee and in the markets served
by CSB and Bank is highly competitive. Bank competes for loans and deposits with
other commercial banks, savings banks, finance companies, credit unions and
other financial institutions. In addition, other entities (both governmental and
private industry) seeking to raise capital through the issuance and sale of debt
or equity securities, mutual funds or tax deferred annuities also provide
competition for each of the entities in the acquisition of deposits. Larger
commercial banks have greater lending limits than does CSB and may perform
certain other functions which CSB and Bank do not or cannot currently offer.
In order to compete with other financial institutions in its primary
service area, CSB relies primarily upon local promotional activities, customer
referrals, personal contact by its officers, directors, employees and
shareholders, and specialized services. While there are many other commercial
banks and lending institutions in the primary service areas of CSB and Bank, CSB
believes its emphasis on customer service and personal contact set it apart from
its competitors.
RECENT LEGISLATION AND OTHER CHANGES
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the Tennessee legislature and before various
bank regulatory agencies. The likelihood of any major changes and the impact
such changes might have on CSB and Bank are impossible to predict.
EMPLOYEES
CSB, together with Bank, had 52 full-time equivalent employees as of
June 30, 1998. Of this number, 52 are employed by Bank.
LEGAL PROCEEDINGS
No material legal proceedings are pending against CSB or Bank other
than ordinary, routine litigation incidental to the business of CSB and Bank.
DIVIDENDS
CSB has never paid a cash dividend to shareholders. In each of the last
three years Bank has paid an aggregate $2.00 per share dividend to CSB for debt
service and other operational reasons.
It is the policy of CSB, as well as that of Bank, to pay cash dividends
to their respective shareholders only when it is prudent to do so and when CSB's
or Bank's performance justifies such action. Accordingly, no assurance can be
given of any future cash dividend payments.
Under Tennessee law, CSB may not pay dividends if, after giving effect
to the dividend, the corporation would not be able to pay its debts as they
become due in the usual course of business or the corporation's total assets
would be less than the sum of its total liabilities plus the amount that would
be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning CSB's
directors and executive officers as of June 30, 1998:
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<PAGE> 63
<TABLE>
<CAPTION>
NAME AGE POSITION AND PRINCIPAL OCCUPATION FOR
------------- --- PAST 5 YEARS
-------------------------------------
<S> <C> <C>
John I. Borum 86 Director; Retired/Investor
Alton Denney 62 Director, Senior VP, Cheatham State Bank
Marion Fowlkes 49 Director; Part Owner, Hickerson Fowlkes
Architects
Vernon Malone 76 Director; Retired/Contractor
W.R. Murray 56 Director; Owner, Harpeth Clock Company
James T. Perry 47 Director; Accountant Delta Dental Plan of TN
Hubert A. Reigle 71 Director; Retired/Real Estate Developer
Bob Saunders 73 Director; Retired/Real Estate Developer
Gary L. Scott 52 Director; President, Cheatham State Bank
</TABLE>
TRANSACTIONS WITH MANAGEMENT
Directors and executive officers of CSB and Bank, including their
associates and members of their immediate families, have been customers of and
have had transactions including loans and commitments to lend with CSB or Bank
in the ordinary course of business. All such loans and commitments were made by
CSB or Bank on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of collectibility or
present other unfavorable features. Similar transactions may be expected to take
place in the ordinary course of business in the future. On June 30, 1998, the
aggregate of these related party loans was approximately $1,457,146 million or
approximately 1.77% of total consolidated loans of Bank.
OWNERSHIP OF CSB COMMON STOCK
As of the CSB Record Date, CSB's records indicated the following
number of shares were beneficially owned by:
(I) ALL PERSONS WHO OWN BENEFICIALLY 5% OR MORE OF THE CSB COMMON STOCK:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
BENEFICIAL OWNER (NUMBER OF SHARES) PERCENT OF CLASS
-------------------- -------------------- ----------------
<S> <C> <C>
John I. Borum
P.O. Box 155
Ashland City, TN 37015 13,714 16.14%
Cheatham State Bank Employee Stock
Ownership Plan
108 Cumberland Street
Ashland City, TN 37015 20,199 23.78%
Vernon Malone
P.O. Box 6
Chapmansboro, TN 37035 5,419.5 6.38%
Robert Saunders
P.O. Box 43
Chapmansboro, TN 37035 8,594.5 10.12%
Thomas T. Woodall
306 Murrell Street
Dickson, TN 37055 4,713 5.55%
Monnie Powers
19 Channing Place
Clarksville, TN 37035 4,687.5 5.52%
Hubert Reigle, Trustee
For HR Trust
121 Cumberland Street
Ashland City, TN 37015 7,983 9.40%
Gary L. Scott
P.O. Box 10
Kingston Springs, TN 37082 6,787.5* 7.99%
</TABLE>
- --------------------------
*Includes 3,374.5 shares held through the Cheatham State Bank Employee
Stock Ownership Plan.
(II) EACH PERSON WHO IS A DIRECTOR OR A NAMED EXECUTIVE OFFICER OF CSB:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
BENEFICIAL OWNER (NUMBER OF SHARES)** PERCENT OF CLASS
-------------------- -------------------- ----------------
<S> <C> <C>
John L. Borum 13,982 16.46%
Alton Denney 5,148* 6.06%
Marion Fowlkes 821 0.97%
Vernon Malone 5,660.5 6.66%
W.R. Murray 774 0.91%
James T. Perry 2,532 2.98%
Hubert A. Reigle 8,224 9.68%
Bob Saunders 8,835.5 10.40%
Gary L. Scott 9,103.5* 10.72%
(III) ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP: 60,893 71.68%
</TABLE>
- ------------------------------------
* Includes shares held through the CSB Financial Corporation Employee
Stock Ownership Plan.
** In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of
any share of CSB Common Stock if he or she has voting and/or
investment power with respect to such security. The table includes
shares owned by spouses, other immediate family members in trust,
shares held in retirement accounts or funds for the benefit of the
named individuals, and other forms or ownership, over which shares
the persons named in the table possess voting and/or investment
power. The amounts shown also include the following amounts of CSB
Common Stock which the indicated individuals have the right to
acquire within 60 days of consummation through the exercise of
stock options granted pursuant to CBS's stock option plans: Mr.
Borum, 241; Mr. Fowlkes, 241; Mr. Malone, 241; Mr. Murray, 241; Mr.
Perry, 241; Mr. Reigle, 241; Mr. Saunders, 241; Mr. Scott, 2,316;
Mr. Denney, 1,158; and all executive officers and director as a
group, 7,477.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The purpose of this discussion is to provide insight into the financial
condition and results of operations of CSB and its subsidiaries for the six
months ended June 30, 1998 and 1997. This discussion should be read in
conjunction with the consolidated financial statements located at pages F-2 to
F-6.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of CSB and its
subsidiaries to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is designed to maintain stability in
the balance of interest-sensitive assets to interest-sensitive liabilities in
order to provide a stable growth in net interest margins. Earnings on
interest-sensitive assets such as loans tied to the prime rate of interest and
Federal funds sold, may vary considerably from fixed rate assets such as
long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
Banks, in general, must maintain large cash balances to meet day-to-day
cash flow requirements as well as maintaining required reserves for regulatory
agencies. The cash balances maintained are the primary source of liquidity.
Federal funds sold, which are basically overnight or short-term loans to other
banks that increase the other bank's required reserves, are also a major source
of liquidity.
CSB's investment portfolio consists of earning assets that provide
interest income. For those securities classified as held-to-maturity CSB has the
ability and intention to hold these securities until maturity. Securities
classified as available-for-sale include securities intended to be used as part
of CSB's asset/liability strategy and/or securities that may be sold in response
to changes in interest rate, prepayment risk, the need or desire to increase
capital and similar economic factors. Securities totaling approximately $16.8
million mature or reprice within the next twelve months.
A secondary source of liquidity is CSB's loan portfolio. At June 30,
1998, commercial, consumer and other loans of approximately $13.2 million and
mortgage loans of approximately $4.3 million either will become due or will be
subject to rate adjustments within twelve months. Continued emphasis will be
placed on structuring adjustable rate loans.
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<PAGE> 64
As for liabilities, certificates of deposit of $100,000 or greater of
approximately $27.3 million will become due during the next twelve months. CSB's
deposit base increased approximately $8.8 million during the six months ended
June 30, 1998. Advances from the Federal Home Loan Bank were $630,000 at June
30, 1998. Federal funds purchased were $375,000 at December 31, 1997.
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management
anticipates that there will be no significant withdrawals from these accounts in
the future.
It is anticipated that with present maturities, the anticipated growth
in deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. At the
present time there are no known trends or any known commitments, demands, events
or uncertainties that will result in or that are reasonably likely to result in
CSB's liquidity changing in any material way.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.6% at June 30,
1998 and 7.5% at December 31, 1997. Total assets increased 7.3% during the six
months ended June 30, 1998. The annualized rate of return on stockholders'
equity for the first six months of 1998 was 17.7% compared to 18.3% for the year
ended December 31, 1997. There were no dividends declared during the six months
ended June 30, 1998 and the year ended December 31, 1997. No material changes in
the mix or cost of capital is anticipated in the foreseeable future.
Regulations of the FDIC establish required minimum capital levels for
the subsidiary bank. Under these regulations, banks must maintain certain
capital levels as a percentage of average total assets (leverage capital ratio)
and as a percentage of total risk-based assets (risk-based capital ratio). Under
the risk-based requirements, various categories of assets and commitments are
assigned a percentage related to credit risk ranging from 0% for assets backed
by the full faith and credit of the United States to 100% for loans other than
residential real estate loans and certain off-balance sheet commitments. Total
capital is characterized as either Tier 1 capital which includes common
shareholders' equity, noncumulative perpetual preferred stock and a limited
amount of cumulative perpetual preferred or total risk based capital which
includes the allowance for loan losses up to 1.25% of risk weighted assets,
perpetual preferred stock, subordinated debt and various other hybrid capital
instruments, subject to various limits. Goodwill is not includable in Tier 1 or
total capital. Banks must maintain a Tier 1 capital to risk-based assets of at
least 4.0%, a total capital to risk-based assets ratio of at least 8.0% and a
leverage capital ratio, defined as Tier 1 capital to average total assets for
the most recent quarter, of at least 4.0%. The same ratios are also required in
order for a bank to be considered "adequately capitalized" under the FDIC's
prompt corrective action regulations, which impose certain operating
restrictions on institutions which are not adequately capitalized. At June 30,
1998, the Bank has a Tier 1 risk-based ratio of 11.74%, a total capital to
risk-based ratio of 12.94% and a leverage ratio of 7.15%, and is classified as
"well capitalized" under the regulations.
The Federal Reserve Board imposes consolidated capital guidelines on
bank holding companies. These guidelines require bank holding companies to
maintain consolidated capital ratios which are essentially the same as the
minimum capital levels required for banks. CSB's consolidated capital ratios
were substantially the same as those set forth above for the Bank, and exceeded
the minimums required under these Federal Reserve Board guidelines.
YEAR 2000 ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems so that such systems recognize more than two
digits to identify a year in any given date field, and are thereby able to
differentiate between years in the twentieth and twenty-first centuries ending
with the same two digits (e.g., 1900 and 2000). To address the Year 2000
issue, CSB has adopted a broad-based approach designed to encompass CSB's total
environment.
CSB has appointed a Year 2000 transition manager who is required to
make written and oral reports each quarter to the board of directors until the
Year 2000. Overseeing the project is the Y2K Steering Committee which was
established in mid-1997. The Y2K Steering Committee has representation from all
affected areas for the purpose of managing the process of assessing and
correcting non-compliance throughout the organization. Areas being addressed by
the Y2K Steering Committee include:
- Bank's primary data processing system. FiServe, Inc., a major
data processor, provides the primary software and hardware for the
data processing system of Bank. This is of the highest priority for
day to day operations, accounting and success of Bank.
- Government systems, such as the Federal Reserve Bank for check
clearing, wire transfers, and the free flow and exchange of funds
between institutions are absolutely critical.
- The internal PC hardware and software systems linked to FiServe
within Bank, along with telecommunications systems.
- The investment portfolio accounting and safekeeping system for
Bank, which is not related to FiServe's primary data processing
system.
- Credit administration - the committee is reviewing the risk
associated with Year 2000 status of the Bank's loan customers and
depositors.
CSB's Y2K Steering Committee is using a 4-phase approach in its Year
2000 project made up of awareness, assessment, renovation, and
validation-testing. Bank has contracted its primary data processing supplier
together with all other vendor supplied systems and determined compliance of
these systems. The Y2K Steering Committee is in the process of testing these
systems, and anticipates having substantially completed the testing of all
critical applications by the end of 1998.
CSB estimates that the cost of its Year 2000 project will not exceed
$40,000 in the aggregate and that the cost will not be material to earnings.
Actual expenditures to date and anticipated future expenditures are within this
estimate. CSB management believes its approach to the Year 2000 issue to be
comprehensive, and does not expect the Year 2000 issue to have a material impact
on its results of operations, liquidity or financial condition. However, given
the widespread nature of the problem, and the number of factors outside of CSB's
direct control, management is continuously evaluating the risks associated with
Year 2000.
RESULTS OF OPERATIONS
Net earnings were $899,000 for the six months ended June 30, 1998 as
compared to $845,000 for the same period in 1997. Net earnings were $441,000 for
the quarter ended June 30, 1998 as compared to $404,000 during the same quarter
in 1997.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income, which is the excess of interest
earned over interest paid. This is particularly true with the potential
volatility in interest rates.
CSB's interest income, excluding tax equivalent adjustments, increased
by $739,000 or 14.6% during the six months ended June 30, 1998 as compared to
the first six months of 1997. Interest income for the quarter ended June 30,
1998 increased $334,000 or 12.8% over the quarter ended June 30, 1997, and
$93,000 or 3.3% from the first quarter of 1998. The increases were primarily
attributable to an increase in average earning assets. The ratio of average
earning assets to total average assets was 92.7% for the six months ended June
30, 1998 and 93.3% for the year ended December 31, 1997.
Interest expense increased by $385,000 for the six months ended June
30, 1998 or 16.5% compared to the same period in 1997. Interest expense for the
quarter ended June 30, 1998 increased $180,000 or 14.9% as compared to the
quarter ended June 30, 1997. Interest expense for the quarter ended June 30,
1998 increased $60,000 or 4.5% compared to the first quarter of 1998. The
increase in interest expense can be attributable primarily to an increase in
average interest bearing liabilities, as well as a slight increase in weighted
average interest rates.
54
<PAGE> 65
The foregoing resulted in net interest income of $3,069,000 for the six
months ended June 30, 1998, an increase of $354,000 or 13.0% compared to the
prior year period. Net interest income for the quarter ended June 30, 1998
increased $154,000 or 11.0% over the second quarter of 1997 and $33,000 or 2.2%
over the first quarter in 1998.
The provision for loan losses was $162,000 for the first six months of
1998. CSB had an $86,000 provision for loan losses for the first six months of
1997. The provision for loan losses is based on past loan experience and other
factors which, in management's judgment, deserve current recognition in
estimating possible loan losses. Such factors include past loan loss experience,
growth and composition of the loan portfolio, review of specific loan problems,
the relationship of the allowance for loan losses to outstanding loans, and
current economic conditions that may affect the borrower's ability to repay.
Management has in place a system that is designed to identify and to monitor
loan problems on a timely basis.
The following schedule details selected information as to
non-performing loans of CSB at June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Past Due 90 Days Non-Accrual
----------------- -------------
(In Thousands)
<S> <C> <C>
Real estate loans $ 80 -
------------
Installment loans 75 23
------------
Commercial - 52
------------ ------------
$ 155 75
============ ============
Renegotiated loans $ - -
============ ============
</TABLE>
At June 30, 1998, loans which include the above, totaling $954,000,
were included in CSB's internal classified loan list. Of these loans $629,000
are real estate and $325,000 are commercial and other. The collateral values
securing these loans are estimated at approximately $1,142,000, ($880,000
related to real property and $262,000 related to commercial and other loans).
Such loans are listed as classified when information obtained about possible
credit problems of the borrower has prompted management to question the ability
of the borrower to comply with the agreed repayment terms. The loan
classifications do not represent or result from trends or uncertainties which
management expects will materially impact future operating results, liquidity or
capital resources.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at June 30,
1998 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income excluding securities transactions decreased $48,000
or 5.7% during the six months ended June 30, 1998 as compared to the same period
in 1997. The increase for the quarter ended June 30, 1998 was $86,000 or 26.9%
as compared to the comparable quarter in 1997. The decrease in the first six
months of 1998 was due primarily to the gain on sale of loans of $248,000 during
1997. Excluding this component of non-interest income, there was an increase of
$200,000 due primarily to increases in service charges on deposits ($28,000 or
9.7%), other fees and commissions ($134,000 or 54.7%) and other income ($38,000
or 57.6%). Commissions and service charges are monitored continually to insure
maximum return based on costs and competition.
Securities gains during the six months ended June 30, 1998 and 1997
amounted to $7,000 and $11,000, respectively, and related to transactions in the
available-for-sale category. The gains during 1998 and 1997 were incurred
primarily in conjunction with management's strategies to restructure the
investment portfolio to improve the quality of the portfolio, to improve
maturity distribution and to maintain a flexible position to react to market
conditions.
Non-interest expense increased $139,000 or 6.3% during the first six
months of 1998 as compared to the same period in 1997. The increase for the
quarter ended June 30, 1998 was $139,000 or 12.9% as compared to the quarter
ended June 30, 1997. The increases in the first six months of 1998 were
primarily attributable to an increase in furniture and equipment expenses and
other expenses.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Registrant's liquidity, capital resources or operations.
IMPACT OF INFLATION
The primary impact which inflation has on the results of CSB's
operations is evidenced by its effects on interest rates. Interest rates tend to
reflect, in part, the financial market's expectations of the level of inflation
and, therefore, will generally rise or fall as the level of expected inflation
fluctuates. To the extent interest rates paid on deposits and other sources of
funds rise or fall at a faster rate than the interest income earned on funds,
loans or investments, net interest income will vary. Inflation also affects
non-interest expenses as goods and services are purchased, although this has not
appeared to
55
<PAGE> 66
have a significant effect on net earnings. If the inflation rate
stays flat or increases slightly, the effect on profits will not be significant.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The purpose of this discussion is to provide insight into the financial
condition and results of operations of CSB and its subsidiaries for the years
ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the consolidated financial statements located at pages F-9 to
F-14.
GENERAL
CSB is a one bank holding company which owns 96.14% of Bank. CSB was
originally chartered in Ashland City, Tennessee. Bank is a community bank
headquartered in Kingston Springs, Tennessee serving Cheatham County, Tennessee
as its primary market area. CSB serves as a financial intermediary whereby its
profitability is determined to a large degree by the interest spread it achieves
and the successful measurement of risks. CSB's management believes that Cheatham
County offers an environment for continued growth and CSB's target market is
local consumers, professionals and small businesses. CSB offers a wide range of
banking services and mortgage banking services, including checking, savings, and
money market deposit accounts, certificates of deposits, and loans for consumer,
commercial and real estate purposes. In addition, CSB offers sale of non-insured
investment products and has a certified financial planner on staff for clients.
Deposit instruments in the form of demand deposits, money market savings and
certificates of deposits are offered to customers to establish CSB's core
deposit base.
In a market such as Cheatham County, management believes there is an
opportunity to increase the loan portfolio. CSB has targeted commercial business
lending, commercial and residential real estate lending, and consumer lending as
areas of focus. It is CSB's intention to limit the size of its loan portfolio to
approximately 75% to 80% of deposit balances; however, the quality of lending
opportunities as well as the desired loan to deposit ratio will determine the
size of the loan portfolio. As a practice, CSB generates substantially all of
its own loans and occasionally buys participations from other institutions. CSB
attempts to maintain a loan portfolio which is capable of adjustment to swings
in interest rates. CSB's policy is to have a diverse loan portfolio. At December
31, 1997, no single industry segment accounted for more than 10% of the
portfolio.
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Regulations of the FDIC establish required minimum capital levels for
the Bank. Under these regulations, banks must maintain certain capital levels as
a percentage of average total assets (leverage capital ratio) and as a
percentage of total risk-based assets (risk-based capital ratio). Under the
risk-based requirements, various categories of assets and commitments are
assigned a percentage related to credit risk ranging from 0% for assets backed
by the full faith and credit of the United States to 100% for loans other than
residential real estate loans and certain off-balance sheet commitments. Total
capital is characterized as either Tier 1 capital - common stockholders' equity,
noncumulative perpetual preferred stock and a limited amount of cumulative
perpetual preferred - or total risk-based capital which includes the allowance
for loan losses up to 1.25% of risk weighted assets, perpetual preferred stock,
subordinated debt and various other hybrid capital instruments, subject to
various limits. Goodwill is not includable in Tier 1 or total risk-based
capital. CSB and its bank subsidiary must maintain a Tier 1 capital to
risk-based assets of at least 4.0%, a total risk-based capital to risk-based
assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1
capital to adjusted total assets for the most recent quarter of at least 4%. The
same ratios are also required in order for a bank to be considered "adequately
capitalized" under the FDIC's "prompt corrective action" regulations, which
impose certain operating restrictions on institutions which are not adequately
capitalized. CSB has a Tier 1 risk based ratio of 11.84%, a total risk-based
capital ratio of 12.96% and a leverage capital ratio of 7.24% at December 31,
1997, and was therefore within the "well capitalized" category under the
regulations. The subsidiary bank's ratios were substantially the same as those
set forth for CSB.
During 1997, Bank completed construction of a new branch at a total
cost of approximately $700,000 of which approximately $225,000 was incurred
during 1996.
No material changes in the mix or cost of capital is anticipated in the
foreseeable future.
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<PAGE> 67
FINANCIAL CONDITION
During 1997, total assets increased $19,453,000 or 16.8% from
$115,535,000 at December 31, 1996 to $134,988,000 at December 31, 1997. Loans,
net of allowance for possible loan losses, increased from $66,179,000 to
$75,642,000 or 14.3% during fiscal year 1997. The aggregate increases in loans
for 1997 was due primarily to a 22.0% increase in real estate - mortgage loans
and a 74.5% increase in real estate - construction loans. There was not a
significant increase in commercial and consumer loans.
Securities increased 25.3% from $39,272,000 at December 31, 1996 to
$49,220,000 at December 31, 1997. The carrying value of securities of U.S.
Treasury and other U.S. Government obligations increased $485,000, obligations
of state and political subdivisions increased $1,988,000 and there was an
increase in mortgage backed securities of $7,405,000. At December 31, 1997 and
1996 the market value of CSB's securities portfolio exceeded its amortized cost
by $805,000 (1.7%) and $342,000 (0.9%), respectively. The weighted average yield
(stated on a tax-equivalent basis, assuming a Federal income tax rate of 34%) of
the securities at December 31, 1997 was 7.07% with an average maturity of 15.3
years, as compared to an average yield of 7.23% and an average maturity of 14.8
years at December 31, 1996.
Effective January 1, 1994 CSB adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities". Under the provisions of the
Statement, securities are to be classified in three categories and accounted for
as follows:
- Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost.
- Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings;
and
- Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of
stockholders' equity.
CSB's classification of securities as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------------------- ---------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------------- -------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. government
agencies and corporations $ - - 12,002 12,089
Obligations of states and
political subdivisions 2,733 2,850 7,680 8,179
Corporate and other securities - - 466 466
Mortgage-backed securities - - 25,651 25,753
------------- ------------ ------------ -----------
$ 2,733 2,850 45,799 46,487
============= ============ ============ ===========
</TABLE>
A portion of the capital increase in 1995 was $1,427,000 which
represents the unrealized gains in securities available-for-sale of $2,300,000
net of applicable tax expense of $873,000. There was a decrease in the net
unrealized gain on available-for-sale securities during 1996 of $256,000 which
resulted from a decrease in the unrealized gain on securities available for sale
of $415,000, net of tax benefits of $159,000. During the year ended December 31,
1997, the net increase in capital totaled $208,000 which represents the
unrealized appreciation in securities available-for-sale of $345,000 net of
applicable taxes of $137,000.
The increase in assets in 1997 was funded primarily by increases in
deposits. Total deposits increased from $104,850,000 at December 31, 1996 to
$122,878,000 at December 31, 1997 representing an increase of 17.2%. Demand
deposits increased 22.1% from $12,836,000 at December 31, 1996 to $15,679,000 at
December 31, 1997. Additionally, increases in certificates of deposit and
individual retirement accounts of $11,331,000 (18.6%) contributed to the
increases in deposits for 1997. Federal funds purchased decreased $285,000 in
1997. The subsidiary bank has lines of credit totaling $3,500,000. The
outstanding balance at December 31, 1997 and 1996 was $375,000 and $660,000,
respectively, which is included in the financial statements as Federal funds
purchased. CSB has an unused line of credit of $1,500,000 at December 31, 1997
with other financial institutions.
CSB's allowance for loan losses at December 31, 1997 was $958,000 as
compared to $882,000 at December 31, 1996. Non-performing loans amounted to
$179,000 at December 31, 1997 compared to $137,000 at December 31, 1996.
57
<PAGE> 68
Non-performing loans are loans which have been placed on non-accrual status,
loans 90 days past due plus renegotiated loans. Net charge-offs to average
outstanding loans for 1997 was .22% as compared to .14% in 1996. Net charge-offs
totaled $156,000 for 1997. In 1997 the provision exceeded net charge-offs by
$76,000.
The allowance for possible loan losses, amounting to $958,000 at
December 31, 1997, represents 1.25% of total loans outstanding. At December 31,
1996, the allowance for possible loan losses represented 1.32% of total loans
outstanding. Management has in place a system to identify and monitor problem
loans. Management believes the allowance for possible loan losses at December
31, 1997 to be adequate.
LIQUIDITY
Liquidity represents the ability to efficiently and economically
accommodate decreases in deposits and other liabilities, as well as fund
increases in assets. A company has liquidity potential when it has the ability
to obtain sufficient funds in a timely manner at a reasonable cost. The
availability of funds through deposits, the purchase and sales of securities in
the investment portfolio, the use of funds for consumer and commercial loans and
the access to debt markets affect the liquidity of CSB. CSB's loan to deposit
ratio was approximately 62.3% and 63.9% at December 31, 1997 and December 31,
1996, respectively.
CSB's investment portfolio, as represented above, consists of earning
assets that provide interest income. Federal Funds sold which are invested
overnight are the most liquid of the investments. CSB had no Federal Funds sold
at December 31, 1997 or 1996.
Funds management decisions must reflect management's intent to maintain
profitability in both the immediate and long-term earnings. CSB's rate
sensitivity position has an important impact on earnings. Senior management of
CSB meets monthly to analyze the rate sensitivity position of the subsidiary
bank. These meetings focus on the spread between the subsidiary bank's cost of
funds and interest yields generated primarily through loans and investments.
CSB presently maintains a liability sensitive position over the 1997
year or a negative gap. Liability sensitivity means that more of CSB's
liabilities are capable of repricing over certain time frames than assets. The
interest rates associated with these liabilities may not actually change over
this period but are capable of changing. For example, the six month gap is a
picture of the possible repricing over a six month period. The following table
shows the rate sensitivity gaps for different time periods as of December 31,
1997:
<TABLE>
<CAPTION>
INTEREST-RATE SENSITIVITY GAPS: REPRICE 1-90 91-180 181-365 ONE YEAR
(IN THOUSANDS) IMMEDIATELY DAYS DAYS DAYS AND LONGER TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets $ - 14,075 9,254 22,471 80,560 126,360
Interest-bearing liabilities 35,232 20,861 18,380 27,451 5,650 107,574
----------- ----------- ----------- ---------- ----------- -----------
Interest rate sensitivity $ (35,232) (6,786) (9,126) (4,980) 74,910 18,786
=========== =========== =========== ========== =========== ===========
Cumulative gap $ (35,232) (42,018) (51,144) (56,124) 18,786
=========== =========== =========== ========== ===========
Interest rate sensitivity
gap as a % of total assets (26.1)% (5.0)% (6.8)% (3.7)% 55.5%
=========== =========== =========== ========== ===========
Cumulative gap as a
% of total assets (26.1)% (31.1)% (37.9)% (41.6)% 13.9%
=========== =========== =========== ========== ===========
</TABLE>
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management does not
anticipate that there will be significant withdrawals from these accounts in the
future.
It is anticipated that with present maturities, the anticipated growth
in deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. At the
present time there are no known trends or any known commitments, demands, events
or uncertainties that will result in or that are reasonably likely to result in
the registrant's liquidity changing in any material way.
RESULTS OF OPERATIONS
Net earnings for the year ended December 31, 1997 were $1,640,000 an
increase of $189,000 or 13.0% from fiscal year 1996. Net earnings for 1996
totaled $1,451,000 which was an increase of $318,000 or 28.1% from $1,133,000
for 1995. Basic earning per common share was $19.31 in 1997, $17.75 in 1996 and
$14.09 in 1995. Diluted earnings per common share were $19.12, $17.69 and $14.09
in 1997, 1996 and 1995, respectively. Average earning assets increased
$16,746,000 for the year ended December 31, 1997 as compared to year ended
December 31, 1996. Average earning assets increased $12,097,000 for the year
ended December 31, 1996 as compared to year ended December 31, 1995.
Additionally, the net
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<PAGE> 69
interest spread decreased from 5.20% in 1996 to 4.89% in 1997. The net interest
spread was 5.07% in 1995. Net interest spread is defined as the effective yield
on earning assets less the effective cost of deposits and borrowed funds, as
calculated on a fully taxable equivalent basis.
Net interest income before provision for loan losses for 1997 totaled
$5,615,000 as compared to $5,113,000 for 1996 and $4,364,000 for 1995. The
provision for loan losses was $232,000 in 1997 as compared to $222,000 in 1996
and $172,000 in 1995. Net charge-offs in 1997 were $156,000 as compared to
$85,000 in 1996 and $61,000 in 1995.
Non-interest income increased 32.9% to $1,497,000 in 1997 from
$1,127,000 in 1996. This increase was due primarily to increases in other fees
and commissions of $206,000, increases in service charges on deposits of $39,000
and a gain on sale of loans of $186,000. Non-interest income of $1,127,000 in
1996 was an increase of approximately 32.0% from $854,000 in 1995. The increase
in 1996 resulted primarily from an increase in other fees and commissions and
securities gains.
Non-interest expense increased 13.4% to $4,352,000 in 1997 from
$3,837,000 in 1996. Non-interest expense was $3,248,000 in 1995. Non-interest
expense, which includes, among other things, salaries and employee benefits,
occupancy expenses, furniture and fixtures expenses, data processing, Federal
Deposit Insurance premiums, supplies and general operating costs, increased
commensurate with the continued growth of CSB. The increase in 1997 was
primarily attributable to an increase in salaries and employment benefits of
$381,000 (19.6%), increases in occupancy expenses ($32,000 or 13.1%), furniture
and equipment expenses of $63,000 or 22.7% and other operating expenses of
$166,000 or 13.6%. These increases in expenses were partially attributable to
opening a new branch in February of 1997 in Pleasant View, Tennessee. These
increases were partially offset by a decrease in securities losses of $138,000.
The non-interest expense increased approximately 18.1% from 1995 to 1996 and was
due primarily to increases in salaries and employees benefits, occupancy
expenses, furniture and equipment expenses, with an offset from the decrease in
Federal Deposit Insurance premiums and securities losses.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
CSB's liquidity, capital resources or operations.
CSB adopted Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income". The new statement which becomes effective
for years beginning after December 15, 1997, requires a new financial statement
that includes unrealized gains and losses on certain assets and liabilities. The
statement will provide additional information but will not impact existing
statements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as CSB are primarily monetary in nature. Therefore,
interest rates have a more significant effect on CSB's performance since they
impact both interest revenues and interest costs.
STATISTICAL DATA FOR CSB
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rate and Interest Differential
The Schedule which follows indicates the average balances for each
major balance sheet item, an analysis of net interest income and the change in
interest income and interest expense attributable to changes in volume and
changes in rates.
The difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities is net interest income, which
is the CSB's gross margin. Analysis of net interest income is more meaningful
when income from tax-exempt earning assets is adjusted to a tax equivalent
basis. Accordingly, the following schedule includes a tax-equivalent adjustment
of tax-exempt earning assets, assuming a weighted average Federal income tax
rate of 34%.
In this Schedule "change due to volume" is the change in volume
multiplied by the interest rate for the prior year. "Change due to rate" is the
change in interest rate multiplied by the volume for the current year. Changes
in interest income and expense not due solely to volume or rate changes are
included in the "change due to rate" category.
59
<PAGE> 70
Non-accrual loans, if any, have been included in their respective loan
category. Loan fees of $381,000, $409,000 and $253,000 for 1997, 1996 and 1995,
respectively, are included in consumer loan income and represent an adjustment
of the yield on these loans.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-----------------------------------------------------------------------------
1997 1996
---------------------------------------- ------------------------------------
Average Interest Income/ Average Interest Income/
Balance Rate Expense Balance Rate Expense
-------------- ---------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned interest $ 70,558 10.58% 7,465 59,685 10.87% 6,487
Investment securities - taxable 37,182 6.73 2,502 33,243 6.73 2,236
-------- ----- ---------- ------------ --------- --------
Investment securities - tax exempt 9,813 5.56 545 7,620 5.88 448
Taxable equivalent adjustment - 2.86 281 - 3.03 231
-------- ----- ---------- ------------ --------- --------
Total tax-exempt investment securities 9,813 8.42 826 7,620 8.91 679
-------- ----- ---------- ------------ --------- --------
Total investment securities 46,995 7.08 3,328 40,863 7.13 2,915
-------- ----- ---------- ------------ --------- --------
Federal funds sold 1,124 5.34 60 1,383 5.35 74
Interest-bearing deposits in banks - - - - - -
-------- ----- ---------- ------------ --------- --------
Total earning assets 118,677 9.14 10,853 101,931 9.30 9,476
-------- ----- ---------- ------------ --------- --------
Cash and due from banks 3,724 3,397
Allowance for possible loan losses (941) (818)
Bank premises and equipment 3,389 2,904
Other assets 2,363 1,947
-------- ------------
Total assets $127,212 109,361
======== ============
<CAPTION>
IN THOUSANDS, EXCEPT
INTEREST RATES
-----------------------------
1997/1996 CHANGE
----------------------------
Due to Due to
Volume Rate Total
--------- --------- --------
<S> <C> <C> <C>
Loans, net of unearned interest 1,182 (204) 978
Investment securities - taxable 266 - 266
-------
Investment securities - tax exempt 129 (32) 97
Taxable equivalent adjustment 66 (16) 50
-------
Total tax-exempt investment securities 195 (48) 147
-------
Total investment securities 437 (24) 413
Federal funds sold (14) - (14)
Interest-bearing deposits in banks - - -
-------
Total earning assets 1,557 (180) 1,377
-------
Cash and due from banks
Allowance for possible loan losses
Bank premises and equipment
Other assets
Total assets
</TABLE>
60
<PAGE> 71
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
------------------------------------------------------------------------------
1997 1996
--------------------------------------- -------------------------------------
Average Interest Income/ Average Interest Income/
Balance Rate Expense Balance Rate Expense
------------- ---------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts $ 10,284 2.37% 244 10,202 2.44% 249
Money market demand accounts 11,448 4.52 518 7,389 4.17 308
Other savings accounts 11,640 2.73 318 13,327 2.62 349
Certificates of deposit and individual
retirement accounts $100,000 and over 24,876 5.87 1,460 18,326 5.93 1,087
Certificates of deposit and individual
retirement accounts under $100,000 42,648 5.57 2,375 38,367 5.45 2,091
------------ --------- ---------- ------------ ---------- --------
Total interest-bearing deposits 100,896 4.87 4,915 87,611 4.66 4,084
Demand 14,960 - - 12,372 - -
------------ --------- ---------- ------------ ---------- --------
Total deposits 115,856 4.24 4,915 99,983 4.08 4,084
------------ --------- ---------- ------------ ---------- --------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 729 5.76 42 701 6.85 48
------------ --------- ---------- ------------ ---------- --------
Total deposits and borrowed funds 116,585 4.25 4,957 100,684 4.10 4,132
------------ --------- ---------- ------------ ---------- --------
Other liabilities 1,321 1,234
Minority interest 347 296
Stockholders' equity 8,959 7,147
------------ ------------
Total liabilities and stockholders' equity $ 127,212 109,361
============ ============
Net interest income 5,896 5,344
========== ========
Net yield on earning assets 4.97% 5.24%
========= ==========
Net interest spread 4.89% 5.20%
========= ==========
<CAPTION>
IN THOUSANDS, EXCEPT
INTEREST RATES
-------------------------------
1997/1996 CHANGE
-------------------------------
Due to Due to
Volume Rate Total
--------- --------- -----------
<S> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts 2 (7) (5)
Money market demand accounts 169 41 210
Other savings accounts (44) 13 (31)
Certificates of deposit and individual
retirement accounts $100,000 and over 388 (15) 373
Certificates of deposit and individual
retirement accounts under $100,000 233 51 284
---------
Total interest-bearing deposits 619 212 831
Demand -
---------
Total deposits 648 183 831
---------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 2 (8) (6)
---------
Total deposits and borrowed funds 652 173 825
---------
Other liabilities
Minority interest
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income 552
=========
Net yield on earning assets
Net interest spread
</TABLE>
61
<PAGE> 72
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
---------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------
Average Interest Income/ Average Interest Income/
Balance Rate Expense Balance Rate Expense
----------- --------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned interest $ 59,685 10.87% 6,487 49,766 11.06% 5,505
Investment securities - taxable 33,243 6.73 2,236 33,270 6.44 2,143
---------- ------- -------- --------- ------- -------
Investment securities - tax exempt 7,620 5.88 448 5,802 6.12 355
Taxable equivalent adjustment - 3.03 231 - 3.15 183
---------- ------- -------- --------- ------- -------
Total tax-exempt investment securities 7,620 8.91 679 5,802 9.27 538
---------- ------- -------- --------- ------- -------
Total investment securities 40,863 7.13 2,915 39,072 6.86 2,681
---------- ------- -------- --------- ------- -------
Federal funds sold 1,383 5.35 74 918 5.66 52
Interest-bearing deposits in banks - - - 78 6.41 5
---------- ------- -------- --------- ------- -------
Total earning assets 101,931 9.30 9,476 89,834 9.18 8,243
---------- ------- -------- --------- ------- -------
Cash and due from banks 3,397 3,384
Allowance for possible loan losses (818) (685)
Bank premises and equipment 2,904 2,535
Other assets 1,947 1,159
---------- ---------
Total assets $ 109,361 96,227
========== =========
<CAPTION>
IN THOUSANDS, EXCEPT
INTEREST RATES
----------------------------
1996/1995 CHANGE
----------------------------
Due to Due to
Volume Rate Total
--------- --------- --------
<S> <C> <C> <C>
Loans, net of unearned interest 1,097 (115) 982
Investment securities - taxable 2 91 93
------
Investment securities - tax exempt 111 (18) 93
Taxable equivalent adjustment 57 (9) 48
------
Total tax-exempt investment securities 168 (27) 141
------
Total investment securities 123 111 234
Federal funds sold 26 (4) 22
Interest-bearing deposits in banks (5) - (5)
------
Total earning assets 1,111 122 1,233
------
Cash and due from banks
Allowance for possible loan losses
Bank premises and equipment
Other assets
Total assets
</TABLE>
62
<PAGE> 73
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
---------------------------------------------------------------------------
1996 1995
-------------------------------------- ---------------------------------
Average Interest Income/ Average Interest Income/
Balance Rate Expense Balance Rate Expense
------------- ---------- ----------- ------------ --------- ---------
Deposits:
<S> <C> <C> <C> <C> <C> <C>
Negotiable order of withdrawal
accounts $ 10,202 2.44% 249 10,328 2.56% 264
Money market demand accounts 7,389 4.17 308 5,143 3.87 199
Other savings accounts 13,327 2.62 349 12,995 2.77 360
Certificates of deposit and individual
retirement accounts $100,000 and over 18,326 5.93 1,087 13,796 6.16 850
Certificates of deposit and individual
retirement accounts under $100,000 38,367 5.45 2,091 35,619 5.46 1,944
Total interest-bearing
deposits 87,611 4.66 4,084 77,881 4.64 3,617
Demand 12,372 - - 11,167 - -
Total deposits 99,983 4.08 4,084 89,048 4.06 3,617
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 701 6.85 48 955 8.27 79
Total deposits and
borrowed funds 100,684 4.10 4,132 90,003 4.11 3,696
Other liabilities 1,234 686
Minority interest 296 239
Stockholders' equity 7,147 5,299
-------
Total liabilities and
stockholders' equity $ 109,361 96,227
=======
Net interest income 5,344 4,547
Net yield on earning assets 5.24% 5.06%
=====
Net interest spread 5.20% 5.07%
=====
<CAPTION>
------------------------------
1996/1995 CHANGE
------------------------------
Due to Due to
Volume Rate Total
-------- -------- --------
Deposits:
<S> <C> <C> <C>
Negotiable order of withdrawal
accounts (3) (12) (15)
Money market demand accounts 87 22 109
Other savings accounts 9 (20) (11)
Certificates of deposit and individual
retirement accounts $100,000 and over 279 (42) 237
Certificates of deposit and individual
retirement accounts under $100,000 150 (3) 147
------
Total interest-bearing
deposits 451 16 467
Demand -
------
Total deposits 444 23 467
------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt (21) (10) (31)
------
Total deposits and
borrowed funds 439 (3) 436
------
Other liabilities
Minority interest
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income 797
======
Net yield on earning assets
Net interest spread
</TABLE>
63
<PAGE> 74
INVESTMENT PORTFOLIO
Securities at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 2,733 117 - 2,850
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
government agencies
and corporations $ 12,002 89 2 12,089
Obligations of state and
political subdivisions 7,680 499 - 8,179
Corporate and
other securities 466 - - 466
Mortgage-backed
securities 25,651 175 73 25,753
----------------- ----------------- ----------------- -----------------
$ 45,799 763 75 46,487
================= ================= ================= =================
</TABLE>
64
<PAGE> 75
Securities at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 1,527 3 - 1,530
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
government agencies
and corporations $ 11,581 103 80 11,604
Obligations of state and
political subdivisions 7,145 256 4 7,397
Corporate and
other securities 396 - - 396
Mortgage-backed
securities 18,284 176 112 18,348
----------------- ----------------- ----------------- -----------------
$ 37,406 535 196 37,745
================= ================= ================= =================
</TABLE>
65
<PAGE> 76
The following schedule details the estimated maturities and weighted
average yields of securities of CSB at December 31, 1997:
<TABLE>
<CAPTION>
Estimated Market Weighted Average
Held-To-Maturity Securities Amortized Cost Value Yields
--------------------------- ---------------- ----------------- ----------------
(In Thousands)
Obligations of states and political subdivisions*:
<S> <C> <C> <C>
Less than one year $ 127 128 7.31%
One to five years 1,178 1,213 8.33
Five to ten years 1,428 1,509 8.45
---------------- ---------------- ---------------
Total held-to-maturity securities $ 2,733 2,850 8.34%
================ ================ ===============
</TABLE>
* Weighted average yield is stated on a tax-equivalent basis, assuming
a weighted average Federal income tax rate of 34%.
<TABLE>
<CAPTION>
Estimated Market Weighted Average
Available-For-Sale Securities Amortized Cost Value Yields
----------------------------- ---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Obligations of U.S. Treasury and
other U.S. Government agencies
and corporations, including
mortgage-backed securities:
Less than one year $ 5,455 5,484 6.64%
One to five years 17,697 17,819 6.63
Five to ten years 7,496 7,521 6.96
More than ten years 7,005 7,018 6.64
---------------- ---------------- ---------------
Total securities of
U.S. Treasury and other
U.S. Government agencies
and corporations 37,653 37,842 6.70
---------------- ---------------- ---------------
Obligations of states and political subdivisions*:
Less than one year 202 203 7.35
One to five years 1,308 1,393 8.55
Five to ten years 1,508 1,649 8.44
More than ten years 4,662 4,934 8.40
---------------- ---------------- ---------------
Total obligations of states
and political subdivisions 7,680 8,179 8.41
---------------- ---------------- ---------------
Other:
Federal Home Loan Bank stock 403 403 -
Other 63 63 -
---------------- ---------------- ---------------
Total available-for-sale
securities $ 45,799 46,487 6.99%
================= ================= ===============
</TABLE>
* Weighted average yield is stated on a tax-equivalent basis, assuming
a weighted average Federal income tax rate of 34%.
