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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 1994
REGISTRATION NO. 33-54739
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST UNION CORPORATION
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 6711 56-0898180
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
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ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(704) 374-6565
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MARION A. COWELL, JR., ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
FIRST UNION CORPORATION
ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(704) 374-6828
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
THOMAS J. HAGGERTY, ESQ.
CYNTHIA M. KRUS, ESQ.
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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FIRST UNION CORPORATION PROSPECTUS
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE RESPONSES
TO THE ITEMS OF PART I OF FORM S-4.
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FORM S-4 ITEM LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus......................................................... Outside front cover page; facing page
2. Inside Front and Outside Back Cover Pages of Prospectus............ AVAILABLE INFORMATION; TABLE OF CONTENTS
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information........................................................ SUMMARY
4. Terms of the Transaction........................................... SUMMARY; GENERAL INFORMATION; THE MERGER;
DESCRIPTION OF FUNC CAPITAL STOCK; CERTAIN
DIFFERENCES IN THE RIGHTS OF HOME FEDERAL AND
FUNC STOCKHOLDERS; ANNEX B; ANNEX C
5. Pro Forma Financial Information.................................... *
6. Material Contacts with the Company Being Acquired.................. THE MERGER; ADDITIONAL MATTERS
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to Be Underwriters.................................. *
8. Interests of Named Experts and Counsel............................. LEGAL OPINIONS; EXPERTS
9. Disclosure of Commission Position on Indemnification for Securities
Act Liabilities.................................................... *
10. Information with Respect to S-3 Registrants........................ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
SUMMARY; FUNC
11. Incorporation of Certain Information by Reference.................. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
12. Information with Respect to S-2 or S-3 Registrants................. *
13. Incorporation of Certain Information by Reference.................. *
14. Information with Respect to Registrants Other Than S-3 or S-2
Registrants........................................................ *
15. Information with Respect to S-3 Companies.......................... *
16. Information with Respect to S-2 or S-3 Companies................... *
17. Information with Respect to Companies Other Than S-2 or S-3
Companies.......................................................... HOME FEDERAL; ANNEX A
18. Information if Proxies, Consents or Authorizations are to be
Solicited.......................................................... INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
SUMMARY; GENERAL INFORMATION; THE MERGER; HOME
FEDERAL; FUNC; EXPERTS
19. Information if Proxies, Consents or Authorizations are not to be
Solicited, or in an Exchange Offer................................. *
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* Not applicable.
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HOME FEDERAL SAVINGS BANK
5225 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20015
(202) 537-8824
September , 1994
Dear Stockholder:
On behalf of the Board of Directors, I want to extend to you a cordial
invitation to attend a Special Meeting of Stockholders of Home Federal Savings
Bank ("Home Federal"). The meeting will be held at 9:00 a.m., Washington, D.C.
time, on October , 1994, at the Embassy Suites Hotel, Chevy Chase Pavilion,
4300 Military Road, N.W., Washington, D.C.
The purpose of the meeting is to vote on a proposal to approve an Agreement
and Plan of Acquisition, dated as of May 27, 1994 (the "Merger Agreement"),
among Home Federal, First Union Corporation ("FUNC"), First Union Corporation of
Virginia and First Union National Bank of Washington, D.C. ("FUNB-DC"), pursuant
to which Home Federal would merge with and into FUNB-DC (the "Merger"). FUNC is
the ninth largest bank holding company in the nation, based on total assets of
$72.6 billion at June 30, 1994.
Upon consummation of the Merger, each outstanding share of Home Federal
common stock would be converted into the right to receive 0.4835 shares of FUNC
common stock, subject to possible adjustment under certain circumstances (the
"Exchange Ratio"), in a transaction that is generally tax-free for federal
income tax purposes, all as more fully discussed in the accompanying
Prospectus/Proxy Statement. Based on (i) $46.875, the last reported sale price
per share on the New York Stock Exchange Composite Transactions Tape (the "NYSE
Tape") of FUNC common stock on May 27, 1994, the last trading day prior to
public announcement of the Merger, and (ii) a 0.4835 Exchange Ratio, each share
of Home Federal common stock would have been converted into $22.625 in market
value of FUNC common stock, if the Merger had been consummated on that date.
Because the market value of FUNC common stock will fluctuate, however, the
market value of the FUNC common stock that Home Federal stockholders would
receive upon actual consummation of the Merger will increase or decrease prior
to, as well as after, consummation of the Merger. The last reported sale price
of FUNC common stock on the NYSE Tape on September , 1994, was $ per
share.
In the event of a decline in the price of FUNC common stock below certain
levels and under certain conditions, the Exchange Ratio may, but is not required
to, be adjusted, as discussed in the accompanying Prospectus/Proxy Statement
under "THE MERGER -- Possible Exchange Ratio Adjustment".
Consummation of the Merger is subject to certain conditions, including
approval of the Merger Agreement by Home Federal stockholders and approval of
the Merger by various regulatory agencies.
The proposed Merger has been unanimously approved by the Board of Directors
of Home Federal as being in the best interests of Home Federal and its
stockholders. The Home Federal Board of Directors has received an opinion of
Hovde Financial, Inc., a financial advisor, that the consideration to be paid to
Home Federal stockholders is fair from a financial point of view. Therefore,
your Board of Directors recommends that you vote "FOR" approval of the Merger
Agreement.
The accompanying Notice of Special Meeting and Prospectus/Proxy Statement
contain information about the Merger. I urge you to carefully review such
information and the information in FUNC's 1993 Annual Report on Form 10-K, 1994
Annual Meeting Proxy Statement and 1994 Second Quarter Report on Form 10-Q,
copies of which are available as indicated in the accompanying Prospectus/Proxy
Statement under "AVAILABLE INFORMATION".
IT IS VERY IMPORTANT THAT YOUR SHARES ARE VOTED AT THE MEETING, REGARDLESS
OF WHETHER YOU ATTEND IN PERSON. THE AFFIRMATIVE VOTE OF AT LEAST TWO-THIRDS OF
ALL OF THE OUTSTANDING SHARES OF HOME FEDERAL COMMON STOCK IS REQUIRED TO
APPROVE THE MERGER AGREEMENT. A FAILURE TO VOTE, EITHER BY NOT RETURNING THE
ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX THEREON, WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST APPROVAL OF THE MERGER AGREEMENT. PLEASE COMPLETE THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID, RETURN
ADDRESSED ENVELOPE. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS TIME.
Yours very truly,
ELWYN G. RAIDEN, JR.
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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HOME FEDERAL SAVINGS BANK
5225 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20015
(202) 537-8824
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER , 1994
September , 1994
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Home
Federal Savings Bank ("Home Federal") will be held at 9:00 a.m., Washington,
D.C. time, on October , 1994, at the Embassy Suites Hotel, Chevy Chase
Pavilion, 4300 Military Road, N.W., Washington, D.C., for the following
purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Acquisition, dated as of May 27, 1994 (the "Merger Agreement"), among
Home Federal, First Union Corporation ("FUNC"), First Union Corporation
of Virginia and First Union National Bank of Washington, D.C.
("FUNB-DC"), pursuant to which (i) Home Federal would merge with and
into FUNB-DC, and (ii) each outstanding share of Home Federal common
stock would be converted into the right to receive 0.4835 shares of FUNC
common stock, subject to possible adjustment under certain
circumstances, all on and subject to the terms and conditions contained
therein.
2. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
A copy of the Merger Agreement is set forth in ANNEX B to the accompanying
Prospectus/Proxy Statement.
The Board of Directors of Home Federal has fixed September 1, 1994, as the
record date for the determination of stockholders entitled to notice of and to
vote at the meeting and, accordingly, only holders of record of Home Federal
common stock at the close of business on that date will be entitled to notice of
and to vote at the meeting.
THE BOARD OF DIRECTORS OF HOME FEDERAL UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors of
HOME FEDERAL SAVINGS BANK
JAMES E. STOUT
SECRETARY
EVEN STOCKHOLDERS WHO EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON ARE URGED
TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY REVOKE YOUR APPOINTMENT OF PROXY AND VOTE
YOUR SHARES IN PERSON. IF A STOCKHOLDER RECEIVES MORE THAN ONE PROXY FOR ANY
REASON, EACH PROXY SHOULD BE COMPLETED AND RETURNED. YOUR COOPERATION WILL BE
APPRECIATED. YOUR PROXY WILL BE VOTED WITH RESPECT TO THE MATTERS IDENTIFIED
THEREON IN ACCORDANCE WITH ANY SPECIFICATIONS ON THE PROXY. 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 MERGER
AGREEMENT.
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PROSPECTUS PROXY STATEMENT
FIRST UNION CORPORATION HOME FEDERAL SAVINGS BANK
COMMON STOCK SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER ,
(PAR VALUE $3.33 1/3 PER SHARE) 1994
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This Prospectus/Proxy Statement is being furnished by Home Federal Savings
Bank ("Home Federal") to the holders of Home Federal common stock, par value
$0.01 per share ("Home Federal Common Stock"), as a proxy statement in
connection with the solicitation of proxies by the Board of Directors of Home
Federal (the "Home Federal Board") for use at a special meeting of stockholders
of Home Federal to be held at 9:00 a.m., Washington, D.C. time, on October ,
1994, at the Embassy Suites Hotel, Chevy Chase Pavilion, 4300 Military Road,
N.W., Washington, D.C. (the "Special Meeting"), and at any adjournment or
adjournments thereof.
This Prospectus/Proxy Statement, the accompanying Notice of Special Meeting
and the form of proxy enclosed herewith are first being mailed to the
stockholders of Home Federal on or about September , 1994.
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve an Agreement and Plan of Acquisition, dated as of May 27, 1994 (the
"Merger Agreement"), among Home Federal, First Union Corporation, a North
Carolina corporation ("FUNC"), First Union Corporation of Virginia, a Virginia
corporation ("FUNC-VA"), and First Union National Bank of Washington D.C.
("FUNB-DC"), pursuant to which Home Federal would merge with and into FUNB-DC
(the "Merger"), all on and subject to the terms and conditions contained
therein. See "SUMMARY", "THE MERGER" and ANNEX B to this Prospectus/Proxy
Statement.
Upon consummation of the Merger each outstanding share of Home Federal
Common Stock would be converted into the right to receive 0.4835 shares of FUNC
common stock, par value $3.33 1/3 per share (together with the FUNC Rights (as
hereinafter defined) attached thereto, "FUNC Common Stock"), subject to possible
adjustment under certain circumstances (the "Exchange Ratio"), with cash in lieu
of the issuance of any fractional share interest.
In the event of a decline in the price of FUNC Common Stock below certain
levels and under certain conditions, the Exchange Ratio may, but is not required
to, be adjusted. See "THE MERGER -- Possible Exchange Ratio Adjustment".
This document also constitutes a prospectus of FUNC relating to the shares
(the "FUNC Common Shares") of FUNC Common Stock that are issuable upon
consummation of the Merger. See "DESCRIPTION OF FUNC CAPITAL STOCK" and "CERTAIN
DIFFERENCES IN THE RIGHTS OF HOME FEDERAL AND FUNC STOCKHOLDERS".
Based on the 1,022,511 shares of Home Federal Common Stock outstanding on
the Record Date (as hereinafter defined), the 78,760 shares of Home Federal
Common Stock issuable upon the exercise of outstanding employee and director
stock options on the date hereof, and a 0.4835 Exchange Ratio, approximately
532,465 FUNC Common Shares will be issuable upon consummation of the Merger.
FUNC Common Stock is listed and traded on the New York Stock Exchange (the
"NYSE"). Home Federal Common Stock is listed and traded on the Nasdaq Stock
Market's Small Cap Market (the "Small Cap Market"). On May 27, 1994, the last
business day prior to public announcement of the execution of the Merger
Agreement, the last reported sale price per share of FUNC Common Stock on the
NYSE Composite Transactions Tape (the "NYSE Tape") and of Home Federal Common
Stock on the Small Cap Market were $46.875 and $12.125, respectively. On
September , 1994, such prices were $ and $ , respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUNC COMMON SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS SEPTEMBER , 1994
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AVAILABLE INFORMATION
FUNC and Home Federal are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"), as to FUNC, and with the Office of Thrift
Supervision (the "OTS"), as to Home Federal. Reports, proxy statements and other
information filed by FUNC can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices in New York (7 World Trade
Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621) and copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports,
proxy statements and other information filed by Home Federal can be inspected
and copied at the public reference facilities maintained by the OTS at the
Office of Public Information, OTS, 1700 G Street, N.W., Washington, D.C. 20552,
and can be obtained by written request from such office, at prescribed rates.
Reports, proxy statements and other information relating to FUNC can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement on Form S-4, of which this Prospectus/Proxy
Statement is a part, and the exhibits thereto (together with any amendments or
supplements thereto, the "Registration Statement"), which has been filed by FUNC
with the Commission under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (the "Securities Act"), certain portions of which
have been omitted pursuant to the rules and regulations of the Commission and to
which portions reference is hereby made for further information.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES CERTAIN FUNC DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. A COPY OF SUCH
DOCUMENTS IS AVAILABLE WITHOUT CHARGE (OTHER THAN CERTAIN EXHIBITS TO SUCH
DOCUMENTS) TO EACH HOME FEDERAL STOCKHOLDER, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST
FROM: FIRST UNION CORPORATION, INVESTOR RELATIONS, TWO FIRST UNION CENTER,
CHARLOTTE, NORTH CAROLINA 28288-0206 (TELEPHONE NUMBER (704) 374-6782). IN ORDER
TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY
OCTOBER , 1994.
All information contained or incorporated by reference in this
Prospectus/Proxy Statement with respect to FUNC was supplied by FUNC, and all
information contained in this Prospectus/Proxy Statement with respect to Home
Federal was supplied by Home Federal.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus/Proxy Statement,
and, if given or made, such information or representations must not be relied
upon as having been authorized by FUNC or Home Federal. Neither the delivery of
this Prospectus/Proxy Statement nor any distribution of the securities to which
this Prospectus/Proxy Statement relates shall, under any circumstances, create
any implication that there has been no change in the affairs of FUNC or Home
Federal since the date hereof or that the information contained herein is
correct as of any time subsequent to its date. This Prospectus/Proxy Statement
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates or an offer to sell or
solicitation of an offer to buy such securities in any circumstances in which
such an offer or solicitation is not lawful.
The Commissioner of Insurance of the State of North Carolina has not
approved or disapproved this offering nor has the Commissioner passed upon the
accuracy or adequacy of this Prospectus/Proxy Statement.
2
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by FUNC with the Commission (File No.
1-10000) under Section 13(a) or 15(d) of the Exchange Act are hereby
incorporated by reference in this Prospectus/Proxy Statement:
(i) FUNC's Annual Report on Form 10-K for the year ended December 31, 1993;
and
(ii) FUNC's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1994 and June 30, 1994 .
All documents filed by FUNC pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date hereof and prior to the Special
Meeting are hereby incorporated by reference into this Prospectus/Proxy
Statement and shall be deemed a part hereof from the date of filing of such
documents.
Certain financial and other information relating to Home Federal is
contained in this Prospectus/Proxy Statement, including ANNEX A.
Any statement contained herein, in any supplement hereto, or in a document
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of the Registration Statement and this
Prospectus/Proxy Statement to the extent that a statement contained herein, in
any supplement hereto, or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Prospectus/Proxy Statement or any supplement hereto.
3
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TABLE OF CONTENTS
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AVAILABLE INFORMATION.................................................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................................ 3
SUMMARY................................................................................................................ 6
GENERAL INFORMATION.................................................................................................... 15
General.............................................................................................................. 15
Record Date; Vote Required........................................................................................... 15
THE MERGER............................................................................................................. 16
General.............................................................................................................. 16
Possible Exchange Ratio Adjustment................................................................................... 16
Effective Date....................................................................................................... 17
Exchange of Home Federal Stock Certificates.......................................................................... 17
Background and Reasons............................................................................................... 18
Opinion of Financial Advisor......................................................................................... 19
Interests of Certain Persons......................................................................................... 22
Certain Federal Income Tax Consequences.............................................................................. 23
Business Pending Consummation........................................................................................ 24
Regulatory Approvals................................................................................................. 24
Conditions to Consummation; Termination.............................................................................. 24
Waiver; Amendment.................................................................................................... 25
No Appraisal Rights.................................................................................................. 25
Accounting Treatment................................................................................................. 25
Expenses............................................................................................................. 26
Stock Option Agreement............................................................................................... 26
Market Prices........................................................................................................ 27
Dividends............................................................................................................ 28
HOME FEDERAL........................................................................................................... 29
General.............................................................................................................. 29
Lending Activities................................................................................................... 29
Classified Assets and Delinquencies.................................................................................. 33
Mortgage-Backed Securities........................................................................................... 36
Investment Activities................................................................................................ 36
Sources of Funds..................................................................................................... 37
Properties........................................................................................................... 38
Subsidiaries......................................................................................................... 38
Competition.......................................................................................................... 39
Employees............................................................................................................ 39
Dividend Policy...................................................................................................... 39
Legal Proceedings.................................................................................................... 39
Management's Discussion and Analysis of Financial Condition.......................................................... 39
Security Ownership of Certain Beneficial Owners...................................................................... 48
Background and Security Ownership of Directors and Executive Officers................................................ 49
Regulation and Supervision........................................................................................... 50
Recent and Proposed Changes in Accounting Rules...................................................................... 58
FUNC................................................................................................................... 60
General.............................................................................................................. 60
History and Business................................................................................................. 60
Common Stock Repurchase.............................................................................................. 61
Certain Regulatory Considerations.................................................................................... 61
DESCRIPTION OF FUNC CAPITAL STOCK...................................................................................... 64
Authorized Capital................................................................................................... 64
FUNC Common Stock.................................................................................................... 64
FUNC Preferred Stock................................................................................................. 65
FUNC Class A Preferred Stock......................................................................................... 65
Rights Plan.......................................................................................................... 66
Other Provisions..................................................................................................... 66
CERTAIN DIFFERENCES IN THE RIGHTS OF HOME FEDERAL AND FUNC STOCKHOLDERS................................................ 67
General.............................................................................................................. 67
Authorized Capital................................................................................................... 67
Amendment of Articles of Incorporation or Bylaws..................................................................... 67
Size and Classification of Board of Directors........................................................................ 68
Removal of Directors................................................................................................. 68
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Director Exculpation................................................................................................. 68
Director Conflict of Interest Transactions........................................................................... 68
Stockholder Meetings................................................................................................. 69
Director Nominations................................................................................................. 69
Stockholder Proposals................................................................................................ 69
Stockholder Protection Rights Plan................................................................................... 70
Stockholder Inspection Rights; Stockholder Lists..................................................................... 70
Required Stockholder Vote for Certain Actions........................................................................ 70
Anti-Takeover Provisions............................................................................................. 71
Dissenters' or Appraisal Rights...................................................................................... 71
Dividends and Other Distributions.................................................................................... 71
Voluntary Dissolution................................................................................................ 72
RESALE OF FUNC COMMON SHARES........................................................................................... 72
ADDITIONAL MATTERS..................................................................................................... 72
OPINIONS............................................................................................................... 72
EXPERTS................................................................................................................ 73
OTHER MATTERS.......................................................................................................... 73
ANNEXES:
ANNEX A -- CONSOLIDATED FINANCIAL STATEMENTS OF HOME FEDERAL......................................................... A-1
ANNEX B -- AGREEMENT AND PLAN OF ACQUISITION, INCLUDING THE STOCK OPTION AGREEMENT................................... B-1
ANNEX C -- OPINION OF HOVDE FINANCIAL, INC. ......................................................................... C-1
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5
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION RELATING TO THE
MERGER. THIS SUMMARY IS NOT INTENDED TO BE A SUMMARY OF ALL MATERIAL INFORMATION
RELATING TO THE MERGER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MORE
DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT,
INCLUDING THE ANNEXES HERETO, AND IN THE DOCUMENTS INCORPORATED BY REFERENCE IN
THIS PROSPECTUS/PROXY STATEMENT. A COPY OF THE MERGER AGREEMENT (INCLUDING THE
STOCK OPTION AGREEMENT (AS HEREINAFTER DEFINED)) IS SET FORTH IN ANNEX B TO THIS
PROSPECTUS/PROXY STATEMENT AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER. STOCKHOLDERS ARE URGED TO READ CAREFULLY
THIS ENTIRE PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES HERETO. AS USED IN
THIS PROSPECTUS/PROXY STATEMENT, THE TERMS "FUNC" AND "HOME FEDERAL" REFER TO
SUCH ORGANIZATIONS, RESPECTIVELY, AND, UNLESS THE CONTEXT OTHERWISE REQUIRES,
SUCH ORGANIZATIONS AND THEIR RESPECTIVE SUBSIDIARIES.
PARTIES TO THE MERGER
FUNC
FUNC is a North Carolina-based, multi-bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and the rules and regulations
thereunder (the "BHCA"). FUNC provides a wide range of commercial and retail
banking services and trust services in North Carolina, Florida, South Carolina,
Georgia, Tennessee, Virginia, Maryland and Washington, D.C. FUNC also provides
various other financial services, including mortgage banking, home equity
lending, insurance and securities' brokerage services, through other
subsidiaries. As of June 30, 1994, and for the six months then ended, FUNC
reported assets of $72.6 billion, net loans of $48.9 billion, deposits of $53.8
billion, stockholders' equity of $5.4 billion and net income applicable to
common stockholders of $440 million, and as of such date FUNC operated through
1,529 offices in 39 states and two foreign countries. FUNC is the ninth largest
bank holding company in the United States, based on total assets at June 30,
1994. The principal executive offices of FUNC are located at One First Union
Center, Charlotte, North Carolina 28288-0013, and its telephone number is (704)
374-6565.
Interstate banking legislation has greatly impacted the growth of FUNC, and
it has also greatly impacted the banking industry in general. North Carolina's
interstate banking statute includes Alabama, Arkansas, Florida, Georgia,
Kentucky, Louisiana, Maryland, Mississippi, South Carolina, Tennessee, Texas,
Virginia, West Virginia and Washington, D.C., each of which has passed
interstate banking legislation, either on a regional or national basis. Various
other states not named in the North Carolina legislation have also adopted
interstate banking legislation, which, under certain conditions, would permit
FUNC to acquire banks in such states. Legislation has been introduced in the
United States Congress that, if enacted, would generally provide for nationwide
interstate banking, subject to certain limitations.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions.
See "FUNC".
FUNC-VA AND FUNB-DC
FUNC-VA is a wholly-owned subsidiary of FUNC (except for certain Class B
shares owned by another subsidiary of FUNC). FUNC-VA, directly or indirectly,
owns all of the outstanding shares (except for directors' qualifying shares) of
FUNB-DC, First Union National Bank of Virginia ("FUNB-VA"), First Union National
Bank of Maryland ("FUNB-MD") and First Union National Bank of Tennessee
("FUNB-TN"). The principal executive offices of FUNC-VA are located at 213 South
Jefferson Street, Roanoke, Virginia 24040, and its telephone number is (703)
580-7465.
FUNB-DC is a national banking association that provides a wide range of
commercial and retail banking services and trust services in Washington, D.C. As
of June 30, 1994, and for the six months then ended, FUNB-DC's call report
reflected assets of $1.4 billion, net loans of $294 million, deposits of $1.1
billion, stockholder's equity of $162 million and net income of $12 million, and
as of such date FUNB-DC operated through 30 banking offices in Washington, D.C.
The principal executive offices of FUNB-DC are located at 740 15th Street, N.W.,
Washington, D.C. 20005, and its telephone number is (202) 637-7644.
6
<PAGE>
HOME FEDERAL
Home Federal is a federally chartered stock savings bank that converted
from a federally chartered mutual savings bank on January 5, 1989. Home Federal
is primarily engaged in the business of attracting deposits from the general
public and using such deposits to originate mortgage loans, consumer loans and
commercial real estate and residential construction loans. Home Federal is a
member of the Federal Home Loan Bank (the "FHLB") of Atlanta and its deposits
are insured by the Savings Association Insurance Fund (the "SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). As of June 30, 1994, and for
the six months then ended, Home Federal had assets of $232 million, net loans of
$191 million, deposits of $198 million, stockholders' equity of $12.5 million
and net income applicable to common stockholders of $374,000, and as of such
date Home Federal operated through six savings bank offices in Washington, D.C.
and two mortgage banking offices, one in Washington, D.C. and one in Annandale,
Virginia. The principal executive offices of Home Federal are located at 5225
Wisconsin Avenue, N.W., Washington, D.C. 20015, and its telephone number is
(202) 537-8874. See "HOME FEDERAL".
SPECIAL MEETING; RECORD DATE
The Special Meeting will be held on October , 1994, at 9:00 a.m.,
Washington, D.C. time, at the Embassy Suites Hotel, Chevy Chase Pavilion, 4300
Military Road, N.W., Washington, D.C., for the purpose of Home Federal
stockholders considering and voting upon a proposal to approve the Merger
Agreement.
The Home Federal Board has fixed September 1, 1994, as the record date for
stockholders entitled to notice of and to vote at the Special Meeting (the
"Record Date"). As of such date, there were 1,022,511 shares of Home Federal
Common Stock outstanding and entitled to be voted at the Special Meeting.
See "GENERAL INFORMATION".
THE MERGER; EXCHANGE RATIO
Under the terms of the Merger Agreement, Home Federal will merge with and
into FUNB-DC. Upon consummation of the Merger each outstanding share of Home
Federal Common Stock would be converted into the right to receive 0.4835 shares
of FUNC Common Stock, subject to possible adjustment under certain
circumstances, with cash in lieu of the issuance of any fractional share
interest. See "THE MERGER -- Possible Exchange Ratio Adjustment", "DESCRIPTION
OF FUNC CAPITAL STOCK" and "CERTAIN DIFFERENCES IN THE RIGHTS OF HOME FEDERAL
AND FUNC STOCKHOLDERS".
POSSIBLE EXCHANGE RATIO ADJUSTMENT
The Merger Agreement may be terminated in certain circumstances, including
by the Home Federal Board, at its sole option, if (i) the FUNC Closing Price (as
hereinafter defined) is less than $37.70, and (ii) the percentage decline in
such price from $47.125 (the last reported sale price of FUNC Common Stock on
May 26, 1994) is more than 20 percent greater than the percentage decline in a
weighted average closing price (the "Index Group Closing Price") on the OCC
Approval Date (as hereinafter defined) of the common stocks of a group of 16
other publicly traded bank holding companies (the "Index Group") from $35.54
(the weighted average closing price of the Index Group's common stocks on June 1
, 1994) (if both (i) and (ii) occur, an "FUNC Common Stock Decline"); provided,
however, that the Merger Agreement may not be so terminated if FUNC elects, at
its sole option, to increase the Exchange Ratio as provided in the Merger
Agreement. See "THE MERGER -- Possible Exchange Ratio Adjustment".
VOTE REQUIRED
Approval of the Merger Agreement requires the affirmative vote of at least
two-thirds of the shares of Home Federal Common Stock outstanding on the Record
Date.
The directors and executive officers of Home Federal (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting, 242,176 shares of outstanding Home
Federal Common Stock, which represent approximately 24 percent of the
outstanding shares of Home Federal Common Stock entitled to be voted at the
Special Meeting. The directors and executive officers of Home Federal have
indicated to the management of Home Federal that they intend to vote their
shares of Home Federal Common Stock in favor of approval of the Merger
Agreement. Accordingly, assuming such shares are so voted, approval of the
Merger Agreement will require the affirmative votes by the holders of an
additional approximately 43 percent of the outstanding shares of Home Federal
Common Stock.
See "GENERAL INFORMATION -- Record Date; Vote Required".
7
<PAGE>
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 MERGER AGREEMENT.
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Merger, the Merger will become effective (the "Effective Date") on such date as
FUNC notifies Home Federal in writing not less than five days prior thereto,
provided such date is not more than 30 days after such conditions have been
satisfied or waived. Subject to the foregoing, it is currently anticipated that
the Merger will be consummated in the fourth quarter of 1994. If the Merger is
consummated in such quarter, or in any other quarter, Home Federal stockholders
should not assume or expect that the Effective Date will precede the record date
for the dividend on FUNC Common Stock for that quarter, so as to enable such
stockholders to receive such dividend. See "THE MERGER -- Exchange of Home
Federal Certificates" and " -- Conditions to Consummation; Termination".
RECOMMENDATION OF THE HOME FEDERAL BOARD
The Home Federal Board has approved the Merger Agreement by unanimous vote.
The Home Federal Board believes the Merger Agreement is in the best interests of
Home Federal and its stockholders, is fair to the stockholders, and recommends
its approval by Home Federal stockholders. See "THE MERGER -- Background and
Reasons; HOME FEDERAL".
OPINION OF FINANCIAL ADVISOR
Hovde Financial, Inc. ("Hovde") advised the Home Federal Board on May 27,
1994, that, in its opinion, the consideration of 0.4835 shares of FUNC Common
Stock for each share of Home Federal Common Stock is fair, from a financial
point of view, to the holders of Home Federal Common Stock. The full text of
Hovde's opinion, dated as of May 27, 1994, which describes the procedures
followed, assumptions made, limitations on the review undertaken, and other
matters in connection with rendering the opinion, is set forth in ANNEX C to
this Prospectus/Proxy Statement and should be read in its entirety by Home
Federal stockholders. See "THE MERGER -- Opinion of Financial Advisor ".
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Home Federal's management and of the Home Federal Board
have certain interests in the Merger that are in addition to their interests as
stockholders of Home Federal generally. These interests include, among others,
provisions in the Merger Agreement relating to indemnification, the receipt of
benefits pursuant to employment contracts upon consummation of the Merger, and
continuation of certain employee benefits. See "THE MERGER -- Interests of
Certain Persons".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon receipt by FUNC and Home
Federal of an opinion of Sullivan & Cromwell, special counsel for FUNC, to the
effect that no gain or loss will be recognized for federal income tax purposes
by stockholders of Home Federal who receive FUNC Common Shares in exchange for
their shares of Home Federal Common Stock, other than in respect of cash
received in lieu of fractional share interests. See "THE MERGER -- Certain
Federal Income Tax Consequences".
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH HOME FEDERAL STOCKHOLDER, IT IS RECOMMENDED THAT HOME
FEDERAL STOCKHOLDERS CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL (AND ANY
STATE AND LOCAL) TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
RESALE OF FUNC COMMON SHARES
The FUNC Common Shares will be freely transferable by the holders of such
shares, except for those shares held by those holders who may be deemed to be
"affiliates" (generally including directors, certain executive officers and ten
percent or more stockholders) of Home Federal or FUNC under applicable federal
securities laws. See "RESALE OF FUNC COMMON SHARES".
8
<PAGE>
BUSINESS PENDING CONSUMMATION
The Merger Agreement provides that, without the prior written consent of
FUNC, Home Federal will conduct its business only in the ordinary and usual
course consistent with past practice, and not take certain actions relating to
the operation of Home Federal pending consummation of the Merger, except as
otherwise permitted by the Merger Agreement. These actions include, without
limitation: (i) not paying any dividends, redeeming or otherwise acquiring any
shares of its capital stock, issuing any additional shares of its capital stock
or giving any person the right to acquire any such shares, or, other than in the
ordinary course of business consistent with past practice, incurring any debt;
(ii) not increasing the rate of compensation or paying any bonus to any of its
directors, officers or employees (except, after prior consultation with FUNC,
normal individual increases in compensation in the ordinary course of business
consistent with past practice); (iii) not entering into or modifying any
employment agreements or employee benefit plans; and (iv) not disposing of any
material portion of its assets or acquiring any substantial portion of the
business or property of any other entity.
The Merger Agreement also provides that at a mutually agreed upon time
prior to the Effective Date, Home Federal will use its best efforts to modify,
consistent with generally accepted accounting principles, its loan, litigation
and real estate valuation policies and practices (including loan classifications
and levels of reserves) so as to be consistent with those policies and practices
applied by FUNC.
See "THE MERGER -- Business Pending Consummation".
REGULATORY APPROVALS
The Merger is subject to the prior approval of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"), the Office of the
Comptroller of the Currency (the "OCC"), and the OTS. Applications have been
filed with such regulatory authorities and are currently pending. There can be
no assurance that the necessary regulatory approvals will be obtained or as to
the timing or conditions of such approvals. See "THE MERGER -- Regulatory
Approvals".
CONDITIONS TO CONSUMMATION; TERMINATION
Consummation of the Merger is subject, among other things, to: (i) approval
of the Merger Agreement by the requisite vote of the stockholders of Home
Federal; (ii) receipt of the regulatory approvals referred to above without any
restrictions or conditions which would so materially adversely impact the
economic or business benefits to FUNC of the transactions contemplated by the
Merger Agreement so as to render inadvisable the consummation of the Merger;
(iii) no court or governmental or regulatory authority having taken any action
which prohibits the Merger; (iv) receipt by FUNC and Home Federal of the opinion
of Sullivan & Cromwell as to certain federal income tax consequences of the
Merger; (v) receipt by FUNC of a letter, satisfactory to FUNC, from its
independent certified public accountants that the Merger will qualify for
pooling of interests accounting treatment, and a letter from Home Federal's
independent certified public accountants to the effect that they are not aware
of any facts or circumstances that might cause the Merger not to qualify for
pooling of interests accounting treatment; and (vi) the FUNC Common Shares
having been approved for listing on the NYSE, subject to official notice of
issuance.
The Merger Agreement may be terminated by mutual agreement of the Boards of
Directors of FUNC and Home Federal. The Merger Agreement may also be terminated
by the Board of Directors of either FUNC or Home Federal if the Merger does not
occur on or before March 31, 1995, or if certain conditions set forth in the
Merger Agreement are not met. The Home Federal Board also is entitled to
terminate the Merger Agreement, at its sole option, in the event there is an
FUNC Common Stock Decline and FUNC does not elect, at its sole option, to
increase the Exchange Ratio as provided in the Merger Agreement.
See "THE MERGER -- Possible Exchange Ratio Adjustment" and " -- Conditions
to Consummation; Termination".
NO APPRAISAL RIGHTS
Holders of Home Federal Common Stock do not have appraisal rights under
applicable provisions of OCC and OTS regulations. See "THE MERGER -- No
Appraisal Rights".
STOCK OPTION AGREEMENT
As a condition to FUNC's entering into the Merger Agreement, and in
consideration thereof, Home Federal entered into a Stock Option Agreement with
FUNC, dated as of May 27, 1994 (the "Stock Option Agreement"). The Stock Option
Agreement is set forth in Exhibit A to the Merger Agreement, which is set forth
in ANNEX B to this Prospectus/Proxy Statement. Pursuant to the Stock Option
Agreement, Home Federal granted to FUNC an irrevocable option (the "Option"),
exercisable only under certain limited and specifically defined circumstances,
none of which, to the best of Home Federal's and FUNC's knowledge, has occurred
as of the date hereof, to purchase up to 200,000 authorized but unissued shares
of
9
<PAGE>
Home Federal Common Stock for a purchase price of $15.00 per share (the
"Purchase Price"), subject to adjustment in certain circumstances. The last sale
price per share of Home Federal Common Stock on the Small Cap Market on May 26,
1994, the last business day prior to the date on which the Stock Option
Agreement was executed, was $12.25. The number of shares of Home Federal Common
Stock subject to the Option represents approximately 19.6 percent of the
outstanding shares of Home Federal Common Stock, before giving effect to the
issuance of such shares. FUNC does not have any voting rights with respect to
the shares of Home Federal Common Stock subject to the Option, prior to exercise
of the Option. The purchase of any shares of Home Federal Common Stock by FUNC
pursuant to the Option is subject to compliance with applicable law, including
receipt of necessary approvals under the BHCA and the Home Owners' Loan Act of
1933, as amended (the "HOLA").
The Stock Option Agreement and the Option are intended to make it more
difficult for another party to acquire Home Federal, thereby increasing the
likelihood that the Merger will occur.
See "THE MERGER -- Stock Option Agreement".
COMPARISON OF CERTAIN UNAUDITED PER SHARE DATA
The following unaudited information, adjusted for any stock dividends and
stock splits, reflects, where applicable, certain comparative per share data
related to book value, cash dividends paid, income and market value: (i) on a
historical basis for FUNC and Home Federal; (ii) on a pro forma combined basis
per share of FUNC Common Stock reflecting consummation of the Merger with a
0.4835 Exchange Ratio; and (iii) on an equivalent pro forma basis per share of
Home Federal Common Stock reflecting consummation of the Merger with a 0.4835
Exchange Ratio. Such information has been prepared giving effect to the Merger
on a pooling of interests accounting basis. See "THE MERGER -- Accounting
Treatment".
As discussed under "THE MERGER -- Possible Exchange Ratio Adjustment", the
Exchange Ratio is subject to possible adjustment as a result of an FUNC Common
Stock Decline. It is not expected that the pro forma information presented would
be materially different if the Exchange Ratio were adjusted as a result of an
FUNC Common Stock Decline.
The information shown below should be read in conjunction with the
historical financial statements of FUNC and Home Federal, including the
respective notes thereto, which are set forth in ANNEX A (with respect to Home
Federal) or incorporated herein by reference (with respect to FUNC). See
"AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
ANNEX A. The pro forma information set forth below does not reflect the
acquisition by FUNC of BancFlorida (as such term is hereinafter defined). See
"FUNC -- History and Business".
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
<S> <C> <C>
BOOK VALUE PER COMMON SHARE:
Historical:
FUNC............................................................................................ $30.26 28.90
Home Federal.................................................................................... 12.41 12.11
Pro forma combined per FUNC common share (1)....................................................... 30.24 28.89
Equivalent pro forma per Home Federal common share (2)............................................. $14.62 13.97
</TABLE>
(1) The pro forma combined book value per FUNC common share amounts represent
the sum of pro forma combined FUNC common stockholders' equity and Home
Federal total stockholders' equity, divided by pro forma combined period-end
common shares outstanding.
(2) The equivalent pro forma book value per Home Federal common share amounts
represent the pro forma combined book value per FUNC common share amounts,
multiplied by a 0.4835 Exchange Ratio.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
CASH DIVIDENDS PAID PER SHARE:
Historical:
FUNC per common share................................................................ $.80 .70 1.50 1.28 1.12
Home Federal per common share........................................................ -- -- -- -- --
Pro forma combined per FUNC common share (3)............................................ .80 .65 1.45 1.05 .90
Equivalent pro forma per Home Federal common share (4).................................. $.39 .31 .70 .51 .44
</TABLE>
(3) Pro forma combined cash dividends paid per FUNC common share amounts
represent pro forma combined cash dividends paid on common stock
outstanding, divided by pro forma combined average common shares
outstanding, rounded to the nearest cent. The difference between the
pre-1994 pro forma combined per FUNC common share amounts and the pre-1994
historical FUNC per common share amounts is primarily caused by three
pooling of interest acquisitions consummated by FUNC in 1993 and not by the
proposed Merger.
10
<PAGE>
(4) Equivalent pro forma cash dividends paid per Home Federal common share
amounts represent pro forma combined per FUNC common share amounts,
multiplied by a 0.4835 Exchange Ratio, rounded to the nearest cent. The
current annualized dividend rate per share for FUNC Common Stock, based upon
the most recently declared quarterly dividend rate of $.46 per share payable
on September 15, 1994, would be $1.84. On an equivalent pro forma basis,
such current annualized FUNC dividend per Home Federal common share would be
$.89, based on a 0.4835 Exchange Ratio. Future FUNC and Home Federal
dividends are dependent upon their respective earnings and financial
conditions, government regulations and policies, and other factors. See "THE
MERGER -- Exchange of Home Federal Certificates" and " -- Business Pending
Consummation".
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED DECEMBER
JUNE 30, 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS:
Historical:
FUNC............................................................................... $2.59 2.49 4.73 2.23 2.24
Home Federal....................................................................... .35 1.41 1.95 (.19) .30
Pro forma combined per FUNC common share (5).......................................... 2.59 2.49 4.72 2.22 2.24
Equivalent pro forma per Home Federal common share (6)................................ $1.25 1.20 2.28 1.07 1.08
</TABLE>
(5) Pro forma combined income per FUNC common share amounts represent pro forma
combined net income applicable to common stockholders, divided by pro forma
combined average common shares outstanding.
(6) Equivalent pro forma income per Home Federal common share amounts represent
the pro forma combined income per FUNC common share amounts, multiplied by a
0.4835 Exchange Ratio.
<TABLE>
<CAPTION>
HISTORICAL EQUIVALENT PRO FORMA
FUNC HOME FEDERAL PER HOME FEDERAL COMMON SHARE (7)
<S> <C> <C> <C>
MARKET VALUE PER SHARE:
May 27, 1994.................................................. $46.875 12.125 22.625
September , 1994............................................ $
</TABLE>
(7) Equivalent pro forma market values per Home Federal common share amounts
represent the historical market values per share of FUNC Common Stock,
multiplied by a 0.4835 Exchange Ratio, rounded down to the nearest
one-eighth. The FUNC and Home Federal historical market values per share
represent the last reported sale price per share of FUNC Common Stock on the
NYSE Tape and of Home Federal Common Stock on the Small Cap Market (i) on
May 27, 1994, the last business day preceding public announcement of the
execution of the Merger Agreement, and (ii) on September , 1994. For
additional market prices, see "THE MERGER -- Market Prices". Because the
market price of FUNC Common Stock is subject to fluctuation, the market
value of the FUNC Common Shares that holders of Home Federal Common Stock
would receive upon consummation of the Merger may increase or decrease prior
to, as well as after, the receipt of such shares following the Effective
Date. Home Federal stockholders are urged to obtain current market
quotations for FUNC Common Stock. See "FUNC -- Common Stock Repurchase".
SELECTED FINANCIAL DATA
The following tables set forth certain unaudited historical consolidated
selected financial information for FUNC and Home Federal and certain unaudited
pro forma combined selected financial data, giving effect to the Merger (with a
0.4835 Exchange Ratio) on a pooling of interests accounting basis. See "THE
MERGER -- Accounting Treatment". This information should be read in conjunction
with the historical financial statements of FUNC and Home Federal, including the
respective notes thereto, which are set forth in ANNEX A (with respect to Home
Federal) or incorporated herein by reference (with respect to FUNC). See
"AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
ANNEX A. The pro forma information set forth below does not reflect the
acquisition by FUNC of BancFlorida. See "FUNC -- History and Business".
As discussed under "THE MERGER -- Possible Exchange Ratio Adjustment", the
Exchange Ratio is subject to possible adjustment as a result of an FUNC Common
Stock Decline. It is not expected that the pro forma information presented would
be materially different if the Exchange Ratio were adjusted as a result of an
FUNC Common Stock Decline.
11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
FUNC (HISTORICAL)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Interest income.................................... $ 2,397,814 2,213,185 4,556,332 4,479,385 4,647,440 4,829,520
Interest expense................................... 919,916 856,554 1,790,439 2,020,968 2,742,996 3,094,334
Net interest income................................ 1,477,898 1,356,631 2,765,893 2,458,417 1,904,444 1,735,186
Provision for loan losses.......................... 50,000 121,779 221,753 414,708 648,284 425,409
Net interest income after provision for loan
losses........................................... 1,427,898 1,234,852 2,544,140 2,043,709 1,256,160 1,309,777
Securities available for sale transactions......... 1,365 18,821 25,767 34,402 -- --
Investment security transactions................... 1,309 3,571 7,435 (2,881) 155,048 7,884
Noninterest income................................. 551,792 559,361 1,165,086 1,032,651 914,511 690,672
Noninterest expense................................ 1,291,061 1,169,337 2,521,647 2,526,678 1,905,918 1,680,973
Income before income taxes......................... 691,303 647,268 1,220,781 581,203 419,801 327,360
Income taxes....................................... 239,224 220,505 403,260 196,152 71,070 64,993
Net income......................................... 452,079 426,763 817,521 385,051 348,731 262,367
Dividends on preferred stock....................... 11,927 13,171 24,900 31,979 34,570 33,868
Net income applicable to common stockholders....... $ 440,152 413,592 792,621 353,072 314,161 228,499
PER COMMON SHARE DATA
Net income......................................... $ 2.59 2.49 4.73 2.23 2.24 1.68
Cash dividends..................................... .80 .70 1.50 1.28 1.12 1.08
Book value......................................... 30.26 27.27 28.90 25.25 23.23 21.81
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)..................................... 135,520 108,176 243,845 167,601 126,029 116,696
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets............................................. 72,604,401 71,958,939 70,786,969 63,828,031 59,273,177 54,588,410
Loans, net of unearned income...................... 48,925,495 45,902,305 46,876,177 41,923,767 41,383,580 36,050,719
Deposits........................................... 53,772,260 55,436,871 53,742,411 49,150,965 47,176,223 38,194,268
Long-term debt..................................... 3,129,444 2,791,620 3,061,944 3,151,260 2,630,930 1,850,860
Preferred stockholders' equity..................... 284,040 284,041 284,041 297,215 397,356 317,011
Common stockholders' equity........................ 5,228,205 4,582,576 4,923,584 4,161,948 3,463,441 2,983,361
Total stockholders' equity......................... $ 5,388,581 4,866,617 5,207,625 4,459,163 3,860,797 3,300,372
Preferred shares outstanding....................... 6,318 6,318 6,318 6,846 10,851 7,293
Common shares outstanding.......................... 172,797 168,042 170,338 164,849 149,112 136,777
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets............................................. $71,088,849 64,316,522 68,101,222 61,145,974 55,095,439 52,124,595
Loans, net of unearned income...................... 46,775,003 41,350,895 43,631,410 41,270,991 37,314,358 35,877,585
Deposits........................................... 52,147,743 47,707,145 50,248,848 47,173,706 40,482,433 36,209,083
Long-term debt..................................... 3,143,570 2,856,637 3,006,560 2,789,653 2,187,595 1,587,497
Common stockholders' equity........................ 5,062,377 4,346,054 4,550,048 3,889,256 3,131,716 2,937,441
Total stockholders' equity......................... $ 5,324,070 4,640,800 4,839,397 4,213,896 3,467,437 3,244,473
Common shares outstanding.......................... 169,689 166,122 167,692 158,683 140,003 135,622
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to
average common stockholders' equity.............. 17.53%* 19.19* 17.42 9.08 10.03 7.78
Net income to:
Average total stockholders' equity............... 17.05* 18.54* 16.89 9.14 10.06 8.09
Average assets................................... 1.28* 1.34* 1.20 .63 .63 .50
Average stockholders' equity to average assets..... 7.49 7.22 7.11 6.89 6.29 6.22
Allowance for loan losses to:
Net loans........................................ 2.06 2.26 2.18 2.24 2.06 1.95
Nonaccrual and restructured loans................ 192 110 147 96 72 77
Nonperforming assets............................. 152 81 111 70 50 56
Net charge-offs to average net loans............... .27* .65* .58 .86 1.48 .68
Nonperforming assets to loans, net and foreclosed
properties....................................... 1.35 2.75 1.95 3.19 4.10 3.42
Capital ratios:**
Tier 1 capital................................... 9.30 7.97 9.14 9.22 7.56 6.53
Total capital.................................... 14.68 12.21 14.64 14.31 11.76 10.83
Leverage......................................... 6.67 6.20 6.13 6.55 5.31 4.90
Net interest margin................................ 4.78%* 4.96* 4.78 4.77 4.08 3.99
<CAPTION>
1989
<S> <C>
FUNC (HISTORICAL)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Interest income.................................... 4,179,100
Interest expense................................... 2,703,623
Net interest income................................ 1,475,477
Provision for loan losses.......................... 139,291
Net interest income after provision for loan
losses........................................... 1,336,186
Securities available for sale transactions......... --
Investment security transactions................... 19,018
Noninterest income................................. 532,295
Noninterest expense................................ 1,445,836
Income before income taxes......................... 441,663
Income taxes....................................... 87,840
Net income......................................... 353,823
Dividends on preferred stock....................... 1,380
Net income applicable to common stockholders....... 352,443
PER COMMON SHARE DATA
Net income......................................... 2.62
Cash dividends..................................... 1.00
Book value......................................... 20.49
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)..................................... 106,952
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets............................................. 45,506,847
Loans, net of unearned income...................... 31,600,776
Deposits........................................... 31,531,770
Long-term debt..................................... 1,514,834
Preferred stockholders' equity..................... 13,773
Common stockholders' equity........................ 2,868,913
Total stockholders' equity......................... 2,882,686
Preferred shares outstanding....................... 551
Common shares outstanding.......................... 140,023
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets............................................. 43,224,474
Loans, net of unearned income...................... 29,507,834
Deposits........................................... 29,804,143
Long-term debt..................................... 1,554,548
Common stockholders' equity........................ 2,758,156
Total stockholders' equity......................... 2,771,982
Common shares outstanding.......................... 134,446
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to
average common stockholders' equity.............. 12.78
Net income to:
Average total stockholders' equity............... 12.76
Average assets................................... .82
Average stockholders' equity to average assets..... 6.41
Allowance for loan losses to:
Net loans........................................ 1.12
Nonaccrual and restructured loans................ 131
Nonperforming assets............................. 89
Net charge-offs to average net loans............... .39
Nonperforming assets to loans, net and foreclosed
properties....................................... 1.25
Capital ratios:**
Tier 1 capital................................... --
Total capital.................................... --
Leverage......................................... --
Net interest margin................................ 4.15
</TABLE>
* Annualized.
** The 1990-1992 capital ratios are not restated for pooling of interests
acquisitions.
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
HOME FEDERAL (HISTORICAL)
CONSOLIDATED SUMMARIES OF OPERATIONS
(In thousands)
Interest income.......................... $ 7,952 8,668 17,010 19,800 23,557 25,457
Interest expense......................... 4,672 5,409 10,630 12,986 17,408 20,217
Net interest income...................... 3,280 3,259 6,380 6,814 6,149 5,240
Provision for loan losses................ 180 1,116 1,371 2,843 1,611 655
Net interest income after provision for
loan losses............................ 3,100 2,143 5,009 3,971 4,538 4,585
Security transactions.................... (1) 251 253 287 152 --
Noninterest income....................... 889 885 2,121 2,385 1,262 784
Noninterest expense...................... 3,483 2,675 5,935 5,392 5,023 4,887
Income before income taxes (benefits) and
accounting change...................... 505 604 1,448 1,251 929 482
Cumulative effect of accounting change... -- 600 600 -- -- --
Income taxes (benefits).................. 131 (245) (7) 1,352 522 214
Net income (loss)........................ 374 1,449 2,055 (101) 407 268
Dividends on preferred stock............. -- 32 32 86 104 108
Net income (loss) applicable to common
stockholders........................... $ 374 1,417 2,023 (187) 303 160
PER COMMON SHARE DATA (1)
Net income (loss)........................ $ .35 1.41 1.95 (.19) .30 .16
Cash dividends........................... -- -- -- -- -- --
Book value............................... 12.41 11.52 12.11 9.87 9.88 9.48
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)........................... 1 -- -- -- -- --
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................... 232,334 236,361 242,903 224,924 241,329 259,733
Loans receivable, net and loans held for
sale................................... 191,735 177,075 192,771 173,085 206,429 215,652
Deposits................................. 198,351 202,905 202,270 195,154 200,346 206,534
Borrowings............................... 16,200 16,500 22,980 16,500 25,220 39,100
Preferred stockholders' equity........... -- -- -- 919 1,225 1,225
Common stockholders' equity.............. 12,532 11,590 12,221 9,925 9,940 9,533
Total stockholders' equity............... $ 12,532 11,590 12,221 10,844 11,165 10,758
Common shares outstanding, net (1)....... 1,010 1,005 1,010 1,005 1,005 1,005
CONSOLIDATED PERCENTAGES
Net income (loss) applicable to common
stockholders to average common
stockholders' equity................... 3.02%* 13.17* 18.27 (1.88) 3.11 1.70
Net income (loss) to:
Average stockholders' equity........... 3.02* 12.91* 17.82 (.92) 3.71 2.51
Average assets......................... .16* .63* .88 (.04) .16 .10
Allowance for loan losses to:
Loans receivable, net.................. 1.29 1.19 1.26 .87 .48 .38
Nonperforming assets................... 55.62 40.74 45.81 17.53 11.61 9.24
Net charge-offs to average loans
receivable, net........................ .01* .30* .32 1.24 .69 .07
Nonperforming assets to loans receivable,
net and real estate acquired in
settlement of loans, net............... 2.31 2.90 2.77 4.83 4.13 4.10
Capital ratios:
Tier 1 risk-based capital (2).......... 9.63 9.04 9.14 7.63 6.86 6.08
Total risk-based capital (2)........... 10.88 10.21 10.38 8.97 8.34 7.38
Leverage............................... 5.40% 4.90 5.03 4.41 4.12 3.67
<CAPTION>
1989
<S> <C>
HOME FEDERAL (HISTORICAL)
CONSOLIDATED SUMMARIES OF OPERATIONS
(In thousands)
Interest income.......................... 26,511
Interest expense......................... 21,643
Net interest income...................... 4,868
Provision for loan losses................ 244
Net interest income after provision for
loan losses............................ 4,624
Security transactions.................... 444
Noninterest income....................... 814
Noninterest expense...................... 4,423
Income before income taxes (benefits) and
accounting change...................... 1,459
Cumulative effect of accounting change... --
Income taxes (benefits).................. 418
Net income (loss)........................ 1,041
Dividends on preferred stock............. 108
Net income (loss) applicable to common
stockholders........................... 933
PER COMMON SHARE DATA (1)
Net income (loss)........................ .92
Cash dividends........................... --
Book value............................... 9.29
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)........................... --
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................... 265,740
Loans receivable, net and loans held for
sale................................... 222,508
Deposits................................. 198,516
Borrowings............................... 53,324
Preferred stockholders' equity........... 1,225
Common stockholders' equity.............. 9,345
Total stockholders' equity............... 10,570
Common shares outstanding, net (1)....... 1,005
CONSOLIDATED PERCENTAGES
Net income (loss) applicable to common
stockholders to average common
stockholders' equity................... 10.65
Net income (loss) to:
Average stockholders' equity........... 10.43
Average assets......................... .38
Allowance for loan losses to:
Loans receivable, net.................. .18
Nonperforming assets................... 28.35
Net charge-offs to average loans
receivable, net........................ --
Nonperforming assets to loans receivable,
net and real estate acquired in
settlement of loans, net............... .62
Capital ratios:
Tier 1 risk-based capital (2).......... 5.81
Total risk-based capital (2)........... 6.82
Leverage............................... 3.52
</TABLE>
(1) Per share data and common shares outstanding have been adjusted to reflect a
10 percent stock dividend paid in January 1994.