66
<PAGE> 77
LOAN PORTFOLIO
Loan Types
The following schedule details the loans of CSB at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
In Thousands
-------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Commercial, financial and agricultural $ 24,590 23,537
Real estate - construction 6,011 3,444
Real estate - mortgage 30,094 24,665
Consumer 16,018 15,486
---------------- ----------------
Total loans 76,713 67,132
Less unearned interest 113 71
---------------- ----------------
Total loans, net of unearned interest 76,600 67,061
Less allowance for possible loan losses 958 882
---------------- ----------------
Net loans $ 75,642 66,179
================ ================
</TABLE>
67
<PAGE> 78
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule details maturities and sensitivities to interest
rates changes for commercial loans of CSB at December 31, 1997:
<TABLE>
<CAPTION>
1 Year to
Less Than Less Than After 5
1 Year* 5 Years Years Total
--------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Maturity Distribution:
Commercial, financial
and agricultural $ 11,864 10,093 2,633 24,590
Real estate -
construction 6,011 - - 6,011
-------------- -------------- -------------- ------------
$ 17,875 10,093 2,633 30,601
============== ============== ============== ============
Interest-Rate Sensitivity:
Fixed interest rates $ 2,345 10,093 2,633 15,071
Floating or adjustable
interest rates 15,530 - - 15,530
-------------- -------------- -------------- ------------
Total commercial,
financial and
agricultural
loans and
real estate
construction
loans $ 17,875 10,093 2,633 30,601
============== ============== ============== ============
</TABLE>
* Includes demand loans, bankers acceptances, commercial paper and
overdrafts.
68
<PAGE> 79
Risk Elements
The following schedule details selected information as to
non-performing loans of CSB at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
In Thousands
------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Non-accrual loans:
Commercial, financial and agricultural $ 57 -
Real estate - construction - -
Real estate - mortgage - -
Consumer 25 106
Lease financing receivable 42 -
---------------- ----------------
Total non-accrual $ 124 106
================ ================
Loans 90 days past due:
Commercial, financial and agricultural $ 52 18
Real estate - construction - -
Real estate - mortgage - -
Consumer 3 13
Lease financing receivable - -
---------------- ----------------
Total loans 90 days past due $ 55 31
================ ================
Renegotiated loans:
Commercial, financial and agricultural $ - -
Real estate - construction - -
Real estate - mortgage - -
Consumer - -
Lease financing receivable - -
---------------- ----------------
Total renegotiated loans past due $ - -
================ ================
Loans current - considered uncollectible $ - -
================ ================
Total non-performing loans $ 179 137
================ ================
Total loans, net of unearned interest $ 76,600 67,061
================ ================
Percent of total loans outstanding,
net of unearned interest 0.23% 0.20%
================ ================
Other real estate $ 70 -
================ ================
</TABLE>
69
<PAGE> 80
The accrual of interest income is discontinued when it is determined
that collection of interest is less than probable or the collection of any
amount of principal is doubtful. The decision to place a loan on a non-accrual
status is based on an evaluation of the borrower's financial condition,
collateral liquidation value, economic and business conditions and other factors
that affect the borrower's ability to pay. At the time a loan is placed on a
non-accrual status, the accrued but unpaid interest is also evaluated as to
collectibility. If collectibility is doubtful, the unpaid interest is charged
off. Thereafter, interest on non-accrual loans is recognized only as received.
Loans on non-accrual status totaled $124,000 and $106,000 at December 31, 1997
and 1996, respectively.
At December 31, 1997, loans totaling $1,084,000 were included in the
Bank's internal classified loan list. Of these loans, $614,000 are real estate
and $470,000 are consumer. The collateral valuations received by management
securing these loans total approximately $988,000 ($650,000 related to real
estate, $338,000 related to consumer loans). Such loans are listed as classified
when information obtained about possible credit problems of the borrower has
prompted management to question the ability of the borrower to comply with the
repayment terms of the loan agreement. The loan classifications do not represent
or result from trends or uncertainties which management expects will materially
impact future operating results, liquidity or capital resources.
At December 31, 1997, other real estate totaled $70,000 and consisted
of one commercial property. There was no other real estate at December 31, 1996.
Management is attempting to sell the property included in other real estate at
December 31, 1997 and no loss is anticipated thereon.
Other Interest-Bearing Assets
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at December
31, 1997 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
70
<PAGE> 81
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule details selected information related to the
allowance for possible loan loss account of CSB at December 31, 1997 and 1996
and the years then ended.
<TABLE>
<CAPTION>
In Thousands Except Percentages
-------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Allowance for possible loan losses at beginning of period $ 882 745
------------ -----------
Less: net loan charge-offs:
Charge-offs:
Commercial, financial and agricultural 65 58
Real estate - construction - -
Real estate - mortgage 19 1
Consumer 112 61
Lease financing - -
------------ -----------
196 120
------------ -----------
Recoveries:
Commercial, financial and agricultural 25 9
Real estate - construction - -
Real estate - mortgage 3 3
Consumer 12 23
Lease financing - -
------------ -----------
40 35
------------ -----------
Net loan charge-offs 156 85
------------ -----------
Provision for possible loan losses charged to expense 232 222
------------ -----------
Allowance for possible loan losses at end of period $ 958 882
============ ===========
Total loans, net of unearned interest, at end of year $ 76,600 67,061
============ ===========
Average total loans outstanding,
net of unearned interest, during year $ 70,558 59,685
============ ===========
Net charge-offs as a percentage of average
total loans outstanding, net of unearned
interest, during year 0.22% 0.14%
============ ===========
Ending allowance for possible loan losses as a
percentage of total loans outstanding
net of unearned interest, at end of year 1.25% 1.32%
============ ===========
</TABLE>
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible. The provision for possible loan losses charged to
operating expense is based on past loan loss experience and other factors which,
in management's judgment, deserve current recognition in estimating possible
loan losses. Such other factors considered by management include growth and
composition of the loan portfolio, review of specific loan problems, the
relationship of the allowance for possible loan losses to outstanding loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions
that may affect the borrower's ability to pay.
Management conducts a continuous review of all loans that are
delinquent, previously charged down or loans which are determined to be
potentially uncollectible. Loan classifications are reviewed periodically by a
person independent of the lending function. The CSB Board periodically reviews
the adequacy of the allowance for possible loan losses.
The breakdown of the allowance by loan category is based in part on
evaluations of specific loans, past history and economic conditions within
specific industries or geographic areas. Accordingly, since all of these
conditions are subject to change, the allocation is not necessarily indicative
of the breakdown of the future losses.
71
<PAGE> 82
The following detail provides a breakdown of the allocation of the allowance for
possible loan losses:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------------- ----------------------------------
Percent of Percent of
Loans In Each Loans In Each
Category To Category To
In Thousands Total Loans In Thousands Total Loans
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 467 32% $ 396 35%
Real estate - construction 17 8 15 5
Real estate - mortgage 137 39 161 37
Consumer 337 21 310 23
--------------- --------------- -------------- ---------------
$ 958 100% $ 882 100%
=============== =============== ============== ===============
</TABLE>
Deposits
The average amounts and average interest rates for deposits for 1997 and 1996
are detailed in the following schedule:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
Average Average
Balance Balance
---------------- Average --------------- Average
In Thousands Rate In Thousands Rate
---------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 14,960 -% 12,372 -%
Negotiable order of withdrawal
accounts 10,284 2.37 10,202 2.44
Money market demand accounts 11,448 4.52 7,389 4.17
Other savings accounts 11,640 2.73 13,327 2.62
Certificates of deposit and
individual retirement accounts
$100,000 and over 24,876 5.87 18,326 5.93
Certificates of deposit and
individual retirement accounts
under $100,000 42,648 5.57 38,367 5.45
------------- ----------- ------------ ----------
$ 115,856 4.24% 99,983 4.08%
============= =========== ============ ==========
</TABLE>
The following schedule details the maturities of certificates of
deposit and individual retirement accounts of $100,000 and over at December 31,
1997:
<TABLE>
<CAPTION>
Total
---------------
In Thousands
---------------
<S> <C>
Less than three months $ 8,247
Three to six months 6,247
Six to twelve months 11,537
More than twelve months 1,410
--------------
$ 27,441
==============
</TABLE>
72
<PAGE> 83
RETURN ON EQUITY AND ASSETS
The following schedule details selected key ratios of CSB at December
31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Return on assets
(Net income divided by average total assets) 1.29% 1.33% 1.18%
Return on equity
(Net income divided by average equity) 18.31% 20.30% 21.38
Dividend payout ratio
(Dividends declared per share divided
by net income per share) -% -% -%
Equity to assets ratio
(Average equity divided by average
total assets) 7.04% 6.53% 5.51%
Leverage capital ratio
(Equity divided by fourth quarter average total
assets, excluding the net unrealized gain or loss
on available-for-sale securities) 7.24% 7.45% 6.79%
</TABLE>
The minimum leverage capital ratio required by the regulatory agencies
is 4%.
Beginning January 1, 1991, new risk-based capital guidelines were
adopted by regulatory agencies. Under these guidelines, a credit risk is
assigned to various categories of assets and commitments ranging from 0% to 100%
based on the risk associated with the asset.
The following schedule details CSB's risk-based capital at December 31,
1997 (excluding the net unrealized gain on available-for-sale securities which
is shown as an addition to stockholders' equity in the consolidated financial
statements).
<TABLE>
<CAPTION>
In Thousands
--------------
<S> <C>
Tier I capital:
Stockholders' equity, including minority
interest and excluding the net
unrealized gain on available-for-sale
securities $ 10,120
Total risk-based capital:
Allowable allowance for loan losses
(limited to 1.25% of risk-weighted
assets) 958
--------------
Total capital $ 11,078
==============
Risk-weighted assets $ 85,451
==============
Risk-based capital ratios:
Tier I capital ratio 11.84%
==============
Total risk-based capital ratio 12.96%
==============
</TABLE>
CSB is required to maintain a total risk-based capital to risk weighted
asset ratio of 8% and a Tier 1 capital to risk weighted asset ratio of 4%. At
December 31, 1997, CSB and its subsidiary bank were in compliance with these
requirements.
73
<PAGE> 84
The following schedule details CSB's interest rate sensitivity at December 31,
1997:
<TABLE>
<CAPTION>
(In Thousands) Repricing Within
-------------------------------------------------------------------------------
Total 0-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
interest $ 76,600 4,604 7,049 5,686 14,648 44,613
Securities 49,220 673 1,209 3,568 7,823 35,947
Loans held for sale 540 540 - - - -
----------- ----------- ----------- ----------- ------------- -----------
Total earning assets 126,360 5,817 8,258 9,254 22,471 80,560
----------- ----------- ----------- ----------- ------------- -----------
Interest-bearing liabilities:
Negotiable order of
withdrawal accounts 10,811 10,811 - - - -
Money market demand
accounts 15,040 15,040 - - - -
Savings deposits 9,006 9,006 - - - -
Certificates of deposit,
$100,000 and over 21,082 2,177 4,886 4,319 9,251 449
Certificates of deposit,
under $100,000 41,742 4,780 7,825 12,373 14,570 2,194
Individual retirement
accounts 9,518 387 806 1,688 3,630 3,007
Federal funds purchased 375 375 - - - -
----------- ----------- ----------- ----------- ------------- -----------
Total interest bearing
liabilities 107,574 42,576 13,517 18,380 27,451 5,650
----------- ----------- ----------- ----------- ------------- -----------
Interest-sensitivity gap $ 18,786 (36,759) (5,259) (9,126) (4,980) 74,910
=========== =========== =========== =========== ============= ===========
Cumulative gap (36,759) (42,018) (51,144) (56,124) 18,786
=========== =========== =========== ============= ===========
Interest-sensitivity gap
as % of total assets (27.2) (3.9) (6.8) (3.7) 55.5
=========== =========== =========== ============= ===========
Cumulative gap as % of
total assets (27.2) (31.1) (37.9) (41.6) 13.9
=========== =========== =========== ============= ===========
</TABLE>
CSB presently maintains a liability sensitive position over the next
twelve months. However, management expects that liabilities of a demand nature
will renew and that it will not be necessary to replace them with significantly
higher cost funds.
74
<PAGE> 85
ADDITIONAL INFORMATION ABOUT CHEATHAM STATE BANK
GENERAL
Bank was organized and incorporated under the laws of the State of
Tennessee as a commercial bank in 1910 as The Bank of Kingston Springs. In 1993,
after several name changes, Bank became known as Cheatham State Bank. Bank has
three wholly-owned subsidiaries: Community Finance Company, an industrial loan
and thrift organized in 1994, CSB Insurance Services, Inc., a full-service
insurance agency, and CSB Acceptance Corporation, an industrial loan and thrift
for lease financing activities. Bank is insured under the Federal Deposit
Insurance Act, with deposits insured up to the applicable limits thereof, and
Bank is not a member of the Federal Reserve system.
Bank provides a wide range of retail banking services, including
checking and savings accounts; certificates of deposit; individual retirement
accounts; commercial, real estate, and consumer loans; safe deposit boxes; and
trust services. There is no individual customer or group of customers the loss
of which will have a material adverse effect on the operations of Bank. No
significant portion of Bank's loans is concentrated within a single industry or
group of related industries.
REGULATION AND SUPERVISION OF BANK
Bank is incorporated and operating under the banking laws of the State of
Tennessee and as such, is subject to the provisions of the Tennessee Banking Act
("TBA") and the supervision of and regulation by the TDFI. Bank is also a member
of the FDIC and therefore is subject to the provisions of the Federal Deposit
Insurance Act and to supervision and examination by the FDIC.
Bank is subject to the same risk-weighted capital guidelines and other
capital adequacy computations described above for CSB. Since CSB is a bank
holding company with consolidated assets of less than $150 million, the capital
guidelines and capital adequacy computations are applied on a "bank only" basis.
The following table sets forth the current regulatory requirements for capital
ratios of banks as compared with Bank's capital ratios at June 30, 1998.
<TABLE>
<CAPTION>
----------------------- ---------------------- -----------------------
TIER 1 CAPITAL TO TOTAL CAPITAL TO
RISK-WEIGHTED RISK-WEIGHTED
LEVERAGE RATIO(1) ASSETS(2) ASSETS(3)
-------------------------------------------- ----------------------- ---------------------- -----------------------
<S> <C> <C> <C>
REGULATORY MINIMUM 4.00-5.00% 4.00% 8.00%
-------------------------------------------- ----------------------- ---------------------- -----------------------
BANK AT JUNE 30, 1998 7.2% 11.7% 12.9%
-------------------------------------------- ----------------------- ---------------------- -----------------------
</TABLE>
(1) The leverage ratio is defined as the ratio of Tier 1 capital
(using final 1992 risk-based capital guidelines to define Tier 1
capital) to average assets, net of goodwill. Federal Reserve
Board Guidelines provide that all bank holding companies (other
than those that meet certain criteria) maintain a minimum
leverage ratio of 3%, plus an additional cushion of 100 to 200
basis points. The guidelines also state that banking
organizations 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.
(2) Shareholders' equity less goodwill (Tier 1 capital) divided by
risk-weighted assets.
(3) Tier 1 capital plus reserve for possible loan losses (limited to
1.25% of total risk-weighted assets) plus qualified subordinated
and convertible debt (Tier 2 capital) divided by risk-weighted
assets.
Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However, management is unable to predict whether and when higher capital
requirements would be imposed and, if so, at what levels and on what schedule.
PROPERTIES
Bank currently operates out of its main office located in Kingston Springs,
Tennessee. Bank also operates 3 branches in the Cheatham County area. The main
office and each of the properties on which branches of Bank are located is owned
or leased by Bank or Bank's subsidiaries.
COMPETITION
Bank accepts checking and savings deposits and makes commercial real
estate, and consumer loans. Bank also offers many customary services, including
but not limited to cashier's checks, bank-by-mail, automatic check deposit and
traveler's checks. The banking business in Tennessee and in the markets served
by Bank is highly competitive. Bank competes for loans and deposits with other
commercial banks, savings banks, finance companies, credit unions and other
financial institutions. In addition, other entities (both governmental and
private industry) seeking to raise capital through the issuance and sale of debt
or
75
<PAGE> 86
equity securities, mutual funds or tax deferred annuities also provide
competition for each of the entities in the acquisition of deposits. Larger
commercial banks have greater lending limits than does Bank and may perform
certain other functions Bank does not or cannot currently offer.
In order to compete with other financial institutions in its primary
service area, Bank relies primarily upon local promotional activities, customer
referrals, personal contact by its officers, directors, employees and
shareholders, and specialized services. While there are many other commercial
banks and lending institutions in the primary service areas of Bank, Bank
believes its emphasis on customer service and personal contact set it apart from
its competitors.
RECENT LEGISLATION AND OTHER CHANGES
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the Tennessee legislature and before various
bank regulatory agencies. The likelihood of any major changes and the impact
such changes might have on Bank are impossible to predict.
EMPLOYEES
Bank has 52 full-time equivalent employees as of June 30, 1998.
LEGAL PROCEEDINGS
No material legal proceedings are pending against Bank other than
ordinary, routine litigation incidental to the business of Bank.
DIVIDENDS
Bank is a legal entity separate and distinct from CSB. However, the
principal source of CSB's revenues is from dividends declared by Bank to CSB.
Under Tennessee law, Bank can only pay dividends out of its undivided profits
which, at June 30, 1998 was approximately $8,225,000. This amount will be
increased by Bank's net earnings and decreased by any losses. Any transfer from
Bank's surplus accounts to undivided profits accounts requires the prior
approval of the Commissioner. Bank's ability to pay dividends is dependent upon
its ability to meet recommended capital levels as established from time to time
by the FDIC. No assurance can be given of any future dividend payments.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning Bank's
directors and executive officers as of June 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION AND PRINCIPAL OCCUPATION FOR PAST 5 YEARS
---- --- --------------------------------------------------
<S> <C> <C>
John L. Borum 86 Director; Retired/Investor
Alton Denney 62 Director; Senior VP, Cheatham State Bank
Marion Fowlkes 49 Director; Part Owner, Hickerson Fowlkes Architects
Vernon Malone 76 Director; Retired/Contractor
W.R. Murray 56 Director; Owner, Harpeth Clock Company
James T. Perry 47 Director; Accountant Delta Dental Plan of TN
Hubert A. Reigle 71 Director; Retired/Real Estate Developer
Bob Saunders 73 Director; Retired/Real Estate Developer
Gary L. Scott 52 Director, President, Cheatham State Bank
Debbie Thrash 42 Executive Vice President and CFO, Cheatham State Bank
Jason West 32 Executive Vice President, Cheatham State Bank
</TABLE>
TRANSACTIONS WITH MANAGEMENT
Directors and executive officers of Bank, including associates and
members of their immediate families, have been customers of and had transactions
including loans and commitments to lend with Bank in the ordinary course of
business. All such loans and commitments were made by Bank on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than normal risk of collectibility or present other unfavorable features.
Similar transactions may be expected to take place in the ordinary course of
business in the future. On June 30, 1998, the aggregate of these related party
loans was approximately $1,457,000 million or approximately 1.77% of total
consolidated loans of Bank.
OWNERSHIP OF BANK COMMON STOCK
As of the Bank Record Date, Bank's records indicated the following
number of shares were beneficially owned by:
(I) ALL PERSONS WHO OWN BENEFICIALLY 5% OR MORE OF THE BANK COMMON STOCK:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP
OF BENEFICIAL OWNER (NUMBER OF SHARES) PERCENT OF CLASS
------------------- ----------------------- -----------------
<S> <C> <C>
CSB Financial Corp.
108 Cumberland Street
Ashland City, TN 37015 171,286.25 96.14%
</TABLE>
(II) EACH PERSON WHO IS A DIRECTOR OR A NAMED EXECUTIVE OFFICER OF BANK:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
NAME (NUMBER OF SHARES) PERCENT OF CLASS
---- -------------------- ----------------
<S> <C> <C>
John L. Borum 30 0.01%
Alton Denney -- --
Marion Fowlkes -- --
Vernon Malone -- --
W.R. Murray -- --
James T. Perry -- --
Hubert A Reigle -- --
Bob Saunders
Gary L. Scott -- --
(III) ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A GROUP 30 0.01%
</TABLE>
<PAGE> 87
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Bank and its subsidiaries for the six
months ended June 30, 1998 and 1997. This discussion should be read in
conjunction with the consolidated financial statements located at pages FF-2 to
FF-6. Reference should also be made to the Bank's financial statements and
statistical data for the year ended December 31, 1997 for a more complete
discussion of factors that impact liquidity, capital and the results of
operations.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Bank and its
subsidiaries to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is designed to maintain stability in
the balance of interest-sensitive assets to interest-sensitive liabilities in
order to provide a stable growth in net interest margins. Earnings on
interest-sensitive assets such as loans tied to the prime rate of interest and
Federal funds sold, may vary considerably from fixed rate assets such as
long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
Banks, in general, must maintain large cash balances to meet day-to-day
cash flow requirements as well as maintaining required reserves for regulatory
agencies. The cash balances maintained are the primary source of liquidity.
Federal funds sold, which are basically overnight or short-term loans to other
banks that increase the other bank's required reserves, are also a major source
of liquidity.
The Bank's investment portfolio consists of earning assets that provide
interest income. For those securities classified as held-to-maturity the Bank
has the ability and intention to hold these securities until maturity.
Securities classified as available-for-sale include securities intended to be
used as part of the Bank's asset/liability strategy and/or securities that may
be sold in response to changes in interest rate, prepayment risk, the need or
desire to increase capital and similar economic factors. Securities totaling
approximately $16.8 million mature or reprice within the next twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At June
30, 1998 commercial, consumer and other loans of approximately $13.2 million and
mortgage loans of approximately $4.3 million either will become due or will be
subject to rate adjustments within twelve months. Continued emphasis will be
placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater of
approximately $27.3 million will become due during the next twelve months. The
Bank's deposit base increased approximately $8.8 million during the six months
ended June 30, 1998. The deposit base increased approximately $1.3 million
during the second quarter of 1998. Advances from the Federal Home Loan Bank were
$630,000 at June 30, 1998. Federal funds purchased were $375,000 at December 31,
1997.
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management
anticipates that there will be no significant withdrawals from these accounts in
the future.
It is anticipated that with present maturities, the anticipated growth
in deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. At the
present time there are no known trends or any known commitments, demands, events
or uncertainties that will result in or that are reasonably likely to result in
the Bank's liquidity changing in any material way.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.4% at June 30,
1998 and December 31, 1997. Total assets increased 7.4% during the six months
ended June 30, 1998. The annualized rate of return on average stockholders'
equity for the first six months of 1998 was 19.1% compared to 19.0% for the year
ended December 31, 1997. Dividends of $178,000 or $1.00 per share were declared
in the six months ended June 30, 1998 and 1997, respectively. Cash dividends
will be increased in the remainder of 1998 over 1997 only in the discretion of
the Board of Directors and as profits permit. Dividends paid during 1997 were
$2.00 per share. No material changes in the mix or cost of capital is
anticipated in the foreseeable future. At the present time, there are no
material commitments for capital expenditures.
Regulations of the FDIC establish required minimum capital levels for
the Bank. Under these regulations, banks must maintain certain capital levels as
a percentage of average total assets (leverage capital ratio) and as a
percentage of total risk-based assets (risk-based capital ratio). Under the
risk-based requirements, various categories of assets and commitments
77
<PAGE> 88
are assigned a percentage related to credit risk ranging from 0% for assets
backed by the full faith and credit of the United States to 100% for loans other
than residential real estate loans and certain off-balance sheet commitments.
Total capital is characterized as either Tier 1 capital which includes common
shareholders' equity, noncumulative perpetual preferred stock and a limited
amount of cumulative perpetual preferred - or total risk based capital which
includes the allowance for loan losses up to 1.25% of risk weighted assets,
perpetual preferred stock, subordinated debt and various other hybrid capital
instruments, subject to various limits. Goodwill is not includable in Tier 1 or
total capital. National banks must maintain a Tier 1 capital to risk-based
assets of at least 4.0%, a total capital to risk-based assets ratio of at least
8.0% and a leverage capital ratio defined as Tier 1 capital to average total
assets for the most recent quarter of at least 4.0%. The same ratios are also
required in order for a bank to be considered "adequately capitalized" under the
FDIC's prompt corrective action regulations, which impose certain operating
restrictions on institutions which are not adequately capitalized. At June 30,
1998 the Bank has a Tier 1 risk-based ratio of 11.74%, a total capital to
risk-based ratio of 12.94% and a leverage ratio of 7.15%, and is classified as
"well capitalized" under the regulations.
RESULTS OF OPERATIONS
Net earnings were $981,000 for the six months ended June 30, 1998 as
compared to $879,000 for the same period in 1997. Net earnings were $516,000 for
the quarter ended June 30, 1998 as compared to $430,000 during the same quarter
in 1997.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income, which is the excess of interest
earned over interest paid. This is particularly true with the potential
volatility in interest rates.
The Bank's interest income, excluding tax equivalent adjustments,
increased by $728,000 or 14.5% and $587,000 or 13.2% during the six months ended
June 30, 1998 and 1997, respectively. Interest income for the quarter ended June
30, 1998 increased $330,000 or 12.7% over the quarter ended June 30, 1997. The
increases were primarily attributable to an increase in average earning assets.
The ratio of average earning assets to total average assets was 93.8% for the
six months ended June 30, 1998 and 93.4% for the same year ended December 31,
1997.
Interest expense increased by $389,000 for the six months ended June
30, 1998 or 16.7% compared to the same period in 1997. Interest expense for the
quarter ended June 30, 1998 increased $184,000 or 15.2% as compared to the
quarter ended June 30, 1997. Interest expense for the quarter ended June 30,
1998 increased $60,000 or 4.5% compared to the first quarter of 1998. The
increase in interest expense can be attributable to an increase in weighted
average interest rates, as well as an increase in average interest bearing
liabilities.
The foregoing resulted in net interest income of $3,040,000 for the six
months ended June 30, 1998, an increase of $339,000 or 12.6% compared to the
prior year period. Net interest income for the quarter ended June 30, 1998
increased $146,000 or 10.5% over the second quarter of 1997 and $38,000 or 2.5%
over the first quarter in 1998.
The provision for loan losses was $162,000 for the first six months of
1998. The Bank had $86,000 provisions for the first six months of 1997. The
provision for loan losses is based on past loan experience and other factors
which, in management's judgment, deserve current recognition in estimating
possible loan losses. Such factors include past loan loss experience, growth and
composition of the loan portfolio, review of specific loan problems, the
relationship of the allowance for loan losses to outstanding loans, and current
economic conditions that may affect the borrower's ability to repay. Management
has in place a system that is designed to identify and to monitor loan problems
on a timely basis.
The following schedule details selected information as to
non-performing loans of the Bank at June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------
Past Due 90 Days Non-Accrual
---------------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $ 80 -
Installment loans 75 23
Commercial - 52
---------- ----------
$ 155 75
========== ==========
Renegotiated loans $ - -
========== ==========
</TABLE>
At June 30, 1998, loans which include the above, totaling $954,000,
were included in the Bank's internal classified loan list. Of these loans
$629,000 are real estate and $325,000 are commercial and other. The collateral
values securing these loans are estimated at approximately $1,142,000, ($880,000
related to real estate and $262,000 related to commercial and other loans). Such
loans are listed as classified when information obtained about possible credit
problems of the borrower has prompted management to question the ability of the
borrower to comply with the agreed repayment terms. The loan classifications do
not represent or result from trends or uncertainties which management expects
will materially impact future operating results, liquidity or capital resources.
78
<PAGE> 89
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at June 30,
1998 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income excluding securities transactions decreased $47,000
or 5.6% during the six months ended June 30, 1998 as compared to the same period
in 1997. The increase for the quarter ended June 30, 1998 was $86,000 or 26.9%
as compared to the comparable quarter in 1997. The decrease in the first six
months of 1998 was due primarily to the gain on sale of loans of $248,000 during
1997. Excluding this component of non-interest income, there was an increase of
$201,000 due primarily to increases in service charges on deposits ($28,000 or
9.8%), other fees and commissions ($135,000 or 55.1%) and other income ($38,000
or 57.6%). Commissions and service charges are monitored continually to insure
maximum return based on costs and competition.
Securities gains during the six months ended June 30, 1998 and 1997
amounted to $7,000 and $11,000, respectively, and related to transactions in the
available-for-sale category. The gains during 1998 and 1997 were incurred
primarily in conjunction with management's strategies to restructure the
investment portfolio to improve the quality of the portfolio, to improve
maturity distribution and to maintain a flexible position to react to market
conditions.
Non-interest expense increased $56,000 or 2.6% during the first six
months of 1998 as compared to the same period in 1997. The increase for the
quarter ended June 30, 1998 was also $56,000 or 5.3% as compared to the quarter
ended June 30, 1997. The increases in the first six months of 1998 were
primarily attributable to an increase in furniture and equipment expenses.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Registrant's liquidity, capital resources or operations.
IMPACT OF INFLATION
The primary impact which inflation has on the results of the Bank's
operations is evidenced by its effects on interest rates. Interest rates tend to
reflect, in part, the financial market's expectations of the level of inflation
and, therefore, will generally rise or fall as the level of expected inflation
fluctuates. To the extent interest rates paid on deposits and other sources of
funds rise or fall at a faster rate than the interest income earned on funds,
loans or investments, net interest income will vary. Inflation also affects
non-interest expenses as goods and services are purchased, although this has not
appeared to have a significant effect on net earnings. If the inflation rate
stays flat or increases slightly, the effect on profits will not be significant.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The purpose of this discussion is to provide insight into the
consolidated financial condition and results of operations of the Bank for the
years ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the financial statements located at pages FF-9 to FF-14.
GENERAL
Bank is a community bank headquartered in Kingston Springs, Tennessee
serving Cheatham County, Tennessee as its primary market area. The Bank serves
as a financial intermediary whereby its profitability is determined to a large
degree by the interest spread it achieves and the successful measurement of
risks. The Bank's management believes that Cheatham County offers an environment
for continued growth and the Bank's target market is local consumers,
professionals and small businesses and mortgage banking. The Bank offers a wide
range of banking services, including checking, savings, and money market deposit
accounts, certificates of deposits, and loans for consumer, commercial and real
estate purposes. In addition, the Bank offers sale of non-insured investment
products and has a certified financial planner on staff for clients. Deposit
instruments in the form of demand deposits, money market, savings and
certificates of deposits are offered to customers to establish the Bank's core
deposit base.
In a market such as Cheatham County, management believes there is an
opportunity to increase the loan portfolio. The Bank has targeted commercial
business lending, commercial and residential real estate lending, and consumer
lending as areas of focus. It is the Bank's intention to limit the size of its
loan portfolio to approximately 75% to 80% of deposit balances; however, the
quality of lending opportunities as well as the desired loan to deposit ratio
will determine the size of the loan portfolio. As a practice, the Bank generates
substantially all of its own loans and occasionally buys participations from
other institutions. The Bank attempts to maintain a loan portfolio which is
capable of adjustment to swings in interest
79
<PAGE> 90
rates. The Bank's policy is to have a diverse loan portfolio. At December 31,
1997, no single industry segment accounted for 10% of the portfolio.
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Regulations of the FDIC establish required minimum capital levels for
the Bank. Under these regulations, banks must maintain certain capital levels as
a percentage of average total assets (leverage capital ratio) and as a
percentage of total risk-based assets (risk-based capital ratio). Under the
risk-based requirements, various categories of assets and commitments are
assigned a percentage related to credit risk ranging from 0% for assets backed
by the full faith and credit of the United States to 100% for loans other than
residential real estate loans and certain off-balance sheet commitments. Total
capital is characterized as either Tier 1 capital - common shareholders' equity,
noncumulative perpetual preferred stock and a limited amount of cumulative
perpetual preferred - or total risk-based capital which includes the allowance
for loan losses up to 1.25% of risk weighted assets, perpetual preferred stock,
subordinated debt and various other hybrid capital instruments, subject to
various limits. Goodwill is not includable in Tier 1 or total risk-based
capital. The Bank must maintain a Tier 1 capital to risk-based assets of at
least 4.0%, a total risk-based capital to risk-based assets ratio of at least
8.0% and a leverage capital ratio defined as Tier 1 capital to adjusted total
assets for the most recent quarter of at least 4%. The Bank has a Tier 1
risk-based ratio of 11.12%, a total risk-based capital ratio of 12.25% and a
leverage capital ratio of 7.07% at December 31, 1997; and therefore, was within
the "well capitalized" category under the regulations.
Dividends of approximately $356,000 were declared during 1997 and 1996,
respectively. Cash dividends are anticipated to approximate those declared in
1997 and 1996 increased in 1998 only if profits remain constant or increase. The
dividend payout ratio (dividends per share declared divided by net earnings per
share) was 20.88%, 23.15% and 28.90% in 1997, 1996 and 1995, respectively. No
material changes in the mix or cost of capital is anticipated in the foreseeable
future.
During 1997, the Bank completed construction of a new branch at a total
cost of approximately $700,000 of which approximately $225,000 was incurred
during 1996.
FINANCIAL CONDITION
During 1997, total assets increased $19,040,000 or 16.5% from
$115,479,000 at December 31, 1996 to $134,519,000 at December 31, 1997. Loans,
net of allowance for possible loan losses, increased from $66,179,000 to
$75,642,000 or 14.3% during fiscal year 1997. The aggregate increases in loans
for 1997 was due primarily to a 22.0% increase in real estate - mortgage loans
and a 74.5% increase in real estate - construction loans. There was not a
significant increase in commercial and consumer loans.
Securities increased 24.3% from $39,217,000 at December 31, 1996 to
$48,754,000 at December 31, 1997. The carrying value of securities of U.S.
Treasury and other U.S. Government obligations increased $82,000, obligations of
state and political subdivisions increased $1,988,000, and there was an increase
in mortgage backed securities of $7,405,000. At December 31, 1997 and 1996 the
market value of the Bank's securities portfolio exceeded its amortized cost by
$804,000 (1.7%) and $342,000 (0.9%), respectively. The weighted average yield
(stated on a tax-equivalent basis, assuming a Federal income tax rate of 34%) of
the securities at December 31, 1997 was 7.05% with an average maturity of 15.3
years, as compared to an average yield of 7.23% and an average maturity of 14.8
years at December 31, 1996.
The Bank follows the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt
and Equity Securities". Under the provisions of the Statement, securities are to
be classified in three categories and accounted for as follows:
- Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost.
- Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings;
and
- Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at
fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders'
equity.
The Bank's classification of securities as of December 31, 1997 is as
follows:
80
<PAGE> 91
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------------------- ---------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------------- --------------- ---------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and
other U.S. government
agencies and corporations $ - - 11,600 11,686
Obligations of states and
political subdivisions 2,733 2,850 7,680 8,179
FHLB stock - - 403 403
Mortgage-backed securities - - 25,651 25,753
------------- ------------ ------------ -----------
$ 2,733 2,850 45,334 46,021
============= ============ ============ ===========
</TABLE>
A portion of the capital increase in 1995 was $1,511,000 which
represents the unrealized gains in securities available-for-sale of $2,436,000
net of applicable tax expense of $925,000. There was a decrease in the net
unrealized gain on available-for-sale securities during 1996 of $291,000 which
resulted from a decrease in the unrealized gain on securities available-for-sale
of $469,000, net of tax benefits of $178,000. During the year ended December 31,
1997, the net increase in capital totaled $216,000 which represents the
unrealized appreciation in securities available-for-sale of $348,000 net of
applicable taxes of $132,000.
The increase in assets in 1997 was funded primarily by increases in
deposits. Total deposits increased from $104,994,000 at December 31, 1996 to
$123,006,000 at December 31, 1997 representing an increase of 17.2%. Demand
deposits increased 22.0% from $12,882,000 at December 31, 1996 to $15,709,000 at
December 31, 1997. Additionally, increases in certificates of deposit and
individual retirement accounts of $11,331,000 (18.6%) contributed to the
increases in deposits for 1997. Federal funds purchased decreased $285,000 in
1997. The bank has lines of credit totaling $3,500,000 with other financial
institutions. The outstanding balances at December 31, 1997 and 1996 were
$375,000 and $660,000, respectively, which is included in the financial
statements as Federal funds purchased.
The Bank's allowance for loan losses at December 31, 1997 was $958,000
as compared to $882,000 at December 31, 1996. Non-performing loans amounted to
$179,000 at December 31, 1997 compared to $137,000 at December 31, 1996.
Non-performing loans are loans which have been placed on non-accrual status,
loans 90 days past due plus renegotiated loans. Net charge-offs to average
outstanding loans for 1997 was .22% as compared to .14% in 1996. Net charge-offs
totaled $156,000 for 1997. In 1997 the provision exceeded net charge-offs by
$76,000.
The allowance for possible loan losses, amounting to $958,000 at
December 31, 1997, represents 1.25% of total loans outstanding. At December 31,
1996, the allowance for possible loan losses represented 1.32% of total loans
outstanding. Management has in place a system to identify and monitor problem
loans. Management believes the allowance for possible loan losses at December
31, 1997 to be adequate.
LIQUIDITY
Liquidity represents the ability to efficiently and economically
accommodate decreases in deposits and other liabilities, as well as fund
increases in assets. A Bank has liquidity potential when it has the ability to
obtain sufficient funds in a timely manner at a reasonable cost. The
availability of funds through deposits, the purchase and sales of securities in
the investment portfolio, the use of funds for consumer and commercial loans and
the access to debt markets affect the liquidity of the Bank. The Bank's loan to
deposit ratio was approximately 62.3% and 63.9% at December 31, 1997 and
December 31, 1996, respectively.
The Bank's investment portfolio, as represented above, consists of
earning assets that provide interest income. Federal Funds sold which are
invested overnight are the most liquid of the investments. The Bank had no
Federal funds sold at December 31, 1997 or 1996.
Funds management decisions must reflect management's intent to maintain
profitability in both the immediate and long-term earnings. The Bank's rate
sensitivity position has an important impact on earnings. Senior management of
the Bank meets monthly to analyze the rate sensitivity position of the Bank.
These meetings focus on the spread between the bank's cost of funds and interest
yields generated primarily through loans and investments.
Cheatham State Bank presently maintains a liability sensitive position
over the 1997 year or a negative gap. Liability sensitivity means that more of
the Bank's liabilities are capable of repricing over certain time frames than
assets. The interest rates associated with these liabilities may not actually
change over this period but are capable of changing. For
81
<PAGE> 92
example, the six month gap is a picture of the possible repricing over a six
month period. The following table shows the rate sensitivity gaps for different
time periods as of December 31, 1997:
<TABLE>
<CAPTION>
Interest-rate sensitivity gaps: Reprice 1-90 91-180 181-365 One Year
(In Thousands) Immediately Days Days Days and Longer Total
- -------------------------------- ----------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets $ - 14,075 9,254 22,471 80,094 125,894
Interest-bearing liabilities 34,857 21,236 18,380 27,549 5,650 107,672
----------- ---------- ---------- ---------- ----------- ------------
Interest rate sensitivity $ (34,857) (7,161) (9,126) (5,078) 74,444 18,222
=========== ========== ========== ========== =========== ============
Cumulative gap $ (34,857) (42,018) (51,144) (56,222) 18,222
=========== ========== ========== ========== ===========
Interest rate sensitivity
gap as a % of total assets (25.9)% (5.3)% (6.8)% (3.8)% 55.3%
=========== ========== ========== ========== ===========
Cumulative gap as a % of total
assets (25.9)% (31.2)% (38.0)% (41.8)% 13.5%
=========== ========== ========== ========== ===========
</TABLE>
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management does not
anticipate that there will be significant withdrawals from these accounts in the
future.
It is anticipated that with present maturities, the anticipated growth
in deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. At the
present time there are no known trends or any known commitments, demands, events
or uncertainties that will result in or that are reasonably likely to result in
the registrant's liquidity changing in any material way.
RESULTS OF OPERATIONS
Net earnings for the year ended December 31, 1997 were $1,707,000 an
increase of $168,000 or 10.9% from fiscal year 1996. Net earnings for 1996
totaled $1,539,000 which was an increase of $306,000 or 24.8% from $1,233,000
for 1995. The opening of a new branch contributed to the lower increase in net
earnings during 1997 as compared to the increase experienced in 1996 over 1995
net earnings. Basic earnings per common share was $9.58 in 1997, $8.64 in 1996
and $6.92 in 1995. Average earning assets increased $16,476,000 for the year
ended December 31, 1997 as compared to year ended December 31, 1996. Average
earning assets increased $12,097,000 for the year ended December 31, 1996 as
compared to year ended December 31, 1995. Additionally, the net interest spread
decreased from 5.20% in 1996 to 4.90% in 1997. The net interest spread was 5.11%
in 1995. Net interest spread is defined as the effective yield on earning assets
less the effective cost of deposits and borrowed funds, as calculated on a fully
taxable equivalent basis.
Net interest income before provision for loan losses for 1997 totaled
$5,583,000 as compared to $5,129,000 for 1996 and $4,426,000 for 1995. The
provision for loan losses was $232,000 in 1997 as compared to $222,000 in 1996
and $172,000 in 1995. Net charge-offs in 1997 were $156,000 as compared to
$85,000 in 1996 and $61,000 in 1995.
Non-interest income increased 32.9% to $1,497,000 in 1997 from
$1,127,000 in 1996. This increase was due primarily to increases in other fees
and commissions of $206,000, increases in service charges on deposits of $39,000
and a gain on sale of loans of $186,000. Non-interest income of $1,127,000 in
1996 was an increase of approximately 32.9% from $848,000 in 1995. The increase
in 1996 resulted primarily from an increase in other fees and commissions and
securities gains.
Non-interest expense increased 13.3% to $4,313,000 in 1997 from
$3,806,000 in 1996. Non-interest expense was $3,220,000 in 1995. Non-interest
expense which includes, among other things, salaries and employee benefits,
occupancy expenses, furniture and fixtures expenses, data processing, Federal
Deposit Insurance premiums, supplies and general operating costs increased
commensurate with the continued growth of the Bank. The increase in 1997 was
primarily attributable to an increase in salaries and employment benefits of
$381,000 (19.6%), increases in occupancy expenses ($32,000 or 13.1%), furniture
and equipment expenses of $63,000 or 22.7% and other operating expenses of
$158,000 or 13.3%. These increases were partially attributable to the Bank
opening a new branch in February of 1997 in Pleasant View, Tennessee. These
increases were partially offset by a decrease in securities losses of $138,000.
The non-interest expense increased approximately 18.2% from 1995 to 1996 and was
due primarily to increases in salaries and employees benefits, occupancy
expenses, furniture and equipment expenses with an offset from the decrease in
Federal Deposit insurance premiums and securities losses.
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Bank's liquidity, capital resources or operations.
82
<PAGE> 93
The Bank adopted Statement of Financial Accounting Standards No. 130
(SFAS 130) "Reporting Comprehensive Income". The new statement which becomes
effective for years beginning after December 15, 1997, requires a new financial
statement that includes unrealized gains and losses on certain assets and
liabilities. The statement provides additional information but does not impact
existing statements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Bank are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Bank's
performance since they impact both interest revenues and interest costs.
83
<PAGE> 94
STATISTICAL DATA FOR BANK
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rate and Interest Rate Differential
The Schedule which follows indicates the average balances for each
major balance sheet item, an analysis of net interest income and the change in
interest income and interest expense attributable to changes in volume and
changes in rates.
The difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities is net interest income, which
is the Bank's gross margin. Analysis of net interest income is more meaningful
when income from tax-exempt earning assets is adjusted to a tax equivalent
basis. Accordingly, the following schedule includes a tax-equivalent adjustment
of tax-exempt earning assets, assuming a weighted average Federal income tax
rate of 34%.
In this Schedule "change due to volume" is the change in volume
multiplied by the interest rate for the prior year. "Change due to rate" is the
change in interest rate multiplied by the volume for the current year. Changes
in interest income and expense not due solely to volume or rate changes are
included in the "change due to rate" category.
Non-accrual loans, if any, have been included in their respective loan
category. Loan fees of $381,000, $409,000 and $253,000 for 1997, 1996 and 1995,
respectively, are included in various loan interest income and represent an
adjustment of the yield on these loans.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-------------------------------------------------------------------------
1997 1996
------------------------------------------- -----------------------------
Average Interest Income/ Average Interest
Balance Rate Expense Balance Rate
------------ ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Loans, net of unearned interest $ 70,558 10.58% 7,465 59,685 10.87%
Investment securities - taxable 36,857 6.72 2,475 33,188 6.73
----------- ---------- --------- ---------- ---------
Investment securities - tax exempt 9,813 5.55 545 7,620 5.83
Taxable equivalent adjustment - 2.86 281 - 3.00
----------- ---------- --------- ---------- ---------
Total tax-exempt investment securities 9,813 8.41 826 7,620 8.83
----------- ---------- --------- ---------- ---------
Total investment securities 46,670 7.07 3,301 40,808 7.12
----------- ---------- --------- ---------- ---------
Federal funds sold 1,124 5.34 60 1,383 5.35
Interest-bearing deposits in banks - - - - -
----------- ---------- --------- ---------- ---------
Total earning assets 118,352 9.15 10,826 101,876 9.29
----------- ---------- --------- ---------- ---------
Cash and due from banks 3,859 3,487
Allowance for possible loan losses (941) (818)
Bank premises and equipment 3,389 2,904
Other assets 2,363 1,947
----------- ----------
Total assets $ 127,022 109,396
=========== ==========
<CAPTION>
-----------------------------------------------
1997/1996 CHANGE
------------ ---------------------------------
Income/ Due to Due to
Expense Volume Rate Total
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Loans, net of unearned interest 6,487 1,182 (204) 978
Investment securities - taxable 2,234 247 (6) 241
-------- -------
Investment securities - tax exempt 444 128 (27) 101
Taxable equivalent adjustment 229 66 (14) 52
-------- -------
Total tax-exempt investment securities 673 194 (41) 153
-------- -------
Total investment securities 2,907 417 (23) 394
--------
Federal funds sold 73 (13) - (13)
Interest-bearing deposits in banks - - - -
-------- -------
Total earning assets 9,467 1,530 (171) 1,359
-------- -------
Cash and due from banks
Allowance for possible loan losses
Bank premises and equipment
Other assets
Total assets
</TABLE>
84
<PAGE> 95
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-------------------------------------------------------------------------
1997 1996
------------------------------------------- -----------------------------
Average Interest Income/ Average Interest
Balance Rate Expense Balance Rate
--------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts $ 10,284 2.37% 244 10,202 2.44%
Money market demand accounts 11,448 4.52 518 7,389 4.17
Other savings accounts 11,640 2.73 318 13,327 2.62
Certificates of deposit and individual
retirement accounts $100,000 and over 24,876 5.87 1,460 18,326 5.93
Certificates of deposit and individual
retirement accounts under $100,000 42,746 5.57 2,381 38,416 5.45
---------- --------- ---------- ----------- ---------
Total interest-bearing deposits 100,994 4.87 4,921 87,660 4.66
Demand 14,997 - - 12,413 -
---------- --------- ---------- ----------- ---------
Total deposits 115,991 4.24 4,921 100,073 4.08
---------- --------- ---------- ----------- ---------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 729 5.62 41 409 5.62
---------- --------- ---------- ----------- ---------
Total deposits and
borrowed funds 116,720 4.25 4,962 100,482 4.09
---------- --------- ---------- ----------- ---------
Other liabilities 1,321 1,234
Stockholders' equity 8,981 7,680
---------- -----------
Total liabilities and
stockholders' equity $ 127,022 109,396
========== ===========
Net interest income 5,864
==========
Net yield on earning assets 4.96% 5.26%
========= ==========
Net interest spread 4.90% 5.20%
========= ==========
<CAPTION>
-------------------------------------------------
1997/1996 CHANGE
-------------- ----------------------------------
Income/ Due to Due to
Expense Volume Rate Total
-------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts 249 2 (7) (5)
Money market demand accounts 308 169 41 210
Other savings accounts 349 (44) 13 (31)
Certificates of deposit and individual
retirement accounts $100,000 and over 1,087 388 (15) 373
Certificates of deposit and individual
retirement accounts under $100,000 2,094 236 51 287
---------- --------
Total interest-bearing deposits 4,087 621 213 834
Demand - -
---------- --------
Total deposits 4,087 649 185 834
---------- --------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 22 19 - 19
---------- --------
Total deposits and
borrowed funds 4,109 664 189 853
---------- --------
Other liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income 5,358 506
========== ========
Net yield on earning assets
Net interest spread
</TABLE>
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
--------------------------------------------------------------------------
1996 1995
------------------------------------------- ------------------------------
Average Interest Income/ Average Interest
Balance Rate Expense Balance Rate
-------------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Loans, net of unearned interest $ 59,685 10.87% 6,487 49,766 11.06%
Investment securities - taxable 33,188 6.73 2,234 33,215 6.45
-------------- ----------- ---------- ----------- ----------
Investment securities - tax exempt 7,620 5.83 444 5,802 6.12
Taxable equivalent adjustment - 3.00 229 - 3.15
-------------- ----------- ---------- ----------- ----------
Total tax-exempt investment securities 7,620 8.83 673 5,802 9.27
-------------- ----------- ---------- ----------- ----------
Total investment securities 40,808 7.12 2,907 39,017 6.87
-------------- ----------- ---------- ----------- ----------
Federal funds sold 1,383 5.35 73 918 5.66
Interest-bearing deposits in banks - - - 78 6.41
-------------- ----------- ---------- ----------- ----------
Total earning assets 101,876 9.29 9,467 89,779 9.18
-------------- ----------- ---------- ----------- ----------
Cash and due from banks 3,487 3,413
Allowance for possible loan losses (818) (685)
Bank premises and equipment 2,904 2,535
Other assets 1,947 1,159
-------------- -------------
Total assets $ 109,396 96,201
============== =============
<CAPTION>
--------------------------------------------
1996/1995 CHANGE
---------- ---------------------------------
Income/ Due to Due to
Expense Volume Rate Total
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Loans, net of unearned interest 5,505 1,097 (115) 982
Investment securities - taxable 2,143 (2) 93 91
----------- --------
Investment securities - tax exempt 354 111 (21) 90
Taxable equivalent adjustment 183 58 (12) 46
----------- --------
Total tax-exempt investment securities 537 169 (33) 136
----------- --------
Total investment securities 2,680 123 104 227
-----------
Federal funds sold 52 26 (5) 21
Interest-bearing deposits in banks 5 (5) - (5)
----------- --------
Total earning assets 8,242 1,110 115 1,225
----------- --------
Cash and due from banks
Allowance for possible loan losses
Bank premises and equipment
Other assets
Total assets
</TABLE>
85
<PAGE> 96
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-------------------------------------------------------------------------
1996 1995
------------------------------------------- -----------------------------
Average Interest Income/ Average Interest
Balance Rate Expense Balance Rate
--------------- ----------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts $ 10,202 2.44% 249 10,328 2.56%
Money market demand accounts 7,389 4.17 308 5,143 3.89
Other savings accounts 13,327 2.62 349 12,995 2.77
Certificates of deposit and individual
retirement accounts $100,000 and over 18,326 5.93 1,087 13,796 6.16
Certificates of deposit and individual
retirement accounts under $100,000 38,416 5.45 2,094 35,619 5.46
-------------- ----------- ---------- ----------- ----------
Total interest-bearing
deposits 87,660 4.66 4,087 77,881 4.65
Demand 12,413 - - 11,196 -
-------------- ----------- ---------- ----------- ----------
Total deposits 100,073 4.08 4,087 89,077 4.06
-------------- ----------- ---------- ----------- ----------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 409 5.62 22 245 6.12
-------------- ----------- ---------- ----------- ----------
Total deposits and
borrowed funds 100,482 4.09 4,109 89,322 4.07
-------------- ----------- ---------- ----------- ----------
Other liabilities 1,234 686
Stockholders' equity 7,680 6,193
-------------- -------------
Total liabilities and
stockholders' equity $ 109,396 96,201
============== =============
Net interest income 5,358
============
Net yield on earning assets 5.26% 5.13%
=========== ==========
Net interest spread 5.20% 5.11%
=========== ==========
<CAPTION>
-------------------------------------------------
1996/1995 CHANGE
-------------- ----------------------------------
Income/ Due to Due to
Expense Volume Rate Total
-------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts 264 (3) (12) (15)
Money market demand accounts 200 87 21 108
Other savings accounts 360 9 (20) (11)
Certificates of deposit and individual
retirement accounts $100,000 and over 850 279 (42) 237
Certificates of deposit and individual
retirement accounts under $100,000 1,944 152 (2) 150
------------ ----------
Total interest-bearing
deposits 3,618 455 14 469
Demand -
------------ ----------
Total deposits 3,618 446 23 469
------------ ----------
Federal funds purchased, securities
sold under repurchase agreements
and short-term debt 15 10 (3) 7
------------ ----------
Total deposits and
borrowed funds 3,633 454 22 476
------------ ----------
Other liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income 4,609 749
============ ==========
Net yield on earning assets
Net interest spread
</TABLE>
86
<PAGE> 97
INVESTMENT PORTFOLIO
Securities at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
---------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 2,733 117 - 2,850
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
government agencies
and corporations $ 11,600 87 1 11,686
Obligations of state and
political subdivisions 7,680 499 - 8,179
Corporate and
other securities 403 - - 403
Mortgage-backed
securities 25,651 175 73 25,753
---------------- ---------------- ---------------- ----------------
$ 45,334 761 74 46,021
================ ================ ================ ================
</TABLE>
87
<PAGE> 98
Securities at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 1,527 3 - 1,530
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
government agencies
and corporations $ 11,581 103 80 11,604
Obligations of state and
political subdivisions 7,145 256 4 7,397
Corporate and
other securities 341 - - 341
Mortgage-backed
securities 18,284 176 112 18,348
---------------- ---------------- ---------------- ----------------
$ 37,351 535 196 37,690
================ ================ ================ ================
</TABLE>
The following schedule details the estimated maturities and weighted
average yields of securities of the Bank at December 31, 1997:
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
Held-To-Maturity Securities Cost Value Yields
--------------------------- ---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Obligations of states and political subdivisions*:
Less than one year $ 127 128 7.31%
One to five years 1,178 1,213 8.33
Five to ten years 1,428 1,509 8.45
---------------- ---------------- ----------------
Total held-to-maturity
securities $ 2,733 2,850 8.34%
================ ================ ================
</TABLE>
* Weighted average yield is stated on a tax-equivalent basis,
assuming a weighted average federal income tax rate of 34%.
88
<PAGE> 99
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
Available-For-Sale Securities Cost Value Yields
----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Obligations of U.S. Treasury and
other U.S. Government agencies
and corporations, including
mortgage-backed securities:
Less than one year $ 5,455 5,484 6.64%
One to five years 17,295 17,416 6.64
Five to ten years 7,496 7,521 6.96
More than ten years 7,005 7,018 6.64
---------------- ---------------- ----------------
Total securities of
U.S. Treasury and other
U.S. Government agencies
and corporations 37,251 37,439 6.71
---------------- ---------------- ----------------
Obligations of states and political subdivisions*:
Less than one year 202 203 7.35
One to five years 1,308 1,393 8.55
Five to ten years 1,508 1,649 8.44
More than ten years 4,662 4,934 8.40
---------------- ---------------- ----------------
Total obligations of states
and political subdivisions 7,680 8,179 8.41
---------------- ---------------- ----------------
Other:
Federal Home Loan Bank stock 403 403 -
---------------- ---------------- ----------------
Total available-for-sale
securities $ 45,334 46,021 6.94%
================ ================ ================
</TABLE>
* Weighted average yield is stated on a tax-equivalent basis, assuming a
weighted average federal income tax rate of 34%.
89
<PAGE> 100
LOAN PORTFOLIO
Loan Types
The following schedule details the loans of Bank at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
In Thousands
------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Commercial, financial and agricultural $ 24,590 23,537
Real estate - construction 6,011 3,444
Real estate - mortgage 30,094 24,665
Consumer 16,018 15,486
---------------- ----------------
Total loans 76,713 67,132
Less unearned interest 113 71
---------------- ----------------
Total loans, net of unearned interest 76,600 67,061
Less allowance for possible loan losses 958 882
---------------- ----------------
Net loans $ 75,642 66,179
================ ================
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule details maturities and sensitivity to interest
rates changes for commercial loans of Bank at December 31, 1997.
<TABLE>
<CAPTION>
1 Year to
Less Than Less Than After 5
1 Year * 5 Years Years Total
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Maturity Distribution:
Commercial, financial
and agricultural $ 11,864 10,093 2,633 24,590
Real estate -
construction 6,011 - - 6,011
---------------- ---------------- ---------------- ----------------
$ 17,875 10,093 2,633 30,601
================ ================ ================ ================
Interest-Rate Sensitivity:
Fixed interest rates $ 2,345 10,093 2,633 15,071
Floating or adjustable
interest rates 15,530 - - 15,530
---------------- ---------------- ---------------- ----------------
Total commercial, financial
and agricultural loans and
real estate - construction
loans $ 17,875 10,093 2,633 30,601
================ ================ ================ ================
</TABLE>
* Includes demand loans, bankers acceptances, commercial paper and overdrafts.
90
<PAGE> 101
Risk Elements
The following schedule details selected information as to
non-performing loans of Bank at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
In Thousands
------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Non-accrual loans:
Commercial, financial and agricultural $ 57 -
Real estate - construction - -
Real estate - mortgage - -
Consumer 25 106
Lease financing receivable 42 -
---------------- ----------------
Total non-accrual $ 124 106
================ ================
Loans 90 days past due:
Commercial, financial and agricultural $ 52 18
Real estate - construction - -
Real estate - mortgage - -
Consumer 3 13
Lease financing receivable - -
---------------- ----------------
Total loans 90 days past due $ 55 31
================ ================
Renegotiated loans:
Commercial, financial and agricultural $ - -
Real estate - construction - -
Real estate - mortgage - -
Consumer - -
Lease financing receivable - -
---------------- ----------------
Total renegotiated loans past due $ - -
================ ================
Loans current - considered uncollectible $ - -
================ ================
Total non-performing loans $ 179 137
================ ================
Total loans, net of unearned interest $ 76,600 67,061
================ ================
Percent of total loans outstanding,
net of unearned interest 0.23% 0.20%
================ ================
Other real estate $ 70 -
================ ================
</TABLE>
91
<PAGE> 102
The accrual of interest income is discontinued when it is determined
that collection of interest is less than probable or the collection of any
amount of principal is doubtful. The decision to place a loan on a non-accrual
status is based on an evaluation of the borrower's financial condition,
collateral liquidation value, economic and business conditions and other factors
that affect the borrower's ability to pay. At the time a loan is placed on a
non-accrual status, the accrued but unpaid interest is also evaluated as to
collectibility. If collectibility is doubtful, the unpaid interest is charged
off. Thereafter, interest on non-accrual loans is recognized only as received.
Loans on non-accrual status totaled $124,000 and $106,000 at December 31, 1997
and 1996, respectively.
At December 31, 1997, loans totaling $1,084,000 were included in the
Bank's internal classified loan list. Of these loans, $614,000 are real estate
and $470,000 are consumer. The collateral valuations received by management
securing these loans total approximately $988,000 ($650,000 related to real
estate, $338,000 related to consumer loans). Such loans are listed as classified
when information obtained about possible credit problems of the borrower has
prompted management to question the ability of the borrower to comply with the
repayment terms of the loan agreement. The loan classifications do not represent
or result from trends or uncertainties which management expects will materially
impact future operating results, liquidity or capital resources.
At December 31, 1997, other real estate totaled $70,000 and consisted
of one commercial property. There was no other real estate at December 31, 1996.
Management is attempting to sell the property included in other real estate at
December 31, 1997 and no loss is anticipated thereon.
Other Interest Bearing Assets
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at December
31, 1997 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
92
<PAGE> 103
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule details selected information related to the
allowance for possible loan loss account of the Bank at December 31, 1997 and
1996 and the years then ended.
<TABLE>
<CAPTION>
In Thousands Except Percentages
---------------------------------
1997 1996
-------------- -----------
<S> <C> <C>
Allowance for possible loan losses at beginning of period $ 882 745
------------- -----------
Less: net loan charge-offs:
Charge-offs:
Commercial, financial and agricultural 65 58
Real estate - construction - -
Real estate - mortgage 19 1
Consumer 112 61
Lease financing - -
------------- -----------
196 120
------------- -----------
Recoveries:
Commercial, financial and agricultural 25 9
Real estate - construction - -
Real estate - mortgage 3 3
Consumer 12 23
Lease financing - -
------------- -----------
40 35
------------- -----------
Net loan charge-offs 156 85
------------- -----------
Provision for possible loan losses charged to expense 232 222
------------- -----------
Allowance for possible loan losses at end of period $ 958 882
============= ===========
Total loans, net of unearned interest, at end of year $ 76,600 67,061
============= ===========
Average total loans outstanding,
net of unearned interest, during year $ 70,558 59,685
============= ===========
Net charge-offs as a percentage of average
total loans outstanding, net of unearned interest,
during year 0.22% 0.14%
============== ===========
Ending allowance for possible loan losses as a
percentage of total loans outstanding
net of unearned interest, at end of year 1.25% 1.32%
============== ===========
</TABLE>
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible. The provision for possible loan losses charged to
operating expense is based on past loan loss experience and other factors which,
in management's judgment, deserve current recognition in estimating possible
loan losses. Such other factors considered by management include growth and
composition of the loan portfolio, review of specific loan problems, the
relationship of the allowance for possible loan losses to outstanding loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic conditions
that may affect the borrower's ability to pay.
Management conducts a continuous review of all loans that are
delinquent, previously charged down or loans which are determined to be
potentially uncollectible. Loan classifications are reviewed periodically by a
person independent of the lending function. The Board of Directors periodically
reviews the adequacy of the allowance for possible loan losses.
The breakdown of the allowance by loan category is based in part on
evaluations of specific loans, past history and economic conditions within
specific industries or geographic areas. Accordingly, since all of these
conditions are subject to change, the allocation is not necessarily indicative
of the breakdown of the future losses.
93
<PAGE> 104
The following detail provides a breakdown of the allocation of the
allowance for possible loan losses:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------- ----------------------------
Percent Percent
of Loans of Loans
In Each In Each
Category Category
In To Total In To Total
Thousands Loans Thousands Loans
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 467 32 % $ 396 35 %
Real estate - construction 17 8 15 5
Real estate - mortgage 137 39 161 37
Consumer 337 21 310 23
----------- ---------- ---------- ----------
$ 958 100 % $ 882 100 %
=========== ========== ========== ==========
</TABLE>
94
<PAGE> 105
DEPOSITS
The average amounts and average interest rates for deposits for 1997
and 1996 are detailed in the following schedule:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ------------------------------
Average Average
Balance Balance
--------------- Average ------------- Average
In Thousands Rate In Thousands Rate
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 14,997 - % 12,413 - %
Negotiable order of withdrawal
accounts 10,284 2.37 10,202 2.44 %
Money market demand accounts 11,448 4.52 7,389 4.17 %
Other savings accounts 11,640 2.73 13,327 2.62 %
Certificates of deposit and
individual retirement accounts
$100,000 and over 24,876 5.87 18,326 5.93 %
Certificates of deposit and
individual retirement accounts
under $100,000 42,746 5.57 38,416 5.45 %
------------- ----------- ----------- ---------
$ 115,991 4.24 % $ 100,073 4.08 %
============= =========== =========== =========
</TABLE>
The following schedule details the maturities of certificates of
deposit and individual retirement accounts of $100,000 and over at December 31,
1997.
<TABLE>
<CAPTION>
Total
-------------
In Thousands
<S> <C>
Less than three months $ 8,247
Three to six months 6,247
Six to twelve months 11,537
More than twelve months 1,410
------------
$ 27,441
============
</TABLE>
95
<PAGE> 106
RETURN ON EQUITY AND ASSETS
The following schedule details selected key ratios of the Bank at
December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Return on assets
(Net income divided by average total assets) 1.34 % 1.41 % 1.28 %
Return on equity
(Net income divided by average equity) 19.00 % 20.04 % 19.91 %
Dividend payout ratio
(Dividends declared per share divided
by net income per share) 20.88 % 23.15 % 28.90 %
Equity to assets ratio
(Average equity divided by average
total assets) 7.07 % 7.02 % 6.44 %
Leverage capital ratio
(Equity divided by fourth quarter
average total assets, excluding the
net unrealized gain or loss on available-
for-sale securities) 7.07 % 7.46 % 6.79 %
</TABLE>
The minimum leverage capital ratio required by the regulatory agencies
is 4%.
Beginning January 1, 1991, new risk-based capital guidelines were
adopted by regulatory agencies. Under these guidelines, a credit risk is
assigned to various categories of assets and commitments ranging from 0% to 100%
based on the risk associated with the asset.
96
<PAGE> 107
The following schedule details the Bank's risk-based capital at
December 31, 1997 (excluding the net unrealized gain on available-for-sale
securities which is shown as an addition to stockholders' equity in the
consolidated financial statements.)
<TABLE>
<CAPTION>
In Thousands
-------------
<S> <C>
Tier I capital:
Stockholders' equity, excluding the net
unrealized gain on available-for-sale
securities $ 9,506
Tier II capital:
Allowable allowance for loan losses
(limited to 1.25% of risk-weighted
assets) 958
-------------
Total capital $ 10,464
=============
Risk-weighted assets $ 85,451
=============
Risk-based capital ratios:
Tier I capital ratio 11.12 %
=============
Total risk-based capital ratio 12.25 %
=============
</TABLE>
The Bank is required to maintain a total risk-based capital to risk
weighted asset ratio of 8% and a Tier I capital to risk weighted asset
ratio of 4%. At December 31, 1997, the Bank is in compliance with these
requirements.
97
<PAGE> 108
The following schedule details the Bank's interest rate sensitivity at
December 31, 1997:
<TABLE>
<CAPTION>
(In Thousands) Repricing Within
------------------------------------------------------------------------------
Total 0-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
------------ ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
interest $ 76,600 4,604 7,049 5,686 14,648 44,613
Securities 48,754 673 1,209 3,568 7,823 35,481
Loans held for sale 540 540 - - - -
----------- ----------- ----------- ----------- ------------- -----------
Total earning assets 125,894 5,817 8,258 9,254 22,471 80,094
----------- ----------- ----------- ----------- ------------- -----------
Interest-bearing liabilities:
Negotiable order of
withdrawal accounts 10,811 10,811 - - - -
Money market demand
accounts 15,040 15,040 - - - -
Savings deposits 9,006 9,006 - - - -
Certificates of deposit,
$100,000 and over 21,082 2,177 4,886 4,319 9,251 449
Certificates of deposit,
under $100,000 41,840 4,780 7,825 12,373 14,668 2,194
Individual retirement
accounts 9,518 387 806 1,688 3,630 3,007
Federal funds purchased 375 375 - - - -
----------- ----------- ----------- ----------- ------------- -----------
Total interest bearing
liabilities 107,672 42,576 13,517 18,380 27,549 5,650
----------- ----------- ----------- ----------- ------------- -----------
Interest-sensitivity gap $ 18,222 (36,759) (5,259) (9,126) (5,078) 74,444
=========== =========== =========== =========== ============= ===========
Cumulative gap (36,759) (42,018) (51,144) (56,222) 18,222
=========== =========== =========== ============= ===========
Interest-sensitivity gap
as % of total assets (27.3) (3.9) (6.8) (3.8) 55.3
=========== =========== =========== ============= ===========
Cumulative gap as % of
total assets (27.3) (31.2) (38.0) (41.8) 13.5
=========== =========== =========== ============= ===========
</TABLE>
The Bank presently maintains a liability sensitive position over the
next twelve months. However, management expects that liabilities of a
demand nature will renew and that it will not be necessary to replace
them with significantly higher cost funds.
98
<PAGE> 109
ADDITIONAL INFORMATION
DISSENTERS' APPRAISAL RIGHTS
CSB. If the Holding Company Merger is consummated, any CSB Shareholder
who properly perfects his or her statutory dissenters' rights of appraisal in
accordance with Sections 48-23-202 and 48-23-204 of the TBCA may be entitled to
receive in cash the fair value of such CSB Shareholder's shares of CSB Common
Stock determined immediately prior to the Holding Company Merger, excluding any
appreciation or depreciation in value in anticipation of the Holding Company
Merger. The following is a summary of Section 48-23-101, et seq., of the TBCA
and the procedures for CSB Shareholders dissenting from the Holding Company
Merger and perfecting such dissenters' rights of appraisal. This summary is
qualified in its entirety by reference to Section 48-23-101, et seq., of the
TBCA, which is reprinted in full as Appendix C to this Prospectus/Proxy
Statement. FAILURE TO STRICTLY COMPLY WITH THE PROCEDURES SET FORTH IN SECTION
48-23-101, ET SEQ., OF THE TBCA MAY RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Any CSB Shareholder entitled to vote on the Holding Company Merger has
the right to receive payment of the fair value of his or her shares of CSB
Common Stock upon compliance with the TBCA. A CSB Shareholder may not dissent as
to less than all of the shares that he or she beneficially owns. A nominee or
fiduciary may not dissent on behalf of any beneficial owner as to less than all
of the shares of such beneficial owner held of record by such nominee or
fiduciary. A beneficial owner asserting dissenters' rights to shares held on his
or her behalf must submit to CSB the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts dissenters'
rights. Any CSB Shareholder intending to enforce this right must not vote in
favor of the Holding Company Merger and must file a written notice of his or her
intent to demand payment for his or her shares (the "OBJECTION NOTICE") with the
Secretary of CSB either before the CSB Special Meeting or before the vote is
taken at the CSB Special Meeting. The Objection Notice must state that the CSB
Shareholder intends to demand payment for his or her shares of CSB Common Stock
if the Holding Company Merger is effected. A vote against approval of the
Holding Company Merger will not, in and of itself, constitute an Objection
Notice satisfying the requirements of the TBCA. A failure to vote will not
constitute a waiver of appraisal rights as long as the requirements of the TBCA
are complied with. However, any CSB Shareholder who executes a proxy card and
who desires to effect his or her appraisal rights must mark the proxy card
"against" the proposal relating to the Holding Company Merger because if the
proxy card is left blank, it will be voted "for" the proposal relating to the
Holding Company Merger.
If the Holding Company Merger is approved, each CSB Shareholder who has
filed an Objection Notice will be notified by CSB of such approval within ten
days of the CSB Special Meeting (the "DISSENTERS' NOTICE"). The Dissenters'
Notice will (i) state where dissenting CSB Shareholders must (a) send the
Payment Demand (as defined below) and where and when they must (b) deposit their
common stock certificates (the "CERTIFICATES"), (ii) inform holders of
uncertified shares of the extent of any restrictions of the transferability of
such shares, (iii) be accompanied by a form for demanding payment that includes
the date of the first announcement to the news media or to CSB Shareholders of
the terms of the proposed Holding Company Merger, (iv) set a date by which CSB
must receive the Payment Demand, which may not be fewer than one nor more than
two months after the date the Dissenters' Notice is delivered, and (v) be
accompanied by a copy of Sections 48-23-101 through 48-23-302 of the TBCA.
Within the time prescribed in the Dissenters' Notice, a CSB Shareholder electing
to dissent must make a demand for payment (the "PAYMENT DEMAND"), certify
whether he or she acquired beneficial ownership of the shares before May 20,
1998 (the date of the first public announcement of the principal terms of the
Agreement), and deposit his or her Certificates in accordance with the terms of
the Dissenters' Notice. Upon filing the Payment Demand and depositing the
Certificates, the CSB Shareholder will retain all other rights of a CSB
Shareholder until these rights are canceled or modified by consummation of the
Holding Company Merger. A Payment Demand may not be withdrawn unless CSB
consents.
As soon as the Holding Company Merger is consummated, or upon receipt
of a Payment Demand, CSB shall, pursuant to Section 48-23-206, pay to each
dissenting CSB Shareholder who has complied with the requirements of Section
48-23-204 of the TBCA the amount that CSB estimates to be the fair value of the
shares of CSB Common Stock, held by such CSB Shareholder, plus accrued interest.
Section 48-23-206 of the TBCA requires the payment to be accompanied by (i)
certain of CSB's financial statements, (ii) a statement of CSB's estimate of
fair value of the shares and explanation of how the interest was calculated,
(iii) notification of rights to demand payment, and (iv) a copy of Sections
48-23-101 through 48-23-302 of the TBCA. CSB may delay any payments with respect
to any shares (the "AFTER-ACQUIRED SHARES") held by a dissenting CSB Shareholder
which were not held by such CSB Shareholder on May 20, 1998, the date of the
first public announcement of the terms of the Agreement. When payments are so
withheld, CSB must send to the holder of the after-acquired shares after the
Holding Company Merger an offer to pay the holder an amount equal to CSB's
estimate of their fair value plus accrued interest, together with an explanation
of the calculation of interest and a statement of the holder's right to demand
payment under Section 48-23-209.
If the Holding Company Merger is not consummated with two months after
the date set for demanding payment and depositing Certificates, CSB shall return
the deposited Certificates. If, after returning deposited Certificates, the
Holding Company Merger is consummated, CSB must send a new Dissenters' Notice
and repeat the payment demand procedure.
99
<PAGE> 110
If the dissenting CSB Shareholder believes that the amount paid by CSB
or offered by CSB is less than the fair value of his shares or that the interest
due is calculated incorrectly, or if CSB fails to make payment (or, if the
Holding Company Merger has not been consummated, CSB does not return the
deposited Certificates or release the transfer restrictions imposed on
uncertificated shares) within two months after the date set in the Dissenters'
Notice, then the dissenting CSB Shareholder may, within one month after CSB made
or offered payment for the shares or failed to pay for the shares, notify CSB in
writing of his own estimate of the fair value of such shares (including interest
due) and demand payment of such estimate (less any payment previously received).
Failure to notify CSB in writing of a demand for payment within one month after
CSB made or offered payment for such shares will constitute a waiver of the
right to demand payment.
If CSB and the dissenting CSB Shareholder cannot agree on a fair price
two months after CSB receives such a demand for payment, the TBCA provides that
CSB will institute judicial proceedings in the appropriate court, as specified
in the TBCA (the "COURT"), to fix (i) the fair value of the shares immediately
before consummation of the Holding Company Merger, excluding any appreciation or
depreciation in anticipation of the Holding Company Merger, and (ii) the accrued
interest. The "fair value" of the CSB Common Stock could be more than, the same
as, or less than the fair market value of the First American Common Stock to be
issued to the dissenting CSB Shareholder in the Holding Company Merger. CSB must
make all dissenters whose demands remain unsettled parties to the proceeding and
all such parties must be served with a copy of the petition. The Court may, in
its discretion, appoint an appraiser to receive evidence and recommend a
decision on the question of fair value. The Court is required to issue a
judgment for the amount, if any, by which the fair value of the shares, as
determined by the Court, plus accrued interest, exceeds the amount paid by CSB
or for the fair value, plus accrued interest, of his or her after-acquired
shares for which CSB elected to withhold payment. If CSB does not institute such
proceeding within such two month period, CSB shall pay each dissenting CSB
Shareholder whose demand remains unsettled the respective amount demanded by
each CSB Shareholder.
The Court will assess the costs and expenses of such proceeding
(including reasonable compensation for and the expenses of the appraiser
appointed by the Court) against CSB, except that the court may assess such costs
and expenses as it deems appropriate against any and all of the dissenting CSB
Shareholders if it finds that their demand for additional payment was arbitrary,
vexatious or otherwise not in good faith in demanding payment from CSB. The
Court may also assess the fees and expenses of counsel and experts for the
respective parties against (i) CSB, if the Court finds that CSB did not comply
with the TBCA, or (ii) either CSB or the Dissenting Shareholders, if either
acted arbitrarily, vexatiously, or otherwise not in good faith. If the Court
finds that the services of counsel for any dissenting CSB Shareholders were of
substantial benefit to other dissenting CSB Shareholders, the court may award
the counsel reasonable attorneys fees to be paid out of the amounts awarded to
the dissenting CSB Shareholders who were benefited.
Bank. Bank Shareholders are entitled to dissenters' rights under the
National Bank Act. Section 215a of the National Bank Act provides that a Bank
Shareholder wishing to perfect his or her right to dissent from the Bank Merger
must either vote against the Bank Merger or give notice in writing, to the
presiding officer, at or prior to the meeting of Bank Shareholders to vote on
the transaction, that the shareholder dissents from the Bank Merger. Such a
dissenting shareholder shall be entitled to receive the value of the shares so
held when such merger shall be approved, upon written request made to the
receiving national association at any time before 30 days after the date of
consummation of the merger, accompanied by the surrender of stock certificates
representing the dissenting shares.
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective time of the merger, by an appraisal made by a
committee of three persons composed of (1) one selected by the vote of the
holders of a majority of the stock, the owners of which are entitled to payment
in cash; (2) one selected by the directors of the receiving association; and (3)
one selected by the two so selected. The valuation agreed upon by any two of the
three appraisers shall govern. If the value so fixed shall not be satisfactory
to any dissenting shareholder who has requested payment, that shareholder may,
within five days after being notified of the appraised value of his shares,
appeal to the OCC who shall cause a reappraisal to be made which shall
be final and binding as to the value of the shares of the appellate.
If, within 90 days from the date of consummation of the Bank Merger,
for any reason one or more of the appraisers is not selected as provided in the
statute, or the appraisers fail to determine the value of such shares, the OCC
shall, upon written request of any interested party, cause an appraisal to be
made that shall be final and binding on all the parties. The expenses of the OCC
in making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders, had they not requested payment, shall be sold by the
receiving association at an advertised public auction and the receiving
association shall have the right to purchase any of such shares at such public
auction if it is the highest bidder therefor, for the purpose of reselling such
shares within 30 days thereafter to such person or persons at such price not
less than par as its Board of Directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such a sale price shall be paid to such
dissenting shareholders.
The foregoing summary of the applicable provisions of the National Bank
Act is not intended to be a complete statement of such provisions and is
qualified in its entirety by reference to such section which is included hereto
as Appendix D.
100
<PAGE> 111
LEGAL OPINION
The legality of the First American Common Stock to be issued in
connection with the Mergers will be passed upon by Mary Neil Price, Esq.,
General Counsel of First American. As of August 24, 1998, Ms. Price beneficially
owned 16,646.995 shares of First American Common Stock.
EXPERTS
The supplemental consolidated financial statements of First American
Corporation and subsidiaries as of December 31, 1997 and December 31, 1996, and
for each of the years in the three-year period ended December 31, 1997, have
been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The supplemental consolidated financial statements give retroactive
effect to the merger of First American Corporation and Deposit Guaranty Corp. on
May 1, 1998 which has been accounted for as a pooling of interests. Generally
accepted accounting principles proscribe giving effect to a consummated business
transaction accounted for by the pooling of interest method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they became
the historical financial statements of First American Corporation and
subsidiaries after financial statements covering the date of consummation of the
business combination were issued.
With respect to the unaudited interim financial information for the
periods ended June 30, 1998 and 1997, and March 31, 1998 and 1997 incorporated
by reference herein, the independent certified public accountants have reported
that they applied limited procedures in accordance with professional standards
for review of such information. However, their separate reports included in
First American's quarterly reports on Form 10-Q for the quarters ended June 30,
1998 and March 31, 1998, 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 KPMG Peat Marwick LLP's
reports on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
reports on the unaudited interim financial information because those reports are
not "reports" 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 financial statements of CSB and subsidiaries as of
December 31, 1997 and December 31, 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included in this
Prospectus/Proxy Statement in reliance upon the report of Maggart & Associates,
P.C., independent certified public accountants, also included herein, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Bank and subsidiaries as of
December 31, 1997 and December 31, 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included in this
Prospectus/Proxy Statement in reliance upon the report of Maggart & Associates,
P.C., independent certified public accountants, also included herein, and upon
the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, neither the CSB
Board nor Bank Board knows of any matters that will be presented for
consideration at the CSB Special Meeting or the Bank Special Meeting, other than
as described in this Prospectus/Proxy Statement. If any other matters should
properly come before the meetings or any adjournments or postponements thereof
and be voted upon, the enclosed proxies will be deemed to confer discretionary
authority on the individuals named as proxies therein to vote the shares
represented by such proxies as to any such matters. The persons named as proxies
intend to vote or not to vote in accordance with the recommendation of the
management of CSB or Bank, as the case may be.
WHERE YOU CAN FIND MORE INFORMATION
First American has filed with the Commission a Registration Statement
under the Securities Act that registers the distribution to CSB Shareholders and
Bank Shareholders of the shares of First American Common Stock to be issued in
connection with the Mergers (the "REGISTRATION STATEMENT"). The Registration
Statement, including the attached exhibits and schedules, contain additional
relevant information about First American and the First American Common Stock.
The rules and regulations of the Commission allow us to omit certain information
included in the Registration Statement from this Prospectus/Proxy Statement.
In addition, First American files reports, proxy statements and other
information with the Commission under the Exchange Act. You may read and copy
this information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
101
<PAGE> 112
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates.
The Commission also maintains an Internet world wide web site that
contains reports, proxy statements and other information about issuers, like
First American, who file electronically with the Commission. The address of that
site is http://www.sec.gov.
You can also inspect reports, proxy statements and other information
about First American at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
The Commission allows First American to "incorporate by reference"
information into this Prospectus/Proxy Statement. This means that First American
can disclose important information to you by referring you to another document
filed separately with the Commission. The information incorporated by reference
is considered to be a part of this Prospectus/Proxy Statement, except for any
information that is superseded by other information that is set forth directly
in this document.
This Prospectus/Proxy Statement incorporates by reference the documents
set forth below that First American has previously filed with the Commission.
They contain important information about First American and its financial
condition.
<TABLE>
<CAPTION>
FIRST AMERICAN SEC FILINGS PERIOD
-------------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997, as filed March 27, 1998
Quarterly Reports on Form 10-Q Quarters ended:
- March 31, 1998, as filed April 30, 1998
- June 30, 1998, as filed August 11, 1998
The description of the First American Common
Stock and the First American Rights
contained in registration statements filed
pursuant to Section 12 of the Exchange Act,
including any amendment or reports filed for
the purpose of updating that description
Current Reports on Form 8-K Filed:
- May 11, 1998
- July 14, 1998
Annual Report on Form 11-K Year ended December 31, 1997, as filed June 30, 1998
</TABLE>
First American incorporates by reference additional documents that it
may file with the Commission between the date of this Prospectus/Proxy Statement
and the date of the CSB Special Meeting and the Bank Special Meeting. These
documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
First American has supplied all information contained or incorporated
by reference in this Prospectus/Proxy Statement relating to First American and
FANB. CSB has supplied all information contained in this Prospectus/Proxy
Statement relating to CSB and Bank.
You can obtain any of the documents incorporated by reference in this
document through First American, or from the Commission through the Commission's
Internet world wide web site at the address described above. Documents
incorporated by reference are available from the companies without charge,
excluding any exhibits to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in this Prospectus/Proxy Statement. You
can obtain documents incorporated by reference in this Prospectus/Proxy
Statement by requesting them in writing or by telephone from First American at
the following address:
Joe Powell
Director Of Investor Relations
First American Corporation
First American Center
Nashville, Tennessee 37237-0700
Telephone (615) 748-2455
102
<PAGE> 113
If you would like to request documents from First American, please do
so by September 18, 1998 to receive them before the CSB Special Meeting or the
Bank Special Meeting. If you request any incorporated documents from us, we will
mail them to you by first class mail, or another equally prompt means, within
one business day after we receive your request.
You should rely only on the information contained in or incorporated by
reference in this Prospectus/Proxy Statement in considering how to vote your
shares at the CSB Special Meeting or the Bank Special Meeting. Neither First
American nor CSB nor Bank has authorized anyone to provide you with information
that is different from the information in this document. This Prospectus/Proxy
Statement is dated August 27, 1998. You should not assume that the information
contained in this document is accurate as of any date other than that date.
Neither the mailing of this Prospectus/Proxy Statement nor the issuance of First
American Common Stock in the Mergers shall create any implication to the
contrary.
If you live in a jurisdiction where it is unlawful for First American
to offer its securities to you, this Prospectus/Proxy Statement does not
constitute an offer for you to purchase or receive First American Common Stock.
THE SHARES OF FIRST AMERICAN COMMON STOCK THAT YOU WOULD RECEIVE IN THE
MERGER ARE NOT DEPOSITS OF ANY BANK AND THEY ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Prospectus/Proxy Statement and documents incorporated herein by
reference contain certain forward-looking statements about the financial
condition, results of operations and business of First American, CSB and Bank.
The words "believes," "expects," "anticipates," "intends," "estimates," "plans"
or similar expressions, indicate we are making forward-looking statements.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. The future results and
shareholder value of First American may differ materially from those expressed
in these forward-looking statements. Many of the factors that could influence or
determine actual results are unpredictable and not within the control of First
American. In addition, First American, CSB and Bank do not intend to, and are
not obligated to, update these forward-looking statements after we distribute
this Prospectus/Proxy Statement, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date. For
all of these statements, First American, CSB and Bank claim the protection of
the safe harbor for forward-looking statements provided in the Private
Securities Litigation Reform Act of 1995.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) competitive pressure among financial services
providers in the mid-south region of the United States or in the financial
services industry generally increases significantly; (ii) interest rates change
in such a way as to reduce First American's margins; (iii) general economic or
monetary conditions, either nationally or regionally, are less favorable than
expected, resulting in a deterioration in credit quality or a diminished demand
for First American's services and products; (iv) changes in laws or government
rules, or the way in which courts interpret these laws or rules, adversely
affect First American's business; (v) business conditions, inflation or
securities markets undergo significant change; and (vi) disruptions occur in the
operations of First American or any of its subsidiaries or any other
governmental or private entity as a result of the "Year 2000 Problem."