(2) The Tier I capital and total capital ratios for Home Federal and for FUNC
are based on risk-weighted assets pursuant to the requirements of their
respective primary federal regulators, which requirements differ in certain
respects.
* Annualized.
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
1994 1993 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
FUNC AND HOME FEDERAL
PRO FORMA COMBINED SELECTED
FINANCIAL DATA (1)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Net income applicable to common
stockholders........................... $ 440,526 415,009 794,644 352,885 314,464 228,659
PER COMMON SHARE DATA
Net income applicable to common
stockholders........................... 2.59 2.49 4.72 2.22 2.24 1.68
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................... 72,836,735 72,195,300 71,029,872 64,052,955 59,514,506 54,848,143
Loans, net of unearned income............ 49,117,230 46,079,380 47,068,948 42,096,852 41,590,009 36,266,371
Deposits................................. 53,970,611 55,639,776 53,944,681 49,346,119 47,376,569 38,400,802
Long-term debt........................... 3,145,644 2,808,120 3,084,924 3,167,760 2,656,150 1,889,960
Preferred stockholders' equity........... 284,040 284,041 284,041 298,134 398,581 318,236
Common stockholders' equity.............. 5,240,737 4,594,166 4,935,805 4,171,873 3,473,381 2,992,894
Total stockholders' equity............... $ 5,524,777 4,878,207 5,219,846 4,470,007 3,871,962 3,311,130
CONSOLIDATED PERCENTAGES
Allowance for loan losses to:
Net loans.............................. 2.06% 2.25 2.17 2.24 2.05 1.94
Nonperforming assets................... 151 81 111 69 49 56
Net charge-offs to average net loans..... .27* .65* .58 .86 1.48 .68
Nonperforming assets to loans, net and
foreclosed properties.................. 1.35% 2.75 1.95 3.20 4.09 3.43
<CAPTION>
1989
<S> <C>
FUNC AND HOME FEDERAL
PRO FORMA COMBINED SELECTED
FINANCIAL DATA (1)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Net income applicable to common
stockholders........................... 353,376
PER COMMON SHARE DATA
Net income applicable to common
stockholders........................... 2.62
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................... 45,772,587
Loans, net of unearned income............ 31,823,284
Deposits................................. 31,730,286
Long-term debt........................... 1,568,158
Preferred stockholders' equity........... 14,998
Common stockholders' equity.............. 2,878,258
Total stockholders' equity............... 2,893,256
CONSOLIDATED PERCENTAGES
Allowance for loan losses to:
Net loans.............................. 1.12
Nonperforming assets................... 89
Net charge-offs to average net loans..... .39
Nonperforming assets to loans, net and
foreclosed properties.................. 1.25
</TABLE>
(1) On a pooling of interests accounting basis, income and other financial
statements of FUNC issued after consummation of the Merger would normally be
restated retroactively to reflect the consolidated combined financial
position and results of operations of FUNC and Home Federal as if the Merger
had taken place prior to the periods covered by such financial statements;
however, because of the relative immateriality of the Merger to FUNC on a
consolidated basis, such statements will not be retroactively restated
solely as a result of consummation of the Merger.
* Annualized.
14
<PAGE>
GENERAL INFORMATION
GENERAL
This Prospectus/Proxy Statement is being furnished by Home Federal to its
stockholders as a proxy statement in connection with the solicitation of proxies
by the Home Federal Board for use at the Special Meeting to be held on October
, 1994, and any adjournment or adjournments thereof, to consider and vote upon
(i) a proposal to approve the Merger Agreement, and (ii) such other business as
may come before the Special Meeting or any adjournment or adjournments thereof.
This document is also furnished by FUNC to the holders of Home Federal
Common Stock as a prospectus in connection with the issuance of the FUNC Common
Shares upon consummation of the Merger.
After having been submitted, the enclosed proxy may be revoked by the
person giving it, at any time before it is exercised, by (i) submitting written
notice of revocation of such proxy to the Secretary of Home Federal, (ii)
submitting a proxy having a later date, or (iii) such person appearing at the
Special Meeting and requesting a return of the proxy. All shares represented by
valid proxies will be exercised in the manner specified thereon. If no
specification is made, such shares will be voted in favor of approval of the
Merger Agreement.
Directors, officers and employees of Home Federal and FUNC may solicit
proxies from Home Federal stockholders, either personally or by telephone,
telegraph or other form of communication. Such persons will receive no
additional compensation for such services. All expenses associated with the
solicitation of proxies in the form enclosed will be borne by the party
incurring the same, except for printing expenses, which will be shared equally
between FUNC and Home Federal.
THE HOME FEDERAL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT. THE
HOME FEDERAL BOARD BELIEVES THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF
HOME FEDERAL AND ITS STOCKHOLDERS, IS FAIR TO THE STOCKHOLDERS, AND RECOMMENDS
ITS APPROVAL BY HOME FEDERAL STOCKHOLDERS. SEE "THE MERGER -- BACKGROUND AND
REASONS; HOME FEDERAL".
RECORD DATE; VOTE REQUIRED
The Home Federal Board has fixed September 1, 1994, as the Record Date for
stockholders entitled to notice of and to vote at the Special Meeting, and,
accordingly, only holders of Home Federal Common Stock of record at the close of
business on that day will be entitled to notice of and to vote at the Special
Meeting. The number of shares of Home Federal Common Stock outstanding on the
Record Date was 1,022,511, each of such shares being entitled to one vote.
The presence, in person or by proxy, of a majority of the shares of Home
Federal Common Stock outstanding on the Record Date is necessary to constitute a
quorum of the stockholders in order to take action at the Special Meeting. For
these purposes, shares of Home Federal Common Stock which are present, or
represented by proxy, at the Special Meeting will be counted for quorum purposes
regardless of whether the holder of the shares or proxy votes on the Merger
Agreement or whether a broker with discretionary authority exercises
discretionary voting authority with respect to the Merger Agreement. Once the
quorum is established, approval of the Merger Agreement requires the affirmative
vote of holders of at least two-thirds of the outstanding shares of Home Federal
Common Stock. For voting purposes, therefore, abstentions and "broker non-votes"
will have the same effect as votes against the Merger Agreement.
The directors and executive officers of Home Federal (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting 242,176 shares of outstanding Home
Federal Common Stock, which represent approximately 24 percent of the
outstanding shares of Home Federal Common Stock entitled to be voted at the
Special Meeting. The directors and executive officers of Home Federal have
indicated to the management of Home Federal that they intend to vote their
shares of Home Federal Common Stock in favor of approval of the Merger
Agreement. Accordingly, assuming such shares are so voted, approval of the
Merger Agreement will require the affirmative votes by the holders of an
additional approximately 43 percent of the outstanding shares of Home Federal
Common Stock.
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 MERGER AGREEMENT.
15
<PAGE>
THE MERGER
THE FOLLOWING INFORMATION RELATING TO THE MERGER IS NOT INTENDED TO BE A
COMPLETE DESCRIPTION OF ALL MATERIAL INFORMATION RELATING TO THE MERGER AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES HERETO, AND
THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. A COPY OF THE MERGER AGREEMENT
(INCLUDING THE STOCK OPTION AGREEMENT) IS SET FORTH IN ANNEX B TO THIS
PROSPECTUS/PROXY STATEMENT AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER. STOCKHOLDERS OF HOME FEDERAL ARE URGED
TO READ THE MERGER AGREEMENT CAREFULLY.
GENERAL
Under the terms of the Merger Agreement, FUNC-VA will acquire all of the
assets and liabilities of Home Federal and will transfer such assets and
liabilities to FUNB-DC, accomplished by means of a merger of Home Federal with
and into FUNB-DC. Upon consummation of the Merger, each outstanding share of
Home Federal Common Stock would be converted, automatically and without any
action on the part of the holder thereof, into the right to receive 0.4835
shares of FUNC Common Stock, subject to possible adjustment as set forth in the
Merger Agreement and as illustrated below. Each holder of Home Federal Common
Stock who would otherwise be entitled to a fractional share of FUNC Common Stock
will receive cash in lieu thereof in an amount determined by multiplying (x) the
last reported sale price per share of FUNC Common Stock on the NYSE Tape on the
last trading day prior to the Effective Date by (y) the fraction of a share of
FUNC Common Stock to which such holder would otherwise be entitled.
POSSIBLE EXCHANGE RATIO ADJUSTMENT
The Merger Agreement may be terminated in certain circumstances, including
by the Home Federal Board, at its sole option, if there is an FUNC Common Stock
Decline, which would occur if (i) the average daily closing sales prices of FUNC
Common Stock on the NYSE Tape for the ten consecutive trading days beginning on
the date (the "OCC Approval Date") the OCC approves the Merger (the "FUNC
Closing Price") is less than $37.70, and (ii) the percentage decline in the FUNC
Closing Price from $47.125 is more than 20 percent greater than the percentage
decline of the Index Group Closing Price on the OCC Approval Date from $35.54;
provided, however, that the Merger Agreement may not be so terminated if FUNC
elects, at its sole option, to increase the Exchange Ratio as set forth in the
Merger Agreement and as illustrated below. There can be no assurance that the
Home Federal Board will exercise its right to terminate the Merger Agreement in
the event of an FUNC Common Stock Decline and, if the Home Federal Board does
elect to so terminate the Merger Agreement, there can be no assurance that FUNC
will elect to increase the Exchange Ratio as provided in the Merger Agreement
and as illustrated below.
The effect of the above provisions on the Exchange Ratio may be illustrated
by the following three scenarios:
(i) The first scenario would occur if the FUNC Closing Price is not
less than $37.70, in which case there would be no FUNC Common Stock Decline
and no adjustment to the Exchange Ratio.
(ii) The second scenario would occur if the FUNC Closing Price is less
than $37.70, but the percentage decline in such price from $47.125 is not
more than 20 percent greater than the percentage decline of the Index Group
Closing Price from $35.54. Under this scenario, there would be no FUNC
Common Stock Decline and no adjustment to the Exchange Ratio.
(iii) The third scenario would occur if the FUNC Closing Price is less
than $37.70 and the percentage decline in such price from $47.125 is more
than 20 percent greater than the percentage decline of the Index Group
Closing Price from $35.54. Under this scenario, the Home Federal Board may,
at its sole option, terminate the Merger Agreement unless FUNC elects, at
its sole option, to increase the Exchange Ratio so as to eliminate the FUNC
Common Stock Decline.
THE ABOVE SCENARIOS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND ARE NOT INTENDED
TO, AND DO NOT, REFLECT THE VALUE OF THE FUNC COMMON SHARES THAT MAY ACTUALLY BE
RECEIVED BY HOLDERS OF HOME FEDERAL COMMON STOCK UPON CONSUMMATION OF THE
MERGER.
STOCKHOLDERS OF HOME FEDERAL SHOULD BE AWARE THAT THE FUNC CLOSING PRICE ON
WHICH THE OCCURRENCE OF AN FUNC COMMON STOCK DECLINE AND THE SUBSEQUENT
ADJUSTMENT, IF ANY, TO THE EXCHANGE RATIO, WILL BE BASED ON THE CLOSING SALE
PRICES OF FUNC COMMON STOCK DURING A TEN-DAY PERIOD BEGINNING ON THE OCC
APPROVAL DATE, WHICH APPROVAL DATE WOULD OCCUR NOT LESS THAN 30 DAYS PRIOR TO
THE EFFECTIVE DATE. ACCORDINGLY, BECAUSE THE MARKET PRICE OF
16
<PAGE>
FUNC COMMON STOCK BETWEEN THE OCC APPROVAL DATE AND THE EFFECTIVE DATE, AS WELL
AS THE DATE CERTIFICATES REPRESENTING FUNC COMMON SHARES ARE DELIVERED IN
EXCHANGE FOR SHARES OF HOME FEDERAL COMMON STOCK FOLLOWING CONSUMMATION OF THE
MERGER, WILL FLUCTUATE AND POSSIBLY DECLINE, THE VALUE OF THE FUNC COMMON SHARES
ACTUALLY RECEIVED BY HOLDERS OF HOME FEDERAL COMMON STOCK MAY BE LESS OR MORE
THAN (I) THE FUNC CLOSING PRICE, OR (II) THE VALUE OF THE FUNC COMMON STOCK ON
THE EFFECTIVE DATE RESULTING FROM THE EXCHANGE RATIO OR ANY POSSIBLE ADJUSTMENT
TO THE EXCHANGE RATIO, AS ILLUSTRATED ABOVE.
If FUNC or any company belonging to the Index Group declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between May 27, 1994 and the OCC
Approval Date, the prices for FUNC Common Stock or such other common stocks
shall be appropriately adjusted for all purposes, including determining whether
there is an FUNC Common Stock Decline or determining any adjustment to the
Exchange Ratio as illustrated above (and, in the case of any such transaction by
FUNC, the Exchange Ratio also shall be appropriately adjusted).
The Home Federal Board has made no decision as to whether it would exercise
its right to terminate the Merger Agreement if there is an FUNC Common Stock
Decline. THE HOME FEDERAL BOARD RESERVES THE RIGHT TO CONSUMMATE THE MERGER IN
THE EVENT OF AN FUNC COMMON STOCK DECLINE WITHOUT ANY ADJUSTMENT TO THE EXCHANGE
RATIO AND WITHOUT ANY FURTHER ACTION BY THE STOCKHOLDERS OF HOME FEDERAL. Any
such decision will be made by the Home Federal Board in light of the
circumstances existing at the time the Home Federal Board has the opportunity to
make such an election. If the Home Federal Board elects to exercise its
termination right, Home Federal must give FUNC notice of that decision during a
ten-day period following the end of the period during which the FUNC Closing
Price is determined, but the Home Federal Board may withdraw such notice, at its
sole option, at any time during such ten-day period. During the seven-day period
after receipt of such notice, FUNC has the option, in its sole discretion, to
adjust the Exchange Ratio in the manner set forth in the Merger Agreement and as
illustrated above, and thereby avoid such termination of the Merger Agreement.
FUNC is under no obligation to adjust the Exchange Ratio, and there can be no
assurance that FUNC would elect to adjust the Exchange Ratio if the Home Federal
Board were to exercise its right to terminate the Merger Agreement as set forth
above. Any such decision will be made by FUNC in light of the circumstances
existing at the time FUNC has the opportunity to make such an election. If FUNC
elects to adjust the Exchange Ratio as set forth in the Merger Agreement and as
illustrated above, it must give Home Federal prompt notice of such election and
adjusted Exchange Ratio, in which case no termination of the Merger Agreement
would occur as a result of an FUNC Common Stock Decline.
THE FOREGOING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
APPLICABLE PROVISIONS IN THE MERGER AGREEMENT RELATING TO POSSIBLE ADJUSTMENT TO
THE EXCHANGE RATIO AS THE RESULT OF AN FUNC COMMON STOCK DECLINE.
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Date will occur on such date as FUNC notifies Home Federal
in writing not less than five days prior thereto, provided such date is not more
than 30 days after such conditions have been satisfied or waived. Subject to the
foregoing, it is currently anticipated that the Merger will be consummated in
the fourth quarter of 1994. If the Merger is consummated in such quarter, or in
any other quarter, Home Federal stockholders should not assume or expect that
the Effective Date will precede the record date for the dividend on FUNC Common
Stock for that quarter, so as to enable such stockholders to receive such
dividend. The Board of Directors of either FUNC or Home Federal may terminate
the Merger Agreement if the Effective Date does not occur on or before March 31,
1995. See " -- Exchange of Home Federal Certificates" and " -- Conditions to
Consummation; Termination".
EXCHANGE OF HOME FEDERAL STOCK CERTIFICATES
As promptly as practicable after the Effective Date, FUNC will send or
cause to be sent to each holder of record of Home Federal Common Stock on the
Effective Date, transmittal materials for use in exchanging all of such holder's
certificates representing Home Federal Common Stock for a certificate or
certificates representing the FUNC Common Shares to which such holder is
entitled and a check for such holder's fractional share interest, as
appropriate. The transmittal materials will contain information and instructions
with respect to the surrender and exchange of such certificates.
HOME FEDERAL STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for Home Federal Common Stock
registered in the name of a holder of such certificates (or indemnity
satisfactory to FUNC and the exchange agent selected by FUNC if any of such
certificates are lost, stolen or destroyed), together with a properly completed
letter of transmittal, such exchange agent will mail to such holder a
17
<PAGE>
certificate or certificates representing the number of FUNC Common Shares to
which such holder is entitled, together with all undelivered dividends or
distributions in respect of such shares and, where applicable, a check for any
fractional share interest (in each case, without interest).
All FUNC Common Shares issued to the holders of Home Federal Common Stock
pursuant to the Merger will be deemed issued as of the Effective Date. After the
Effective Date, former holders of record of Home Federal Common Stock will be
entitled to vote at any meeting of holders of FUNC Common Stock the number of
FUNC Common Shares into which their Home Federal shares have been converted,
regardless of whether they have surrendered their Home Federal Common Stock
certificates. FUNC dividends having a record date on or after the Effective Date
will include dividends on all FUNC Common Shares issued in the Merger, but no
dividend or other distribution payable to the holders of record of FUNC Common
Shares on or after the Effective Date will be distributed to the holder of any
Home Federal Common Stock certificates until such holder physically surrenders
all such certificates as hereinabove described. Promptly after such surrender,
all undelivered dividends and other distributions and, where applicable, a check
for any fractional share interest, will be delivered to such holder (in each
case, without interest). FUNC dividends having a record date before the
Effective Date (which record date may, in FUNC's sole discretion, be the day
immediately preceding the Effective Date or any other day prior to the Effective
Date) will not include dividends on the FUNC Common Shares issued in the Merger.
After the Effective Date, the stock transfer books of Home Federal will be
closed, and there will be no transfers on the transfer books of Home Federal of
the shares of Home Federal Common Stock that were outstanding immediately prior
to the Effective Date.
BACKGROUND AND REASONS
HOME FEDERAL
The Merger Agreement is the result of arm's length negotiations between
Home Federal and FUNC and their respective representatives. In negotiating the
terms of the Merger Agreement, Home Federal reviewed many factors, including but
not limited to: the benefits to Home Federal stockholders, including the market
prices of Home Federal Common Stock and FUNC Common Stock and the relative
liquidity of the trading markets for such common stocks; the future prospects of
Home Federal as a small, independent savings bank headquartered in Washington,
D.C.; the advantages and disadvantages of a strategic alliance with FUNC;
management of Home Federal and FUNC and its subsidiaries; and historical
earnings records, book and market value of assets, dividend histories, deposit
growth prospects, and future earning potential of Home Federal and FUNC
separately and combined.
Originally chartered in 1897, Home Federal converted from the mutual to the
stock form of organization in January 1989. Since becoming a stock institution,
Home Federal periodically has sought to evaluate how best to enhance stockholder
value and achieve the long-term best interests of its stockholders. For example,
in November 1990 and November 1991, Home Federal retained an investment advisor
to help it explore various prospects. Home Federal efforts have been affected
particularly by the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (the "FIRREA") and subsequent legislation, which
severely impacted the operation and prospects of thrift institutions, such as
Home Federal, by the imposition of stringent new requirements and the imposition
of harsh penalties for failure to comply with such requirements. In addition,
during the period since its conversion to stock form, Home Federal has been
subject to the adverse experience of the real estate market in the Washington,
D.C. area, particularly with regard to its levels of non performing assets and
provisions for losses.
By December 31, 1993, Home Federal had succeeded in repurchasing all of its
outstanding preferred stock, owned by the FSLIC Resolution Fund, and had
achieved "well capitalized" status under the OTS prompt corrective action
regulations. In addition, Home Federal's level of nonperforming assets (net of
provisions for loan losses) had been reduced to .86 percent of assets at
December 31, 1993, compared to 2.47 percent at December 31, 1992. Further, in
April 1994, Home Federal succeeded in having its common stock listed for trading
on the Small Cap Market.
On January 26, 1994, after extensive discussions, Home Federal entered into
a consulting agreement with Hovde, for Hovde to identify potential acquirors of
Home Federal, evaluate proposals from any such acquirors, and render its opinion
with respect to the fairness of the consideration, from a financial point of
view, to stockholders of Home Federal regarding any possible transaction.
Hovde developed a list of possible acquirors, which, after consultation
with Home Federal, was narrowed to seven prospects, which Hovde contacted during
February and March 1994. In March, three of the prospective acquirors submitted
expressions of interests, and on March 15, 1994, the Home Federal Board
authorized the continued exploration of the opportunities presented. As a result
of such exploration, extensive discussions were continued with two of the
parties, including
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FUNC. By May 10, 1994, FUNC and the other potential acquiror had indicated
possible general terms of a transaction. A proposed definitive agreement was
received from FUNC on May 11, 1994. The Home Federal Board met on May 17, 1994,
and determined to proceed to negotiate with FUNC, based on the Home Federal
Board's judgment that the FUNC proposal would be in the best interests of Home
Federal and its stockholders, and involved payment of a greater consideration to
such stockholders. The Home Federal Board instructed management, legal counsel
and Hovde to finalize negotiations with FUNC.
On May 27, 1994, the Home Federal Board met with representatives of Hovde
and with legal counsel to consider the FUNC offer. The Home Federal Board had
received the proposed Merger Agreement and Stock Option Agreement for review
prior to the meeting. The Home Federal Board discussed the financial and legal
implications of the proposal, and the provisions of the Merger Agreement and the
Stock Option Agreement. At such time, Hovde rendered oral advice, subsequently
followed by its written opinion (see " -- Opinion of Financial Advisor"), that
the consideration to be paid to the holders of Home Federal Common Stock was
fair, from a financial point of view.
Following further discussion, the Home Federal Board unanimously approved
the Merger Agreement and the Stock Option Agreement and authorized their
execution.
THE HOME FEDERAL BOARD UNANIMOUSLY RECOMMENDS THAT HOME FEDERAL
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
FUNC
FUNC believes that it is advantageous to build a multi-state banking
organization. The economies of scale in banking favor such an organization as a
way of gaining efficiency and spreading costs over a large base, as well as
providing diversification. To further its objective to build a multi-state
banking organization, FUNC has heretofore concentrated its efforts on what it
perceives to be some of the better banking markets in the southeast and south
atlantic regions of the United States, and on advantageous ways of entering or
expanding its presence in those markets. FUNC believes that Washington, D.C. is
among the better banking markets in such regions and that joining with Home
Federal is an attractive way to expand FUNC's presence in the Washington, D.C.
market. Legislation has been introduced in the United States Congress that, if
enacted, would generally provide for nationwide interstate banking, subject to
certain limitations.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions. See
"FUNC -- History and Business".
OPINION OF FINANCIAL ADVISOR
Home Federal engaged Hovde on January 26, 1994, as its financial advisor to
assist with the possible sale of Home Federal, to assist in the negotiating and
structuring of possible merger proposals, and to render an opinion on the
fairness, from the financial point of view, of the merger consideration to the
stockholders of Home Federal.
The Home Federal Board selected Hovde to serve as its financial advisor
based upon, among other things, Hovde's expertise in the valuation of businesses
and their securities in connection with mergers and acquisitions of financial
institutions in general, and commercial banks and thrift institutions in
particular. As part of its services as financial advisor, Hovde contacted
parties regarding a potential acquisition of, or merger with, Home Federal,
assisted Home Federal in negotiating the Merger Agreement, participated in
direct discussions with FUNC, and provided comparative information regarding
similar transactions, as well as provided general advisory services.
Hovde has delivered to the Home Federal Board its written opinion that,
based upon and subject to the various considerations set forth in such opinion,
dated May 27, 1994, the Merger consideration was fair from a financial point of
view to the stockholders of Home Federal as of such date. In requesting Hovde's
advice and opinion, no limitations were imposed by the Home Federal Board upon
Hovde with respect to the investigations made or procedures followed by it in
rendering its opinion.
The full text of the opinion of Hovde, dated May 27, 1994, which describes
the procedures followed, assumptions made, matters considered, and limitations
on the review undertaken, is set forth in ANNEX C to this Prospectus/Proxy
Statement. Stockholders of Home Federal should read the opinion in its entirety.
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HOVDE'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE MERGER CONSIDERATION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER OF HOME FEDERAL AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF HOVDE SET FORTH IN THIS
PROSPECTUS/PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
During the course of its engagement, and as a basis for arriving at its
opinion, Hovde reviewed and analyzed material bearing upon the financial and
operating condition of FUNC and Home Federal, and material prepared in
connection with the Merger, including, among other things, the following: (i)
the Merger Agreement and the Stock Option Agreement; (ii) certain publicly
available information concerning FUNC and Home Federal, including the
consolidated financial statements of FUNC and Home Federal for each of the three
years ended December 31, 1993, and the quarterly period ended March 31, 1994;
(iii) the nature and terms of recent acquisition and merger transactions
involving thrift institutions and thrift holding companies that Hovde considered
reasonably similar to Home Federal in size, financial character, operating
character, historical performance, and geographic market; and (iv) historical
and current market data for FUNC Common Stock and Home Federal Common Stock, and
financial and other information provided to Hovde by the management of FUNC and
Home Federal. In addition, Hovde conducted meetings with members of senior
management of Home Federal for purposes of reviewing the future prospects of
Home Federal. In addition, Hovde evaluated the pro forma earnings, book value
and tangible book value attributable to the FUNC Common Stock to be exchanged
for each share of Home Federal Common Stock. Hovde also took into account its
experience in other transactions, as well as its knowledge of the commercial
banking and thrift industries and its general experience in securities'
valuations.
In rendering its opinion, Hovde assumed, without independent verification,
the accuracy and completeness of the financial and other information, and the
representations provided to it by FUNC and Home Federal. Hovde did not conduct a
physical inspection of any of the properties or assets of FUNC or Home Federal,
and has not made any independent evaluation or appraisals of any properties,
assets or liabilities of FUNC or Home Federal. Hovde assumed and relied upon the
accuracy and completeness of the publicly available and other financial and
other information provided to it, relied upon the representations and warranties
of FUNC and Home Federal made pursuant to the Merger Agreement, and did not
independently attempt to verify any of such information.
In connection with its opinion, Hovde performed various analyses with
respect to FUNC and Home Federal. The following is a brief summary of such
analyses, certain of which were presented to the Home Federal Board by Hovde on
or before May 27, 1994. Hovde noted the provision in the Merger Agreement
regarding a possible adjustment to the Exchange Ratio.
ANALYSIS OF FUNC OFFER. Hovde reviewed the value of the consideration to be
received by Home Federal stockholders based upon the trading price for FUNC
Common Stock on May 26, 1994, of $47.125 per share. Hovde calculated that FUNC's
offer equated to a multiple of 2.0 times Home Federal's tangible book value at
December 31, 1993, and a multiple of 11.6 times Home Federal's earnings for the
year ended December 31, 1993. After excluding an accounting change, the FUNC
offer represented a multiple of 16.4 times Home Federal's 1993 earnings.
ANALYSIS OF SELECTED MERGER/ACQUISITION TRANSACTIONS. Hovde reviewed
certain financial data relating to selected recently completed (within the prior
six-month period) and pending thrift acquisition transactions involving
institutions throughout the United States, and, in particular, acquisition
transactions in the mid-atlantic United States. The selection included a total
of 45 completed and 31 pending transactions nationally, of which there were ten
completed and 13 pending transactions in the mid-atlantic United States. In each
transaction, Hovde reviewed the price as a multiple of book value and as a
multiple to earnings for the last 12 reported months for each acquired thrift.
With regard to the 45 completed transactions, the median price to book
value multiple was 1.46, and the median price to earnings multiple was 12.3. The
mean price to book value and price to earnings multiples for these transactions
were 1.48 and 14.5, respectively. Seventeen of the 45 completed transactions
indicated total consideration of $25 million or less. The mean price to book
value multiple of such 17 transactions was 1.31, and the median price to
earnings multiple was 10.0. The mean price to book value multiple for the 17
transactions involving consideration of $25 million or less was 1.37, and the
mean price to earnings multiple was 15.2.
With regard to the 31 pending transactions, the median price to book value
multiple was 1.42, and the median price to earnings multiple was 13.6.
Twenty-one of the 42 completed transactions involved consideration of $25
million or less. The median price to book value multiple for these 21
transactions was 1.38, and the median price to earnings multiple was 10.9. The
mean price to book value multiple for the 31 pending transactions was 1.44, and
the mean price to earnings multiple was 14.1. The mean price to book value
multiple for the 21 pending transactions involving consideration of $25 million
or less was 1.35, and the mean price to earnings multiple was 11.8.
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With respect to the ten completed mid-atlantic transactions, the median
price to book value and price to earnings multiples were 1.26 and 13.0,
respectively, and the mean price to book value and price to earnings multiples
were 1.26 and 14.2, respectively.
No company or transaction used in the above analysis as a comparison is
identical to Home Federal, FUNC, or the contemplated transaction. Accordingly,
an analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies, and other factors that
could affect the public trading value of the companies to which they are being
compared.
COMPARISON OF FUNC OFFER TO SELECTED MERGER/ACQUISITION TRANSACTIONS. The
FUNC offer equated to 200 percent of Home Federal's book value at December 31,
1993, based upon the trading price of FUNC Common Stock on May 26, 1994. This
compared favorably to both the median and mean price to book value multiples for
all of the comparative groups discussed above (completed, pending, mid-atlantic,
and consideration of $25 million or less), which medians and means ranged from
1.26 to 1.59. With respect to the mid-atlantic companies, the FUNC offer
represented the highest price to book multiple of any transaction, with the
exception of the Lincoln Savings Bank acquisition by City Holdings.
On a price to earnings basis, the FUNC offer equated to a multiple of 11.6
times Home Federal's reported earnings for the year ended December 31, 1993, and
a multiple of 16.4 times Home Federal's 1993 earnings, excluding an accounting
change. Based upon a multiple of reported earnings, the FUNC offer was somewhat
below the median and mean for all of the comparative groups of transactions,
which ranged from 9.1 to 17.1. However, after excluding the accounting change,
the FUNC offer as a multiple of Home Federal's 1993 earnings (which was 16.4)
was above the median and mean for all of the comparative groups, except for the
mid-atlantic (median of 17.1 and mean of 16.8), which group exhibited comparable
multiples.
ACCRETION/DILUTION AND CONTRIBUTION ANALYSIS. Hovde reviewed the exchange
ratio in the FUNC offer to analyze per share accretion or dilution expected for
each Home Federal stockholder for the year ending December 31, 1995. Based upon
average analyst estimates for 1995, Hovde estimated that 1995 earnings per share
("EPS") attributable to each share of FUNC Common Stock would be $5.63. Based
upon a review of Home Federal's 1994 budget (which Hovde used as an estimate for
Home Federal's projected earnings for 1995) and discussions with Home Federal's
management, Hovde estimated that 1995 EPS for Home Federal Common Stock would be
$1.63. Based upon an exchange ratio of 0.4835, each share of Home Federal Common
Stock would be exchanged for shares of FUNC Common Stock with expected 1995
earnings per share attributable to such shares of $2.72, or an increase of 70.0
percent. In addition, Hovde determined that the FUNC offer would result in an
increase in December 31, 1995 book value per share for each share of Home
Federal Common Stock of 21.6 percent, but would result in marginal dilution of
3.0 percent on a tangible book value per share basis.
Based upon the foregoing analyses and other investigations and assumptions
set forth in the opinion, without giving specific weightings to any one factor
or comparison, Hovde determined that the FUNC offer was fair from a financial
point of view to the stockholders of Home Federal.
THE SUMMARY OF THE PRESENTATION BY HOVDE TO THE HOME FEDERAL BOARD SET
FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH PRESENTATION.
THE PREPARATION OF A FAIRNESS OPINION INVOLVES VARIOUS DETERMINATIONS AS TO THE
MOST APPROPRIATE AND RELEVANT METHODS OF FINANCIAL ANALYSES, AND THE APPLICATION
OF THOSE METHODS TO THE PARTICULAR CIRCUMSTANCES, AND, THEREFORE, SUCH AN
OPINION IS NOT READILY SUSCEPTIBLE TO SUMMARY DESCRIPTION. FURTHERMORE, IN
ARRIVING AT ITS OPINION, HOVDE DID NOT ATTRIBUTE ANY PARTICULAR WEIGHT TO ANY
ANALYSIS OR FACTOR CONSIDERED BY IT, BUT RATHER MADE QUALITATIVE JUDGMENTS AS TO
THE SIGNIFICANCE AND RELEVANCE OF EACH ANALYSIS AND FACTOR. ACCORDINGLY, HOVDE
BELIEVES THAT ITS ANALYSES AND THE SUMMARY SET FORTH ABOVE MUST BE CONSIDERED AS
A WHOLE, AND THAT SELECTING PORTIONS OF ITS ANALYSES, WITHOUT CONSIDERING ALL
FACTORS AND ANALYSES, COULD CREATE AN INCOMPLETE VIEW OF THE PROCESS UNDERLYING
THE ANALYSES SET FORTH IN ITS REPORT TO THE HOME FEDERAL BOARD, AND OF ITS
FAIRNESS OPINION. IN PERFORMING ITS ANALYSES, HOVDE MADE NUMEROUS ASSUMPTIONS
WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS AND ECONOMIC CONDITIONS,
AND OTHER MATTERS, MANY OF WHICH ARE BEYOND THE CONTROL OF FUNC OR HOME FEDERAL.
THE ANALYSES PERFORMED BY HOVDE ARE NOT NECESSARILY INDICATIVE OF ACTUAL VALUES
OR ACTUAL FUTURE RESULTS, WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN
SUGGESTED BY SUCH ANALYSES.
Pursuant to a Consulting Agreement, dated January 26, 1994, between Home
Federal and Hovde, Home Federal retained Hovde for an initial three-month term
to evaluate and implement various strategic alternatives involving Home Federal,
including the potential sale or merger of Home Federal. Pursuant to the
Consulting Agreement, Home Federal agreed to pay Hovde $5,000 upon execution of
the agreement and an additional $5,000 at the beginning of each calendar month
during the initial three-month term of the agreement and during any extensions
thereof. In addition, Home Federal agreed to pay to
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Hovde for its services a fee equal to 1.25 percent of the first $15 million of
Aggregate Consideration (as defined in the Consulting Agreement), and 4.0
percent of Aggregate Consideration thereafter, paid in a transaction, such as
the Merger, with 25 percent of the estimated amount of such fee to be paid upon
the execution of the Merger Agreement. Based on the closing per share price of
the FUNC Common Stock on May 26, 1994, the aggregate fee to be paid by Home
Federal to Hovde in connection with the Merger is $570,052. Home Federal also
agreed to reimburse Hovde for its reasonable out-of-pocket expenses in
connection with the Merger, provided that such expenses may not exceed $2,500
per calendar quarter without Home Federal's prior approval, which shall not be
unreasonably withheld. In addition, Home Federal agreed to indemnify Hovde and
its directors, employees, agents and controlling persons, against certain
claims, damages, losses and liabilities, including all reasonably incurred legal
and other expenses, to which Hovde or such persons may become subject in
connection with Hovde's engagement by Home Federal.
INTERESTS OF CERTAIN PERSONS
Certain members of Home Federal's management and the Home Federal Board may
be deemed to have interests in the Merger in addition to their interests as
stockholders of Home Federal generally. In each case, the Home Federal Board was
aware of these factors and considered them, among others, in approving the
Merger Agreement.
EMPLOYMENT AGREEMENTS
Home Federal has an employment agreement with Elwyn G. Raiden, Jr. and with
three other executive officers of Home Federal.
Home Federal entered into the employment agreement with Mr. Raiden,
effective January 1, 1987. Mr. Raiden's contract provides for a five-year term
of employment. Commencing on the first anniversary date of the contract and
continuing each anniversary date thereafter, the contract is automatically
extended for an additional year, unless notice of termination is given to Home
Federal. Mr. Raiden's contract will expire December 31, 1997. In addition to a
base salary, the contract provides, among other things, for participation by Mr.
Raiden in the stock option plans and other fringe benefits applicable to the
executive personnel of Home Federal. The contract provides for termination of
Mr. Raiden's employment by Home Federal for "cause", as defined in the contract,
at any time, or in certain events specified by OTS regulations.
In the event Home Federal chooses to terminate Mr. Raiden's employment for
reasons other than for "cause", he, or in the event of his subsequent death, his
beneficiary, would be entitled to a sum equal to the greater of (i) 36 times the
highest monthly salary received by Mr. Raiden during the past five years, or
(ii) the amount due under the contract from the date of termination of
employment until expiration of the contract.
The contract also provides that if termination results from a "change in
control" of Home Federal (as defined in the contract), Mr. Raiden would be
entitled to a sum of 2.99 times the highest annual salary paid under the
contract (regardless of whether he resigns or is dismissed, other than for
cause). Pursuant to the terms of the employment agreement, Mr. Raiden will not
be entitled to receive any compensation payment or benefit, whether pursuant to
the employment contract or other benefit plans, to the extent such payment would
be considered an "excess parachute payment" within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"). The contract also provides for
the continuation of Mr. Raiden's life, health and disability insurance coverage.
The Merger would constitute a "change in control" under the contract.
In the case of the three other executive officers, the employment contracts
are for a period of three years, and are renewed automatically for one year at
the end of the initial term and each year thereafter, unless notice of
termination is given to the employee in question by Home Federal. Under the
contracts, if the employment of an officer is terminated voluntarily or
involuntarily (other than for cause) after a "change in control" has occurred,
the officer would be entitled to receive a sum equal to three times the average
salary paid to the officer for the preceding five years.
Under the contracts, in the event of a "change in control" resulting in the
termination of employment, and assuming it occurred on June 30, 1994, Mr. Raiden
would have received approximately $415,011, and the three other executive
officers in the aggregate would have received approximately $684,790, in
addition to certain other non-cash benefits provided under the contracts. It is
anticipated that the Merger and the accompanying voluntary or involuntary (other
than for cause) termination of employment of such executive officers will
require such payments to be made to them.
INDEMNIFICATION
The Merger Agreement provides that FUNC will indemnify the directors,
officers and employees of Home Federal against certain liabilities following
consummation of the Merger.
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TREATMENT OF STOCK OPTIONS
On the Effective Date, stock options granted under the Home Federal 1988
Long-Term Incentive Stock Option Plan (the "Incentive Option Plan") and under
the 1988 Stock Option Plan for Outside Directors (the "Outside Directors' Plan")
that have not been exercised will be converted into, and become options with
respect to, FUNC Common Stock, and FUNC will assume each such option in
accordance with the terms of the related Home Federal plan and stock option
agreement. The number of shares of FUNC Common Stock subject to such options
will be equal to the number of shares of Home Federal Common Stock subject to
the option, multiplied by the Exchange Ratio and rounded to the nearest whole
share, and the per share price under such option will be adjusted by dividing
the per share exercise price of each such option by the Exchange Ratio and
rounding up to the nearest cent. See "HOME FEDERAL -- Background and Security
Ownership of Directors and Executive Officers".
FUNC agreed in the Merger Agreement that as soon as administratively
practicable following the Effective Date, employees of Home Federal will
generally be entitled to participate in FUNC's pension, severance, benefit and
similar plans on substantially the same terms and conditions as employees of
FUNC, giving effect, for eligibility and vesting of benefits (but not for
accrual of benefits), to years of service with Home Federal as if such service
were with FUNC.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER. THE DISCUSSION IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY AND
MAY NOT APPLY TO SPECIAL SITUATIONS, SUCH AS HOME FEDERAL STOCKHOLDERS, IF ANY,
WHO RECEIVED THEIR HOME FEDERAL COMMON STOCK UPON THE EXERCISE OF EMPLOYEE STOCK
OPTIONS, OR OTHERWISE AS COMPENSATION, AND HOME FEDERAL STOCKHOLDERS THAT ARE
INSURANCE COMPANIES, SECURITIES DEALERS, FINANCIAL INSTITUTIONS OR FOREIGN
PERSONS.
Sullivan & Cromwell, special counsel for FUNC, has advised FUNC and Home
Federal that in its opinion:
(i) No gain or loss will be recognized for federal income tax
purposes by Home Federal stockholders upon the exchange in the Merger of
shares of Home Federal Common Stock solely for FUNC Common Shares (except
with respect to cash received in lieu of a fractional share interest in
FUNC Common Shares).
(ii) The basis of FUNC Common Shares received in the Merger by Home
Federal stockholders (including the basis of any fractional share interest
in FUNC Common Shares) will be the same as the basis of the shares of Home
Federal Common Stock surrendered in exchange therefor.
(iii) The holding period of FUNC Common Shares received in the Merger
by a Home Federal stockholder (including the holding period of any
fractional share interest in FUNC Common Shares) will include the holding
period during which the shares of Home Federal Common Stock surrendered in
exchange therefor were held by the Home Federal stockholder, provided such
shares of Home Federal Common Stock were held as capital assets.
(iv) Cash received by a holder of Home Federal Common Stock in lieu
of a fractional share interest in FUNC Common Shares will be treated as
received in exchange for such fractional share interest, and, provided the
fractional share would have constituted a capital asset in the hands of
such holder, the holder should in general recognize capital gain or loss in
an amount equal to the difference between the amount of cash received and
the portion of the adjusted tax basis in the Home Federal Common Stock
allocable to the fractional share interest.
In addition, consummation of the Merger is conditioned on receipt by FUNC
and Home Federal of an opinion of Sullivan & Cromwell to the effect that (i) the
Merger constitutes a reorganization under Section 368 of the Code, and (ii) no
gain or loss will be recognized by Home Federal stockholders who receive FUNC
Common Stock in exchange for their shares of Home Federal Common Stock, except
that gain or loss may be recognized as to cash received in lieu of fractional
share interests.
The opinions of Sullivan & Cromwell summarized above are or will be based,
among other things, on assumptions relating to certain facts and circumstances
of, and the intentions of the parties to, the Merger, which assumptions will
have been made with the consent of Home Federal and FUNC.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH STOCKHOLDER
OF HOME FEDERAL IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR
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TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER (INCLUDING THE APPLICATION AND
EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
BUSINESS PENDING CONSUMMATION
The Merger Agreement provides that, without the prior written agreement of
FUNC, Home Federal will conduct its business only in the ordinary and usual
course consistent with past practice, and not take certain actions relating to
the operation of Home Federal pending consummation of the Merger, except as
otherwise permitted in the Merger Agreement. These actions include, without
limitation: (i) not paying any dividends, redeeming or otherwise acquiring any
shares of its capital stock, issuing any additional shares of its capital stock
or giving any person the right to acquire any such shares, or, other than in the
ordinary course of business consistent with past practice, incurring any debt;
(ii) not increasing the rate of compensation or paying any bonus to any of its
directors, officers or employees (except, after prior consultation with FUNC,
normal individual increases in compensation in the ordinary course of business
consistent with past practice); (iii) not entering into or modifying any
employment agreements or employee benefit plans; or (iv) not disposing of any
material portion of its assets or acquiring any substantial portion of the
business or property of any other entity.
The Merger Agreement also provides that Home Federal, at a mutually agreed
upon time prior to the Effective Date, will use its best efforts to modify,
consistent with generally accepted accounting principles, its loan, litigation
and real estate valuation policies and practices (including loan classifications
and levels of reserves) so as to be consistent with those policies and practices
applied by FUNC.
REGULATORY APPROVALS
The Merger is subject to the prior approval of the Federal Reserve Board
under the Federal Deposit Insurance Act (the "FDI Act"), by the OCC under the
FDI Act and the Bank Merger Act (the "BMA"), and by the OTS under the HOLA. The
BMA requires that the OCC take into consideration, among other factors, the
financial and managerial resources and future prospects of the institutions, and
the convenience and needs of the communities to be served (including compliance
with fair lending laws). The BMA prohibits the OCC from approving the Merger (i)
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 (ii) if its effect in any section of the
country may be substantially to lessen competition or to tend to create a
monopoly, or if it would in any other manner be a restraint of trade, unless the
OCC finds that the anti-competitive effects of such merger are clearly
outweighed by the public interest and by the probable effect of the transaction
in meeting the convenience and needs of the communities to be served. The OCC
has the authority to deny an application if it concludes that the combined
organization would have an inadequate capital position or if the acquiring
organization does not meet the requirements of the Community Reinvestment Act of
1977 (the "CRA"). Under the FDI Act and the BMA, the Merger may not be
consummated until the 30th day following the date of the approval of the
relevant regulatory agency, during which time the United States Department of
Justice may challenge the Merger on antitrust grounds. The commencement of an
antitrust action would stay the effectiveness of such an approval unless a court
specifically orders otherwise. Under the HOLA, the OTS is required to review,
among other factors, the financial and managerial resources and future prospects
of the institutions, and the anti-competitive effects of the Merger. The OTS
evaluation of the anti-competitive impact of the Merger would take into account
the same standards required by the BMA. Applications for approval of the Merger
by the Federal Reserve Board, the OCC and the OTS have been filed and are
currently pending.
THE MERGER CANNOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVALS. THERE CAN BE NO ASSURANCE THAT SUCH REGULATORY APPROVALS WILL BE
OBTAINED, AND, IF THE MERGER IS APPROVED, THERE CAN BE NO ASSURANCE AS TO THE
DATES OF ANY OF SUCH APPROVALS. THERE CAN ALSO BE NO ASSURANCE THAT SUCH
APPROVALS WILL NOT CONTAIN A CONDITION OR REQUIREMENT WHICH CAUSES SUCH
APPROVALS TO FAIL TO SATISFY THE CONDITION SET FORTH IN THE MERGER AGREEMENT AND
DESCRIBED BELOW UNDER " -- CONDITIONS TO CONSUMMATION; TERMINATION". THERE CAN
LIKEWISE BE NO ASSURANCE THAT THE UNITED STATES DEPARTMENT OF JUSTICE WILL NOT
CHALLENGE THE MERGER, OR, IF SUCH A CHALLENGE IS MADE, AS TO THE RESULT THEREOF.
ANY APPROVALS, IF AND WHEN RECEIVED FROM THE APPLICABLE REGULATORY AGENCIES, DO
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE MERGER BY SUCH AGENCIES.
CONDITIONS TO CONSUMMATION; TERMINATION
Consummation of the Merger is subject, among other things, to: (i) approval
of the Merger Agreement by the requisite vote of the stockholders of Home
Federal; (ii) receipt of the regulatory approvals referred to above without any
restrictions or
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conditions which would so materially adversely impact the economic or business
benefits to FUNC of the transactions contemplated by the Merger Agreement so as
to render inadvisable the consummation of the Merger; (iii) no court or
governmental or regulatory authority having taken any action which prohibits the
Merger; (iv) receipt by FUNC and Home Federal of the opinion of Sullivan &
Cromwell as to certain federal income tax consequences of the Merger; (v)
receipt by FUNC of a letter, satisfactory to FUNC, from its independent
certified public accountants that the Merger will qualify for pooling of
interests accounting treatment, and a letter from Home Federal's independent
certified public accountants to the effect that they are not aware of any facts
or circumstances that might cause the Merger not to qualify for pooling of
interests accounting treatment; and (vi) the FUNC Common Shares having been
approved for listing on the NYSE, subject to official notice of issuance.
Consummation of the Merger is also subject to the satisfaction or waiver of
various other conditions specified in the Merger Agreement, including, among
others: (i) the delivery by Home Federal and FUNC, each to the other, of (a)
opinions of their respective counsel, and (b) certificates executed by certain
of their respective executive officers as to compliance with the Merger
Agreement; (ii) the accuracy of the representations and warranties, and
compliance in all material respects with the agreements and covenants, of the
parties to the Merger Agreement; and (iii) the receipt by FUNC of a letter from
Home Federal's independent certified public accountants with respect to Home
Federal's financial position.
The Merger Agreement provides that, whether before or after the Special
Meeting, and notwithstanding the approval of the Merger Agreement by the
stockholders of Home Federal, the Merger Agreement may be terminated, and the
Merger abandoned, at any time prior to the Effective Date: (i) by mutual consent
of the Boards of Directors of FUNC and Home Federal; or (ii) by either the Board
of Directors of FUNC or the Home Federal Board (a) if the stockholders of Home
Federal fail to approve the Merger Agreement, (b) in the event of a breach by
the other party of any representation, warranty or covenant contained in the
Merger Agreement, which breach is not cured after 30 days' written notice
thereof is given to the party committing such breach, or (c) if the Merger is
not consummated on or before March 31, 1995.
The Home Federal Board may also terminate the Merger Agreement, at its sole
option, in the event of an FUNC Common Stock Decline, unless FUNC elects, at its
sole option, to increase the Exchange Ratio as provided in the Merger Agreement.
See " -- Possible Exchange Ratio Adjustment".
WAIVER; AMENDMENT
Prior to the Effective Date, any provision of the Merger Agreement may be:
(i) waived by the party benefitted by the provision; or (ii) amended or modified
at any time (including the structure of the transaction) by an agreement in
writing among the parties thereto, approved by their respective Boards of
Directors and executed in the same manner as the Merger Agreement, provided that
after approval by the stockholders of Home Federal, the consideration to be
received by the stockholders of Home Federal may not thereby be decreased.
NO APPRAISAL RIGHTS
Holders of Home Federal Common Stock do not have appraisal rights under the
applicable provisions of OCC regulations or OTS regulations. In a transaction
such as the Merger, OCC regulations provide that OTS regulations shall determine
whether or not Home Federal stockholders have any appraisal rights, and, since
Home Federal Common Stock is listed on the Small Cap Market and FUNC Common
Stock is listed on the NYSE, there are no appraisal rights under OTS
regulations.
ACCOUNTING TREATMENT
Consummation of the Merger is conditioned upon the Merger being accounted
for on a pooling of interests accounting basis and upon the receipt by FUNC of a
letter from each of FUNC's and Home Federal's independent certified public
accountants with respect thereto. See " -- Conditions to Consummation;
Termination". Under this accounting treatment, as of the Effective Date the
assets and liabilities of Home Federal would be added to those of FUNC at their
recorded book values, and the stockholders' equity accounts of Home Federal and
FUNC would be combined on FUNC's consolidated balance sheet. On a pooling of
interests accounting basis, income and other financial statements of FUNC issued
after consummation of the Merger would normally be restated retroactively to
reflect the consolidated combined financial position and results of operations
of FUNC and Home Federal as if the Merger had taken place prior to the periods
covered by such financial statements; however, because of the relative
immateriality of the Merger to FUNC on a consolidated basis, such statements
will not be retroactively restated solely as a result of consummation of the
Merger.