103
<PAGE> 114
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS OF CSB FINANCIAL
CORPORATION AND SUBSIDIARIES
<TABLE>
Page
----
<S> <C>
Consolidated Financial Statements for Six Months Ended June 30, 1998 and 1997.................... F-2
- -----------------------------------------------------------------------------
Consolidated Balance Sheets...................................................................... F-2
Consolidated Statements of Earnings.............................................................. F-3
Consolidated Statements of Comprehensive Earnings................................................ F-4
Consolidated Statements of Cash Flows............................................................ F-5
Notes to Consolidated Financial Statements....................................................... F-7
Consolidated Financial Statements for Years Ended
- -------------------------------------------------
December 31, 1997, 1996 and 1995............................................................ F-8
--------------------------------
Independent Auditors' Report..................................................................... F-8
Consolidated Balance Sheets...................................................................... F-9
Consolidated Statements of Earnings.............................................................. F-10
Consolidated Statements of Comprehensive Earnings................................................ F-11
Consolidated Statements of Changes in Stockholders' Equity....................................... F-12
Consolidated Statements of Cash Flows............................................................ F-13
Notes to Consolidated Financial Statements....................................................... F-15
</TABLE>
F-1
<PAGE> 115
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(In Thousands)
Assets
------
<S> <C> <C> <C>
Loans $ 82,352 76,600
Less: Allowance for loan losses 1,060 958
-------- --------
Net loans 81,292 75,642
Securities:
Held to maturity, at cost (market value $3,703,000 and
$2,850,000, respectively) 3,597 2,733
Available-for-sale, at market (amortized cost $48,210,000
and $45,799,000, respectively) 48,807 46,487
Loans held for sale 1,039 540
-------- ---------
Total earning assets 134,735 125,402
Cash and due from banks 4,501 4,167
Bank premises and equipment, net 3,280 3,406
Accrued interest receivable 1,374 1,309
Deferred tax asset 152 73
Other real estate 91 70
Other assets 728 561
-------- ---------
Total assets $144,861 134,988
======== =========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $131,679 122,878
Advances from Federal Home Loan Bank 630 -
Federal funds purchased - 375
Accrued interest payable 601 578
Other liabilities 546 627
-------- ---------
Total liabilities 133,456 124,458
-------- ---------
Minority interest 412 383
-------- ---------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 200,000
shares, issued 84,947 shares 85 85
Additional paid-in capital 1,639 1,639
Retained earnings 8,912 8,013
Net unrealized gains on available-for-sale securities, net of
taxes of $218,000 and $261,000, respectively 357 410
-------- ---------
Total stockholders' equity 10,993 10,147
-------- ---------
Total liabilities and stockholders' equity $144,861 134,988
======== =========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-2
<PAGE> 116
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars In Thousands (Dollars in Thousands
Except Per Share Amounts) Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,108 1,818 4,149 3,554
Interest and dividends on securities:
Taxable securities 620 648 1,258 1,204
Tax exempt from Federal income taxes 167 132 312 258
Interest on federal funds sold 46 9 70 34
------------ ------------ ------------ ------------
Total interest income 2,941 2,607 5,789 5,050
------------ ------------ ------------ ------------
Interest expense:
Interest on negotiable order of withdrawal accounts 52 60 103 120
Interest on money market demand accounts 210 112 396 222
Interest on savings accounts 193 213 379 414
Interest on certificates of deposit 925 814 1,823 1,562
Interest on Federal funds purchased 1 7 2 10
Interest on advances from Federal Home Loan Bank 9 4 17 7
------------ ------------ ------------ ------------
Total interest expense 1,390 1,210 2,720 2,335
------------ ------------ ------------ ------------
Net interest income before provision for loan 1,551 1,397 3,069 2,715
losses
Provision for loan losses 74 37 162 86
------------ ------------ ------------ ------------
Net interest income after provision for loan
losses 1,477 1,360 2,907 2,629
------------ ------------ ------------ ------------
Other income:
Service charges on deposit accounts 160 150 315 287
Other fees and commissions 191 128 380 245
Gain on sale of loans - - - 248
Security gains, net 7 11 7 11
Other income 55 42 104 66
------------ ------------ ------------ ------------
413 331 806 857
------------ ------------ ------------ ------------
Other expenses:
Salaries and employee benefits 589 570 1,168 1,164
Occupancy expenses, net 69 70 140 139
Furniture and equipment expense 94 81 191 158
FDIC insurance 3 3 7 6
Other operating expenses 462 353 831 730
------------ ------------ ------------ ------------
1,217 1,077 2,337 2,197
------------ ------------ ------------ ------------
Earnings before taxes and minority interest 673 614 1,376 1,289
Income taxes 212 193 439 410
------------ ------------ ------------ ------------
Earnings before minority interest 461 421 937 879
Minority interest 20 17 38 34
------------ ------------ ------------ ------------
Net earnings $ 441 404 899 845
============ ============ ============ ============
Basic earnings per common share $ 5.19 4.96 10.59 9.95
============ ============ ============ ============
Diluted earnings per common share $ 5.10 4.93 10.41 9.89
============ ============ ============ ============
Dividends per share $ - - - -
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-3
<PAGE> 117
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net earnings $ 441 404 899 845
Other comprehensive earnings, net of tax:
Net unrealized gains (losses) on available-for-
sale securities, net of tax benefits of
$14,000, tax expense of $116,000, tax
benefits of $32,000 and tax expense of
$4,000, respectively (24) 189 (52) 6
Reclassification adjustment for gains
included in net earnings, net of income
taxes of $3,000, $5,000, $3,000 and
$4,000, respectively (4) (7) (4) (7)
------------- ------------ ------------ ------------
Other comprehensive income (loss) (28) 182 (56) (1)
------------- ------------ ------------ ------------
Comprehensive earnings $ 413 586 843 844
============= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-4
<PAGE> 118
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 5,743 4,794
Fees and commissions received 799 846
Proceeds from sale of loans 9,316 6,144
Origination of loans held for sale (9,814) (4,945)
Interest paid (2,697) (2,301)
Cash paid to suppliers and employees (2,329) (2,125)
Income taxes paid (525) (495)
--------------- ---------------
Net cash provided by operating activities 493 1,918
--------------- ---------------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 84 149
Proceeds from maturities of available-for-sale securities 8,725 2,012
Proceeds from sales of available-for-sale securities 1,093 1,446
Purchase of held-to-maturity securities (950) -
Purchase of available-for-sale securities (12,237) (12,237)
Loans made to customers, net of repayments (5,812) (2,813)
Purchase of premises and equipment (53) (558)
Increase in other assets (55) (25)
--------------- ---------------
Net cash used in investing activities (9,205) (12,026)
--------------- ---------------
Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW
deposit accounts 6,120 4,774
Net increase in time deposits 2,680 7,214
Decrease in Federal funds purchased (375) (660)
Dividends paid to commercial bank subsidiary minority
stockholders (9) (7)
Advances from Federal Home Loan Bank 630 -
--------------- ---------------
Net cash provided by financing activities 9,046 11,321
--------------- ---------------
Net increase in cash and cash equivalents 334 1,213
Cash and cash equivalents at beginning of period 4,167 4,149
--------------- ---------------
Cash and cash equivalents at end of period $ 4,501 5,362
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-5
<PAGE> 119
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 899 845
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 179 162
Amortization and accretion, net 34 4
Provision for loan losses 162 86
Security gains related to available-for-sale (7) (11)
Decrease (increase) in loans held for sale (499) 1,199
FHLB dividend reinvestment (15) (14)
Decrease in other assets (133) (139)
Increase in other liabilities (123) (36)
Increase in interest receivable (65) (246)
Increase in interest payable 23 34
Increase in minority interest 38 34
------ ------
Total adjustments (406) 1,073
------ ------
Net cash provided by operating activities $ 493 1,918
====== ======
Supplemental schedule of non-cash activities:
Unrealized loss in value of securities available-for-
sale, net of income tax benefits of $43,000 in 1997 $ (53) (1)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
F-6
<PAGE> 120
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of CSB
Financial Corporation (the "Company") and its 96.14% owned subsidiary, Cheatham
State Bank and Cheatham State Bank's wholly-owned subsidiaries, Community
Finance Company, CSB Insurance Services, Inc. and CSB Acceptance Corporation.
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the consolidated financial statements contain all
adjustments and disclosures necessary to summarize fairly the financial position
of the Company as of June 30, 1998 and December 31, 1997, and the results of
operations and comprehensive income for the six months and three months ended
June 30, 1998 and 1997 and changes in cash flows for the six months ended June
30, 1998 and 1997. All significant intercompany transactions have been
eliminated. The interim consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements for the year
ended December 31, 1997. The results for interim periods are not necessarily
indicative of results to be expected for the complete fiscal year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Balance, January 1, 1998 and 1997, respectively $ 958 882
Add (deduct):
Losses charged to allowance (99) (47)
Recoveries credited to allowance 39 24
Provision for loan losses 162 86
------- -------
Balance, June 30, 1998 and 1997, respectively $ 1,060 945
======= =======
</TABLE>
F-7
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CSB Financial Corporation:
We have audited the accompanying consolidated balance sheets of CSB Financial
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, comprehensive earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of CSB
Financial Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
February 13, 1998
F-8
<PAGE> 122
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
In Thousands
----------------------
1997 1996
---- ----
ASSETS
------
<S> <C> <C> <C>
Loans, less allowance for possible loan losses of $958,000
and $882,000, respectively $ 75,642 66,179
Securities:
Held-to-maturity, at cost (market value - $2,850,000 and
$1,530,000, respectively) 2,733 1,527
Available-for-sale, at market (amortized cost - $45,799,000 and
$37,406,000, respectively) 46,487 37,745
-------- --------
Total securities 49,220 39,272
-------- --------
Loans held for sale 540 1,198
-------- --------
Total earning assets 125,402 106,649
-------- --------
Cash and due from banks 4,167 4,149
Premises and equipment, net 3,406 3,028
Deferred income taxes 73 146
Accrued interest receivable 1,309 1,103
Other real estate 70 --
Other assets 561 460
-------- --------
Total assets $134,988 115,535
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $122,878 104,850
Federal funds purchased 375 660
Accrued interest payable 578 455
Other liabilities 627 617
Advances from Federal Home Loan Bank -- 335
-------- --------
Total liabilities 124,458 106,917
-------- --------
Minority interest 383 322
-------- --------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 200,000 shares,
issued and outstanding 84,947 and 84,913 shares, respectively 85 85
Additional paid-in capital 1,639 1,636
Retained earnings 8,013 6,373
Net unrealized gains on available-for-sale securities, net of taxes of
$261,000 and $124,000, respectively 410 202
-------- --------
Total stockholders' equity 10,147 8,296
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
Total liabilities and stockholders' equity $134,988 115,535
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 123
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands,
Except Per Share Amounts
--------------------------------
1997 1996 1995
---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,465 6,487 5,505
Interest and dividends on securities:
Taxable securities 2,502 2,236 2,143
Exempt from Federal income taxes 545 448 355
Interest on Federal funds sold 60 74 52
Interest on interest-bearing deposits in financial institutions - - 5
------- ------- -------
Total interest income 10,572 9,245 8,060
------- ------- -------
Interest expense:
Interest on negotiable order of withdrawal accounts 244 249 264
Interest on money market demand accounts 518 308 199
Interest on savings accounts 318 349 360
Interest on certificates of deposit 3,835 3,178 2,794
Interest on Federal funds purchased 22 21 15
Interest on note payable 1 26 64
Interest on advances from Federal Home Loan Bank 19 1 -
------- ------- -------
Total interest expense 4,957 4,132 3,696
------- ------- -------
Net interest income before provision for possible
loan losses 5,615 5,113 4,364
Provision for possible loan losses 232 222 172
------- ------- -------
Net interest income after provision for possible
loan losses 5,383 4,891 4,192
Non-interest income 1,497 1,127 854
Non-interest expense 4,352 3,837 3,248
------- ------- -------
Earnings before income taxes and minority interest 2,528 2,181 1,798
Income taxes 822 670 616
------- ------- -------
Earnings before minority interest 1,706 1,511 1,182
Minority interest in earnings of subsidiary 66 60 49
------- ------- -------
Net earnings $ 1,640 1,451 1,133
======= ======= =======
Basic earnings per common share $ 19.31 17.75 14.09
======= ======= =======
Diluted earnings per common share $ 19.12 17.69 14.09
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 124
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 1,640 1,451 1,133
------- ------- -------
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale securities
arising during the period, net of taxes of $129,000, tax
benefits of $195,000 and taxes of $786,000, respectively 212 (318) 1,285
Reclassification adjustment for (gains) losses included in
net earnings, net of income taxes of $2,000, and
income tax benefits of $38,000 and $87,000, respectively (4) 62 142
------- ------- -------
Other comprehensive earnings (loss) 208 (256) 1,427
------- ------- -------
Comprehensive earnings $ 1,848 1,195 2,560
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 125
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------------
Net
Unrealized
Gains (Losses)
Par Value Additional On Available-
Common Paid-In Retained For-Sale
Stock Capital Earnings Securities Total
--------- ---------- --------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 80 1,222 3,789 (969) 4,122
Net earnings - - 1,133 - 1,133
Net change in unrealized appreciation
during the year, net of taxes of
$873,000 - - - 1,427 1,427
------- ------ ------- ------ ------
Balance December 31, 1995 80 1,222 4,922 458 6,682
Sale of 4,505 shares of common stock 5 414 - 419
-
Net earnings - - 1,451 - 1,451
Net change in unrealized appreciation
during the year, net of tax benefits
of $159,000 - - - (256) (256)
------- ------ ------- ------ ------
Balance December 31, 1996 85 1,636 6,373 202 8,296
Sale of 34 shares of common stock - 3 - 3
-
Net earnings - - - 1,640
1,640
Net change in unrealized appreciation
during the year, net of income taxes
of $137,000 - - - 208 208
------- ------ ------- ------ ------
Balance December 31, 1997 $ 85 1,639 8,013 410 10,147
======= ====== ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 126
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 10,354 9,258 7,852
Fees and commissions received 1,482 1,028 843
Proceeds from sale of loans 12,141 13,284 6,366
Origination of loans held for sale (11,483) (14,182) (6,523)
Interest paid (4,835) (4,132) (3,544)
Cash paid to suppliers and employees (4,010) (3,304) (2,700)
Income taxes paid (903) (757) (638)
-------- -------- --------
Net cash provided by operating activities 2,746 1,195 1,656
-------- -------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (20,350) (20,633) (15,671)
Proceeds from sales of available-for-sale securities 4,491 17,030 13,600
Proceeds from maturities of available-for-sale securities 6,404 4,838 3,633
Purchase of held-to-maturity securities (425) (330) (4,391)
Proceeds from maturities of held-to-maturity securities 300 464 842
Proceeds from maturities of interest bearing deposits in banks - - 100
Loans made to customers, net of repayments (9,766) (13,569) (9,290)
Purchase of premises and equipment (713) (617) (827)
Proceeds from sales of other real estate - - 76
Increase in cash surrender value of directors' and officers' life
insurance policies (64) (60) (59)
Proceeds from life insurance policy - 82 -
Purchase of other assets (2) (6) -
Purchase of silver coins - - (5)
Sales of silver coins - 2 -
Purchase of commercial bank subsidiary common stock - - (14)
-------- -------- --------
Net cash used in investing activities (20,125) (12,799) (12,006)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 6,697 2,891 2,297
Net increase in time deposits 11,331 7,224 9,293
Increase (decrease) in Federal funds purchased (285) 660 (175)
Principal payments on note payable - (585) (250)
Advances from FHLB - 335 -
Repayment of advances from FHLB (335) - -
Proceeds from sales of common stock 3 419 -
Dividends paid to commercial bank subsidiary minority
stockholders (14) (14) (14)
-------- -------- --------
Net cash provided by financing activities 17,397 10,930 11,151
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 18 (674) 801
Cash and cash equivalents at beginning of year 4,149 4,823 4,022
-------- -------- --------
Cash and cash equivalents at end of year $ 4,167 4,149 4,823
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 127
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 1,640 1,451 1,133
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 335 283 206
Amortization and accretion, net (13) (33) (21)
Provision for loan losses 232 222 172
Provision for deferred taxes (59) (94) (71)
Securities (gains) losses (6) 100 229
Decrease (increase) in loans held for sale 658 (898) (158)
Minority interest in earnings of commercial bank subsidiary 66 60 49
Increase (decrease) in taxes payable (22) 5 49
Decrease (increase) in interest receivable (206) 46 (187)
Increase in interest payable 123 - 153
Increase in other assets (34) (2) (9)
Increase in other liabilities 32 55 111
------- ------ ------
Total adjustments 1,106 (256) 523
------- ------ ------
Net cash provided by operating activities $ 2,746 1,195 1,656
======= ====== ======
Supplemental Schedule of Non-Cash Activities:
Securities transferred to available-for-sale $ - - 7,102
======= ====== ======
Securities transferred to held-to-maturity $ 1,083 - 486
======= ====== ======
Change in unrealized gain in securities available-for-sale,
net of income taxes of $137,000 and income tax benefit
of $159,000 and income taxes of $873,000, respectively $ 208 (256) 1,427
======= ====== ======
Loans transferred to other real estate $ 70 - -
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-14
<PAGE> 128
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CSB Financial Corporation and
Subsidiaries are in accordance with generally accepted accounting
principles and conform to general practices within the banking
industry. The following is a brief summary of the significant policies.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its 96.14% owned subsidiary, Cheatham State
Bank, and Cheatham State Bank's 100% owned subsidiaries,
Community Finance Company, CSB Insurance Services, Inc. and
CSB Acceptance Corporation. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
(B) NATURE OF OPERATIONS
Cheatham State Bank operates under a State bank charter. As a
State chartered bank, the Bank is subject to regulation by the
State of Tennessee, Department of Financial Institutions and
the Federal Deposit Insurance Corporation. Cheatham State Bank
provides full banking services normally offered by a community
bank. The area served by the Bank is primarily the Middle
Tennessee area with a concentration in Cheatham and
surrounding counties of Tennessee. Services are provided at
the main office and three branch offices.
(C) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(D) LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs,
and the allowance for possible loan losses are shown as
reductions of loans. Loan origination and commitment fees and
certain loan-related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the loan. Unearned discount
represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest
income on most loans is accrued based on the principal amount
outstanding.
F-15
<PAGE> 129
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(D) LOANS, CONTINUED
The Company adopted, on a prospective basis effective January
1, 1995, Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." These
pronouncements apply to impaired loans except for large groups
of smaller-balance homogeneous loans that are collectively
evaluated for impairment including residential mortgage and
installment loans.
A loan is impaired when it is probable that the Company will
be unable to collect the scheduled payments of principal and
interest due under the contractual terms of the loan
agreement. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the
fair value of the collateral if the loan is collateral
dependent. If the measure of the impaired loan is less than
the recorded investment in the loan, the Company recognize an
impairment by creating a valuation allowance with a
corresponding charge to the provision for possible loan losses
or by adjusting an existing valuation allowance for the
impaired loan with a corresponding charge or credit to the
provision for possible loan losses.
The Company's consumer loans are divided into various groups
of smaller-balance homogeneous loans that are collectively
evaluated for impairment and, thus, are not subject to the
provisions of SFAS Nos. 114 and 118. Substantially all other
loans of the Company are evaluated for impairment under the
provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as
to timely collection of principal or interest exists, or when
principal or interest is past due 90 days or more unless such
loans are well-secured and in the process of collection.
Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired.
Generally, delinquencies under 90 days are considered
insignificant unless certain other factors are present which
indicate impairment is probable. The decision to place a loan
on nonaccrual status is also based on an evaluation of the
borrower's financial condition, collateral liquidation value,
and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status,
all interest accrued and uncollected on the loan in the
current fiscal year is reversed from income, and all interest
accrued and uncollected from the prior year is charged off
against the allowance for possible loan losses. Thereafter,
interest on nonaccrual loans is recognized as interest income
only to the extent that cash is received and future collection
of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such cash received is
applied as a reduction of principal. A nonaccrual loan may be
restored to an accruing status when principal and interest are
no longer past due and unpaid and future collection of
principal and interest on a timely basis is not in doubt.
F-16
<PAGE> 130
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(D) LOANS, CONTINUED
Loans not on nonaccrual status are classified as impaired in
certain cases when there is inadequate protection by the
current net worth and financial capacity of the borrower or of
the collateral pledged, if any. In those cases, such loans
have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will
sustain some loss. In such cases, interest income continues to
accrue as long as the loan does not meet the Company's
criteria for nonaccrual status.
Generally, the Company also classifies as impaired any loans
the terms of which have been modified in a troubled debt
restructuring. Interest is generally accrued on such loans
that continue to meet the modified terms of their loan
agreements.
The Company's charge-off policy for impaired loans is similar
to its charge-off policy for all loans in that loans are
charged off in the month when they are considered
uncollectible.
(E) ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents a charge to
earnings necessary, after loan charge-offs and recoveries, to
maintain the allowance for possible loan losses at an
appropriate level which is adequate to absorb estimated losses
inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from
other sources, including commitments to extend credit and
standby letters of credit. The level of the allowance is
determined on a quarterly basis using procedures which
include: (1) categorizing commercial and commercial real
estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss
experience of those risk categories and current economic
conditions; (2) analyzing significant commercial and
commercial real estate credits and calculating specific
reserves as necessary; (3) assessing various homogeneous
consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing
unfunded commitments; and (5) considering various other
factors, such as changes in credit concentrations, loan mix,
and economic conditions which may not be specifically
quantified in the loan analysis process.
The allowance for possible loan losses consists of an
allocated portion and an unallocated, or general portion. The
allocated portion is maintained to cover estimated losses
applicable to specific segments of the loan portfolio. The
unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not
identified by the more objective processes used for the
allocated portion of the allowance due to risk of errors or
imprecision. While the total allowance consists of an
allocated portion and an unallocated portion, these terms are
primarily used to describe a process. Both portions of the
allowance are available to provide for inherent loss in the
entire portfolio.
F-17
<PAGE> 131
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(E) ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
The allowance for possible loan losses is increased by
provisions for possible loan losses charged to expense and is
reduced (increased) by loans charged off net of recoveries on
loans previously charged off. The provision is based on
Management's determination of the amount of the allowance
necessary to provide for estimated loan losses based on its
evaluation of the loan portfolio. Determining the appropriate
level of the allowance and the amount of the provision
involves uncertainties and matters of judgment and therefore
cannot be determined with precision.
(F) DEBT AND EQUITY SECURITIES
Securities are classified in three categories and accounted
for as follows:
- Securities Held-to-Maturity
Debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified
as held-to-maturity securities and reported at amortized
cost. Amortization of premiums and accretion of
discounts are calculated by the interest method.
- Trading Securities
Debt and equity securities that are bought and held
principally for the purpose of selling them in the
near term are classified as trading securities and
reported at fair value, with unrealized gains and
losses included in earnings.
- Securities Available-for-Sale
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported
at estimated fair value, with unrealized gains and
losses excluded from earnings and reported in a separate
component of stockholders' equity. Premiums and
discounts are recognized in interest income using the
interest method.
No securities have been classified as trading securities.
Realized gains or losses from the sale of securities are
recognized upon realization based upon the specific
identification method.
F-18
<PAGE> 132
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(G) LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost
or market value, determined by outstanding commitments from
investors at the balance sheet date. These loans are valued on
an aggregate basis.
(H) PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets. Gain or loss on
items retired and otherwise disposed of is credited or charged
to operations and cost and related accumulated depreciation
are removed from the asset and accumulated depreciation
accounts.
Expenditures for major renewals and improvements of premises
and equipment are capitalized and those for maintenance and
repairs are charged to earnings as incurred.
(I) LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that long-lived
assets and certain identifiable intangibles to be held and
used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The
Company has determined that no impairment loss need be
recognized for its long-lived assets.
(J) OTHER REAL ESTATE
Real estate acquired in settlement of loans is initially
recorded at the lower of cost (loan value of real estate
acquired in settlement of loans plus incidental expense) or
estimated fair value, less estimated cost of disposal. Based
on periodic evaluations by management, the carrying values are
reduced by a direct charge to earnings when they exceed net
realizable value. Costs relating to the development and
improvement of the property are capitalized, while holding
costs of the property are charged to expense in the period
incurred.
F-19
<PAGE> 133
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(K) INCOME TAXES
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences
between the amount of taxable and pretax financial income and
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax asset and liabilities are
expected to be realized or settled as prescribed in FASB
Statement No. 109, "Accounting for Income Taxes." As changes
in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income
taxes.
The Company and its subsidiaries file a consolidated Federal
income tax return. Its subsidiaries provide for income taxes
on a separate-return basis.
(L) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
Federal funds sold. Generally, Federal funds sold are
purchased and sold for one-day periods. The Bank maintains
deposits with other financial institutions in excess of the
Federal insurance amounts. Management makes deposits only with
financial institutions it considers to be financially sound.
(M) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the subsidiary bank has
entered into off balance sheet financial instruments
consisting of commitments to extend credit, commitments under
credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or
related fees are incurred or received.
F-20
<PAGE> 134
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans and allowance for possible loan losses at December 31, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
---------------------
1997 1996
---- ----
<S> <C> <C>
Commercial, financial and agricultural $24,590 23,537
Real estate - construction 6,011 3,444
Real estate - mortgage 30,094 24,665
Consumer 15,905 15,415
------- ------
76,600 67,061
Less allowance for possible loan losses 958 882
------- ------
$75,642 66,179
======= ======
</TABLE>
Loans to officers and directors totaled $1,242,000 and $1,562,000 at December
31, 1997 and 1996, respectively. All such loans were made in the ordinary course
of business on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties.
Loans that had been placed on non-accrual status at December 31, 1997 and 1996
totaled $124,000 and $106,000, respectively. Had the loans been on accrual
status, interest income would have been increased by approximately $5,000 in
1997 and $2,000 in 1996. No loans had been placed on nonaccrual status in 1995.
<TABLE>
<CAPTION>
In Thousands
-----------------------------------------------------------------------------
Commercial
Financial
and Real Estate- Real Estate-
Maturity Agricultural Construction Mortgage Consumer Total
-------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
3 months or less $ 10,251 6,011 14,740 4,185 35,187
3 to 12 months 1,613 - 3,220 1,927 6,760
1 to 5 years 10,093 - 5,760 8,239 24,092
Over 5 Years 2,633 - 6,374 1,554 10,561
------------ ----------- ---------- ----------- -----------
$ 24,590 6,011 30,094 15,905 76,600
============ =========== ========== =========== ===========
</TABLE>
At December 31, 1997, variable rate and fixed rate loans totaled approximately
$30,755,000 and $45,845,000. The totals at December 31, 1996 were $26,633,000
and $40,428,000, respectively.
F-21
<PAGE> 135
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
Transactions in the allowance for possible loan losses for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
-----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance - beginning of year $ 882 745 634
Provision charged to operating
expenses 232 222 172
---------------- ---------------- ----------------
1,114 967 806
---------------- ---------------- ----------------
Loans charged-off (196) (120) (114)
Recoveries on losses 40 35 53
---------------- ---------------- ----------------
Net loans charged off (156) (85) (61)
---------------- ---------------- ----------------
Balance - end of year $ 958 882 745
================ ================ ================
</TABLE>
The Company's principal customers are basically in the Middle Tennessee
area with a concentration in Cheatham County, Tennessee. Credit is
extended to businesses and individuals and is evidenced by promissory
notes. The terms and conditions of the loans including collateral
varies depending upon the purpose of the credit and the borrower's
financial condition.
During 1997, 1996 and 1995, the Company originated and sold loans in
the secondary market totaling $12,141,000, $13,284,000 and $6,366,000,
respectively. The loans were sold without recourse to the Company.
These loans are presold prior to origination and are sold at book
value.
There were no impaired loans outstanding at December 31, 1997 and 1996.
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheet
according to management's intent. The Company's classification of
securities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------
1997
------------------------------------------------------------------
Securities Held-To-Maturity
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions $ 2,733 117 - 2,850
============ ========== ========== =========
</TABLE>
F-22
<PAGE> 136
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
<TABLE>
<CAPTION>
In Thousands
--------------------------------------------------------------
1997
--------------------------------------------------------------
Securities Available-for-Sale
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporation $12,002 89 2 12,089
Obligations of state and political
subdivisions 7,680 499 - 8,179
Mortgage backed securities 25,651 175 73 25,753
FHLB stock 403 - -- 403
Corporate securities 63 - -- 63
------- -------- ------- -------
$45,799 763 75 46,487
======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------
1996
------------------------------------------------------------------
Securities Held-To-Maturity
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of state and political
subdivisions $ 1,527 3 - 1,530
========== ========== ========== ========
<CAPTION>
In Thousands
------------------------------------------------------------------
1996
----------------------------------------------------------------
Securities Available-for-Sale
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporation $ 11,581 103 80 11,604
Obligations of state and political
subdivisions 7,145 256 4 7,397
Mortgage backed securities 18,284 176 112 18,348
FHLB stock 341 - - 341
Corporate securities 55 - - 55
--------- ---------- -------- ----------
$ 37,406 535 196 37,745
========= ========== ======== ==========
</TABLE>
F-23
<PAGE> 137
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
The amortized cost and estimated market value of debt and equity
securities at December 31, 1997, 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>
In Thousands
-------------------------------------
Securities Held-To-Maturity Estimated
---------------------------
Amortized Market
Cost Value
---------------- ----------------
<S> <C> <C>
Due in one year or less $ 127 128
Due after one year through five years 1,178 1,213
Due after five years through ten years 1,428 1,509
------------- -------------
$ 2,733 2,850
============= =============
In Thousands
-------------------------------------
Securities Available-for-Sale
----------------------------- Estimated
Amortized Market
Cost Value
---------------- ----------------
Due in one year or less $ 403 403
Due after one year through five years 9,591 9,744
Due after five years through ten years 4,675 4,836
Due after ten years 5,013 5,285
------------- -------------
19,682 20,268
Mortgage backed securities 25,651 25,753
FHLB stock 403 403
Corporate securities 63 63
------------- -------------
$ 45,799 46,487
============= =============
</TABLE>
Results from sales of debt and equity securities are as follows:
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross proceeds $ 4,491 17,030 13,600
============= ============= =============
Gross realized gains $ 15 47 11
Gross realized losses (9) (147) (240)
------------- ------------- -------------
Net realized gains (losses) $ 6 (100) (229)
============= ============= =============
</TABLE>
The Company periodically applies the stress test to its securities
portfolio. To meet the stress test a security's estimated market value
should not decline more than certain percentages given certain assumed
interest rate increases. The Company has no securities which failed
this stress test.
F-24
<PAGE> 138
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
Securities available-for-sale with approximate carrying values of
$10,383,000 and $11,323,000 (approximate amortized cost of $10,215,000
and $11,310,000) at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes required or
permitted by law. There were no securities classified as
held-to-maturity which were pledged at December 31, 1997 and 1996.
Included in the securities above at December 31, 1997 and 1996,
respectively, are securities with a carrying value of approximately
$3,989,000 and $2,052,000 (market value of $4,158,000 and $2,066,000)
in obligations of political subdivisions located within the State of
Tennessee. Additionally, securities issued by or in connection with the
Federal National Mortgage Association with a carrying value of
approximately $29,133,000 and $7,326,000 (amortized cost of $29,263,000
and $7,385,000) are included in securities. Management purchases only
obligations of such political subdivisions it considers to be
financially sound.
Securities that have rates that adjust prior to maturity totaled
approximately $16,960,000 and $13,772,000 at December 31, 1997 and
1996, respectively.
Included in the securities portfolio is stock of the Federal Home Loan
Bank amounting to $403,000 and $341,000 at December 31, 1997 and 1996,
respectively. The stock can be sold back at par and only to the Federal
Home Loan Bank or to another member institution.
(4) PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
In Thousands
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 348 348
Buildings and improvements 2,677 2,237
Furniture and equipment 2,125 1,867
Construction in progress 16 175
------------- -------------
5,166 4,627
Less accumulated depreciation (1,760) (1,599)
------------- -------------
$ 3,406 3,028
============= =============
</TABLE>
F-25
<PAGE> 139
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(5) DEPOSITS
Deposits at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
-----------------------------------
1997 1996
---- ----
<S> <C> <C>
Demand deposits $ 15,679 12,836
Negotiable order of withdrawals 10,811 9,681
Money market demand accounts 15,040 8,677
Savings deposits 9,006 12,645
Certificates of deposit and individual retirement
accounts $100,000 or greater 27,441 20,680
Other certificates of deposit and individual
retirement accounts 44,901 40,331
---------------- ----------------
$ 122,878 104,850
================ ================
</TABLE>
Principal maturities of certificates of deposit and individual
retirement accounts at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
In Thousands
----------------------------------------------------
Single Deposits Single Deposits
Maturity Under $100,000 Over $100,000 Total
-------- --------------- --------------- --------
<S> <C> <C> <C>
3 months or less $ 12,653 8,247 20,900
3 to 6 months 11,698 6,247 17,945
6 to 12 months 16,061 11,537 27,598
1 to 5 years 4,395 1,410 5,805
Over 5 years 94 - 94
------------- ------------ -------
$ 44,901 27,441 72,342
============= ============ =======
</TABLE>
The subsidiary bank is required to maintain cash balances or balances
with the Federal Reserve Bank or other correspondent banks based on
certain percentages of deposit types. The average required amounts for
the years ended December 31, 1997 and 1996 were approximately $603,000
and $530,000, respectively.
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank totaling $335,000 at
December 31, 1996 bear interest at 5.39% and were due November 26,
1997. The advances were collateralized by a blanket pledge of
approximately $502,000 of the subsidiary bank's mortgage loan
portfolio. The advances were paid in full during 1997.
F-26
<PAGE> 140
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(7) NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The significant components of non-interest income and non-interest
expense for the years ended December 31, 1997, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
In Thousands
----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non-interest income:
Service charges on deposits $ 607 568 517
Other fees and commissions 546 340 181
Gain on sale of loans 186 - -
Securities gains 15 47 11
Other income 143 172 145
------------- ------------- -------------
Total non-interest income $ 1,497 1,127 854
============= ============= =============
Non-interest expense:
Salaries and employee benefits $ 2,328 1,947 1,560
Occupancy expenses, net 277 245 183
Furniture and equipment expenses 341 278 201
FDIC insurance 13 2 96
Securities losses 9 147 240
Other operating expenses 1,384 1,218 968
------------- ------------- -------------
Total non-interest expense $ 4,352 3,837 3,248
============= ============= =============
</TABLE>
(8) INCOME TAXES
The components of the net deferred tax asset (liability) at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
In Thousands
----------------------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Federal $ 354 289
State 67 54
------------- -------------
421 343
------------- -------------
Deferred tax liability:
Federal (293) (166)
State (55) (31)
------------- -------------
(348) (197)
------------- -------------
Net deferred tax asset $ 73 146
============= =============
</TABLE>
F-27
<PAGE> 141
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES, CONTINUED
The tax effects of each type of significant item that gave rise to
deferred taxes at December 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
In Thousands
--------------------------------
1997 1996
---- --------
<S> <C> <C>
Financial statement allowance for loan losses
in excess of tax allowance $ 268 206
Excess of depreciation deducted for tax purposes
over the amounts deducted in the financial statements (76) (68)
Deferred compensation deducted for financial
statements, not deducted for tax purposes 153 137
Excess of estimated market value over amortized
cost related to securities available-for-sale (262) (129)
FHLB stock dividends not recognized for
tax purposes (10) -
------------- --------
Net deferred tax asset $ 73 146
============= ========
</TABLE>
The components of income tax expense (benefit) are summarized as
follows:
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1997
----
Current $ 710 171 881
Deferred (50) (9) (59)
------------- ------------- -------------
Total $ 660 162 822
============= ============= =============
1996
----
Current $ 621 143 764
Deferred (79) (15) (94)
------------- ------------- -------------
Total $ 542 128 670
============= ============= =============
1995
----
Current $ 550 137 687
Deferred (58) (13) (71)
------------- ------------- -------------
Total $ 492 124 616
============= ============= =============
</TABLE>
F-28
<PAGE> 142
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES, CONTINUED
A reconciliation of actual income tax expense of $822,000, $670,000 and
$616,000 for the years ended December 31, 1997, 1996 and 1995 to the
"expected" tax expense (computed by applying the statutory tax rate of
34% to earnings before income taxes and minority interest) is as
follows:
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 859 741 611
Life insurance proceeds - (17) -
State income taxes, net of Federal
income tax benefit 107 84 72
Tax exempt interest, net of interest
expense exclusion (158) (130) (106)
Other 14 (8) 39
------------- ------------- -------------
Actual tax expense $ 822 670 616
============= ============= =============
</TABLE>
Total income tax expense for 1997 includes an income tax expense of
$2,000 related to the sale of securities. Total income tax expense for
1996 and 1995, respectively, includes an income tax benefit of $38,000
and $87,000 related to the sale of securities.
(9) REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS
The Company and its wholly-owned bank subsidiary are subject to
regulatory capital requirements administered by the Tennessee
Department of Financial Institutions, Federal Deposit Insurance
Corporation and the Federal Reserve. Failure to meet capital
requirements can initiate certain mandatory and possibly additional
discretionary-actions by regulators that if undertaken could, have a
direct material effect on the Company's financial statements. The
Company's capital classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors. Those qualitative judgments could also affect the Company's
and the Subsidiary Bank's capital status and the amounts of dividends
the subsidiary may distribute. At December 31, 1997 and 1996,
management believes that the Company and its subsidiary meet all such
capital requirements to which they are subject.
The Company and its subsidiary bank are required to maintain minimum
amounts of capital to total "risk weighted" assets, as defined by the
banking regulators. At December 31, 1997 and 1996, the Company and its
bank subsidiary are required to have minimum Tier I and total
risk-based capital ratios of 4% and 8%, respectively. The actual ratios
at those dates were 11.84% and 12.96% and 12.52% and 13.69%,
respectively. The leverage ratios at December 31, 1997 and 1996 were
7.24% and 7.45% and the minimum requirement was 4.0%.
F-29
<PAGE> 143
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(10) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are commitments outstanding and
contingent liabilities such as legal proceedings pending against the
Company. In the opinion of management, no material adverse effect on
the financial position is anticipated as a result of these items.
The Company has an unsecured $1,500,000 line of credit with another
financial institution. At December 31, 1997 and 1996, there was no
outstanding balance under the line of credit. The subsidiary bank has
lines of credit with other financial institutions totaling $3,500,000.
The outstanding balance at December 31, 1997 and 1996, respectively,
was $375,000 and $660,000 and is included in the accompanying financial
statements as Federal funds purchased.
The Company leases a building from one of its directors in which two of
the subsidiary bank's subsidiaries operate. The lease is for a one year
term and was automatically renewed on February 1, 1996 for three
additional one year terms unless notice is given of intent to terminate
sixty days prior to the expiration of the one year term. Monthly rental
amounts are $400 through January 31, 1996, and increase to $500 at that
date. Rental expense under the lease totaled $6,000, $5,900 and $4,800
during 1997, 1996 and 1995, respectively. Future minimum rentals at
December 31, 1997 are $6,000 in 1998 and $500 in 1999.
(11) DEFERRED COMPENSATION PLAN
The Company provides its directors and executive officers with the
opportunity to participate in an unfunded deferred compensation
program. There were sixteen participants in the program at December 31,
1997 and eight participants at December 31, 1996. Under the program
participants may defer a portion of their total cash compensation. The
amounts deferred remain the sole property of the Company, which uses
corporate funds to purchase either insurance policies on the lives of
the participants or other investments. The insurance policies, which
remain the sole property of the Company, are payable to the Company
upon the death of the participant. The Company separately contracts
with the participant to pay benefits based upon the deferred amount
compounded at an interest rate as determined by management. At December
31, 1997 and 1996, four participants had elected to commence receiving
benefits under the plan. The deferred compensation liability totaled
$404,000 and $361,000 at December 31, 1997 and 1996, respectively. Cash
surrender values of the life insurance policies totaled $434,000 and
$370,000 at December 31, 1997 and 1996, respectively. The face amount
of the insurance policies in force at December 31, 1997 and 1996 was
approximately $1,957,000 and $1,257,000, respectively. The program is
not qualified under Section 401 of the Internal Revenue Code.
F-30
<PAGE> 144
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(12) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan ("ESOP"), the purpose
of which is to enable participating employees to share in the growth of
the Company by acquiring ownership in the Company's stock.
Employees are eligible upon completing 1,000 hours of service within
the first 12 months of employment and attaining the age of 18. The Plan
provides for graduated vesting of benefits based on years of service.
Contributions to the Plan are determined annually by the Company's
Board of Directors. The contributions for each of the years ended
December 31, 1997, 1996 and 1995 amounted to $180,000, $150,000 and
$150,000, respectively.
At December 31, 1997 and 1996, the Plan owned 23.8% of the Company's
common stock.
F-31
<PAGE> 145
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
In Thousands
---------------------------------
1997 1996
---- ----
ASSETS
------
<S> <C> <C>
Cash $ 30* 45*
Securities, available-for-sale, at market (cost $464,000 and
$55,000, respectively) 466 55
Investment in commercial bank subsidiary 9,549* 8,043*
Due from commercial bank subsidiary 75* 150*
Certificate of deposit 98* 98*
Accrued interest receivable 9* 1*
------------- -------------
Total assets $ 10,227 8,392
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Income taxes payable $ 52 74
Deferred income taxes 1 -
Other liabilities 27 22
------------- -------------
Total liabilities 80 96
------------- -------------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized
200,000 shares, issued and outstanding 84,947 and
84,913 shares, respectively 85 85
Additional paid-in capital 1,639 1,636
Retained earnings 8,013 6,373
Net unrealized gains on available-for-sale securities,
net of tax of $261,000 and $124,000, respectively 410 202
------------- -------------
Total stockholders' equity 10,147 8,296
------------- -------------
Total liabilities and stockholders' equity $ 10,227 8,392
============= =============
</TABLE>
*Eliminated in consolidation.
F-32
<PAGE> 146
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from commercial bank subsidiary $ 342* 342* 342*
Dividends on securities - - 7
Interest income - - 1*
Interest and dividends on securities 27 6 -
Interest on time deposit in financial institution 6* 5* -
-------------- -------------- ---------------
Total income 375 353 350
-------------- -------------- --------------
Expenses:
Interest expense 1 26 64
Other 39 32 28
-------------- -------------- --------------
Total expenses 40 58 92
-------------- -------------- --------------
Earnings before Federal income tax
benefit and equity in undistributed
earnings of commercial bank
subsidiary 335 295 258
Income tax benefit 6 20 33
-------------- -------------- --------------
341 315 291
Equity in undistributed earnings of commercial
bank subsidiary 1,299* 1,136* 842*
-------------- -------------- --------------
Net earnings $ 1,640 1,451 1,133
============== ============== ==============
</TABLE>
*Eliminated in consolidation.
F-33
<PAGE> 147
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 1,640 1,451 1,133
--------------- --------------- ---------------
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale
securities arising during the period, net of
taxes of $129,000, tax benefits of $195,000
and taxes of $786,000, respectively 212 (318) 1,285
Reclassification adjustment for (gains) losses
included in net earnings, net of income taxes
of $2,000 and income tax benefits of
$38,000 and $87,000, respectively (4) 62 142
--------------- --------------- ---------------
Other comprehensive earnings (loss) 208 (256) 1,427
--------------- --------------- ---------------
Comprehensive earnings $ 1,848 1,195 2,560
=============== =============== ===============
</TABLE>
F-34
<PAGE> 148
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------------
Net
Unrealized
Gains (Losses)
Additional On Available-
Common Paid-In Retained For-Sale
Stock Capital Earnings Securities Total
-------- ---------- -------- --------------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 80 1,222 3,789 (969) 4,122
Net earnings - - 1,133 - 1,133
Net change in unrealized appreciation
during the year, net of taxes of
$873,000 - - - 1,427 1,427
------- ------- ------- ------- ------
Balance, December 31, 1995 80 1,222 4,922 458 6,682
Sale of 4,505 shares of common stock 5 414 - - 419
Net earnings - - 1,451 - 1,451
Net change in unrealized
appreciation during the year,
net of tax benefits of $159,000 - - - (256) (256)
------- ------- ------- ------- ------
Balance December 31, 1996 85 1,636 6,373 202 8,296
Sale of 34 shares of common stock - 3 - - 3
Net earnings - - 1,640 - 1,640
Net change in unrealized appreciation
during the year, net of income taxes
of $137,000 - - - 208 208
------- ------- ------- ------- ------
Balance December 31, 1997 $ 85 1,639 8,013 410 10,147
======= ======= ======= ======= ======
</TABLE>
F-35
<PAGE> 149
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Cash paid to suppliers $ (39) (31) (28)
Income tax benefit received from commercial
bank subsidiary 20 - 29
Interest and dividends received 16 9 7
Interest paid (1) (48) (69)
----- ----- -----
Net cash used in operating activities (4) (70) (61)
----- ----- -----
Cash flows from investing activities:
Dividend received from commercial bank
subsidiary 342 342 342
Purchase of commercial bank subsidiary
common stock - - (14)
Purchase of certificate of deposit - (98) -
Purchase of available-for-sale securities (401) - -
Decrease in due from commercial bank subsidiary 75 - -
----- ----- -----
Net cash provided by investing activities 16 244 328
----- ----- -----
Cash flows from financing activities:
Payment of note payable - (585) (250)
Proceeds from sale of common stock 3 418 -
Income taxes received from commercial bank
subsidiary 810 - -
Income taxes paid (840) - -
----- ----- -----
Net cash used in financing activities (27) (167) (250)
----- ----- -----
Net increase (decrease) in cash and cash equivalents (15) 7 17
Cash and cash equivalents at beginning of year 45 38 21
----- ----- -----
Cash and cash equivalents at end of year $ 30 45 38
===== ===== =====
</TABLE>
F-36
<PAGE> 150
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CSB FINANCIAL CORPORATION -
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CSB FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash used
in operating activities:
Net earnings $ 1,640 1,451 1,133
Adjustments to reconcile net earnings to net cash
used in operating activities:
Equity in earnings of commercial bank
subsidiary (1,641) (1,478) (1,184)
Decrease (increase) in income tax benefit
receivable from subsidiary 14 (20) (4)
Increase in accrued interest receivable (9) (1) --
Stock dividend reinvestment (8) -- --
Decrease in accrued interest payable -- (22) (6)
------- ------- -------
Total adjustments (1,644) (1,521) (1,194)
------- ------- -------
Net cash used in operating
activities $ (4) (70) (61)
======= ======= =======
</TABLE>
F-37
<PAGE> 151
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Company disclose estimated fair values for its financial instruments.
Fair value estimates, methods, and assumptions are set forth below for
the Company's financial instruments.
Cash and short-term investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investments and Mortgage-Backed Securities
The carrying amounts for short-term investments approximate
fair value because they mature in 90 days or less and do not
present unanticipated credit concerns. The fair value of
longer-term investments and mortgage-backed securities,
except certain state and municipal securities, is estimated
based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily
available through market sources other than dealer
quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for
differences between the quoted instruments and the
instruments being valued.
SFAS No. 107 specifies that fair values should be calculated
based on the value of one unit without regard to any premium
or discount that may result from concentrations of ownership
of a financial instrument, possible tax ramifications, or
estimated transaction costs. Accordingly, these
considerations have not been incorporated into the fair
value estimates.
Loans
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as commercial, mortgage and consumer.
The fair value of the various categories of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining average estimated maturities.
The estimated maturity for mortgages is modified from the
contractual terms to give consideration to management's
experience with prepayments. Management has made estimates
of fair value discount rates that it believes to be
reasonable. However, because there is no market for many of
these financial instruments, management has no basis to
determine whether the fair value presented above would be
indicative of the value negotiated in an actual sale.
F-38
<PAGE> 152
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Loans, Continued
The value of the loan portfolio is also discounted in
consideration of the credit quality of the loan portfolio as
would be the case between willing buyers and sellers.
Particular emphasis has been given to loans on the
subsidiary bank's internal watch list. Valuation of these
loans is based upon borrower performance, collateral values
(including external appraisals), etc.
Deposit Liabilities
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar
remaining maturities. Under the provision of SFAS No. 107
the fair value estimates for deposits does not include the
benefit that results from the low cost funding provided by
the deposit liabilities compared to the cost of borrowing
funds in the market.
Notes Payable
Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate
fair value of existing notes payable.
Commitments to Extend Credit, Standby Letters of Credit and
Financial Guarantees Written
Loan commitments are made to customers generally for a
period not to exceed one year and at the prevailing interest
rates in effect at the time the loan is closed. Commitments
to extend credit related to construction loans are made for
a period not to exceed six months with interest rates at the
current market rate at the date of closing. In addition,
standby letters of credit are issued for periods up to three
years with rates to be determined at the date the letter of
credit is funded. Fees are only charged for the construction
loans and other commercial commitments and the amounts
unearned at December 31, 1997 and 1996 are insignificant.
F-39
<PAGE> 153
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
In Thousands
---------------------------------------------------------------
1997 1996
------------------------------ ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term $ 4,167 4,167 4,149 4,149
investments
Securities 49,220 49,337 39,272 39,275
Loans held for sale 540 540 1,198 1,198
Loans 76,600 67,061
Less: allowance for loan
losses (958) (882)
---------- -------------
Loans, net of allowance 75,642 75,322 66,179 65,365
---------- -------------
Financial liabilities:
Deposits 122,878 123,087 104,850 104,610
Federal funds purchased 375 375 660 660
FHLB advance - - 335 335
Unrecognized financial
instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
</TABLE>
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. 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-40
<PAGE> 154
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Limitations, Continued
Fair value estimates are based on estimating
on-and-off-balance sheet 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. Other significant
assets and liabilities that are not considered financial
assets or liabilities include deferred tax assets and
liabilities and property, 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 the estimates.
(15) CONCENTRATION OF CREDIT RISK
Practically all of the Company's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the
Company's market area. Practically all such customers are depositors of
the subsidiary bank. Investment in state and municipal securities also
include governmental entities within the Company's market area. The
concentrations of credit by type of loan are set forth in note 2 to the
consolidated financial statements.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
F-41
<PAGE> 155
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
In Thousands
-------------------
Contract or
Notional Amount at
December 31, 1997
-------------------
<S> <C>
Financial instruments whose contract amounts
represent credit risk:
Commercial loan commitments $ 3,734
Unfunded lines-of-credit 11,468
Letters of credit 522
--------------
Total $ 15,724
==============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to be drawn upon, the total commitment amounts
generally represent future cash requirements. The Company evaluates
each customer's credit-worthiness on a case-by-case basis. The amount
of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral normally consists of real property.
(17) STOCK OPTION PLAN
On May 21, 1996, the stockholders of the Company approved the CSB
Financial Corporation 1996 Stock Option Plan. The Stock Option Plan
provides for the granting of stock options, and authorizes the issuance
of common stock upon the exercise of such options, for up to 7,238
shares of common stock, to officers of the Company and up to 2,412
shares of common stock to the Directors of the Company.
Under the Stock Option Plan, stock option awards may be granted in the
form of incentive stock options or nonstatutory stock options, and are
generally exercisable for up to seven years following the date such
option awards are granted. Exercise prices of incentive stock options
must be equal to or greater than 100% of the fair market value of the
common stock on the grant date.
F-42
<PAGE> 156
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(17) STOCK OPTION PLAN, CONTINUED
In 1995, SFAS 123, "Accounting for Stock Based Compensation" (SFAS 123)
changed the method for recognition of cost of plans similar to those of
the Company. As is permitted, management has elected to continue
accounting for the plan under APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for the stock option plan.
However, under SFAS 123, the Company is required to make proforma
disclosures as if cost had been recognized in accordance with the
pronouncement. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of SFAS No. 123, the
Company's net earnings and basic earnings per common share and diluted
earnings per common share would have been reduced to the proforma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net earnings As Reported $ 1,640 $ 1,451
(in thousands) Proforma $ 1,636 $ 1,447
Basic earnings per As Reported $ 19.31 $ 17.75
common share Proforma $ 19.26 $ 17.70
Diluted earnings per As Reported $ 19.12 $ 17.69
common share Proforma $ 19.07 $ 17.64
</TABLE>
Due to the initial phase-in period, the effects of applying this
statement for proforma disclosures are not likely to be representative
of the effects on reported net earnings for future years.
A summary of the stock option activity from the date of the adoption of
the plan (May 21, 1996) through December 31, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of 7,718 $ 93.00 - $ -
year
Granted - - 7,718 93.00
Exercised (34) 93.00 - -
Forfeited - - - -
--------- --------- --------- ---------
Outstanding at end of year 7,684 $ 93.00 7,718 93.00
========= ========= ========= =========
Options exercisable at
year end 2,162 1,098
========= =========
</TABLE>
F-43
<PAGE> 157
CSB FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(17) STOCK OPTION PLAN, CONTINUED
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Price at 12/31/97 Price Life at 12/31/97 Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 93.00 7,684 $ 93.00 5 years 2,162 $ 93.00
</TABLE>
(18) EARNINGS PER SHARE (EPS)
In 1997, Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share" established uniform standards for computing and
presenting earnings per share. SFAS 128 replaces the presentation of
primary earnings per share with the presentation of basic earnings per
share and diluted earnings per share. The computation of basic earnings
per share is based on the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per
share for the Company begins with the basic earnings per share plus the
effect of common shares contingently issuable from stock options.
The following is a summary of the components comprising basic and
diluted earnings per share (EPS):
<TABLE>
<CAPTION>
In Thousands, Except Share and Per Share Amounts
--------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic EPS Computation:
Numerator - Income available to common
shareholders $ 1,640 1,451 1,133
Denominator - Weighted average number of
common shares outstanding 84,929 81,738 80,408
------- ------- -------
Basic earnings per common share $ 19.31 17.75 14.09
======= ======= =======
Diluted EPS computation:
Numerator - income available to common
stockholders $ 1,640 1,451 1,133
------- ------- -------
Denominator:
Weighted average number of common
shares outstanding 84,929 81,738 80,408
Dilutive effective of stock options 847 254 -
------- ------- -------
85,776 81,992 80,408
------- ------- -------
Diluted earnings per common share $ 19.12 17.69 14.09
======= ======= =======
</TABLE>
F-44
<PAGE> 158
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
CHEATHAM STATE BANK AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements for Six Months Ended June 30, 1998 and 1997.................... FF-2
- -----------------------------------------------------------------------------
Consolidated Balance Sheets...................................................................... FF-2
Consolidated Statements of Earnings.............................................................. FF-3
Consolidated Statement of Comprehensive Earnings................................................. FF-4
Consolidated Statements of Cash Flows............................................................ FF-5
Notes to Consolidated Financial Statements....................................................... FF-7
Consolidated Financial Statements for Years Ended December 31, 1997, 1996 and 1995............... FF-8
- ----------------------------------------------------------------------------------
Independent Auditors' Report..................................................................... FF-8
Consolidated Balance Sheets...................................................................... FF-9
Consolidated Statements of Earnings.............................................................. FF-10
Consolidated Statements of Comprehensive Earnings................................................ FF-11
Consolidated Statements of Changes in Stockholders' Equity....................................... FF-12
Consolidated Statements of Cash Flows............................................................ FF-13
Notes to Consolidated Financial Statements....................................................... FF-15
</TABLE>
FF-1
<PAGE> 159
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(In Thousands)
Assets
------
<S> <C> <C>
Loans $ 82,352 76,600
Less: Allowance for loan losses 1,060 958
Net loans -------- --------
81,292 75,642
Securities:
Held to maturity, at cost (market value $3,703,000 and
$2,850,000, respectively) 3,597 2,733
Available-for-sale, at market (amortized cost $47,635,000
and $45,334,000, respectively) 48,232 46,021
Loans held for sale 1,039 540
-------- --------
Total earning assets 134,160 124,936
Cash and due from banks 4,501 4,167
Bank premises and equipment, net 3,280 3,406
Accrued interest receivable 1,362 1,300
Deferred tax asset 380 74
Other real estate 91 70
Other assets 731 566
-------- --------
Total assets $144,505 134,519
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $131,787 123,006
Advances from Federal Home Loan Bank 630 --
Federal funds purchased -- 375
Accrued interest payable 601 578
Other liabilities 807 628
-------- --------
Total liabilities 133,825 124,587
-------- --------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 200,000
shares, issued 178,154 shares 178 178
Additional paid-in capital 1,907 1,907
Retained earnings 8,225 7,421
Net unrealized losses on available-for-sale securities, net of
income taxes of $227,000 and $261,000, respectively 370 426
-------- --------
Total stockholders' equity 10,680 9,932
-------- --------
Total liabilities and stockholders' equity $144,505 134,519
======== ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
FF-2
<PAGE> 160
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars In Thousands (Dollars in Thousands
Except Per Share Amounts) Except Per Share Amounts)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,108 1,818 $4,149 3,554
Interest and dividends on securities:
Taxable securities 610 642 1,233 1,190
Tax exempt from Federal income taxes 167 132 312 258
Interest on federal funds sold 46 9 70 34
------ ----- ------ -----
Total interest income 2,931 2,601 5,764 5,036
------ ----- ------ -----
Interest expense:
Interest on negotiable order of withdrawal accounts 52 60 103 120
Interest on money market demand accounts 210 112 396 222
Interest on savings accounts 193 213 379 414
Interest on certificates of deposit 927 812 1,827 1,562
Interest on Federal funds purchased 1 7 2 10
Interest on advances from Federal Home Loan Bank 9 4 17 7
------ ----- ------ -----
Total interest expense 1,392 1,208 2,724 2,335
------ ----- ------ -----
Net interest income before provision for loan
losses 1,539 1,393 3,040 2,701
Provision for loan losses 74 37 162 86
------ ----- ------ -----
Net interest income after provision for loan 1,465 1,356 2,878 2,615
------ ----- ------ -----
losses
Other income:
Service charges on deposit accounts 160 150 315 287
Other fees and commissions 191 128 380 245
Gain on sale of loans -- -- -- 248
Security gains, net 7 11 7 11
Other income 55 42 104 66
------ ----- ------ -----
413 331 806 857
------ ----- ------ -----
Other expenses:
Salaries and employee benefits 589 570 1,168 1,164
Occupancy expenses, net 69 70 140 139
Furniture and equipment expense 94 81 191 158
FDIC insurance 3 3 7 6
Other operating expenses 359 334 728 711
------ ----- ------ -----
1,114 1,058 2,234 2,178
------ ----- ------ -----
Earnings before income taxes 764 629 1,450 1,294
Income taxes 248 199 469 415
------ ----- ------ -----
Net earnings $ 516 430 $ 981 879
====== ===== ====== =====
Basic earnings per common share $ 2.90 2.41 $ 5.51 4.93
====== ===== ====== =====
Dividends per share $ 1.00 -- $ 1.00 1.00
====== ===== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
FF-3
<PAGE> 161
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Net earnings $ 516 430 981 879
Other comprehensive earnings, net of tax:
Net unrealized gains (losses) on available-
for-sale securities, net of tax benefits of
$16,000, income taxes of $120,000 and
tax benefits of $32,000 and income taxes
of $4,000, respectively (26) 196 (52) 6
Reclassification adjustment for gains
included in net earnings, net of income
taxes of $3,000, $4,000, $3,000 and
$4,000, respectively (4) (7) (4) (7)
----- ---- ---- ----
Other comprehensive earnings (loss) (30) 189 (56) (1)
----- ---- ---- ----
Comprehensive earnings $ 486 619 925 878
===== ==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
FF-4
<PAGE> 162
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 5,721 4,783
Fees and commissions received 799 846
Proceeds from sale of loans (9,814) (4,945)
Origination of loans held for sale 9,316 6,144
Interest paid (2,700) (2,302)
Cash paid to suppliers and employees (2,200) (2,111)
Income taxes paid (549) (554)
-------- --------
Net cash provided by operating activities 573 1,861
-------- --------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity securities 84 149
Proceeds from maturities of available-for-sale securities 8,725 2,012
Proceeds from sales of available-for-sale securities 1,093 1,446
Purchase of held-to-maturity securities (950) --
Purchase of available-for-sale securities (12,129) (11,978)
Loans made to customers, net of repayments (5,812) (2,813)
Purchase of premises and equipment (53) (558)
Increase in other assets (55) (25)
-------- --------
Net cash used in investing activities (9,097) (11,767)
-------- --------
Cash flows from financing activities:
Net increase in non-interest bearing, savings and NOW
deposit accounts 6,102 4,744
Net increase in time deposits 2,680 7,214
Decrease in Federal funds purchased (375) (660)
Dividends paid (179) (179)
FHLB advances 630 --
-------- --------
Net cash provided by financing activities 8,858 11,119
-------- --------
Net increase in cash and cash equivalents 334 1,213
Cash and cash equivalents at beginning of period 4,167 4,149
-------- --------
Cash and cash equivalents at end of period $ 4,501 5,362
======== ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
FF-5
<PAGE> 163
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------ ------
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 981 879
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 179 162
Amortization and accretion, net 34 4
Provision for loan losses 162 86
Securities losses related to available-for-sale
Security gains related to available-for-sale (7) (11)
Decrease (increase) in loans held for sale (499) 1,199
FHLB dividend reinvestment (15) (13)
Increase in other assets, net (133) (37)
Increase in other liabilities (90) (197)
Increase in interest receivable (62) (244)
Increase in interest payable 23 33
------ ------
Total adjustments (408) 982
------ ------
Net cash provided by operating activities $ 573 1,861
====== ======
Supplemental schedule of non-cash activities:
Unrealized loss in value of securities available-for-
sale, net of income tax benefits of $34,000 in 1997 $ (56) (1)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
FF-6
<PAGE> 164
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Cheatham
State Bank (Bank) and its wholly-owned subsidiaries, Community Finance Company,
CSB Insurance Services, Inc., and CSB Acceptance Corporation.
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the consolidated financial statements contain all
adjustments and disclosures necessary to summarize fairly the financial position
of the Bank as of June 30, 1998 and December 31, 1997, and the results of
operations and comprehensive income for the six months and three months ended
June 30, 1998 and 1997 and changes in cash flows for the six months ended June
30, 1998 and 1997. All significant intercompany transactions have been
eliminated. The interim consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements for the year
ended December 31, 1997. The results for interim periods are not necessarily
indicative of results to be expected for the complete fiscal year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Balance, January 1, 1998 and 1997, respectively $ 958 882
Add (deduct):
Losses charged to allowance (99) (47)
Recoveries credited to allowance 39 24
Provision for loan losses 162 86
------- -------
Balance, June 30, 1998 and 1997, respectively $ 1,060 945
======= =======
</TABLE>
FF-7
<PAGE> 165
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cheatham State Bank
We have audited the accompanying consolidated balance sheets of Cheatham State
Bank and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, comprehensive earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of
Cheatham State Bank and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
February 13, 1998
FF-8
<PAGE> 166
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
In Thousands
------------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
------
Loans, less allowance for possible loan losses of $958,000
and $882,000, respectively $ 75,642 66,179
Securities:
Held-to-maturity, at cost (market value - $2,850,000 and
$1,530,000, respectively) 2,733 1,527
Available-for-sale, at market (amortized cost - $45,334,000 and
$37,351,000, respectively) 46,021 37,690
-------- -------
Total securities 48,754 39,217
-------- -------
Loans held for sale 540 1,198
-------- -------
Total earning assets 124,936 106,594
-------- -------
Cash and due from banks 4,167 4,149
Premises and equipment, net 3,406 3,028
Deferred income taxes 74 146
Accrued interest receivable 1,300 1,102
Other real estate 70 --
Other assets 566 460
-------- -------
Total assets $134,519 115,479
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $123,006 104,994
Federal funds purchased 375 660
Accrued interest payable 578 456
Other liabilities 628 669
Advances from Federal Home Loan Bank - 335
-------- -------
Total liabilities 124,587 107,114
-------- -------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 200,000
shares, issued and outstanding 178,154 shares 178 178
Additional paid-in capital 1,907 1,907
Retained earnings 7,421 6,070
Unrealized gains on available-for-sale securities, net of taxes of
$261,000 and $129,000, respectively 426 210
-------- -------
Total stockholders' equity 9,932 8,365
-------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
Total liabilities and stockholders' equity $134,519 115,479
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
FF-9
<PAGE> 167
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands, Except Per Share Amounts
--------------------------------------
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,465 6,487 5,505
Interest and dividends on securities:
Taxable securities 2,475 2,234 2,143
Exempt from Federal income taxes 545 444 354
Interest on Federal funds sold 60 73 52
Interest on interest-bearing deposits in financial institutions -- -- 5
------- ----- -----
Total interest income 10,545 9,238 8,059
------- ----- -----
Interest expense:
Interest on negotiable order of withdrawal accounts 244 249 264
Interest on money market demand accounts 518 308 200
Interest on savings accounts 318 349 360
Interest on certificates of deposit 3,841 3,181 2,794
Interest on Federal funds purchased 22 21 15
Interest on advances from Federal Home Loan Bank 19 1 --
------- ----- -----
Total interest expense 4,962 4,109 3,633
------- ----- -----
Net interest income before provision for possible
loan losses 5,583 5,129 4,426
Provision for possible loan losses 232 222 172
------- ----- -----
Net interest income after provision for possible
loan losses 5,351 4,907 4,254
Non-interest income 1,497 1,127 848
Non-interest expense 4,313 3,806 3,220
------- ----- -----
Earnings before income taxes 2,535 2,228 1,882
Income taxes 828 689 649
------- ----- -----
Net earnings $ 1,707 1,539 1,233
======= ===== =====
Basic earnings per common share $ 9.58 8.64 6.92
======= ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
FF-10
<PAGE> 168
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
-----------------------------
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Net earnings $ 1,707 1,539 1,233
------- ----- -----
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale securities
arising during the period, net of taxes of $134,000, tax
benefits of $216,000 and taxes of $838,000, respectively 220 (353) 1,369
Reclassification adjustment for (gains) losses included in net
earnings, net of income taxes of $2,000 and income
tax benefits of $38,000 and $87,000, respectively (4) 62 142
------- ----- -----
Other comprehensive earnings (loss) 216 (291) 1,511
------- ----- -----
Comprehensive earnings $ 1,923 1,248 2,744
======= ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
FF-11
<PAGE> 169
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
-----------------------------------------------------------------
Net
Unrealized
$1.00 Gains (Losses)
Par Value Additional On Available-
Common Paid-In Retained For-Sale
Stock Capital Earnings Securities Total
--------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 178 1,907 4,010 (1,010) 5,085
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,233 -- 1,233
Net change in unrealized appreciation
during the year, net of income taxes
$925,000 -- -- -- 1,511 1,511
--------- --------- --------- --------- ---------
Balance December 31, 1995 178 1,907 4,887 501 7,473
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,539 -- 1,539
Net change in unrealized appreciation
during the year, net of tax benefits
$ 178,000 -- -- -- (291) (291)
--------- --------- --------- --------- ---------
Balance December 31, 1996 178 1,907 6,070 210 8,365
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,707 -- 1,707
Net change in unrealized appreciation
during the year, net of income taxes
$132,000 -- -- -- 216 216
--------- --------- --------- --------- ---------
Balance December 31, 1997 $ 178 1,907 7,421 426 9,932
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
FF-12
<PAGE> 170
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 10,344 9,252 7,852
Fees and commissions received 1,482 1,028 836
Proceeds from sale of loans 12,141 13,284 6,366
Origination of loans held for sale (11,483) (14,182) (6,523)
Interest paid (4,840) (4,087) (3,475)
Cash paid to suppliers and employees (3,998) (3,273) (2,700)
Income taxes paid (940) (757) (638)
-------- ------- -------
Net cash provided by operating activities 2,706 1,265 1,718
-------- ------- -------
Cash flows from investing activities:
Purchase of available-for-sale securities (19,949) (20,633) (15,671)
Proceeds from sales of available-for-sale securities 4,491 17,030 13,600
Proceeds from maturities of available-for-sale securities 6,404 4,838 3,633
Purchase of held-to-maturity securities (425) (330) (4,391)
Proceeds from maturities of held-to-maturity securities 300 464 842
Proceeds from maturities of interest bearing deposits in banks - - 100
Loans made to customers, net of repayments (9,766) (13,569) (9,290)
Purchase of premises and equipment (713) (617) (827)
Proceeds from sales of other real estate - - 76
Increase in cash surrender value of directors' and officers' life
insurance policies (64) (60) (59)
Proceeds from life insurance policy - 82 -
Purchase of other assets (2) (4) (5)
-------- ------- -------
Net cash used in investing activities (19,724) (12,799) (11,992)
-------- ------- -------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 6,681 3,022 2,191
Net increase in time deposits 11,331 7,199 9,415
Increase (decrease) in Federal funds purchased (285) 660 (175)
Advances from FHLB - 335 -
Repayment of advances from FHLB (335) - -
Dividends (356) (356) (356)
-------- ------- -------
Net cash provided by financing activities 17,036 10,860 11,075
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 18 (674) 801
Cash and cash equivalents at beginning of year 4,149 4,823 4,022
-------- ------- -------
Cash and cash equivalents at end of year $ 4,167 4,149 4,823
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
FF-13
<PAGE> 171
CHEATHAM STATE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 1,707 1,539 1,233
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 335 283 206
Amortization and accretion, net (5) (33) (21)
Provision for loan losses 232 222 172
Provision for deferred taxes (59) (94) (71)
Securities (gains) losses (6) 100 229
Gain on life insurance proceeds -- (51) --
Decrease (increase) in loans held for sale 658 (898) (158)
Increase (decrease) in taxes payable (52) 27 82
Decrease (increase) in interest receivable (198) 46 (187)
Increase in interest payable 122 22 158
Decrease (increase) in other assets (34) 7 (7)
Increase in other liabilities 6 95 82
------- ------ ------
Total adjustments 999 (274) 485
------- ------ ------
Net cash provided by operating activities $ 2,706 1,265 1,718
======= ====== ======
Supplemental Schedule of Non-Cash Activities:
Securities transferred to available-for-sale $ - - 7,102
======= ====== ======
Securities transferred to held-to-maturity $ 1,083 - 486
======= ====== ======
Change in unrealized gain in securities available-for-sale,
net of income taxes of $132,000 and income tax benefit
of $178,000 and income taxes of $925,000, respectively $ 216 (291) 1,511
======= ====== ======
Loans transferred to other real estate $ 70 - -
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
FF-14
<PAGE> 172
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Cheatham State Bank and
Subsidiaries are in accordance with generally accepted accounting
principles and conform to general practices within the banking
industry. The following is a brief summary of the significant policies.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Bank and its 100% owned subsidiaries, Community Finance
Company, CSB Insurance Services, Inc. and CSB Acceptance
Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) NATURE OF OPERATIONS
Cheatham State Bank operates under a State bank charter. As a
State chartered bank, the Bank is subject to regulation by the
State of Tennessee, Department of Financial Institutions and
the Federal Deposit Insurance Corporation. Cheatham State Bank
provides full banking services normally offered by a community
bank. The area served by the Bank is primarily the Middle
Tennessee area with a concentration in Cheatham and
surrounding counties of Tennessee. Services are provided at
the main office and three branch offices.
(c) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(d) LOANS
Loans are stated at the principal amount outstanding. Unearned
discount, deferred loan fees net of loan acquisition costs,
and the allowance for possible loan losses are shown as
reductions of loans. Loan origination and commitment fees and
certain loan-related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the loan. Unearned discount
represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest
income on most loans is accrued based on the principal amount
outstanding.
The Bank adopted, on a prospective basis effective January 1,
1995, Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." These
pronouncements apply to impaired loans except for large groups
of smaller-balance homogeneous loans that are collectively
evaluated for impairment including residential mortgage and
installment loans.
A loan is impaired when it is probable that the Bank will be
unable to collect the scheduled payments of principal and
interest due under the contractual terms of the loan
agreement. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the
fair value of the collateral if the loan is collateral
dependent. If the measure of the impaired loan is less than
the recorded investment in the loan, the Bank recognizes an
impairment by creating a valuation allowance with a
corresponding charge to the provision for possible loan losses
or by adjusting an existing valuation allowance for the
impaired loan with a corresponding charge or credit to the
provision for possible loan losses.
FF-15
<PAGE> 173
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(D) LOANS, CONTINUED
The Bank's consumer loans are divided into various groups of
smaller-balance homogeneous loans that are collectively
evaluated for impairment and, thus, are not subject to the
provisions of SFAS Nos. 114 and 118. Substantially all other
loans of the Bank are evaluated for impairment under the
provisions of SFAS Nos. 114 and 118.
The Bank considers all loans on nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as
to timely collection of principal or interest exists, or when
principal or interest is past due 90 days or more unless such
loans are well-secured and in the process of collection.
Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired.
Generally, delinquencies under 90 days are considered
insignificant unless certain other factors are present which
indicate impairment is probable. The decision to place a loan
on nonaccrual status is also based on an evaluation of the
borrower's financial condition, collateral liquidation value,
and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status,
all interest accrued and uncollected on the loan in the
current fiscal year is reversed from income, and all interest
accrued and uncollected from the prior year is charged off
against the allowance for possible loan losses. Thereafter,
interest on nonaccrual loans is recognized as interest income
only to the extent that cash is received and future collection
of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such cash received is
applied as a reduction of principal. A nonaccrual loan may be
restored to an accruing status when principal and interest are
no longer past due and unpaid and future collection of
principal and interest on a timely basis is not in doubt.
Loans not on nonaccrual status are classified as impaired in
certain cases when there is inadequate protection by the
current net worth and financial capacity of the borrower or of
the collateral pledged, if any. In those cases, such loans
have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Bank will sustain
some loss. In such cases, interest income continues to accrue
as long as the loan does not meet the Bank's criteria for
nonaccrual status.
Generally, the Bank also classifies as impaired any loans the
terms of which have been modified in a troubled debt
restructuring. Interest is generally accrued on such loans
that continue to meet the modified terms of their loan
agreements.
The Bank's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged
off in the month when they are considered uncollectible.
(e) ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents a charge to
earnings necessary, after loan charge-offs and recoveries, to
maintain the allowance for possible loan losses at an
appropriate level which is adequate to absorb estimated losses
inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from
other sources, including commitments to extend credit and
standby letters of credit. The level of the allowance is
determined on a quarterly basis using procedures which
include: (1) categorizing commercial and commercial real
estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss
experience of those risk categories and current economic
conditions; (2) analyzing significant commercial and
commercial real estate credits and calculating specific
reserves as necessary; (3) assessing various homogeneous
consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing
unfunded commitments; and (5) considering various other
factors, such as changes in credit concentrations, loan mix,
and economic conditions which may not be specifically
quantified in the loan analysis process.
FF-16
<PAGE> 174
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(E) ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
The allowance for possible loan losses consists of an
allocated portion and an unallocated, or general portion. The
allocated portion is maintained to cover estimated losses
applicable to specific segments of the loan portfolio. The
unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not
identified by the more objective processes used for the
allocated portion of the allowance due to risk of errors or
imprecision. While the total allowance consists of an
allocated portion and an unallocated portion, these terms are
primarily used to describe a process. Both portions of the
allowance are available to provide for inherent loss in the
entire portfolio.
The allowance for possible loan losses is increased by
provisions for possible loan losses charged to expense and is
reduced (increased) by loans charged off net of recoveries on
loans previously charged off. The provision is based on
Management's determination of the amount of the allowance
necessary to provide for estimated loan losses based on its
evaluation of the loan portfolio. Determining the appropriate
level of the allowance and the amount of the provision
involves uncertainties and matters of judgment and therefore
cannot be determined with precision.
(f) DEBT AND EQUITY SECURITIES
Securities are classified in three categories and accounted
for as follows:
- Securities Held-to-Maturity
Debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified
as held-to-maturity securities and reported at
amortized cost. Amortization of premiums and
accretion of discounts are calculated by the interest
method.
- Trading Securities
Debt and equity securities that are bought and held
principally for the purpose of selling them in the
near term are classified as trading securities and
reported at fair value, with unrealized gains and
losses included in earnings.
- Securities Available-for-Sale
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and
reported at estimated fair value, with unrealized
gains and losses excluded from earnings and reported
in a separate component of stockholders' equity.
Premiums and discounts are recognized in interest
income using the interest method.
No securities have been classified as trading securities.
Realized gains or losses from the sale of securities are
recognized upon realization based upon the specific
identification method.
(g) LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost
or market value, determined by outstanding commitments from
investors at the balance sheet date. These loans are valued on
an aggregate basis.
(h) PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets. Gain or loss on
items retired and otherwise disposed of
FF-17
<PAGE> 175
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(H) PREMISES AND EQUIPMENT, NET, CONTINUED
is credited or charged to operations and cost and related
accumulated depreciation are removed from the asset and
accumulated depreciation accounts.
Expenditures for major renewals and improvements of premises
and equipment are capitalized and those for maintenance and
repairs are charged to earnings as incurred.
(i) LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that long-lived
assets and certain identifiable intangibles to be held and
used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Bank
has determined that no impairment loss need be recognized for
its long-lived assets.
(j) OTHER REAL ESTATE
Real estate acquired in settlement of loans is initially
recorded at the lower of cost (loan value of real estate
acquired in settlement of loans plus incidental expense) or
estimated fair value, less estimated cost of disposal. Based
on periodic evaluations by management, the carrying values are
reduced by a direct charge to earnings when they exceed net
realizable value. Costs relating to the development and
improvement of the property are capitalized, while holding
costs of the property are charged to expense in the period
incurred.
(k) INCOME TAXES
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences
between the amount of taxable and pretax financial income and
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax asset and liabilities are
expected to be realized or settled as prescribed in FASB
Statement No. 109, "Accounting for Income Taxes." As changes
in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income
taxes.
The Bank and its subsidiaries file a consolidated Federal
income tax return with its parent company, CSB Financial
Corporation. The Bank and its subsidiaries provide for income
taxes on a separate-return basis.
(l) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
Federal funds sold. Generally, Federal funds sold are
purchased and sold for one-day periods. The Bank maintains
deposits with other financial institutions in excess of the
Federal insurance amounts. Management makes deposits only with
financial institutions it considers to be financially sound.
(m) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into
off balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card
arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are
incurred or received.
FF-18
<PAGE> 176
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans and allowance for possible loan losses at December 31, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
-------------------
1997 1996
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 24,590 23,537
Real estate - construction 6,011 3,444
Real estate - mortgage 30,094 24,665
Consumer 15,905 15,415
---------- -------
76,600 67,061
Less allowance for possible loan losses 958 882
---------- -------
$ 75,642 66,179
========== =======
</TABLE>
Loans to officers and directors totaled $1,242,000 and $1,562,000 at
December 31, 1997 and 1996, respectively. All such loans were made in
the ordinary course of business on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated
parties.
Loans that had been placed on non-accrual status at December 31, 1997
and 1996 totaled $124,000 and $106,000, respectively. Had the loans
been on accrual status, interest income would have been increased by
approximately $5,000 in 1997 and $2,000 in 1996. No loans had been
placed on nonaccrual status in 1995.
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------------
Commercial
Financial
and Real Estate - Real Estate -
Maturity Agricultural Construction Mortgage Consumer Total
-------- ------------ ------------ ------------- ------------- ------
<C> <C> <C> <C> <C> <C>
3 months or less $10,251 6,011 14,740 4,185 35,187
3 to 12 months 1,613 -- 3,220 1,927 6,760
1 to 5 years 10,093 -- 5,760 8,239 24,092
Over 5 Years 2,633 -- 6,374 1,554 10,561
------- ------ ------ ------ ------
$24,590 6,011 30,094 15,905 76,600
======= ====== ====== ====== ======
</TABLE>
At December 31, 1997, variable rate and fixed rate loans totaled
approximately $30,755,000 and $45,845,000. The totals at December 31,
1996 were $26,633,000 and $40,428,000, respectively.
FF-19
<PAGE> 177
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES, CONTINUED
Transactions in the allowance for possible loan losses for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
--------------------------------
1997 1996 1995
------- ---- ----
<S> <C> <C> <C>
Balance - beginning of year $ 882 745 634
Provision charged to operating expenses 232 222 172
------- ------- -------
1,114 967 806
------- ------- -------
Loans charged-off (196) (120) (114)
Recoveries on losses 40 35 53
------- ------- -------
Net loans charged off (156) (85) (61)
------- ------- -------
Balance - end of year $ 958 882 745
======= ======= =======
</TABLE>
The Bank's principal customers are basically in the Middle Tennessee
area with a concentration in Cheatham County, Tennessee. Credit is
extended to businesses and individuals and is evidenced by promissory
notes. The terms and conditions of the loans including collateral
varies depending upon the purpose of the credit and the borrower's
financial condition.
During 1997, 1996 and 1995, the Bank originated and sold loans in the
secondary market totaling $12,141,000, $13,284,000 and $6,366,000,
respectively. The loans were sold without recourse to the Bank. These
loans are presold prior to origination and are sold at book value.
There were no impaired loans outstanding at December 31, 1997 and 1996.
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheet
according to management's intent. The Bank's classification of
securities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
In Thousands
----------------------------------------------------------
1997
----------------------------------------------------------
Securities Held-To-Maturity
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 2,733 117 - 2,850
========= ========== ========== =========
</TABLE>
FF-20
<PAGE> 178
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
<TABLE>
<CAPTION>
In Thousands
--------------------------------------------------------------
1997
--------------------------------------------------------------
Securities Available-for-Sale
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporation $ 11,600 87 1 11,686
Obligations of states and political
subdivisions 7,680 499 - 8,179
Mortgage backed securities 25,651 175 73 25,753
FHLB stock 403 - - 403
-------------- ---------- ---------- ---------
$ 45,334 761 74 46,021
============== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
In Thousands
-----------------------------------------------------------------
1996
-----------------------------------------------------------------
Securities Held-To-Maturity
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 1,527 3 - 1,530
============== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
In Thousands
-----------------------------------------------------------------------
1996
-----------------------------------------------------------------------
Securities Available-for-Sale
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporation $ 11,581 103 80 11,604
Obligations of states and political
subdivisions 7,145 256 4 7,397
Mortgage backed securities 18,284 176 112 18,348
FHLB stock 341 - - 341
-------------- ---------- ---------- ----------
$ 37,351 535 196 37,690
============== ========== ========== ==========
</TABLE>
FF-21
<PAGE> 179
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
The amortized cost and estimated market value of debt and equity
securities at December 31, 1997, 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>
In Thousands
----------------------------------
Securities Held-To-Maturity Estimated
Amortized Market
Cost Value
------------ ----------
<S> <C> <C>
Due in one year or less $ 127 128
Due after one year through five years 1,178 1,213
Due after five years through ten years 1,428 1,509
------------- ----------
$ 2,733 2,850
============= ==========
</TABLE>
<TABLE>
<CAPTION>
In Thousands
----------------------------------
Securities Available-for-Sale Estimated
Amortized Market
Cost Value
------------- ----------
<S> <C> <C>
Due in one year or less $ 403 403
Due after one year through five years 9,190 9,341
Due after five years through ten years 4,675 4,836
Due after ten years 5,012 5,285
------------- ----------
19,280 19,865
Mortgage backed securities 25,651 25,753
FHLB stock 403 403
------------- ----------
$ 45,334 46,021
============= ==========
</TABLE>
Results from sales of debt and equity securities are as follows:
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------
For the Year Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross proceeds $ 4,491 17,030 13,600
============= =========== ==========
Gross realized gains $ 15 47 11
Gross realized losses (9) (147) (240)
------------- ----------- ----------
Net realized gains (losses) $ 6 (100) (229)
============= =========== ==========
</TABLE>
The Bank periodically applies the stress test to its securities
portfolio. To meet the stress test a security's estimated market value
should not decline more than certain percentages given certain assumed
interest rate increases. The Bank has no securities which failed this
stress test.
FF-22
<PAGE> 180
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(3) DEBT AND EQUITY SECURITIES, CONTINUED
Securities available-for-sale with approximate carrying values of
$10,383,000 and $11,323,000 (approximate amortized cost of $10,215,000
and $11,310,000) at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes required or
permitted by law. There were no securities classified as
held-to-maturity which were pledged at December 31, 1997 and 1996.
Included in the securities above at December 31, 1997 and 1996,
respectively, are securities with a carrying value of approximately
$3,989,000 and $2,052,000 (market value of $4,158,000 and $2,066,000)
in obligations of political subdivisions located within the State of
Tennessee. Additionally, securities issued by or in connection with the
Federal National Mortgage Association with a carrying value of
approximately $29,133,000 and $7,326,000 (amortized cost of $29,263,000
and $7,385,000) are included in securities. Management purchases only
obligations of such political subdivisions it considers to be
financially sound.
Securities that have rates that adjust prior to maturity totaled
approximately $16,960,000 and $13,772,000 at December 31, 1997 and
1996, respectively.
Included in the securities portfolio is stock of the Federal Home Loan
Bank amounting to $403,000 and $341,000 at December 31, 1997 and 1996,
respectively. The stock can be sold back at par and only to the Federal
Home Loan Bank or to another member institution.
(4) PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
In Thousands
---------------------
1997 1996
------- -----
<S> <C> <C>
Land $ 348 348
Buildings and improvements 2,677 2,237
Furniture and equipment 2,125 1,867
Construction in progress 16 175
------- -----
5,166 4,627
Less accumulated depreciation (1,760) (1,599)
------- -----
$ 3,406 3,028
======= =====
</TABLE>
FF-23
<PAGE> 181
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(5) DEPOSITS
Deposits at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
In Thousands
----------------------
1997 1996
-------- -------
<S> <C> <C>
Demand deposits $ 15,709 12,882
Negotiable order of withdrawals 10,811 9,681
Money market demand accounts 15,040 8,677
Savings deposits 9,006 12,645
Certificates of deposit and individual retirement
accounts $100,000 or greater 27,441 20,680
Other certificates of deposit and individual
retirement accounts 44,999 40,429
-------- -------
$123,006 104,994
======== =======
</TABLE>
Principal maturities of certificates of deposit and individual
retirement accounts at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
In Thousands
--------------------------------------------------------
Single Deposits Single Deposits
Maturity Under $100,000 Over $100,000 Total
-------- -------------- ------------- -------
<S> <C> <C> <C>
3 months or less $12,653 8,247 20,900
3 to 6 months 11,698 6,247 17,945
6 to 12 months 16,159 11,537 27,696
1 to 5 years 4,395 1,410 5,805
Over 5 years 94 -- 94
------- ------ -------
$44,999 27,441 72,440
======= ====== =======
</TABLE>
The Bank is required to maintain cash balances or balances with the
Federal Reserve Bank or other correspondent banks based on certain
percentages of deposit types. The average required amounts for the
years ended December 31, 1997 and 1996 were approximately $603,000 and
$530,000, respectively.
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank totaling $335,000 at
December 31, 1996 bear interest at 5.39% and were due November 26,
1997. The advances were collateralized by a blanket pledge of
approximately $502,000 of the Bank's mortgage loan portfolio. The
advances were paid in full during 1997.
FF-24
<PAGE> 182
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(7) NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The significant components of non-interest income and non-interest
expense for the year ended December 31, 1997, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
In Thousands
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non-interest income:
Service charges on deposits $ 607 568 517
Other fees and commissions 546 340 181
Gain on sale of loans 186 -- --
Securities gains 15 47 11
Other income 143 172 139
------- ------ ------
Total non-interest income $ 1,497 1,127 848
======= ====== ======
Non-interest expense:
Salaries and employee benefits $ 2,328 1,947 1,560
Occupancy expenses, net 277 245 183
Furniture and equipment expenses 341 278 201
FDIC insurance 13 2 96
Security losses 9 147 240
Other operating expenses 1,345 1,187 940
------- ------ ------
Total non-interest expense $ 4,313 3,806 3,220
======= ====== ======
</TABLE>
(8) INCOME TAXES
The components of the net deferred tax asset (liability) at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
In Thousands
---------------------
1997 1996
------- ------
Deferred tax asset:
<S> <C> <C>
Federal $ 354 289
State 67 54
------- ------
421 343
------- ------
Deferred tax liability:
Federal (292) (166)
State (55) (31)
------- ------
(347) (197)
------- ------
Net deferred tax asset $ 74 146
======= ======
</TABLE>
FF-25
<PAGE> 183
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES, CONTINUED
The tax effects of each type of significant item that gave rise to
deferred taxes at December 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
In Thousands
----------------------
1997 1996
------- ------
<S> <C> <C>
Financial statement allowance for loan losses
in excess of tax allowance $ 268 206
Excess of depreciation deducted for tax purposes
over the amounts deducted in the financial statements (76) (68)
Deferred compensation deducted for financial
statements, not deducted for tax purposes 153 137
Excess of estimated market value over amortized
cost related to securities available-for-sale (261) (129)
FHLB stock dividends not recognized for
tax purposes (10) --
------- ------
Net deferred tax asset $ 74 146
======= ======
</TABLE>
The components of income tax expense (benefit) are summarized as
follows:
<TABLE>
<CAPTION>
In Thousands
---------------------------
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1997
----
Current $ 716 171 887
Deferred (50) (9) (59)
------- ------ ------
Total $ 666 162 828
======= ====== ======
1996
----
Current $ 638 145 783
Deferred (79) (15) (94)
------- ------ ------
Total $ 559 130 689
======= ====== ======
1995
----
Current $ 578 142 720
Deferred (58) (13) (71)
------- ------ ------
Total $ 520 129 649
======= ====== ======
</TABLE>
FF-26
<PAGE> 184
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(8) INCOME TAXES, CONTINUED
A reconciliation of actual income tax expense of $828,000, $689,000 and
$649,000 for the years ended December 31, 1997, 1996 and 1995 to the
"expected" tax expense (computed by applying the statutory tax rate of
34% to earnings before income taxes) is as follows:
<TABLE>
<CAPTION>
In Thousands
---------------------------
1997 1996 1995
------- ------ -----
<S> <C> <C> <C>
Computed "expected" tax expense $ 862 758 640
Life insurance proceeds -- (18) --
State income taxes, net of Federal income
tax benefit 107 86 75
Tax exempt interest, net of interest expense
exclusion (159) (130) (106)
Other 18 (7) 40
------- ------ -----
Actual tax expense $ 828 689 649
======= ====== =====
</TABLE>
Total income tax expense for 1997 includes an income tax expense of
$2,000 related to the sale of securities. Total income tax expense for
1996 and 1995, respectively, includes an income tax benefit of $38,000
and $87,000 related to the sale of securities.