25
<PAGE>
The unaudited pro forma financial information contained in this
Prospectus/Proxy Statement has been prepared using the pooling of interests
accounting basis to account for the Merger. If the Merger is required to be
accounted for as a purchase, and FUNC elected to consummate the Merger, it is
not expected that the pro forma financial information presented herein would be
materially different. See "SUMMARY".
EXPENSES
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by the
party incurring the same, except that printing expenses for this
Prospectus/Proxy Statement will be shared equally by FUNC and Home Federal.
STOCK OPTION AGREEMENT
As a condition to FUNC's entering into the Merger Agreement, and in
consideration thereof, Home Federal issued to FUNC the Option to purchase, under
certain conditions, up to 200,000 shares of Home Federal Common Stock at a
Purchase Price of $15.00 per share, subject to adjustment in certain
circumstances. The Option was granted to FUNC pursuant to the Stock Option
Agreement. The last sale price of Home Federal Common Stock on the Small Cap
Market on May 26, 1994, the last business day prior to the date on which the
Stock Option Agreement was executed, was $12.25. The number of shares of Home
Federal Common Stock subject to the Option represents approximately 19.6 percent
of the outstanding shares of Home Federal Common Stock, before giving effect to
the issuance of such shares. FUNC does not have any voting rights with respect
to the shares of Home Federal Common Stock subject to the Option, prior to
exercise of the Option.
If FUNC is not in material breach of the Stock Option Agreement or the
Merger Agreement, and no injunction against delivery of the shares covered by
the Option is in effect, FUNC may exercise the Option, in whole or in part, at
any time and from time to time following the happening of certain events (each a
"Purchase Event"), including, among others:
(i) Home Federal taking certain actions (each an "Acquisition
Transaction"), including, among others, authorizing, recommending or
entering into an agreement with any third party to effect (a) a merger,
consolidation or similar transaction involving Home Federal or any of its
subsidiaries, (b) the sale, lease, exchange or other disposition of 15
percent or more of the consolidated assets of Home Federal and its
subsidiaries, or (c) the issuance, sale or other disposition of 15 percent
or more of the voting securities of Home Federal or any of its
subsidiaries; or
(ii) the acquisition or the right to acquire by any third party of 15
percent or more of the outstanding shares of Home Federal Common Stock.
The Option will terminate upon the earliest of certain events, including:
(i) consummation of the Merger; (ii) termination of the Merger Agreement by Home
Federal or FUNC (other than pursuant to (iv) below), prior to the happening
(subject to certain limitations) of a Purchase Event or a Preliminary Purchase
Event (as defined below), unless Home Federal has engaged in discussions after
the date of the Merger Agreement with any third party regarding an Acquisition
Transaction; (iii) 18 months after termination of the Merger Agreement by Home
Federal or FUNC (other than pursuant to (i) above or (iv) below); or (iv) 18
months after termination of the Merger Agreement by FUNC pursuant to Section
7.02 thereof. A "Preliminary Purchase Event" is defined to include, among other
events: (a) commencement by any third party of a tender or exchange offer to
purchase 15 percent or more of the outstanding shares of Home Federal; (b)
failure of the stockholders of Home Federal to approve the Merger Agreement
after public announcement that a third party (x) proposes to engage in an
Acquisition Transaction, or (y) files an application under certain federal
statutes relating to the regulation of banks or their holding companies, to
engage in an Acquisition Transaction; or (c) any third party shall have proposed
to Home Federal or its stockholders, publicly or in any writing that becomes
publicly disclosed, to engage in an Acquisition Transaction.
The Stock Option Agreement and the Option are intended to increase the
likelihood that the Merger will be consummated according to the terms set forth
in the Merger Agreement, and may be expected to discourage competing offers to
acquire Home Federal from potential third party acquirors because the Option
could increase the cost of such an acquisition.
To the best of Home Federal's and FUNC's knowledge, no event giving rise to
exercise of the Option has occurred as of the date of this Prospectus/Proxy
Statement.
A copy of the Stock Option Agreement is set forth in Exhibit A to the
Merger Agreement, which is set forth in ANNEX B to this Prospectus/Proxy
Statement, and reference is made thereto for the complete terms of the Stock
Option Agreement and the Option. The foregoing discussion is qualified in its
entirety by reference to the Stock Option Agreement.
26
<PAGE>
MARKET PRICES
The following table sets forth (i) the high and low last reported sale
prices per share of FUNC Common Stock on the NYSE Tape, with respect to each
quarterly period since January 1, 1992, (ii) the high and low last sale prices
of Home Federal Common Stock on the Small Cap Market, with respect to each
quarterly period since April 13, 1994, and the high and low bid prices as
reported on the National Association of Securities Dealers, Inc.
over-the-counter market or "pink sheets", prior to such date, and (iii) the
equivalent pro forma market values per share of Home Federal Common Stock, based
on a 0.4835 Exchange Ratio. The high and low bid prices for Home Federal Common
Stock are based on information received from market makers in Home Federal
Common Stock.
<TABLE>
<CAPTION>
HOME
FUNC FEDERAL
HIGH LOW HIGH
<S> <C> <C> <C>
1992
First quarter................................................................. $ 38 1/4 29 1/2 3 1/4
Second quarter................................................................ 39 3/4 34 3/4 3 1/4
Third quarter................................................................. 40 35 3
Fourth quarter................................................................ 44 7/8 35 7/8 3 1/2
1993
First quarter................................................................. 50 7/8 42 1/4 3 3/8
Second quarter................................................................ 51 1/2 40 5 1/2
Third quarter................................................................. 49 5/8 43 1/2 8 1/2
Fourth quarter................................................................ 48 1/8 37 7/8 9 3/4
1994
First quarter................................................................. 43 3/4 39 3/4 9 3/4
Second quarter................................................................ 46 5/8 41 1/4 20
Third quarter (through September ).......................................... $
<CAPTION>
EQUIVALENT PRO FORMA PER
HOME FEDERAL COMMON
SHARE (1)
LOW HIGH LOW
<S> <C> <C> <C>
1992
First quarter................................................................. 3 1/4 18 3/8 14 1/4
Second quarter................................................................ 3 19 1/8 16 3/4
Third quarter................................................................. 2 3/4 19 1/4 16 7/8
Fourth quarter................................................................ 3 21 5/8 17 1/4
1993
First quarter................................................................. 3 24 1/2 20 3/8
Second quarter................................................................ 4 24 7/8 19 1/4
Third quarter................................................................. 7 23 7/8 21
Fourth quarter................................................................ 8 1/4 23 1/4 18 1/4
1994
First quarter................................................................. 7 3/4 21 1/8 19 1/8
Second quarter................................................................ 8 22 1/2 19 7/8
Third quarter (through September )..........................................
</TABLE>
(1) Equivalent pro forma market values per Home Federal common share amounts
represent the high and low last reported sales prices per share of FUNC
Common Stock, multiplied by a 0.4835 Exchange Ratio, rounded down to the
nearest one-eighth. As discussed under " -- Possible Exchange Ratio
Adjustment", the Exchange Ratio is subject to possible adjustment under
certain circumstances. It is not expected that the pro forma information
presented would be materially different if the Exchange Ratio were so
adjusted.
On May 27, 1994, the last business day prior to public announcement of
execution of the Merger Agreement, the last reported sale prices per share of
FUNC Common Stock on the NYSE Tape and of Home Federal Common Stock on the Small
Cap Market were $46.875 and $12.125, respectively. On September , 1994, such
prices were $ and $ , respectively. See "FUNC -- Common Stock
Repurchase".
The Merger Agreement provides for the filing of a listing application with
the NYSE covering the FUNC Common Shares. It is a condition to consummation of
the Merger that the FUNC Common Shares be authorized for listing on the NYSE,
effective upon official notice of issuance. See " -- Conditions to Consummation;
Termination".
27
<PAGE>
DIVIDENDS
The following table sets forth (i) the cash dividends paid or declared on
FUNC Common Stock and Home Federal Common Stock with respect to each calendar
quarter since January 1, 1992, and (ii) the equivalent pro forma cash dividends
paid per share of Home Federal Common Stock, based on a 0.4835 Common Stock
Exchange Ratio.
<TABLE>
<CAPTION>
EQUIVALENT PRO FORMA
FUNC HOME FEDERAL PER HOME FEDERAL COMMON SHARE (1)
<S> <C> <C> <C>
1992
First quarter..................................................... $.31 -- .15
Second quarter.................................................... .31 -- .15
Third quarter..................................................... .31 -- .15
Fourth quarter.................................................... .35 -- .17
1993
First quarter..................................................... .35 -- .17
Second quarter.................................................... .35 -- .17
Third quarter..................................................... .40 -- .19
Fourth quarter.................................................... .40 -- .19
1994
First quarter..................................................... .40 -- .19
Second quarter.................................................... .40 -- .19
Third quarter..................................................... $.46 -- .22
</TABLE>
(1) Equivalent pro forma cash dividends paid per Home Federal common share
amounts represent FUNC historical dividend rates per share, multiplied by a
0.4835 Exchange Ratio, rounded to the nearest cent. The current annualized
dividend rate per share for FUNC Common Stock, based upon the most recently
declared quarterly dividend rate of $.46 per share payable on September 15,
1994, would be $1.84. On an equivalent pro forma basis, such current
annualized FUNC dividend per Home Federal common share would be $.89, based
on a 0.4835 Exchange Ratio. Future FUNC and Home Federal dividends are
dependent upon their respective earnings and financial condition, government
regulations and policies, and other factors. As discussed under
" -- Possible Exchange Ratio Adjustment", the Exchange Ratio is subject to
possible adjustment under certain circumstances. It is not expected that the
pro forma information presented would be materially different if the
Exchange Ratio were so adjusted.
See "FUNC -- Certain Regulatory Considerations; PAYMENT OF DIVIDENDS",
"HOME FEDERAL -- Dividend Policy" and "DESCRIPTION OF FUNC CAPITAL STOCK".
28
<PAGE>
HOME FEDERAL
GENERAL
The business of Home Federal consists primarily of attracting deposits from
the general public and originating and investing in loans secured by first
mortgage liens on residential and other real estate primarily in the greater
metropolitan Washington, D.C. area, including Maryland and Virginia. Home
Federal also invests in certain government obligations and other investments
permitted by applicable laws and regulations.
The principal sources of funds for Home Federal 's lending activities are
deposits, amortization and repayment of loans, proceeds from the sale of loans
and loan participations, FHLB of Atlanta advances and other borrowings.
Home Federal's principal sources of revenue are interest and fees on real
estate mortgage loans and interest or dividends on investments. From time to
time, gains and losses have been realized from the sale of loans and
investments. Home Federal's principal expenses are interest paid on deposits,
advances from the FHLB of Atlanta and other borrowings and operating expenses.
LENDING ACTIVITIES
Historically, the primary lending activity of Home Federal has been the
origination for its own portfolio of conventional first mortgage loans that are
for the purpose of enabling borrowers to purchase or refinance residential real
property. Conventional loans are loans that are neither insured by the Federal
Housing Administration nor partially guaranteed by the Veteran's Administration.
Home Federal's net loan portfolio totaled $190.6 million at June 30, 1994,
representing 82.1 percent of its total assets at that date, and 77.3 percent of
its portfolio consisted of residential real estate loans secured by one-to-four
family dwellings. Home Federal also had $39.6 million, or 20.3 percent of its
loan portfolio, in commercial real estate loans, which includes commercial real
estate loans, multi-family residential loans and construction loans outstanding,
net of undisbursed portion of loans receivable, at June 30, 1994.
Set forth below is selected data relating to the composition of Home
Federal's loan portfolio by type of loan and by type of security on the dates
indicated.
<TABLE>
<CAPTION>
LOAN PORTFOLIO ANALYSIS AT DECEMBER 31,
BY TYPE OF LOAN 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Real Estate Loans:
Mortgage Loans -- Variable Rate................. $130,579,472 120,257,544 117,591,237 108,013,126 106,286,361
Mortgage Loans -- Fixed Rate.................... 43,231,733 44,778,142 72,707,574 91,021,450 97,045,006
Construction and Land Development............... 6,629,206 5,961,122 8,935,461 13,081,471 18,971,839
Consumer Loans.................................. 591,719 232,415 8,661 -- --
Loans on Savings Accounts....................... 468,735 479,359 479,006 531,520 618,089
Commercial Loans -- Secured..................... 1,558,286 2,503,691 2,265,007 1,439,313 1,481,626
Commercial Loans -- Unsecured................... 313,621 482,942 1,733,353 3,291,632 3,784,500
Less:
Undisbursed Portion of Loans
Receivable................................. 1,599,528 2,202,789 490,083 1,286,777 4,104,408
Deferred Loan Fees and Discounts on Loans..... 714,368 929,710 1,088,158 1,104,065 1,177,727
Allowance for Loan Losses..................... 2,297,025 1,491,923 979,364 820,600 397,750
Total........................................... $178,761,851 170,070,793 201,162,694 214,167,070 222,507,536
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO ANALYSIS AT DECEMBER 31,
BY TYPE OF SECURITY 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Residential:
One-to Four-Family............................ $137,408,976 125,984,273 144,385,758 152,128,816 153,325,688
Other Dwelling Units.......................... 4,375,436 6,019,970 6,216,682 7,333,817 7,439,979
Commercial Real Estate.......................... 35,066,899 37,742,565 42,054,872 45,424,518 49,644,898
Developed Lots, Acquisition and Development of
Land, Unimproved
Land.......................................... 3,589,100 1,250,000 6,576,960 7,228,896 11,892,641
Consumer Loans.................................. 591,719 232,415 8,661 -- --
Loans on Savings Accounts....................... 468,735 479,359 479,006 531,520 618,089
Commercial Loans -- Unsecured................... 313,621 482,942 1,733,353 3,291,632 3,784,500
Commercial Loans -- Secured..................... 1,558,286 2,503,691 2,265,007 1,439,313 1,481,626
Less:
Undisbursed Portion of Loans
Receivable................................. 1,599,528 2,202,789 490,083 1,286,777 4,104,408
Deferred Loan Fees and Discounts on Loans..... 714,368 929,710 1,088,158 1,104,065 1,177,727
Allowance for Loan Losses..................... 2,297,025 1,491,923 979,364 820,600 397,750
Total........................................... $178,761,851 170,070,793 201,162,694 214,167,070 222,507,536
</TABLE>
The following table sets forth certain information at December 31, 1993,
regarding the dollar amount of loans maturing in Home Federal's portfolio based
on their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts, are reported as
due in one year or less.
<TABLE>
<CAPTION>
DUE 1 DUE 2 DUE 3 DUE 5 DUE 10 DUE 15
DUE WITHIN 1 THROUGH 2 THROUGH 3 THROUGH 5 THROUGH 10 THROUGH 15 OR MORE
YEAR AFTER YEARS AFTER YEARS AFTER YEARS AFTER YEARS AFTER YEARS AFTER YEARS AFTER
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS) 1993 1993 1993 1993 1993 1993 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate
Mortgage............ $2,210 5,307 1,016 12,000 6,127 5,395 145,345
Real Estate
Construction........ 655 2,324 61 -- -- -- --
Loans Secured by
Savings............. 469 -- -- -- -- -- --
Commercial and
Financial........... 2,464 -- -- -- -- -- --
Total................. $5,798 7,631 1,077 12,000 6,127 5,395 145,345
<CAPTION>
(IN THOUSANDS) TOTAL
<S> <C>
Real Estate
Mortgage............ 177,400
Real Estate
Construction........ 3,040
Loans Secured by
Savings............. 469
Commercial and
Financial........... 2,464
Total................. 183,373
</TABLE>
The next table sets forth at December 31, 1993, the dollar amount of all
loans due after one year from December 31, 1993, which have predetermined
interest rates and which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED ADJUSTABLE
(IN THOUSANDS) RATES RATES
<S> <C> <C>
Real Estate Mortgage.................................................................. $36,498 138,692
Real Estate Construction.............................................................. -- 2,385
Loans Secured by Savings.............................................................. -- --
Commercial and Financial.............................................................. $ -- --
</TABLE>
The foregoing table does not reflect actual repayments because of loan
refinancings, repayments and enforcement of due on sale clauses, which give Home
Federal the right to declare a conventional loan immediately due and payable in
the event, among other things, that the borrower sells the real property subject
to the mortgage and the loan is not repaid. Thus, although in accordance with
federal regulations Home Federal's single-family residential loan documents
traditionally provided for repayment of principal over 30 years, such loans have
normally remained outstanding for substantially shorter periods.
As a federally chartered savings institution, Home Federal has general
authority to originate and purchase loans secured by real estate located
throughout the United States. Notwithstanding this nationwide authority,
substantially all of Home
30
<PAGE>
Federal's mortgage loan portfolio is secured by real estate located in the
metropolitan Washington, D.C. area, including Maryland and Virginia. Therefore,
its borrowers' ability to repay is dependent to a significant extent upon the
economy of metropolitan Washington, D.C.
Historically, all residential and commercial real estate loans have been
originated directly by Home Federal through salaried loan officers. During 1990,
Home Federal implemented a mortgage banking operation. As part of the mortgage
banking operation some of the loan officers were placed on a commission schedule
based on loans closed by the loan officers. Residential and commercial loan
customers have been obtained by referrals from real estate brokers and builders,
mortgage brokers, depositors and walk-in customers. In July 1993, the mortgage
banking operation was transferred to a wholly-owned subsidiary, Home Federal
Mortgage Corporation ("Home Mortgage"). On September 1, 1993, Home Mortgage
acquired Liberty Mortgage Corporation, a mortgage banking company located in
northern Virginia.
Home Federal sells whole loans and participations in loans to other
financial institutions and institutional investors. Home Federal previously
retained responsibility for collecting and remitting loan payments, inspecting
the properties, making certain insurance and tax payments on behalf of borrowers
and otherwise servicing the loans it sells, and receives fees for performing
these services. At June 30, 1994, Home Federal was servicing $39.5 million in
loans for others. However, since the implementation, in 1990, of a mortgage
banking operation, loan sales have been primarily on a servicing released basis.
Home Federal also purchases whole loans and participations in loans in
order to increase the diversity of its portfolio and provide it with assets
which are consistent with its asset and liability management goals. These loans
and participations are obtained primarily by direct solicitation and mortgage
broker referrals. Home Federal purchased no loans during 1993 since its asset
and liability management goals were met through loan originations. Home Federal
sold $94.0 million of mortgage loans and participations during the year ended
December 31, 1993, on a servicing released basis.
The table below sets forth certain information relating to loan
originations, and loan purchases and sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
Loans Originated:
Conventional Real Estate Loans:
Residential One-to-Four Family................................................ $157,693,567 124,101,516 76,627,116
Commercial Real Estate Loans.................................................. 500,000 544,000 --
Developed Lots, Acquisition and Development of Land, Unimproved Land.......... 2,925,000 -- --
All Others.................................................................... 1,950,161 413,500 --
Unsecured Commercial Loans...................................................... -- 220,000 1,188,445
Total........................................................................... $163,068,728 125,279,016 77,815,561
Loans Purchased:
Real Estate Loans:
Participation Loans........................................................... $ -- 500,000 --
Whole Loans................................................................... -- -- --
Total........................................................................... $ -- 500,000 --
Loans Sold:
Real Estate Loans:
Participation Loans........................................................... $ -- -- --
Whole Loans................................................................... 93,975,830 66,898,727 37,922,484
Total........................................................................... $ 93,975,830 66,898,727 37,922,484
</TABLE>
Home Federal's principal lending activity consists of originating loans
secured by first mortgages on existing single family residences or, to a lesser
extent, the purchase of such loans or of pass-through securities backed by such
loans. As a result, at June 30, 1994, $33.6 million, or 17.2 percent of Home
Federal's $195.3 million loan portfolio, consisted of long-term mortgage loans
with fixed rates of interest.
Home Federal originates and, to a lesser extent, purchases mortgage loans
which provide for periodic interest rate adjustments ("ARMs"), subject to
certain limitations. ARMs represented 77.6 percent of Home Federal's loan
portfolio on
31
<PAGE>
June 30, 1994. ARMs currently offered by Home Federal have up to 30-year terms
and interest rates which adjust yearly, every three years or every five years,
in accordance with a designated index. To encourage the origination of ARMs with
interest rates which adjust every year, Home Federal, like many of its
competitors, offers a rate of interest on such loans below the fully indexed
rate for an initial period of the loan. ARMs generally pose a risk that as the
interest rate rises, the amount of a borrower's monthly loan payment also rises,
thereby increasing the potential for delinquencies and loan losses. However,
this potential risk is mitigated by Home Federal's policy of originating ARMs
with annual and lifetime interest rate caps that limit the amount that a
borrower's monthly payment may increase.
Home Federal intends to continue to emphasize the origination for the loan
portfolio of ARMs over fixed rate mortgage loans in order to reduce the impact
on its operations of rapid increases in market rates of interest. However,
interest rates and the resulting cost of funds increases in a rapidly increasing
interest rate environment could exceed the cap levels on these loans and
negatively impact net income. Home Federal's loan portfolio at June 30, 1994,
consisted of $151.7 million, or 77.6 percent, of ARMs. Home Federal continues to
offer one-to-four family residential loans with fixed rates of interest, but
only under terms, conditions and documentation designed to permit sale in the
secondary market. At June 30, 1994, $1.1 million in loans were held in inventory
for sale in the secondary market.
OTS regulations limit the amount of a real estate loan made by a federally
chartered savings institution (see " -- Regulation and Supervision; SAFETY AND
SOUNDNESS") to 100 percent of the appraised value of the property securing the
loan (referred to as the "loan-to-value ratio") at the time of origination.
Maximum loan-to-value ratios for each type of real estate loan are to be
established by the institution's board of directors. In addition, the board of
directors is to approve each real estate loan (other than a residential loan)
with a loan-to-value ratio in excess of 90 percent. If the amount of a
residential loan originated or refinanced is in excess of 90 percent of the
appraised value, the institution is required to obtain private mortgage
insurance on the portion of the principal amount of the loan that exceeds 80
percent of the appraised value of the property. Home Federal generally will lend
up to 95 percent of the appraised value of single-family residential dwellings
when private mortgage insurance insures the portion of the principal amount of
the loan that exceeds 80 percent of the appraised value of the property.
All residential mortgage loans are subject to full underwriting procedures,
including income verification in conformity with general industry practice. Home
Federal requires title insurance insuring the priority of its lien, and fire and
extended coverage casualty insurance in order to protect the properties securing
its single-family residential loans, as well as its construction, multi-family
residential and commercial real estate loans.
Substantially all of Home Federal's mortgage loans include a "due on sale"
clause, which provides it with a contractual right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells or
otherwise disposes of the property subject to the mortgage and the loan is not
repaid. It is the policy of Home Federal to enforce due on sale provisions. This
provides Home Federal with the opportunity to adjust the rate of interest on
existing fixed-rate loans by negotiating a new rate at the time of sale.
The original contractual loan payment period normally is 30 years; however,
it has been Home Federal's experience that because of prepayments and sales of
properties, the average life of residential loans has been substantially
shorter.
Home Federal engages in the purchase and sale of loans and loan
participations. Management believes that purchases of loans and loan
participations are generally desirable, when local mortgage demand is less than
the supply of funds available for local mortgage originations or when favorable
rates are available in areas outside Home Federal's normal lending area. Such
purchases are conducted in the secondary mortgage market and all loans purchased
must meet the same underwriting standards as loans originated by Home Federal.
Although Home Federal's purchases of loans and participations are for long-term
investment purposes, Home Federal has in the past, after appropriate
consideration of market factors, sold such loans in order to provide funds for
then existing alternative investment opportunities.
Home Federal also has made loans secured by multi-family residential and
commercial properties, such as shopping centers and industrial parks, and for
the acquisition, development and construction of single-family residences and
commercial real estate properties. Home Federal recognizes that such
construction and commercial real estate financing may involve a higher degree of
risk of loss than long-term financing of existing residential real estate. Home
Federal concentrates on originating such loans secured by properties located in
the Washington, D.C. metropolitan area. At June 30, 1994, Home Federal had $39.6
million of commercial real estate loans, including residential loans on other
dwelling units and construction loans outstanding, net of undisbursed portion of
loans receivable, representing 20.3 percent of its net loan portfolio at that
date, compared to $41.4 million of such loans, or 22.5 percent of the loan
portfolio, at December 31, 1993, and $42.8 million of such loans at December 31,
1992, or 24.5 percent of its loan portfolio.
32
<PAGE>
OTS regulations restrict non-residential loans to four times the lending
institution's capital. This will limit the amount available for this type of
lending. As a result, Home Federal anticipates that activity in such loans will
be restricted to a small percentage of total originations.
In its underwriting of commercial real estate loans, Home Federal generally
considers an appraisal report prepared in accordance with OTS standards by
independent, professionally qualified appraisers approved by Home Federal, the
economic viability of the property, including the ratio of projected cash flow
to operating expenses and debt service, and the credit worthiness of the
borrower. Credit worthiness is determined by considering the financial strength,
management and experience of the borrower, and any personal guarantee by the
principal of the borrower. Such loans generally are limited to no more than 80
percent of the appraised value of the property.
Home Federal also makes acquisition, development and construction loans,
primarily for residential projects. At June 30, 1994, Home Federal had $3.6
million of such loans outstanding, or 1.8 percent of its loan portfolio. Most
construction loans are made on a short-term basis, usually ranging from nine
months to two years, with interest rates usually in excess of the published
prime rate and adjustable monthly. The loan application process generally
includes the same criteria which are required for permanent commercial mortgage
loans, as well as submission of completed plans, specifications and cost
estimates related to the proposed construction.
Participation interests are also purchased in construction loans with terms
ranging from 12 to 24 months. These loans are originated by other lenders who
sell loans on the basis of the originator retaining a ten percent to 20 percent
ownership investment. The loan interest rates are indexed to a major bank prime
or base rate. Upon completion of construction, these loans convert to relatively
short-term permanent loans provided by either Home Federal or the loan
originator. Home Federal makes regular inspections of the collateral securing
these loans, and also monitors the originating institution's loan servicing and
accounting operations to ensure adherence to regulatory standards.
Home Federal also makes a limited amount, 0.9 percent of its loan portfolio
at June 30, 1994, of secured and unsecured consumer loans, which generally are
individual lines of credit in amounts of $150,000 or less.
In addition to interest earned on loans, Home Federal receives fees which
are collected in connection with loan originations, loan modifications, late
payments, changes of property ownership and for miscellaneous services related
to its loans. Home Federal also receives fees for its servicing of loans.
Revenue from these activities varies from period to period consistent with the
volume and type of loans made and purchased.
Home Federal is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation (the "FHLMC") and the Federal National Mortgage
Association. Home Federal has participated in various programs of the FHLMC and
at June 30, 1994, serviced $33.8 million of mortgages for the FHLMC. At June 30,
1994, the total amount of loans serviced for others by Home Federal was $39.5
million, compared to $48.3 million, $71.9 million and $61.2 million at December
31, 1993, 1992 and 1991, respectively. The decrease in the amount of loans
serviced for others was attributable to the large amount of early payoffs of
mortgage loans experienced during 1993. During 1993, Home Federal received
$237,000 in servicing fees compared with $204,000 and $197,000 in 1992 and 1991,
respectively.
In its lending operations, Home Federal charges loan origination fees which
are calculated as a percentage of the amount borrowed and are charged at the
time of origination of the loan. The amount of income derived from loan
origination fees is largely dependent on the volume of loans originated, which
in turn, is dependent on prevailing mortgage interest rates and the demand for
mortgage loans in the markets served by Home Federal. The fees received in
connection with the origination of construction loans and commercial real estate
loans generally range from one to three percentage points.
CLASSIFIED ASSETS AND DELINQUENCIES
OTS regulations require insured institutions to utilize a classification
system for problem assets of insured institutions which covers all problem
assets. Under this classification system, problem assets of insured institutions
are classified as "substandard", "doubtful" or "loss", depending on the presence
of certain characteristics. An asset is considered "substandard" if inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified "doubtful" include
those with the added characteristic that the weaknesses present make "collection
or liquidation in full", on the basis of currently existing facts, conditions
and values, "highly questionable and improbable". Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
33
<PAGE>
In connection with the filing of its periodic reports to the OTS, Home
Federal regularly reviews the problem loans in its portfolio to determine
whether any loans require classification in accordance with applicable
regulations. On the basis of such periodic review, management of Home Federal
believes that of the $195.3 million of Home Federal's outstanding loans at June
30, 1994, $5.4 million required classification as "substandard". Also, an
insured institution is required to establish a general allowance for loan losses
in an amount deemed prudent by management to recognize the inherent risk
associated with the institution's lending activities, including consideration of
the institution's classified assets. Such general allowances, unlike specific
allowances, are not allocated to particular problem assets. When an insured
institution classifies problem assets as "loss", it is required either to
establish a specific allowance for losses equal to 100 percent of the amount of
the asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement requires that institutions have effective systems and controls to
identify, monitor and address asset quality problems; have analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
The following table sets forth information regarding nonaccrual loans,
loans which are 90 days or more delinquent, restructured loans and real estate
owned held by Home Federal at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE
30, AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C>
Residential Real Estate:
Nonaccrual Loans..................................................... $ 397 840 1,022 1,464 2,267 --
Restructured Loans................................................... -- -- -- 5,049 5,049 --
Nonperforming Loans............................................... 397 840 1,022 6,513 7,316 --
Accruing Loans Which are 90 Days Overdue.......................... -- -- -- -- -- 68
Total Residential Real Estate Loans.................................... 397 840 1,022 6,513 7,316 68
Commercial Real Estate:
Nonaccrual Loans..................................................... 152 23 787 957 -- --
Restructured Loans................................................... 2,890 2,915 2,960 -- -- --
Total Commercial Real Estate Loans..................................... 3,042 2,938 3,747 957 -- --
Consumer Loans......................................................... -- -- -- -- -- --
Commercial Loans....................................................... -- -- -- -- -- --
Total Nonperforming Loans.............................................. 3,439 3,778 4,769 7,470 7,316 68
Real Estate Acquired in Settlement of Loans, Net....................... 1,016 1,236 3,740 967 1,561 1,335
Total Nonperforming Assets............................................. $ 4,455 5,014 8,509 8,437 8,877 1,403
Total Nonperforming Assets as a Percent of Total Assets................ 1.92% 2.06 3.78 3.50 3.42 .53
Gross Interest Income That Would Have Been Recorded:
Nonaccrual Loans..................................................... $ 27 79 199 260 238 --
Restructured Loans................................................... 114 241 267 498 143 --
Total.................................................................. $ 141 320 466 758 381 --
Interest Income Included in Net Income:
Nonaccrual Loans..................................................... $ 15 54 124 145 120 --
Restructured Loans................................................... 107 217 234 422 115 --
Total.................................................................. $ 122 271 358 567 235 --
</TABLE>
34
<PAGE>
Loans are placed on nonaccrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is deducted from interest income. The $397,000 of
nonaccrual residential real estate loans at June 30, 1994, consisted of six
loans to five separate and unrelated borrowers. When a borrower fails to make a
required payment on a loan, Home Federal attempts to cause the default to be
cured by contacting the borrower. In general, contacts are made after a payment
is more than 15 days past due, and a late charge is assessed at that time. In
most cases, defaults are cured promptly. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through Home Federal's normal collection
procedures or an acceptable arrangement is not worked out with the borrower,
Home Federal will institute measures to remedy the default, including commencing
a foreclosure action or in special circumstances accepting from the mortgagor a
voluntary deed of the secured property in lieu of foreclosure.
If foreclosure is effected, the property is sold at a public auction in
which Home Federal participates as a bidder. If Home Federal is the successful
bidder, acquired real estate property is then included in its "real estate
owned" account until it is sold. Real estate acquired by Home Federal by
deed-in-lieu of foreclosure also is classified as real estate owned until it is
sold. When property is acquired, it is recorded at fair value less estimated
costs to sell at the date of acquisition, and any write down resulting therefrom
is charged to the allowance for loan losses. Subsequently, such real estate is
carried at the lower of fair value less estimated costs to sell or its initial
recorded value. Reductions in the carrying value of real estate subsequent to
acquisition are recorded through a valuation allowance. Interest accrual ceases
on the date of acquisition, and all costs incurred from that date in maintaining
the property are expensed. Costs incurred for the improvement and development of
such property are capitalized. Home Federal is permitted to finance sales of
real estate owned by "loans to facilitate", which may involve more favorable
interest rates and terms than generally would be granted under its guidelines.
A variety of factors, including the appreciation of real estate values in
the Washington, D.C. metropolitan area, has historically limited Home Federal's
loss and delinquency experience on its real estate loan portfolio. However,
during the past few years, the Washington, D.C. metropolitan area has
experienced both a slow down in the real estate market and increased
unemployment, which had an adverse impact on Home Federal's nonperforming
assets. The economy has shown indications during 1993 and into 1994 of slowly
improving, and Home Federal's nonperforming assets decreased to $4.5 million at
June 30, 1994.
During the year ended December 31, 1990, certain concessions were granted
in extending a loan of $5.1 million. These concessions would not have been
considered by Home Federal in the making of a new loan, but were agreed to
because the loan was already outstanding and in light of the borrower's
financial difficulties and declining real estate market activity. At the time of
modification, anticipated future cash receipts on this loan, which was accounted
for as a troubled debt restructuring, exceeded the recorded investment in the
loan. Therefore, no loss was required to be recognized. On March 1, 1992, this
loan became 90 days delinquent and all interest accrued was fully reserved.
Foreclosure proceedings were initiated. On April 2, 1992, the foreclosure sale
occurred and Home Federal was the successful bidder. Home Federal ordered a new
appraisal of the property. In August 1992, the new appraisal of the property was
received, and it indicated an appraisal value substantially below the book value
of the property. Therefore, Home Federal recognized a charge of $1.6 million
against the allowance for loan losses during the year ended December 31, 1992.
Also, during the year ended December 31, 1992, certain concessions were granted
in extending a loan receivable of $3.6 million. These concessions would not have
been considered by Home Federal in the making of a new loan, but were agreed to
because the loan was already outstanding and in light of the borrower's
financial difficulties and declining real estate market activity. A new
appraisal was obtained which indicated a fair value of $600,000 less than the
book value of the loan. The 1992 provision for loan losses increased to $2.8
million primarily as a result of the $1.6 million charge off and to provide for
the $600,000 indicated loss in the allowance for loan losses.
The $1.6 million provision for loan losses in 1991 was attributable
primarily to the $1.1 million of charge offs to the commercial loan portfolio as
a result of the inability of the borrowers to pay off or make monthly payments
on lines of credit maturing during the year.
In light of its evaluation of its loan portfolio, Home Federal maintains an
allowance for potential loan losses and makes a determination as to an
appropriate provision from earnings necessary to maintain such allowance. This
determination resulted in a decrease in the provision for loan losses to $1.4
million for the year ended December 31, 1993, compared to $2.8 million for the
year ended December 31, 1992. This decrease was due primarily to the decrease in
total nonperforming assets to $5.0 million at December 31, 1993, from $8.5
million at December 31, 1992. The provision for loan losses for the six months
ended June 30, 1994, was $180,000, compared to $1,116 ,000 in the comparable
period in 1993.
35
<PAGE>
The following tables set forth certain information relating to the
allowance for losses for Home Federal for the periods and at the dates
indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
Balance, Beginning of Period......................................................... $1,491,923 979,364 820,600
Provision Charged to Operations...................................................... 1,371,000 2,843,335 1,610,341
Recoveries:
Mortgage Loans..................................................................... 6,523 470 --
Commercial Real Estate Loans....................................................... -- -- 3,638
Consumer Loans..................................................................... -- -- --
Commercial Loans................................................................... 33,446 26,220 --
Total Recoveries..................................................................... 39,969 26,690 3,638
Charge-Offs:
Mortgage Loans..................................................................... (71,420) (1,635,229) --
Commercial Real Estate Loans....................................................... (325,226) (314,637) (347,879)
Consumer Loans..................................................................... -- -- --
Commercial Loans................................................................... (209,221) (407,600) (1,107,336)
Total Charge-Offs.................................................................... (605,867) (2,357,466) (1,455,215)
Balance, End of Period............................................................... $2,297,025 1,491,923 979,364
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993 1992
% OF LOANS % OF LOANS
TO TO
TOTAL TOTAL
ALLOWANCE FOR LOSSES BY TYPE OF LOAN AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C>
Mortgage Loans......................................................... $1,482,680 79.2% $ 576,303 78.3%
Commercial Real Estate Loans........................................... 600,000 19.3 600,000 19.9
Consumer Loans......................................................... 30,000 .6 10,000 .4
Commercial Loans....................................................... 184,345 .9 305,620 1.4
Total.................................................................. $2,297,025 100.0% $1,491,923 100.0%
</TABLE>
MORTGAGE-BACKED SECURITIES
Home Federal engages in the purchase and sale of mortgage-backed
securities. Purchases of mortgage-backed securities are generally undertaken
when local mortgage demand is less than the supply of funds available for local
mortgage originations or when favorable rates are available in areas outside
Home Federal's normal lending area. Mortgage-backed securities are also readily
saleable in the securities market and provide a reasonably liquid source of
funds as compared to conventional mortgage loans. Home Federal has purchased and
sold both FHLMC and Government National Mortgage Association mortgaged-backed
securities. During 1993, Home Federal purchased $5.9 million of mortgage-backed
securities and sold $4.1 million of mortgage-backed securities.
Home Federal uses FHLMC swap programs to add liquidity and flexibility to
its mortgage loan portfolio. Generally, seasoned fixed-rate and adjustable rate
mortgage loans have been packaged and exchanged for FHLMC participation
certificates. Home Federal retains the servicing of the mortgage loans and pays
a negotiated fee to the FHLMC. Since there is a ready market for FHLMC
securities, the certificates afford Home Federal a much greater degree of
liquidity than would the mortgage loans. During 1993, Home Federal exchanged
$1.2 million of mortgage loans for an equal amount of FHLMC participation
certificates.
INVESTMENT ACTIVITIES
Under OTS regulations, Home Federal is permitted to invest in United States
government, federal agency, state and municipal securities, federal funds,
negotiable certificates of deposit and bankers' acceptances issued by commercial
banks insured by the FDIC, instruments issued by savings institutions insured by
the FDIC, and other specified investments. As of June 30, 1994, Home Federal had
an investment portfolio of $15.1 million, which included $15.0 million invested
in United States government agency securities, with the balance in bank or
savings and loan certificates of deposit.
36
<PAGE>
SOURCES OF FUNDS
Deposits have traditionally been the principal source of Home Federal's
funds for use in lending and for other general business purposes. Home Federal
also derives funds from scheduled loan principal repayments and prepayments of
outstanding loans, borrowings from the FHLB of Atlanta, and other sources,
including repurchase agreements and sales of investment securities, loans and
mortgage-backed securities. Borrowings generally may be used on a short-term
basis to compensate for seasonal or other reductions in deposits or other
inflows at less than projected levels, as well as on a longer-term basis to
support expanded lending activities and for asset/liability structuring
purposes.
Home Federal offers a variety of rates and deposit programs, short-term and
long-term, designed to attract customers in its natural market area. Rates on
deposits offered by Home Federal are evaluated on a weekly basis and are priced
based on investment opportunities, competitive rates available at other
depository institutions and the cost of alternative sources of funds. Home
Federal relies upon its branch network and primary market area advertising to
generate its deposit flows, and has not sought deposits from institutional
brokerage programs.
In recent years, Home Federal has been required by market conditions to
rely increasingly on newly-authorized types of short-term certificate accounts
and other deposit alternatives that are more responsive to market interest rates
than passbook accounts and fixed-rate, fixed-term certificates that were
historically its primary sources of deposits. Home Federal's current deposit
products include passbook savings accounts, NOW accounts, super NOW accounts,
money market deposit accounts, certificates of deposit ranging in term from 90
days to five years, and certificates of deposit in denominations of $95,000 or
more ("Jumbos"). Included among these deposit products are Individual Retirement
Account certificates and Keogh Plan retirement account certificates.
At June 30, 1994, 5.4 percent of Home Federal's deposits were Jumbos, which
tend to have a generally short-term and carry higher rates of interest than
other deposits with comparable maturities.
The following tables set forth certain information relating to deposits for
the periods and at the dates indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SAVINGS ACTIVITY 1993 1992 1991
<S> <C> <C> <C>
Deposits....................................................................... $195,241,419 181,874,931 166,383,419
Withdrawals.................................................................... 195,595,478 195,906,984 183,821,664
Net Change Before Interest Credit.............................................. (354,059) (14,032,053) (17,438,245)
Interest Credited.............................................................. 7,591,005 9,220,580 12,156,388
Accrued Interest Payable....................................................... (120,757) (380,694) (906,704)
Total.......................................................................... $ 7,116,189 (5,192,167) (6,188,561)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
CERTIFICATES OF DEPOSIT BY RATE 1993 1992 1991
<S> <C> <C> <C>
2.75%-4.00%................................................................... $ 40,596,221 26,054,936 --
4.01%-6.00%................................................................... 77,236,198 58,316,404 29,233,416
6.01%-8.00%................................................................... 25,247,754 44,732,123 97,839,945
8.01%-10.00%.................................................................. 5,278,944 14,221,650 28,344,878
10.01%-15.05%.................................................................. -- 38,364 35,233
Total........................................................................ $148,359,117 143,363,477 155,453,472
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
LESS THAN ONE TO TWO TWO TO MORE THAN
CERTIFICATES OF DEPOSIT BY RATE AND MATURITY DATE ONE YEAR YEARS THREE YEARS THREE YEARS TOTAL
<S> <C> <C> <C> <C> <C>
2.75%-4.00%.......................................... $38,911,707 1,500,236 184,278 -- 40,596, 221
4.01%-6.00%.......................................... 12,876,746 44,874,640 9,528,671 9,956,141 77,236,198
6.01%-8.00%.......................................... 12,005,989 4,391,465 7,309,724 1,540,576 25,247,754
8.01%-10.00%......................................... 2,412,258 1,581,882 286,397 998,407 5,278,944
Total.............................................. $66,206,700 52,348,223 17,309,070 12,495,124 148,359,117
</TABLE>
The FHLB system provides advances to its members both for the purpose of
meeting the member's demand for funds when deposit flows are insufficient and to
enable its members to fix their cost of funds for longer terms through its
long-term,
37
<PAGE>
fixed-rate programs. Historically, Home Federal has relied on borrowings from
the FHLB of Atlanta to a greater extent than borrowings from other sources, to
meet its need for funds. Advances from the FHLB of Atlanta may be on a secured
or unsecured basis depending on a number of factors, including the purpose for
which the funds are being borrowed and existing advances outstanding.
Home Federal has relied on reverse repurchase agreements as an alternative
source of funds. A reverse repurchase agreement is effected by the transfer of
securities to a lender in exchange for cash under an agreement to repay the
cash, plus interest, in exchange for the return of the same securities on the
maturity date. Home Federal deals only with nationally recognized securities
dealers and commercial banks when entering into these transactions. Generally,
the securities used in these transactions have been FHLMC participation
certificates which were obtained in exchange for seasoned fixed-rate mortgage
loans. Funds from this source have been used to provide additional liquidity.
The following table sets forth certain information as to FHLB advances and
other borrowings by Home Federal at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
FHLB Advances..................................................................... $22,000,000 16,500,000 25,220,000
Other Borrowings.................................................................. 980,000 -- --
Total............................................................................. $22,980,000 16,500,000 25,220,000
</TABLE>
PROPERTIES
Home Federal's executive offices are located at 5225 Wisconsin Avenue,
N.W., Washington, D.C. 20015. Home Federal also operates five savings bank
offices in the District of Columbia and two mortgage banking offices, one in
Washington, D.C. and one in Annandale, Virginia. All the office locations are
leased, with remaining terms, with options, from four to 13 years.
The following table sets forth, at December 31, 1993, certain information
relating to Home Federal's leased locations.
<TABLE>
<CAPTION>
NET BOOK
REMAINING TERM VALUE
<S> <C> <C>
Chevy Chase
5225 Wisconsin Avenue, N.W...................................................................... 8 years $32,446
Midtown
970 15th Street, N.W............................................................................ 9 years 35,423
Federal Triangle
1115 Pennsylvania Avenue, N.W................................................................... 12 years 43,818
Shepherd Park
7800 Georgia Avenue, N.W........................................................................ 5 years 5,047
Federal Center Plaza
500 C Street, S.W............................................................................... 3 years 12,086
Capitol Hill
444 North Capitol Street, N.W................................................................... 5 years 10,909
Annandale, Virginia
7857 Heritage Drive............................................................................. 7 years $ 3,451
</TABLE>
SUBSIDIARIES
OTS regulations permit a savings bank to invest up to two percent of its
assets in capital stock and secured and unsecured loans to subsidiary
corporations or service corporations and an additional one percent of its assets
when the additional funds are utilized for community or inner-city purposes.
Home Federal owns all the outstanding stock of Home Mortgage (formerly HFS
Commercial Mortgage Corporation), which is engaged in residential mortgage
banking. On September 1, 1993, Home Mortgage acquired Liberty Mortgage
Corporation, a mortgage banking company located in Northern Virginia, for a cash
payment of $100,000 plus the fair value of the company's fixed assets. Home
Mortgage closed the year with two offices and originated $104.0 million in
residential mortgage loans in 1993. Home Federal also owns all the outstanding
stock of Home Financial Services, Inc. ("Home Financial"), which is not
presently conducting any business activities. Home Financial Insurance Services,
Inc. ("Home Insurance"), a wholly-owned subsidiary of Home Financial, offers
insurance, primarily mortgage life, accident, health and disability, to
38
<PAGE>
customers of Home Federal. Home Insurance has operated on a limited basis and
revenues from its operations are, in management's opinion, insignificant to Home
Federal's overall results of operations.
In addition, Home Federal has a five percent interest in the stock of
Savings Associations Financial Enterprises, Inc. ("SAFE"), a service corporation
formed in 1972 by the savings and loan associations and savings banks
headquartered in Washington, D.C. SAFE's investment activities consist primarily
of loans for inner-city or community development purposes. Home Federal had
$178,750 invested in SAFE at December 31, 1993.
COMPETITION
Home Federal experiences substantial competition in attracting and
retaining savings deposits and in making real estate and commercial loans. The
primary factors in competing for savings deposits are interest rates and
convenience of office locations. Direct competition for savings deposits comes
from other savings and loan associations, savings banks, commercial banks,
credit unions and other financial service concerns. Additional significant
competition for savings deposits comes from corporate and government securities
and money market funds, which may yield higher interest rates than instruments
offered by savings institutions. The primary factors in competing for loans are
interest rates and rate adjustment provisions, loan maturity, loan fees and the
quality of service to borrowers. Competition for origination of real estate
loans normally comes from other savings and loan associations, savings banks,
commercial banks, mortgage companies, insurance companies and real estate
investment trusts.
EMPLOYEES
Home Federal had 87 full-time employees and two part-time employees as of
June 30, 1994. None of these employees are represented by a collective
bargaining agent, and Home Federal believes that it enjoys good relations with
its personnel.
DIVIDEND POLICY
Home Federal has not paid or declared any cash dividends on Home Federal
Common Stock. Home Federal is subject to certain restrictions which limit its
ability to pay dividends. See " -- Regulation and Supervision; LIMITATION ON
CAPITAL DISTRIBUTIONS". In addition, Home Federal is not permitted to pay
dividends on Home Federal Common Stock if its stockholders' equity would be
reduced below the amount required for the liquidation account. Home Federal paid
a ten percent stock dividend in January 1994. See "THE MERGER -- Business
Pending Consummation".
In January 1989, in connection with its conversion to stock form, Home
Federal issued 24,500 shares of Adjustable Rate Cumulative Preferred Stock,
Class A (the "Home Federal Preferred Stock"), to the Federal Savings and Loan
Insurance Corporation (the "FSLIC") in exchange for Net Worth Certificates
previously held by the FSLIC. The Home Federal Preferred Stock called for
dividends to be paid quarterly at a floating rate and to accumulate if not paid.
For the years ended December 31, 1993 and 1992, $205,000 and $45,000,
respectively, of dividends were paid on the Home Federal Preferred Stock. No
dividends were paid in 1991.
In June 1992, Home Federal entered into an agreement with the FDIC as
manager of the FSLIC Resolution Fund (successor in interest to the FSLIC as
owner of the Home Federal Preferred Stock) regarding repurchase of the
outstanding Home Federal Preferred Stock. In June 1992, Home Federal repurchased
$306,000, or 6,125 shares, of the $1.2 million of outstanding Home Federal
Preferred Stock for $220,000, which included accumulated and unpaid dividends on
the amount repurchased. In May and June 1993, Home Federal repurchased the
remaining 18,375 shares of Home Federal Preferred Stock and accumulated and
unpaid dividends thereon, having a stated value of $919,000, for $498,000.
LEGAL PROCEEDINGS
Home Federal is involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by management
of Home Federal to be immaterial to Home Federal's financial condition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
ASSET AND LIABILITY MANAGEMENT
The primary objective of Home Federal's asset and liability management
strategy has been to reduce the risk to net interest income from interest rate
movements. With rapid changes in interest rates substantially impacting net
interest income and operating results, Home Federal has sought to improve the
interest sensitivity of its assets through the origination of
39
<PAGE>
ARMS and the extension of the average maturity of liabilities, particularly
through the solicitation of longer term deposits, that better match the duration
of assets and liabilities.
The emphasis of Home Federal continues to be the origination of ARMS and
other variable-rate assets. This strategy has helped to reduce the ratio of
fixed-rate loans in its portfolio. Home Federal continues to originate
fixed-rate mortgage loans. However, the fixed-rate mortgage loans are sold in
the secondary market, servicing released. At June 30, 1994, Home Federal had
$33.6 million, or 17.2 percent of its loan portfolio in fixed-rate loans,
compared to $97.0 million, or 42.5 percent, at December 31, 1989.
Based on the data furnished by Home Federal on Schedule CMR to the OTS,
Home Federal's total interest-earning assets maturing or repricing within one
year (interest-sensitive assets) have increased from $132.1 million at December
31, 1989, to $142.7 million at December 31, 1993. At the same time, total
interest-bearing liabilities maturing or repricing within one year
(interest-sensitive liabilities) have decreased from $166.1 million at December
31, 1989, to $136.0 million at December 31, 1993. Accordingly, the amount of
Home Federal's repricing assets as a percentage of Home Federal's repricing
liabilities ("gap") for a one-year period as a ratio of total assets has
decreased from a negative 12.8 percent at December 31, 1989, to a positive 2.8
percent at December 31, 1993. A gap is considered positive when the amount of
interest rate sensitive assets exceeds interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to decrease net interest income, while
a positive gap would tend to increase net interest income. During a period of
falling interest rates, a negative gap would tend to increase net interest
income, while a positive gap would tend to decrease net interest income.
This decrease was primarily due to Home Federal's attempts to extend the
average maturity of its liabilities through the solicitation of longer term
deposits and the origination of ARMS. However, Home Federal remains dependent
upon the activity of interest rates in general and a significant increase in
interest rates would have a negative effect upon Home Federal's net interest
income. The following table summarizes the contractual maturities or repricing
characteristics of Home Federal's interest-earning assets and interest-bearing
liabilities. The principal balance of adjustable-rate assets are included in the
period in which they are scheduled to adjust rather than in the period in which
they mature. Estimated maturity/repricing amounts are based on contractual
maturity and amortization. Estimated loan prepayment rates and NOW accounts,
other transaction accounts and deposit erosion rates are provided by the OTS.