(9) REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS
The bank is subject to regulatory capital requirements administered by
the Tennessee Department of Financial Institutions, Federal Deposit
Insurance Corporation and the Federal Reserve. Failure to meet capital
requirements can initiate certain mandatory and possibly additional
discretionary-actions by regulators that if undertaken could, have a
direct material effect on the Bank's financial statements. The Bank's
capital classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Those qualitative judgments could also affect the Bank's capital status
and the amounts of dividends the subsidiary may distribute. At December
31, 1997 and 1996, management believes that the Bank meets all such
capital requirements to which it is subject.
The Bank is required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. At
December 31, 1997 and 1996, the bank is required to have minimum Tier I
and total risk-based capital ratios of 4% and 8%, respectively. The
actual ratios at those dates were 11.12% and 12.25% and 11.43% and
12.67%, respectively. The leverage ratios at December 31, 1997 and 1996
were 7.07% and 7.46% and the minimum requirement was 4.0%.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are commitments outstanding and
contingent liabilities such as legal proceedings pending against the
Bank. In the opinion of management, no material adverse effect on the
financial position is anticipated as a result of these items.
The Bank has lines of credit with other financial institutions totaling
$3,500,000. The outstanding balance at December 31, 1997 and 1996,
respectively, was $375,000 and $660,000 and is included in the
accompanying financial statements as Federal funds purchased.
The Bank leases a building from one of its directors in which two of
its subsidiaries operate. The lease is for a one year term and was
automatically renewed on February 1, 1996 for three additional one year
terms unless notice is given of intent to terminate sixty days prior to
the expiration of the one year term. Monthly rental amounts are $400
FF-27
<PAGE> 185
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(10) COMMITMENTS AND CONTINGENT LIABILITIES, CONTINUED
through January 31, 1996, and increase to $500 at that date. Rental
expense under the lease totaled $6,000, $5,900 and $4,800 during 1997,
1996 and 1995, respectively. Future minimum rentals at December 31,
1997 are $6,000 in 1998 and $500 in 1999.
(11) DEFERRED COMPENSATION PLAN
The Bank provides its directors and executive officers with the
opportunity to participate in an unfunded deferred compensation
program. There were sixteen participants in the program at December 31,
1997 and eight participants at December 31, 1996. Under the program
participants may defer a portion of their total cash compensation. The
amounts deferred remain the sole property of the Bank, which uses
corporate funds to purchase either insurance policies on the lives of
the participants or other investments. The insurance policies, which
remain the sole property of the Bank, are payable to the Bank upon the
death of the participant. The Bank separately contracts with the
participant to pay benefits based upon the deferred amount compounded
at an interest rate as determined by management. At December 31, 1997
and 1996, four participants had elected to commence receiving benefits
under the plan. The deferred compensation liability totaled $404,000
and $361,000 at December 31, 1997 and 1996, respectively. Cash
surrender values of the life insurance policies totaled $434,000 and
$370,000 at December 31, 1997 and 1996, respectively. The face amount
of the insurance policies in force at December 31, 1997 and 1996 was
approximately $1,957,000 and $1,257,000, respectively. The program is
not qualified under Section 401 of the Internal Revenue Code.
(12) EMPLOYEE STOCK OWNERSHIP PLAN
The Bank's parent company, CSB Financial Corporation ("Company") has an
Employee Stock Ownership Plan ("ESOP"), the purpose of which is to
enable participating employees to share in the growth of the Company by
acquiring ownership in the Company's stock.
Employees are eligible upon completing 1,000 hours of service within
the first 12 months of employment and attaining the age of 18. The Plan
provides for graduated vesting of benefits based on years of service.
Contributions to the Plan are determined annually by the Bank's Board
of Directors. The contributions for each of the years ended December
31, 1997, 1996 and 1995 amounted to $180,000, $150,000 and $150,000,
respectively.
At December 31, 1997 and 1996, the Plan owned 23.8% of the Company's
common stock.
FF-28
<PAGE> 186
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
In Thousands
---------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
------
Loans, less allowance for possible loan losses of $823,000
and $764,000, respectively $ 68,434 58,498
Loans to subsidiaries 7,294* 7,665*
Securities:
Held-to-maturity, at cost (market value - $2,850,000 and
$1,530,000, respectively) 2,733 1,527
Available-for-sale, at market (amortized cost - $45,334,000 and
$37,351,000, respectively) 46,021 37,690
-------- -------
Total securities 48,754 39,217
-------- -------
Loans held for sale 540 1,198
-------- -------
Total earning assets 125,022 106,578
-------- -------
Cash and due from banks 4,167 4,149
Premises and equipment, net 3,381 3,017
Deferred income taxes 24 102
Accrued interest receivable 1,240 1,037
Investment in subsidiaries 211* 131*
Other assets 560 459
-------- -------
Total assets $134,605 115,473
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $123,107 105,063
Federal funds purchased 375 660
Accrued interest payable 577 456
Other liabilities 614 594
Advances from Federal Home Loan Bank -- 335
-------- -------
Total liabilities 124,673 107,108
-------- -------
Stockholders' equity:
Common stock, par value $1.00 per share, authorized 200,000
shares, issued and outstanding 178,154 shares 178 178
Additional paid-in capital 1,907 1,907
Retained earnings 7,421 6,070
Net unrealized gains on available-for-sale securities, net of taxes
of $261,000 and $129,000, respectively 426 210
-------- -------
Total stockholders' equity 9,932 8,365
-------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
Total liabilities and stockholders' equity $134,605 115,473
======== =======
</TABLE>
*Eliminated in consolidation.
FF-29
<PAGE> 187
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 7,301 6,275 5,382
Interest and dividends on securities:
Taxable securities 2,475 2,234 2,143
Exempt from Federal income taxes 545 444 354
Interest on Federal funds sold 60 73 52
Interest on interest-bearing deposits in
financial institutions -- -- 5
------- ------- -------
Total interest income 10,381 9,026 7,936
------- ------- -------
Interest expense:
Interest on negotiable order of withdrawal accounts 244 249 264
Interest on money market demand accounts 518 308 200
Interest on savings accounts 836 776 771
Interest on certificates of deposit 3,323 2,754 2,383
Interest on Federal funds purchased 22 21 15
Interest on advances from Federal Home Loan Bank 19 1 --
------- ------- -------
Total interest expense 4,962 4,109 3,633
------- ------- -------
Net interest income before provision for possible loan losses 5,419 4,917 4,303
Provision for possible loan losses 176 165 147
------- ------- -------
Net interest income after provision for possible loan losses 5,243 4,752 4,156
------- ------- -------
Non-interest income 1,257 1,122 852
Non-interest expense 4,078 3,682 3,148
------- ------- -------
Earnings before income taxes and equity
in earnings of subsidiaries 2,422 2,192 1,860
Equity in earnings of subsidiaries 70* 22* 17*
------- ------- -------
Earnings before income taxes 2,492 2,214 1,877
Income taxes 785 675 644
------- ------- -------
Net earnings $ 1,707 1,539 1,233
======= ======= =======
</TABLE>
*Eliminated in consolidation.
FF-30
<PAGE> 188
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 1,707 1,539 1,233
------- ------- -------
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale securities
arising during the period, net of taxes of $134,000, tax
benefits of $216,000 and taxes of $838,000, respectively 220 (353) 1,369
Reclassification adjustment for (gains) losses included in
net earnings, net of income taxes of $2,000 and income
tax benefits of $38,000 and $87,000, respectively (4) 62 142
------- ------- -------
Other comprehensive earnings (loss) 216 (291) 1,511
------- ------- -------
Comprehensive earnings $ 1,923 1,248 2,744
======= ======= =======
</TABLE>
FF-31
<PAGE> 189
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
In Thousands
------------------------------------------------------------------
Net
Unrealized
$1.00 Gains (Losses)
Par Value Additional On Available-
Common Paid-In Retained For-Sale
Stock Capital Earnings Securities Total
--------- ---------- -------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 178 1,907 4,010 (1,010) 5,085
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,233 -- 1,233
Net change in unrealized
appreciation during the year, net
of income taxes of $925,000 -- -- -- 1,511 1,511
------ ------ ------ ------ ------
Balance December 31, 1995 178 1,907 4,887 501 7,473
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,539 -- 1,539
Net change in unrealized
appreciation during the year, net
of tax benefits of $178,000 -- -- -- (291) (291)
------ ------ ------ ------ ------
Balance December 31, 1996 178 1,907 6,070 210 8,365
Dividends paid, $2.00 per share -- -- (356) -- (356)
Net earnings -- -- 1,707 -- 1,707
Net change in unrealized
appreciation during the year, net
of income taxes of $132,000 -- -- -- 216 216
------ ------ ------ ------ ------
Balance December 31, 1997 $ 178 1,907 7,421 426 9,932
====== ====== ====== ====== ======
</TABLE>
FF-32
<PAGE> 190
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 10,174 9,098 7,739
Fees and commissions received 1,242 1,023 841
Proceeds from sale of loans 12,141 13,284 6,365
Origination of loans held for sale (11,483) (14,182) (6,523)
Interest paid (4,840) (4,087) (3,475)
Cash paid to suppliers and employees (3,753) (3,162) (2,619)
Income taxes paid (839) (757) (656)
-------- -------- --------
Net cash provided by operating activities 2,642 1,217 1,672
-------- -------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities (19,949) (20,633) (15,671)
Proceeds from sales of available-for-sale securities 4,491 17,030 13,600
Proceeds from maturities of available-for-sale securities 6,404 4,838 3,633
Purchase of held-to-maturity securities (425) (330) (4,391)
Proceeds from maturities of held-to-maturity securities 300 464 842
Proceeds from maturities of interest bearing deposits in banks -- -- 100
Loans made to customers, net of repayments (9,741) (13,498) (9,262)
Purchase of premises and equipment (695) (608) (824)
Proceeds from sales of other real estate -- -- 76
-------- -------- --------
Increase in cash surrender value of directors' and officers'
life insurance policies (64) (60) (59)
Proceeds from life insurance policy -- 82 --
Purchase of other assets (3) (4) (5)
Purchase of subsidiary common stock (10) (64) (1)
-------- -------- --------
Net cash used in investing activities (19,692) (12,783) (11,962)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 6,713 3,054 2,207
Net increase in time deposits 11,331 7,199 9,415
Increase (decrease) in Federal funds purchased (285) 660 --
Advances from FHLB -- 335 --
Repayment of advances from FHLB (335) -- (175)
Dividends paid (356) (356) (356)
-------- -------- --------
Net cash provided by financing activities 17,068 10,892 11,091
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 18 (674) 801
Cash and cash equivalents at beginning of year 4,149 4,823 4,022
-------- -------- --------
Cash and cash equivalents at end of year $ 4,167 4,149 4,823
======== ======== ========
</TABLE>
FF-33
<PAGE> 191
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13) CHEATHAM STATE BANK
PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
CHEATHAM STATE BANK
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
In Thousands
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings $ 1,707 1,539 1,233
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 331 281 205
Amortization and accretion, net (5) (33) (21)
Provision for loan losses 176 165 147
Provision for deferred taxes (59) (94) (71)
Securities (gains) losses (6) 100 229
Gain on life insurance proceeds -- (51) --
Decrease (increase) in loans held for sale 658 (898) (158)
Equity in earnings of subsidiaries (70) (22) (17)
Increase in taxes payable 5 12 58
Decrease (increase) in interest receivable (203) 105 (175)
Increase in interest payable 121 22 158
Decrease (increase) in other assets (33) 8 10
Increase in other liabilities 20 83 74
------- ------- -------
Total adjustments 935 (322) 439
------- ------- -------
Net cash provided by operating activities $ 2,642 1,217 1,672
======= ======= =======
Supplemental Schedule of Non-Cash Activities:
Securities transferred to available-for-sale $ -- -- 7,102
======= ======= =======
Securities transferred to held-to-maturity $ 1,083 -- 486
======= ======= =======
Change in unrealized gain in securities available-for-sale,
net of income taxes of $132,000 and income tax benefit
of $178,000 and income taxes of $925,000, respectively $ 216 (291) 1,511
======= ======= =======
Loans transferred to other real estate $ 70 -- --
======= ======= =======
</TABLE>
FF-34
<PAGE> 192
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Bank disclose estimated fair values for its financial instruments. Fair
value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments.
Cash and short-term investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investments and Mortgage-Backed Securities
The carrying amounts for short-term investments approximate
fair value because they mature in 90 days or less and do not
present unanticipated credit concerns. The fair value of
longer-term investments and mortgage-backed securities, except
certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair value of certain
state and municipal securities is not readily available
through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
SFAS No. 107 specifies that fair values should be calculated
based on the value of one unit without regard to any premium
or discount that may result from concentrations of ownership
of a financial instrument, possible tax ramifications, or
estimated transaction costs. Accordingly, these considerations
have not been incorporated into the fair value estimates.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such
as commercial, mortgage and consumer.
The fair value of the various categories of loans is estimated
by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining average estimated
maturities.
The estimated maturity for mortgages is modified from the
contractual terms to give consideration to management's
experience with prepayments. Management has made estimates of
fair value discount rates that it believes to be reasonable.
However, because there is no market for many of these
financial instruments, management has no basis to determine
whether the fair value presented above would be indicative of
the value negotiated in an actual sale.
The value of the loan portfolio is also discounted in
consideration of the credit quality of the loan portfolio as
would be the case between willing buyers and sellers.
Particular emphasis has been given to loans on the Bank's
internal watch list. Valuation of these loans is based upon
borrower performance, collateral values (including external
appraisals), etc.
Deposit Liabilities
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities. Under
the provision of SFAS No. 107 the fair value estimates for
deposits does not include the benefit that results from the
low cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market.
FF-35
<PAGE> 193
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Notes Payable
Rates currently available to the Bank for debt with similar
terms and remaining maturities are used to estimate fair value
of existing notes payable.
Commitments to Extend Credit, Standby Letters of Credit and
Financial Guarantees Written
Loan commitments are made to customers generally for a period
not to exceed one year and at the prevailing interest rates in
effect at the time the loan is closed. Commitments to extend
credit related to construction loans are made for a period not
to exceed six months with interest rates at the current market
rate at the date of closing. In addition, standby letters of
credit are issued for periods up to three years with rates to
be determined at the date the letter of credit is funded. Fees
are only charged for the construction loans and other
commercial commitments and the amounts unearned at December
31, 1997 and 1996 are insignificant.
FF-36
<PAGE> 194
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
In Thousands
--------------------------------------------------
1997 1996
------------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 4,167 4,167 4,149 4,149
Securities 48,754 48,871 39,217 39,220
Loans held for sale 540 540 1,198 1,198
Loans 76,600 67,061
Less: allowance for loan losses (958) (882)
--------- ---------
Loans, net of allowance 75,642 75,322 66,179 65,365
--------- ---------
Financial liabilities:
Deposits 123,006 123,215 104,994 104,753
Federal funds purchased 375 375 660 660
FHLB advance -- -- 335 335
Unrecognized financial instruments:
Commitments to extend credit -- -- -- --
Standby letters of credit -- -- -- --
</TABLE>
Limitations
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. These estimates do not reflect
any premium or discount that could result from offering for
sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a
significant portion of the Bank'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.
Fair value estimates are based on estimating
on-and-off-balance sheet 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. Other significant
assets and liabilities that are not considered financial
assets or liabilities include deferred tax assets and
liabilities and property, 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 the estimates.
(15) CONCENTRATION OF CREDIT RISK
Practically all of the Bank's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the Bank's
market area. Practically all such customers are depositors of the Bank.
Investment in state
FF-37
<PAGE> 195
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(15) CONCENTRATION OF CREDIT RISK, CONTINUED
and municipal securities also include governmental entities within the
Bank's market area. The concentrations of credit by type of loan are
set forth in note 2 to the consolidated financial statements.
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments consist primarily of commitments
to extend credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
In Thousands
------------------
Contract or
Notional Amount at
December 31, 1997
------------------
<S> <C>
Financial instruments whose contract
amounts represent credit risk:
Commercial loan commitments $ 3,734
Unfunded lines-of-credit 11,468
Letters of credit 522
---------
Total $ 15,724
=========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to be drawn upon, the total commitment amounts
generally represent future cash requirements. The Bank evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of
collateral, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the counterparty.
Collateral normally consists of real property.
(17) EARNINGS PER SHARE (EPS)
In 1997, Statement of Financial Accounting Standards ("SFAS") 128
"Earnings Per Share" established uniform standards for computing and
presenting earnings per share. SFAS 128 replaces the presentation of
primary earnings per share with the presentation of basic earnings per
share and diluted earnings per share. The computation of basic earnings
per share is based on the weighted average number of common shares
outstanding during the period.
FF-38
<PAGE> 196
CHEATHAM STATE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(17) EARNINGS PER SHARE (EPS), CONTINUED
The following is a summary of the components comprising basic earnings
per share (EPS):
<TABLE>
<CAPTION>
In Thousands, Except Shares
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic EPS Computation:
Numerator - Income available to common
Stockholders $ 1,707 1,539 1,233
Denominator - Weighted average number of
Outstanding 178,154 178,154 178,154
-------- -------- --------
Basic earnings per common share $ 9.58 8.64 6.92
======== ======== ========
</TABLE>
The Bank has no dilutive securities outstanding.
FF-39
<PAGE> 197
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF JUNE 9, 1998
BY AND AMONG
FIRST AMERICAN CORPORATION,
FIRST AMERICAN NATIONAL BANK,
CSB FINANCIAL CORPORATION,
AND
CHEATHAM STATE BANK
A-1
<PAGE> 198
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
The Bank Merger.................................................................................................A-5
1.1 The Bank Merger...............................................................................A-5
1.2 Effect of the Bank Merger.....................................................................A-6
1.3 Conversion of Shares..........................................................................A-6
1.4 Exchange of Certificates......................................................................A-7
1.5 Shares of Dissenting Holders..................................................................A-7
ARTICLE II
The Merger......................................................................................................A-7
2.1 Effective Time of the Merger..................................................................A-7
2.2 Closing.......................................................................................A-7
2.3 Effects of the Merger.........................................................................A-8
ARTICLE III
Effect of the Merger on the Capital Stock of the Constituent
Corporations; Exchange of Certificates..........................................................................A-8
3.1 Effect on Capital Stock.......................................................................A-8
3.2 Exchange of Certificates......................................................................A-10
ARTICLE IV
Representations and Warranties..................................................................................A-12
4.1 Representations and Warranties of CSB.........................................................A-12
4.2 Representations and Warranties of FAC.........................................................A-22
ARTICLE V
Covenants Relating to Conduct of Business.......................................................................A-26
5.1 Covenants of Both Parties.....................................................................A-26
5.2 Covenants of CSB..............................................................................A-26
5.3 Covenants of FAC's............................................................................A-28
5.4 Adverse Changes in Condition..................................................................A-28
5.5 Reports.......................................................................................A-28
5.6 Affirmative Covenants of CSB..................................................................A-29
5.7 No Solicitation...............................................................................A-30
</TABLE>
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ARTICLE VI
Additional Agreements..........................................................................................A-30
6.1 Preparation of S-4 and the Joint Proxy Statement.............................................A-30
6.2 Letter of CSB's Accountants..................................................................A-31
6.3 Letter of FAC's Accountants..................................................................A-31
6.4 Access to Information........................................................................A-32
6.5 CSB and the Bank Stockholders' Meetings......................................................A-32
6.6 Legal Conditions to Merger...................................................................A-32
6.7 Affiliates...................................................................................A-33
6.8 Exchange Listing.............................................................................A-33
6.9 Transition of Certain Employee Benefit Plans;
Employment Matters...........................................................................A-33
6.10 Expenses.....................................................................................A-35
6.11 Brokers or Finders...........................................................................A-35
6.12 Indemnification; Directors' and Officers' Insurance..........................................A-35
6.13 Reserved.....................................................................................A-36
6.14 CSB Accruals and Reserves....................................................................A-36
6.15 Bank Merger..................................................................................A-36
6.16 Additional Agreements........................................................................A-36
6.17 Reserved.....................................................................................A-37
6.18 Cooperation Generally........................................................................A-37
6.19 Deferred Compensation........................................................................A-37
ARTICLE VII
Conditions Precedent...........................................................................................A-37
7.1 Conditions to Each Party's Obligation to Effect the
Merger and the Bank Merger...................................................................A-37
7.2 Conditions to Obligations of FAC and FANB....................................................A-38
7.3 Conditions to Obligations of CSB and the Bank................................................A-42
ARTICLE VIII
Termination and Amendment......................................................................................A-45
8.1 Termination..................................................................................A-45
8.2 Rights and Obligations upon Termination......................................................A-49
8.3 Fees and Expenses............................................................................A-49
8.4 Effect of Termination........................................................................A-50
</TABLE>
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<TABLE>
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ARTICLE IX
General Provisions.............................................................................................A-50
9.1 Nonsurvival of Representations, Warranties, and Agreements...................................A-50
9.2 Notices......................................................................................A-51
9.3 Interpretation...............................................................................A-51
9.4 Counterparts.................................................................................A-52
9.5 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership..........................................................................A-52
9.6 Governing Law................................................................................A-52
9.7 Injunctive Relief; Limitations on Remedies...................................................A-52
9.8 Publicity....................................................................................A-52
9.9 Assignment...................................................................................A-53
9.10 Consents.....................................................................................A-53
9.11 Disclosures..................................................................................A-53
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION dated as of June 9,
1998 (the "Agreement"), between First American Corporation, a Tennessee
corporation ("FAC"), First American National Bank, a national banking
association ("FANB"), CSB Financial Corporation, a Tennessee corporation ("CSB")
and Cheatham State Bank, a Tennessee banking corporation ("Bank").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of FAC, FANB, CSB and the
Bank 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 CSB would merge with and into FAC (the "Merger")
and the Bank would merge into FANB (the "Bank Merger"); and
WHEREAS, FAC, CSB and the Bank desire to make certain
representations, warranties and agreements in connection with the Merger and the
Bank Merger and also to prescribe various conditions to the Merger and the Bank
Merger; and
WHEREAS, it is intended, for Federal income tax purposes, that
the Merger and the Bank Merger shall qualify as reorganizations under the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), and it is further intended that the Merger and the Bank Merger shall be
accounted for as a pooling of interests.
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 Bank Merger
1.1 The Bank Merger. Pursuant to the laws of the United States of
America and the State of Tennessee, as applicable, and subject to the terms and
conditions of this Agreement, the Bank shall be merged with and into FANB, which
shall be the surviving bank, immediately after, but essentially concurrently
with the Merger.
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1.2 Effect of the Bank Merger. At the effective time, the Bank
shall be merged with and into FANB in the manner and with the effect provided by
the laws of the United States of America and the State of Tennessee, if
applicable, and the separate legal, existence of the Bank shall cease except to
the extent provided by the laws of the United States of America or Tennessee in
the case of a bank after its merger into another bank, and thereupon the Bank
and FANB (sometimes referred to as the "Merging Banks") shall be a single bank.
FANB as the surviving bank, shall thereupon and thereafter possess all the
rights, privileges, powers and franchises, of a public as well as a private
nature, and shall be subject to all of the restrictions, disabilities and duties
of the Merging Banks; and all of the rights, privileges, powers, liabilities and
franchises of the Merging Banks on whatever account, subscriptions for shares
and all other things in action or belonging to the Merging Banks shall be taken
and deemed to be vested in FANB without further act or deed.
The outstanding shares of capital stock of the Bank shall be converted
on the basis, terms and conditions described in Section 1.3.
(a) Articles of Association and Bylaws. The Articles of Association
and Bylaws of FANB in effect immediately prior to the Bank Merger shall govern
FANB after the Bank Merger without amendment.
(b) Directors. The directors of FANB immediately following
the Bank Merger shall be those directors of FANB immediately prior to the Bank
Merger without change.
1.3 Conversion of Shares. At the effective time of the Bank
Merger, each share of FANB capital stock outstanding immediately prior to the
Bank Merger shall retain all of its present rights and privileges and shall be
unchanged as the result of the Bank Merger. At the effective time of the Bank
Merger, the issued and outstanding shares of Bank Common Stock held by CSB shall
be canceled. Each share of Bank Common Stock other than that held by CSB which
is outstanding immediately prior to the Bank Merger (of which there shall be no
more than 6,867.75 shares), other than shares to which dissenters' rights are
perfected, and all rights in respect thereof, at the effective time of the Bank
Merger shall be converted into the right to receive 4.4653 shares of FAC Common
Stock including the corresponding number of rights associated with the FAC
Common Stock pursuant to the FAC Rights Agreement (the "Bank Conversion Ratio")
unless prior to the effective time of the Bank Merger the outstanding shares of
FAC Common Stock have been increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization, reclassification,
stock dividend, stock split, reverse stock split or other similar change in
which case applicable adjustments shall be made to the Bank Conversion Ratio.
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1.4 Exchange of Certificates. After the effective time of the
Bank Merger, each holder of shares of Bank Common Stock outstanding immediately
prior to the Bank Merger, other than shares held by CSB or shares to which
dissenters' rights are perfected, and all rights in respect thereof, shall, upon
surrender for cancellation of a certificate or certificates representing the
number of shares of FAC Common Stock into which such shares of Bank Common Stock
shall have been converted pursuant to the procedures set forth in Section 3.2
below.
1.5 Shares of Dissenting Holders. If any holder of Bank Common
Stock shall dissent from the Bank Merger and demand the value of their shares,
any issued and outstanding shares of Bank Common Stock held by any such holder
shall not be converted as aforesaid, but shall thereafter be canceled and from
and after the effective time of the Bank Merger shall represent only the right
to receive such consideration as may be determined to be due such dissenting
holder under applicable law.
ARTICLE II
The Merger
2.1 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 2.3(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. The Bank Merger shall become effective immediately following the
Effective Time.
2.2 Closing. The closing of the Merger and the Bank 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 December 1998, 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 7.1, 7.2 and 7.3 (other
than the delivery of the officers' certificate referred to in Sections 7.2(b)
and 7.3(b) (provided that the other closing conditions set forth in Article VI
have been met or waived as provided in Article VII 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.
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2.3 Effects of the Merger. (a) At the Effective Time, (i) the
separate existence of CSB shall cease and CSB shall be merged with and into FAC,
(ii) the charter of FAC as in effect immediately prior to the Effective Time
shall be the charter of the Surviving Corporation and (iii) the By-laws of FAC
as in effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation.
(b) As used in this Agreement, "Constituent Corporation" shall
mean FAC and CSB 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 III
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
3.1 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 CSB Common Stock:
(a) Cancellation of Stock. All shares of the no par value
common stock of CSB (the "CSB 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 $2.50 par value common stock of
FAC (the "FAC Common Stock") that are owned by CSB 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 CSB Common Stock. Subject to Section 3.2(a),
each of the issued and outstanding shares of CSB Common Stock and each of the
issued and outstanding options for CSB Common Stock (other than shares to be
canceled in accordance with Section 3.1(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 9.7071 shares of fully paid and
nonassessable shares of FAC
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Common Stock (the "CSB Conversion 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)) unless prior to the Effective Time the
outstanding shares of FAC Common Stock have been increased, decreased, changed
into or exchanged for a different number or kind of shares through a
reorganization (but not a merger where FAC is the surviving corporation),
reclassification, stock dividend, stock split, reverse stock split or other
similar change in which case applicable adjustments shall be made to the CSB
Conversion Ratio.
All such shares of CSB 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 CSB Common Stock
has been converted and the right to cash payment for fractional shares, if any.
Certificates previously representing shares of CSB Common Stock shall be
exchanged for certificates representing whole shares of FAC Common Stock issued
in consideration therefor and cash for fractional shares, if any, upon the
surrender of such certificates in accordance with Section 2.2.
(c) Conversion of CSB Stock Options. Each option to purchase a
share of CSB Common Stock ("CSB Stock Options") issued and outstanding
immediately prior to the Effective Time shall be converted into and exchangeable
for the right to receive the number of shares of FAC Common Stock equal to the
CSB Conversion Ratio on a pro rata basis. Prior to the Effective Time, FAC shall
reserve for issuance the number of shares of CSB Common Stock necessary to
satisfy FAC's obligations under this Section.
(d) Dissenters Rights. Notwithstanding anything in this
Agreement to the contrary, and only to the extent required by TBCA Section
48-23-101 et seq. ("TBCA Dissenters' Provisions"), shares of CSB Common Stock
which are issued and outstanding immediately prior to the Effective Time and
which are held by stockholders who shall not have voted such shares in favor of
the Merger and the transactions related thereto and who shall have delivered to
CSB a written demand for appraisal of such shares of CSB Common Stock
(collectively, "Dissenting Shares") in the manner provided by the TBCA
Dissenters' Provisions shall not be entitled to the right to receive FAC shares
in accordance with Section 3.1(b) hereof, but the holders of the Dissenting
Shares shall be entitled to the appraised value of such shares in accordance
with the TBCA Dissenters' Provisions; provided, however, that (a) if any holder
of Dissenting Shares shall subsequently deliver a written withdrawal of his or
her demand for appraisal of such shares or (b) if any holder fails to establish
his or her entitlement to appraisal rights as provided in the TBCA Dissenters'
Provisions or (c) if neither any holder of Dissenting Shares has filed a
petition demanding a determination of the value of all Dissenting Shares within
the time provided in the TBCA Dissenters' Provisions, such holder or holders
shall forfeit the right to appraisal of such shares and such shares
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shall thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive FAC shares
solely in accordance with Section 2.1(b) hereof. CSB shall give FAC prompt
written notice of any demand received by CSB from holders of Dissenting Shares,
and FAC shall have the right to participate in all negotiations and proceeding
with respect to such dissent. CSB shall not purport to make any determination of
fair value, make any payment with respect to, or settle or offer to settle any
matter arising out of such dissent.
(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.
3.2. Exchange of Certificates. (a) Exchange Agent. As of the
Effective Time, FAC shall deposit, or shall cause to be deposited, with First
Chicago Trust Company of New York or its successor (the "Exchange Agent"), for
the benefit of the holders of shares of the Bank Common Stock and the CSB Common
Stock, for exchange in accordance with Articles I and 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 1.3 and Section 3.1 in exchange
for outstanding shares of CSB Common Stock and cash for fractional shares.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, 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 Bank Common Stock or CSB Common Stock (the
"Certificates") whose shares were converted into shares of FAC Common Stock
pursuant to Section 1.3 or Section 3.1 (as applicable), (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 CSB may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of FAC Common Stock and cash for fractional shares, if any.
Upon surrender of a Certificate for cancellation to the Exchange Agent together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of FAC Common Stock which such holder has the right
to receive in respect of the Certificate surrendered pursuant to the provisions
of Articles I and II hereof(after taking into account all shares of Bank Common
Stock or CSB 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 CSB Common Stock which is not
registered in the transfer records of the Bank or CSB, a certificate
representing the proper number of shares of FAC Common Stock may be issued to a
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transferee if the Certificate representing such Bank Common Stock or CSB 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
3.2, 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 3.2.
(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 3.2(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 3.2(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 Bank Common Stock or CSB
Common Stock. All shares of FAC Common Stock issued upon conversion of shares of
Bank Common Stock or CSB Common Stock in accordance with the terms hereof
(including any cash paid pursuant to Section 3.2) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Bank
Common Stock or CSB Common Stock, subject, however, to the Surviving
Corporation's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Time which may have been declared or
made by CSB or the Bank on such shares of CSB Common Stock or the Bank on such
shares of Bank 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 CSB Common Stock or Bank Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Article
III.
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(e) No Fractional Shares. (i) No certificates or scrip
representing fractional shares of FAC Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interests will
not entitle the owner thereof to vote or to any rights of a stockholder of FAC
including without limitation the right to receive dividends. Each holder of CSB
Common Stock or Bank 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
which shall be the closing price of such stock on The Nasdaq Stock Market or
such other exchange as FAC Common Stock may then be traded (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
CSB Common Stock or Bank Common Stock with respect to any fractional share
interests, the Exchange Agent shall make available such amounts to such holders
of CSB Common Stock or Bank Common Stock subject to and in accordance with the
terms of Section 3.2(b).
(f) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the stockholders of CSB or the Bank for one
year after the Effective Time shall be delivered to FAC, upon demand, and any
stockholders of CSB or the Bank who have not theretofore complied with this
Article III 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, FANB, the Bank or CSB shall be
liable to any holder of shares of CSB Common Stock, Bank Common Stock or FAC
Common Stock, as the case may be, for such shares (or dividends or distributions
with respect thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
ARTICLE IV
Representations and Warranties
4.1 Representations and Warranties of CSB. CSB represents and
warrants to FAC as follows:
(a) Organization, Standing and Power. CSB is a Tennessee
corporation and a bank holding company registered under the Bank Holding Company
Act. The Bank is a Tennessee chartered state bank. CSB owns 171,286.25 shares of
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the 178,154 outstanding shares of the capital stock of the Bank. Other than the
Bank, CSB has no subsidiaries. Community Finance Company, CSB Insurance
Services, Inc., and CSB Acceptance Corporation are all wholly owned subsidiaries
of the Bank. The Bank and the direct and indirect subsidiaries of CSB are
sometimes referred to herein individually as a "Subsidiary" or collectively as
"Subsidiaries".
Each of CSB 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 CSB.
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 CSB 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 CSB consists of 200,000 shares of CSB Common Stock, no par
value ("CSB Common Stock"). As of the date hereof, 84,946.5 shares of CSB Common
Stock were issued and outstanding, options for 7,477 shares of CSB Common Stock
were issued and outstanding and no shares of CSB Common Stock were held by CSB
in treasury or by any of its subsidiaries. Except as disclosed on Schedule
4.1(b)(i) of the CSB Disclosure Schedules, all outstanding shares of CSB capital
stock are validly issued, fully paid and nonassessable and not subject to
preemptive rights or any shareholders' agreement of any nature. As of the date
hereof, the authorized capital stock of the Bank consists of 200,000 shares of
Bank Common Stock, $1.00 par value ("Bank Common Stock"). As of the date hereof,
178,154 shares of Bank Common Stock were issued and outstanding and no shares of
Bank Common Stock were held by the Bank in treasury or by any Subsidiaries. All
outstanding shares of Bank Common Stock are validly issued, fully paid and
non-assessable and not subject to any preemptive rights or any shareholders'
agreement of any nature.
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(ii) As of the date hereof, no bonds, debentures, notes or
other indebtedness having the right to vote (or convertible into or exercisable
for securities having the right to vote) on any matters on which stockholders
may vote ("Voting Debt") of CSB were issued or outstanding.
(iii) As of the date hereof, except for this Agreement, and
except for options for 7,477 shares of CSB Common Stock, there are no options,
warrants, calls, rights, commitments or agreements of any character to which CSB
or any Subsidiary of CSB is a party or by which it is bound obligating CSB or
Bank, or any Subsidiary thereof to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or any Voting Debt
of CSB, or Bank, or any Subsidiary thereof, or obligating CSB or Bank, or any
Subsidiary thereof 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 CSB, Bank or any
Subsidiary of Bank to issue, deliver or sell, or cause to be issued, delivered
or sold, any shares of capital stock or any Voting Debt of CSB, Bank or any
Subsidiary of Bank, or obligating CSB Bank or any Subsidiary of Bank 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 CSB, Bank or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of CSB, Bank or any of
its Subsidiaries.
(iv) Except as contemplated by this Agreement and except as
disclosed in Schedule 4.1(b)(iv), since March 31, 1996, CSB 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 CSB or any of its
Subsidiaries; (B) repurchased, redeemed or otherwise acquired, directly or
indirectly through one or more of its Subsidiaries, any shares of capital stock
of CSB 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 CSB
dividends or other distributions on the outstanding shares of capital stock of
CSB, other than regular quarterly cash dividends on CSB Common Stock at a rate
not in excess of the regular quarterly cash dividends most recently declared by
CSB prior to the date hereof and as set forth in Section 4.2(c) below.
(c) Authority. (i) CSB has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the stockholders of CSB, and the receipt of all required regulatory
approvals, to consummate the transactions contemplated hereby. The Bank has all
requisite corporate power and authority to enter into this Agreement and,
subject to approval of this Agreement by the shareholders of the Bank and the
receipt of all required regulatory approvals, 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
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the part of CSB and the Bank, subject in the case of this Agreement to such
approval of this Agreement by the stockholders of CSB and the stockholders of
the Bank. This Agreement has been duly executed and delivered by CSB and
constitutes the valid and binding obligation of CSB and the Bank, 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.
(ii) Except as disclosed in Section 4.1(c)(ii) of the CSB
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 CSB or any Subsidiary of CSB 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 4.1(j)) or other
agreement, obligation, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to CSB or any Subsidiary of CSB or their respective properties or assets which
Violation would have a material adverse effect on CSB 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 CSB or any Subsidiary of CSB in
connection with the execution and delivery of this Agreement and the
transactions contemplated hereby 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
Tennessee Department of Financial Institutions (the "TDFI"), and with the U. S.
Comptroller of the Currency (the "OCC") and approval of same, (B) the filing
with the SEC of (1) a joint proxy statement in definitive form relating to the
meetings of CSB's and the Bank's stockholders, respectively, to be held in
connection with the Merger and the Bank 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 pursuant to state takeover or change in control laws
("State Takeover Approval"), (D) consents, authorizations, approvals, filings or
exemptions in connection with compliance with the applicable
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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 The Nasdaq Stock Market or such other exchange on which FAC Common
Stock may then be traded, or which are required under consumer finance, mortgage
banking an other similar laws and (E) filings, notifications and approvals under
state insurance laws and regulations.
(d) Financial Statements. CSB has made available to FAC a true
and complete copies of its consolidated financial statements for the years ended
December 31, 1995, 1996 and 1997 (the "Financial Statements"). CSB has also made
available to FAC true and complete copies of the most recent annual and
quarterly Consolidated Report of Condition and Income ("Call Reports") of The
Bank filed with the FDIC and the TDFI. 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 Financial Statements were true and accurate in all material respects,
and none of the Financial Statements 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 Financial Statements comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations with respect thereto, have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved and fairly present the consolidated
financial position of CSB and its consolidated Subsidiaries at the dates thereof
and the consolidated results of their operations and cash flows for the periods
then ended. Except as disclosed in Section 4.1(d) of the CSB Disclosure
Schedule, CSB has no off-balance sheet financial instruments including but not
limited to letters of credit, unfunded commitments and derivative financial
instruments. There are no unasserted claims that are not disclosed in the
Financial Statements that would reasonably be expected to have, individually or
in the aggregate, a material adverse effect on CSB and its Subsidiaries, taken
as a whole.
(e) Information Supplied. None of the information supplied
pursuant to this Agreement or to be supplied by CSB or the Bank 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 and the Bank 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 joint
Proxy Statement will, at the date of mailing to stockholders and at the times of
the meetings of stockholders to be held in connection with the Merger and the
Bank Merger, contain any untrue statement of a material fact or omit to state
any material fact
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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 joint Proxy Statement 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. CSB 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
CSB and its Subsidiaries, taken as a whole (the "CSB Permits"). CSB and its
Subsidiaries are in compliance with the terms of the CSB Permits. Except for
violations which, individually or in the aggregate do not have a material impact
on the operations or financial condition of CSB or its Subsidiaries, that are
disclosed on Schedule 4.1(f) of the CSB Disclosure Schedules, the businesses of
CSB and its Subsidiaries are not being conducted in violation of any law,
ordinance, or regulation of any Governmental Entity. Except for routine
examinations by Federal or state Governmental Entities charged with the
supervision or regulation of banks, thrifts, industrial loan and thrifts 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 CSB, no
investigation by any Governmental Entity with respect to CSB or any of its
Subsidiaries is pending or threatened.
(g) Litigation. As of the date of this Agreement, except as
disclosed in Section 4.1(g) of the CSB Disclosure Schedule there is no suit,
action or proceeding pending or, to the knowledge of CSB, threatened, against or
affecting CSB or any Subsidiary of CSB, nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against CSB or any Subsidiary of CSB.
(h) Taxes. CSB and each of its Subsidiaries have filed all tax
returns required to be filed by any of them and have paid (or CSB 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 CSB Financial Statements reflect an
adequate provision for current and deferred taxes payable by CSB and its
Subsidiaries accrued through the date of consolidated such financial statements.
No deficiencies for any taxes have been proposed, asserted or assessed against
CSB or any of its Subsidiaries that are not adequately reserved for. Except with
respect to claims for refund, the Federal income tax returns of CSB 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
1994. To the knowledge of CSB or any of its Subsidiaries, no Federal income tax
returns of CSB and each of its Subsidiaries consolidated are currently under
examination by the IRS. All tax information returns have been timely filed by
CSB and its Subsidiaries. To the best knowledge of CSB, each tax identification
number relating to an interest bearing account at any of CSB's Subsidiaries is
accurate, and in any
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instances where such tax identification number is missing, CSB has used its best
efforts to obtain the relevant information. 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 Section 4.1(i)
of the CSB Disclosure Schedule, and except for this Agreement, as of the date
hereof, neither CSB 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 CSB nor any of its Subsidiaries
maintains for the benefit of its employees any "employee benefit plans" (each a
"CSB Benefit Plan"), as defined in ss.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 Section 4.1(j) of the CSB Disclosure
Schedule. CSB has made available to FAC a true and complete copy of each CSB
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. CSB
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 CSB Benefit
Plan, and the most recent IRS determination letter, if any, for each CSB Benefit
Plan. All contributions required to be made to each CSB Benefit Plan under the
terms of that CSB Benefit Plan, ERISA, or other applicable law have been timely
made. Except as set forth in Section 4.1(j) of the CSB Disclosure Schedule, in
the case of each CSB 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 CSB Benefit
Plan exceed the actuarial present value (based on the actuarial assumptions used
by CSB and its Subsidiaries for funding) of all accrued benefits, both vested
and nonvested under that CSB Benefit Plan. Each CSB 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 CSB
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 in Section 4.1(j)
of the CSB Disclosure Schedule CSB knows of no facts or circumstances that are
likely to adversely affect the qualified status of any CSB Benefit Plan. 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 CSB Benefit Plans,
any fiduciary thereof or any party dealing with the CSB Benefit Plans to the tax
on prohibited transactions imposed by Section 4975 of the Code or to a civil
penalty
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imposed by Section 502 of ERISA. No amount is due or owing from CSB and or any
of its Subsidiaries to the Pension Benefit Guaranty Corporation under Title IV
of ERISA for any reason. No event which constitutes a "reportable event" as
defined in Section 4043 of ERISA has occurred with respect to any CSB Benefit
Plan that is covered by ERISA. Since September 2, 1974, CSB 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.