<TABLE>
<CAPTION>
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Interest-Sensitive Assets (one year or less):
Loans............................................................... $133,148 134,106 112,480 111,545 119,628
Investments......................................................... 9,551 16,726 12,052 15,882 12,469
Total................................................................. 142,699 150,832 124,532 127,427 132,097
Interest-Sensitive Liabilities (one year or less):
Money Market and Demand Accounts.................................... 43,083 41,957 36,479 30,055 31,897
Deposits............................................................ 72,926 90,083 102,076 137,651 119,940
Borrowings.......................................................... 19,980 9,000 8,720 12,000 14,224
Total................................................................. 135,989 141,040 147,275 179,706 166,061
Excess (Deficiency) of Interest-Sensitive Assets Over
Interest-Sensitive Liabilities (Gap)................................ $ 6,710 9,792 (22,743) (52,279) (33,964)
Interest-Sensitive Assets as a Percent of Interest-Sensitive
Liabilities......................................................... 105% 107 85 71 80
Gap as a Percent of Total Assets...................................... 2.76% 4.35 (9.42) (20.13) (12.78)
</TABLE>
FINANCIAL CONDITION
Home Federal's total assets were $232.3 million at June 30, 1994, which
represents a decrease of $10.6 million, or 4.4 percent, from total assets of
$242.9 million at December 31, 1993. This decrease resulted primarily from a
decrease of $12.9 million, or 92.2 percent, in loans held for sale to $1.1
million at June 30, 1994, from $14.0 million at December 31, 1993. Total
deposits decreased by $3.9 million, or 1.9 percent, to $198.4 million at June
30, 1994, from $202.3 million at December 31, 1993. Also, borrowings from the
FHLB of Atlanta decreased by $5.8 million, or 26.4 percent, to $16.2 million at
June 30, 1994, from $22.0 million at December 31, 1993.
40
<PAGE>
OTS regulations require that a savings institution maintain a minimum of
five percent of its net withdrawable accounts and borrowings payable in one year
or less in cash and short-term United States government and other specified
securities. Home Federal has met this liquidity ratio requirement and at June
30, 1994, Home Federal's liquidity ratio was 8.43 percent.
The primary sources of funds for operations of Home Federal include
principal repayments and sales of loans and mortgage-backed securities, new
savings deposits, borrowings and FHLB of Atlanta advances. Home Federal had
outstanding loan commitments of $1.0 million at June 30, 1994. Home Federal also
had commitments to other lenders to sell $1.2 million of loans as of June 30,
1994. In the opinion of management, Home Federal's liquid assets are adequate to
meet commitments for loan fundings and other obligations and expenditures.
Total nonperforming assets decreased by $559,000, or 11.1 percent, to $4.5
million at June 30, 1994, from $5.0 million at December 31, 1993. Nonperforming
assets consist of delinquent loans on which borrowers have failed to make
required payments, restructured loans and real estate owned, which is real
estate acquired by Home Federal as a result of foreclosure or by deed-in-lieu of
foreclosure.
At June 30, 1994, Home Federal met its tangible, core and risk-based
capital requirements, which were as follows:
<TABLE>
<CAPTION>
ACTUAL CAPITAL REQUIRED CAPITAL EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible............................................................... $12,532 5.4 % $ 3,484 1.5 % $9,048 3.9 %
Core................................................................... 12,532 5.4 9,291 4.0 3,241 1.4
Risk-Based............................................................. $14,159 10.9 % $10,409 8.0 % $3,750 2.9 %
</TABLE>
Although the OTS has not adopted an increased core (leverage) requirement,
an institution with less than four percent is deemed to be "undercapitalized",
and thus may be subject to certain restrictions under the OTS Prompt Corrective
Action Rule. Home Federal is classified as "well capitalized" under such Rule.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND
1993
Home Federal's principal sources of revenues are interest and fees on real
estate mortgage loans and mortgage-backed securities and interest or dividends
on investments. In the six months ended June 30, 1994, Home Federal's revenues
were also positively impacted by gains on sales of loans. Net income is affected
by operating expenses and interest paid on savings deposits and borrowings from
the FHLB of Atlanta.
The following table sets forth for Home Federal on a consolidated basis for
the periods indicated the weighted average yields earned on its loan and
investment portfolios, the weighted average effective interest rates paid on
savings deposits and borrowings, the net interest margin between yields earned
and interest rates paid, and the end-of-period yields and rates for these
categories at June 30, 1994. During-the-period calculations utilize month-end
balances.
<TABLE>
<CAPTION>
SIX
MONTHS ENDED AT
JUNE 30, JUNE 30,
1994 1993 1994
<S> <C> <C> <C>
Weighted Average Yield on Loan Portfolio.......................................................... 7.41% 8.14 7.15
Weighted Average Yield on Mortgage-Backed Securities.............................................. 5.41 5.97 5.77
Weighted Average Yield on Investment Securities................................................... 4.92 6.90 4.86
Weighted Average Yield on Other Interest-Earning Assets........................................... 5.10 5.89 5.57
Total Weighted Average Yield on Interest-Earning Assets........................................... 7.00 7.80 6.89
Weighted Average Effective Rate Paid on Savings Deposits.......................................... 4.22 4.71 4.33
Weighted Average Effective Rate Paid on FHLB Advances............................................. 5.79 8.70 7.19
Weighted Average Effective Rate Paid on Other Borrowings.......................................... 3.78 -- --
Total Weighted Effective Rate Paid on Interest-Bearing Liabilities................................ 4.33 5.02 4.54
Net Interest Margin............................................................................... 2.67% 2.78 2.35
</TABLE>
41
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate), (ii) changes in rates (changes in rates multiplied by
old volume), and (iii) changes in rate-volume (changes in rates multiplied by
the changes in volume).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1994
VERSUS
JUNE 30, 1993
RATE/
VOLUME RATE VOLUME NET
<S> <C> <C> <C> <C>
(IN THOUSANDS)
INTEREST INCOME
Loans Receivable............................................................................ $294 (681) (28) (415)
Mortgage-Backed Securities.................................................................. (90) (57) 8 (139)
Investment Securities....................................................................... 9 (156) (3) (150)
Other Interest-Earning Assets............................................................... 7 (18) (1) (12)
Total Interest-Earning Assets.......................................................... 220 (912) (24) (716)
INTEREST EXPENSE
Savings Deposits............................................................................ 41 (492) (4) (455)
FHLB Advances............................................................................... (67) (240) 22 (285)
Other Borrowings............................................................................ -- -- 3 3
Total Interest-Bearing Liabilities..................................................... (26) (732) 21 (737)
Net Change............................................................................. $246 (180) (45) 21
</TABLE>
NET INCOME. Net income for the six months ended June 30, 1994, totaled
$374,000, a decrease of $1.1 million from $1.4 million for the six months ended
June 30, 1993. This decrease in net income was primarily attributable to the
impact of implementing SFAS No. 109, "Accounting for Income Taxes", and a change
in the method of calculating Home Federal's 1992 bad debt deduction, which
resulted in lower income tax expense during the six months ended June 30, 1993.
In addition, the loan loss provision decreased $936,000 which was offset by an
increase in operating expenses of $808,000. The cumulative effect at January 1,
1993, of the change in accounting for income taxes was an increase of $600,000
in net income. The change in estimate of the 1992 income tax expense reduced
income tax expense for the six months ended June 30, 1993, by $550,000.
For the three months ended June 30, 1994, net income totaled $166,000, a
decrease of $533,000 from $699,000 for the three months ended June 30, 1993.
This decrease was primarily due to the previously mentioned change in estimate
of the 1992 income tax expense during the three months ended June 30, 1993.
INTEREST INCOME. Interest income decreased by $715,000, or 8.2 percent, for
the six months ended June 30, 1994, from $8.7 million for the six months ended
June 30, 1993. This decrease resulted primarily from an 80 basis point decrease
in the weighted average yield on interest-earning assets from 7.80 percent for
the six months ended June 30, 1993, to 7.00 percent for the six months ended
June 30, 1994. The decrease in interest income occurred even though net loans
increased by $11.9 million, or 6.6 percent, to $190.6 million at June 30, 1994,
from $178.8 million at December 31, 1993.
Interest income for the three months ended June 30, 1994, decreased by
$359,000, or 8.3 percent, to $4.0 million from $4.3 million for the three months
ended June 30, 1993. This was primarily due to the previously mentioned decrease
in the weighted average yield on interest-earning assets.
INTEREST EXPENSE. Interest expense decreased by $737,000, or 13.6 percent,
to $4.7 million for the six months ended June 30, 1994, from $5.4 million for
the six months ended June 30, 1993. The decrease resulted primarily from a 69
basis point decrease in the weighted effective rate paid on interest-bearing
liabilities from 5.02 percent for the six months ended June 30, 1993, to 4.33
percent for the six months ended June 30, 1994. Total deposits decreased by $3.9
million, or 1.9 percent, from $202.3 million at December 31, 1993, to $198.4
million at June 30, 1994. Also, FHLB of Atlanta advances decreased by $5.8
million, or 26.4 percent, to $16.2 million at June 30, 1994, from $22.0 million
at December 31, 1993.
Interest expense for the three months ended June 30, 1994, decreased by
$379,000, or 14.0 percent, to $2.3 million from $2.7 million for the three
months ended June 30, 1993. This decrease was primarily due to the previously
mentioned decrease in the weighted effective rate paid on interest-bearing
liabilities.
42
<PAGE>
PROVISION FOR LOAN LOSSES. It is management's policy to establish in its
best judgment adequate allowances for estimated losses on loans. Management has
determined certain levels of general allowances for losses, based upon
historical levels of charge offs, which are maintained by charges to current
earnings. In addition, the loan portfolio is reviewed monthly and estimated
losses on specific loans, if any, are charged to earnings in the current period.
Earnings were charged $180,000 and $1.1 million for the six months ended June
30, 1994 and 1993, respectively, as provisions for possible loan losses. General
valuation allowances as a percent of nonperforming assets increased to 38.1
percent at June 30, 1994, from 33.1 percent at December 31, 1993. The June 30,
1994 level of general valuation allowances reflects management's judgment as a
level appropriate to absorb potential losses in the loan portfolio.
OTHER INCOME. Total other income decreased by $249,000, or 21.9 percent,
from $1.1 million for the six months ended June 30, 1993, to $887,000 for the
six months ended June 30, 1994. This decrease resulted primarily from a decrease
in gain (loss) on sale of investments and mortgage-backed securities from a gain
of $251,000 for the six months ended June 30, 1993, to a loss of $1,000 for the
six months ended June 30, 1994. This decrease in gain (loss) on sale of
investments and mortgage-backed securities was a result of the decrease in
proceeds from sales of mortgage-backed securities from $4.3 million for the six
months ended June 30, 1993, to $1.0 million for the six months ended June 30,
1994, and market conditions. Gain on sale of loans also decreased from $581,000
for the six months ended June 30, 1993, to $495,000 for the six months ended
June 30, 1994. This decrease occurred even though mortgage banking activity, as
indicated by the increase in proceeds from sales of loans held for sale to $38.7
million for the six months ended June 30, 1994, increased from $32.9 million for
the six months ended June 30, 1993. However, other income increased by $166,000
to $279,000 for the six months ended June 30, 1994, from $113,000 for the six
months ended June 30, 1993. This increase was due to a gain of $143,000 on the
sale of one single family lot from real estate acquired in settlement of loans
during the six months ended June 30, 1994.
OPERATING EXPENSES. For the six months ended June 30, 1994, operating
expenses increased by $808,000, or 30.2 percent, compared to the six months
ended June 30, 1993. This increase was partly due to an increase of $285,000 in
compensation and employee related expenses to $1.9 million for the six months
ended June 30, 1994, from $1.6 million for the six months ended June 30, 1993,
primarily as a result of increased levels of mortgage banking activity
experienced during the six months ended June 30, 1994, compared to the same
period in 1993. Also, FDIC insurance premiums increased to $263,000 for the six
months ended June 30, 1994, from $24,000 for the six months ended June 30, 1993.
The amount of FDIC insurance premiums in the 1993 period reflected the
application by the FDIC of the balance of the secondary reserve credit against
the insurance premium for that period. Further, other expenses increased to $1.0
million for the six months ended June 30, 1994, from $739,000 for the six months
ended June 30, 1993. This increase was primarily due to expenses of $177,000 for
the six months ended June 30, 1994, related to the Merger.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992
AND 1991
Home Federal's operating results depend primarily on its net interest
income. Net interest income is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The interest rate
spread is affected by economic and market conditions, loan demand and deposit
flows. Operating results also are affected by the level of noninterest revenue,
including loan origination and other fees, as well as income or loss from the
sale of loans and mortgage-backed securities, and operating expenses.
43
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents information regarding
changes in interest income and interest expense for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate), (ii) changes in rates (changes in
rates multiplied by old volume), and (iii) changes in rate-volume (changes in
rates multiplied by the change in volume).
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
VERSUS VERSUS VERSUS
DECEMBER 31, 1992 DECEMBER 31, 1991 DECEMBER 31, 1990
VOLUME/ VOLUME/ VOLUME/
(IN THOUSANDS) VOLUME RATE RATE NET VOLUME RATE RATE NET VOLUME RATE RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans Receivable.......... $(2,066) (1,538) 173 (3,431) (363 ) (2,574) 45 (2,892) (954 ) (729) 30
Mortgage-Backed
Securities.............. 553 (85) (63) 405 (370 ) (381) 101 (650) (274 ) 48 (8)
Investment Securities..... 462 (180) (90) 192 (37 ) (146) 5 (178) 221 (158) (33)
Other Interest-Earning
Assets.................. 74 (23) (8) 43 (1 ) (35) -- (36) -- (43) --
(977) (1,826) 12 (2,791) (771 ) (3,136) 151 (3,756) (1,007) (882) (11)
Interest Expense:
Deposits.................. 31 (1,760) (5) (1,734) (261 ) (3,389) 61 (3,589) -- (1,720) --
Advances.................. (368) (351) 81 (638) (840 ) 30 (9) (819) (926 ) (26) 6
Borrowings................ -- -- 15 15 (14 ) (14) 14 (14) (63 ) (78) 44
(337) (2,111) 91 (2,357) (1,115) (3,373) 66 (4,422) (989 ) (1,824) 50
Net Change................ $ (640) 285 (79) (434) 344 237 85 666 (18 ) 942 (61)
<CAPTION>
(IN THOUSANDS) NET
<S> <C>
Interest Income:
Loans Receivable.......... (1,653)
Mortgage-Backed
Securities.............. (234)
Investment Securities..... 30
Other Interest-Earning
Assets.................. (43)
(1,900)
Interest Expense:
Deposits.................. (1,720)
Advances.................. (946)
Borrowings................ (97)
(2,763)
Net Change................ 863
</TABLE>
RATE SENSITIVITY ANALYSIS. The following table presents average monthly
balances of interest-earning assets, interest-bearing liabilities, interest
earned and paid and average rates at the dates and for the periods indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER YEARS ENDED DECEMBER 31,
31, 1993 1993 1992 1991
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
(DOLLARS IN THOUSANDS) BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans Receivable.............. $192,771 7.28% $184,026 14,510 7.92% $207,658 17,941 8.65% $211,344
Mortgage-Backed
Securities.................. 21,291 5.63 19,993 1,150 5.75 11,481 745 6.49 15,621
Investment Securities......... 19,001 4.75 21,465 1,114 5.19 14,296 922 6.45 14,797
Other Interest-Earning
Assets...................... 3,106 4.65 4,536 236 5.38 3,191 193 6.10 3,202
Total......................... 236,169 6.92 $230,020 17,010 7.40 $236,626 19,801 8.37 244,964
Interest-Bearing Liabilities:
Deposits...................... 202,270 4.43 199,987 9,214 4.61 199,419 10,948 5.49 203,071
Advances...................... 22,000 5.39 18,477 1,400 7.06 23,210 2,038 8.78 32,883
Borrowings.................... 980 3.35 309 16 3.30 -- -- -- 528
Total......................... 225,250 4.51 218,773 10,630 4.86 222,629 12,986 5.83 236,482
Excess of Interest-Earning
Assets Over Interest-Bearing
Liabilities................. $ 10,919 $ 11,247 $ 13,997 $ 8,482
Net Interest and Dividend
Income...................... $ 6,380 $ 6,815
Interest Rate Spread.......... 2.41% 2.54% 2.54%
Interest Margin............... 2.77% 2.88%
<CAPTION>
YIELD/
(DOLLARS IN THOUSANDS) INTEREST RATE
<S> <<C> <C>
Interest-Earning Assets:
Loans Receivable.............. 20,832 9.86%
Mortgage-Backed
Securities.................. 1,395 8.93
Investment Securities......... 1,100 7.44
Other Interest-Earning
Assets...................... 230 7.45
Total......................... 23,557 9.63
Interest-Bearing Liabilities:
Deposits...................... 14,537 7.16
Advances...................... 2,857 8.69
Borrowings.................... 14 2.66
Total......................... 17,408 7.36
Excess of Interest-Earning
Assets Over Interest-Bearing
Liabilities.................
Net Interest and Dividend
Income...................... $ 6,149
Interest Rate Spread.......... 2.27%
Interest Margin............... 2.52%
</TABLE>
44
<PAGE>
NET INCOME (LOSS). Home Federal's net income for the year ended December
31, 1993, totaled $2.1 million, an increase of $2.2 million from a net loss of
$101,000 for the year ended December 31, 1992. Net income before taxes and
cumulative effect of accounting change for the year ended December 31, 1993,
totaled $1.5 million, an increase of $197,000 from $1.3 million for the year
ended December 31, 1992. The increase in net income before taxes and cumulative
effect of accounting change was primarily due to the decrease in the provision
for loan losses to $1.4 million for the year ended December 31, 1993 from $2.8
million for the year ended December 31, 1992. The increase in net income was
also affected by the result of implementing SFAS No. 109, and a change in the
method of calculating Home Federal's 1992 bad debt deduction, which resulted in
lower income tax expense. The cumulative effect at January 1, 1993, of the
change in accounting for income taxes was an increase of $600,000 in net income.
The change in the estimate of the 1992 income tax expense reduced income tax
expense for the year ended December 31, 1993, by $533,000.
Home Federal reported a net loss of $101,000, or $.19 per common share, for
the year ended December 31, 1992. This compared to net earnings of $407,000, or
$.30 per common share, reported for the year ended December 31, 1991. This
decrease in earnings was primarily attributable to an increase in the provision
for loan losses.
Home Federal's consolidated assets increased 8.0 percent to $242.9 million
at December 31, 1993, from $224.9 million at December 31, 1992. This increase
was primarily due to an increase in mortgage banking activity and loan growth,
as indicated by the increase in loans held for sale to $14.0 million at December
31, 1993, from $3.0 million at December 31, 1992.
For the year ended December 31, 1993, total interest income decreased to
$17.0 million from $19.8 million for the year ended December 31, 1992. This
represented a decrease of $2.8 million, or 14.1 percent, which resulted
primarily from a 97 basis point decrease in the weighted average yield on
interest-earning assets from 8.4 percent for the year ended December 31, 1992,
to 7.4 percent for the year ended December 31, 1993. The decrease in total
interest income occurred even though net loans receivable increased by $8.7
million, or 5.0 percent, to $183.4 million at December 31, 1993, from $174.7
million at December 31, 1992.
Total interest expense decreased by $2.4 million, or 18.1 percent, to $10.6
million for the year ended December 31, 1993, from $13.0 million for the year
ended December 31, 1992. The decrease resulted primarily from a 97 basis point
decrease in the weighted effective rate paid on interest-bearing liabilities
from 5.83 percent for the year ended December 31, 1992, to 4.86 percent for the
year ended December 31, 1993. The decrease in interest expense occurred even
though savings deposits increased by $7.1 million, or 3.6 percent, from $195.2
million at December 31, 1992, to $202.3 at December 31, 1993, and FHLB advances
increased by $5.5 million, or 33.3 percent, from $16.5 million at December 31,
1992, to $22.0 million at December 31, 1993. As a result, net interest income
decreased by $434,000, or 6.4 percent, to $6.4 million for the year ended
December 31, 1993, from $6.8 million for the year ended December 31, 1992.
Total interest income decreased by $3.8 million, or 15.9 percent, for the
year ended December 31, 1992, from $23.6 million for the year ended December 31,
1991. Loans receivable decreased by $31.1 million, or 15.5 percent, from $201.2
million at December 31, 1991, to $170.1 million at December 31, 1992. Total
mortgage-backed securities increased by $12.0 million from $9.4 million at
December 31, 1991, to $21.4 million at December 31, 1992. This was primarily the
result of the sale to FHLMC of $17.4 million in fixed-rate mortgage loans and
$14.9 million in ARMs and the purchase from the FHLMC of $32.3 million in FHLMC
mortgage-backed securities. It is the intent of the Home Federal to sell
mortgage-backed securities received in exchange for fixed-rate mortgage loans to
fund current mortgage loan originations. In addition, the decrease in interest
income resulted from a 125 basis point decrease in the weighted average yield on
interest-earning assets from 9.62 percent for the year ended December 31, 1991,
to 8.4 percent for the year ended December 31, 1992.
Total interest expense decreased by $4.4 million, or 25.4 percent, to $
13.0 million for the year ended December 31, 1992, compared to $17.4 million for
the year ended December 31, 1991. This decrease in total interest expense
resulted primarily from a decrease of $5.2 million, or 2.6 percent, in deposits
to $195.2 million at December 31, 1992, from $200.4 million at December 31,
1991, and a decrease of $8.7 million, or 34.6 percent, in borrowings from the
FHLB of Atlanta to $16.5 million at December 31, 1992, from $25.2 million at
December 31, 1991. Also, the weighted effective rate paid on interest-bearing
liabilities decreased by 153 basis points from 7.4 percent for the year ended
December 31, 1991, to 5.8 percent for the year ended December 31, 1992.
Therefore, net interest income increased by $665,000, or 10.8 percent, to $6.8
million for the year ended December 31, 1992, from $6.2 million for the year
ended December 31, 1991.
OTHER INCOME. Total other income decreased by $299,000, or 11.2 percent,
from $2.7 million for the year ended December 31, 1992, to $2.4 million for the
year ended December 31, 1993. This decrease resulted primarily from recoveries
written off in previous years, decreasing from $317,000 for the year ended
December 31, 1992, to $13,000 for the year ended
45
<PAGE>
December 31, 1993. These recoveries resulted from the sale of real estate
acquired in settlement of loans for amounts in excess of the fair value to which
such properties had been written down in 1988. However, gain on sale of loans
increased by $293,000 to $1.5 million for the year ended December 31, 1993, from
$1.2 million for the year ended December 31, 1992. This increase in gain on sale
of loans was primarily a result of increased mortgage banking activity as
indicated by the increase in proceeds from sales of loans held for sale to $93.8
million for the year ended December 31, 1993, from $65.4 million for the year
ended December 31, 1992.
Total other income increased by $1.3 million, or 89.0 percent, to $2.7
million for the year ended December 31, 1992, from $1.4 million for the year
ended December 31, 1991. This was primarily due to an increase in gain on sale
of loans and investments to $1.2 million for the year ended December 31, 1992,
from $534,000 for the year ended December 31, 1991, and as a result of increased
mortgage banking activity. The increase in mortgage banking activity is
reflected in the increase in proceeds from sales of loans held for sale to $65.4
million for the year ended December 31, 1992, compared to $32.0 million for the
year ended December 31, 1991. Included in gain on sale of investments and
mortgage-backed securities for the year ended December 31, 1992, is $287,000 of
realized gain on the sale of $21.1 million of mortgage-backed securities, which
had been intended to be held for investment. The sales of mortgage-backed
securities occurred to ensure compliance with regulatory capital requirements.
Other income increased to $876,000 for the year ended December 31, 1992, from
$383,000 for the year ended December 31, 1991. This primarily resulted from
$317,000 in recoveries of loan losses written off in previous years.
OPERATING EXPENSES. For the year ended December 31, 1993, operating
expenses increased by $543,000, or 10.1 percent, compared to the year ended
December 31, 1992. This increase was primarily due to the increase in
compensation and employee-related expenses to $3.4 million for the year ended
December 31, 1993, from $2.8 million for the year ended December 31, 1992. This
increase was primarily attributed to the implementation of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions",
effective January 1, 1993, and increased levels of mortgage banking activity
experienced during the year ended December 31, 1993, compared to the year ended
December 31, 1992. However, FDIC insurance premiums decreased to $317,000 for
the year ended December 31, 1993, from $393,000 for the year ended December 31,
1992. This decrease was primarily due to the application by the FDIC of the
balance of the secondary reserve credit against the insurance premium for the
first six months of the year ended December 31, 1993.
For the year ended December 31, 1992, operating expenses increased by
$369,000, or 7.3 percent, to $5.4 million, compared to $5.0 million for the year
ended December 31, 1991. This was primarily due to an increase in other
operating expenses to $1.5 million for the year ended December 31, 1992, from
$1.3 million for the year ended December 31, 1991, and an increase in
compensation and employee related expenses to $2.8 million for the year ended
December 31, 1992, from $2.7 million for the year ended December 31, 1991. These
increases were primarily due to a higher level of mortgage banking activity
experienced during the year ended December 31, 1992, compared to the same period
in 1991. Also, office occupancy expense increased to $658,000 for the year ended
December 31, 1992, from $601,000 for the year ended December 31, 1991. This was
a result of escalatory clauses in leases renewed during 1991.
INCOME TAXES. For the year ended December 31, 1993, Home Federal recognized
an income tax benefit of $7,000, compared to income tax expense of $1.4 million
for the year ended December 31, 1992. This was primarily due to a change in the
method of calculating Home Federal's 1992 bad debt deduction. This change in
estimate of the 1992 income tax expense reduced income tax expense for the year
ended December 31, 1993, by $533,000.
Income tax expense for the year ended December 31, 1992, increased to $1.4
million from $522,000 for the year ended December 31, 1991. This was primarily
due to the increase in income before income taxes to $1.3 million for the year
ended December 31, 1992, from $928,000 for the year ended December 31, 1991.
PROVISION FOR POSSIBLE LOAN LOSSES. During the year ended December 31,
1990, certain concessions were granted in extending a loan of $5.1 million.
These concessions would not have been considered by Home Federal in the making
of a new loan, but were agreed to because the loan was already outstanding and
in light of the borrower's financial difficulties and declining real estate
market activity. At the time of modification, anticipated future cash receipts
on this loan, which was accounted for as a troubled debt restructuring, exceeded
the recorded investment in the loan. Therefore, no loss was required to be
recognized. On March 1, 1992, this loan became 90 days delinquent and all
interest accrued was fully reserved. Foreclosure proceedings were initiated. On
April 2, 1992, the foreclosure sale occurred and Home Federal was the successful
bidder. Home Federal ordered a new appraisal of the property. In August 1992,
the new appraisal of the property was received, and it indicated an appraisal
value substantially below the book value of the property. Therefore, Home
Federal recognized a charge of $1.6 million against the allowance for loan
losses during the year ended December 31, 1992. Also, during the year ended
December 31, 1992, certain concessions were granted in extending a loan
receivable of $3.6 million.
46
<PAGE>
These concessions were necessitated by the borrower's financial difficulties and
declining real estate market activity. A new appraisal was obtained which
indicated a fair value of $600,000 less than the book value of the loan. The
1992 provision for loan losses increased to $2.8 million, primarily as a result
of the $1.6 million charge off and to provide for the $600,000 indicated loss in
the allowance for loan losses.
The $1.6 million provision for loan losses in 1991 was attributable
primarily to the $1.1 million of charge offs to the commercial loan portfolio as
a result of the inability of the borrowers to pay off or make monthly payments
on lines of credit maturing during the year.
Earnings were charged $1.4 million, $2.8 million and $1.6 million for the
years ended December 31, 1993, 1992 and 1991, respectively, as provisions for
possible loan losses. General valuation allowances as a percent of nonperforming
assets increased to 28.7 percent at December 31, 1993, from 9.7 percent at
December 31, 1992.
Real estate acquired in settlement of loans and held for sale is recorded
at the lower of cost or fair value when acquired. Estimated losses are provided
by charges to current earnings in the event that cost exceeds fair value.
LIQUIDITY AND CAPITAL RESOURCES. Liquidity consists of cash and amounts due
from depository institutions, interest-bearing deposits in other banks, federal
funds sold and certain investment securities. OTS regulations require that a
savings institution maintain a minimum of five percent of its net withdrawable
accounts and borrowings payable in one year or less in cash and short-term
United States government and other specified securities. Home Federal met such
requirement at March 31, 1994, with a liquidity ratio of 8.2 percent.
Home Federal's primary sources of funds for operations include principal
repayments, sales of loans and mortgage-backed securities, new savings deposits,
borrowings and FHLB of Atlanta advances. Home Federal had outstanding loan
commitments of $3.4 million at March 31, 1994. Home Federal also had commitments
to other lenders to sell $6.2 million of loans as of March 31, 1994. In the
opinion of management, Home Federal's liquid assets were adequate to meet
commitments for loan fundings and other obligations and expenditures.
Outstanding loan commitments, exclusive of the undisbursed portion of loans
receivable, amounted to $3.3 million as of December 31, 1993, compared to $2.0
million as of December 31, 1992. At December 31, 1993, s cheduled repayments of
FHLB advances and securities sold under agreements to repurchase for the period
ending December 31, 1994, were $20.0 million, and the amount of certificates of
deposits maturing in 1994 was $66.2 million, of which a substantial portion is
expected to remain with Home Federal.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles. These require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services. In the current interest rate environment, liquidity and
the maturity structure of Home Federal's assets and liabilities are critical to
the maintenance of acceptable performance levels.
47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table presents the information indicated as of the Record
Date, with respect to any person who is known to Home Federal to be the
beneficial owner of more than five percent of Home Federal Common Stock. Other
than the persons listed below, management is not aware of any person or group
that beneficially owns more than five percent of Home Federal Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT
<S> <C> <C>
Robert H. Digges
1700 N. Albermarle St.
McLean, VA 22101............................................................................... 100,540 9.83%
Thaddeus A. Lindner
5225 Wisconsin Avenue, NW
Washington, DC 20015........................................................................... 53,458 5.23
Leland H. Phillips
5225 Wisconsin Avenue, NW
Washington, DC 20015........................................................................... 53,458(1) 5.21
Burton J. Reiner
5225 Wisconsin Avenue, NW
Washington, DC 20015........................................................................... 53,460 5.23%
</TABLE>
(1) Includes 3,960 shares which may be acquired upon exercise of options granted
under the Outside Directors' Plan.
48
<PAGE>
BACKGROUND AND SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of the Record Date, the names of the
directors of Home Federal, their ages, a brief description of their recent
business experience, including present occupations and employment, certain
directorships held by each, the year in which each first became a director of
Home Federal, the year in which their term as directors of Home Federal expire
and the amount of Home Federal Common Stock and the percent thereof beneficially
owned by each and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF
NAME, AGE, PRINCIPAL OCCUPATION DIRECTOR OF CURRENT SHARES BENEFICIALLY
BUSINESS EXPERIENCE FOR FIVE YEARS SINCE TERM OWNED (1)
<S> <C> <C> <C>
Directors:
Maurice J. Flynn, Age 74
Mr. Flynn is President of Butler Flynn Paint Company, Bethesda, MD, a
wholesale and retail painting supply business............................ 1963 1997 13,857
Leland H. Phillips, Age 56
Mr. Phillips is Chairman of the Board of Frank S. Phillips, Inc.,
Bethesda, MD, a mortgage banking and real estate company................. 1966 1997 53,458(2)
Ralph S. Childs, Jr., Age 66
Mr. Childs has been Chairman of the Board of Home Federal since 1985. He
retired as Chief Executive Officer of Home Federal on December 31, 1988,
after being employed since 1952. He is a member of the board of the FHLB
of Atlanta............................................................... 1966 1997 41,702(3)
Burton J. Reiner, Age 65
Mr. Reiner is President of Bresler and Reiner, Inc., Washington, DC, a
real estate development and sales company................................ 1963 1996 53,460
A. J. Somerville, Jr., Age 64
Mr. Somerville is President of Somerville Associates, Bethesda, MD, a
land acquisition and property management business. He was formerly
President of Thos. Somerville Co......................................... 1964 1996 12,052
Thaddeus A. Lindner, Age 67
Mr. Lindner is Founding Director of Colonial Parking, Inc., Washington,
DC, which is engaged in commercial parking............................... 1967 1995 53,458
Elwyn G. Raiden, Jr., Age 51
Mr. Raiden is President and Chief Executive Officer of Home Federal. He
has served in various capacities since joining Home Federal in 1962. He
was elected President and Chief Operations Officer in 1985 and Chief
Executive Officer in January 1989. He also serves on the Advisory
Committee of the Fifth District -- Federal Reserve Bank of Richmond...... 1985 1995 42,935(4)
Named Executive Officer (Who is not a Director):
Grant F. Boss
President of Home Mortgage since July 1, 1993............................ -- -- --
All directors and executive officers as a group (11 persons)............... -- -- 318,736(5)
<CAPTION>
NAME, AGE, PRINCIPAL OCCUPATION
BUSINESS EXPERIENCE FOR FIVE YEARS PERCENT
<S> <C>
Directors:
Maurice J. Flynn, Age 74
Mr. Flynn is President of Butler Flynn Paint Company, Bethesda, MD, a
wholesale and retail painting supply business............................ 1.36%
Leland H. Phillips, Age 56
Mr. Phillips is Chairman of the Board of Frank S. Phillips, Inc.,
Bethesda, MD, a mortgage banking and real estate company................. 5.21
Ralph S. Childs, Jr., Age 66
Mr. Childs has been Chairman of the Board of Home Federal since 1985. He
retired as Chief Executive Officer of Home Federal on December 31, 1988,
after being employed since 1952. He is a member of the board of the FHLB
of Atlanta............................................................... 3.98
Burton J. Reiner, Age 65
Mr. Reiner is President of Bresler and Reiner, Inc., Washington, DC, a
real estate development and sales company................................ 5.23
A. J. Somerville, Jr., Age 64
Mr. Somerville is President of Somerville Associates, Bethesda, MD, a
land acquisition and property management business. He was formerly
President of Thos. Somerville Co......................................... 1.18
Thaddeus A. Lindner, Age 67
Mr. Lindner is Founding Director of Colonial Parking, Inc., Washington,
DC, which is engaged in commercial parking............................... 5.23
Elwyn G. Raiden, Jr., Age 51
Mr. Raiden is President and Chief Executive Officer of Home Federal. He
has served in various capacities since joining Home Federal in 1962. He
was elected President and Chief Operations Officer in 1985 and Chief
Executive Officer in January 1989. He also serves on the Advisory
Committee of the Fifth District -- Federal Reserve Bank of Richmond...... 4.11
Named Executive Officer (Who is not a Director):
Grant F. Boss
President of Home Mortgage since July 1, 1993............................ --
All directors and executive officers as a group (11 persons)............... 29.00%
</TABLE>
(1) Unless otherwise noted, all shares are owned directly by the named
individuals or by their spouses and minor children, and the named individual
exercises sole or shared voting and investment power.
(2) Includes 3,960 shares which may be acquired upon exercise of options granted
under the Outside Directors' Plan.
(3) Includes 26,400 shares which Mr. Childs has the right to acquire upon
exercise of options granted under the Incentive Option Plan.
(4) Includes 20,900 shares which Mr. Raiden has the right to acquire upon
exercise of options granted under the Incentive Option Plan.
(5) Includes an aggregate of 76,560 shares subject to options granted under the
Incentive Option Plan and the Outside Directors' Plan.
49
<PAGE>
REGULATION AND SUPERVISION
GENERAL
Home Federal is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency and primary federal regulator,
and by the FDIC, as the deposit insurer. Home Federal is a member of the FHLB
System and its deposits are insured up to applicable limits by the SAIF. Home
Federal files reports with the OTS and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other savings institutions. There are periodic examinations by the OTS and the
FDIC to test Home Federal's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework governing
the activities in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss allowances for regulatory purposes. Any change in such
regulation, whether by the OTS, the FDIC or the United States Congress could
have a material adverse impact on Home Federal and its operations.
BUSINESS ACTIVITIES
The activities of savings institutions are governed by the HOLA, and, in
certain respects, the FDI Act. The HOLA and the FDI Act were amended by the
FIRREA and the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "FDICIA"). The FIRREA and the FDICIA both contain provisions affecting
numerous aspects of the operations and regulations of federally insured savings
institutions and empower the OTS and the FDIC, among other agencies, to
promulgate regulations implementing their provisions. The description of
statutory provisions and regulations applicable to savings banks set forth in
this Prospectus/Proxy Statement does not purport to be a complete description of
such statutes and regulations and their effects on Home Federal. Moreover,
because some of the provisions of the FDICIA are still in the process of being
implemented through the adoption of regulations by the various federal banking
agencies, Home Federal cannot yet fully assess the impact of these provisions on
its operations.
The federal banking statutes, as amended by the FIRREA and the FDICIA: (i)
restrict the solicitation of brokered deposits by savings institutions that are
"troubled" or not "well capitalized"; (ii) prohibit the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories; (iii) restrict the aggregate amount of loans secured by
non-residential real estate property to 400 percent of capital; (iv) permit
savings and loan holding companies to acquire up to five percent of the voting
shares of non-subsidiary savings institutions or savings and loan holding
companies without prior approval; (v) permit bank holding companies to acquire
healthy savings institutions; and (vi) require the federal banking agencies to
establish, by regulation, standards for extensions of credit secured by real
estate lending. Under the HOLA, a savings bank has the authority to make certain
loans or investments, not exceeding five percent of its total assets, on each of
(a) non-conforming loans (loans in excess of the specific limitations of the
HOLA), and (b) construction loans without security, for the purpose of financing
what is or is expected to be residential property. To assure repayment of such
loans, a savings bank would have to rely substantially on the borrower's general
credit standing, personal guarantees and projected future income on the
properties.
CAPITAL REQUIREMENTS
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5 percent tangible capital standard; as a practical
matter, a four percent leverage (core capital) ratio; and an eight percent
risk-based capital standard. Core capital is defined as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, and minority interests in equity accounts of consolidated
subsidiaries, less intangibles other than certain qualifying supervisory
goodwill and certain purchased mortgage servicing rights ("PMSRs").
The OTS regulations require that in meeting the leverage ratio and tangible
and risk-based capital standards institutions must deduct investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
The OTS recently amended its capital regulations to make its capital treatment
of intangible assets consistent with the rules previously adopted by the other
federal banking agencies. As amended, the regulation permits both PMSRs and
purchased credit card relationships ("PCCRs") to be included in a savings
institution's capital, provided the aggregate amount of such intangibles, when
added together, do not exceed 50 percent of core capital. In addition, the
regulation provides that a savings institution may include the same dollar
amount of PMSRs in tangible capital that it includes in core capital. These two
types of intangible assets must be valued at the lower of 90 percent of fair
market or 100 percent of remaining unamortized book value.
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<PAGE>
PMRSs and PCCRs in excess of applicable limits, as well as core deposit
intangibles, must be deducted from both assets and capital in calculating core
and tangible capital.
In April 1991, the OTS issued a proposal to amend the regulatory capital
regulations to establish a three percent leverage ratio (defined as the ratio of
core capital to adjusted total assets) for institutions in the strongest
financial and managerial condition, with the highest rating on the MACRO
financial institutions rating system. For all other institutions, the minimum
core capital leverage ratio would be three percent plus at least an additional
100 to 200 basis points. In determining the amount of additional capital under
the proposal, the OTS would assess both the quality of risk management systems
and the level of overall risk in each individual institution through the
supervisory process on a case-by-case basis. If the leverage capital rule is
enacted in final form as proposed, management does not believe that the proposed
regulations will have a material impact on Home Federal since it presently
exceeds the proposed OTS capital requirements. Although the OTS has not adopted
this regulation in final form, the prompt corrective action regulations adopted
by the OTS provides that a savings institution that has a leverage capital ratio
of less than four percent will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See " -- ; PROMPT CORRECTIVE REGULATORY
ACTION". As discussed below, the OTS intends to issue a proposal to reduce the
leverage ratio requirement to three percent.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of eight percent. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of zero percent to 100 percent, as assigned by
the OTS capital regulation, based on the risks the OTS believes are inherent in
the type of asset. The components of core capital are equivalent to those
discussed above under the leverage standard. The components of supplementary
capital currently include cumulative perpetual preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and allowances for loan and lease losses.
Allowances for loan and lease losses includable in supplementary capital are
limited to a maximum of 1.25 percent. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100 percent of core
capital.
Pursuant to the FDICIA, the OTS (and other federal banking agencies)
revised, in 1993, the risk-based capital standards with appropriate transition
rules to ensure that capital ratios include factors related to interest rate
risk, concentration of risk and the risks of nontraditional activities. On
August 23, 1993, the OTS issued a final rule which sets forth the methodology
for calculating an interest rate risk component that would be incorporated in
the OTS regulatory capital rule. The final interest rate risk rule also adjusts
the risk-weighing for certain mortgage derivative securities. Under the final
rule, savings institutions with "above normal" interest rate risk exposure would
be subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (I.E., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
(except when the three-month Treasury bond equivalent yield falls below four
percent, then the decrease will be equal to one-half of that Treasury rate)
divided by the estimated economic value of the institution's assets, as
calculated in accordance with guidelines issued by the OTS. A savings
institution whose measured interest rate risk exposure exceeds two percent must
deduct an interest rate component in calculating its total capital under the
risk-based capital rule. The interest rate risk component is an amount equal to
one-half of the difference between the institution's measured interest rate risk
and two percent, multiplied by the estimated economic value of the institution's
assets. That dollar amount is deducted from an institution's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two-quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. Pursuant to recent amendments, the interest rate risk component of
capital becomes effective as of September 30, 1994. In the preamble to the final
rule, the OTS also noted its intent to issue a proposal to lower the leverage
ratio requirement applicable to savings banks from four percent to three
percent, the date on which the interest rate risk component will be fully
incorporated into the risk-based capital rule. The rule also provides that the
Director of the OTS may waive or defer an institution's interest rate risk
component on a case-by-case basis.
The OTS recently proposed to amend its minimum regulatory capital
regulations by revising the definition of the term "stockholders' equity" to
incorporate a change in generally accepted accounting principles required by the
Financial Accounting Standards Board (the "FASB"). SFAS No. 115, "Accounting for
Certain Debt and Equity Securities", which is effective for fiscal years
beginning after December 15, 1993, and requires that most debt and equity
securities be reported at fair value, rather than at amortized cost. With the
implementation of SFAS No. 115, unrealized gains and losses on available-
for-sale securities will be included in stockholders' equity under generally
accepted accounting principles and therefore the value of stockholders' equity
will fluctuate. Under the proposed rule, these unrealized gains and losses would
be included in core capital for purposes of calculating a savings institution's
leverage capital requirement and the OTS measures for prompt
51
<PAGE>
corrective action and could cause an intitution's capital ratios to fluctuate
based on changes in the value of the institution's debt and equity securities
which are held for sale.
At June 30, 1994, Home Federal met each of its capital requirements, in
each case on a fully phased-in basis and was "well capitalized" for purposes of
the standards under the OTS prompt corrective action regulations. See
" -- Management's Discussion and Analysis of Financial Condition; FINANCIAL
CONDITION".
PROMPT CORRECTIVE REGULATORY ACTION
The FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective December 19, 1992, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, subject
to a narrow exception, the FDICIA requires the banking regulator to appoint a
receiver or conservator for an institution that is "critically
undercapitalized". The FDICIA authorizes the banking regulators to specify the
ratio of tangible capital to assets at which an institution becomes "critically
undercapitalized" and requires that such ratio be no less than two percent of
assets.
Under the OTS final rule implementing the FDICIA standard, generally a
savings institution is treated as "well capitalized" if its ratio of risk-based
capital to risk-weighted assets is at least ten percent, its ratio of core
capital to adjusted tangible assets is at least six percent, its ratio of
tangible capital to tangible assets is at least five percent, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings institution will be considered "adequately capitalized" if its ratio of
risk-based capital to risk-weighted assets is at least eight percent, its ratio
of core capital to adjusted tangible assets is at least four percent, and its
ratio of tangible capital to adjusted tangible assets is at least four percent
(three percent if the institution receives the highest rating on the MACRO
financial institutions rating system). A savings institution that has a total
risk-based capital of less than eight percent or a leverage ratio or a Tier 1
capital ratio that is less than four percent is considered to be
"undercapitalized". A savings institution that has total risk-based capital of
less than six percent, or a leverage ratio or a Tier 1 risk based capital ratio
of less than three percent is considered to be "significantly undercapitalized",
and a savings institution that has a tangible capital to assets ratio equal to
or less than two percent is deemed to be "critically undercapitalized".
Generally, a capital restoration plan must be filed with the OTS within 45 days
of the date an institution receives notice that it is "undercapitalized",
"significantly undercapitalized" or "critically undercapitalized". In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDICIA required the FDIC to establish, beginning January 1, 1994, a
risk-based assessment system for insured depository institutions that includes
factors related to the risks attributable to different categories and
concentrations of assets and liabilities. For the semi-annual assessment period
beginning January 1, 1993, a transitional risk-based insurance system was
implemented by regulation by the FDIC pursuant to the FDICIA, and the average
assessment rate paid by SAIF and the Bank Insurance Fund (the "BIF") for insured
institutions was increased. Under the rule implementing the transitional system,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period consisting of (i) "well capitalized", (ii)
"adequately capitalized", or (iii) "undercapitalized", and one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Under the transitional system, there are nine assessment
risk classifications (I.E., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates
range from 23 basis points for an institution in the highest category (I.E.,
"well capitalized" and "healthy") to 31 basis points for an institution in the
lowest category (I.E., "undercapitalized" and "substantial supervisory
concern"). For 1993, the deposit insurance premiums were assessed at the rate of
.23 percent of deposits for all institutions insured by the SAIF. Home Federal
had a $316,600 expense for federal deposit insurance premiums to the SAIF for
the year ended December 31, 1993.
On June 17, 1993, the FDIC adopted a final rule establishing a new
risk-based system that will be implemented beginning with the semi-annual
assessment period commencing on January 1, 1994, as required under the FDICIA.
Except for
52
<PAGE>
limited changes, the structure of the new risk-based system is substantially the
same as the structure of the transitional system it will replace. Thus, under
the FDIC rule implementing the new risk-based system, an institution's deposit
insurance assessment rate will be determined by assigning the institution to a
capital category and a supervisory subgroup to determine which one of the nine
risk classification categories is applicable, in substantially the same manner
as the transitional system discussed above. The FDIC is authorized to raise the
assessment rates in certain circumstances. If the FDIC determined to increase
the assessment rates for all institutions, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and may raise insurance premiums again in the future. If such action is
taken by the FDIC, it could have an adverse effect on the earnings of Home
Federal.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices; is
in an unsafe or unsound condition to continue operations; or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of Home Federal does not know of any practice, condition or
violation that might lead to termination of deposit insurance. At December 31,
1993, Home Federal's regulatory capital exceeded all of the fully phased-in
capital requirements.
LOANS TO ONE BORROWER
Under the HOLA, savings institutions are generally subject to the national
bank limits on loans to one borrower. Generally, savings institutions may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15 percent of the institution's unimpaired capital and surplus. An additional
amount may be lent, equal to ten percent of unimpaired capital and surplus, if
such loan is secured by readily-marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate. At December 31, 1993, Home Federal's largest aggregate amount of loans
to one borrower consisted of three loans totaling $4.3 million, which exceeded
Home Federal's loan to one borrower limit at that date.
QTL TEST
The HOLA requires savings institutions to meet a qualified thrift lender
("QTL") test. Under the QTL test, as modified by the FDICIA, a savings
institution is required to maintain 65 percent of its "portfolio assets" (total
assets less (i) specified liquid assets up to 20 percent of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
on a monthly basis in nine out of every 12 months.
An institution that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. If the savings institution does
not convert to a bank charter, generally it will be prohibited from (i) engaging
in any new activity not permissible for a national bank, (ii) paying dividends
not permissible under national bank regulations, (iii) obtaining advances from
any FHLB, and (iv) establishing any new branch office in a location not
permissible for a national bank in the institution's home state. In addition,
beginning three years after the institution failed the QTL test, the institution
would be prohibited from engaging in any activity not permissible for a national
bank and would have to repay any outstanding advances from an FHLB as promptly
as possible. As of December 31, 1993, Home Federal maintained 84.3 percent of
its portfolio assets in "qualified thrift investments" and met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire their shares, payments to stockholders of another institution
in a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions, which are based primarily on an
institution's capital level. An institution that exceeds all fully phased-in
capital requirements before and after a proposed capital distribution (a "Tier 1
Bank") and has not been advised by the OTS that it is in need of more than
normal supervision, could, after prior notice to, but without the approval of,
the OTS, make capital distributions during a calendar year equal to the greater
of: (i) 100 percent of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year; or (ii) 75 percent of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. As of December 31, 1993, Home Federal was a Tier 1 Bank. In the event
Home Federal's capital fell below its fully phased-in requirement or the OTS
notified Home Federal that it was in need of more than normal supervision, its
ability to make capital distributions could be restricted. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations,
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which took effect on December 19, 1992, Home Federal would be prohibited from
making any capital distributions if, after the distribution, it would have: (i)
a total risk-based capital ratio of less than eight percent; (ii) a tier 1
risk-based capital ratio of less than four percent; or (iii) a leverage ratio of
less than four percent.
LIQUIDITY
Home Federal is required to maintain an average daily balance of liquid
assets (I.E., cash, certain time deposits, bankers' acceptances, specified
United States Government securities, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement, which is currently five percent, may be changed from time to time
by the OTS to any amount within the range of four percent to ten percent
depending upon economic conditions and the savings flows of member institutions.
OTS regulations also require each member savings institution to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently one percent) of the total of its net withdrawable deposit accounts
and borrowings payable in one year or less. Monetary penalties may be imposed
for failure to meet these liquidity requirements. The monthly average liquidity
of Home Federal at December 31, 1993, was 9.20 percent which exceeded the then
applicable five percent liquidity requirement. Home Federal's short-term
liquidity ratio at December 31, 1993, was 8.98 percent. Home Federal has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
ASSESSMENTS
Savings institutions are required by OTS regulation to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, to be paid on
a semiannual basis, is computed on the basis of the savings institution's total
assets, including consolidated subsidiaries, as reported in the institution's
latest quarterly thrift financial report. Home Federal's total assessments for
fiscal 1993 were $66,800.
BRANCHING
In April 1992, the OTS amended its rule on branching by federally chartered
savings institutions to permit nationwide branching to the extent allowed by
federal statute. This permits savings institutions with interstate networks to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
COMMUNITY REINVESTMENT
Under the CRA, as implemented by OTS regulations, a savings institution has
a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the OTS,
in connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The CRA also requires all institutions to publicly disclose their
CRA ratings. Home Federal's current CRA rating is "satisfactory".
BROKERED DEPOSITS
Under the FDIC regulations governing brokered deposits, "well capitalized"
institutions that are not "troubled" are subject to no brokered deposit
limitations, while "adequately capitalized" institutions are able to accept,
renew or roll over brokered deposits only (i) with a waiver from the FDIC, and
(ii) subject to the limitation that they do not pay an effective yield on any
such deposits which exceeds by more than (a) 75 basis points the effective yield
paid on deposits of comparable size and maturity in such institution's normal
market area, or (b) 120 basis points for retail deposits and 130 basis points
for wholesale deposits, respectively, of the current yield on comparable
maturity United States Treasury obligations for deposits accepted outside the
institution's normal market area. "Undercapitalized" institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
an effective yield that exceeds by more than 75 basis points the prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal market area or in the market area in which such deposits are being
solicited.
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FINANCIAL MANAGEMENT REQUIREMENTS
The FDIC recently adopted a rule implementing a provision in the FDICIA
that imposes more stringent reporting requirements and requires the
establishment and maintenance of internal control structures and procedures. The
FDIC rule is applicable to any insured depository institution having assets of
$500 million or more as of the beginning of each fiscal year after December 31,
1992, and requires management to prepare and make available to the public the
annual and agency reports on the financial condition and management of the
institution that would be filed with the FDIC and the OTS in the case of a
federally chartered savings institution. The annual report must contain
financial statements prepared in accordance with generally accepted accounting
principles that are audited by the institution's independent public accountant.
This report also must contain management's assertions concerning the
effectiveness of the institution's internal control structure and procedures and
its compliance with designated laws and regulations. The rule requires that the
independent public accountant examine the institution's internal control
structure and apply procedures agreed upon by the FDIC to determine the extent
of the institution's compliance with laws and regulations designated by the FDIC
concerning safety and soundness, such as regulations governing affiliate
transactions, legal lending limitations, loans to insiders, dividend
restrictions, and financial reporting in thrift financial reports.