There are no issues or disputes with respect to any CSB Benefit Plan, or the
administration thereof, currently existing between any trustee or other
fiduciary thereunder, CSB or any of its Subsidiaries and any governmental
agency, employee, former employee or beneficiary of any employee or former
employee of CSB or any of its Subsidiaries. Except as set forth in Section
4.1(j) the CSB Disclosure Schedule, neither CSB 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 CSB 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) Agreement with Bank Regulators. As of the date of this
Agreement, neither CSB 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, nor has CSB or any Subsidiary 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.
(l) Absence of Certain Changes or Events. Since December 31
1997, neither CSB nor any of its Subsidiaries have incurred any material
liability, except in the ordinary course of their businesses 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 CSB or any of its Subsidiaries which has
had, or is reasonably likely to have, a material adverse effect.
(m) Vote Required. The affirmative votes of (i) the holders of
not more than a majority of the outstanding shares of CSB Common Stock entitled
to vote thereon and (ii) the holders of at least two-thirds of the outstanding
shares of Bank Common Stock are the only votes of the holders of any class or
series of CSB or Bank capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
(n) Properties. CSB or one of its Subsidiaries (i) has good,
clear and marketable title to all the properties and assets which are reflected
in the latest audited consolidated balance sheet as being owned by CSB or one of
its Subsidiaries or
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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 CSB
incurred in the ordinary course of their business and (C) such imperfections or
irregularities of title, claims, liens, charges, security interests or
encumbrances as do not affect the use of the properties or assets subject
thereto or affected thereby or otherwise impair business operations at such
properties, and (ii) is the lessee of all leasehold estates which are reflected
in the latest audited consolidated financial statements of CSB or acquired after
the date thereof (except for leases that have expired by their terms or as to
which CSB 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 the lessor.
(o) Ownership of FAC Common Stock. As of the date hereof,
neither CSB, the Bank nor, any of their respective 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).
(p) Allowance for Possible Loan Losses. The allowance for
possible loan losses shown on the Call Report of the Bank as of March 31, 1998
was in the opinion of management of CSB, 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, 1998, and as of and as of the Effective
Time will be in the opinion of management of CSB, 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.
(q) Certain Transactions with Affiliated Persons. Except as
disclosed in Section 4.1(q) of the CSB Disclosure Schedule, there are no
transactions to which CSB or any Subsidiary was a party in which any officer or
director of CSB or any Subsidiary or any other entity controlled by, under
common control with or in control of CSB had a direct or indirect interest.
(r) Permissible Activities. All of the business activities
conducted by CSB and its Subsidiaries as of the date hereof are business
activities in which each respective entity or its immediate parent company is
permitted to engage under applicable law.
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(s) Environmental Matters. Except as disclosed in Section
4.1(s) of the CSB Disclosure Schedule:
(i) The operations of CSB and its Subsidiaries have been in
the past and are 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. ss. 9601 et seq.
("CERCLA"); the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss.
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. ss. 6901 et seq.;
the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et seq.,
the Safe Water Drinking Act, 42 U.S.C. ss. 300f-300j; the Clean Air Act, 42
U.S.C. ss. 7401 et seq.; and the Occupational Safety and Health Act.
(ii) Neither CSB nor any Subsidiary has been notified of an
Environmental Laws violation; and is not otherwise aware that it is considered
potentially liable under the Environmental Laws; and neither CSB nor any
Subsidiary has 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) 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
CSB or any Subsidiary.
(iv) To the best knowledge of CSB, there has been no disposal,
release, burial or placement of Hazardous Materials on any real property not
owned, leased or operated by CSB or any Subsidiary which may result or has
resulted in contamination of or beneath the property owned, leased or operated
at any time by CSB or any Subsidiary.
(v) All of the above-ground and underground storage tanks
presently on any real property owned, leased or operated by CSB 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 CSB
or any Subsidiary by any governmental agency.
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(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 CSB or any Subsidiary under any
Environmental Law.
(t) Charter Provisions and State Anti-Takeover Laws. CSB and
each of its Subsidiaries have 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 articles of incorporation, association, charter, bylaws or other governing
instrument of CSB 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 CSB 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.
(u) Accounting for the Merger and the Bank Merger;
Reorganization. As of the date of this Agreement, neither CSB nor the Bank has
any reason to believe that the Merger and the Bank Merger will fail to qualify
(i) for pooling of interests accounting treatment under GAAP or (ii) as a
reorganization under Section 368(a) of the Code.
4.2. Representations and Warranties of FAC. FAC represents and
warrants to CSB as follows:
(a) Organization, Standing and Power. FAC is a Tennessee
corporation and a bank holding company registered under the Bank Holding Company
Act. FANB is a national banking association and a wholly owned Subsidiary of
FAC. Each of FAC and its Subsidiaries is a national bank, corporation or
partnership duly organized, validly existing and, in the case of banks or
corporations, in good standing under the laws of its jurisdiction of
incorporation or organization, has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary other than in such
jurisdictions where the failure so to qualify would not have a material adverse
effect on FAC and its Subsidiaries, taken as a whole.
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(b) Capital Structure. (i) As of the date hereof, the
authorized capital stock of FAC consists of 200,000,000 shares of FAC Common
Stock $2.50 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
May 20, 1998, 106,652,566 shares of FAC Common Stock were outstanding, no shares
of FAC Preferred Stock were outstanding. FANB is a wholly owned subsidiary of
FAC.
(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 CSB Stock Options, as the case may be, will be validly issued,
fully paid and nonassessable and not subject to preemptive rights.
(c) Authority. (i) FAC has all requisite corporate power and
authority to enter into this Agreement and, subject to the receipt of all
required regulatory approvals, to consummate the transactions contemplated
hereby. FANB has all requisite corporate power and authority to enter into this
Agreement and, subject to the receipt of all required regulatory approvals, 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 and
FANB. This Agreement has been duly executed and delivered by FAC and constitutes
the valid and binding obligation of FAC and FANB, 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.
(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, articles of incorporation or 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 or FANB
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
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FDIA and with the TDFI, and the OCC and approval of same, (B) the filing with
the SEC of the joint 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 pursuant to state
takeover or change in control laws ("State Takeover Approval"), (D) 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 such other exchange on which FAC Common
Stock may then be traded, or which are required under consumer finance, mortgage
banking and other similar laws; and (E) filings, notifications and approvals
under state insurance laws and regulations.
(d) SEC Documents. FAC has made available to CSB 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, 1997 (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 CSB true and complete copies of the most recent annual and
quarterly Consolidated Reports of Condition and Income ("Call Reports") of FANB
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 GAAP 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.
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(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 CSB and the Bank
in connection with the meetings of shareholders to vote on the Merger and the
Bank Merger, as applicable, and at all times subsequent to such mailing up to
and including the time of such meetings, 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) 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, 1997 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 CSB prior to execution of this
Agreement).
(g) 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. Under federal law, FAC as the sole
shareholder of FANB must approve the Bank Merger prior to its consummation.
(h) Consideration. FAC has reserved or will reserve for
issuance sufficient shares of FAC Common Stock for issuance in the Merger and
the Bank Merger and for the potential exercise of CSB Options that are converted
into options to acquire FAC Common Stock.
(i) Accounting for the Merger and the Bank Merger;
Reorganization. As of the date of this Agreement, FAC has no reason to believe
that the Merger or the Bank Merger will fail to qualify (i) for pooling of
interests accounting treatment under GAAP or (ii) as reorganizations under
Section 368(a) of the Code.
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ARTICLE V
Covenants Relating to Conduct of Business
5.1 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 CSB 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; (iii) prevent or impede the transactions contemplated hereby from being
accounted for as a "pooling of interests" or (iv) 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
does not adversely affect FAC's ability to consummate the Merger or the Bank
Merger or have a material adverse effect on FAC. Neither FAC nor CSB shall
intentionally take or cause to be taken any action, that would disqualify the
Merger or Bank Merger as a "reorganization" within the meaning of Section 368(a)
of the Code or from being accounted for as a pooling of interests.
5.2 Covenants of CSB. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, CSB
covenants and agrees that it will not do or agree or commit to do, or permit any
of its Subsidiaries to do or agree or commit to do, any of the following without
the prior written consent of the chief executive officer or president of FAC:
(a) amend the Articles of Incorporation, Charter, Bylaws, or
other governing instruments of CSB or any Subsidiary;
(b) incur, guarantee, or otherwise become responsible for, any
additional debt obligation or other obligation for borrowed money (other than
indebtedness of a CSB or any Subsidiary thereof to another Subsidiary) except in
the ordinary course of the business of CSB and its Subsidiaries consistent with
past practices, or impose or suffer the imposition, on any share of capital
stock held by CSB or any 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;
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(c) repurchase, redeem, or otherwise acquire or exchange,
directly or indirectly, any shares, or any securities convertible into any
shares, of the capital stock of any CSB or any Subsidiary, or declare or pay any
dividend or make any other distribution in respect of CSB's capital stock;
(d) except for this Agreement, or pursuant to the exercise of
stock CSB Stock Options outstanding as of the date hereof, issue, sell, pledge,
encumber, authorize the issuance of, enter into any contract to issue, sell,
pledge, encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of CSB Common Stock or Bank Common Stock or
any other capital stock of any CSB 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;
(e) adjust, split, combine, or reclassify any capital stock of
CSB or any Subsidiary or issue or authorize the issuance of any other securities
in respect of or in substitution for shares of CSB capital stock, or sell,
lease, mortgage, or otherwise dispose of or otherwise encumber any shares of
capital stock of any CSB Subsidiary or any assets other than in the ordinary
course of business for reasonable and adequate consideration;
(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;
(g) grant any increase in compensation or benefits to the
employees or officers of CSB or any Subsidiary except as required by law and
except for pay increases, which are customary and consistent with past practice,
to employees of CSB or the Bank on the anniversary date of their hire in an
amount not to exceed 5% of such employees current salary, 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 CSB or any Subsidiary, grant any increase
in fees or other increases in compensation or other benefits to directors of any
CSB or any Subsidiary;
(h) except as disclosed enter into or amend any employment
contract between CSB or any Subsidiary and any person that CSB or any Subsidiary
does not have the unconditional right to terminate without liability at any time
on or after the Effective Time;
(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
CSB 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 CSB or any Subsidiary thereof;
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(j) commence any litigation other than in accordance with past
practice, settle any litigation involving any liability of CSB or any Subsidiary
for money damages in excess of $5,000 or restrictions upon the operations of CSB
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;
(k) except as disclosed 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;
(l) change its methods of accounting in effect at December 31,
1997, except as required by changes in generally accepted accounting principles
concurred in by CSB's independent auditors or change its fiscal year;
(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.
5.3 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 CSB, 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 CSB Common
Stock.
5.4 Adverse Changes in Condition. Each of CSB 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.
5.5 Reports. Each of FAC and CSB 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
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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.
5.6 Affirmative Covenants of CSB. CSB 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) CSB and the Bank agree to cooperate and coordinate with
FAC and FANB in good faith to adopt and, after the Effective Time, to implement
policies and procedures pursuant to action plans acceptable to FAC and FANB with
respect to CRA, HMDA, and compliance consistent with those of FAC and FANB.
(b) No later than thirty (30) calendar days after the date of
this Agreement, CSB shall, at its cost and expense, obtain title opinions of the
real property of each branch owned by CSB or the Bank and each branch leased by
CSB or the Bank (the "CSB Properties"), and CSB shall promptly forward such
title opinions to FAC. If requested by FAC, CSB, at its cost and expense, agrees
promptly to obtain and provide to FAC a Phase I environmental assessment of any
or all of the CSB Properties. Such assessments shall include a recommendation 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, CSB agrees
promptly to obtain and provide to FAC such Phase II assessments at CSB's cost
and expense.
(c) CSB agrees to terminate all key man life insurance
maintained by CSB or the Bank as of the Effective Time.
(d) Each of CSB and the Bank agrees to take all appropriate
measures to ensure that any restrictive covenants against each of them or
against FAC, after the Effective Time, including, without limitation,
noncompetition agreements relating to the sale, marketing, or promotion of
securities, insurance products, mutual funds, and annuities, are terminated and
of no force and effect on or before the Closing Date.
(e) Each of CSB and the Bank, and any director or officer
thereof, shall provide to FAC information requested by FAC concerning any
agreement or arrangement regarding CSB's or the Bank's sale, marketing or
promotion of credit-based insurance, and, at the option of FAC, shall terminate
any such agreement or arrangement as of the Effective Time.
(f) Except as provided in (c) above, CSB agrees to maintain in
effect all existing insurance coverage including, without limitation, such
coverage with respect to existing or threatened litigation.
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(g) CSB agrees to cooperate and coordinate with FAC in good
faith to ensure that there will be no liabilities to FAC, at and after the
Effective Time, arising from or related to any former subsidiary of CSB, wholly
owned or otherwise, that is no longer in existence as of the date of this
Agreement, whether by merger, sale, dissolution, administrative dissolution, or
divestiture.
Within ten (10) days after the end of each month commencing July 1, 1998 and
continuing to the Effective Time, CSB 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.
5.7 No Solicitation. CSB will not authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of CSB or any 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). CSB will not authorize or permit any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of CSB or any CSB 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. CSB
will promptly give written notice to FAC upon becoming aware of any Competing
Transaction.
ARTICLE VI
Additional Agreements
6.1 Preparation of S-4 and the Joint Proxy Statement.
(a) For purposes of (i) holding the CSB shareholders' meeting
to on vote on the Merger and the Bank shareholders' meeting to vote on the Bank
Merger and other matters contemplated herein, and (ii) registering the FAC
Common Stock in connection with the Merger and the Bank 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
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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 joint proxy statement, insofar as it relates to
FAC to comply with Section 6.1(a) hereof. FAC agrees promptly to advise CSB if
at any time prior to the Effective Time any information provided by FAC in the
joint 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 CSB with such supplemental information as may be necessary in
order to cause such joint proxy statement, insofar as it relates to FAC, to
comply with Section 6.1(a).
(c) CSB shall furnish FAC with such information concerning CSB
and the Bank as is necessary in order to cause the S-4, insofar as it relates to
the CSB and the Bank, to comply with Section 6.1(a) hereof. CSB agrees promptly
to advise FAC if at any time prior to the Effective Time any information
provided by CSB 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. CSB shall furnish FAC with such supplemental information
as may be necessary in order to cause the S-4, insofar as it relates to CSB or
the Bank, to comply with Section 6.1(a). CSB may include the opinion referred to
in Section 7.3(e), updated to a date within three days of the date of the proxy
statement, in the proxy statement.
(d) CSB shall file with the SEC the Joint 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 the Bank Merger, and CSB shall furnish all information
concerning CSB and the Bank and the holders of CSB Common Stock and Bank Common
Stock as may be reasonably requested in connection with any such action. FAC
shall advise CSB promptly when the S-4 has become effective and of any
supplements or amendments thereto, and FAC shall furnish CSB with copies of all
such documents.
6.2 Letter of CSB's Accountants. CSB shall use its best
efforts to cause to be delivered to FAC a consent letter of Maggart &
Associates, P.C., CSB'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.
6.3 Letter of FAC's Accountants. FAC shall use is best efforts
to cause to be delivered to CSB a consent letter of KPMG Peat Marwick LLP, FAC's
independent
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auditors, dated a date within two business days before the date on which the S-4
shall become effective and addressed to CSB, in form and substance reasonably
satisfactory to CSB, 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.
6.4 Access to Information. Upon reasonable notice, CSB 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 CSB 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. CSB 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. No investigation by either FAC or CSB
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. CSB 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 CSB's customers, employees,
communities and shareholders.
6.5 CSB and the Bank Stockholders' Meetings. CSB and the Bank
shall call meetings of their respective stockholders to be held as promptly as
practicable on a date mutually agreeable to FAC for the purpose of voting upon
the approval of this Agreement. CSB and the Bank will, through their Boards of
Directors, recommend to its stockholders, 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. CSB and FAC shall coordinate and cooperate with respect to the timing of
such meetings and CSB and the Bank shall use their best efforts to hold such
meetings as soon as practicable after the date on which the S-4 becomes
effective.
6.6 Legal Conditions to Merger. Each of CSB and FAC shall, and
shall cause its Subsidiaries to, use all reasonable efforts (i) to take, or
cause to be taken, all actions necessary to comply promptly with all legal
requirements which may be imposed on such party or its Subsidiaries with respect
to the Merger and the Bank Merger and to consummate the transactions
contemplated by this Agreement, subject to the appropriate votes of stockholders
of CSB and the Bank, and (ii) to obtain (and to cooperate with the other party
to obtain) any consent, authorization, order or approval
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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 Bank Merger, and
the transactions contemplated by this Agreement. Each of CSB 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.
6.7 Affiliates. Prior to the CSB and the Bank shareholders
meetings regarding the Merger and the Bank Merger, CSB shall deliver to FAC a
letter identifying all persons who are, at the time this Agreement is submitted
for approval to the stockholders of CSB and the Bank, "affiliates" of CSB and
the Bank for purposes of Rule 145 under the Securities Act and for
pooling-of-interests accounting CSB shall use its best efforts to cause each
person named in the letter delivered by it deliver to the other party prior to
the shareholders meetings a written "affiliates" agreement, in the form attached
hereto as Exhibit A, restricting the disposition by such person of the FAC
Common Stock to be received by such person in the Merger or the Bank Merger.
6.8 Exchange Listing. FAC shall use all reasonable efforts to
cause the shares of FAC Common Stock to be issued in the Merger and the Bank
Merger to be approved for listing on The Nasdaq Stock Market or such other
exchange as FAC Common Stock may then be traded prior to the Closing Date.
6.9 Transition of Certain Employee Benefit Plans; Employment
Matters.
(a) FAC and CSB agree that the CSB Employee Stock Ownership
Plan (the "ESOP") will be continued as long as necessary in order to meet the
pooling of interests accounting requirements of the SEC for the benefit of
current employees of the Bank eligible to participate therein in accordance with
the ESOP's current terms and conditions.
(b) The other tax-qualified defined contribution and defined
benefit plans maintained by CSB or its Subsidiaries will be terminated by CSB in
a manner reasonably acceptable to FAC as of the Effective Time or as soon as may
be practicable thereafter (and FAC and CSB 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, CSB or its Subsidiaries will, to the extent permitted by
applicable funding rules under the Code and ERISA, contribute to each
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CSB 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.
All welfare and other benefit plans maintained by CSB, the
Bank or their Subsidiaries may at FAC's request be terminated by CSB in a manner
reasonably acceptable to CSB and FAC as of the Effective Time or as soon as may
be practicable thereafter. Employees of CSB, the Bank and their 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 CSB, the Bank or their Subsidiaries shall
be credited with service with CSB 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 CSB prior to the date
hereof. Employees of CSB 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 CSB 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 CSB and its Subsidiaries will be recognized in determining the vacation and
short-term disability benefits of employees of CSB and its Subsidiaries after
the Effective Time.
The tax qualified defined contribution and defined benefit
plans of CSB 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 CSB may agree on or before the
Effective Time to cause any CSB Benefit Plan in effect at the Effective Time to
terminate as of the Effective Time or 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 CSB Benefit Plans to FAC plans in a fair, equitable and
administratively reasonable manner.
FAC, FANB, CSB, the Bank and their respective Subsidiaries and
the executive officers will communicate with employees of CSB, the Bank or their
Subsidiaries concerning the matters set forth in this Section only through
mutually agreed upon communications.
(c) From and after the Effective Time, all CSB and Bank
employees who are terminated as the result of the Merger or within one year of
the consummation thereof will be eligible for benefits available under FAC's
reduction in force policy previously provided to CSB.
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6.10 Expenses. Whether or not the Merger and the Bank Merger
are 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 Joint Proxy Statement and the S-4 shall be shared
equally by FAC and CSB.
6.11 Brokers or Finders. Except as disclosed to the other
party prior to the date hereof, each of FAC, FANB, CSB and the Bank 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.
6.12 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 CSB 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 CSB or any Subsidiary of CSB, 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 CSB 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 articles of
incorporation, charter and By-laws or the charter and by laws of the CSB
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, 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 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,
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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 two
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 CSB 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 CSB 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 CSB's directors' and officers'
insurance policies (or any substitute policies permitted by this Section.
6.13 [This section intentionally left blank]
6.14 CSB Accruals and Reserves. Within three days prior to the
Closing Date, CSB shall review and, to the extent determined necessary or
advisable, consistent with GAAP, modify and change its loan, accrual and reserve
policies and practices (including loan classifications and levels of reserves
and accruals and reserves to (i) reflect the Surviving Corporation's plans with
respect to the conduct of CSB'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. Within three days
prior to the Closing, CSB also will adjust loan loss and OREO reserves as may be
appropriate, consistent with GAAP, in light of the then anticipated post-Closing
disposition of certain CSB assets. The parties agree to cooperate in preparing
for the implementation of the adjustments contemplated by this Section.
6.15 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 Bank Merger will occur immediately after the Effective Time. As soon as
practicable after the execution and delivery of this Agreement, CSB shall cause
the Bank and FAC shall cause FANB to enter into a short form Bank Plan of
Merger, mutually agreeable to the parties and consistent with this Agreement.
6.16 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, or to vest FANB with full title to all
properties, assets, rights, approvals, immunities and franchises of the Bank,
the proper officers and directors of each party to this Agreement shall take all
such necessary action.
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6.17 [This section intentionally left blank]
6.18 Cooperation Generally. Between the date of this Agreement
and the Effective Time, FAC, FANB, CSB, the Bank and their Subsidiaries shall
use their best efforts, and to take all actions necessary or appropriate, to
consummate the Merger, the Bank Merger and the other transactions contemplated
by this Agreement at the earliest practicable date.
6.19 Deferred Compensation. As of the Effective Time, FAC
shall assume and perform all obligations arising under deferred compensation
agreements and plans between CSB or the Bank and Thomas Woodall, Hugh Riegle,
Vernon Malone, and Robert Saunders. All other deferred compensation agreements
and plans in effect at CSB or the Bank shall be terminated as of the Effective
Time and FAC shall cause to be paid in a lump sum to each participant under such
terminated deferred compensation agreements and plans as soon as practicable
after the Effective Time an amount equal to the greater of (i) the total
compensation deferred by the participant under such deferred compensation
agreement and plan or (ii) the benefit liability that has been accrued on the
books of CSB or the Bank related to such participant's deferred compensation
agreement and plan as of the Effective Time.
ARTICLE VII
Conditions Precedent
7.1 Conditions to Each Party's Obligation To Effect the Merger
and the Bank Merger. The respective obligation of each party to effect the
Merger and the Bank Merger shall be subject to the satisfaction prior to the
Closing Date of the following conditions:
(a) Exchange Listing. The shares of FAC Common Stock issuable
to CSB and Bank stockholders pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger and the Bank
Merger shall have been authorized for listing on The Nasdaq Stock Market or such
other exchange as FAC Common Stock may then be traded.
(b) Other Approvals. Other than the filing provided for by
Section 2.1, 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 and the Bank Merger, other than Consents the
failure to obtain which would have no material adverse effect on the
consummation of the Merger or the Bank 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
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necessary to issue the FAC Common Stock in exchange for CSB Common Stock and
Bank Common Stock and to consummate the Merger and the Bank Merger.
(c) 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.
(d) 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 or the Bank 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 or the Bank Merger which makes the consummation of the Merger or the Bank
Merger illegal.
7.2 Conditions to Obligations of FAC and FANB. The obligation
of FAC to effect the Merger is subject to the satisfaction of the following
conditions unless waived by FAC or FANB:
(a) Representations and Warranties: The representations and
warranties of CSB and the Bank 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 and FANB shall have received a
certificate signed on behalf of CSB and the Bank by the President and Chief
Executive Officer and by the Chief Financial Officer of CSB and the Bank to such
effect.
(b) Performance of Obligations of CSB. CSB and the Bank shall
have performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and FAC and FANB
shall have received a certificate signed on behalf of CSB and the Bank by the
President or Chief Executive Officer and by the Chief Financial Officer of CSB
and the Bank to such effect.
(c) CSB and Bank Stockholder Approvals. This Agreement shall
have been approved and adopted by (i) the affirmative vote of the holders of a
majority of the outstanding shares of CSB Common Stock entitled to vote thereon
and (ii) the affirmative vote of at least two-thirds of the outstanding shares
of Bank Common Stock, and the holders of not more than 5% of the outstanding
shares of CSB Common Stock or Bank Common Stock shall have elected to exercise
dissenters' rights.
(d) The Bank Merger. CSB and the Bank shall have taken such
actions as may be necessary to effect the Bank Merger immediately after the
Merger in accordance with the terms of this Agreement.
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(e) Consents Under Agreements. CSB and the Bank shall have
obtained the consent or approval of each person (other than the Governmental
Entities whose consent or approval shall be required in order to permit the
succession by the Surviving Corporation or FANB as the case may be pursuant to
the Merger or the Bank Merger, to any obligation, right or interest of CSB, the
Bank or any Subsidiary of either 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.
(f) Pooling,Tax and Legal 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 and the Bank Merger will be
accounted for as a pooling of interests and treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and that FAC, FANB, CSB and the Bank will each be a party to that reorganization
within the meaning of Section 368(b) of the Code. FAC also shall have received
the opinion of Gerrish & McCreary, P.C. counsel to CSB and the Bank, dated as of
the Effective Time, in form reasonably satisfactory to FAC and FANB, which shall
cover the following matters:
(i) CSB is a corporation duly organized, validly existing and
in good standing under the laws of the State of Tennessee;
(ii) The Bank is a Tennessee chartered state bank duly
incorporated, organized, validly existing, and in good standing under the
banking laws of the State of Tennessee;
(iii) Community Insurance Agency Inc. is duly incorporated
under the TBCA and is organized, validly existing and in good standing under the
laws of the State of Tennessee. CSB Acceptance Corporation and Community Finance
Company are industrial loan and thrift companies incorporated, validly existing
and in good standing under the TBCA, and are both wholly owned subsidiaries of
the Bank;
(iv) The Agreement and Plan of Reorganization has been duly
and validly authorized, executed and delivered by CSB and the Bank (assuming
that this Agreement is a binding obligation of FAC and FANB) constitutes the
valid and binding obligation of CSB and the Bank 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;
(v) 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 CSB and the Bank and no other corporate
action is necessary to authorize the Agreement or to consummate the Merger and
the
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Bank Merger by CSB, the Bank or any Subsidiary thereof. To the 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 CSB and the
Bank of the Agreement or any of the documents to be executed and delivered by
CSB or the Bank in connection therewith and the consummation of the Merger and
the Bank Merger;
(vi) Immediately prior to the Effective Time (1) the
authorized capital stock of CSB consists of 200,000 shares of CSB Common Stock,
and the authorized capital stock of the Bank consists of 200,000 shares of Bank
Common Stock; (2) there are no agreements or understandings by CSB or the Bank
with respect to the voting, sale or transfer of any shares of capital stock of
CSB, the Bank or any Subsidiary of either CSB or the Bank other than as
contemplated by this Agreement; (3) except for the minority interests in the
Bank specified in this Agreement, CSB and each other Subsidiary of CSB is wholly
owned by CSB, directly or indirectly; (4) except for the shares of Bank Common
Stock, CSB Common Stock and 7,477 options for CSB Common Stock, there are no
shares of capital stock or securities convertible into or evidencing the right
to purchase shares of capital stock of CSB or the Bank outstanding; and (5) all
shares of CSB Common Stock and Bank Common Stock outstanding were duly
authorized, and nonassessable and were free of the preemptive right of any
shareholder;
(vii) Neither the execution, delivery and performance of this
Agreement by CSB or the Bank 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 CSB, the Bank 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 CSB,
the Bank or any Subsidiary of CSB or the Bank pursuant to any note, bond,
mortgage, indenture, license, agreement, lease or other instrument or obligation
included in the CSB Disclosure Schedule to which CSB, the Bank or any Subsidiary
thereof is a party or by which CSB 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 CSB, the Bank or any Subsidiary thereof is a
party or by which any of them or any of their properties or assets is bound;
(viii) Except as set forth in the CSB Disclosure Schedules,
there is no litigation, proceeding or governmental investigation pending or, to
the best of its knowledge after a reasonable exercise of due diligence,
threatened against CSB 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 CSB or its Subsidiaries and neither CSB,
the Bank nor any Subsidiary of CSB or the Bank has received any notification by
any regulatory agency asserting that it is not in compliance with any applicable
laws, statutes or regulations (where such non-compliance would reasonably be
expected to have, individually or in the aggregate, a material adverse
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effect on CSB 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 CSB, the Bank, 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) 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 CSB or the Bank from that reflected in the
Financial Statements or the CSB Disclosure Schedule and CSB, the Bank 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 CSB, the Bank 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.
(f) Affiliate Agreements. FAC shall have received written
"affiliates" agreements from CSB's affiliates and the Bank's affiliates as
provided herein.
(g) Accountants' Letter. FAC shall have received a letter from
Maggart & Associates, P.C., dated the Closing Date, in form and substance
satisfactory to FAC, stating in effect in respect of CSB and its Subsidiaries
that: (1) they have examined the consolidated financial statements of CSB as of
December 31, 1997, and December 31, 1996 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 CSB available after
December 31, 1997; (2) on the basis of reading the latest available unaudited
consolidated interim financial statements of CSB; reading the minutes of the
meetings of the stockholders and the Board of Directors and committees thereof
of CSB and the Bank for the period from December 31, 1997 to the Closing Date,
and inquiries of officers of CSB or the Bank 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, 1997 and December 31, 1996 and for the years then ended, nothing
came to their attention which caused them to believe that during the period from
December 31, 1997 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 CSB or the Bank or any decreases in revenues, net earnings or net assets of
CSB or the Bank have occurred or are expected to occur (except for changes or
decreases resulting from securities portfolio gains or losses, the effect of
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transaction costs and other costs incurred upon consummation of the Merger and
the Bank Merger; 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 CSB or the Bank 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, 1997 and December
31, 1996 and for the years then ended.
(h) FAC and FANB shall have received a certificate of the
chief executive officer of CSB and the Bank certifying to FAC immediately prior
to the Effective Time (1) the number of shares of CSB Common Stock and Bank
Common Stock issued and outstanding; (2) the number of CSB Common Stock Options
outstanding and that no options for Bank Common Stock are outstanding; (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 CSB or the
Bank are outstanding; (4) that 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 CSB or the
Bank or any Subsidiary thereof to issue any shares of capital stock or
securities convertible into or evidencing the right to purchase such stock; and
(5) no shares of CSB Common Stock are held by CSB or the Bank in treasury or by
its Subsidiaries.
7.3 Conditions to Obligations of CSB and the Bank. The
obligations of CSB and the Bank to effect the Merger and the Bank Merger are
subject to the satisfaction of the following conditions unless waived by CSB or
the Bank:
(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 CSB and the Bank shall have received a certificate signed on
behalf of FAC by the Chairman or the President or a Vice Chairman and by the
Principal Accounting Officer of FAC to such effect.
(b) Performance of Obligations of FAC and FANB. FAC and FANB
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and CSB
and the Bank shall have received a certificate signed on behalf of FAC and FANB
by the Chairman, President and Chief Executive Officer or a Vice Chairman and by
the Principal Accounting Officer of FAC and FANB to such effect.
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(c) Consents Under Agreements. FAC and FANB shall have
obtained the consent or approval of each person (other than the Governmental
Entities referred to herein 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. CSB and the Bank shall have received the opinion
of Gerrish & McCreary, counsel to CSB and the Bank, 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, FANB, CSB and the Bank will each be a party to
that reorganization within the meaning of Section 368(b) of the Code; (ii) the
shareholders of CSB and the shareholders of the Bank will not recognize any gain
or loss to the extent that such shareholders exchange shares of CSB Common Stock
or shares of stock in the Bank solely for shares of FAC Common Stock in the
Merger or the Bank Merger, (iii) the basis of the FAC Common Stock received by
any CSB or Bank shareholder who exchanges CSB or Bank Common Stock solely for
FAC Common Stock will be the same as the basis of the CSB or Bank Common Stock
surrendered in exchange therefor (subject to any adjustments required as the
result of receipt of cash in lieu of a fractional share of FAC Common Stock),
(iv) the holding period of the FAC Common Stock received by a CSB or Bank
shareholder receiving FAC Common Stock will include the period during which the
CSB Common Stock surrendered in exchange therefor was held (provided that the
CSB Common Stock of such shareholder was held as a capital asset at the
Effective Time), and (v) cash received by a CSB or Bank 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.
CSB also shall have received the opinions of Mary Neil Price, Esq., General
Counsel to FAC and FANB, dated as of the Effective Time, in form reasonably
satisfactory to CSB and the Bank, 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 has been duly and validly authorized,
executed and delivered by FAC and FANB (assuming that this Agreement is a
binding obligation of CSB and the Bank) constitutes a valid and binding
obligation of FAC and FANB enforceable in accordance with its terms, subject as
to enforceability to
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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, FANB 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 or FANB of the Agreement or any of the documents to be executed and
delivered by FAC or FANB 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 200,000,000 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 the CSB shareholders and to the Bank
shareholders upon consummation of the Merger and the Bank Merger; and the shares
of FAC Common Stock to be issued to the holders of CSB Common Stock and to the
Bank stockholders 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 or FANB 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, FANB 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, FANB or any
Subsidiary thereof pursuant to any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which FAC, FANB or any
Subsidiary thereof is a party or by which FAC, FANB 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, FANB 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) Receipt of Consideration. The Exchange Agent shall
acknowledge in writing to CSB and the Bank 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
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CSB and the Bank pursuant to the Merger and the Bank Merger; and (ii) sufficient
cash to pay for fractional shares as provided herein.
(f) No Material Adverse Change. There shall have been no
material adverse change since May 15, 1998, 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 GAAP or regulatory accounting principles or interpretations thereof or (iii)
changes in general economic conditions including changes in the general level of
interest rates.
(g) Fairness Opinion.The Boards of Directors of CSB and the
Bank shall have received the opinion of Southard Financial dated as of the date
hereof to the effect that the Merger, the Bank Merger and the transactions
contemplated hereby are fair to the shareholders of CSB and to the shareholders
of the Bank.
ARTICLE VIII
Termination and Amendment
8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
shareholders of CSB and/or the Bank:
(1) by mutual consent of FAC and CSB; or
(2) by either FAC or CSB if (i) the Merger shall not have been
consummated on or before February 15, 1999 (the "Termination Date") provided the
terminating party shall not have breached in any material respect its
obligations under this Agreement in a manner that proximately contributed to the
failure to consummate the Merger by such date, (ii) any governmental or
regulatory body, the consent of which is a condition to the obligations of FAC
and CSB to consummate the Merger or the Bank Merger, 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 or the Bank Merger and such order, judgment or decree
shall have become final and nonappealable.
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(3) By FAC:
(a) if any event shall have occurred as a result of which any
condition set forth in Sections 7.1 or 7.2 is no longer capable of being
satisfied; or
(b) if there has been a breach by CSB or the Bank 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 CSB 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 CSB or the Bank, 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 CSB;
or
(c) If CSB or the Bank (or their Boards 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 and FANB; or
(d) if the Board of Directors of CSB or the Bank shall have
withdrawn or materially modified its authorization, approval or recommendation
to the stockholders of CSB and the stockholders of the Bank with respect to the
Merger, the Bank Merger or this Agreement in a manner adverse to FAC or FANB or
shall have failed to make the favorable recommendation required by this
Agreement.
(4) By CSB or the Bank:
(a) if any event shall have occurred as a result of which any
condition set forth in Sections 7.1 or 7.3 is no longer capable of being
satisfied; or
(b) if there has been a breach by FAC or FANB 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 or FANB which breach is not curable or, if curable, is not cured
within 20 days after written notice of such breach is given by CSB to FAC or
FANB.
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(5) By CSB if:
(1) the Average Closing Price (as defined below) shall be less
than the product of 0.80 and the Starting Price; and
(2) (i) the number obtained by dividing the Average Closing
Price by the Starting Price (such number being referred to herein as the "FAC
Ratio") shall be less than (ii) the number obtained by dividing the Index Price
on the Determination Date by the Index Price on the Starting Date and
subtracting 0.15 from such quotient (such number being referred to herein as the
"Index Ratio").
If the CSB elects to exercise its termination right pursuant to the immediately
preceding sentence, it shall give to FAC written notice on or before the second
trading day after the Determination Date. During the five-day period commencing
on the date of such notice, FAC shall have the option of adjusting the CSB
Conversion Ratio and the Bank Conversion Ratio to equal the lesser of (i) a
number equal to a quotient (rounded to the nearest one-ten thousandth), the
numerator of which is the product of 0.80, the Starting Price and the Exchange
Ratio (as then in effect) and the denominator of which is the Average Closing
Price, or (ii) a number equal to a quotient (rounded to the nearest one-ten
thousandth), the numerator of which is the Index Ratio multiplied by the
Exchange Ratio (as then in effect) and the denominator of which is the FAC
Ratio. If FAC makes an election contemplated by the preceding sentence, within
such five-day period, it shall give prompt written notice to CSB of such
election and the revised CSB and Bank Conversion Ratios, whereupon no
termination shall have occurred pursuant to this Section and this Agreement
shall remain in effect in accordance with its terms (except as the Conversion
Ratios shall have been so modified), and any references in this Agreement to
"CSB Conversion Ratio" or "Bank Conversion Ratio" shall thereafter be deemed to
refer to such ratios as adjusted pursuant to this Section.
For purposes of this Section only, the following terms shall have the meanings
indicated:
"Average Closing Price" means the average of the last reported sale prices per
share of FAC Common Stock as reported on The Nasdaq Stock Market or such
successor exchange on which FAC Common Stock may then be traded (as reported in
The Wall Street Journal or, if not reported therein, in another mutually agreed
upon authoritative source) for the 20 consecutive trading days on The Nasdaq
Stock Market or such successor exchange on which FAC Common Stock may then be
traded ending at the close of trading on the Determination Date.
"Determination Date" means the date on which the approval of the Federal Reserve
Board required for consummation of the Merger shall be received by FAC, without
regard to any requisite waiting periods in respect thereof.
"Index Group" means the group of the 17 bank holding companies listed below, the
common stock of all of which shall be publicly traded as to which there shall
not have been, since the Starting Date and before the Determination Date, an
announcement of
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a transaction whereby such company would be acquired or whereby such company
would acquire another company or companies in transactions with a value
exceeding 25% of the acquiror's market capitalization as of the Starting Date.
In the event that the common stock of any such company ceases to be publicly
traded or any such announcement is made with respect to any such company, such
company will be removed from the Index Group, and the weights (which have been
determined based on the number of outstanding shares of common stock)
redistributed proportionately for purpose of determining the Index Price. The
bank holding companies and the weights attributed to them are as follows:
BB&T Corp 9.9%
Regions Financial Corp 9.3
Mercantile Bancorporation 8.3
Union Planters Corp 8.1
Southtrust Corp. 7.2
Star Banc Corp 7.1
Crestar Financial Corp 6.8
Huntington Bancshares, Inc. 6.8
Marshall & Ilsley Corp 6.6
Firstar Corp 5.6
First Tenn Natl Corp 4.7
Old Kent Financial Corp 4.3
Zions Bancorp 3.9
Hibernia Corp 3.4
Amsouth Bancorporation 3.4
National Commerce Bancorporation 2.5
Commerce Bancshares, Inc. 2.0
"Index Price" on a given date means the weighted average (weighted in accordance
with the factors listed above) of the closing prices of the companies comprising
the Index Group.
"Starting Date" means May 23, 1998.
"Starting Price" shall mean the last reported sale price per share of FAC Common
Stock on the Starting Date, as reported by The Nasdaq Stock Market or such
successor exchange on which FAC Common Stock may then be traded (as reported in
The Wall Street Journal or, if not reported therein, in another mutually agreed
upon authoritative source).
If any company belonging to the Index Group or FAC declares or effects
a stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company or FAC shall
be appropriately adjusted for the purposes of applying this Section.
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For purposes of this Agreement, the term "Competing Transaction" means any of
the following involving CSB or the Bank (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 CSB or the Bank 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.
8.2 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
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.
8.3 Fees and Expenses. CSB and the Bank acknowledge that FAC
and FANB have spent, and will be required to spend, substantial time and effort
in examining the business, properties, affairs, financial condition and
prospects of CSB, the Bank and their Subsidiaries, have 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 and FANB 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 7.2(a) or (b) due to CSB's or the Bank'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 CSB or the Bank
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;
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(ii) Section 8.1(3)(d);
(iii) Section 8.1(3)(c) and within 12 months from the date of
termination a Competing Transaction is consummated or CSB or the Bank shall have
entered into an agreement which if consummated would constitute a Competing
Transaction; or
(b) if CSB or the Bank terminates this Agreement pursuant to
Section 8.1(4) because this Agreement did not receive the requisite vote of the
CSB stockholders or the requisite vote of the Bank Stockholders and within 12
months from the date of termination a Competing Transaction is consummated or
CSB shall have entered into an agreement which if consummated would constitute a
Competing Transaction; then CSB shall pay to FAC a fee in the amount of $2
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,
CSB 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 CSB 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 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, CSB shall also pay to FAC interest at
the rate of 8% 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 CSB to pay the Fee or such interest.
8.4 Effect of Termination. Except for such provisions of this
Agreement which by their terms expressly survive the termination hereof and the
provisions of Sections 6.12, 9.8, 8.2, 8.3 and this Section 8.4, which shall
survive any termination of this Agreement. In the event of a termination of this
Agreement pursuant to Section 8.1, this Agreement shall forthwith become void
and have no further effect.
ARTICLE IX
General Provisions
9.1 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.
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9.2 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 or FANB, 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
Mary Neil Price, Esq.
General Counsel
721 First American Center
Nashville, Tennessee 37237-0721
and
(b) if to CSB or the Bank, to
CSB Financial Corporation
108 Cumberland Street
Ashland City, Tennessee 37082
Attention: Gary Scott, President and Chief Executive Officer
with a copy to:
Gerrish & McCreary, P.C.
700 Colonial Road
Memphis, Tennessee 38117
Attention: Jeffrey Gerrish, Esq.
9.3 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
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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 June
9, 1998.
9.4 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement and
shall become effective when all of the 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.
9.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (including the documents and the instruments referred
to herein) (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof 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.
9.6 Governing Law; Choice of Forum; Venue. 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. All matters
arising out of this Agreement and the transactions contemplated hereby shall be
heard before a federal or Tennessee state court with competent jurisdiction
residing in Davidson County, Tennessee.
9.7 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.
9.8 Publicity. Except as otherwise required by law or the
rules of The Nasdaq Stock Market or such other exchange as FAC Common Stock may
be traded, so long as this Agreement is in effect, no party to this Agreement
shall, nor shall any
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party 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 parties, which
consent shall not be unreasonably withheld.
9.9 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.
9.10 Consents. For purposes of any provision of this Agreement
requiring, permitting or providing for the consent of FAC, FANB, the Bank or
CSB, the written consent of the Chief Executive Officer of such party shall be
sufficient to constitute such consent.
9.11 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.
IN WITNESS WHEREOF, FAC, FANB, CSB and bank have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of June 9, 1998.