In addition, the rule requires that an insured depository institution have
an independent audit committee comprised of outside directors which, in the case
of a large institution, includes members with banking or financial management
expertise, has access to outside counsel, and does not include any large
customers.
TRANSACTIONS WITH RELATED PARTIES
Home Federal's authority to engage in transactions with its "affiliates"
(I.E., any company that controls or is under common control with an institution,
including its non-savings institution subsidiaries), is limited by Sections 23A
and 23B of the Federal Reserve Act (the "FRA"). Section 23A limits the aggregate
amount of transactions with any individual affiliate to ten percent of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20 percent of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHCA. Further, no savings institution may purchase the securities of
any affiliate other than a subsidiary.
Home Federal's authority to extend credit to executive officers, directors
and ten percent or more stockholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the FRA, and
Regulation O thereunder. Among other things, these regulations require such
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and to not involve more than a normal risk of
repayment, place limits on the amount of loans a savings bank may make to such
persons, based, in part, on the savings bank's capital position, and require
certain approval procedures to be followed.
ENFORCEMENT
Under the FDI Act, the OTS has primary enforcement responsibility over
savings institutions and has the authority to bring enforcement actions against
all "institution-related parties", including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
actions likely to have an adverse effect on an insured institution. Civil
penalties cover a wider range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement action ranges from the imposition of a capital plan and capital
directive, to receivership, conservatorship or the termination of deposit
insurance. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the FDIC
has authority to take such action under certain circumstances.
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STANDARDS FOR SAFETY AND SOUNDNESS
The FDICIA requires each federal banking agency to prescribe regulations
for all insured depository institutions and their holding companies relating to
internal controls, information systems and audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth and compensation,
fees and benefits, and such other operational and managerial standards as the
agency deems appropriate. In addition, the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets-to-capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; (iii) to the extent feasible, a minimum ratio
of market value to book value for publicly traded shares of depository
institutions or the depository institutions' holding companies; and (iv) such
other standards relating to asset quality, earnings and valuation as the agency
deems appropriate. Finally, each federal banking agency is required to prescribe
standards for employment contracts and other compensation arrangements of
executive officers, employees, directors and principal stockholders of insured
depository institutions that would prohibit compensation and benefits and
arrangements that are excessive or that could lead to a material financial loss
for the institution. If an insured depository institution fails to meet any of
its prescribed standards as described above, it will be required to submit to
the appropriate federal banking agency a plan specifying the steps that will be
taken to cure the deficiency. If an institution fails to submit an acceptable
plan or fails to implement the plan, the appropriate federal banking agency will
require the institution to correct the deficiency and until corrected, may
impose restrictions on the institution, including any of the restrictions
applicable under the prompt corrective action provisions of the FDICIA. Under
the FDICIA, final regulations to implement safety and soundness standards were
to become effective no later then December 1, 1993. However, the federal banking
agencies, including the OTS and the FDIC, recently adopted a proposed rule
regarding implementation of these standards. Since final regulations have not
yet been prescribed, Home Federal cannot assess the significance of the impact,
if any, such standards may have on it.
The FDICIA also requires each appropriate federal banking agency to adopt
uniform regulations prescribing standards for extensions of credit (i) secured
by real estate, or (ii) made for the purpose of financing the construction of
improvements on real estate. In prescribing these standards, the banking
agencies must consider the risk posed to the deposit insurance funds by real
estate loans, the need for safe and sound operation of insured depository
institutions, and the availability of credit. The OTS and the other federal
banking agencies adopted final regulations, effective March 19, 1993,
implementing such standards. The OTS regulation requires each savings
institution to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices and appropriate to
the size of the institution and the nature and scope of its real estate lending
activities.
FEDERAL HOME LOAN BANK SYSTEM
Home Federal is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. Home Federal, as a member of the FHLB of Atlanta, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to one percent of the aggregate principal amount of Home Federal's unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or .20 percent of its advances (borrowings) from the FHLB of Atlanta,
whichever is greater. Home Federal is in compliance with this requirement, with
an investment in FHLB of Atlanta stock at December 31, 1993, of $3.1 million.
FHLB advances must be secured by specified types of collateral and may be
obtained primarily for the purpose of providing funds for residential housing
finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1993, 1992 and 1991,
dividends from the FHLB of Atlanta to Home Federal amounted to $169,700,
$189,200 and $231,900, respectively. Should dividends be reduced, or interest on
future FHLB advances be increased, Home Federal's net interest income might also
be reduced. Further, there can be no assurance that the impact of the FIRREA on
the FHLBs will not also cause a decrease in the value of the FHLB of Atlanta
stock held by Home Federal.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings institutions to maintain
noninterest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). Federal Reserve Board regulations generally
require that reserves must be maintained against aggregate transaction accounts
as follows: for such accounts aggregating $51.9 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is three
percent; for accounts greater than $51.9 million, the reserve requirement is
$1.6 million plus ten percent (subject to adjustment by the Federal
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Reserve Board between eight percent and 14 percent) against that portion of
total transaction accounts in excess of $51.9 million. The first $4.0 million of
otherwise reserveable balances (subject to adjustment by the Federal Reserve
Board) are exempt from the reserve requirements. Home Federal is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of either vault cash, a noninterest-bearing account at a
Federal Reserve Bank, or a pass-through account (as defined by the Federal
Reserve Board), the effect of this reserve requirement is to reduce Home
Federal's interest-earning assets. FHLB System members are also authorized to
borrow from a Federal Reserve Bank's "discount window", but Federal Reserve
Board regulations require institutions to exhaust all FHLB sources before
borrowing from a Federal Reserve Bank.
FEDERAL TAXATION
Home Federal reports its income and expenses on a calendar year basis using
the accrual method of accounting and is subject to federal income taxation in
the same manner as other corporations, with certain exceptions, including
particularly Home Federal's reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to Home Federal. Home
Federal has not been audited by the Internal Revenue Service during the last
five tax years.
Savings institutions such as Home Federal, which meet certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), are permitted to establish a reserve for bad debts and
to make annual additions thereto, which additions may, within specified formula
limits, be deducted in arriving at their taxable income. Home Federal's
deduction with respect to "qualifying loans", generally loans secured by certain
interests in real property, may be computed using an amount based on its actual
loss experience, or may be a percentage equal to eight percent of Home Federal's
taxable income, computed with certain modifications, and reduced by the amount
of any permitted addition to the nonqualifying reserve. Use of the percentage of
taxable income method of calculating Home Federal's deductible addition to its
bad debt reserve has the effect of reducing the marginal rate of federal tax on
Home Federal's income (exclusive of wholly-owned service corporations) to 31.3
percent, exclusive of any minimum or environmental tax, compared to the
generally applicable maximum corporate federal income tax rate of 35 percent.
Home Federal's deduction with respect to nonqualifying loans must be computed
under the experience method, which essentially allows a deduction for actual
charge-offs. Each year Home Federal selects the most favorable way to calculate
the deduction with respect to an addition to the tax bad debt reserve.
Home Federal presently satisfies the qualifying thrift definitional tests.
If Home Federal failed to satisfy such tests in any taxable year, it would be
unable to make additions to its bad debt reserve. Instead, Home Federal would be
required to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions over a multi-year period. Among other
things, the qualifying thrift definitional tests require Home Federal to hold at
least 60 percent of its assets as "qualifying assets". Qualifying assets
generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political subdivision
thereof, loans secured by interests in improved residential real property or by
savings accounts, student loans, and property used by Home Federal in the
conduct of its banking business. Home Federal's ratio of qualifying assets to
total assets exceeded 60 percent through December 31, 1993. Although there can
be no assurance that Home Federal will satisfy the 60 percent test in the
future, management of Home Federal believes that this level of qualifying assets
can be maintained.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on qualifying
real property loans at the close of the taxable year to six percent of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. Also, if the qualifying thrift uses the percentage of taxable
income method, then the qualifying thrift's aggregate addition to its reserve
for losses on qualifying real property loans cannot, when added to the addition
to the reserve for losses on nonqualifying loans, exceed the amount by which (i)
12 percent of the amount that the total deposits or withdrawable accounts of
depositors of the qualifying thrift at the close of the taxable year exceeds
(ii) the sum of the qualifying thrift's surplus, undivided profits and reserves
at the beginning of such year. As of December 31, 1993, this overall limitation
would not have restricted Home Federal's deduction for additions to its bad debt
reserve.
To the extent that (i) Home Federal's bad debt reserve for losses on
qualifying real property loans exceeds the amount that would have been allowed
under the experience method, and (ii) Home Federal makes "nondividend
distributions" that are considered to have been made from the excess bad debt
reserve or the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the distribution will be included in
Home Federal's taxable income. Nondividend
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distributions include distributions in excess of Home Federal's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out of
Home Federal's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from Home Federal's bad debt reserves. Thus, any dividends that would reduce
amounts appropriated to Home Federal's bad debt reserves and deducted for
federal income tax purposes would create a tax liability for Home Federal.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if Home Federal makes a "nondividend
distribution" approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 34
percent corporate income tax rate (exclusive of state and city taxes). Home
Federal does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserves.
The Code imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20 percent. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90 percent of AMTI can be offset by net
operating loss carryovers. AMTI is increased by an amount equal to 75 percent of
the amount by which Home Federal's adjusted current earnings exceed its AMTI
(determined without regard to this preference and prior to reduction for the net
operating losses). In addition, for taxable years beginning after December 31,
1986, and before January 1, 1996, an environmental tax of .12 percent of the
excess of AMTI (with certain modifications) over $2 million is imposed on
corporations, including Home Federal, whether or not an Alternative Minimum Tax
("AMT") is paid. Home Federal does not expect to be subject to the AMT, but may
be subject to the environment tax liability.
Except as provided in the succeeding sentence, Home Federal may deduct from
its income 100 percent of dividends received from members of the same affiliated
group of corporations and 70 percent of the dividends received from unaffiliated
corporations with which Home Federal will not file a consolidated tax return,
except that if Home Federal owns more than 20 percent of the stock of a
corporation distributing a dividend, 80 percent of any dividend received may be
deducted. However, if Home Federal computes its addition to reserves for a
taxable year using the percentage of taxable income method, then its dividends
received deduction for such taxable year will be reduced by eight percent.
LOCAL TAXATION
Home Federal and its subsidiaries are subject to taxes on earnings imposed
by Washington, D.C. The Washington, D.C. franchise tax is substantially similar
in application to the federal income tax, except that net operating loss carry
forwards and, for tax years prior to 1987, the federal bad debt deduction (in
excess of actual loss experience) are not allowed. The tax rate is 10.25 percent
of Home Federal's Washington, D.C. taxable income.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
The FASB recently adopted or issued proposals and guidelines which may have
a significant impact on the accounting practices of commercial enterprises in
general and financial institutions in particular.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes", relating to the method of accounting for deferred income taxes.
Implementation of SFAS No. 109 is required for fiscal years beginning after
December 15, 1992. SFAS No. 109 requires companies to include current changes in
tax rates when valuing the deferred income tax amounts recorded on the balance
sheet. SFAS No. 109 also requires that deferred taxes be provided for all
temporary differences between financial statement and tax income, in addition to
the timing differences in the recognition of income for financial statement and
tax purposes which were covered by prior accounting rules. Home Federal adopted
SFAS No. 109 effective January 1, 1993. Home Federal has elected not to restate
prior year financial statements. The cumulative effect of the accounting change
on years prior to January 1, 1993, of $600,000, is included in 1993 net income.
In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS No. 106 focuses principally
on postretirement health care benefits. SFAS No. 106 requires the accrual of
health care and postretirement benefit costs during the years that the employee
renders the necessary service. The effect of the adoption of SFAS No. 106 for
the year ended December 31, 1993, was to decrease (i) income before taxes and
cumulative effect of accounting change by $253,740, and (ii) net income by
$153,500.
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In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits". SFAS No. 112 establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. Home Federal does not provide any postemployment
benefits, and therefore SFAS No. 112 is not applicable to Home Federal.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114 requires that impaired loans be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. As a practiced expedient, impairment may be
measured based on Home Federal's observable market price or the fair value of
the collateral if the loan is collateral-dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded as a provision for loan losses in the statement of operations and
valuation allowance in the statement of financial condition. Home Federal
adopted SFAS No. 114 effective January 1, 1993. Prior to the adoption of SFAS
No. 114, Home Federal measured loan impairment using methods required by SFAS
No. 15. The impact of the adoption of SFAS No. 114 was not material.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Investment
and mortgage-backed securities that may be sold as part of Home Federal's
asset/liability or liquidity management or in response to or in anticipation of
changes in interest rates and prepayment risk or other factors, are classified
as available-for-sale and are carried at fair market value. Unrealized gains and
losses on such securities are reported net of related taxes as a separate
component of stockholders' equity. Home Federal adopted SFAS No. 115 effective
December 31, 1993. The adoption of SFAS No. 115, which has not been applied
retroactively in prior years' financial statements, resulted in an increase in
stockholders' equity of $9,751 at December 31, 1993.
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FUNC
GENERAL
Financial and other information relating to FUNC, including information
relating to FUNC's directors and executive officers, is set forth in FUNC's 1993
Annual Report on Form 10-K, 1994 Annual Meeting Proxy Statement and 1994 Second
Quarter Report on Form 10-Q, copies of which may be obtained from FUNC as
indicated under "AVAILABLE INFORMATION".
HISTORY AND BUSINESS
FUNC was incorporated under the laws of North Carolina in 1967 and is
registered as a bank holding company under the BHCA. Pursuant to a corporate
reorganization in 1968, First Union National Bank of North Carolina ("FUNB-NC")
and First Union Mortgage Corporation, a mortgage banking firm acquired by
FUNB-NC in 1964, became subsidiaries of FUNC.
In addition to FUNB-DC and FUNB-NC, FUNC also operates banks in Florida,
South Carolina, Georgia, Tennessee, Virginia and Maryland. In addition to
providing a wide range of commercial and retail banking and trust services
through its banking subsidiaries, FUNC also provides various other financial
services, including mortgage banking, home equity lending, insurance and
securities' brokerage services, through other subsidiaries.
Since the 1985 Supreme Court decision upholding regional interstate banking
legislation, FUNC has concentrated its efforts on building a large, regional
banking organization in what it perceives to be some of the better banking
markets in the southeastern and south atlantic regions of the United States.
Since November 1985, FUNC has completed 41 banking related acquisitions,
including the more significant completed acquisitions set forth in the following
table.
<TABLE>
<CAPTION>
ASSETS/ CONSIDERATION/
NAME HEADQUARTERS DEPOSITS(1) ACCOUNTING TREATMENT COMPLETION DATE
<S> <C> <C> <C> <C>
Atlantic Bancorporation....................... Florida $ 3.8 billion common stock/pooling November 1985
Northwestern Financial Corporation............ North Carolina 3.0 billion common stock/pooling December 1985
Southern Bancorporation, Inc.................. South Carolina 1.1 billion cash and notes/purchase March 1986
First Bankers Corporation of Florida.......... Florida 1.3 billion cash and notes/purchase May 1986
First Railroad & Banking Company of Georgia... Georgia 3.7 billion common stock/pooling November 1986
Florida Commercial Banks, Inc................. Florida 1.0 billion cash/purchase March 1988
Florida National Banks of Florida, Inc........ Florida 7.9 billion cash and preferred January 1990
stock/purchase
Southeast banks............................... Florida 9.9 billion cash, notes and preferred September 1991
stock/
purchase
RTC acquisitions.............................. Florida 4.8 billion cash/purchase 1991-1994
PSFS Thrift Holding Company................... Florida 1.2 billion cash/purchase December 1992
South Carolina Federal Corporation............ South Carolina .9 billion common stock/pooling January 1993
DFSoutheastern, Inc........................... Georgia 2.6 billion common stock/pooling January 1993
Dominion Bankshares Corporation............... Virginia 8.9 billion common stock and March 1993
preferred stock/pooling
Georgia Federal Bank, FSB..................... Georgia 4.0 billion cash/purchase June 1993
First American Metro Corp..................... Virginia 4.6 billion cash/purchase June 1993
Lieber & Company ("Lieber")(1)................ New York 3.4 billion common stock/pooling June 1994
BancFlorida Financial Corporation
("BancFlorida")(2).......................... Florida $ 1.6 billion common stock/purchase August 1994
</TABLE>
(1) The dollar amounts indicated represent the assets of the related
organization as of the last reporting period prior to acquisition, except
for (i) the dollar amount relating to Resolution Trust Corporation ("RTC")
acquisitions, which represents savings and loan deposits acquired from the
RTC, (ii) the dollar amount relating to Southeast banks, which represent
assets of the two banking subsidiaries of Southeast Banking Corporation
acquired from the FDIC, and (iii) the dollar amount relating to the
acquisition of Lieber, which represents assets under management by Lieber as
of June 30, 1994. Since such assets are not owned by Lieber, they are not
reflected on FUNC's balance sheet. Lieber serves as
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investment adviser to the Evergreen family of mutual funds. FUNC issued 3.1
million shares of FUNC Common Stock to acquire Lieber.
(2) FUNC issued four million shares of FUNC Common Stock to acquire BancFlorida.
Interstate banking legislation has greatly impacted the growth of FUNC, and
it has also greatly impacted the banking industry in general. North Carolina's
interstate banking statute includes the states of Alabama, Arkansas, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, South Carolina, Tennessee,
Texas, Virginia and West Virginia and Washington, D.C., each of which has passed
interstate banking legislation, either on a regional or national basis. Various
other states not named in the North Carolina legislation have also adopted
interstate banking legislation, which, under certain conditions, would permit
FUNC to acquire banks in such states. Legislation has been introduced in the
United States Congress that, if enacted, would generally provide for nationwide
interstate banking, subject to certain limitations.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions.
COMMON STOCK REPURCHASE
The Board of Directors of FUNC has authorized the repurchase from time to
time of up to 13 million shares of FUNC Common Stock, in addition to the four
million shares FUNC previously repurchased and cancelled in 1994 in connection
with the BancFlorida acquisition at a cost of $175 million.
CERTAIN REGULATORY CONSIDERATIONS
AS A BANK HOLDING COMPANY, FUNC IS SUBJECT TO REGULATION UNDER THE BHCA AND
TO ITS EXAMINATION AND REPORTING REQUIREMENTS. THE FOLLOWING DISCUSSION SETS
FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE REGULATORY FRAMEWORK APPLICABLE TO
BANK HOLDING COMPANIES AND THEIR SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC
INFORMATION RELEVANT TO FUNC. TO THE EXTENT THAT THE FOLLOWING INFORMATION
DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE PARTICULAR STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN
APPLICABLE REGULATION MAY HAVE A MATERIAL EFFECT ON THE BUSINESS OF FUNC.
GENERAL
FUNC is a bank holding company within the meaning of the BHCA and is
registered as such with the Federal Reserve Board. Under the BHCA, bank holding
companies may not directly or indirectly acquire the ownership or control of
more than five percent of the voting shares or substantially all of the assets
of any company, including a bank, without the prior approval of the Federal
Reserve Board. FUNC has applied to the Federal Reserve Board for permission to
acquire Home Federal. See "THE MERGER -- Regulatory Approvals". In addition,
bank holding companies are generally prohibited under the BHCA from engaging in
nonbanking activities, subject to certain exceptions.
The earnings of FUNC are affected by general economic conditions,
management policies and the legislative and governmental actions of various
regulatory authorities, including the Federal Reserve Board and the OCC. In
addition, there are numerous governmental requirements and regulations which
affect the activities of FUNC.
PAYMENT OF DIVIDENDS
FUNC is a legal entity separate and distinct from its banking and other
subsidiaries. A major portion of FUNC's revenues result from amounts paid as
dividends to FUNC by its national bank subsidiaries. The prior approval of the
OCC is required if the total of all dividends declared by a national bank in any
calendar year will exceed the sum of such bank's net profits for that year and
its retained net profits for the preceding two calendar years, less any required
transfers to surplus. Federal law also prohibits any national bank from paying
dividends which would be greater than such bank's undivided profits after
deducting statutory bad debt in excess of such bank's allowance for loan losses.
Under the foregoing dividend restrictions and certain restrictions
applicable to certain of FUNC's nonbanking subsidiaries, as of June 30, 1994,
FUNC's subsidiaries, without obtaining affirmative governmental approvals, could
pay aggregate dividends of $350 million to FUNC. During 1993 and the first six
months of 1994, FUNC's subsidiaries paid $407 million and $279 million,
respectively, in dividends to FUNC.
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In addition, FUNC and its national bank subsidiaries are subject to various
general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory
minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
national bank or bank holding company that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment thereof. The OCC and the FDIC
have indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsound and unsafe banking practice. The OCC, the
FDIC and the Federal Reserve Board have each indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
BORROWINGS
There are also various legal restrictions on the extent to which each of
FUNC and its nonbank subsidiaries can borrow or otherwise obtain credit from its
bank subsidiaries. In general, these restrictions require that any such
extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of FUNC or such nonbank subsidiaries,
to ten percent of the lending bank's capital stock and surplus, and as to FUNC
and all such nonbank subsidiaries in the aggregate, to 20 percent of such
lending bank's capital stock and surplus.
CAPITAL
The minimum guidelines for the ratio of capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit) is eight percent. At least half of the total capital is to be composed
of common equity, retained earnings and a limited amount of qualifying perpetual
preferred stock, less certain intangibles ("tier 1 capital" and together with
tier 2 capital "total capital"). The remainder may consist of subordinated debt,
qualifying preferred stock and a limited amount of the loan loss allowance
("tier 2 capital"). At June 30, 1994, FUNC's tier 1 and total capital ratios
were 9.30 percent and 14.68 percent, respectively. On an FUNC and Home Federal
combined basis, such ratios at June 30, 1994, would have been 9.30 percent and
14.67 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
("leverage ratio ") equal to three percent for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies will generally be required to maintain a leverage
ratio of from at least four to five percent. FUNC's leverage ratio at June 30,
1994, was 6.67 percent. On an FUNC and Home Federal combined basis, such ratio
at June 30, 1994, would have been 6.66 percent. The guidelines also provide that
bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve Board has not advised FUNC of any specific minimum leverage ratio or
tangible tier 1 leverage ratio applicable to it.
Each of FUNC's subsidiary national banks is subject to similar capital
requirements adopted by the OCC or other applicable federal regulatory agencies.
Each of FUNC's subsidiary banks had a leverage ratio in excess of 5.64 percent,
as of June 30, 1994. The OCC has not advised any of the subsidiary national
banks of any specific minimum leverage ratio applicable to it.
As of June 30, 1994, the capital ratios of FUNC's banking subsidiaries,
which consist of FUNB-NC, First Union National Bank of South Carolina
("FUNB-SC"), First Union National Bank of Georgia ("FUNB-GA"), First Union
National Bank of Florida ("FUNB-FL"), FUNB-TN, FUNB-VA, FUNB-MD and FUNB-DC were
as follows:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM FUNB-NC FUNB-SC FUNB-GA FUNB-FL FUNB-TN FUNB-VA FUNB-MD FUNB-DC
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital
ratio............... 4% 7.70 8.54 8.74 9.63 13.36 10.57 17.75 16.30
Total capital ratio... 8 10.51 12.96 11.70 11.31 14.62 12.90 19.04 17.60
Leverage ratio........ 3-5% 5.65 6.03 6.07 6.53 8.41 7.70 10.62 7.11
</TABLE>
Banking regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations, including a proposal to add an
interest rate risk component to risk-based capital guidelines.
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FIRREA
The FIRREA, among other things, imposes liability on an institution the
deposits of which are insured by the FDIC, such as FUNC's subsidiary national
banks, for certain potential obligations to the FDIC incurred in connection with
other FDIC-insured institutions under common control with such institution.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's stockholders, pro rata and, to the
extent necessary, if any such assessment is not paid by any stockholder after
three months notice, to sell the stock of such stockholder to make good the
deficiency. Under Federal Reserve Board policy, FUNC is expected to act as a
source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve Board policy, FUNC may not find itself
willing or able to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
FDICIA
In December 1991, the FDICIA was enacted, which substantially revises the
bank regulatory and funding provisions of the FDI Act and makes revisions to
several other federal banking statutes.
Among other things, the FDICIA requires the federal banking agencies to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. The FDICIA establishes five capital
tiers: "well capitalized"; "adequately capitalized"; "undercapitalized";
"significantly undercapitalized"; and "critically undercapitalized". A
depository institution's capital tier will depend upon how its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.
Each of the OCC and the FDIC has adopted substantially identical
regulations establishing relevant capital measures and relevant capital levels.
The relevant capital measures are the total capital ratio, tier 1 capital ratio
and the leverage ratio. Under the regulations, a regulated bank will be (i)
"well capitalized" if it has a total capital ratio of ten percent or greater, a
tier 1 capital ratio of six percent or greater and a leverage ratio of five
percent or greater and is not subject to any order or written directive by the
OCC or the FDIC, as the case may be, to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
capital ratio of eight percent or greater, a tier 1 capital ratio of four
percent or greater and a leverage ratio of four percent or greater (three
percent in certain circumstances) and is not "well capitalized"; (iii)
"undercapitalized" if it has a total capital ratio of less than eight percent, a
tier 1 capital ratio of less than four percent or a leverage ratio of less than
four percent (three percent in certain circumstances); (iv) "significantly
undercapitalized" if it has a total capital ratio of less than six percent, a
tier 1 capital ratio of less than three percent or a leverage ratio of less than
three percent; and (v) "critically undercapitalized" if its tangible equity is
equal to or less than two percent of average quarterly tangible assets. As of
June 30, 1994, all of FUNC's subsidiary banks had capital levels that qualify
them as being "well capitalized" under such regulations.
The FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
"undercapitalized". "Undercapitalized" depository institutions are subject to
growth limitations and are required to submit a capital restoration plan. The
federal banking agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of: (i) an amount equal to five percent
of the depository institution's total assets at the time it became
"undercapitalized"; and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized".
"Significantly undercapitalized" depository institutions may be subject to
a number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized", requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator.
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The FDICIA directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses, a minimum ratio of market value to book value for
publicly traded shares, and such other standards as the agency deems
appropriate. The ultimate effect of these standards cannot be ascertained until
final regulations are adopted.
The FDICIA also contains a variety of other provisions that may affect the
operations of FUNC, including new reporting requirements, regulatory standards
for real estate lending, "truth in savings" provisions, the requirement that a
depository institution give 90 days' prior notice to customers and regulatory
authorities before closing any branch and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not "well
capitalized" or are "adequately capitalized" and have not received a waiver from
the FDIC. Under regulations relating to the brokered deposit prohibition, all of
FUNC's subsidiary banks are "well capitalized" and not subject to the
prohibition.
DEPOSITOR PREFERENCE STATUTE
Legislation has been enacted providing that deposits and certain claims for
administrative expenses and employee compensation against an insured depository
institution would be afforded a priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, in
the "liquidation or other resolution" of such an institution by any receiver.
DESCRIPTION OF FUNC CAPITAL STOCK
THE DESCRIPTIVE INFORMATION SUPPLIED HEREIN OUTLINES CERTAIN PROVISIONS OF
THE ARTICLES OF INCORPORATION, AS AMENDED (THE "ARTICLES"), AND BYLAWS OF FUNC
AND THE NORTH CAROLINA BUSINESS CORPORATION ACT (THE "NCBCA"). THE INFORMATION
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO
THE PROVISIONS OF FUNC'S ARTICLES AND BYLAWS AND THE NCBCA.
AUTHORIZED CAPITAL
The authorized capital stock of FUNC consists of 750,000,000 shares of FUNC
Common Stock, 10,000,000 shares of Preferred Stock, no-par value per share
("FUNC Preferred Stock"), and 40,000,000 shares of FUNC Class A Preferred Stock,
no-par value per share ("FUNC Class A Preferred Stock"). As of June 30, 1994,
there were 172,796,786 shares of FUNC Common Stock, 6,318,350 shares of Series
1990 Cumulative Perpetual Adjustable Rate Preferred Stock (the "FUNC Series 1990
Preferred Stock"), constituting a single series of FUNC Preferred Stock, and no
shares of FUNC Class A Preferred Stock issued and outstanding. The FUNC
Preferred Stock and FUNC Class A Preferred Stock are each issuable in one or
more series and, with respect to any series, the Board of Directors of FUNC,
subject to certain limitations, is authorized to fix the numbers of shares,
dividend rates, liquidation prices, liquidation rights of holders, redemption,
conversion and voting rights and other terms of the series. Shares of FUNC Class
A Preferred Stock and FUNC Preferred Stock that are redeemed, repurchased or
otherwise acquired by FUNC have the status of authorized, unissued and
undesignated shares of FUNC Class A Preferred Stock and FUNC Preferred Stock,
respectively, and may be reissued.
FUNC COMMON STOCK
Subject to the prior rights of the holders of any FUNC Preferred Stock and
any FUNC Class A Preferred Stock then outstanding, holders of FUNC Common Stock
are entitled to receive such dividends as may be declared by the Board of
Directors out of funds legally available therefor and, in the event of
liquidation or dissolution, to receive the net assets of FUNC remaining after
payment of all liabilities and after payment to holders of all shares of FUNC
Preferred Stock and FUNC Class A Preferred Stock of the full preferential
amounts to which such holders are respectively entitled, in proportion to their
respective holdings.
See "FUNC -- Certain Regulatory Considerations; PAYMENT OF DIVIDENDS" for
information relating to certain regulatory restrictions on the payment of
dividends by national banks, including FUNC's subsidiary national banks.
Subject to the rights of the holders of any FUNC Preferred Stock and any
FUNC Class A Preferred Stock then outstanding, all voting rights are vested in
the holders of the shares of FUNC Common Stock, each share being entitled to one
vote on
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all matters requiring stockholder action and in the election of directors.
Holders of FUNC Common Stock have no preemptive, subscription or conversion
rights. All of the outstanding shares of FUNC Common Stock are fully paid and
nonassessable, and the shares issuable to the stockholders of Home Federal upon
consummation of the Merger will, upon issuance, be fully paid and nonassessable.
FUNC PREFERRED STOCK
All shares of each series of FUNC Preferred Stock must be of equal rank and
have the same powers, preferences and rights and are subject to the same
qualifications, limitations and restrictions, except with respect to dividend
rates, redemption prices, liquidation amounts, terms of conversion or exchange
and voting rights.
FUNC SERIES 1990 PREFERRED STOCK
The following summary of the FUNC Series 1990 Preferred Stock is qualified
in its entirety by reference to the Statement of Classification of Shares of
FUNC relating thereto, a copy of which is incorporated by reference as an
exhibit to the Registration Statement, and to the applicable provisions of the
NCBCA.
The FUNC Series 1990 Preferred Stock, the only series of FUNC Preferred
Stock currently outstanding, is entitled, in the event of involuntary
liquidation, dissolution or winding up of FUNC, to receive a distribution of
$5.00 per share, plus accrued and unpaid dividends (whether or not declared) to
the date of the final distribution (the "Preferential Amount"), if any, before
any payment or distribution shall be made or set apart for payment on the FUNC
Common Stock or any other class or series of stock ranking junior to the FUNC
Series 1990 Preferred Stock. If FUNC's assets are insufficient to pay the full
Preferential Amount, no distribution may be made to holders of any other series
of FUNC Preferred Stock or any series of stock ranking on a parity with the FUNC
Series 1990 Preferred Stock unless proportionate distributive amounts are paid
ratably in proportion to the preferential sums that would be payable if all sums
payable in respect of all such stock were discharged in full.
The FUNC Series 1990 Preferred Stock is redeemable, at FUNC's option, at
$51.50 per share on any dividend payment date after January 29, 1995, and after
January 29, 2000, at $50.00 per share, in each case plus accrued and unpaid
dividends to the date fixed for redemption. The FUNC Series 1990 Preferred Stock
is not convertible.
The dividend rate on the FUNC Series 1990 Preferred Stock is calculated on
the basis of a price of $50.00 per share, payable quarterly, and is reset
quarterly at a rate of one percent per annum above the highest of: (i) a
three-month United States Treasury bill rate; (ii) a United States Treasury
ten-year constant maturity rate; and (iii) a United States Treasury 30-year
constant maturity rate. In no event will such rate be less than 6.75 percent per
annum or more than 13.75 percent per annum. Dividends on the FUNC Series 1990
Preferred Stock are cumulative.
The FUNC Series 1990 Preferred Stock has no voting rights except as set
forth below.
If the equivalent of six full quarterly dividends payable on the FUNC
Series 1990 Preferred Stock or any other series of FUNC Preferred Stock are in
arrears, holders of the FUNC Series 1990 Preferred Stock will have the right,
voting together as a single class with the holders of all other series of FUNC
Preferred Stock having like voting rights, to elect two additional directors of
FUNC until all dividends in arrears on the FUNC Series 1990 Preferred Stock and
any such other series of FUNC Preferred Stock have been fully paid or set apart
for payment.
The affirmative vote or consent of the holders of 66 2/3 percent, or in
some cases a majority, of the outstanding shares of the FUNC Series 1990
Preferred Stock and all other series of FUNC Preferred Stock then outstanding
having like voting rights, voting together as a single class, will be necessary
for the approval of certain matters affecting the rights of the series,
including the authorization, creation, establishment or increase in the amount
of shares of any series of stock ranking prior to the FUNC Series 1990 Preferred
Stock, or any voluntary liquidation, dissolution or winding up of FUNC; provided
that a consolidation or merger of FUNC with or into any other corporation or
corporations or a sale, lease or other conveyance of all or substantially all of
the assets of FUNC will not be deemed to be a liquidation, dissolution or
winding up of FUNC.
FUNC CLASS A PREFERRED STOCK
Shares of FUNC Class A Preferred Stock rank prior or superior to FUNC
Common Stock and on a parity with or junior to (but not prior or superior to)
FUNC Preferred Stock or any series thereof, in respect of the right to receive
dividends and/or the right to receive payments out of the net assets of FUNC
upon any involuntary or voluntary liquidation, dissolution or winding up of
FUNC. However, shares of FUNC Class A Preferred Stock do not have the right to
vote with shares of FUNC Series 1990 Preferred Stock for purposes of electing
two directors in the event of dividend arrearages, as described under
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" -- FUNC Preferred Stock" above. Subject to the foregoing and the terms of any
particular series of FUNC Class A Preferred Stock, series of FUNC Class A
Preferred Stock may vary as to priority.
RIGHTS PLAN
Each share of FUNC Common Stock has attached to it one right (a "FUNC
Right") issued pursuant to a Shareholder Protection Rights Agreement (as
amended, the "FUNC Rights Agreement"). Each FUNC Right entitles its registered
holder to purchase one one-hundredth of a share of a junior participating series
of FUNC Class A Preferred Stock designed to have economic and voting terms
similar to those of one share of FUNC Common Stock, for $110.00 (the "Rights
Exercise Price"), subject to adjustment, after the earlier of: (i) the tenth
business day (subject to extension) after commencement of a tender or exchange
offer which, if consummated, would result in a person becoming the beneficial
owner of 15 percent or more of the outstanding shares of FUNC Common Stock (an
"Acquiring Person"); and (ii) the tenth business day after the first date (the
"Flip-in Date") of a public announcement that a person has become an Acquiring
Person (in either case, the "Separation Time"). The FUNC Rights will not trade
separately from the shares of FUNC Common Stock unless and until the Separation
Time occurs.
The FUNC Rights will not be exercisable until the business day following
the Separation Time. The FUNC Rights will expire on the earliest of: (i) the
Exchange Time (as defined below); (ii) the close of business on December 28,
2000; and (iii) the date on which the FUNC Rights are redeemed or terminated as
described below (in any such case, the "Expiration Time"). The Rights Exercise
Price and the number of FUNC Rights outstanding, or in certain circumstances the
securities purchasable upon exercise of the FUNC Rights, are subject to
adjustment upon the occurrence of certain events.
In the event that prior to the Expiration Time a Flip-in Date occurs, FUNC
will take such action as shall be necessary to ensure and provide that each FUNC
Right (other than FUNC Rights beneficially owned by an Acquiring Person or any
affiliate, associate or transferee thereof, which FUNC Rights shall become void)
shall constitute the right to purchase, from FUNC, shares of FUNC Common Stock
having an aggregate market price equal to twice the Rights Exercise Price for an
amount in cash equal to the then current Rights Exercise Price. In addition, the
Board of Directors of FUNC may, at its option, at any time after a Flip-in Date
and prior to the time that an Acquiring Person becomes the beneficial owner of
more than 50 percent of the outstanding shares of FUNC Common Stock, elect to
exchange all of the then outstanding FUNC Rights for shares of FUNC Common
Stock, at an exchange ratio of two shares of FUNC Common Stock per FUNC Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the Separation Time (the "Rights Exchange Rate").
Immediately upon such action by the Board of Directors (the "Exchange Time"),
the right to exercise the FUNC Rights will terminate and each FUNC Right will
thereafter represent only the right to receive a number of shares of FUNC Common
Stock equal to the Rights Exchange Rate. If FUNC becomes obligated to issue
shares of FUNC Common Stock upon exercise of or in exchange for FUNC Rights,
FUNC, at its option, may substitute therefor shares of junior participating FUNC
Class A Preferred Stock upon exercise of each FUNC Right at a rate of two
one-hundredths of a share of junior participating FUNC Class A Preferred Stock
upon the exchange of each FUNC Right.
The FUNC Rights are redeemable by FUNC at $0.01 per right, subject to
adjustment upon the occurrence of certain events, at any date prior to the date
on which they become exercisable and, in certain events, may be canceled and
terminated without any payment to the holders thereof. The FUNC Rights have no
voting rights and are not entitled to dividends.
The FUNC Rights will not prevent a takeover of FUNC. The FUNC Rights,
however, may cause substantial dilution to a person or group that acquires 15
percent or more of FUNC Common Stock unless the FUNC Rights are first redeemed
or terminated by the Board of Directors of FUNC. Nevertheless, the FUNC Rights
should not interfere with a transaction that is in the best interests of FUNC
and its stockholders because the FUNC Rights can be redeemed or terminated, as
hereinabove described, before the consummation of such transaction.
The complete terms of the FUNC Rights are set forth in the FUNC Rights
Agreement. The FUNC Rights Agreement is incorporated by reference as an exhibit
to the Registration Statement. A copy of the FUNC Rights Agreement can be
obtained upon written request to the Rights Agent, First Union National Bank of
North Carolina, Two First Union Center, Charlotte, North Carolina 28288-1154.
OTHER PROVISIONS
The Articles and Bylaws of FUNC contain a number of provisions which may be
deemed to have the effect of discouraging or delaying attempts to gain control
of FUNC, including provisions in the Articles: (i) classifying the Board of
Directors into three classes with each class to serve for three years with one
class being elected annually; (ii) authorizing the Board
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of Directors to fix the size of the Board of Directors between nine and 30
directors; (iii) authorizing directors to fill vacancies on the Board of
Directors that occur between annual meetings, except that vacancies resulting
from a removal of a director by a stockholder vote may only be filled by a
stockholder vote; (iv) providing that directors may be removed only for cause
and only by affirmative vote of the majority of shares entitled to be voted in
the election of directors, voting as a single class; (v) authorizing only the
Board of Directors, the Chairman of the Board or the President to call a special
meeting of stockholders (except for special meetings called under specified
circumstances for holders of classes or series of stock ranking superior to the
FUNC Common Stock); and (vi) requiring an 80 percent vote of stockholders
entitled to vote in the election of directors, voting as a single class, to
alter any of the foregoing provisions.
The Bylaws include provisions setting forth specific conditions under
which: (i) business may be transacted at an annual meeting of stockholders; and
(ii) persons may be nominated for election as directors of FUNC at an annual
meeting of stockholders.
Two North Carolina "anti-takeover" statutes adopted in 1990, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act, allowed North Carolina corporations to elect to either be
covered or not be covered by such statutes. FUNC elected not to be covered by
such statutes.
In addition to the foregoing, in certain instances the issuance of
authorized but unissued shares of FUNC Common Stock, FUNC Class A Preferred
Stock or FUNC Preferred Stock may have an anti-takeover effect.
CERTAIN DIFFERENCES IN THE RIGHTS OF HOME FEDERAL AND FUNC STOCKHOLDERS
GENERAL
Home Federal is a federal savings association subject to the provisions of
the HOLA and the rules and regulations thereunder. FUNC is a North Carolina
corporation subject to the provisions of the NCBCA. Stockholders of Home Federal
will, upon consummation of the Merger, become stockholders of FUNC. The rights
of such stockholders as stockholders of FUNC will then be governed by the
Articles and Bylaws of FUNC, in addition to the NCBCA.
Set forth below are certain differences between the rights of a Home
Federal stockholder under Home Federal's Charter and Bylaws and the HOLA, on the
one hand, and the rights of an FUNC stockholder under FUNC's Articles and Bylaws
and the NCBCA, on the other hand.
The following summary does not reflect any rules of the NYSE that may apply
to FUNC in connection with the matters discussed. THIS SUMMARY DOES NOT PURPORT
TO BE A COMPLETE DISCUSSION OF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO, THE HOLA, THE NCBCA, AND THE ARTICLES OR CHARTER AND BYLAWS OF EACH
CORPORATION.
AUTHORIZED CAPITAL
HOME FEDERAL. The Home Federal Charter authorizes the issuance of up to
10,000,000 shares of Home Federal Common Stock, of which 1,022,511 shares were
issued and outstanding on the Record Date, and up to 5,000,000 shares of
preferred stock, par value $.01 per share, of which no shares were issued and
outstanding as of the Record Date.
FUNC. FUNC's authorized capital is set forth under "DESCRIPTION OF FUNC
CAPITAL STOCK -- Authorized Capital".
AMENDMENT OF ARTICLES OF INCORPORATION OR BYLAWS
HOME FEDERAL. Home Federal's Charter provides that, subject to certain
exceptions, no amendment, addition, alteration, change or repeal thereof may be
made unless first proposed by the Home Federal Board, then preliminarily
approved by the OTS, which preliminary approval may be granted by the OTS
pursuant to specified regulations with respect to pre-approved charter
amendments, and thereafter approved by the holders of a majority of the total
votes eligible to be cast at a meeting of Home Federal stockholders. Home
Federal's Bylaws provide that they may be amended in a manner consistent with
OTS regulations at any time by a majority of the full Home Federal Board or by a
majority vote of the outstanding shares of Home Federal Common Stock at any
meeting of its stockholders.
FUNC. Under North Carolina law, an amendment to the Articles of FUNC
generally requires the recommendation of the Board of Directors of FUNC and the
approval of either a majority of all shares entitled to vote thereon or a
majority of the votes cast thereon, depending on the nature of the amendment. In
accordance with North Carolina law, the Board of Directors of FUNC may condition
its submission of the proposed amendment on any basis. An amendment to the
Bylaws of FUNC generally requires the approval of either the stockholders or the
Board of Directors of FUNC. The Board of Directors of
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FUNC generally may not amend any Bylaw approved by the stockholders. Under
certain circumstances, the approval of the holders of at least two-thirds, or in
some cases a majority, of the outstanding shares of any series of FUNC Preferred
Stock or FUNC Class A Preferred Stock may be required to amend the FUNC
Articles. In addition, certain amendments to the Articles or Bylaws require the
approval of not less than 80 percent of the outstanding shares of FUNC entitled
to vote in the election of directors, voting together as a single class. See
"DESCRIPTION OF FUNC CAPITAL STOCK".
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS
HOME FEDERAL. The number of Home Federal directors is set at seven and is
divided into three classes as nearly equal in number as possible.
FUNC. The size of the Board of Directors of FUNC is determined by the
affirmative vote of a majority of the Board of Directors of FUNC, provided that
the FUNC Board of Directors may not set the number of directors at less than
nine nor more than 30, and provided further that no decrease in the number of
directors may shorten the term of any director then in office. The number of
directors of FUNC is currently set at 25. The FUNC Board of Directors is divided
into three classes, each as nearly as possible equal in number as the others,
with one class being elected annually. See "DESCRIPTION OF FUNC CAPITAL STOCK".
REMOVAL OF DIRECTORS
HOME FEDERAL. At a meeting of stockholders called expressly for that
purpose, any director may be removed for cause by a vote of the holders of a
majority of the shares entitled to vote at an election of directors, except that
whenever the holders of the shares of any class are entitled to elect one or
more directors by the provisions of Home Federal's Charter, the removal of such
director or directors requires the vote of the holders of the outstanding shares
of the class entitled to elect such director or directors.
FUNC. Except for directors elected under specified circumstances by holders
of any class or series of stock having a preference over the FUNC Common Stock
as to dividends or upon liquidation, directors of FUNC may be removed only for
cause and only by a vote of the holders of a majority of the shares then
entitled to vote in the election of directors, voting together as a single
class.
DIRECTOR EXCULPATION
HOME FEDERAL. Home Federal's Charter and Bylaws contain no provisions
concerning directors' liability.
FUNC. FUNC's Articles provide for the elimination of personal liability of
each director of FUNC to the fullest extent permitted by the provisions of the
NCBCA, as the same may be in effect from time to time. The NCBCA does not permit
the elimination of such liability with respect to (i) acts or omissions the
director believed were clearly in conflict with the best interests of FUNC, (ii)
any liability under the NCBCA for unlawful distributions by FUNC, or (iii) any
transaction from which the director derived an improper personal benefit.
DIRECTOR CONFLICT OF INTEREST TRANSACTIONS
HOME FEDERAL. Extensions of credit between Home Federal and its directors
generally are subject to Regulation 0 of the Federal Reserve Board, which
subjects such transactions to stringent standards to ensure that they do not
create any safety and soundness problems for the institution. See "HOME
FEDERAL -- Regulation and Supervision; TRANSACTIONS WITH RELATED PARTIES". In
addition, OTS regulations set forth a policy which provides that directors and
officers should avoid conflicts of interest and that engaging in a conflict of
interest transaction which is detrimental to the institution is an unsafe and
unsound practice.
FUNC. North Carolina law generally permits transactions involving a North
Carolina corporation and an interested director of that corporation if: (i) the
material facts of the transaction and the director's interest are disclosed and
a majority of disinterested shares entitled to vote thereon authorizes, approves
or ratifies the transaction; (ii) the material facts are disclosed and a
majority of disinterested directors or a committee of the board of directors
authorizes, approves or ratifies the transaction; or (iii) the transaction is
fair to the corporation. North Carolina law prohibits loans to directors or the
guaranteeing of their obligations by a North Carolina corporation unless
approved by a majority vote of disinterested stockholders or unless the
corporation's board of directors determines that the loan or guarantee benefits
the corporation and either approves the specific loan or guarantee or a general
plan or loans and guarantees by the corporation.
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STOCKHOLDER MEETINGS
HOME FEDERAL. Under Home Federal's Bylaws, unless otherwise prescribed by
OTS regulations, special meetings of stockholders may be called at any time by
the Chairman of the Board, the President or a majority of the Home Federal
Board, and shall be called by the Chairman of the Board, the President or the
Secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of Home Federal entitled to vote at the
meeting. Under Home Federal's Bylaws, any action required or permitted to be
taken at a meeting of stockholders may be taken without a meeting if written
consents setting forth the action so taken are signed by all stockholders
entitled to vote with respect to such action. A quorum for a meeting of
stockholders of Home Federal is a majority of the outstanding shares of Home
Federal entitled to vote, represented in person or by proxy.
FUNC. A special meeting of stockholders may be called for any purpose only
by the Board of Directors of FUNC, by the Chairman of FUNC's Board of Directors
or by FUNC's President (except for special meetings called under specified
circumstances for holders of any class or series of stock having a preference
over the FUNC Common Stock as to dividends or upon liquidation). A quorum for a
meeting of the stockholders of FUNC is a majority of the outstanding shares of
FUNC entitled to vote. Except as provided in FUNC's Articles or the NCBCA, a
majority of the votes cast is generally required for any action by the
stockholders of FUNC. North Carolina law provides that such quorum and voting
requirements may be increased only with the approval of the stockholders of
FUNC.
DIRECTOR NOMINATIONS
HOME FEDERAL. Under OTS regulations and Home Federal's Bylaws, stockholder
nominations for directors must be stated in writing and filed with the Secretary
of Home Federal at least five days before the annual meeting of stockholders in
order to be voted on at the meeting. The Bylaws also provide that the Home
Federal Board shall act as a nominating committee for selecting the management
nominees for election as directors. Except in the case of a nominee substituted
as a result of death or other incapacity of a management nominee, the nominating
committee must deliver written nominations to the Secretary at least 20 days
prior to the date of the annual meeting. All nominations, whether by
stockholders or the nominating committee, shall be posted in a conspicuous place
in each office of Home Federal.
FUNC. FUNC's Bylaws establish procedures that must be followed for
stockholders to nominate persons for election to FUNC's Board of Directors. Such
nominations must be made by delivering written notice to the Secretary of FUNC
not less than 60 or more than 90 days prior to the annual meeting at which
directors will be elected; provided, however, that if less than 70 days' notice
of the date of the meeting is given, such written notice by the stockholder must
be so delivered not later than the tenth day after the day on which such notice
of the date of the meeting was given. Notice will be deemed to have been given
more than 70 days prior to the meeting if the meeting is called on the third
Tuesday of April regardless as to when public disclosure is made. The nomination
notice must set forth certain information about the person to be nominated
similar to that required to be disclosed in the solicitation of proxies for
election of directors pursuant to Items 7(a) and 7(b) of Regulation 14A under
the Exchange Act, and such person's written consent to being nominated and to
serving as a director if elected. The nomination notice must also set forth
certain information about the person submitting the notice, including the name
and address of the stockholder and the class and number of shares of FUNC owned
of record or beneficially by such stockholder. The Chairman of the meeting will,
if the facts warrant, determine that a nomination was not made in accordance
with the provisions prescribed by the Bylaws and the defective nomination will
be disregarded. The foregoing procedures do not apply to any director who is
nominated under specified circumstances by holders of any class or series of
stock having a preference over FUNC Common Stock as to dividends or upon
liquidation.
STOCKHOLDER PROPOSALS
HOME FEDERAL. Under Home Federal's Bylaws, any new business to be taken up
at an annual meeting of stockholders shall be stated in writing and filed with
the Secretary of Home Federal at least five days before the date of the annual
meeting, and all business so stated and filed, shall be considered at the annual
meeting, but no other proposal shall be acted upon at the annual meeting. Any
stockholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
Secretary of Home Federal at least five days prior to the meeting, such proposal
shall be laid over for action at an adjourned, special or annual meeting of
stockholders taking place 30 days or more thereafter. This provision does not
prevent the consideration and approval or disapproval at an annual meeting of
reports of officers, directors and committees, but in connection with such
reports no new business shall be acted upon at an annual meeting unless stated
and filed as described above.
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FUNC. FUNC's Bylaws establish procedures that must be followed for a
stockholder to submit a proposal to a vote of the stockholders of FUNC at an
annual meeting of stockholders. Such proposal must be made by the stockholder
delivering written notice to the Secretary of FUNC not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that if less than 70
days' notice of the date of the meeting is given, such written notice by the
stockholder must be so delivered not later than the tenth day after the day on
which such notice of the date of the meeting was given. Notice will be deemed to
have been given more than 70 days prior to the meeting if the meeting is called
on the third Tuesday of April. The stockholder proposal notice must set forth:
(i) a brief description of the proposal and the reasons for its submission; (ii)
the name and address of the stockholder, as they appear on FUNC's books; (iii)
the classes and number of shares of FUNC owned by the stockholder; and (iv) any
material interest of the stockholder in such proposal other than such holder's
interest as a stockholder of FUNC. The Chairman of the meeting will, if the
facts warrant, determine that any proposal was not properly submitted in
accordance with the provisions prescribed by the Bylaws and the defective
proposal will not be submitted to the meeting for a vote of the stockholders.
STOCKHOLDER PROTECTION RIGHTS PLAN
HOME FEDERAL. Home Federal has not adopted a stockholders' rights plan.
FUNC. FUNC has adopted the FUNC Rights Agreement. See "DESCRIPTION OF FUNC
CAPITAL STOCK -- Rights Plan".
STOCKHOLDER INSPECTION RIGHTS; STOCKHOLDER LISTS
HOME FEDERAL. OTS regulations applicable to Home Federal provide that any
stockholder or group of stockholders holding of record (i) voting shares having
a cost of at least $100,000 or constituting at least one percent of the total
outstanding shares, provided in either case that such stockholder or group has
held those shares of record for at least six months, or (ii) at least five
percent of the total outstanding shares, has the right to examine, with certain
exceptions, books and records of account, minutes, and records of stockholders,
upon written demand stating a proper purpose.
In addition, an officer or agent having charge of the stock transfer books
for shares of Home Federal must make a complete list of the stockholders
entitled to vote at such meeting or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
stockholders shall be kept on file at the home office of Home Federal and must
be available for inspection by any stockholder at any time during usual business
hours, for a period of 20 days prior to such meeting. Such list shall also be
available for inspection at the meeting.
FUNC. Under the NCBCA, qualified stockholders have the right to inspect and
copy certain records of FUNC if their demand is made in good faith and for a
proper purpose. Such right of inspection requires that the stockholder give FUNC
at least five business days' written notice of the demand, describing with
reasonable particularity his purpose and the requested records. The records must
be directly connected with the stockholder's purpose. The rights of inspection
and copying extend not only to stockholders of record but also to beneficial
ownership which is certified to FUNC by the stockholder of record. However, FUNC
is under no duty to provide any accounting records or any records with respect
to any matter that FUNC determines in good faith may, if disclosed, adversely
affect FUNC in the conduct of its business or may constitute material non-public
information, and the rights of inspection and copying are limited to
stockholders who either have been stockholders for at least six months or who
hold at least five percent of the outstanding shares of any class of stock of
FUNC. A stockholder's agent or attorney has the same inspection and copying
rights as the stockholder he represents.
In addition, after fixing a record date for a stockholders' meeting, FUNC
is required to prepare a stockholder list with respect to such stockholders'
meeting and to make such list available at FUNC's principal office or at a place
identified in the meeting notice to any stockholder beginning two business days
after notice or such meeting is given and continuing through such meeting and
any adjournment thereof. Subject to the applicable provisions of the NCBCA, a
stockholder or his agent or attorney upon written demand at his own expense
during regular business hours is entitled to copy such list.
REQUIRED STOCKHOLDER VOTE FOR CERTAIN ACTIONS
HOME FEDERAL. Federal regulations applicable to Home Federal generally
require the affirmative vote of the holders of at least two-thirds of the
outstanding Home Federal voting stock for approval of mergers or consolidations
or the sale or exchange of all or substantially all of Home Federal's assets.
FUNC. Under North Carolina law, except as otherwise provided below or in
the NCBCA, any plan of merger or share exchange involving FUNC would require
adoption by the Board of Directors, who would generally be required to recommend
its approval to the stockholder, who in turn would be required to approve the
plan by a vote of a simple majority of the
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outstanding shares. Except as otherwise provided below or in the NCBCA, any
share, lease, exchange or other disposition of all or substantially all of
FUNC's assets not made in the usual and regular course of business would
generally require that the Board of Directors recommend the proposed transaction
to the stockholders who would be required to approve the transaction by a vote
of a simple majority of the outstanding shares. In accordance with North
Carolina law, the submission by the Board of Directors of any such action may be
conditioned on any basis, including, without limitation, conditions regarding a
supermajority voting requirement or that no more than a certain number of shares
indicate that they will seek dissenters' rights.
With respect to a plan of merger, no vote of the stockholders of FUNC is
required if FUNC is the surviving corporation and: (i) FUNC's Articles would
remain unchanged after the merger, subject to certain exceptions; (ii) each
stockholder of FUNC immediately before the merger would hold an identical number
of shares, with identical designations, limitations, preferences and relative
rights, after the merger; (iii) the number of shares of FUNC stock entitled to
vote unconditionally in the election of directors to be issued in the merger
(either by the conversion of securities issued in the merger or by the exercise
of rights and warrants issued in the merger) would not exceed 20 percent of the
shares of FUNC stock entitled to vote unconditionally in the election of
directors outstanding immediately before the merger; and (iv) the number shares
of FUNC stock entitling holders to participate without limitation in
distributions to be issued in the merger (either by the conversion of securities
issued in the merger or by the exercise of rights and warrants issued in the
merger) would not exceed 20 percent of the shares of FUNC stock entitling
holders to participate without limitation in distributions outstanding
immediately before the merger.
With respect to a sale, lease, exchange or other disposition of all or
substantially all the assets of FUNC made upon the authority of the Board of
Directors, no vote of the stockholders of FUNC would be required if such
disposition is made in the usual and regular course of business or if such
disposition is made to a wholly-owned subsidiary of FUNC.
ANTI-TAKEOVER PROVISIONS
HOME FEDERAL. Regulations adopted by the OTS pursuant to the savings
association holding company provisions of the HOLA and the Change in Bank
Control Act of 1978, prohibit a person or company from acquiring "control" of a
thrift unless an application has been filed with the OTS and the OTS has
approved or disapproved such application. The acquisition of 25 percent or more
of the outstanding Home Federal Common Stock, among other things, would
constitute control of Home Federal; however, control may be presumed under OTS
regulations once such company or person owns more than ten percent of the
outstanding shares of Home Federal Common Stock.
FUNC. North Carolina has two anti-takeover statutes in force, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act. These statutes restrict business combinations with, and the
accumulation of shares of voting stock of, certain North Carolina corporations.
In accordance with the provisions of these statutes, FUNC elected not to be
covered by the restrictions imposed by these statutes. As a result, such
statutes do not apply to FUNC.
DISSENTERS' OR APPRAISAL RIGHTS
HOME FEDERAL. OTS regulations govern whether Home Federal stockholders are
entitled to appraisal rights, enabling such holders to obtain cash payments for
the appraised "fair value" of their shares. Such regulations provide, however,
that no stockholder shall have such right to demand payment if such stock was
listed on a national securities exchange or quoted on the National Association
of Securities Dealers' Automated Quotation System and the consideration the
stockholder will receive is stock that will be listed on an exchange or quoted
on Nasdaq. Since Home Federal Common Stock is listed in the Nasdaq's Small Cap
Market and FUNC Common Stock is listed on the NYSE, Home Federal stockholders
will have no dissenters' or appraisal rights with respect to the Merger.
FUNC. North Carolina law generally provides dissenters' rights for mergers
and certain share exchanges that would require stockholder approval, sales of
all or substantially all of the assets (other than sales that are in the usual
and regular course of business and certain liquidations and court-ordered
sales), certain amendments to the articles of incorporation and any corporate
action taken pursuant to a stockholder vote to the extent the articles of
incorporation, bylaws or a resolution of the board of directors entitles
stockholders to dissent.
DIVIDENDS AND OTHER DISTRIBUTIONS
HOME FEDERAL. OTS regulations impose limitations upon all capital
distributions by savings institutions. The amount a savings institution may pay
is tied to the savings institutions capital level. See "HOME FEDERAL -- Dividend
Policy" and " -- Regulation and Supervision; LIMITATION ON CAPITAL
DISTRIBUTIONS" and " -- ; FEDERAL TAXATION".
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FUNC. Under North Carolina law, FUNC generally may make dividends or other
distributions to its stockholders unless after the distribution either: (i) FUNC
would not be able to pay its debts as they become due in the usual course of
business; or (ii) FUNC's assets would be less than the sum of its liabilities
plus the amount that would be needed to satisfy the preferential dissolution
rights of stockholders whose preferential rights are superior to those receiving
the distribution. See "CERTAIN REGULATORY CONSIDERATIONS RELATING TO
FUNC -- Payment of Dividends" and "DESCRIPTION OF FUNC CAPITAL STOCK".
VOLUNTARY DISSOLUTION
HOME FEDERAL. In connection with its conversion from the mutual to the
stock form of ownership, Home Federal was required to establish a "liquidation
account" for the benefit of savings account holders at the time of conversion.
The liquidation account grants such savings account holders who have continued
to maintain their savings accounts at Home Federal the right to a priority
distribution from the liquidation account before any distribution is made with
respect to Home Federal Common Stock in the event of a complete liquidation of
Home Federal. The Merger does not constitute a complete liquidation and will not
trigger a distribution from the liquidation account. Upon consummation of the
Merger, the liquidation account will be maintained by FUNB-DC.
FUNC. North Carolina law provides that FUNC may be dissolved if the Board
of Directors of FUNC proposes dissolution and a majority of the shares of FUNC
entitled to vote thereon approves. In accordance with North Carolina law, the
Board of Directors of FUNC may condition its submission of a proposal for
dissolution on any basis.
RESALE OF FUNC COMMON SHARES
The FUNC Common Shares have been registered under the Securities Act,
thereby allowing such shares to be traded freely and without restriction by
those holders of Home Federal Common Stock who receive such shares following
consummation of the Merger and who are not deemed to be "affiliates" (as defined
under the Securities Act, but generally including directors, certain executive
officers and ten percent or more stockholders) of Home Federal or FUNC. Each
holder of Home Federal Common Stock who is deemed by Home Federal to be an
affiliate has entered into an agreement with FUNC providing, among other things,
that such affiliate will not transfer any FUNC Common Shares received by such
holder in the Merger except in compliance with the Securities Act and will not
sell or otherwise transfer such shares until financial results of FUNC and its
subsidiaries (including Home Federal) for at least 30 days of combined
operations are published. This Prospectus/Proxy Statement does not cover any
resales of FUNC Common Shares received by affiliates of Home Federal.
ADDITIONAL MATTERS
From time to time FUNB-DC and its affiliates have entered into transactions
with certain of the directors of Home Federal or their affiliates in the
ordinary course of business, including, without limitation, certain members of
the Home Federal Board or their affiliates maintaining deposit accounts with
FUNB-DC.
OPINIONS
The validity of the FUNC Common Shares being offered hereby is being passed
upon for FUNC by Marion A. Cowell, Jr., Esq., Executive Vice President,
Secretary and General Counsel of FUNC. Mr. Cowell is also a stockholder of FUNC
and holds options to purchase additional shares of FUNC Common Stock.
Sullivan & Cromwell, special counsel for FUNC, has delivered an opinion
concerning certain federal income tax consequences of the Merger. See "THE
MERGER -- Certain Federal Income Tax Consequences". Sullivan & Cromwell
regularly performs legal services for FUNC and its subsidiaries. Members of
Sullivan & Cromwell performing these legal services own shares of FUNC's Common
Stock.
Certain legal matters associated with the Merger will be passed upon for
Home Federal by Muldoon, Murphy & Faucette, counsel for Home Federal.
Home Federal has relied upon an opinion prepared by Hovde as to the
fairness of the Exchange Ratio to the Home Federal stockholders from a financial
point of view. Hovde has consented to the inclusion herein of a summary of the
opinion and to the attachment of the opinion as ANNEX C to this Prospectus/Proxy
Statement.
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EXPERTS
The consolidated financial statements of Home Federal Savings Bank and its
subsidiaries as of December 31, 1993, and for the year then ended, included in
this Prospectus/Proxy Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Home Federal Savings Bank and its
subsidiaries as of December 31, 1992 and for the years ended December 31, 1992
and 1991, included in this Prospectus/Proxy Statement, have been audited by
Councilor, Buchanan and Mitchell, P.C., independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The consolidated balance sheets of FUNC as of December 31, 1993 and 1992,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1993, included in FUNC's 1993 Annual Report to Stockholders which
is incorporated by reference in FUNC's 1993 Annual Report on Form 10-K and
incorporated by reference, have been incorporated herein 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.
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the Home Federal Board
knows of no matters which will be presented for consideration at the Special
Meeting other than as set forth in the Notice of Special Meeting accompanying
this Prospectus/Proxy Statement. However, if any other matters shall come before
the meeting or any adjournment or adjournments thereof and be voted upon, the
enclosed proxy shall be deemed to confer discretionary authority to the
individuals named as proxies therein to vote the shares represented by such
proxy as to any such matters.
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ANNEX A
INDEX TO HOME FEDERAL SAVINGS BANK FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports......................................................................................... A-2
Consolidated Statements of Financial Condition........................................................................ A-4
Consolidated Statements of Operations................................................................................. A-5
Consolidated Statements of Stockholders' Equity....................................................................... A-6
Consolidated Statements of Cash Flows................................................................................. A-7
Notes to Consolidated Financial Statements............................................................................ A-9
</TABLE>
All schedules have been omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or notes thereto.
A-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HOME FEDERAL SAVINGS BANK
Washington, D.C.
We have audited the consolidated statement of financial condition of Home
Federal Savings Bank and Subsidiaries as of December 31, 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Home Federal Savings Bank and
Subsidiaries as of December 31, 1993 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its methods of accounting for investment securities, income taxes, and
postretirement benefits other than pensions during the year ended December 31,
1993.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 4, 1994
A-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS,
HOME FEDERAL SAVINGS BANK,
WASHINGTON, D.C.
We have audited the consolidated statement of financial condition of Home
Federal Savings Bank and Subsidiaries as of December 31, 1992, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1991 and 1992. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Federal
Savings Bank and Subsidiaries as of December 31, 1992, and the results of their
operations and their cash flows for the years ended December 31, 1991 and 1992
in conformity with generally accepted accounting principles.
COUNCILOR, BUCHANAN & MITCHELL, P.C.
Bethesda, Maryland
February 10, 1993
A-3
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993 1992
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and Cash Equivalents................................................... $ 1,145,137 $ 1,527,817 $ 1,723,888
Interest Bearing Deposits................................................... 21,534 497,890 9,122,745
Investment Securities (Estimated Market Value of $14,679,859, $18,593,360
and $10,207,360 at June 30, 1994 (Unaudited), December 31, 1993 and 1992,
Respectively)............................................................. 15,051,885 18,555,586 10,112,570
Loans Held for Sale......................................................... 1,085,992 14,008,660 3,013,775
Mortgage-Backed Securities Available for Sale (Amortized Cost of $2,154,745
and $3,162,716 for June 30, 1994 (Unaudited) and December 31, 1993,
Respectively, and Market Value of $4,745,201 at December 31, 1992)........ 2,074,918 3,177,903 4,514,755
Mortgage-Backed Securities (Estimated Market Value of $13,923,377,
$18,506,351 and $17,137,743 at June 30, 1994 (Unaudited), December 31,
1993 and 1992, Respectively).............................................. 14,151,401 18,112,834 16,838,017
Loans Receivable -- Net..................................................... 190,649,355 178,761,851 170,070,793
Real Estate Acquired in Settlement of Loans -- Net.......................... 1,015,832 1,236,330 3,740,045
Office Properties and Equipment -- Net...................................... 632,430 684,553 600,929
Accrued Interest Receivable................................................. 1,402,792 1,431,198 1,436,807
FHLB Stock -- At Cost....................................................... 3,053,400 3,053,400 3,053,400
Deferred Tax Asset.......................................................... 987,900 894,064 129,495
Prepaid Expenses and Other Assets........................................... 1,061,252 961,022 567,082
TOTAL ASSETS................................................................ $232,333,828 $242,903,108 $224,924,301
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................................... $198,351,071 $202,269,916 $195,153,727
Advance Payments by Borrowers for Taxes and Insurance....................... 1,987,732 1,086,187 625,196
FHLB Advances............................................................... 16,200,000 22,000,000 16,500,000
Securities Sold Under Agreements to Repurchase.............................. -- 980,000 --
Accounts Payable, Accrued Expenses and Other Liabilities.................... 3,263,073 4,345,721 1,801,611
TOTAL LIABILITIES........................................................... 219,801,876 230,681,824 214,080,534
STOCKHOLDERS' EQUITY
Preferred Stock -- Nonconvertible Cumulative Adjustable Preferred Stock,
Redeemable at $50 per share, 5,000,000 Shares Authorized, -0-, -0-and
18,375 Shares Issued and Outstanding at June 30, 1994, December 31, 1993
and 1992, Respectively.................................................... -- -- 1,225,000
Common Stock ($0.01 Par Value, 10,000,000 Shares Authorized, 1,009,531,
917,880 and 914,280 Shares Issued and Outstanding at June 30, 1994
(Unaudited), December 31, 1993 and 1992, Respectively).................... 10,095 9,179 9,143
Paid-in Capital in Excess of Par............................................ 4,549,093 3,748,063 3,312,174
Retained Earnings -- Substantially Restricted............................... 8,024,691 8,454,291 6,603,700
Net Unrealized (Loss) Gain on Mortgage-Backed Securities Available for
Sale...................................................................... (51,927) 9,751 --
Treasury Stock (6,125 Shares of Preferred Stock)............................ -- -- (306,250)
TOTAL STOCKHOLDERS' EQUITY.................................................. 12,531,952 12,221,284 10,843,767
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................. $232,333,828 $242,903,108 $224,924,301
</TABLE>
See Notes to Consolidated Financial Statements.
A-4
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
INTEREST INCOME
Interest on Loans...................................... $6,981,133 $7,396,312 $14,510,368 $17,940,483 $20,832,005
Interest on Mortgage-Backed Securities................. 469,333 608,241 1,149,879 745,235 1,394,500
Interest and Dividends on Investments.................. 395,447 546,289 1,114,090 921,858 1,100,164
Other.................................................. 106,335 116,477 235,577 192,941 230,178
TOTAL INTEREST INCOME.................................... 7,952,248 8,667,319 17,009,914 19,800,517 23,556,847
INTEREST EXPENSE
Interest on Deposits
Passbook and Statement Savings Accounts................ 223,802 220,791 439,866 470,994 600,795
Negotiable Order of Withdrawal Accounts................ 90,254 90,219 179,308 275,153 375,469
Money Market Fund Accounts............................. 342,627 399,113 758,862 1,050,751 1,223,901
Certificate Accounts................................... 3,579,462 3,980,980 7,835,922 9,150,690 12,336,857
TOTAL INTEREST ON DEPOSITS............................... 4,236,145 4,691,103 9,213,958 10,947,588 14,537,022
Interest on FHLB Advances................................ 433,289 717,605 1,399,630 2,038,553 2,857,252
Interest on Short-Term Borrowings........................ 2,645 -- 15,947 -- 14,033
TOTAL INTEREST EXPENSE................................... 4,672,079 5,408,708 10,629,535 12,986,141 17,408,307
NET INTEREST INCOME...................................... 3,280,169 3,258,611 6,380,379 6,814,376 6,148,540
PROVISION FOR LOAN LOSSES................................ 180,000 1,116,000 1,371,000 2,843,335 1,610,841
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 3,100,169 2,142,611 5,009,379 3,971,041 4,537,699
OTHER INCOME
Loan Fees................................................ 114,486 191,730 414,522 324,426 344,924
Gain on Sale of Loans.................................... 494,657 581,005 1,477,556 1,184,523 534,285
(Loss) Gain on Sale of Investments and Mortgage-Backed
Securities............................................. (1,003) 250,785 252,477 286,841 152,510
Other.................................................... 279,249 112,540 228,848 876,212 382,509
TOTAL OTHER INCOME....................................... 887,389 1,136,060 2,373,403 2,672,002 1,414,228
OPERATING EXPENSES
Compensation and Employee Related Expenses............... 1,870,946 1,586,076 3,416,774 2,835,202 2,720,503
Office Occupancy......................................... 344,714 326,394 661,622 658,034 600,675
FDIC Insurance Premium................................... 263,252 23,611 316,646 393,078 387,946
Other.................................................... 1,004,166 739,244 1,540,097 1,506,034 1,314,362
TOTAL OPERATING EXPENSES................................. 3,483,078 2,675,325 5,935,139 5,392,348 5,023,486
INCOME BEFORE INCOME TAXES AND ACCOUNTING CHANGE......... 504,480 603,346 1,447,643 1,250,695 928,441
INCOME TAX EXPENSE Current............................... 211,433 (123,358) 162,963 1,279,496 516,761
Deferred................................................. (80,500) (121,906) (170,005) 72,347 5,101
TOTAL INCOME TAX EXPENSE................................. 130,933 (245,264) (7,042) 1,351,843 521,862
INCOME (LOSS) BEFORE ACCOUNTING CHANGE................... 373,547 848,610 1,454,685 (101,148) 406,579
Cumulative Effect at January 1, 1993, of Change in
Accounting for Income Taxes............................ -- 600,000 600,000 -- --
NET INCOME (LOSS)........................................ $ 373,547 $1,448,610 $ 2,054,685 $ (101,148) $ 406,579
EARNINGS (LOSS) PER COMMON SHARE
Net Income (Loss) Before Accounting Change............... $ 0.35 $ 0.81 $ 1.37 $ (0.19) $ 0.30
Cumulative Effect of Change in Accounting for Income
Taxes.................................................. -- 0.60 0.58 -- --
Net Income (Loss)........................................ $ 0.35 $ 1.41 $ 1.95 $ (0.19) $ 0.30
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING FULL
DILUTION
Net Income (Loss) Before Accounting Change............... $ 0.35 $ 0.80 $ 1.34 $ (0.19) $ 0.30
Cumulative Effect of Change in Accounting for Income
Taxes.................................................. -- 0.58 0.57 -- --
Net Income (Loss)........................................ $ 0.35 $ 1.38 $ 1.91 $ (0.19) $ 0.30
</TABLE>
See Notes to Consolidated Financial Statements.
A-5
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PAID-IN
CAPITAL RETAINED MARKET
PREFERRED COMMON IN EXCESS EARNINGS- VALUATION TREASURY
STOCK STOCK OF PAR RESTRICTED ALLOWANCE STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1991.................. $ 1,225,000 $ 9,143 $3,180,488 $6,343,650 $ -- $ -- $10,758,281
Net Income............................... -- -- -- 406,579 -- -- 406,579
BALANCE DECEMBER 31, 1991................ 1,225,000 9,143 3,180,488 6,750,229 -- -- 11,164,860
Redemption of Preferred Stock............ -- -- 131,686 -- -- (306,250) (174,564)
Dividends on Preferred Stock............. -- -- -- (45,381) -- -- (45,381)
Net Loss................................. -- -- -- (101,148) -- -- (101,148)
BALANCE DECEMBER 31, 1992................ 1,225,000 9,143 3,312,174 6,603,700 -- (306,250) 10,843,767
Redemption of Preferred Stock............ -- -- 420,625 -- -- (918,750) (498,125)
Dividends on Preferred Stock............. -- -- -- (204,094) -- -- (204,094)
Retirement of Preferred Stock............ (1,225,000) -- -- -- -- 1,225,000 --
Issuance of Common Stock................. -- 36 15,264 -- -- -- 15,300
Net Unrealized Gain on Mortgage-Backed
Securities Available for Sale.......... -- -- -- -- 9,751 -- 9,751
Net Income............................... -- -- -- 2,054,685 -- -- 2,054,685
BALANCE DECEMBER 31, 1993................ -- 9,179 3,748,063 8,454,291 9,751 -- 12,221,284
Stock Dividend (Unaudited)............... -- 916 801,030 (801,946) -- -- --
Cash Dividend Fractional Shares
(Unaudited)............................ -- -- -- (1,201) -- -- (1,201)
Net Unrealized (Loss) on Mortgage-Backed
Securities Available For Sale
(Unaudited)............................ -- -- -- -- (61,678) -- (61,678)
Net Income (Unaudited)................... -- -- -- 373,547 -- -- 373,547
BALANCE JUNE 30, 1994
(UNAUDITED)............................ $ -- $10,095 $4,549,093 $8,024,691 $ (51,927) $ -- $12,531,952
</TABLE>
See Notes to Consolidated Financial Statements.
A-6
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)................................... $ 373,547 $ 1,448,610 $ 2,054,685 $ (101,148) $ 406,579
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
Loans Originated for Sale......................... (25,452,250) (36,420,667) (103,797,788) (62,227,750) (35,310,750)
Proceeds from Sales of Loans Held for Sale........ 38,729,132 32,869,944 93,755,104 65,406,615 31,982,288
Federal Home Loan Bank Stock Dividends............ -- -- -- -- (63,300)
Provision for Loan Losses......................... 180,000 1,116,000 1,371,000 2,843,335 1,610,841
Depreciation and Amortization of Properties and
Equipment...................................... 123,457 98,171 213,678 201,198 190,641
Net Amortization of (Discounts) Premiums on Loans
and Securities................................. (73,135) 28,610 115,502 3,055 (76,278)
Provision for Deferred Income Taxes............... (80,500) (121,906) (170,005) 72,347 5,101
Cumulative Effect of Change in Accounting for
Income Taxes................................... -- (600,000) (600,000) -- --
Net Loss (Gain) on Sale of:
Mortgage-Backed and Investment
Securities................................... 1,003 (250,785) (252,477) (286,841) (152,510)
Loans.......................................... (494,657) (581,005) (1,477,556) (1,184,523) (534,285)
Real Estate Acquired in Settlement
of Loans..................................... (164,861) (13,195) (13,259) (350,727) --
Decrease (Increase) in Interest and Dividends
Receivable..................................... 28,406 (105,521) 5,609 301,314 503,122
(Increase) Decrease in Prepaid Expenses and Other
Assets......................................... (100,230) (427,160) (393,040) 560,584 (84,215)
Increase (Decrease) in Interest Payable........... 23,567 44,143 (147,620) (445,593) (1,004,696)
Decrease in Deferred Loan Fees.................... (66,759) (155,861) (215,342) (158,448) (15,907)
(Decrease) Increase in Other Liabilities.......... (1,066,629) 2,214,988 2,570,973 (1,864,185) 1,431,609
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ 11,960,091 (855,634) (6,980,536) 2,769,233 (1,111,760)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of Investments........................... 6,000,000 1,500,000 3,500,000 4,000,000 6,000,000
Proceeds from Sales of Investments.................. -- -- 1,052,485 50,593 --
Purchases of Investments............................ (2,497,813) (12,012,187) (13,012,187) (4,006,673) (9,515,044)
Net Decrease (Increase) in Interest Bearing
Deposits.......................................... 476,356 2,137,562 8,624,855 (2,224,587) 3,456,858
Proceeds from Loan Sales............................ 1,857,452 584,268 1,698,282 2,676,635 6,474,481
Principal Collected on Loans Receivable............. 20,359,488 18,745,941 46,729,938 53,285,915 41,795,381
Principal Collected on Mortgage-Backed Securities... 3,970,641 962,085 3,122,382 1,481,251 1,420,895
Loans Originated or Acquired........................ (34,053,928) (17,498,177) (56,345,940) (63,051,266) (42,504,811)
Purchase of Mortgage-Backed Securities.............. -- (5,938,789) (5,938,789) (1,935,538) (2,049,998)
Proceeds from the Sale of Mortgage-Backed
Securities........................................ 1,000,000 4,323,438 4,323,438 21,053,913 14,133,933
Development Costs -- Real Estate Acquired in
Settlement of Loans............................... (4,554) (135,102) (176,974) (277,056) --
Proceeds from Sales of Real Estate Acquired in
Settlement of Loans............................... 459,006 13,195 13,259 1,311,135 1,547,420
Proceeds from Sale of Equipment..................... -- -- 17,088 8,161 --
Purchases of Premises and Equipment................. (71,334) (79,828) (314,390) (103,389) (281,291)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES........................................ (2,504,686) (7,397,594) (6,706,553) 12,269,094 20,477,824
</TABLE>
See Notes to Consolidated Financial Statements.
A-7
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in NOW, Money Market and
Savings........................................... (2,213,519) 2,241,276 2,241,306 7,278,522 6,235,673
Net (Decrease) Increase in Certificates of
Deposit........................................... (1,744,912) 5,461,765 4,995,640 (12,089,995) (11,517,529)
Net Increase (Decrease) in Escrow Accounts.......... 901,547 728,516 460,991 (241,944) (76,018)
Proceeds from Federal Home Loan Bank Advances....... -- -- 5,500,000 -- 120,000
Payments of Maturing Federal Home Loan Bank
Advances.......................................... (5,800,000) -- -- (8,720,000) (14,000,000)
Proceeds from Securities Sold Under Agreements to
Repurchase........................................ -- -- 980,000 -- --
Payments of Maturing Securities Sold Under
Agreements to Repurchase.......................... (980,000) -- -- -- --
Issuance of Common Stock............................ -- -- 15,300 -- --
Dividends on Common Stock........................... (1,201) -- -- --
Redemption of Preferred Stock....................... -- (498,125) (498,125) (174,564) --
Payments of Dividends on Preferred Stock............ -- (204,094) (204,094) (45,381) --
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES........................................ (9,838,085) 7,729,338 13,491,018 (13,993,362) (19,237,874)
(Decrease) Increase in Cash and Cash
Equivalents....................................... (382,680) (523,890) (196,071) 1,044,965 128,190
Cash and Cash Equivalents at Beginning of
Year.............................................. 1,527,817 1,723,888 1,723,888 678,923 550,733
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 1,145,137 $ 1,199,998 $ 1,527,817 $ 1,723,888 $ 678,923
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For
Interest.......................................... $ 4,648,512 $ 5,364,565 $ 10,777,155 $ 13,431,734 $ 18,413,003
Income Taxes...................................... $ 286,570 $ 341,923 $ 687,533 $ 1,170,880 $ 999,313
Non-cash Transactions
Mortgage-Backed Securities Received in Exchange
for Equal Amounts of Loans Receivable.......... $ -- $ -- $ 1,166,191 $ 32,297,650 $ 4,772,016
Loans to Facilitate the Sale of Real Estate Acquired
in Settlement of Loans............................ $ -- $ 2,925,000 $ 2,925,000 $ -- $ --
Loans Receivable Transferred to Real Estate Acquired
in Settlement of Loans............................ $ 69,093 $ 244,311 $ 244,311 $ 3,456,076 $ 954,192
</TABLE>
See Notes to Consolidated Financial Statements.
A-8
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following comments comprise the significant policies which Home Federal
Savings Bank (the Bank) and its subsidiaries follow in preparing and presenting
their consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Home Federal
Savings Bank and its subsidiaries, Home Financial Services, Inc., Home Financial
Insurance Services, Inc., and Home Federal Mortgage Corporation (formerly HFS
Commercial Mortgage Corporation), all of which are wholly-owned. All significant
intercompany balances and transactions between the Bank and its subsidiaries
have been eliminated in the consolidation.
CASH EQUIVALENTS
Cash equivalents include cash on hand and amounts due from banks on demand.
INTEREST BEARING DEPOSITS
Interest bearing deposits include certificates of deposit with original
maturities of three months or more.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Effective December 31, 1993 the Bank adopted, on a prospective basis,
Statement of Financial Accounting Standard No. 115, "Accounting for Certain Debt
and Equity Securities" (SFAS 115) and revised its accounting policy for
investment and mortgage-backed securities. Investment and mortgage-backed
securities that may be sold as part of the Bank's asset/liability or liquidity
management or in response to or anticipation of changes in interest rates and
prepayment risk or other factors, are classified as available-for-sale and are
carried at fair market value. Unrealized gains and losses on such securities are
reported net of related taxes as a separate component of stockholders' equity.
Securities that the Bank has the intent and ability to hold to maturity are
classified as held-to-maturity and are carried at amortized cost. Realized gains
and losses on sales of all securities are reported in earnings and computed
using the specific identified cost basis. The adoption of SFAS 115, which has
not been applied retroactively to prior years' financial statements, resulted in
an increase in stockholders' equity of $9,751 for the net unrealized gains on
mortgage-backed and investment securities classified as available-for-sale at
December 31, 1993.
Prior to December 31, 1993 all investment and mortgage-backed securities
intended for sale were carried at the lower of aggregate cost or market value.
All other securities that the Bank had the intention and ability to hold to
maturity were carried at amortized cost. Changes in the carrying value of
securities held for sale were reported in earnings as securities gains and
losses.
LOAN ORIGINATION FEES, DISCOUNTS AND PREMIUMS ON LOANS PURCHASED
Origination fees and direct and certain other costs directly related to
specified activities performed for a loan origination are deferred and
recognized over the contractual life of the loan using a method approximating
level yield in accordance with Statement of Financial Accounting Standards 91
(SFAS 91) requirements. Any unamortized amount of net fees on loans sold or paid
off is included in the gain or loss on sale in the year of sale or payoff.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
No charges to income to establish such a valuation allowance was required in
1993, 1992 or 1991, and for the six months ended June 30, 1994 and 1993.
ALLOWANCE FOR LOAN LOSSES
The Bank provides a valuation allowance for estimated losses on loans based
on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations which may effect the borrowers' ability to repay,
estimated values of underlying collateral and current economic conditions in the
Bank's lending area. The allowance is increased by
A-9
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
provisions for loan losses charged to operations and is reduced by charge-offs
and increased by net recoveries. While management uses available information to
estimate losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions beyond management's control.
Effective January 1, 1993, the Bank adopted Financial Accounting Standard
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). SFAS 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded as a provision for loan loss
in the statement of operations and valuation allowance in the statement of
financial condition. Prior to the adoption of SFAS 114 the Bank measured loan
impairment using methods required by Financial Accounting Standard No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings". The
impact of the adoption of SFAS 114 was not material.
UNCOLLECTED INTEREST
The Bank provides an allowance for the loss of uncollected interest on any
loan which is contractually delinquent more than 90 days and on other delinquent
loans when management believes the collection of interest is doubtful. Any such
interest ultimately collected is recorded as interest income in the period of
recovery.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is initially recorded at fair
value less estimated costs to sell. Subsequently, such real estate is carried at
the lower of fair value less estimated costs to sell or its initial recorded
value. Reductions in the carrying value of real estate subsequent to acquisition
are recorded through a valuation allowance. Costs related to the development and
improvement of the real estate are capitalized, whereas those costs relating to
holding the real estate are charged to expense.
Recovery of the carrying value of real estate acquired in settlement of
loans is dependent to a great extent on economic, operating, and other
conditions that may be beyond the Bank's control.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of furniture, equipment and leasehold
improvements, which are stated at cost, are provided over the estimated useful
lives by the straight-line and declining-balance methods as follows:
<TABLE>
<S> <C>
Leasehold Improvements...................................................... 2-20 Years
Furniture and Equipment..................................................... 2-10 Years
Automobiles................................................................. 3 Years
</TABLE>
INCOME TAXES
The Bank files a consolidated Federal income tax return with its
subsidiaries.
Effective January 1, 1993 the Bank adopted Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires that deferred tax assets and liabilities be recognized for the future
tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. In addition, SFAS 109 requires the Bank to reduce any deferred tax asset
by the amount of any tax benefit that more than likely will not be realized. The
cumulative effect of the adoption of SFAS 109 at January 1, 1993, is $600,000.
The Bank elected not to restate prior years, thus 1993 income was increased by
$600,000 or $0.59 per share.
Prior to January 1, 1993, the Bank accounted for income taxes in accordance
with Accounting Principles Board Opinion No. 11 which required that deferred
income taxes be provided for timing differences between the determination of net
income for financial reporting purposes and tax purposes.
A-10
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993 the Bank adopted Statement of Financial
Accounting Standard No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" (SFAS 106). SFAS 106 requires the accrual of health care
and other postretirement benefits costs during the years that the employee
renders the necessary service. The Bank has elected to amortize the accumulated
benefit obligation existing at the time of the statement adoption over a period
of 20 years. The effect of the adoption of SFAS 106 for the year ended December
31, 1993 was to decrease income before taxes and cumulative effect of accounting
change by $253,740 and net income by $153,500 or $0.16 per share. Prior years'
financial statements have not been restated to reflect the adoption of SFAS 106.
Prior to January 1, 1993, the Bank accounted for health care and other
postretirement benefits costs as they were incurred.
EARNINGS PER SHARE
Earnings per common share and common equivalent share are computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents during the year. Stock options are considered to be
common stock equivalents. The increase in common shares attributed to stock
options outstanding is based on the number of shares which would be assumed to
be purchased with the proceeds of the exercise of the options at the average
market price of the stock during the year. The weighted average shares of common
stock and common stock equivalents outstanding at June 30, 1994 and 1993 were
1,064,900 and 1,005,708, respectively (unaudited). The weighted average shares
of common stock and common stock equivalents outstanding at December 31, 1993,
1992 and 1991 were 1,038,581, 1,005,708 and 1,005,708, respectively. Stock
options, for the purposes of computing earnings per share for 1992 and 1991, are
determined to be anti-dilutive.
Earnings per common share -- assuming full dilution is determined on the
assumption that the stock options were exercised as above except that purchases
are assumed to have been made at the market price at the end of the period. This
results in a weighted average number of shares of 1,081,592 and 1,027,458, for
the six months ended June 30, 1994 and 1993, (unaudited). Earnings per common
share -- assuming full dilution for 1993 is determined on the assumption that
the stock options were exercised as above except that purchases were assumed to
have been made at the year end price of $9.75 which results in a weighted
average number of shares of 1,059,832.
On December 27, 1993, the Bank declared a 10% stock dividend to all holders
of record as of January 10, 1994. The stock dividend issued on January 31, 1994
resulted in an increase in the number of common shares outstanding from 917,880
at December 31, 1993 to 1,009,531 at June 30, 1994. Per share data in prior
periods presented has been restated for the effect of the stock dividend.
RECLASSIFICATIONS
Certain reclassifications of 1992 and 1991 information have been made to
conform to the 1993 presentation.
OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
The consolidated financial statements of the Bank as of June 30, 1994 and
for the six months ended June 30, 1994 and 1993, included herein are unaudited;
however, they reflect all adjustments consisting of a normal and recurring
nature, which in the opinion of management, are necessary to present fairly the
results for the periods presented. The results of operations for the six months
ended June 30, 1994 are not necessarily indicative of the results to be expected
for the remainder of the year.
NOTE 2 -- ACQUISITION
The Bank acquired Liberty Mortgage Corporation, a mortgage banking company
located in Northern Virginia, on September 1, 1993 for a cash payment of
$100,000 plus the fair value of the company's fixed assets. The acquisition is
accounted for under the purchase method of accounting and the statement of
operations of the Bank for the year ended December 31,
A-11
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- ACQUISITION -- Continued
1993 includes the results of the operations of the acquired company beginning
September 1, 1993. Supplemental proforma results of operations, as if the
acquisition had taken place on January 1, 1992, is not required as the results
would be immaterial.
NOTE 3 -- Investment Securities
The carrying values and estimated market values of investment securities to
be held to maturity are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 (UNAUDITED)
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations................................. $14,999,371 $ 1,365 $ 373,391 $14,627,345
Other Securities....................................................... 52,514 -- -- 52,514
Total.................................................................. $15,051,885 $ 1,365 $ 373,391 $14,679,859
<CAPTION>
DECEMBER 31, 1993
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations................................. $18,503,072 $ 70,316 $ 32,542 $18,540,846
Other Securities....................................................... 52,514 -- -- 52,514
Total.................................................................. $18,555,586 $ 70,316 $ 32,542 $18,593,360
<CAPTION>
DECEMBER 31, 1992
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government and Agency Obligations................................. $10,010,056 $ 124,638 $ 29,848 $10,104,846
Other Securities....................................................... 102,514 -- -- 102,514
Total.................................................................. $10,112,570 $ 124,638 $ 29,848 $10,207,360
</TABLE>
The contractual maturities of debt securities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 (UNAUDITED)
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
U.S. Government and Agency Obligations:
Maturing Within 1 Year........................................................... $ 3,001,366 $ 2,994,219
Maturing After 1 Year Through 5 Years............................................ 11,998,005 11,633,126
Total.............................................................................. $14,999,371 $14,627,345
<CAPTION>
DECEMBER 31, 1993
ESTIMATED
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
U.S. Government and Agency Obligations:
Maturing Within 1 Year........................................................... $ 2,502,858 $ 2,517,813
Maturing After 1 Year Through 5 Years............................................ 16,000,214 16,023,033
Total.............................................................................. $18,503,072 $18,540,846
</TABLE>
A-12
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993 1992
<S> <C> <C> <C>
(UNAUDITED)
Guaranteed by GNMA, Partially Guaranteed by VA or GNMA, or Insured by FHA... $ 92,099 $ 108,022 $ 119,937
Conventional Mortgage Loans
Residential............................................................... 151,515,719 138,636,284 127,069,434
Commercial................................................................ 33,645,163 35,066,899 37,742,565
Construction Mortgage Loans
Residential............................................................... 5,613,729 5,379,206 4,711,122
Commercial................................................................ 1,250,000 1,250,000 1,250,000
Real Estate Loans Subject to Prior Liens.................................. -- -- 103,750
Loans to Depositors, Secured by Savings..................................... 652,610 468,735 479,359
Consumer Loans.............................................................. 780,692 591,719 232,415
Commercial Loans
Secured................................................................... 1,481,654 1,558,286 2,503,691
Unsecured................................................................. 315,721 313,621 482,942
195,347,387 183,372,772 174,695,215
Less
Undisbursed Portion of Loans Receivable................................... (1,572,358) (1,599,528) (2,202,789)
Deferred Loan Fees and Discounts on Loans................................. (647,609) (714,368) (929,710)
Allowances for Loan Losses................................................ (2,478,065) (2,297,025) (1,491,923)
Total....................................................................... $190,649,355 $178,761,851 $170,070,793
</TABLE>
Loans serviced for others and not reflected in the statements of financial
condition are $39,450,206 at June 30, 1994 (unaudited) and $48,332,832 and
$71,879,752 at December 31, 1993 and 1992, respectively.
The Bank grants loans throughout the greater Metropolitan Washington, D.C.
area, including Maryland and Virginia. Its borrowers' ability to repay is,
therefore, dependent upon the economy of Metropolitan Washington.
The following table sets forth the activity in the allowance for losses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Balance, Beginning of Period.......................... $2,297,025 $1,491,923 $1,491,923 $ 979,364 $ 820,600
Provision Charged to Operations....................... 180,000 1,116,000 1,371,000 2,843,335 1,610,341
Recoveries............................................ 11,056 22,208 39,969 26,690 3,638
Charge-offs........................................... (10,016) (523,252) (605,867) (2,357,466) (1,455,215)
Balance, End of Period................................ $2,478,065 $2,106,879 $2,297,025 $ 1,491,923 $ 979,364
</TABLE>
A-13
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LOANS RECEIVABLE -- Continued
Included in loans receivable at June 30, 1994 and 1993 is $1,651,968 and
$1,036,413, respectively, (unaudited) and at December 31, 1993, 1992 and 1991 is
$1,493,378, $956,929 and $1,205,473, respectively, due from officers or
directors. Changes in loans outstanding to officers and directors were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Balance, Beginning of Period.......................... $1,493,378 $ 956,929 $ 956,929 $ 1,205,473 $ 1,366,560
Additional Loan Disbursements......................... 726,910 363,700 882,066 218,630 7,044
Principal Repayments.................................. (568,320) (284,216) (345,617) (467,174) (168,131)
Balance, End of Period................................ $1,651,968 $1,036,413 $1,493,378 $ 956,929 $ 1,205,473
</TABLE>
During 1992, certain concessions were granted in extending a loan
receivable of approximately $3.6 million. These concessions were necessitated by
the borrower's financial difficulties and the declining real estate market
activity. A new appraisal was obtained which indicated a fair value $600,000
less than book value of the loan. Therefore, a loss reserve was established in
the amount of $600,000 and charged against earnings for the year ended December
31, 1992. Interest income will be computed using the interest method so that a
constant effective interest rate will be recognized. If the interest income had
been recorded in accordance with the original terms $113,903 and $126,499 would
have been recognized in the six months ended June 30, 1994 and 1993,
respectively, (unaudited). As a result of the modification $107,332 and $108,740
were recognized as interest income for the six months ended June 30, 1994 and
1993, respectively, (unaudited). If the interest income had been recorded in
accordance with the original terms $241,160 and $267,277 would have been
recognized in the years ended December 31, 1993 and 1992, respectively. As a
result of the modification $216,786 and $233,717 were recognized as interest
income for the years ended December 31, 1993 and 1992, respectively.
Nonaccrual loans totaled $548,874 and $1,039,107 at June 30, 1994 and 1993,
respectively, (unaudited). Nonaccrual loans consist of delinquent loans on which
borrowers have failed to make required payments. Uncollected interest on total
nonaccrual loans totaled $23,123 and $68,492 at June 30, 1994 and 1993,
respectively, (unaudited). Of the total nonaccrual loans at June 30, 1994 and
1993, $151,916 and $786,957, respectively, were nonresidential mortgage loans
(unaudited). Nonaccrual loans totaled $863,320, $1,809,123 and $2,420,975 at
December 31, 1993, 1992 and 1991, respectively. Nonaccrual loans consist of
delinquent loans on which borrowers have failed to make required payments.
Uncollected interest on total nonaccrual loans totaled $31,693, $121,388 and
$141,854 at December 31, 1993, 1992 and 1991, respectively. Of the total
nonaccrual loans at December 31, 1993, 1992 and 1991, $22,846, $786,957 and
$956,508, respectively, were nonresidential mortgage loans.
A-14
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- MORTGAGE-BACKED SECURITIES
The carrying values and estimated market values of mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
At June 30, 1994 (Unaudited)
Available for Sale:
FHLMC Certificates................................................... $ 1,155,748 $ -- $ 62,844 $ 1,092,904
AMF ARM Fund......................................................... 998,997 -- 16,983 982,014
Total.................................................................. $ 2,154,745 $ -- $ 79,827 $ 2,074,918
Held for Investment:
FHLMC Certificates................................................... $12,494,981 $ -- $ 132,641 $12,362,340
GNMA Certificates.................................................... 1,656,420 -- 95,383 1,561,037
Total.................................................................. $14,151,401 $ -- $ 228,024 $13,923,377
At December 31, 1993
Available for Sale:
FHLMC Certificates................................................... $ 1,162,716 $ 15,987 $ -- $ 1,178,703
AMF ARM Fund......................................................... 2,000,000 -- 800 1,999,200
Total.................................................................. $ 3,162,716 $ 15,987 $ 800 $ 3,177,903
Held for Investment:
FHLMC Certificates................................................... $16,357,840 $361,722 $ -- $16,719,562
GNMA Certificates.................................................... 1,754,994 31,795 -- 1,786,789
Total.................................................................. $18,112,834 $393,517 $ -- $18,506,351
At December 31, 1992
Available for Sale:
FHLMC Certificates................................................... $ 4,514,755 $230,446 $ -- $ 4,745,201
Held for Investment:
FHLMC Certificates................................................... $14,938,799 $285,015 $ -- $15,223,814
GNMA Certificates.................................................... 1,899,218 14,711 -- 1,913,929
Total.................................................................. $16,838,017 $299,726 $ -- $17,137,743
</TABLE>
The proceeds from the sales and realized gains and losses of
mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Proceeds from Sale................................... $1,000,000 $4,323,438 $4,323,438 $21,053,913 $14,133,933
Gross Realized Gains................................. -- 250,785 250,785 286,890 190,002
Gross Realized Losses................................ 1,003 -- -- -- 37,492
</TABLE>
A-15
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- MORTGAGE-BACKED SECURITIES -- Continued
The contractual maturities of mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
(UNAUDITED)
Available for Sale
Maturing
Within 1 Year.............................................. $ 998,997 $ 982,014 $ 2,000,000 $ 1,999,200
After 1 Yr Thru 5 Yr....................................... -- -- -- --
After 5 Yr Thru 10 Yr...................................... 1,155,748 1,092,904 1,162,716 1,178,703
Total........................................................... $ 2,154,745 $ 2,074,918 $ 3,162,716 $ 3,177,903
Held for Investment
Maturing
Within 1 Year.............................................. $ -- $ -- $ -- $ --
After 1 Yr Thru 5 Yr....................................... 3,469,174 3,319,458 3,760,390 3,806,187
After 5 Yr Thru 10 Yr...................................... -- -- -- --
After 10 Years............................................. 10,682,227 10,603,919 14,352,444 14,700,164
Total........................................................... $14,151,401 $13,923,377 $18,112,834 $18,506,351
</TABLE>
NOTE 6 -- REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
A recap of activity in the allowance for losses on real estate acquired in
settlement of loans follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Balance, Beginning of Period.............................................. $ -- $ -- $ -- $ 3,000 $2,500
Provisions Charged to Operations.......................................... -- -- -- -- 500
Charge-offs, Net of Recoveries............................................ -- -- -- (3,000) --
Balance, End of Period.................................................... $ -- $ -- $ -- $ -- $3,000
</TABLE>
The Bank's real estate acquired in settlement of loans is comprised of
residential real estate properties.
NOTE 7 -- OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment is as follows:
<TABLE>
<CAPTION>
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1992
<S> <C> <C> <C>
(UNAUDITED)
Leasehold Improvements.............................................................. $ 1,015,567 $1,014,524 $ 984,739
Furniture and Equipment............................................................. 1,509,592 1,447,844 1,202,482
Automobiles......................................................................... 46,360 46,360 35,149
2,571,519 2,508,728 2,222,370
Less Accumulated Depreciation and Amortization...................................... 1,939,089 1,824,175 1,621,441
Net................................................................................. $ 632,430 $ 684,553 $ 600,929
</TABLE>
A-16
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- DEPOSITS
A summary of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1994 1993 1992
AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Balance by Interest Rate:
Passbook and Statement Accounts 0% to 2.75%....... $ 16,589,395 8 % $ 15,832,090 8 % $ 14,219,678 7 %
Negotiable Orders of Withdrawal
0% to 2.50%..................................... 10,871,968 6 10,393,491 5 10,553,506 5
Money Market Fund
2.75%, 2.75% and 3.20% at June 30, 1994,
December 31, 1993 and 1992 (Respectively).... 24,131,752 12 27,581,053 14 26,792,144 14
51,593,115 26 53,806,634 27 51,565,328 26
Certificate Accounts
0 to 4%........................................... 35,770,158 18 40,596,221 20 26,054,936 13
4 to 5%........................................... 55,420,621 28 48,992,684 24 35,371,456 18
5 to 6%........................................... 34,235,495 17 28,243,514 14 22,944,948 12
6 to 7%........................................... 9,823,018 5 10,135,467 5 24,289,978 12
7 to 8%........................................... 7,448,760 4 15,112,287 7 20,442,145 11
8 to 9%........................................... 2,623,762 1 3,952,750 2 12,969,810 7
9 to 10%.......................................... 1,292,391 1 1,326,194 1 1,251,840 1
10 to 16%......................................... -- -- -- -- 38,364 --
146,614,205 74 148,359,117 73 143,363,477 74
Accrued Interest on Deposits...................... 143,751 -- 104,165 -- 224,922 --
Total............................................. $198,351,071 100 % $202,269,916 100 % $195,153,727 100 %
Weighted Average Cost of Deposits................. 4.3 % 4.4 % 5.1 %
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
<S> <C> <C>
(UNAUDITED)
Certificate Maturities:
Under 12 Months.................................................... $ 69,336,064 $ 66,206,700
12 to 24 Months.................................................... 50,122,934 52,348,223
24 to 36 Months.................................................... 13,675,301 17,309,070
Over 36 Months..................................................... 13,479,906 12,495,124
Total.............................................................. $146,614,205 $148,359,117
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $95,000 was $10,742,672 at June 30, 1994 (unaudited) and
$11,528,823 and $13,911,836 at December 31, 1993 and 1992, respectively.
A-17
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- BORROWED MONEY
The advances from the Federal Home Loan Bank are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
YEAR DUE INTEREST RATE 1994 1993 1992
<S> <C> <C> <C> <C>
(UNAUDITED)
1993 8.55% to 9.25% $ -- $ -- $ 9,000,000
1994 3.40% to 8.60% 13,200,000 19,000,000 7,500,000
1996 4.95% 3,000,000 3,000,000 --
Total $16,200,000 $22,000,000 $16,500,000
</TABLE>
As of June 30, 1994, first mortgage loans receivable in the amounts of
$12,083,252, FHLB stock in the amount of $3,053,400 and mortgage-backed
securities in the amounts of $11,022,406, were pledged to secure FHLB advances
(unaudited).
As of December 31, 1993 and 1992, first mortgage loans receivable in the
amounts of $15,632,472 and $24,951,819, respectively, FHLB stock in the amounts
of $3,053,400 and $3,053,400, respectively, and mortgage-backed securities in
the amounts of $14,722,573 and $7,508,800, respectively, were pledged to secure
FHLB advances.