FIRST AMERICAN CORPORATION
BY: /s/ Dennis C. Bottorff
----------------------------------------
Dennis C. Bottorff
Chairman and Chief Executive Officer
ATTEST:
/s/ Pamela R. Welch
----------------------------------------
Title: Assistant Secretary
----------------------------------------
FIRST AMERICAN NATIONAL BANK
BY: /s/ Dennis C. Bottorff
----------------------------------------
Dennis C. Bottorff
Chairman and Chief Executive Officer
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ATTEST:
/s/ Pamela R. Welch
----------------------------------------
Title: Assistant Secretary
----------------------------------------
CSB FINANCIAL CORPORATION
BY: /s/ Gary Scott
----------------------------------------
Gary Scott
President and Chief Executive Officer
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ATTEST:
/s/ Jason K. Holt
----------------------------------------
Title: Senior Vice President
----------------------------------------
CHEATHAM STATE BANK
BY: /s/ Gary Scott
----------------------------------------
Gary Scott
President and Chief Executive Officer
ATTEST:
/s/ Jason K. Holt
----------------------------------------
Title: Executive Vice President
----------------------------------------
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APPENDIX B
OPINION OF SOUTHARD FINANCIAL
June 1, 1998
Board of Directors Board of Directors
CSB Financial Corporation and Subsidiaries Cheatham State Bank
Kingston Springs, Tennessee Kingston Springs, Tennessee
RE: FAIRNESS OPINION RELATIVE TO PROPOSED AGREEMENT OF CSB
FINANCIAL CORPORATION AND SUBSIDIARIES AND CHEATHAM STATE
BANK, KINGSTON SPRINGS, TENNESSEE, TO MERGE WITH AND INTO
FIRST AMERICAN CORPORATION, NASHVILLE, TENNESSEE
Directors:
The Board of Directors of CSB Financial Corporation and Subsidiaries ("CSB") and
the Board of Directors of Cheatham State Bank ("Bank") jointly retained Southard
Financial, in its capacity as a financial valuation and consulting firm, to
render its opinion of the fairness, from a financial viewpoint, of the
acquisition of CSB and Bank by First American Corporation ("First American").
Southard Financial and its principals have no past, present, or future
contemplated financial, equity, or other interest either in CSB, Bank, or First
American. This opinion is issued based upon financial data as of December 31,
1997 and March 31, 1998.
This opinion is being issued prior to the execution of the Definitive Agreement.
The opinion reflects our understanding of the proposed transaction as of the
date of this letter.
APPROACH TO ASSIGNMENT
The approach to this assignment was to consider the following factors:
- A review of the financial performance and position of CSB and
Bank and the value of their common shares;
- A review of the financial performance and position of First
American and the value of its common stock;
- A review of recent bank merger transactions in the United
States, Tennessee, and nearby states;
- A review of the current and historical market prices of bank
holding companies in the United States, Tennessee, and nearby
states;
- A review of the investment characteristics of the common stock
of CSB, Bank, and First American;
- An evaluation of the impact of the merger on the expected
return to the current shareholders of CSB and Bank; and,
- An evaluation of other factors as was considered necessary to
render this opinion.
It is Southard Financial's understanding that the merger and resulting exchange
of the stock of First American for the outstanding common shares of CSB and Bank
constitute a non-taxable exchange for federal income tax purposes. The exchange
of cash for fractional shares may have tax consequences.
DUE DILIGENCE REVIEW PROCESS
In performing this assignment, Southard Financial reviewed the documents
specifically outlined in Exhibit 1 pertaining to CSB and in Exhibit 2 pertaining
to First American.
REVIEW OF CSB FINANCIAL CORPORATION AND SUBSIDIARIES/CHEATHAM STATE BANK
Southard Financial visited with the management of CSB and Bank. Discussions
included questions regarding the current and historical financial position and
performance of CSB and Bank, their outlooks for the future, and other pertinent
factors. Details pertaining to CSB and Bank are contained in Southard
Financial's file.
REVIEW OF FIRST AMERICAN CORPORATION
Southard Financial visited with the management of First American. Discussions
included questions regarding the current and historical financial position and
performance of First American and its operating subsidiaries, its outlook for
the future, and other pertinent factors. Details pertaining to First American
are contained in Southard Financial's file.
MERGER DOCUMENTATION
Southard Financial reviewed the proposed merger terms with the management of CSB
and Bank, and with legal counsel for CSB and Bank. Southard Financial reviewed
the draft, dated June 1, 1998, of the Agreement and Plan of Reorganization (the
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Board of Directors
CSB Financial Corporation and Subsidiaries
Cheatham State Bank
Page 2
"Agreement"). The Agreement is still in the process of negotiation. The analysis
in this opinion reflects the proposed merger terms as outlined in Exhibit 3,
Terms of the Agreement.
Southard Financial did not independently verify the information reviewed, but
relied on such information as being complete and accurate in all material
respects. Southard Financial did not make any independent evaluation of the
assets of First American, Bank, or CSB, but reviewed data supplied by the
management of each institution.
MAJOR CONSIDERATIONS
Numerous factors were considered in the overall review of the proposed merger.
The review process included considerations regarding CSB and Bank, First
American, and the proposed merger. The major considerations are:
CSB FINANCIAL CORPORATION AND SUBSIDIARIES/CHEATHAM STATE BANK
- Historical earnings;
- Historical dividend payments;
- Outlook for future performance, earnings, and dividends;
- Economic conditions and outlook in Bank's market;
- The competitive environment in Bank's market;
- Comparisons with peer banks;
- Potential risks in the loan and securities portfolios;
- Recent minority stock transactions in CSB's and Bank's common
stocks; and,
- Other such factors as were deemed appropriate in rendering
this opinion.
FIRST AMERICAN CORPORATION
- Historical earnings;
- Historical dividend payments;
- Outlook for future performance, earnings, and dividends;
- Economic conditions and outlook in First American's market;
- The competitive environment in First American's market;
- Comparisons with peer banks; Potential risks in the loan and
securities portfolios;
- Recent minority stock transactions in First American's common
stock; and,
- Other such factors as were deemed appropriate in rendering
this opinion.
COMMON FACTORS
- Historical and current bank merger pricing; and,
- Current market prices for minority blocks of common stocks of
regional bank holding companies in the United States,
Tennessee, and nearby states.
THE PROPOSED MERGER
- The terms of the Agreement as described herein;
- The specific pricing of the merger;
- Adequacy of the consideration paid to the shareholders of CSB
and Bank;
- The assumption that the merger will be treated as a tax-free
exchange;
- The amount of debt and goodwill on the balance sheet of First
American and the impact of the merger of CSB and Bank on First
American's capital and liquidity positions;
- The historical dividend payments of First American and the
likely impact on the dividend income of the current
shareholders of CSB and Bank (equivalency of cash dividends);
- Pro-forma combined income statements for First American post
merger and the expected returns to CSB and Bank shareholders
(equivalency of earnings yield);
- The market for minority blocks of First American common stock;
and,
- Other such factors as deemed appropriate.
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Board of Directors
CSB Financial Corporation and Subsidiaries
Cheatham State Bank
Page 3
OVERVIEW OF FAIRNESS ANALYSIS
In connection with rendering its opinion, Southard Financial performed a variety
of financial analyses, which are summarized below. Southard Financial believes
that its analyses must be considered as a whole and that considering only
selected factors could create an incomplete view of the analyses and the process
underlying the opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not susceptible to partial
analyses.
In its analyses, Southard Financial made numerous assumptions, many of which are
beyond the control of CSB, Bank, and First American. Any estimates contained in
the analyses prepared by Southard Financial are not necessarily indicative of
future results or values, which may vary significantly from such estimates.
Estimates of value of companies do not purport to be appraisals or necessarily
reflect the prices at which companies or their securities may actually be sold.
None of the analyses performed by Southard Financial was assigned a greater
significance than any other.
FAIRNESS OF THE MERGER PRICE
ANALYSIS OF MARKET TRANSACTIONS
Based upon the merger terms, CSB and Bank shareholders will receive about 386%
of fully diluted book value at March 31, 1998, 24.6 times reported 1997 diluted
earnings, 22.5x estimated fully diluted 1998 earnings, and 31.5% of Bank assets
at March 31, 1998. Based upon the review conducted by Southard Financial, the
pricing multiples for the merger are at or above the average multiples seen in
recent bank acquisitions (see Exhibit 4).
ANALYSIS OF LIQUIDITY
Unlike the shares of CSB and Bank, First American shares are traded on the
National Market System (NASDAQ) under the ticker symbol "FATN". The stock is
actively traded, has several institutional holders, and is followed by several
investment analysts. Finally, except in the case of certain officers, directors,
and significant shareholders of CSB and Bank ("Affiliates"), First American
shares received will be freely tradable with no restrictions.
ANALYSIS OF ALTERNATIVES
During 1997, the Boards of CSB and Bank began to consider alternatives relative
to the possible sale of CSB and Bank. After deciding to investigate the possible
sale of CSB and Bank, outside professionals were engaged to assist in the
process. Several potential acquirors were identified and materials were prepared
for the marketing of CSB and Bank. However, prior to contacting possible
acquirors, First American contacted CSB and Bank and entered into negotiations
which ultimately resulted in the proposed transaction. The pricing offered by
First American was higher than initially expected, reflecting the attractiveness
of Bank's market to First American. This fact is a key consideration in this
fairness opinion.
SUMMARY OF ANALYSES
The summary set forth does not purport to be a complete description of the
analyses performed by Southard Financial. The analyses performed by Southard
Financial are not necessarily indicative of actual values, which may differ
significantly from those suggested by such analyses. Southard Financial did not
appraise any individual assets or liabilities of CSB, Bank, or First American.
Throughout the due diligence process, all information provided by CSB, Bank,
First American, and third party sources was relied upon by Southard Financial
without independent verification.
Based upon the analyses discussed above and other analyses performed by Southard
Financial, the impact of the merger on the shareholders of CSB is expected to be
favorable.
FAIRNESS OPINION
Based upon the analyses of the foregoing and such matters as were considered
relevant, it is the opinion of Southard Financial that the terms of the offer
for the acquisition of CSB Financial Corporation and Subsidiaries and Cheatham
State Bank by First American Corporation pursuant to the Agreement and Plan of
Reorganization are fair, from a financial viewpoint, to the shareholders of CSB
Financial Corporation and Subsidiaries and Cheatham State Bank.
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Board of Directors
CSB Financial Corporation and Subsidiaries
Cheatham State Bank
Page 4
Thank you for this opportunity to be of service to the shareholders of CSB
Financial Corporation and Subsidiaries and Cheatham State Bank.
Sincerely yours,
/s/ Southard Financial
SOUTHARD FINANCIAL
Attachments:
Exhibit 1: CSB Financial Corporation and Subsidiaries/Cheatham State Bank,
Document Review List
Exhibit 2: First American Corporation, Document Review List
Exhibit 3: Terms of the Agreement and Plan of Reorganization
Exhibit 4: Comparison of the Merger Pricing to Public Market Transactions
Exhibit 5: Overview of the Expected Impact on CSB Shareholders
Exhibit 6: Qualifications of Southard Financial
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APPENDIX C
CHAPTER 23 OF THE TENNESSEE BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS OF CSB SHAREHOLDERS
TENNESSEE CODE ANNOTATED
TITLE 48. CORPORATIONS AND ASSOCIATIONS
CHAPTER 23. BUSINESS CORPORATIONS-- DISSENTERS' RIGHTS
PART 1-- RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SS. 48-23-101. DEFINITIONS
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 48-23-102. RIGHT TO DISSENT
(a) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation
is a party:
(A) If shareholder approval is required for the
merger by ss. 48-21-104 or the charter and the shareholder is entitled to vote
on the merger; or
(B) If the corporation is a subsidiary that is merged
with its parent under ss. 48-21-105;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one (1) year after the date of sale;
(4) An amendment of the charter that materially and adversely
affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the
shares;
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(B) Creates, alters, or abolishes a right in respect
of redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to
vote on any matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the
shareholder to a fraction of a share, if the fractional share is to be acquired
for cash under ss. 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote
to the extent the charter, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder
may dissent as to any shares of a security which, as of the date of the
effectuation of the transaction which would otherwise give rise to dissenters'
rights, is listed on an exchange registered under ss. 6 of the Securities
Exchange Act of 1934, as amended, or is a "national market system security," as
defined in rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
SS. 48-23-103. 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.
SS. 48-23-201. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section
will not invalidate the corporate action.
SS. 48-23-202. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
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(2) Not vote the shareholder's shares in favor of the proposed
action. No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provide the notice required by ss.
48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this chapter.
SS. 48-23-203. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days
after the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the principal terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person asserting dissenters'
rights acquired beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2) months
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation
has not previously sent a copy of this chapter to the shareholder pursuant to
ss. 48-23-201.
SS. 48-23-204. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in ss. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to ss. 48-23-203(b)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
SS. 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 ss.
48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed corporate
action.
SS. 48-23-206. PAYMENT
(a) Except as provided in ss. 48-23-208, as soon as the proposed
corporate action is effectuated, or upon receipt of a payment demand, whichever
is later, the corporation shall pay each dissenter who complied with ss.
48-23-204 the amount the corporation estimates to be the fair value of each
dissenter's shares, plus accrued interest.
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(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value
of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
ss. 48-23-209; and
(5) A copy of this chapter if the corporation has not previously
sent a copy of this chapter to the shareholder pursuant to ss. 48-23-201 or ss.
48-23-203.
SS. 48-23-207. 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 ss. 48-23-203 and repeat the payment demand
procedure.
SS. 48-23-208. AFTER-ACQUIRED SHARES
(a) A corporation may elect to withhold payment required by ss.
48-23-206 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under ss.
48-23-209.
SS. 48-23-209. 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 ss. 48-23-206), or reject the corporation's offer under ss.
48-23-208 and demand payment of the fair value of the dissenter's shares and
interest due, if:
(1) The dissenter believes that the amount paid under ss.
48-23-206 or offered under ss. 48-23-208 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss.48-23-206
within two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after the
date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection (a) within one (1) month after the
corporation made or offered payment for the dissenter's shares.
SS. 48-23-301. COURT ACTION
(a) If a demand for payment under ss. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months after receiving
the payment demand and petition the court to determine the fair value of the
shares and
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accrued interest. If the corporation does not commence the proceeding within the
two-month period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents
of this state) whose demands remain unsettled, parties to the proceeding as in
an action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair
value of the dissenter's shares, plus accrued interest, exceeds the amount paid
by the corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
SS. 48-23-302. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under ss. 48-23-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds
equitable against:
(1) The corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with
the requirements of part 2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or
not in good faith with respect to the rights provided by this
chapter.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
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APPENDIX D
12 U.S.C. SS. 215A
DISSENTERS' RIGHTS OF BANK SHAREHOLDERS
UNITED STATES CODE ANNOTATED
TITLE 12. BANKS AND BANKING
CHAPTER 2--NATIONAL BANKS
SUBCHAPTER XVI--CONSOLIDATION AND MERGER
SECTION 215a -- Merger of national banks or State banks into national banks
(a) Approval of Comptroller, board and shareholders; merger agreement; notice;
capital stock; liability of receiving association
One or more national banking associations or one or more State banks,
with the approval of the Comptroller, under an agreement not inconsistent with
this subchapter, may merge into a national banking association located within
the same State, under the charter of the receiving association. The merger
agreement shall--
(1) be agreed upon in writing by a majority of the board of directors
of each association or State bank participating in the plan of merger;
(2) be ratified and confirmed by the affirmative vote of the
shareholders of each such association or State bank owning at least two-thirds
of its capital stock outstanding, or by a greater proportion of such capital
stock in the case of a State bank if the laws of the State where it is organized
so require, at a meeting to be held on the call of the directors, after
publishing notice of the time, place, and object of the meeting for four
consecutive weeks in a newspaper of general circulation published in the place
where the association or State bank is located, or, if there is no such
newspaper, then in the newspaper of general circulation published nearest
thereto, and after sending such notice to each shareholder of record by
certified or registered mail at least ten days prior to the meeting, except to
those shareholders who specifically waive notice, but any additional notice
shall be given to the shareholders of such State bank which may be required by
the laws of the State where it is organized. Publication of notice may be
waived, in cases where the Comptroller determines that an emergency exists
justifying such waiver, by unanimous action of the shareholders of the
association or State banks;
(3) specify the amount of the capital stock of the receiving
association, which shall not be less than that required under existing law for
the organization of a national bank in the place in which it is located and
which will be outstanding upon completion of the merger, the amount of stock (if
any) to be allocated, and cash (if any) to be paid, to the shareholders of the
association or State bank being merged into the receiving association; and
(4) provide that the receiving association shall be liable for all
liabilities of the association or State bank being merged into the receiving
association.
(b) Dissenting shareholders
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) Valuation of shares
The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of
(1) one selected by the vote of the holders of the majority of the
stock, the owners of which are entitled to payment in cash;
(2) one selected by the directors of the receiving association; and (3)
one selected by the two so selected. The valuation agreed upon by any two of the
three appraisers shall govern. If the value so fixed shall not be satisfactory
to any dissenting shareholder who has requested payment, that shareholder may,
within five days after being notified of the
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appraised value of his shares, appeal to the Comptroller, who shall cause a
reappraisal to be made which shall be final and binding as to the value of the
shares of the appellant.
(d) Application to shareholders of merging associations: appraisal by
Comptroller; expenses of receiving association; sale and resale of shares; State
appraisal and merger law
If, within ninety days from the date of consummation of the merger, for
any reason one or more of the appraisers is not selected as herein provided, or
the appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State bank
shall be determined in the manner prescribed by the law of the State in such
cases, rather than as provided in this section, if such provision is made in the
State law; and no such merger shall be in contravention of the law of the State
under which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or association
being merged into the receiving association.
(e) Status of receiving association; property rights and interests vested and
held as fiduciary
The corporate existence of each of the merging banks or banking
associations participating in such merger shall be merged into and continued in
the receiving association and such receiving association shall be deemed to be
the same corporation as each bank or banking association participating in the
merger. All rights, franchises, and interests of the individual merging banks or
banking associations in and to every type of property (real, personal, and
mixed) and chooses in action shall be transferred to and vested in the receiving
association by virtue of such merger without any deed or other transfer. The
receiving association, upon the merger and without any order or other action on
the part of any court or otherwise, shall hold and enjoy all rights of property,
franchises, and interests, including appointments, designations, and
nominations, and all other rights and interests as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, and committee of estates of lunatics, and in every other fiduciary
capacity, in the same manner and to the same extent as such rights, franchises,
and interests were held or enjoyed by any one of the merging banks or banking
associations at the time of the merger, subject to the conditions hereinafter
provided.
(f) Removal as fiduciary; discrimination
Where any merging bank or banking association, at the time of the
merger, was acting under appointment of any court as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates, assignee,
receiver, or committee of estates of lunatics, or in any other fiduciary
capacity, the receiving association shall be subject to removal by a court of
competent jurisdiction in the same manner and to the same extent as was such
merging bank or banking association prior to the merger. Nothing contained in
this section shall be considered to impair in any manner the right of any court
to remove the receiving association and to appoint in lieu thereof a substitute
trustee, executor, or other fiduciary, except that such right shall not be
exercised in such a manner as to discriminate against national banking
associations, nor shall any receiving association be removed solely because of
the fact that it is a national banking association.
(g) Issuance of stock by receiving association; pre-emptive rights
Stock of the receiving association may be issued as provided by the
terms of the merger agreement, free from any preemptive rights of the
shareholders of the respective merging banks.
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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 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 First American Charter 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
First American Bylaws 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.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith or incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2 -- Agreement and Plan of Reorganization, by and among CSB
Financial Corporation, First American Corporation, First
American National Bank and Cheatham State Bank, dated as of
June 9, 1998, included as Appendix A to the accompanying
Prospectus/Proxy Statement.
4 -- Rights Agreement, dated December 14, 1988, between First
American Corporation and First American Trust Company, N.A.
(incorporated herein by reference to Exhibit 1 to First
American's Current Report on Form 8-K dated December 14,
1988).
5 -- Opinion of Mary Neil Price, Esq., General Counsel of First
American Corporation, previously filed.
8 -- Opinion of KPMG Peat Marwick LLP, filed herewith.
15 -- Letter of KPMG Peat Marwick LLP re: unaudited interim
financial information for First American Corporation,
previously filed.
23.1 -- Consent of KPMG Peat Marwick LLP (with respect to First
American Corporation), previously filed.
23.2 -- Consent of Maggart & Associates, P.C. (with respect to CSB
Financial Corporation), previously filed.
23.3 -- Consent of Maggart & Associates, P.C. (with respect to
Cheatham State bank), previously filed.
23.4 -- Consent of Mary Neil Price, Esq., General Counsel of First
American Corporation, included in Exhibit 5 to this
Registration Statement.
23.5 -- Consent of KPMG Peat Marwick LLP, filed herewith.
23.6 -- Consent of Southard Financial, previously filed.
24 -- Powers of Attorney, previously filed.
99.1 -- Form of Proxy for Special Meeting of Stockholders of CSB
Financial Corporation, previously filed.
99.2 -- Form of Proxy for Special Meeting of Stockholders of
Cheatham State Bank, filed herewith.
</TABLE>
ITEM 22. UNDERTAKINGS
(a) 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:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) 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;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change in 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 the 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.
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(b) 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
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the 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.
(c) The undersigned registrant hereby undertakes 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.
(d) The undersigned registrant hereby undertakes that every prospectus
(i) that is filed pursuant to paragraph (c) immediately preceding, or (ii) that
purports to meet the requirements of Sections 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.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and CSB
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Nashville, State of Tennessee, this 27th day of
August, 1998.
FIRST AMERICAN CORPORATION
(Registrant)
/s/ DENNIS C. BOTTORFF*
-------------------------------
By: DENNIS C. BOTTORFF
Dennis C. Bottorff
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities indicated on this 27th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
/s/ DENNIS C. BOTTORFF* Chairman, Chief Executive Officer and Director
- ---------------------------------- (Principal Executive Officer)
Dennis C. Bottorff
/s/ DALE W. POLLEY* Director, President and Principal Financial Officer
- ----------------------------------
Dale W. Polley
/s/ M. JACK VANNATTA, JR. Executive Vice President (Principal Accounting Officer)
- ----------------------------------
Marvin Jack Vannatta, Jr.
/s/ EARNEST W. DEAVENPORT, JR.* Director
- ----------------------------------
Earnest W. Deavenport, Jr.
/s/ REGINALD D. DICKSON* Director
- ----------------------------------
Reginald D. Dickson
Director
- ----------------------------------
James A. Haslam II
/s/ WARREN A. HOOD, JR.* Director
- ----------------------------------
Warren A. Hood, Jr.
/s/ MARTHA R. INGRAM* Director
- ----------------------------------
Martha R. Ingram
/s/ WALTER A. KNESTRICK* Director
- ----------------------------------
Walter A. Knestrick
/s/ GENE C. KOONCE* Director
- ----------------------------------
Gene C. Koonce
/s/ JAMES R. MARTIN* Director
- ----------------------------------
James R. Martin
/s/ ROBERT A. McCABE, JR.* Director
- ----------------------------------
Robert A. McCabe, Jr.
/s/ HOWARD L. McMILLAN, JR.* Director
- ----------------------------------
Howard L. McMillan, Jr.
</TABLE>
II-4
<PAGE> 267
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ E. B. ROBINSON, Jr.* Director
- ----------------------------------
E. B. Robinson, Jr.
/s/ ROSCOE R. ROBINSON* Director
- ----------------------------------
Roscoe R. Robinson
/s/ JAMES F. SMITH, JR.* Director
- ----------------------------------
James F. Smith, Jr.
/s/ CAL TURNER, JR.* Director
- ----------------------------------
Cal Turner, Jr.
/s/ CELIA A. WALLACE* Director
- ----------------------------------
Celia A. Wallace
/s/ TED H. WELCH* Director
- ----------------------------------
Ted H. Welch
/s/ J. KELLY WILLIAMS* Director
- ----------------------------------
J. Kelly Williams
Director
- ----------------------------------
David K. Wilson
/s/ TOBY S. WILT* Director
- ----------------------------------
Toby S. Wilt
/s/ WILLIAM S. WIRE II* Director
- ----------------------------------
William S. Wire II
*By: /s/ MARY NEIL PRICE
------------------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 268
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2 -- Agreement and Plan of Reorganization, by and among CSB
Financial Corporation, First American Corporation, First
American National Bank and Cheatham State Bank, dated as of
June 9, 1998, included as Appendix A to the accompanying
Prospectus/Proxy Statement.
4 -- Rights Agreement, dated December 14, 1988, between First
American Corporation and First American Trust Company, N.A.
(incorporated herein by reference to Exhibit 1 to First
American's Current Report on Form 8-K dated December 14,
1988).
5 -- Opinion of Mary Neil Price, Esq., General Counsel of First
American Corporation, previously filed.
8 -- Opinion of KPMG Peat Marwick LLP, filed herewith.
15 -- Letter of KPMG Peat Marwick LLP re: unaudited interim
financial information for First American Corporation,
previously filed.
23.1 -- Consent of KPMG Peat Marwick LLP (with respect to First
American Corporation), previously filed.
23.2 -- Consent of Maggart & Associates, P.C. (with respect to CSB
Financial Corporation), previously filed.
23.3 -- Consent of Maggart & Associates, P.C. (with respect to
Cheatham State bank), previously filed.
23.4 -- Consent of Mary Neil Price, Esq., General Counsel of First
American Corporation, included in Exhibit 5 to this
Registration Statement.
23.5 -- Consent of KPMG Peat Marwick LLP, filed herewith.
23.6 -- Consent of Southard Financial, previously filed.
24 -- Powers of Attorney, previously filed.
99.1 -- Form of Proxy for Special Meeting of Stockholders of CSB
Financial Corporation, previously filed.
99.2 -- Form of Proxy for Special Meeting of Stockholders of
Cheatham State Bank, previously filed.
</TABLE>
II-6
<PAGE> 1
EXHIBIT 8
August 14, 1998
Board of Directors
First American Corporation
615 First American Center
Nashville, TN 37237-0615
Board of Directors
CSB Financial Corporation
108 Cumberland Street
Ashland City, TN 37082
Board of Directors
Cheatham State Bank
108 Cumberland Street
Ashland City, TN 37082
Dear Board Members:
You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") with respect to
certain Federal income tax issues related to the merger (the "Merger") of CSB
Financial Corporation ("CSB") with and into First American Corporation ("FAC")
and with respect to the merger (the "Bank Merger") of Cheatham State Bank
("Bank") with and into First American National Bank ("FANB"). In order to
facilitate the issuance of this tax opinion you have furnished KPMG with a copy
of the Agreement and Plan of Reorganization dated as of June 9, 1998, by and
among FAC, FANB, CSB and Bank (the "Agreement"). In rendering this opinion
letter KPMG is relying upon the Agreement. In addition you have furnished KPMG
with certain FACTS and REPRESENTATIONS as contained in this letter all of which
form a material basis upon which KPMG has based its opinions. Other than the
Agreement, KPMG has not reviewed the legal documents necessary to effectuate the
steps to be undertaken to consummate either the Merger or the Bank Merger and
KPMG assumes that all steps taken will be consistent with those described in the
Agreement and in this letter and that such steps will be effectuated under
applicable state and Federal law. This opinion is specifically conditioned on
the consummation of both the Merger and the Bank Merger as part of a single
plan, and should either of these mergers fail to occur this opinion will be null
and void. All capitalized terms as used herein have, unless stated otherwise,
the same meaning as such term as used in the Agreement. All section references
herein are, unless stated otherwise, referring to the Internal Revenue Code of
1986, as amended.
<PAGE> 2
FACTS
CSB is a Tennessee corporation and a bank holding company owning approximately
96.14% of the issued and outstanding shares of common stock of Bank (consisting
of approximately 171,286.25 shares of Bank). CSB has currently issued and
outstanding solely common stock of one class ("CSB Common Stock"). There are
approximately 84,946.5 shares of CSB Common Stock outstanding and approximately
7,477 shares of CSB Common Stock are reserved for issuance pursuant to certain
outstanding options ("CSB Options"). CSB has not redeemed any shares of stock in
contemplation of the transactions described herein.
Bank is a Tennessee banking corporation which has issued and outstanding solely
common stock of one class ("Bank Common Stock"). There are approximately 178,154
shares of Bank Common Stock outstanding and there are no options outstanding
with regard to Bank Common Stock. The shares of Bank Common Stock not owned by
CSB (i.e. approximately 6,867.75 shares) are owned by approximately 51 other
shareholders (the "Minority Shareholders"). Bank has not redeemed any shares of
stock in contemplation of the transactions described herein.
FAC is a Tennessee corporation and a bank holding company owning 100% of the
issued and outstanding stock of FANB. FAC has currently authorized for issuance
shares of common stock of one class ("FAC Common Stock") and shares of preferred
stock. In addition, solely as a means of thwarting an unwanted takeover
transaction, FAC adopted a rights plan (the "Rights") which, in the event of
certain events described in such plan, would result in the holders of FAC Common
Stock receiving rights to acquire additional shares of FAC or perhaps of another
corporation. Subsequent to adopting this rights plan the Rights were distributed
to the then holders of FAC Common Stock on a pro rata basis. Holders of CSB
Common Stock and the Minority Shareholders who receive FAC Common Stock pursuant
to either the Merger or the Bank Merger will also receive Rights consistent with
the number of shares of FAC Common Stock received.
FANB is a national bank and a wholly owned subsidiary of FAC. FAC and FANB are
members of an affiliated group which files a consolidated federal income tax
return with FAC as the common parent (the "FAC Consolidated Group").
Proposed Mergers:
On the Closing Date and at the Effective Time, Bank will be merged with and into
FANB in accordance with applicable state and federal law with FANB surviving. As
a result, the separate corporate existence of Bank shall cease as provided by
law and FANB will acquire all the assets and assume all the liabilities of Bank.
Also on the Closing Date and at the Effective Time, CSB will be merged with and
into FAC in accordance with applicable state and federal law with FAC surviving.
As a
2
<PAGE> 3
result, the separate corporate existence of CSB shall cease as provided by
law and FAC will acquire all of the assets and all of the liabilities of CSB.
Pursuant to the Bank Merger the Minority Shareholders who do not perfect their
dissenters rights will be entitled to receive solely 4.4653 shares of FAC Common
Stock (and the associated Rights) in exchange for each share of Bank Common
Stock surrendered in the Bank Merger. Except as described below regarding
fractional shares, no other consideration is payable to the Minority
Shareholders pursuant to the Bank Merger.
Pursuant to the Merger each shareholder of CSB that does not perfect its
dissenters rights will be entitled to receive solely 9.7071 shares of FAC Common
Stock (and the associated Rights) in exchange for each share of CSB Common Stock
surrendered in the Merger. Except as described below regarding fractional
shares, no other consideration is payable to the CSB shareholders pursuant to
the Merger.
No fractional shares of FAC Common Stock will be issued as a result of either
the Merger or the Bank Merger. Instead, any Minority Shareholder or CSB
shareholder entitled to a fractional share of FAC Common Stock as a result of
either merger described herein shall receive cash in an amount equal to the
corresponding fractional price of one share of FAC Common Stock as traded on the
last trading day before the Effective Time.
Pursuant to the Merger holders of CSB Options will receive options to acquire
FAC Common Stock on the same terms and conditions (taking into account the
effects of the Merger) as with respect to the CSB Options.
REPRESENTATIONS
With regard to the Bank Merger:
a. The fair market value of the FAC Common Stock to be received by each
Minority Shareholder will be approximately equal to the fair market value of
the Bank Common Stock surrendered in exchange therefor.
b. FANB will acquire at least 90 percent of the fair market value of the net
assets and at least 70 percent of the fair market value of the gross assets
held by Bank immediately prior to the Bank Merger. Amounts used to pay: (i)
Bank shareholders who dissent to the Bank Merger, (ii) expenses related to
the Bank Merger, (iii) cash in lieu of fractional shares, and (iv) all
redemptions or distributions (except for regular, normal dividends) made
prior to the Bank Merger but in contemplation thereof will be considered as
assets held by Bank immediately prior to the Bank Merger for purposes of
making this representation.
3
<PAGE> 4
c. There is no plan or intention for FANB to issue any shares of any class of
stock. Prior to and following the Bank Merger, FAC will own all of the
outstanding stock of FANB.
d. Neither FAC nor any party related to FAC within the meaning of Treas. Reg.
Sec. 1.368-1(e)(3) has any plan or intention to redeem or otherwise acquire
any shares of FAC Common Stock issued in the Bank Merger.
e. FAC has no plan or intention to liquidate FANB, to merge FANB with any
corporation in which FANB would not be the surviving corporation, to sell or
otherwise dispose of any of the FANB stock, or to cause FANB to sell or
otherwise dispose of any of the assets of Bank acquired in the Bank Merger
(except for dispositions occurring in the ordinary course of business).
f. The liabilities of Bank to be assumed by FANB in the Bank Merger were
incurred by Bank in the ordinary course of its business and are associated
with the assets acquired in such merger.
g. Following the Bank Merger, FANB will continue the historic business of Bank
in a substantially unchanged manner.
h. FAC, FANB and the Minority Shareholders will each pay their own expenses,
if any, related to the Bank Merger.
i. At the Effective Time there will be no intercorporate indebtedness existing
between FANB and Bank or between any member of the FAC Consolidated Group
and Bank.
j. Neither FAC, FANB nor Bank is an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv).
k. Bank is not under the jurisdiction of a court in a Title 11 or similar case
as defined in Section 368(a)(3)(A).
l. The fair market value of the assets of Bank to be transferred to FANB
pursuant to the Bank Merger will equal or exceed the sum of the liabilities
of Bank to assumed by FANB in such merger plus the amount of liabilities, if
any, to which the transferred assets are subject.
With regard to the Merger:
m. The fair market value of the FAC Common Stock to be received by each
shareholder of CSB pursuant to the Merger will be approximately equal to
the fair market value of the CSB Common Stock surrendered in exchange
therefor.
4
<PAGE> 5
n. Neither FAC nor any party related to FAC within the meaning of Treas. Reg.
Sec. 1.368-1(e)(3) has any plan or intention to redeem or otherwise acquire
any shares of FAC Common Stock issued in the Merger.
o. FAC has no plan or intention to sell or otherwise dispose of any of the
assets of CSB acquired in the Merger, excepts for dispositions made in the
ordinary course of business or transferred as described in Section
368(a)(2)(c) of the Internal Revenue Code.
p. The liabilities of CSB to be assumed by FAC in the Merger were incurred by
CSB in the ordinary course of its business and are associated with the
assets to be acquired in such merger.
q. Following the Merger, FAC will continue to conduct the historic business of
CSB in a substantially unchanged manner.
r. FAC, CSB and the shareholders of CSB will each pay their own expenses, if
any, related to the Merger.
s. At the Effective Time there will be no intercorporate indebtedness existing
between FAC and CSB.
t. Neither FAC nor CSB is an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv).
u. CSB is not under the jurisdiction of a court in a Title 11 or similar matter
as defined in Section 368(a)(3)(A).
v. Both the fair market value and the adjusted basis of the assets of CSB to
be transferred to FAC in the Merger will equal or exceed the sum of the
liabilities of CSB to be assumed by FAC plus the amount of the liabilities,
if any, to which the transferred assets are subject.
With regard to both the Merger and the Bank Merger:
w. The payment of cash in lieu of fractional shares of FAC Common Stock is
solely for the purpose of avoiding the expense and inconvenience of issuing
fractional shares and such cash does not represent separately bargained-for
consideration. The total cash that will be paid in lieu of fractional
shares represents less than 1% of the total consideration paid in each
merger respectively and no shareholder will receive cash with a value equal
to or greater than the value of one full share of FAC Common Stock.
5
<PAGE> 6
x. No event has occurred that would make the Rights exercisable and the
occurrence of such event is both remote and contingent.
6
<PAGE> 7
OPINIONS
Based solely upon the contents of the Agreement and the FACTS and
REPRESENTATIONS above and subject to the SCOPE OF OPINION below, it is the
opinion of KPMG that:
With Respect to the Bank Merger:
1. The merger of Bank with and into FANB will constitute a reorganization
within the meaning of Sections 368(a)(1)(A) and (a)(2)(D) and Bank, FANB and
FAC will each be a "party to a reorganization" as defined in Section 368(b).
2. Provided the Rights are not "other property" (see discussion under Scope of
Opinion) then no gain or loss will be recognized by the Minority
Shareholders upon their exchange of Bank Common Stock solely for shares of
FAC Common Stock and Rights associated therewith (including any fractional
share of FAC Common Stock to which they may be entitled). Section 354. In
the event the Rights are "other property' then the Minority Shareholders
would recognize any realized gain on the exchange but in an amount not in
excess of the fair market value of the Rights received. Section 356(a)(1).
This recognized gain will be either a capital gain or a dividend computed
with regard to each Minority Shareholder separately based on their
individual circumstances and taking into account the principles of Donald
E. Clark, 489 US 726. EACH MINORITY SHAREHOLDER SHOULD CONSULT THEIR OWN
TAX ADVISOR WITH REGARD TO THE TREATMENT OF THE RIGHTS AS "OTHER PROPERTY"
AND THE FEDERAL INCOME TAX CONSEQUENCES TO THEM, e.g. CAPITAL GAIN OR
DIVIDEND. In any event, no loss will be recognized. Section 356(c). For
the remainder of this opinion, including that portion of the opinion
addressing the Merger, it will be assumed that the Rights are NOT "other
property".
3. The basis of the FAC Common Stock received by each Minority Shareholder
(including any fractional share interest to which the shareholder may be
entitled) will be the same as the basis of the Bank Common Stock surrendered
in exchange therefor. Section 358(a)(1).
4. The holding period of the FAC Common Stock received by each Minority
Shareholder (including any fractional share interest to which they may be
entitled) will include the period during which they held the Bank Common
Stock surrendered in exchange therefore, provided the Bank Common Stock
surrendered was held as a capital asset as of the Closing Date. Section
1223(2).
5. No gain or loss will be recognized by FANB upon the receipt of the assets of
Bank solely in exchange for shares of FAC Common Stock and the assumption by
FANB of the liabilities of Bank, provided the shares of FAC Common Stock
used in this merger
7
<PAGE> 8
are provided by FAC to FANB (or issued directly by FAC to the Minority
Shareholders) as part of the plan of reorganization. Treas. Reg.
Sec. 1.1032-2(b).
6. The holding period of each asset of Bank in the hands of FANB will include
the period during which Bank held such asset. Section 1223(1).
7. No gain or loss will be recognized by Bank upon the transfer of its assets
to FANB solely in exchange for the FAC Common Stock and the assumption by
FANB of its liabilities. Sections 357(a) and 361(a).
8. No gain or loss will be recognized by Bank upon the distribution of the FAC
Common Stock to the Minority Shareholders in exchange for their shares of
Bank Common Stock. Section 361(c).
With Respect to the Merger:
9. The merger of CSB with and into FAC will be a reorganization within the
meaning of section 368(a)(1)(A) and FAC and CSB will each be a "party to a
reorganization" within the meaning of Section 368(b).
10. No gain or loss will be recognized by a shareholder of CSB upon the
receipt of solely shares of FAC Common Stock (including any fractional
share to which they may be entitled) in exchange for their shares of CSB
Common Stock. Section 354. PLEASE SEE OPINION #2 ABOVE. THE DISCUSSION
CONTAINED THEREIN REGARDING THE TREATMENT OF THE RIGHTS AS "OTHER
PROPERTY" APPLIES EQUALLY WITH RESPECT TO THE EXCHANGE OF CSB COMMON STOCK
FOR FAC COMMON STOCK AND ASSOCIATED RIGHTS. THUS, EACH SHAREHOLDER OF CSB
SHOULD ALSO CONSULT THEIR OWN TAX ADVISOR ON THESE MATTERS.
11. The basis of the FAC Common Stock received by each shareholder of CSB
(including any fractional share interest to which the shareholder may be
entitled) will be the same as the basis of the CSB Common Stock exchanged
therefor. Section 358(a)(1).
12. The holding period of the FAC Common Stock received by each shareholder of
CSB (including any fractional share interest to which the shareholder may
be entitled) will include the period during which the CSB Common Stock
exchanged was held, provided the CSB Common Stock was held as a capital
asset on the Closing Date. Section 1223(2).
13. No gain or loss will be recognized by FAC upon the receipt of the assets
of CSB solely in exchange for shares of FAC Common Stock and the
assumption by FAC of the liabilities of CSB. Section 1032.
8
<PAGE> 9
14. The holding period of each asset of CSB in the hands of FAC will include
the period of time during which CSB held the asset. Section 1223(1).
15. No gain or loss will be recognized by CSB upon the transfer of its assets
to FAC solely in exchange for shares of FAC Common Stock and the
assumption by FAC of the its liabilities. Sections 357(a) and 361(a).
16. No gain or loss will be recognized by CSB upon the distribution to its
shareholders of the FAC Common Stock in exchange for their CSB Common
Stock. Section 361(c).
With Respect to both the Merger and the Bank Merger:
17. The receipt of cash in lieu of a fractional share of FAC Common Stock will
be treated as if such fractional share was actually received and then
redeemed for cash by FAC. Provided that neither FAC, CSB nor Bank is a
"collapsible corporation" as defined in Section 341(b), such cash will be
treated as in full payment in exchange for such fractional share. Rev Proc
77-41, 1977-2 CB 574.
SCOPE OF OPINIONS
The opinions contained herein are based upon the statements in the Agreement and
the FACTS and REPRESENTATIONS as contained herein. If any of these are not
entirely correct or complete in any material way then it is imperative that KPMG
be so informed in writing as such could cause us to change our opinions. KPMG
renders its opinion only with respect to the specific items as detailed under
the heading "OPINIONS" and KPMG expresses no opinion with respect to any other
federal, state, local or foreign tax aspect of the transactions described
herein. No inference should be drawn regarding any matter not specifically
opined upon.
This opinion is not binding upon the Internal Revenue Service ("IRS"), any other
tax authority or any court and no assurance can be given that a position
contrary to that expressed herein will not be asserted by a tax authority and
ultimately sustained by a court. In rendering our opinions KPMG is relying upon
the relevant provisions of the Internal Revenue Code of 1986, as amended, the
regulations thereunder, and the judicial and administrative interpretation
thereof all as of the date of this letter. All such items are subject to change
which can be retroactive in effect and such change can effect the validity of
the opinions contained herein. KPMG assumes no obligation to inform you of any
such change which occurs subsequent to the date this letter is issued.
With regard to the Rights please be advised as follows: presently there is no
direct authority regarding the treatment of the Rights as "other property". The
only available
9
<PAGE> 10
guidance is in the form of Private Letter Rulings (PLRs) issued by the National
Office of the IRS. Such PLRs generally may not be relied upon by a taxpayer
other than the specific taxpayer obtaining the PLR. However, these PLRs do at
least give insight into how the IRS views a particular issue.
In PLR 8808081 the IRS ruled that rights similar to the Rights DID constitute
"other property" when received in a reorganization under Section 368. Thus,
shareholders receiving such rights had, in part, a taxable transaction.
Subsequently, however, the IRS reversed its position and held that rights
similar to the Rights did NOT constitute "other property" and, therefore,
receipt of these rights in a reorganization under Section 368 did not result in
any taxable event. See PLRs 8925087, 8925088, 9040069, and 9040042 (among
others).
As well, in published Revenue Ruling 90-11, 1990-1 C.B. 10, the IRS held that
the distribution of rights similar to the Rights to the existing shareholders of
a corporation did not result in the distribution of "property" and was,
therefore, not a taxable event. As this is a published Revenue Ruling it may be
relied upon by any taxpayer in a similar situation. While this published Revenue
Ruling can be distinguished from the transactions described in this opinion
letter (the published Revenue Ruling does not address rights issued in a
corporate reorganization) this Revenue Ruling coupled with the more recent PLRs
cited above clearly indicates that the current view of the IRS is that the
Rights should not be "other property". Thus, while no direct authority exists
and, therefore, the matter is not free from doubt, it seems reasonable to
conclude that the Rights are not "other property" and, therefore, the receipt of
the Rights in the Merger or the Bank Merger does not result in a taxable
transaction to the recipient.
In any event, the presence of the Rights will not disqualify either the Merger
or the Bank Merger from treatment under Section 368. The only effect is upon the
taxable nature of the transactions to the Minority Shareholders and the CSB
Shareholders and the basis of the FAC Common Stock they receive.
Sincerely,
KPMG Peat Marwick LLP
rww
10
<PAGE> 1
EXHIBIT 23.5
ACCOUNTANTS' CONSENT
The Board of Directors
First American Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading of "Certain Federal Income Tax Consequences in the in the
Proxy Statement - Prospectus.
Nashville, Tennessee
August 26, 1998