At June 30, 1994 the maturities of FHLB advances and securities sold under
agreements to repurchase are as follows (unaudited):
<TABLE>
<S> <C>
1994....................................................................... $13,200,000
1996....................................................................... 3,000,000
Total...................................................................... $16,200,000
</TABLE>
At December 31, 1993 the maturities of FHLB advances and securities sold
under agreements to repurchase are as follows:
<TABLE>
<S> <C>
1994....................................................................... $19,980,000
1996....................................................................... 3,000,000
Total...................................................................... $22,980,000
</TABLE>
NOTE 10 -- INCOME TAXES
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rates of 34 percent to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Expected Income Tax Expense at Federal Tax Rate.............. $171,523 $ 205,137 $ 492,199 $ 425,236 $315,670
State Taxes, Net of Federal Benefit.......................... 22,975 84,421 62,662 225,335 86,756
Tax Basis Bad Debt Deduction................................. -- -- -- (135,458) (359,146)
Book Basis Provision for Bad Debts........................... -- -- -- 966,734 547,686
Net Gains on Sale of Real Estate............................. (56,052) (4,486) -- (124,007) (68,187)
Change in Valuation Allowance................................ (13,000) -- (30,545) -- --
Adjustment of Prior Year Accruals............................ -- (533,339) (533,339) (5,146) --
Other........................................................ 5,487 3,003 1,981 (851) (917)
Total Income Tax Expense..................................... $130,933 $(245,264) $ (7,042) $1,351,843 $521,862
</TABLE>
A-18
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- INCOME TAXES -- Continued
Deferred tax results from temporary differences in the recognition of
income and expense for tax and financial reporting purposes. The sources and tax
effects of these temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
Deferred Compensation Agreements........................................................... $ 41,277 $ 2,311 $ 1,936
Loan Fees Taxed When Received.............................................................. (154,253) 42,287 4,292
Interest Taxed but Reserved for Financial Reporting Purposes............................... (30,496) 6,971 (1,702)
Deferred State Taxes Relating to Above Items, Net of Federal Income Tax Benefits........... (28,547) 10,261 900
Adjustment of Prior Year Accruals.......................................................... -- 10,415 --
Other...................................................................................... 2,014 102 (325)
Deferred Tax............................................................................... $(170,005) $72,347 $ 5,101
</TABLE>
Retained earnings include approximately $2,127,000 and $2,288,000 as of
December 31, 1993 and 1992, representing special bad debt deductions allowed the
Bank for Federal income tax purposes. If the amounts that qualified as bad debt
deductions for Federal income tax purposes are later used for purposes other
than bad debt losses, Federal income taxes may be imposed at the then prevailing
corporate rates.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Bank's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
<S> <C> <C>
(UNAUDITED)
Allowance for Loan Losses.................................... $ 843,000 $ 781,000
Deferred Fees................................................ 160,000 162,000
Other -- Net................................................. 139,000 118,000
1,142,000 1,061,000
Valuation Allowance.......................................... (154,000) (167,000)
Net Deferred Tax Asset....................................... $ 988,000 $ 894,000
</TABLE>
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Bank had outstanding loan commitments approximating $1,014,450 at June
30, 1994 (unaudited) and $3,251,600 and $1,994,200 at December 31, 1993 and
1992, respectively. The June 30, 1994 commitments consist of no fixed rate loans
and variable rate loans totaling $1,014,450 (unaudited). The December 31, 1993
commitments consist of $1,156,850 of fixed rate loans at 6.84% and variable rate
loans totaling $2,094,750. These commitments are normally met from savings
account growth, existing loan payments, excess liquidity or borrowed money. It
is not anticipated that the Bank will be required to fund a substantial portion
of these commitments at any one time.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its borrowers.
These financial instruments are loan commitments to extend credit. These
instruments may, but not necessarily, involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. 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 amount of those instruments. The Bank uses the
same credit policies in making commitments as it does for on-balance sheet loans
receivable.
The Bank has issued letters of credit which guarantee the performance of a
customer to a third party, primarily relating to construction. At June 30, 1994,
seven letters of credit in the amount of $329,443 were outstanding (unaudited).
At December 31, 1993, seven letters of credit in the amount of $329,443 were
outstanding. The credit risk involved with these letters of
A-19
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES -- Continued
credit is similar to that involved in extending loans to customers. The Bank
holds cash or notes receivable as collateral on these commitments.
The Bank, also, had commitments to other lenders to sell approximately
$1,161,761 of loans as of June 30, 1994 (unaudited) and $3,213,567 and
$4,297,528 of loans as of December 31, 1993 and 1992, respectively.
The Bank is obligated as lessee under various leases for facilities with
approximate minimum annual rentals as follows:
<TABLE>
<S> <C>
1994........................................................................ $ 548,997
1995........................................................................ 513,510
1996........................................................................ 488,476
1997........................................................................ 144,061
1998........................................................................ 121,047
1999-2000................................................................... 71,536
Total....................................................................... $1,887,627
</TABLE>
The composition of total rental expenses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Minimum Rentals.................................................. $276,111 $253,065 $519,034 $503,852 $352,922
Contingent Rentals............................................... 27,256 37,282 65,474 78,222 154,912
Total............................................................ $303,367 $290,347 $584,508 $582,074 $507,834
</TABLE>
Contingent rental provisions include increases based on the Bank's
proportionate shares of increases in real estate taxes over base periods' taxes,
increases in operating expenses over base periods' expenses, and increases based
on the Consumer Price Index. The expiration dates range from 1994 to 2000 with
renewal options available.
NOTE 12 -- EMPLOYEE BENEFITS
The Bank and its subsidiaries have a qualified, noncontributory defined
benefit pension and life insurance plan covering substantially all of its
employees. The benefits are based on each employee's years of service up to a
maximum of 30 years, and the average of the highest three consecutive annual
salaries of the ten years prior to retirement. An employee becomes fully vested
upon completion of five years of qualifying service. It is the policy of the
Bank to fund the maximum amount that can be deducted for Federal income tax
purposes.
The amounts charged to operations related to pension cost are $37,800 and
$30,000 for the six months ended June 30, 1994 and 1993, respectively,
(unaudited).
Net 1993, 1992 and 1991 pension cost for the Bank's plan consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992 1991
<S> <C> <C> <C>
Normal Service Cost.................................................................... $ 73,502 $ 114,023 $ 129,978
Interest Expense....................................................................... 348,779 292,584 300,533
Actual Return on Plan Assets........................................................... (340,900) (346,435) (253,041)
All Other Components................................................................... (5,939) 59,828 (52,676)
Net Pension Cost..................................................................... $ 75,442 $ 120,000 $ 124,794
</TABLE>
A-20
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- EMPLOYEE BENEFITS -- Continued
The reconciliation of the funded status of the plan to the amount reported
in the Bank's statement of financial condition is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1992
<S> <C> <C>
Actuarial Present Value of Benefit Obligation
Vested Benefit Obligation....................................................................... $(3,231,488) $(2,922,078)
Non-vested Accumulated Benefits................................................................. (150,214) (142,799)
Accumulated Benefit Obligation.................................................................. (3,381,702) (3,064,877)
Effect of Projected Salary Increases............................................................ (1,641,191) (1,438,179)
Projected Benefit Obligation for Services Rendered to Date...................................... (5,022,893) (4,503,056)
Fair Value of Plan Assets Primarily Bonds and Mortgages......................................... 4,622,962 4,378,539
Projected Benefit Obligation in Excess of Plan Assets........................................... (399,931) (124,517)
Deferred Transition Gain to Be Amortized Over 17 Years.......................................... (17,946) (19,741)
Unrecognized Net Loss (Gain).................................................................... 257,038 (77,208)
Accrued Pension Costs on Statement of Financial Condition....................................... $ (160,839) $ (221,466)
</TABLE>
The expected long-term rate of return on plan assets used in determining
the actuarial present value of accumulated plan benefits was 8.00% for 1993 and
1992. The salary projection assumption used in determining the actuarial present
value of the projected benefit obligation was 5.50% for 1993 and 1992. The
assumed discount rate was 8.00% for 1993 and 1992.
As of December 31, 1976, the Bank entered into a supplemental retirement
agreement with a senior officer. The total liability under this agreement as of
December 31, 1993 and 1992 was $71,634 and $83,220, respectively. The cost of
the plan, including amortization of past service cost, for the six months ended
June 30, 1994 and 1993 was $4,296 and $4,992, respectively, (unaudited). The
cost of the plan, including amortization of past service cost, for the years
ended December 31, 1993, 1992 and 1991 was $9,984, $11,232 and $12,336,
respectively.
Effective October 1, 1992, the Bank has a 401(k) plan covering
substantially all its employees. Company contributions are equal to 100% of the
first 3% of each employee's salary and 50% of the next 2% of each employee's
salary subject to certain limitations. An employee is vested in the employer's
matching contribution after one year of service. For the six months ended June
30, 1994 and 1993, the Bank contributed approximately $47,756 and $30,419,
respectively, (unaudited). For the years ended December 31, 1993, 1992 and 1991,
the Bank contributed approximately $64,034, $17,298 and $-0-, respectively.
The Bank provides certain health care and life insurance benefits for
substantially all of its retired employees. The plan is not funded and the
following table sets forth the plan's status recognized in the Bank's statement
of financial condition at December 31, 1993:
<TABLE>
<S> <C>
Accumulated Postretirement Benefit
Obligation in Excess of Plan Assets................................................... $ 1,638,421
Unrecognized Transition Obligation...................................................... 1,384,681
Accrued Postretirement Benefit Cost..................................................... $ 253,740
</TABLE>
For the six months ended June 30, 1994 and 1993, the Bank recognized
approximately $172,000 and $97,200, respectively, for postretirement health care
and life insurance benefits (unaudited).
Net postretirement benefit cost for the year ended December 31, 1993
consisted of the following components:
<TABLE>
<S> <C>
Service Cost.............................................................................. $ 83,518
Interest Cost............................................................................. 115,864
Amortization of Transition Obligation..................................................... 72,878
Net Periodic Postretirement Benefit Cost.................................................. $ 272,260
</TABLE>
A-21
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- EMPLOYEE BENEFITS -- Continued
For the year ended December 31, 1992 and 1991, the Bank recognized
approximately $12,000 and $10,000, respectively, for postretirement health care
and life insurance benefits.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of January 1, 1993 was 12.5% for 1993
decreasing linearly each successive year until it reaches 6% in 2005, after
which it remains constant. A one percentage point increase in the assumed health
care cost trend rate for each year would increase the accumulated postretirement
benefit obligation as of January 1, 1993 and net postretirement health care cost
by approximately $346,000. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 8%.
NOTE 13 -- PREFERRED STOCK
Pursuant to an Exchange Agreement dated January 31, 1988, between the Bank
and Federal Savings and Loan Insurance Corporation (FSLIC), the Bank issued
24,500 shares of Adjustable Rate Cumulative Preferred Stock Series A to FSLIC in
exchange for $1,225,000 of net worth certificates held by FSLIC. The 24,500
shares of nonconvertible cumulative adjustable preferred stock are redeemable at
the option of FSLIC and have a stated value and liquidation value of $50 per
share. The preferred stock terms prohibit payment of dividends on common stock
shares in the event that dividends on the preferred stock are in arrears.
Dividends are cumulative and payable when and as declared by the Bank's Board of
Directors and are based on yields of selected U. S. Government Securities.
Dividends in arrears totaled $172,243 and $132,055, or $9.37 and $5.39 per
share, at December 31, 1992 and 1991, respectively. During the years ended
December 31, 1993, 1992 and 1991, the Bank paid $204,094, $45,381 and $-0-,
respectively, in dividends on its Series A Preferred Stock.
In June, 1992, the Bank entered into an agreement with the OTS under which
the preferred stock may be repurchased at less than the stated value of $50
based on a formula related to the dividend rate on the stock. In June, 1992, the
Bank repurchased 6,125 shares of the preferred stock having a stated value of
$306,250 for $174,564. During 1993, the Bank repurchased the remaining 18,375
shares of the preferred stock having a stated value of $918,750 for $498,125.
NOTE 14 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
Federal banking regulations require that thrifts maintain certain minimum
capital requirements including (i) tangible capital to adjusted total assets of
1.5%, (ii) core capital to adjusted total assets of at least 3.00% for the
strongest thrifts and not less than 4.00% to 5.00% for other thrifts, (iii)total
capital to total risk-adjusted assets of 8.00% [at least 50% of the total
capital must be core capital (i.e. core capital to total risk-adjusted assets
must be at least 4.00%)]. Failure to meet these minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
banking regulators that could have a material effect on the thrift's financial
statements.
In August 1993, the Office of Thrift Supervision (OTS) published a final
rule, "Regulatory Capital: Interest Rate Risk Component", which, effective July
1, 1994, will require a thrift to deduct from its total capital an interest rate
risk component for interest rate risk that is considered "above normal". A
thrift would have "above normal" interest rate risk if it sustains a loss in net
portfolio value (NPV) (as defined) of more than 2.00% of the thrift's assets
upon a 200 basis point change in interest rates. If a thrift's measured interest
rate risk (as defined) exceeds 2.00%, it is required to deduct from total
capital an amount equal to 50% of that excess. Thrifts whose measured interest
rate risk is less than or equal to 2.00% would not be required to deduct from
total capital an amount for interest rate risk. The impact of this regulation on
the Bank is not determinable at this time.
A-22
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL -- Continued
The following is a reconciliation of GAAP capital to regulatory capital at
June 30, 1994 (unaudited):
<TABLE>
<CAPTION>
REGULATORY
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C> <C>
GAAP Capital.................................................... $ 12,531,952 $12,532,000 $12,532,000 $12,532,000
Additional Capital Items
General Valuation Allowances -- Limited....................... -- -- 1,627,000
Regulatory Capital -- Computed.................................. 12,532,000 12,532,000 14,159,000
Minimum Capital Requirement..................................... 3,484,000 9,291,000 10,409,000
Regulatory Capital -- Excess.................................... $ 9,048,000 $ 3,241,000 $ 3,750,000
Regulatory Capital as a Percentage (1).......................... 5.40% 5.40% 10.90%
Minimum Capital Required as a Percentage (1).................... 1.50 4.00 8.00
Regulatory Capital as a Percentage in Excess of
Requirement................................................... 3.90% 1.40% 2.90%
</TABLE>
(1) Tangible capital and core capital are computed as a percentage of total
assets of $232,334,000. Risk-based capital is computed as a percentage of
risk-weighted assets of $130,111,000.
The following is a reconciliation of GAAP capital to regulatory capital at
December 31, 1993:
<TABLE>
<CAPTION>
REGULATORY
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C> <C>
GAAP Capital.................................................... $ 12,221,284 $12,221,000 $12,221,000 $12,221,000
Additional Capital Items
General Valuation Allowances -- Limited....................... -- -- 1,672,000
Regulatory Capital -- Computed.................................. 12,221,000 12,221,000 13,893,000
Minimum Capital Requirement..................................... 3,644,000 9,716,000 10,703,000
Regulatory Capital -- Excess.................................... $ 8,577,000 $ 2,505,000 $ 3,190,000
Regulatory Capital as a Percentage (1).......................... 5.03% 5.03% 10.38%
Minimum Capital Required as a Percentage(1)..................... 1.50 4.00 8.00
Regulatory Capital as a Percentage in Excess of
Requirement................................................... 3.53% 1.03% 2.38%
</TABLE>
(1) Tangible capital and core capital are computed as a percentage of total
assets of $242,903,000. Risk-based capital is computed as a percentage of
risk-weighted assets of $133,787,000.
The Bank is subject to certain dividend restrictions set forth by the OTS.
Under such restrictions, the institution may not, without the approval of the
OTS, declare dividends in excess of the higher of either, the sum of the current
year's net income and the amount that would reduce by one-half its surplus
capital ratio (as defined) or 75 percent of its net income for the most recent
four-quarter period.
A-23
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL -- Continued
The Bank has issued options to directors and key officers and employees to
purchase shares of stock at the initial offering price of the stock. The options
were exercisable upon grant and remain exercisable for ten years from the grant
date. The schedule of option activity is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1994 1993 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Outstanding, Beginning of Year.............................................. 83,400 87,000 87,000 87,000 90,000
Issued -- Stock Dividend.................................................... 8,340 -- -- -- --
Cancelled................................................................... -- -- -- -- (3,000)
Exercised................................................................... -- -- (3,600) -- --
Outstanding, End of Year.................................................... 91,740 87,000 83,400 87,000 87,000
</TABLE>
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
For investment and mortgage-backed securities fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS RECEIVABLE
For homogeneous categories of loans, such as fixed-rate residential
mortgage loans, adjustable residential mortgage loans, fixed-rate commercial
mortgage loans, adjustable commercial mortgage loans, construction loans,
consumer loans, and secured and unsecured lines of credit, fair value 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 maturities.
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.
FHLB ADVANCES
Rates currently available to the bank for advances with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The amounts shown under "carrying
amount" represent accruals or deferred revenue (fees) arising from those
unrecognized financial instruments.
A-24
<PAGE>
HOME FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The estimated fair value of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Short-Term Investments.......................... $ 2,025,707 $ 2,025,707 $ 10,846,633 $ 10,846,633
FHLB Stock............................................... 3,053,400 3,053,400 3,053,400 3,053,400
Investment Securities.................................... 18,555,586 18,593,360 10,112,570 10,207,360
Mortgage-Backed Securities............................... 21,290,737 21,684,254 21,352,772 21,882,944
Loans.................................................... 195,067,536 174,576,491
Less: Allowance for Loan Losses.......................... (2,297,025) (1,491,923)
192,770,511 191,679,000 173,084,568 175,557,000
FINANCIAL LIABILITIES:
Deposits................................................. 202,165,751 203,803,000 194,928,805 197,656,000
FHLB Advances............................................ 22,000,000 22,201,000 16,500,000 17,487,000
Securities Sold Under Agreements to Repurchase........... 980,000 980,000 -- --
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to Extend Credit............................. 21,055 25,500 24,732 55,500
Standby Letters of Credit................................ -- 3,300 -- 3,000
</TABLE>
A-25
<PAGE>
ANNEX B
AGREEMENT AND PLAN OF ACQUISITION
AGREEMENT AND PLAN OF ACQUISITION, dated as of the 27th day of May, 1994
(this "Plan"), by and among HOME FEDERAL SAVINGS BANK ("Home Federal"), FIRST
UNION CORPORATION ("First Union"), FIRST UNION CORPORATION OF VIRGINIA
("FUNC-VA") and FIRST UNION NATIONAL BANK OF WASHINGTON, D.C. ("FUNB-DC").
RECITALS:
(A) HOME FEDERAL. Home Federal is a stock savings bank duly organized and
existing in good standing under the laws of the United States, with its
principal executive offices located in Washington, D.C. As of the date hereof,
Home Federal has 10,000,000 authorized shares of common stock, each of $0.01 par
value ("Home Federal Common Stock"), and 5,000,000 authorized shares of
Nonconvertible Cumulative Adjustable Preferred Stock, each of $0.01 par value
("Home Federal Preferred Stock") (no other class of capital stock being
authorized), of which 1,009,531 shares of Home Federal Common Stock and no
shares of Home Federal Preferred Stock, are issued and outstanding. As of March
31, 1994, Home Federal had capital of $12,391,412, divided into common stock of
$10,095, paid-in capital of $4,549,093 and retained earnings, net of loss on
mortgage-backed securities available for sale, of $7,832,224.
(B) FIRST UNION. First Union is a corporation duly organized and existing
in good standing under the laws of the State of North Carolina, with its
principal executive offices located in Charlotte, North Carolina, and a
multi-bank holding company, registered under the Bank Holding Company Act of
1956, as amended. As of the date hereof, First Union has 750,000,000 authorized
shares of common stock, each of $3.33 1/3 par value (together with the First
Union Rights (as hereinafter defined) attached thereto, "First Union Common
Stock"), 40,000,000 authorized shares of Class A Preferred Stock, no-par value
("First Union Class A Preferred Stock"), and 10,000,000 authorized shares of
Preferred Stock, no-par value ("First Union Preferred Stock") (no other class of
capital stock being authorized), of which 169,443,814 shares of First Union
Common Stock, no shares of First Union Class A Preferred Stock and 6,318,350
shares of Series 1990 Cumulative Perpetual Adjustable Rate Preferred Stock,
constituting a single series of First Union Preferred Stock, were issued and
outstanding as of March 31, 1994.
(C) FUNC-VA. FUNC-VA is a corporation duly organized and existing in good
standing under the laws of the Commonwealth of Virginia, with its principal
executive offices located in Roanoke, Virginia. As of the date hereof, FUNC-VA
has 10,000 authorized shares of Class A common stock each of $1.00 par value
("FUNC-VA Common Stock") and 5,000 authorized shares of Class B common stock
each of $1.00 par value ("FUNC-VA Class B Stock")(no other class of capital
stock being authorized), of which 1,001 shares of FUNC-VA Common Stock are
issued and outstanding and owned by First Union and 134 shares of FUNC-VA Class
B Stock are issued and outstanding and owned by Washington Bankshares, Inc., a
wholly-owned subsidiary of First Union.
(D) FUNB-DC. FUNB-DC is a national banking association duly organized and
existing under the laws of the United States, with its principal executive
offices located in Washington, D.C. As of the date hereof, FUNB-DC has 1,000,000
authorized shares of common stock, each of $4.00 par value ("FUNB-DC Common
Stock") (no other class of capital stock being authorized), of which 682,829
shares are issued and outstanding and owned by FUNC-VA (other than directors'
qualifying shares). As of March 31, 1994, FUNB-DC had capital of $171,199,628
divided into common stock of $2,731,316, surplus of $168,910,518, undivided
profits, including capital reserves, of $5,478,437, and net unrealized holding
gains (losses) on available-for-sale securities of ($5,920,643).
(E) STOCK OPTION AGREEMENT; VOTING AGREEMENT. As a condition and inducement
to First Union's, FUNC-VA's and FUNB-DC's willingness to enter into this Plan,
Home Federal has entered into a Stock Option Agreement with First Union (the
"Stock Option Agreement") in the form attached hereto as Exhibit A, pursuant to
which Home Federal has granted to First Union an option to purchase, under
certain circumstances, shares of Home Federal Common Stock.
(F) RIGHTS, ETC. Except as Previously Disclosed (as hereinafter defined) in
Schedule 4.01(C), there are no shares of Home Federal Common Stock or Home
Federal Preferred Stock authorized and reserved for issuance, Home Federal does
not have any Rights (as defined below) issued or outstanding with respect to its
capital stock, and Home Federal does not have any commitment to authorize, issue
or sell any such shares or Rights, except pursuant to this Plan and the Stock
Option
B-1
<PAGE>
Agreement. The term "Rights" means securities or obligations convertible into or
exchangeable for, or giving any person any right to subscribe for or acquire, or
any options, calls or commitments relating to, shares of capital stock.
(G) APPROVALS. The Board of Directors of each of Home Federal, First Union,
FUNC-VA and FUNB-DC has approved, at meetings of each of such Boards of
Directors, this Plan and (in the case of Home Federal and First Union) the Stock
Option Agreement and has authorized the execution hereof and thereof in
counterparts.
(H) OTHER. It is the intention of the parties to this Plan that the
transactions contemplated hereby shall include the right of FUNC-VA to acquire
the assets and assume the liabilities of Home Federal and to assign such right
to any corporation which FUNC-VA controls.
In consideration of their mutual promises and obligations, the parties
hereto adopt and make this Plan and prescribe the terms and conditions thereof
and the manner and basis of carrying it into effect, which shall be as follows:
I. THE ACQUISITION.
1.01. THE PURCHASE AND SALE. Subject to and upon the terms and conditions
of this Plan, on the Effective Date (as hereinafter defined), Home Federal shall
sell, transfer, convey assign and deliver to FUNC-VA (or a subsidiary
corporation designated by FUNC-VA pursuant to Section 1.02 that is controlled by
FUNC-VA) all of the assets of Home Federal, including cash balances on the
Effective Date (the "Home Federal Assets"). FUNC-VA shall cause such subsidiary
to purchase, acquire and accept the Home Federal Assets from, and assume all
liabilities (the "Home Federal Liabilities") of, Home Federal.
1.02. RIGHT TO DIRECT HOME FEDERAL ASSETS AND HOME FEDERAL LIABILITIES. As
contemplated in paragraph (H) of the Recitals above, FUNC-VA may direct that the
Home Federal Assets be transferred to and that the Home Federal Liabilities be
assumed by a corporation controlled by FUNC-VA. Pursuant to the foregoing and
the authority of Revenue Rulings 64-73 and 70-224, FUNC-VA hereby assigns its
right to acquire the Home Federal Assets and assume the Home Federal Liabilities
to FUNB-DC, and also directs Home Federal to transfer all of the Home Federal
Assets and the Home Federal Liabilities to FUNB-DC on the Effective Date by
means of a statutory merger (the "Merger").
1.03. THE MERGER. On the Effective Date:
(A) THE CONTINUING BANK. Home Federal shall be merged with and into
FUNB-DC, the separate existence of Home Federal shall cease and FUNB-DC (the
"Continuing Bank") shall survive, the name of the Continuing Bank shall be
"First Union National Bank of Washington, D.C." and the Continuing Bank shall
continue to conduct the business of a national banking association at its main
office in Washington, D.C. and at the legally established branches of Home
Federal and FUNB-DC.
(B) RIGHTS, ETC. The Continuing Bank shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises, of a public as well as of
a private nature, of each of the banks so merged; and all property, real
personal and mixed, and all debts due on whatever account, and all other choses
in action, and all and every other interest, of or belonging to or due to each
of the banks so merged, shall be taken and deemed to be transferred to and
vested in the Continuing Bank without further act or deed, including
appointments, designations and nominations and all other rights and interests in
any fiduciary capacity; and the title to any real estate or any interest
therein, vested in any of such banks, shall not revert or be in any way impaired
by reason of the Merger.
(C) LIABILITIES, ETC. The Continuing Bank shall thenceforth be responsible
and liable for all the liabilities, obligations and penalties of the banks so
merged (including liabilities arising out of the operation of any trust
departments). All rights of creditors and obligors and all liens on the property
of each of Home Federal and FUNB-DC shall be preserved unimpaired.
(D) CHARTER; BY-LAWS; DIRECTORS; OFFICERS. The Charter and By-Laws of the
Continuing Bank shall be those of FUNB-DC, as in effect immediately prior to the
Merger becoming effective. The directors and officers of FUNB-DC in office
immediately prior to the Merger becoming effective shall be the directors and
officers of the Continuing Bank, together with such additional directors and
officers as may thereafter be elected, who shall hold office until such time as
their successors are elected and qualified.
(E) OUTSTANDING STOCK OF FUNB-DC. The amount of the capital stock of
FUNB-DC shall be not less than $2,731,316 and shall consist of not less than
682,829 issued and outstanding shares of common stock, each of $4.00 par value,
and the issued and outstanding shares shall remain issued and outstanding as
shares of FUNB-DC, each of $4.00 par value, and the holders thereof shall retain
their rights therein.
B-2
<PAGE>
1.04. EFFECTIVE DATE. Subject to the conditions to the obligations of the
parties to effect the Merger as set forth in Article VI, the effective date (the
"Effective Date") shall be such date as First Union shall notify Home Federal in
writing not less than five days prior thereto, which date shall not be more than
30 days after such conditions have been satisfied or waived.
II. CONSIDERATION.
2.01. MERGER CONSIDERATION. Subject to the provisions of this Plan, on the
Effective Date:
(A) OUTSTANDING FIRST UNION COMMON STOCK. The shares of First Union Common
Stock (including the rights ("First Union Rights") issued pursuant to a
Shareholder Protection Rights Agreement, dated December 18, 1990 (the "First
Union Rights Agreement")), issued and outstanding immediately prior to the
Effective Date shall, on and after the Effective Date, remain as issued and
outstanding shares of First Union Common Stock.
(B) OUTSTANDING HOME FEDERAL COMMON STOCK. Each share (excluding shares (i)
held by dissenting stockholders ("Dissenters' Shares"), or (ii) held by Home
Federal or any of its subsidiaries or by First Union or any of its subsidiaries,
in each case other than in a fiduciary capacity or as a result of debts
previously contracted "Treasury Shares")) of Home Federal Common Stock issued
and outstanding immediately prior to the Effective Date shall, by virtue of the
Merger, automatically and without any action on the part of the holder thereof,
become and be converted into the right to receive 0.4835 shares of First Union
Common Stock (the "Exchange Ratio"), subject to possible adjustment as set forth
in Sections 2.06 and 7.05, and any references in this Plan to "Exchange Ratio"
shall thereafter be deemed to refer to the Exchange Ratio as adjusted pursuant
to such Sections, as applicable.
(C) OUTSTANDING FUNB-DC COMMON STOCK. The shares of FUNB-DC Common Stock
issued and outstanding immediately prior to the Effective Date, shall, on and
after the Effective Date, remain as issued and outstanding shares of FUNB-DC
Common Stock.
2.02. STOCKHOLDER RIGHTS; STOCK TRANSFERS. On the Effective Date, holders
of Home Federal Common Stock shall cease to be, and shall have no rights as,
stockholders of Home Federal, other than to receive the consideration provided
under this Article II. After the Effective Date, there shall be no transfers on
the stock transfer books of Home Federal or the Continuing Bank of the shares of
Home Federal Common Stock which were issued and outstanding immediately prior to
the Effective Date.
2.03. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of First Union Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, First Union shall pay to each holder of Home Federal Common Stock who
would otherwise be entitled to a fractional share an amount in cash determined
by multiplying such fraction by the last sale price of First Union Common Stock
on the last trading day prior to the Effective Date, as reported by the New York
Stock Exchange (the "NYSE") Composite Transactions reporting system (as reported
in THE WALL STREET JOURNAL).
2.04. EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, First Union shall send or cause to be sent to each former stockholder of
Home Federal of record immediately prior to the Effective Date transmittal
materials for use in exchanging such stockholder's certificates of Home Federal
Common Stock for the consideration set forth in this Article II. The
certificates representing the shares of First Union Common Stock into which
shares of such stockholder's Home Federal Common Stock are converted on the
Effective Date, any fractional share check which such stockholder shall be
entitled to receive, and any dividends paid on such shares of First Union Common
Stock for which the record date for determination of stockholders entitled to
such dividends is on or after the Effective Date, will be delivered to such
stockholder only upon delivery to First Union National Bank of North Carolina
(the "Exchange Agent") of the certificates representing all of such shares of
Home Federal Common Stock (or indemnity satisfactory to First Union and the
Exchange Agent, in their judgment, if any of such certificates are lost, stolen
or destroyed). No interest will be paid on any such fractional share check or
dividends to which the holder of such shares shall be entitled to receive upon
such delivery. Certificates surrendered for exchange by any person constituting
an "affiliate" of Home Federal for purposes of Rule 145 of the Securities Act
(as hereinafter defined) shall not be exchanged for certificates representing
First Union Common Stock until First Union has received a written agreement from
such person as specified in Section 4.01(W).
2.05. DISSENTING STOCKHOLDERS. To the extent, if any, that dissenters'
rights of appraisal are available to any holder of shares of Home Federal Common
Stock under applicable law, any such holder who perfects such rights in
accordance with such applicable law, shall be entitled to receive the value of
such shares in cash as determined pursuant to such applicable law.
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2.06. ANTI-DILUTION PROVISIONS. In the event First Union changes the number
of shares of First Union Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding First Union Common Stock and
the record date therefor shall be prior to the Effective Date, the Exchange
Ratio shall be proportionately adjusted.
2.07. TREASURY SHARES. Each of the shares of Home Federal Common Stock held
by Home Federal or any of its subsidiaries or by First Union or any of its
subsidiaries, in each case other than in a fiduciary capacity or as a result of
debts previously contracted, shall be canceled and retired at the effectiveness
of the Merger and no consideration shall be issued in exchange therefor.
2.08. RESERVATION OF RIGHT TO REVISE TRANSACTION. First Union may at any
time change the method of effecting the acquisition of Home Federal by First
Union if and to the extent it deems such change to be desirable to consummate
the acquisition; provided, however, that no such change shall (i) alter or
change the amount or kind of consideration to be issued to holders of Home
Federal Common Stock as provided for in this Plan, (ii) adversely affect the tax
treatment to Home Federal stockholders as a result of receiving such
consideration, or (iii) materially impede or delay receipt of any approval
referred to in Section 6.02 or the consummation of the transactions contemplated
by this Plan.
2.09. OPTIONS. From and after the Effective Date, (i) all employee or
director stock options to purchase shares of Home Federal Common Stock
("Options"), which are then outstanding and unexercised, shall be converted into
and become options with respect to First Union Common Stock, and First Union
shall assume each such Option, in accordance with the terms of the plan and
agreement by which it is evidenced, (ii) each such Option assumed by First Union
may be exercised solely for shares of First Union Common Stock, (iii) the number
of shares of First Union Common Stock subject to such Option shall be equal to
the number of shares of Home Federal Common Stock subject to such Option
immediately prior to the Effective Date multiplied by the Exchange Ratio and
rounded to the nearest whole share, and (iv) the per share price under such
Option shall be adjusted by dividing the per share exercise price of each such
Option by the Exchange Ratio, and rounding up to the nearest cent. The number of
shares of Home Federal Common Stock which are issuable upon exercise of Options
as of the date hereof are Previously Disclosed in Schedule 2.09.
III. ACTIONS PENDING MERGER.
Without the prior written consent of First Union, Home Federal shall
conduct its business in the ordinary and usual course consistent with past
practice and shall use its best efforts to maintain and preserve its business
organization, employees and advantageous business relationships and retain the
services of its officers and key employees, and Home Federal will not, and will
cause each of its subsidiaries not to and Home Federal will not agree and will
cause each of its subsidiaries not to agree to:
3.01. CAPITAL STOCK. Except for the exercise of Options in accordance with
their terms and except for or as otherwise permitted in or contemplated by this
Plan and the Stock Option Agreement, issue, sell, or otherwise permit to become
outstanding any additional shares of Home Federal Common Stock, or Home Federal
Preferred Stock, or any other capital stock of Home Federal, any stock
appreciation rights, or any Rights, or enter into any agreement with respect to
the foregoing, or permit any additional shares of Home Federal Common Stock to
become subject to new grants of employee stock options, stock appreciation
rights, or similar stock based employee compensation rights.
3.02. DIVIDENDS, ETC. Make, declare or pay any dividend on or in respect of
(other than dividends from subsidiaries to Home Federal), or declare or make any
distribution on, or directly or indirectly combine, redeem, reclassify, purchase
or otherwise acquire, any shares of its capital stock or, other than the
exercise of Options in accordance with their terms and other than as permitted
under the Stock Option Agreement, authorize the creation or issuance of, or
issue, any additional shares of its capital stock or any Rights with respect
thereto.
3.03. INDEBTEDNESS; LIABILITIES; ETC. Other than in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual, corporation
or other entity.
3.04. POLICIES; CAPITAL EXPENDITURES; ETC. Except as may be directed by any
regulatory agency, (i) change its or its subsidiaries' lending, investment,
liability management, operations and other material policies and procedures in
any material respect, except such changes as are in accordance and in an effort
to comply with Section 5.11 of this Plan, or (ii) incur or commit to incur any
capital expenditures other than in the ordinary course of business and not
exceeding $50,000, or (iii) commence any new lines of business.
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3.05. LIENS AND ENCUMBRANCES. Other than in the ordinary course of
business, voluntarily suffer the imposition on any of its assets any lien,
charge, or encumbrance (collectively, "Liens"), or voluntarily permit any Lien
to exist.
3.06. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Enter into or amend any
employment, severance or similar agreement or arrangement with any director,
officer or employee, or grant any salary or wage increase or increase any
employee benefit (including incentive or bonus payments), except, after prior
consultation with First Union, normal individual increases in compensation to
employees in the ordinary course of business consistent with past practice.
3.07. BENEFIT PLANS. Enter into or modify (except as may be required by
applicable law) any pension, retirement, stock option, stock purchase, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance or
other employee benefit, incentive or welfare contract, plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or other employees, including without limitation taking any action that
accelerates the vesting or exercise of any benefits payable thereunder.
3.08. CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion of its
assets, business or properties, which is material to Home Federal and its
subsidiaries taken as a whole, or merge or consolidate with, or acquire all or
any portion of, the business or property of any other entity which is material
to Home Federal and its subsidiaries taken as a whole (except foreclosures or
acquisitions of control by Home Federal in its fiduciary capacity in each case
in the ordinary course of business consistent with past practice).
3.09. AMENDMENTS. Amend its Articles of Incorporation, Charter or Bylaws.
IV. REPRESENTATIONS AND WARRANTIES.
4.01. HOME FEDERAL REPRESENTATIONS AND WARRANTIES. Home Federal hereby
represents and warrants to First Union and FUNB-DC as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect
to it are true and correct.
(B) ORGANIZATION, STANDING, AND AUTHORITY. It is duly qualified to do
business and is in good standing in the states of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and in which the failure to be duly
qualified, in the aggregate, is reasonably likely to have a Material Adverse
Effect (as hereinafter defined). Home Federal has in effect all federal, state,
local, and foreign governmental authorizations necessary for it to own or lease
its properties and assets and to carry on its business as it is now conducted,
except for authorizations, the absence of which, individually or in the
aggregate, is not reasonably likely to have a Material Adverse Effect.
(C) SHARES. The outstanding shares of it are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive rights
(and were not issued in violation of any preemptive rights). Except as
Previously Disclosed in Schedule 4.01(C) and except as provided under the Stock
Option Agreement, there are no shares of capital stock of Home Federal
outstanding and no outstanding Rights.
(D) HOME FEDERAL SUBSIDIARIES. Home Federal has Previously Disclosed in
Schedule 4.01(D) a list of all of the subsidiaries of Home Federal (each an
"Home Federal Subsidiary" and, collectively, the "Home Federal Subsidiaries")
together with the state of incorporation for each such Home Federal Subsidiary
and the states or jurisdictions in which such Home Federal Subsidiary is
qualified to conduct business. Home Federal is an "insured depository
institution" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder. No equity securities of any of the Home Federal
Subsidiaries are or may become required to be issued (other than to Home
Federal) by reason of any Rights. There are no contracts, commitments,
understandings, or arrangements by which any of the Home Federal Subsidiaries is
or may be bound to sell or otherwise transfer any shares of the capital stock of
any Home Federal Subsidiary, and there are no contracts, commitments,
understandings, or arrangements relating to the rights of Home Federal to vote
or to dispose of such shares. All of the shares of capital stock of each Home
Federal Subsidiary held by Home Federal or an Home Federal Subsidiary are fully
paid and nonassessable and are owned by Home Federal or an Home Federal
Subsidiary free and clear of any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance. Each Home Federal Subsidiary is in
good standing under the laws of the jurisdiction in which it is incorporated or
organized, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and in which the failure to be duly
qualified is reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect. Except as Previously Disclosed in Schedule 4.01(D),
Home Federal does not own beneficially, directly or indirectly, any shares of
any equity securities or similar interests of any corporation, bank, business
trust, association or other
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organization. The deposits of Home Federal are insured by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). Home Federal is a member in good standing with the
Federal Home Loan Bank of Atlanta (the "FHL Bank"). Except as Previously
Disclosed in Schedule 4.01(D), neither Home Federal nor any Home Federal
Subsidiary holds any interest in a partnership or joint venture of any kind.
(E) CORPORATE POWER. It and each of its subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval by
its stockholders referred to in Section 6.01, each of this Plan and the Stock
Option Agreement has been authorized by all necessary corporate action of it and
is a valid and binding agreement of it enforceable against it in accordance with
its terms, subject to bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(G) NO DEFAULTS. Subject to the approval by its stockholders referred to in
Section 6.01, the required regulatory approvals referred to in Section 6.02, and
the required filings under federal and state securities' laws, the execution,
delivery and performance of this Plan and the Stock Option Agreement and the
consummation of the transactions contemplated hereby and thereby by it, do not
and will not constitute (i) a breach or violation of, or a default under, any
law, rule or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of it or of any of its
subsidiaries or to which it or any of its subsidiaries or properties is subject
or bound, which breach, violation or default is reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect, or (ii) a breach or
violation of, or a default under, its Articles of Incorporation, Charter or
Bylaws; and the consummation of the transactions contemplated by this Plan and
the Stock Option Agreement will not require any consent or approval under any
law, rule, regulation, judgment, decree, order, governmental permit or license
or, except as Previously Disclosed in Schedule 4.01(G), the consent or approval
of any other party to any such agreement, indenture or instrument, other than
the required approvals of applicable regulatory authorities referred to in
Section 6.02 and Section 8 of the Stock Option Agreement.
(H) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.01(H),
(i) its Annual Report on Form 10-K for the fiscal year ended December 31, 1993,
and all other documents filed or to be filed subsequent to December 31, 1993
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (together with the rules and regulations thereunder, the "Exchange
Act"), in the form filed with the Office of Thrift Supervision (the "OTS") (in
each such case, the "Home Federal Shareholder Financial Reports"), and (ii) its
Thrift Financial Report for the fiscal year ended December 31, 1993, and all
other Thrift Financial Reports filed or to be filed subsequent to December 31,
1993, in the form filed with the OTS (in each case, the "Home Federal OTS
Financial Reports" and together with the "Home Federal Shareholder Financial
Reports," the "Home Federal Financial Reports") did not 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 to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Home Federal Financial
Reports (including the related notes and schedules thereto) fairly presents and
will fairly present the financial position of the entity or entities to which it
relates as of its date and each of the statements of income and changes in
stockholders' equity and cash flows or equivalent statements in the Home Federal
Financial Reports (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, as to the Home Federal
Shareholder Financial Reports, and in accordance with regulatory accounting
principles consistently applied to federal savings banks, as to the Home Federal
OTS Financial Reports, except in each case as may be noted therein, subject to
normal and recurring year-end audit adjustments in the case of unaudited
statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. None of Home Federal or the Home
Federal Subsidiaries has any obligation or liability (contingent or otherwise)
that, individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect, except (i) as reflected in the Home Federal Financial Statements
prior to the date of this Plan, and (ii) for commitments and obligations made,
or liabilities incurred, in the ordinary course of its business consistent with
past practice since December 31, 1993. Since December 31, 1993, none of Home
Federal or the Home Federal Subsidiaries has incurred or paid any obligation or
liability (including any obligation or liability incurred in connection with any
acquisitions in which any form of direct financial assistance of the federal
government or any agency thereof has been provided to Home Federal or any Home
Federal Subsidiary) which, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect.
(J) NO EVENTS. Since December 31, 1993, no event has occurred which,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect.
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(K) PROPERTIES. Except as reflected in the Home Federal Financial
Statements, Home Federal and the Home Federal Subsidiaries have good and
marketable title, free and clear of all Liens, to all of the properties and
assets, tangible and intangible, reflected in the Home Federal Financial
Statements as being owned by Home Federal or the Home Federal Subsidiaries as of
the dates thereof other than those that, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect. All buildings and all
fixtures, equipment, and other property and assets which are held under leases
or subleases by any of Home Federal or the Home Federal Subsidiaries are held
under valid leases or subleases enforceable in accordance with their respective
terms, other than any such exceptions to validity or enforceability that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect. The policies of fire, theft, liability, fidelity, and other
insurance maintained with respect to the assets or businesses of Home Federal or
the Home Federal Subsidiaries provide adequate coverage against loss.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.01(L), no litigation, proceeding or controversy before any court or
governmental agency is pending which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect or which alleges claims
under any fair lending law or other law relating to discrimination, including,
without limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the
Community Reinvestment Act and the Home Mortgage Disclosure Act, and, to the
best of its knowledge, no such litigation, proceeding or controversy has been
threatened; and except as Previously Disclosed in Schedule 4.01(L) neither it
nor any of its subsidiaries or properties is a party to or is subject to any
order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, any federal or state
governmental agency or authority (the "Regulatory Authorities") charged with the
supervision or regulation of depository institutions or engaged in the insurance
of deposits (including, without limitation, the OTS, the FHL Bank and the FDIC)
or the supervision or regulation of Home Federal or any of the Home Federal
Subsidiaries and neither it nor any of the Home Federal Subsidiaries has been
advised by any such Regulatory Authority that such Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum or
understanding, commitment letter or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in Schedule
4.01(M), each of Home Federal and the Home Federal Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and have made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit them to own
their businesses as presently conducted and that are material to the
business of Home Federal and the Home Federal Subsidiaries, taken as a
whole; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to the best knowledge of Home
Federal, no suspension or cancellation of any of them is threatened; and
all such filings, applications and registrations are current;
(2) has received no notification or communication from any Regulatory
Authority or the staff thereof (i) asserting that any of Home Federal or
any Home Federal Subsidiary is not in compliance with any of the statutes,
regulations, or ordinances which such Regulatory Authority enforces, which,
as a result of such noncompliance in any such instance, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect, (ii)
threatening to revoke any license, franchise, permit, or governmental
authorization which revocation, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect, or (iii) requiring any
of Home Federal or any Home Federal Subsidiary (or any of their officers,
directors, or controlling persons) to enter into a cease and desist order,
agreement, or memorandum of understanding (or requiring the board of
directors thereof to adopt any resolution or policy);
(3) is not required to give prior notice to any federal banking or
thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive;
(4) is, in the case of Home Federal, able to receive brokered deposits
without a waiver; and
(5) is in substantial compliance with all fair lending laws or other
laws relating to discrimination, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act and the Home Mortgage Disclosure Act.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in Schedule 4.01(N),
none of Home Federal or the Home Federal Subsidiaries, nor any of their
respective assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, any contract or agreement or amendment
thereto that in each case would be required to be filed as an exhibit to a Form
10-K filed by Home Federal that has not been filed as an exhibit to Home
Federal's Form 10-K filed for the fiscal year ended December 31, 1993. None of
Home Federal or the Home Federal Subsidiaries is in default under any
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contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective assets,
business, or operations receives benefits, which default, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect, and there has
not occurred any event that, with the lapse of time or the giving of notice or
both, would constitute such a default. Neither Home Federal nor any Home Federal
Subsidiary is subject to or bound by any contract containing covenants which
limit the ability of Home Federal or any Home Federal Subsidiary to compete in
any line of business or with any person or which involve any restriction of
geographical area in which, or method by which, Home Federal or any Home Federal
Subsidiary may carry on its business (other than as may be required by law or
any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1991, each of Home Federal and the Home
Federal Subsidiaries has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with the FDIC, the OTS, the FHL Bank, the Federal Home Loan Bank System,
and any other applicable Regulatory Authority. As of their respective dates (and
without giving effect to any amendments or modifications filed after the date of
this Plan with respect to reports and documents filed before the date of this
Plan), each of such reports and documents, including the financial statements,
exhibits, and schedules thereto, complied in all material respects with all of
the statutes, rules, and regulations enforced or promulgated by the authority
with which they were filed and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein in light of the circumstances under which they were made
not misleading.
(P) NO BROKERS. All negotiations relative to this Plan and the transactions
contemplated hereby have been carried on by it directly with the other parties
hereto and no action has been taken by it that would give rise to any valid
claim against any party hereto for a brokerage commission, finder's fee or other
like payment, excluding a fee previously disclosed to First Union to be paid to
Hovde Financial, Inc.
(Q) EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.01(Q)(1) contains a complete list of all bonus,
deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase, restricted
stock and stock option plans, all employment or severance contracts, all
medical, dental, health and life insurance plans, all other employee
benefit plans, contracts or arrangements and any applicable "change of
control" or similar provisions in any plan, contract or arrangement
maintained or contributed to by it or any of its subsidiaries for the
benefit of officers, former officers, employees, former employees,
directors, former directors or the beneficiaries of any of the foregoing
(the "Compensation and Benefit Plans"). True and complete copies of all
Compensation and Benefit Plans, including, but not limited to, any trust
instruments and/or insurance contracts, if any, forming a part thereof, and
all amendments thereto have been supplied to First Union.
(2) All "employee benefit plans" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than "multiemployer plans" within the meaning of Section 3(37) of
ERISA ("Multiemployer Plans"), covering employees or former employees of it
and its subsidiaries (the "Plans"), to the extent subject to ERISA, are in
substantial compliance with ERISA. Each Plan which is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan")
and which is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the Internal Revenue
Service, and Home Federal is not aware of any circumstances reasonably
likely to result in the revocation or denial of any such favorable
determination letter. There is no material pending or, to Home Federal's
knowledge, threatened litigation relating to the Plans. Neither Home
Federal nor any of the Home Federal Subsidiaries has engaged in a
transaction with respect to any Plan that, assuming the taxable period of
such transaction expired as of the date hereof, could subject it or any of
its subsidiaries to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA in an amount which would be material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by Home Federal or any of the Home Federal
Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with it under Section
4001(a)(15) of ERISA or Section 414 of the Code (an "ERISA Affiliate").
Neither Home Federal nor any of the Home Federal Subsidiaries presently
contributes to a Multiemployer Plan, nor have they contributed to such a
plan within the five calendar years preceding this year. No notice of a
"reportable event", within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to
be filed for any Pension Plan or by any ERISA Affiliate within the 12-month
period ending on the date hereof.
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(4) All contributions required to be made under the terms of any Plan
have been timely made. Neither any Pension Plan nor any single-employer
plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether
or not waived) within the meaning of Section 412 of the Code or Section 302
of ERISA. Neither Home Federal nor any of the Home Federal Subsidiaries has
provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29)
of the Code.
(5) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within
the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of
the actuarial assumptions contained in the Plan's most recent actuarial
valuation) did not exceed the then current value of the assets of such
Plan, and there has been no material change in the financial condition of
such Plan since the last day of the most recent Plan year.
(6) Except as Previously Disclosed in Schedule 4.01(Q)(6), (i) neither
Home Federal nor any of the Home Federal Subsidiaries has any obligations
for retiree health and life benefits under any plan or (ii) there are no
restrictions on the rights of Home Federal or any of the Home Federal
Subsidiaries to amend or terminate any Compensation and Benefit Plan
without incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.01(Q)(7), neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute
or otherwise) becoming due to any director or any employee of Home Federal
or any of the Home Federal Subsidiaries under any Compensation and Benefit
Plan or otherwise from Home Federal or any of the Home Federal
Subsidiaries, (ii) increase any benefits otherwise payable under any
Compensation and Benefit Plan or (iii) result in any acceleration of the
time of payment or vesting of any such benefit.
(R) NO KNOWLEDGE. It knows of no reason why the regulatory approvals
referred to in Section 6.02 should not be obtained without the imposition of any
condition of the type referred to in the proviso following such Section 6.02.
(S) LABOR AGREEMENTS. Neither it nor any of the Home Federal Subsidiaries
is a party to, or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor
is it or any of the Home Federal Subsidiaries the subject of a proceeding
asserting that it or any such subsidiary has committed an unfair labor practice
(within the meaning of the National Labor Relations Act) or seeking to compel it
or such subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike or other labor dispute
involving it or any of its subsidiaries, pending or, to the best of its
knowledge, threatened, nor is it aware of any activity involving it or any of
the Home Federal Subsidiaries' employees seeking to certify a collective
bargaining unit or engaging in any other organization activity.
(T) ASSET CLASSIFICATION. It has Previously Disclosed in Schedule 4.01(T) a
list, accurate and complete in all material respects, of the aggregate amounts
of loans, extensions of credit and other assets of Home Federal and the Home
Federal Subsidiaries that have been criticized or classified as of March 31,
1994, by it, separated by category of classification or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been classified or criticized as of the date hereof, by any regulatory
examiner as "Other Loans Specially Mentioned", "Substandard", "Doubtful",
"Loss", or words of similar import are excluded from the amounts disclosed in
the Asset Classification, other than amounts of loans, extensions of credit or
other assets that were charged off by Home Federal prior to the date hereof.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses shown on the consolidated balance sheets of Home Federal included in the
Home Federal Financial Statements at December 31, 1993, and March 31, 1994, were
adequate to provide for possible losses on loans outstanding (including accrued
interest receivable) as of the dates thereof in accordance with generally
accepted accounting principles consistently applied during the periods involved.
(V) INSURANCE. Each of Home Federal and the Home Federal Subsidiaries has
taken all requisite action (including without limitation the making of claims
and the giving of notices) pursuant to its directors' and officers' liability
insurance policy or policies in order to preserve all rights thereunder with
respect to all matters (other than matters arising in connection with this Plan
and the transactions contemplated hereby) that are known to Home Federal, except
for such matters which, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect. Previously Disclosed in Schedule
4.01(V) is a list of all insurance policies maintained by or for the benefit of
Home Federal or the Home Federal Subsidiaries or their directors, officers,
employees or agents.
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(W) AFFILIATES. Except as Previously Disclosed in Schedule 4.01(W), to the
best of its knowledge, there is no person who, as of the date of this Plan, may
be deemed to be an "affiliate" of Home Federal as that term is used in Rule 145
under the Securities Act of 1933, as amended (together with the rules and
regulations thereunder, the "Securities Act").
(X) TAKEOVER LAWS. It is not subject to any applicable takeover laws of the
District of Columbia, excluding any applicable takeover laws of the District of
Columbia that may apply solely to, or solely by virtue of the conduct of, First
Union or FUNB-DC. It has taken all necessary action to exempt this Plan and the
Stock Option Agreement and the transactions contemplated hereby and thereby
from, and this Plan, the Stock Option Agreement and the transactions
contemplated hereby and thereby are exempt from the applicable takeover
provisions of Home Federal's Charter.
(Y) NO FURTHER ACTION. It has taken all action so that the entering into of
this Plan and the Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby (including without limitation the
Merger and the exercise of the Option (as defined in the Stock Option
Agreement)) or any other action or combination of actions, or any other
transactions, contemplated hereby or thereby do not and will not (i) require a
vote of stockholders (other than the vote required pursuant to Section 6.01), or
(ii) except as Previously Disclosed in Schedule 4.01(Y), result in the grant of
any rights to any person under the Articles of Incorporation, Charter or Bylaws
of Home Federal or under any agreement to which Home Federal or any of the Home
Federal Subsidiaries is a party, or (iii) restrict or impair in any way the
ability of First Union or FUNB-DC to exercise the rights granted hereunder or,
as to First Union, under the Stock Option Agreement.
(Z) ENVIRONMENTAL MATTERS.
(1) To its knowledge, it and each of the Home Federal Subsidiaries, the
Participation Facilities and the Loan/Fiduciary Properties (each as defined
below) are, and have been, in compliance with all Environmental Laws (as
defined below) and it has no knowledge of any circumstances that with the
passage of time or the giving of notice would be reasonably likely to
result in noncompliance, except for instances of noncompliance which are
not reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect or have been Previously Disclosed in Schedule 4.01(Z).
(2) There is no proceeding pending or to its knowledge, threatened
before any court, governmental agency or board or other forum in which it
or any of the Home Federal Subsidiaries or to its knowledge, any
Participation Facility has been, or with respect to threatened proceedings,
reasonably would be expected to be, named as a defendant or potentially
responsible party (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law, or (ii) relating to the presence,
release or threatened release into the environment of any Hazardous
Material (as defined below), whether or not occurring at or on a site
owned, leased or operated by it or any of the Home Federal Subsidiaries or
any Participation Facility, except for such proceedings pending or
threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect or have been Previously
Disclosed in Schedule 4.01(Z)(2).
(3) To its knowledge, there is no proceeding pending or threatened
before any court, governmental agency or board or other forum in which any
Loan/Fiduciary Property (or it or any of the Home Federal Subsidiaries in
respect of any Loan/Fiduciary Property) has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a
defendant or potentially responsible party (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (ii) relating
to the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property,
except for such proceedings pending or threatened that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
or have been Previously Disclosed in Schedule 4.01(Z)(3).
(4) To its knowledge, there is no reasonable basis for any proceeding
of a type described in subparagraphs (2) or (3) above, except as has been
Previously Disclosed in Schedule 4.01(Z)(4).
(5) To its knowledge, during the period of (i) its or any of the Home
Federal Subsidiaries' ownership or operation of any of their respective
current properties, (ii) its or any of the Home Federal Subsidiaries'
participation in the management of any Participation Facility, or (iii) its
or any of the Home Federal Subsidiaries' holding of a security or other
interest in a Loan/Fiduciary Property, there have been no releases or
threatened releases of Hazardous Material in, on, from, under or affecting
any such property, Participation Facility or Loan/Fiduciary Property,
except for such releases or threatened releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
or have been Previously Disclosed in Schedule 4.01(Z)(5).
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(6) To its knowledge, prior to the period of (i) its or any of the
Home Federal Subsidiaries' ownership or operation of any of their
respective current properties, (ii) its or any of the Home Federal
Subsidiaries' participation in the management of any Participation
Facility, or (iii) its or any of the Home Federal Subsidiaries' holding of
a security or other interest in a Loan/Fiduciary Property, there were no
releases or threatened releases of Hazardous Material in, on, under or
affecting any such property, Participation Facility or Loan/Fiduciary
Property, except for such releases or threatened releases that are not
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect or have been Previously Disclosed in Schedule 4.01(Z)(6).
(7) The following definitions apply for purposes of this Section
4.01(Z): "Loan/Fiduciary Property" means any property owned or controlled
by it or any of the Home Federal Subsidiaries or in which it or any of the
Home Federal Subsidiaries holds a security or other interest (including,
withour limitation, a fiduciary interest), and, where required by the
context, includes any such property where Home Federal or any of the Home
Federal Subsidiaries constitutes the owner or operator of such property,
but only with respect to such property; "Participation Facility" means any
facility in which it or any of the Home Federal Subsidiaries participates
in the management and, where required by the context, includes the owner or
operator of such property; "Environmental Law" means (i) any federal, state
and local law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity, relating
to (a) the protection, preservation or restoration of the environment,
(including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, plant
and animal life or any other natural resource), or to human health or
safety, or (b) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Material, in each case as amended and as
now in effect and includes, without limitation, the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the federal Clean Air Act, the federal Clean Water
Act, the federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste
Disposal Act, the federal Toxic Substances Control Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety
and Health Act of 1970, and any similar state or local laws each as amended
and as now in effect, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such
as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material;
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or
quantity, and includes, without limitation, any oil or other petroleum
product, toxic waste, pollutant, contaminant, hazardous substance, toxic
substance, hazardous waste, special waste, solid waste or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
(AA) OPTION SHARES. As to Home Federal, the Option Shares (as defined in
the Stock Option Agreement), when issued upon exercise of the Option, will be
validly issued, fully paid and nonassessable and subject to no preemptive
rights.
(BB) TAX REPORTS. Except as Previously Disclosed in Schedule 4.01(BB), (i)
all reports and returns with respect to Taxes (as defined below) that are
required to be filed by or with respect to it or its subsidiaries, including
without limitation consolidated federal income tax returns of it and the Home
Federal Subsidiaries (collectively, the "Home Federal Tax Returns"), have been
duly filed, or requests for extensions have been timely filed and have not
expired, for periods ended on or prior to December 31, 1993, and on or prior to
the date of the most recent fiscal year end immediately preceding the Effective
Date, except to the extent all such failures to file, taken together, are not
reasonably likely to have a Material Adverse Effect, and such Home Federal Tax
Returns were true, complete and accurate in all material respects, (ii) all
taxes (which shall include federal, state, local or foreign income, gross
receipts, windfall profits, severance, property, production, sales, use,
license, excise, franchise, employment, withholding or similar taxes imposed on
the income, properties or operations of it or the Home Federal Subsidiaries,
together with any interest, additions, or penalties with respect thereto and any
interest in respect of such additions or penalties, collectively the "Taxes")
shown to be due on the Home Federal Tax Returns have been paid in full, (iii)
the Home Federal Tax Returns have been examined by the Internal Revenue Service
or the appropriate state, local or foreign taxing authority or the period for
assessment of the Taxes in respect of which such Home Federal Tax Returns were
required to be filed has expired, (iv) all Taxes due with respect to completed
and settled examinations have been paid in full, (v) no issues have been raised
by the relevant taxing authority in connection with the examination of any of
the Home Federal Tax Returns which are reasonably likely to result in a
determination that would have a Material Adverse Effect, except as reserved
against in its Financial Reports, and (vi) no waivers of statutes of limitations
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(excluding such statutes that relate to years currently under examination by the
Internal Revenue Service) have been given by or requested with respect to any
Taxes of it or the Home Federal Subsidiaries.
(CC) POOLING. It has not taken any action or failed to take any action that
would cause the Merger to fail to qualify for pooling of interests accounting
treatment.
(DD) ACCURACY OF INFORMATION. The statements contained in this Plan, the
Schedules and any other written documents executed and delivered by or on behalf
of Home Federal pursuant to the terms of this Plan are true and correct in all
material respects, and such statements and documents do not omit any material
fact necessary to make the statements contained therein not misleading.
(EE) NO DISSENTERS' RIGHTS. Except as Previously Disclosed in Schedule
4.01(EE), the holders of Home Federal Common Stock have no dissenters',
appraisal or similar rights in connection with the execution of this Plan, the
Stock Option Agreement or the consummation of any of the transactions
contemplated hereby or thereby.
(FF) DERIVATIVES CONTRACTS. None of Home Federal or the Home Federal
Subsidiaries is a party to or has agreed to enter into an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract (including various combinations thereof)(each a "Derivatives Contract")
except for those Derivatives Contracts Previously Disclosed in Schedule 4.01(FF)
including a list, as applicable, of Home Federal assets pledged as security for
each Derivatives Contract.
4.02. FIRST UNION AND FUNB-DC REPRESENTATIONS AND WARRANTIES. Each of First
Union and FUNB-DC hereby represents and warrants to Home Federal, as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect
to it are true and correct.
(B) CORPORATE AUTHORITY. Subject to the required regulatory approvals
referred to in Section 6.02 herein, each of this Plan and, in the case of First
Union, the Stock Option Agreement, has been authorized by all necessary
corporate action of it and is a valid and binding agreement of it enforceable
against it in accordance with its terms, subject to bankruptcy, insolvency and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(C) NO DEFAULTS. Subject to the required regulatory approvals referred to
in Section 6.02, and the required filings under federal and state securities'
laws, the execution, delivery and performance of this Plan and (in the case of
First Union) the Stock Option Agreement, and the consummation of the
transactions contemplated hereby and thereby by it, do not and will not
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of it or of any of its subsidiaries or to
which it or any of its subsidiaries or properties is subject or bound, which
breach, violation or default is reasonably likely to have a Material Adverse
Effect, or (ii) a breach or violation of, or a default under, its Articles of
Incorporation, Charter or Bylaws; and the consummation by it of the transactions
contemplated by this Plan and (in the case of First Union) the Stock Option
Agreement will not require any consent or approval under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or the
consent or approval of any other party to any such agreement, indenture or
instrument.
(D) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.02(D),
in the case of First Union, its Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, and all other documents filed or to be filed subsequent
to December 31, 1993 under Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, in the form filed with the SEC (in each such case, the "First Union
Financial Reports"), did not 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 to make the statements made therein, in light of the circumstances
under which they were made, not misleading; and each of the balance sheets in or
incorporated by reference into the First Union Financial Reports (including the
related notes and schedules thereto) fairly presents and will fairly present the
financial position of the entity or entities to which it relates as of its date
and each of the statements of income and changes in stockholders' equity and
cash flows or equivalent statements in the First Union Financial Reports
(including any related notes and schedules thereto) fairly presents and will
fairly present the results of operations, changes in stockholders' equity and
changes in cash flows, as the case may be, of the entity or entities to which it
relates for the periods set forth therein, in each case in accordance with
generally accepted accounting principles consistently applied to banks and bank
holding companies during the periods involved, except as may be noted therein,
subject to normal and recurring year-end audit adjustments in the case of
unaudited statements.
(E) NO EVENTS. Except as Previously Disclosed in Schedule 4.02(E), since
December 31, 1993, no event has occurred which is reasonably likely to have a
Material Adverse Effect.
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(F) NO BROKERS. All negotiations relative to this Plan and the transactions
contemplated hereby have been carried on by it directly with the other parties
hereto and no action has been taken by it that would give rise to any valid
claim against any party hereto for a brokerage commission, finder's fee or other
like payment.
(G) NO KNOWLEDGE. It knows of no reason why the regulatory approvals
referred to in Section 6.02 herein should not be obtained without the imposition
of any condition of the type referred to in the proviso following such Section
6.02.
(H) SHARES AUTHORIZED. In the case of First Union, the shares of First
Union Common Stock to be issued in exchange for shares of Home Federal Common
Stock upon consummation of the Merger in accordance with Article II, have been
duly authorized and, when issued in accordance with the terms of this Plan, will
be validly issued, fully paid and nonassessable and subject to no preemptive
rights.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. None of First Union or its
subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect, except (i) as reflected in the First Union Financial Reports
prior to the date of this Plan, and (ii) for commitments and obligations made,
or liabilities incurred, in the ordinary course of its business consistent with
past practice since December 31, 1993. Since December 31, 1993, none of First
Union or its subsidiaries has incurred or paid any obligation or liability
(including any obligation or liability incurred in connection with any
acquisitions in which any form of direct financial assistance of the federal
government or any agency thereof has been provided to any of subsidiary of First
Union) which, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect.
(J) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.02(J), no litigation, proceeding or controversy before any court or
governmental agency is pending which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect, and, to the best of its
knowledge, no such litigation, proceeding or controversy has been threatened.
(K) ACCURACY OF INFORMATION. The statements contained in this Plan, the
Schedules and any other written documents executed and delivered by or on behalf
of First Union or FUNB-DC pursuant to the terms of this Plan are true and
correct in all material respects, and such statements and documents do not omit
any material fact necessary to make the statements contained therein not
misleading.
V. COVENANTS.
Home Federal hereby covenants to First Union and FUNB-DC, and each of First
Union and FUNB-DC hereby covenants to Home Federal, that:
5.01. BEST EFFORTS. Subject to the terms and conditions of this Plan, it
shall use its best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the Merger on the Effective Date and to otherwise enable consummation of the
transactions contemplated hereby and (in the case of Home Federal and First
Union) by the Stock Option Agreement and shall cooperate fully with the other
parties hereto to that end (it being understood that any amendments to the
Registration Statement (as hereinafter defined) or a resolicitation of proxies
as a consequence of an acquisition agreement by First Union or any of its
subsidiaries shall not violate this covenant).
5.02. HOME FEDERAL PROXY. In the case of Home Federal, it shall promptly
prepare a proxy statement (the "Proxy Statement") to be mailed to the holders of
Home Federal Common Stock in connection with the transactions contemplated
hereby and to be filed by Home Federal with the OTS and by First Union in a
registration statement (the "Registration Statement") with the SEC, which shall
conform to all applicable legal requirements and it shall call a special meeting
(the "Meeting") of the holders of Home Federal Common Stock to be held as soon
as practicable for purposes of voting upon the transactions contemplated hereby
and Home Federal shall use its best efforts to solicit and obtain votes of the
holders of Home Federal Common Stock in favor of the transactions contemplated
hereby and the board of directors of Home Federal shall recommend approval of
the Merger by such holders.
5.03. REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the date of the Meeting, such Registration Statement and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by Home Federal relating to Home Federal or
the Home Federal Subsidiaries and by First Union relating to First Union or its
subsidiaries, (i) will comply in all material respects with the provisions of
the Securities Act and any other applicable statutory or regulatory
requirements, and (ii) will not contain any
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untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading; PROVIDED, HOWEVER, in no event shall any party hereto be liable for
any untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
written information concerning another party furnished by such other party
specifically for use in the Registration Statement.
5.04. REGISTRATION STATEMENT EFFECTIVE. First Union will advise Home
Federal, promptly after First Union receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the suspension of the
qualification of the First Union Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.05. PRESS RELEASES. Home Federal and First Union will not, without the
prior approval of the other, issue any press release or written statement for
general circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law.
5.06. ACCESS; INFORMATION. (1) Upon reasonable notice, Home Federal shall
afford First Union and its officers, employees, counsel, accountants and other
authorized representatives, access, during normal business hours throughout the
period prior to the Effective Date, to all of its properties, books, contracts,
commitments and records and, during such period, Home Federal shall furnish
promptly to First Union (i) a copy of each material report, schedule and other
document filed by Home Federal pursuant to the requirements of federal or state
securities, thrift or banking laws, and (ii) all other information concerning
the business, properties and personnel of Home Federal as First Union may
reasonably request, provided that no investigation pursuant to this Section 5.06
by First Union shall affect or be deemed to modify or waive any representation
or warranty made by Home Federal or the conditions to the obligation of Home
Federal to consummate the transactions contemplated by this Plan; (2) First
Union will not use any information obtained pursuant to this Section 5.06 for
any purpose unrelated to the consummation of the transactions contemplated by
this Plan and, if this Plan is terminated, will hold all information and
documents obtained pursuant to this paragraph in confidence (as provided in
Section 8.06) unless and until such time as such information or documents become
publicly available other than by reason of any action or failure to act by First
Union or as it is advised by counsel that any such information or document is
required by law or applicable stock exchange rule to be disclosed, and in the
event of the termination of this Plan, First Union will, upon request by Home
Federal, deliver to Home Federal all documents so obtained by First Union or
destroy such documents; and (3) First Union shall furnish promptly to Home
Federal a copy of each material report, schedule and other document filed by
First Union pursuant to federal securities laws.
5.07. ACQUISITION PROPOSALS. In the case of Home Federal, it shall not, and
it shall cause the Home Federal Subsidiaries not to, solicit or encourage
inquiries or proposals with respect to, or, except as required by the fiduciary
duties of the Board of Directors of Home Federal (as advised in a written
opinion of its counsel), furnish any nonpublic information relating to or
participate in any negotiations or discussions concerning, any acquisition or
purchase of all or a substantial portion of the assets of, or a substantial
equity interest in (whether by a purchase of outstanding stock or otherwise),
Home Federal or any of its subsidiaries or any merger or other business
combination with Home Federal or any of its subsidiaries other than as
contemplated by this Plan; it shall instruct its and the Home Federal
Subsidiaries' officers, directors, agents, advisors and affiliates to refrain
from doing any of the foregoing; and it shall notify First Union immediately if
any such inquiries or proposals are received by, or any such negotiations or
discussions are sought to be initiated with, Home Federal or any of the Home
Federal Subsidiaries.
5.08. REGISTRATION STATEMENT PREPARATION. In the case of First Union, it
shall, as promptly as practicable following the date of this Plan, prepare and
file the Registration Statement with the SEC and First Union shall use its best
efforts to cause the Registration Statement to be declared effective as soon as
practicable after the filing thereof.
5.09. BLUE-SKY FILINGS. In the case of First Union, it shall use its best
efforts to obtain, prior to the effective date of the Registration Statement,
all necessary state securities laws or "blue sky" permits and approvals,
provided that First Union shall not be required by virtue thereof to submit to
general jurisdiction in any state.
5.10. AFFILIATE AGREEMENTS. In the case of Home Federal, it will cause each
person who may be deemed to be an "affiliate" of Home Federal for purposes of
Rule 145 under the Securities Act to execute and deliver to First Union on or
before the mailing of the Proxy Statement for the Meeting an agreement in the
form attached hereto as EXHIBIT B restricting the disposition of such
affiliate's shares of Home Federal Common Stock and the shares of First Union
Common Stock to be received by such person in exchange for such person's shares
of Home Federal Common Stock.
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5.11. CERTAIN POLICIES OF HOME FEDERAL. In the case of Home Federal, at
such time prior to the Effective Date as shall be mutually agreed upon between
First Union and Home Federal, it shall use its best efforts to modify and change
its loan, litigation and real estate valuation policies and practices (including
loan classifications and levels of reserves) prior to the Effective Date so as
to be consistent with those of First Union and generally accepted accounting
principles. Home Federal's representations, warranties and covenants contained
in this Plan shall not be deemed to be untrue or breached in any respect for any
purpose as a consequence of any modifications or changes undertaken solely on
account of this Section 5.11.
5.12. STATE TAKEOVER LAW. In the case of Home Federal, it shall not take
any action that would cause the transactions contemplated by this Plan and/or
the Stock Option Agreement to be subject to any applicable state takeover
statute and Home Federal shall take all reasonable and necessary steps to exempt
(or ensure the continued exemption of) the transactions contemplated by this
Plan and the Stock Option Agreement from, or if necessary challenge the validity
or applicability of, any applicable state takeover law, as now or hereafter in
effect, excluding any applicable state takeover laws that may apply solely to,
or solely by virtue of the conduct of, First Union or FUNB-DC.
5.13. NO RIGHTS TRIGGERED. In the case of Home Federal, it shall take all
necessary steps to ensure that the entering into of this Plan and the Stock
Option Agreement and the consummation of the transactions contemplated hereby
and thereby (including without limitation the Merger and the exercise of the
Option) and any other action or combination of actions, or any other
transactions contemplated hereby or thereby, do not and will not, except as
Previously Disclosed in Schedule 5.13, (i) result in the grant of any rights to
any person under the Articles of Incorporation, Charter or Bylaws of Home
Federal or under any agreement to which Home Federal or any of the Home Federal
Subsidiaries is a party, or (ii) restrict or impair in any way the ability of
First Union or FUNB-DC to exercise the rights granted hereunder or, as to First
Union, under the Stock Option Agreement.
5.14. SHARES LISTED. In the case of First Union, First Union shall use its
best efforts to list, prior to the Effective Date, on the NYSE, upon official
notice of issuance, the shares of First Union Common Stock to be issued to the
holders of Home Federal Common Stock pursuant to this Plan.
5.15. MERGER; POOLING. It undertakes and agrees to use its best efforts to
cause the Merger to be effected and to take no action which would cause the
Merger to fail to qualify for pooling of interests accounting treatment.
5.16. REGULATORY APPLICATIONS. It shall promptly prepare and submit
applications to the appropriate federal and state bank regulatory authorities
for approval of the Merger, and promptly make all other appropriate filings to
secure all other approvals, consents and rulings which are necessary for the
consummation of the Merger.
5.17. REGULATORY DIVESTITURES. In the case of Home Federal, effective on or
before the Effective Date, Home Federal shall cease engaging in such activities
as First Union shall advise Home Federal in writing are not permitted to be
engaged in by First Union or FUNB-DC under applicable law following the
Effective Date and shall divest any subsidiary engaged in activities or holding
assets that are impermissible for a bank holding company or national bank, on
terms and conditions reasonably acceptable to First Union; provided, however,
Home Federal shall only be required to take such action on or before the
Effective Date to the extent required by any Regulatory Authority as a
conditional approval of the transactions contemplated by this Plan.
5.18. INDEMNIFICATION. Without limitation with respect to any
indemnification required other than pursuant to this Plan:
(A) For six years after the Effective Date, First Union shall indemnify,
defend and hold harmless the directors, officers and employees of Home Federal
and the Home Federal Subsidiaries (each, an "Indemnified Party") against all
liabilities arising out of actions or omissions occurring at or prior to the
Effective Date (including, without limitation, the transactions contemplated by
this Plan and the Stock Option Agreement) to the extent such persons are
indemnified under OTS regulations as in effect on the date hereof, including
provisions relating to advances of expenses incurred in the defense of any
litigation.
(B) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 5.18, upon learning of such claim, action, suit, proceeding
or investigation, shall promptly notify First Union thereof; provided, that the
failure so to notify shall not affect the obligations of First Union under
paragraph (a) of this Section 5.18 (unless such failure materially and adversely
increases First Union's liability under such paragraph (a)). In the event of any
such claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Date), (i) First Union shall have the right to assume the
defense thereof, (ii) the Indemnified Parties will cooperate in the defense of
any such matter, and (iii) First Union shall not be liable for any settlement
effected without its prior written consent.
B-15
<PAGE>
VI. CONDITIONS TO CONSUMMATION OF THE MERGERS.
Consummation of the Merger is conditioned upon:
6.01. SHAREHOLDER VOTE. Approval of the transactions contemplated hereby by
the requisite vote of the stockholders of Home Federal, as may be required.
6.02. REGULATORY APPROVALS. Procurement by Home Federal, First Union and
FUNB-DC of regulatory consents and approval by the appropriate federal and state
bank regulatory authorities and the expiration of the statutory waiting period
relating thereto;
PROVIDED, HOWEVER, that no approval or consent in Section 6.02 shall have
imposed any condition or requirement which, in the opinion of First Union, would
so materially adversely impact the economic or business benefits to First Union
of the transactions contemplated by this Plan so as to render inadvisable the
consummation of the Merger.
6.03. NO INJUNCTION. There shall not be in effect any order, decree or
injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated hereby or under
the Stock Option Agreement.
6.04. DELOITTE & TOUCHE LETTERS. First Union shall have received from
Deloitte & Touche letters, dated the date of or shortly prior to (i) the mailing
of the Proxy Statement and (ii) the Effective Date, in form and substance
satisfactory to First Union, with respect to Home Federal's consolidated
financial position and results of operations, which letters shall be based upon
customary specified procedures undertaken by such firm, and First Union shall
have received from Deloitte & Touche a letter, dated as of the Effective Date in
form and substance satisfactory to First Union, to the effect that Deloitte &
Touche are not aware of any facts or circumstances which might cause the Merger
not to qualify for pooling of interests accounting treatment.
6.05. LEGAL OPINION. Home Federal shall have received an opinion, dated the
Effective Date, of Marion A. Cowell, Jr., counsel for First Union and FUNB-DC,
in form reasonably satisfactory to Home Federal, which shall cover the matters
contained in EXHIBIT C hereto.
6.06. LEGAL OPINION. First Union shall have received an opinion, dated the
Effective Date, of Muldoon, Murphy & Faucette, in form reasonably satisfactory
to First Union, which shall cover the matters contained in EXHIBIT D hereto.
6.07. OFFICERS' CERTIFICATE. (i) Each of the representations and warranties
contained herein of First Union and FUNB-DC shall be true and correct as of the
date of this Plan and upon the Effective Date with the same effect as though all
such representations and warranties had been made on the Effective Date, except
for any such representations and warranties made as of a specified date, which
shall be true and correct as of such date, and (ii) each and all of the
agreements and covenants of First Union and FUNB-DC to be performed and complied
with pursuant to this Plan on or prior to the Effective Date shall have been
duly performed and complied with in all material respects, and Home Federal
shall have received a certificate signed by an executive officer of each of
First Union and FUNB-DC dated the Effective Date, to such effect.
6.08. OFFICERS' CERTIFICATE. (i) Each of the representations and warranties
contained herein of Home Federal shall be true and correct as of the date of
this Plan and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except for
any such representations and warranties made as of a specified date, which shall
be true and correct as of such date, and (ii) each and all of the agreements and
covenants of Home Federal to be performed and complied with pursuant to this
Plan on or prior to the Effective Date shall have been duly performed and
complied with in all material respects, and First Union and FUNB-DC shall have
received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of Home Federal dated the Effective Date, to such effect.
6.09. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
regulatory authority.
6.10. BLUE-SKY PERMITS. First Union shall have received all state
securities laws and "blue sky" permits necessary to consummate the Merger.
6.11. TAX OPINION. First Union and Home Federal shall have received an
opinion from Sullivan & Cromwell, special counsel to First Union, to the effect
that (i) the Merger constitutes a reorganization under Section 368 of the
Internal Revenue Code, and (ii) no gain or loss will be recognized by
stockholders of Home Federal who receive shares of First Union Common Stock in
exchange for their shares of Home Federal Common Stock, except that gain or loss
may be recognized as to
B-16
<PAGE>
cash received in lieu of fractional share interests and, in rendering their
opinion, Sullivan & Cromwell may require and rely upon representations contained
in certificates of officers of First Union, Home Federal and others.
6.12. NYSE LISTING. The shares of First Union Common Stock issuable
pursuant to this Plan shall have been approved for listing on the NYSE, subject
to official notice of issuance.
6.13. POOLING LETTER. First Union shall have received a letter, dated as of
the Effective Date, in form and substance acceptable to First Union, from KPMG
Peat Marwick to the effect that the Merger will qualify for pooling of interests
accounting treatment.
6.14. RECEIPT OF AFFILIATE AGREEMENTS. First Union shall have received from
each affiliate of Home Federal the agreement referred to in Section 5.10;
PROVIDED, HOWEVER, that a failure to satisfy any of the conditions set forth in
the proviso following Section 6.02 or in Section 6.04, 6.06, 6.08, 6.13 or 6.14
shall only constitute conditions if asserted by First Union, and a failure to
satisfy any of the conditions set forth in Section 6.05 or 6.07 shall only
constitute conditions if asserted by Home Federal.
VII. TERMINATION.
This Plan may be terminated prior to the Effective Date, either before or
after receipt of required stockholder approvals:
7.01. MUTUAL CONSENT. By the mutual consent of First Union and Home
Federal, if the Board of Directors of each so determines by vote of a majority
of the members of its entire Board.
7.02. BREACH. By First Union or Home Federal, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of (i) a breach by the other party of any representation or warranty
contained herein, which breach cannot be or has not been cured within thirty
(30) days after the giving of written notice to the breaching party of such
breach, or (ii) a breach by the other party of any of the covenants or
agreements contained herein, which breach cannot be or has not been cured within
thirty (30) days after the giving of written notice to the breaching party of
such breach.
7.03. DELAY. By First Union or Home Federal, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event that the Merger is not consummated by March 31, 1995.
7.04. NO STOCKHOLDER APPROVAL. By Home Federal or First Union, if its Board
of Directors so determines by a vote of a majority of the members of its entire
Board, in the event that any stockholder approval contemplated by Section 6.01
herein is not obtained at a meeting or meetings called for the purpose of
obtaining such approval.
7.05. POSSIBLE ADJUSTMENT. By Home Federal, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, at any
time during the ten-day period commencing with the Determination Date, if both
of the following conditions are satisfied:
(1) the Average Closing Price on the Determination Date of shares of
First Union Common Stock shall be less than $37.70 per share; and
(2) (i) the number obtained by dividing the Average Closing Price on
such Determination Date by $47.125 (such number being referred to herein as
the "First Union 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 0.20 from the quotient in this clause (2)
(ii) (such number being referred to herein as the "Index Ratio");
SUBJECT, HOWEVER, to the following three sentences. If Home Federal elects to
exercise its termination right as previously provided in this Section 7.05, it
shall give prompt written notice to First Union (PROVIDED that such notice of
election to terminate may be withdrawn at any time within the aforementioned
ten-day period). During the seven-day period commencing with its receipt of such
notice, First Union shall have the option, in the case of a failure to fulfill
any condition in the above clause of this Section 7.05, of adjusting the
Exchange Ratio to equal the lesser of (i) a number equal to a quotient, the
numerator of which is $47.125 multiplied by the Exchange Ratio and the
denominator of which is the Average Closing Price, and (ii) a number equal to a
quotient, the numerator of which is the Index Ratio multiplied by the Exchange
Ratio and the denominator of which is the First Union Ratio. If First Union
makes an election contemplated by the preceding sentence, within such seven-day
period it shall give written notice to Home Federal of such election and the
revised Exchange Ratio, whereupon no termination shall have occurred pursuant to
this Section 7.05 and this Plan shall remain in effect in accordance
B-17
<PAGE>
with its terms (except as the Exchange Ratio shall have been so modified), and
any references in this Plan to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 7.05.
For purposes of this Section 7.05, the following terms shall have the
meanings indicated:
"Average Closing Price" means the average of the daily closing sales
prices of First Union Common Stock as reported on the NYSE Composite
Transactions reporting system (as reported by THE WALL STREET JOURNAL or,
if not reported thereby, another authoritative source as chosen by First
Union) for the ten consecutive full trading days in which such shares are
traded on the NYSE beginning at the close of trading on the date on which
the Comptroller of the Currency approves the Merger and ending at the close
of trading on such tenth trading day following such approval (the
"Determination Date").
"Index Group" means the 16 bank holding companies listed below, the
common stock of all of which shall be publicly traded and as to which there
shall not have been a publicly announced proposal since the Starting Date
and before the Determination Date for any such company to be acquired. In
the event that the common stock of any such company ceases to be publicly
traded or a proposal to acquire any such company is announced after the
Starting Date and before Determination Date, such company will be removed
from the Index Group, and the weights (which have been determined based on
the market capitalization) redistributed proportionately for purposes of
determining the Index Price. For purposes of this definition, a company
would be acquired if, INTER ALIA, it engages, or proposes to engage, in a
merger or similar transaction in which such company's shareholders would
own less than 60 percent of the combined or surviving company. The 16 bank
holding companies and the weights attributed to them are as follows:
<TABLE>
<CAPTION>
BANK HOLDING COMPANY WEIGHTING
<S> <C>
Banc One Corp. (ONE)....................................................................... 14.34%
Norwest Corporation (NOB).................................................................. 9.62
SunTrust Banks, Inc. (STI)................................................................. 6.76
Key/Society Corp. (KEY).................................................................... 9.01
Fleet Financial Group, Inc. (FLT).......................................................... 6.11
NBD Bancorp, Inc. (NBD).................................................................... 5.58
PNC Financial Corp (PNC)................................................................... 7.91
U.S. Bancorp (USBC)........................................................................ 3.00
Wachovia Corporation (WB).................................................................. 6.54
First Bank System, Inc. (FBS).............................................................. 4.72
First Fidelity Bancorporation (FFB)........................................................ 4.38
Barnett Banks, Inc. (BBI).................................................................. 5.23
National City Corporation (NCC)............................................................ 4.82
CoreStates Financial Corp. (CSFN).......................................................... 4.05
Mellon Bank Corporation (MEL).............................................................. 4.03
Boatmen's Bancshares, Inc. (BOAT).......................................................... 3.90
100.00%
</TABLE>
"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 composing the Index Group.
"Starting Date" means the first NYSE trading day immediately following
the date of the first public announcement of entry into this Plan.
If any company belonging to the Index Group or First Union 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
First Union shall be appropriately adjusted for the purposes of applying this
Section 7.05.
VIII. OTHER MATTERS.
8.01. SURVIVAL. If the Effective Date occurs, all representations,
warranties, agreements and covenants contained in this Plan shall not survive
the Effective Date, except for Section 5.18. If this Plan is terminated prior to
the Effective Date, the agreements and representations of the parties in
Sections 4.01(P) and 4.02(F), Sections 5.03 and 5.06(2), and Sections 8.01,
8.04, 8.05, 8.06, 8.07, 8.09 and 8.11 shall survive such termination.
B-18
<PAGE>
8.02. WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this
Plan may be (i) waived by the party benefitted by the provision, or (ii) amended
or modified at any time, by an agreement in writing among the parties hereto
approved by their respective Boards of Directors and executed in the same manner
as this Plan, except that, after the vote by the stockholders of Home Federal,
the consideration to be received by the stockholders of Home Federal for each
share of Home Federal Common Stock shall not thereby be decreased.
8.03. COUNTERPARTS. This Plan may be executed in one or more counterparts,
each of which shall be deemed to constitute an original. This Plan shall become
effective when one counterpart has been signed by each party hereto.
8.04. GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of North Carolina, without regard to any
conflict of law principles.
8.05. EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated hereby, except
printing expenses which shall be shared equally between Home Federal and First
Union.
8.06. CONFIDENTIALITY. Except as otherwise provided in Section 5.06(2),
each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed or as it is advised by
counsel that any such information or document is required by law or applicable
stock exchange rule to be disclosed.
8.07. NOTICES. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
<TABLE>
<S> <C>
If to First Union or FUNB-DC, to: First Union Corporation
One First Union Center
Charlotte, N.C. 28288-0013
Attn: Chief Executive Officer
Copy to: Marion A. Cowell, Jr., Esq.
First Union Corporation
One First Union Center
Charlotte, N.C. 28288-0013
If to Home Federal, to: Home Federal Savings Bank
5225 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Attn: Chief Executive Officer
Copy to: Thomas J. Haggerty, Esq.
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
</TABLE>
8.08. DEFINITIONS. Any term defined anywhere in this Plan shall have the
meaning ascribed to it for all purposes of this Plan (unless expressly noted to
the contrary). In addition:
(1) the term "Material Adverse Effect" shall mean any event,
occurrence or circumstance (including without limitation (i) the making of
any provisions for possible loan and lease losses, write-downs of other
real estate and taxes and (ii) any breach of a representation or warranty
by such party) which, individually or combined with one or more other
events, circumstances or occurrences (a) has or is reasonably likely to
have a material adverse effect on the financial condition , results of
operations or business or prospects of Home Federal and its subsidiaries,
taken as a whole, or First Union and its subsidiaries, taken as a whole or
(b) would materially impair the party's ability to perform its obligations
under this Plan or the consummation of the Merger and the other
transactions contemplated by this Plan; and
(2) the term "Previously Disclosed" by a party shall mean information
set forth in a Schedule that is delivered by that party to the other party
prior to the execution of this Plan and specifically designated as
information "Previously Disclosed" pursuant to this Plan.
B-19
<PAGE>
8.09. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and the
Stock Option Agreement together represent the entire understanding of the
parties hereto with reference to the transactions contemplated hereby and
thereby and supersede any and all other oral or written agreements heretofore
made. Nothing in this Plan expressed or implied, is intended to confer upon any
person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this Plan.
8.10. BENEFIT PLANS. Upon consummation of the Merger, as soon as
administratively practicable, employees of Home Federal and the Home Federal
Subsidiaries shall be generally entitled to participate in the pension,
severance, benefit and similar plans on substantially the same terms and
conditions as employees of First Union and its subsidiaries. For the purpose of
determining eligibility to participate in such plans and the vesting of benefits
under such plans (but not for the accrual of benefits under such plans), First
Union shall give effect to years of service with Home Federal or the Home
Federal Subsidiaries, as the case may be, as if such service were with First
Union or its subsidiaries.
8.11. HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION CORPORATION OF VIRGINIA
By: /s/ BENJAMIN P. JENKINS, III
Name: Benjamin P. Jenkins, III
Title: President
FIRST UNION NATIONAL BANK OF
WASHINGTON, D.C.
By: /s/ BENJAMIN P. JENKINS, III
Name: Benjamin P. Jenkins, III
Title: President
HOME FEDERAL SAVINGS BANK
By: /s/ ELWYN G. RAIDEN, JR.
Name: Elwyn G. Raiden, Jr.
Title: President and Chief Executive
Officer
B-20
<PAGE>
ALL OF THE DIRECTORS
HOME FEDERAL SAVINGS BANK
<TABLE>
<S> <C>
/s/ RALPH S. CHILDS, JR. /s/ ELWYN G. RAIDEN, JR.
Ralph S. Childs, Jr. Elwyn G. Raiden, Jr.
/s/ MAURICE J. FLYNN /s/ BURTON J. REINER
Maurice J. Flynn Burton J. Reiner
/s/ THADDEUS A. LINDNER /s/ A. J. SOMERVILLE, JR.
Thaddeus A. Lindner A. J. Somerville, Jr.
/s/ LELAND H. PHILLIPS
Leland H. Phillips
</TABLE>
B-21
<PAGE>
BOARD OF DIRECTORS
FIRST UNION NATIONAL BANK OF WASHINGTON, D.C.
<TABLE>
<S> <C>
/s/ CARL D. GENT /s/ THOMAS JOHNSTON
Carl D. Gent Thomas Johnston
/s/ GAIL GRAHAM /s/ GLENN E. KINARD
Gail Graham Glenn E. Kinard
/s/ BENJAMIN P. JENKINS, III
Benjamin P. Jenkins, III
</TABLE>
B-22
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of May 27, 1994 (the "Agreement"), by and
between Home Federal Savings Bank, a stock savings bank organized under the laws
of the United States ("Issuer"), and First Union Corporation, a North Carolina
corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Acquisition dated as of May 27, 1994 (the "Plan"), providing for, among other
things, the merger of Issuer with and into First Union National Bank of
Washington, D.C. ("FUNB-DC"), a subsidiary of Grantee, with FUNB-DC as the
surviving bank; and
WHEREAS, as a condition and inducement to Grantee's execution of the Plan,
Grantee has required that Issuer agree, and Issuer has agreed, to grant Grantee
the Option (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Plan, and intending to be legally bound hereby, Issuer and Grantee agree as
follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Plan.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 200,000 shares (as adjusted as set forth herein) (the "Option Shares",
which shall include the Option Shares before and after any transfer of such
Option Shares) of Common Stock, par value $0.01 per share ("Issuer Common
Stock"), of Issuer at a purchase price per Option Share (the "Purchase Price")
equal to $15.00.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder, as applicable, shall not be
in material breach of the agreements or covenants contained in this
Agreement or the Plan, and (ii) no preliminary or permanent injunction or
other order against the delivery of shares covered by the Option issued by
any court of competent jurisdiction in the United States shall be in
effect, the Holder may exercise the Option, in whole or in part, at any
time and from time to time following the occurrence of a Purchase Event;
PROVIDED that the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Date, (B)
termination of the Plan by Issuer or Grantee (except as provided in (D)
below) in accordance with the terms thereof prior to the occurrence of a
Purchase Event or a Preliminary Purchase Event unless the Issuer has, after
the date hereof, engaged in discussions with any third party regarding an
Acquisition Transaction (an "Issuer Termination"), (C) 18 months after the
termination of the Plan by Issuer or Grantee (except as provided in (D)
below) in accordance with the terms thereof other than pursuant to an
Issuer Termination, and (D) 18 months after the termination of the Plan by
Grantee in accordance with Section 7.02 thereof (PROVIDED, HOWEVER, that if
no Purchase Event or Preliminary Purchase Event occurs before such
termination but if within 12 months after such termination a Purchase Event
or a Preliminary Purchase Event shall occur, then notwithstanding anything
to the contrary contained herein, this Option shall terminate 18 months
after the first occurrence of such an event); and provided, further, that
any purchase of shares upon exercise of the Option shall be subject to
compliance with applicable law, including, without limitation, the Bank
Holding Company Act of 1956, as amended (the "BHC Act") and the Home Owners
Loan Act ("HOLA"). The term "Holder" shall mean the holder or holders of
the Option from time to time, and which initially is Grantee.
(b) As used herein, a "Purchase Event" means any of the following
events:
(i) Without Grantee's prior written consent, Issuer shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose, or entered into an
agreement with any person (other than Grantee or any subsidiary of
Grantee) to effect an Acquisition Transaction. As used herein, the term
"Acquisition Transaction" shall mean (A) a merger, consolidation or
similar transaction involving Issuer or any of its subsidiaries, (B) the
disposition, by sale, lease, exchange or otherwise, of assets of Issuer
or any of its subsidiaries representing in either case 15% or more of
the consolidated assets of Issuer and its subsidiaries or (C) the
issuance, sale or other disposition of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 15% or more of the voting power of Issuer or any of its
subsidiaries; or
(ii) any person (other than Grantee or any subsidiary of Grantee)
shall have acquired beneficial ownership (as such term is defined in
Rule 13d-3 promulgated under the Exchange Act of or the right to acquire
beneficial
B-23
<PAGE>
ownership of, or any "group" (as such term is defined under the Exchange
Act) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 15% or more of the then outstanding
shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any subsidiary of Grantee)
shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act) or shall have filed a registration statement under the
Securities Act, with respect to, a tender offer or exchange offer to
purchase any shares of Issuer Common Stock such that, upon consummation
of such offer, such person would own or control 15% or more of the then
outstanding shares of Issuer Common Stock (such an offer being referred
to herein as a "Tender Offer" or an "Exchange Offer," respectively); or
(ii) the holders of Issuer Common Stock shall not have approved the
Plan at the meeting of such stockholders held for the purpose of voting
on the Plan, such meeting shall not have been held or shall have been
canceled prior to termination of the Plan or Issuer's Board of Directors
shall have withdrawn or modified in a manner adverse to Grantee the
recommendation of Issuer's Board of Directors with respect to the Plan,
in each case after it shall have been publicly announced that any person
(other than Grantee or any subsidiary of Grantee) shall have (A) made,
or disclosed an intention to make, a proposal to engage in an
Acquisition Transaction, (B) commenced a Tender Offer or filed a
registration statement under the Securities Act with respect to an
Exchange Offer or (C) filed an application (or given a notice), whether
in draft or final form, under the BHC Act, the Bank Merger Act or the
Change in Bank Control Act of 1978, for approval to engage in an
Acquisition Transaction; or
(iii) any person, other than Grantee or any subsidiary of the
Grantee, shall have made a bona fide proposal to Issuer or its
stockholders by public announcement or written communication that is or
becomes the subject of public disclosure to engage in an Acquisition
Transaction; or
(iv) after a proposal is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Plan and such
breach would entitle Grantee to terminate the Plan under Section 7.02 of
Article VII thereof (without regard to the cure period provided for
therein unless such cure is promptly effected without jeopardizing
consummation of the Merger pursuant to the terms of the Plan); or
(v) any person, other than Grantee or any subsidiary of the Grantee
shall have filed an application or notice with the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"), the
Comptroller of the Currency (the "OCC"), the Office of Thrift
Supervision (the "OTS") or other federal or state bank regulatory
authority for approval or non-disapproval to engage in an Acquisition
Transaction.
As used in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Preliminary Purchase Event or Purchase Event (in either case, a
"Triggering Event"), it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder wishes to exercise the Option, it shall
send to Issuer a written notice (the date of which being herein referred to
as the "Notice Date") specifying (i) the total number of Option Shares it
intends to purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 15 business days from the
Notice Date for the closing (the "Closing") of such purchase (the "Closing
Date"). If prior notification(s) to or approval(s) of regulatory
authority(ies) is required in connection with such purchase, Issuer shall
cooperate with the Holder in the filing of the required notice(s) or
application(s) and the Closing shall occur immediately following such
regulatory approval(s) or non-disapproval(s) (and any mandatory waiting
periods). Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, the Holder shall (i) pay to Issuer, in
immediately available funds by wire transfer to a bank account designated
by Issuer, an amount equal to the Purchase Price multiplied by the number
of Option Shares to be purchased on such Closing Date, and (ii) present and
surrender this Agreement to the Issuer at the address of the Issuer
specified in subsection (f) of Section 11 hereof.
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(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in subsection
(a) of this Section 4, (i) Issuer shall deliver to the Holder (A) a
certificate or certificates representing the Option Shares to be purchased
at such Closing, which Option Shares shall be free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever and subject to no
preemptive rights, and (B) if the Option is exercised in part only, an
executed new agreement with the same terms as this Agreement evidencing the
right to purchase the balance of the shares of Issuer Common Stock
purchasable hereunder, and (ii) the Holder shall deliver to Issuer a letter
agreeing that the Holder shall not offer to sell or otherwise dispose of
such Option Shares in violation of applicable federal and state law or of
the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable
law, certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as
follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER APPLICABLE FEDERAL LAW, AND PURSUANT TO THE
TERMS OF A STOCK OPTION AGREEMENT DATED AS OF MAY 27, 1994. A COPY OF SUCH
AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT
BY THE ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if the Holder
shall have delivered to Issuer a copy of a letter from the staff of the OTS
or other applicable federal agency, or an opinion of counsel in form and
substance reasonably satisfactory to Issuer and its counsel, to the effect
that such legend is not required for purposes of applicable federal law.
(d) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under Section 3(e), the tender of the
applicable purchase price in immediately available funds and the tender of
a copy of this Agreement to Issuer, the Holder shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Issuer Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state, and local taxes and
other charges that may be payable in connection with the preparation,
issue, and delivery of stock certificates under this Section in the name of
the Holder or its assignee, transferee, or designee.
(e) Issuer agrees (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Issuer Common Stock so that the Option may be exercised without additional
authorization of Issuer Common Stock after giving effect to all other
options, warrants, convertible securities, and other rights to purchase
Issuer Common Stock, (ii) that it will not, by charter amendment or through
reorganization, consolidation, merger, dissolution, or sale of assets, or
by any other voluntary act, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations, or conditions to be
observed or performed hereunder by Issuer, (iii) promptly to take all
action as may from time to time be required (including (A) complying with
all premerger notification, reporting, and waiting period requirements
specified in 15 U.S.C. (section mark) 18a and regulations promulgated
thereunder and (B) in the event, prior approval of or notice to any federal
or state regulatory authority is necessary before the Option may be
exercised, cooperating fully with the Holder in preparing such applications
or notices and providing such information to such regulatory authority as
they may require) in order to permit the Holder to exercise the Option and
Issuer duly and effectively to issue shares of the Issuer Common Stock
pursuant hereto, and (iv) promptly to take all action provided herein to
protect the rights of the Holder against dilution.
(f) This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Issuer Common Stock purchasable hereunder. The terms "Agreement" and
"Option" as used herein include any Stock Option Agreements and related
Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it
of the loss, theft, destruction, or mutilation of this Agreement, and (in
the case of loss, theft, or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement, if
mutilated, Issuer will execute and deliver a new Agreement of like tenor
and date. Any such new Agreement executed and delivered shall constitute an
additional contractual obligation on the part of Issuer whether or not the
Agreement is lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
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5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee (and Holder, if different than Grantee) as follows:
(a) DUE AUTHORIZATION. Issuer has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals
referred to herein, 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 Issuer. This Agreement has been duly
executed and delivered by Issuer.
(b) AUTHORIZED STOCK. Issuer has taken all necessary corporate and
other action to authorize and reserve and to permit it to issue, and, at
all times from the date hereof until the obligation to deliver Issuer
Common Stock upon the exercise of the Option terminates, will have reserved
for issuance, upon exercise of the Option, the number of shares of Issuer
Common Stock necessary for Holder to exercise the Option, and Issuer will
take all necessary corporate action to authorize and reserve for issuance
all additional shares of Issuer Common Stock or other securities which may
be issued pursuant to Section 7 upon exercise of the Option. The shares of
Issuer Common Stock to be issued upon due exercise of the Option, including
all additional shares of Issuer Common Stock or other securities which may
be issuable pursuant to Section 7, upon issuance pursuant hereto, shall be
duly and validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all liens, claims, charges and encumbrances of
any kind or nature whatsoever, including any preemptive rights of any
stockholder of Issuer.
6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents and
warrants to Issuer that:
(a) DUE AUTHORIZATION. Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or
consents referred to herein, 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 Grantee. This Agreement has been
duly executed and delivered by Grantee.
(b) PURCHASE NOT FOR DISTRIBUTION. This Option is not being, and any
Option Shares or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to the public distribution thereof
and will not be transferred or otherwise disposed of except in a
transaction complying with or exempt from applicable federal law.
7. ADJUSTMENT UPON CHANGES IN ISSUER CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a
stock dividend, stock split, split-up, recapitalization, combination,
exchange of shares or similar transaction, the type and number of shares or
securities subject to the Option, and the Purchase Price therefor, shall be
adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction so that the Holder shall receive,
upon exercise of the Option, the number and class of shares or other
securities or property that the Holder would have received in respect of
Issuer Common Stock if the Option had been exercised immediately prior to
such event, or the record date therefor, as applicable. If any additional
shares of Issuer Common Stock are issued after the date of this Agreement
(other than pursuant to an event described in the first sentence of this
subsection (a)), the number of shares of Issuer Common Stock subject to the
Option shall be adjusted so that, after such issuance, it, together with
any shares of Issuer Common Stock previously issued pursuant hereto, equals
19.9% of the number of shares of Issuer Common Stock then issued and
outstanding, without giving effect to any shares subject to or issued
pursuant to the Option.
(b) In the event that Issuer shall enter in an agreement: (i) to
consolidate with or merge into any person, other than Grantee or one of its
subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any person, other than Grantee
or one of its subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such merger,
the then outstanding shares of Issuer Common Stock shall be changed into or
exchanged for stock or other securities of Issuer or any other person or
cash or any other property or the outstanding shares of Issuer Common Stock
immediately prior to such merger shall after such merger represent less
than 50% of the outstanding shares and share equivalents of the merged
company, or (iii) to sell or otherwise transfer all or substantially all of
its assets to any person, other than Grantee or one of its subsidiaries,
then, and in each such case, the agreement governing such transaction shall
make proper provisions so that the Option shall, upon the consummation of
any such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at
the election of the Holder, of either (x) the Acquiring Corporation (as
hereinafter defined), (y) any person that controls the Acquiring
Corporation, or (z) in the case of a merger described in clause (ii),
Issuer (such person being referred to as the "Substitute Option Issuer").
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(c) The Substitute Option shall have the same terms as the Option,
provided, that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to the Holder. The Substitute
Option Issuer shall also enter into an agreement with the then Holder or
Holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of the Substitute Common Stock (as hereinafter defined) as is equal
to the Assigned Value (as hereinafter defined) multiplied by the number of
shares of the Issuer Common Stock for which the Option was theretofore
exercisable, divided by the Average Price (as hereinafter defined). The
exercise price of the Substitute Option per share of the Substitute Common
Stock (the "Substitute Option Price") shall then be equal to the Option
Price multiplied by a fraction in which the numerator is the number of
shares of Issuer Common Stock for which the Option was theretofore
exercisable and the denominator is the number of shares of the Substitute
Common Stock for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing
or surviving person, or (iii) the transferee of all or substantially all
of Issuer's assets (or a substantial part of the assets of its
subsidiaries taken as a whole).
(2) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(3) "Assigned Value" shall mean the highest of (x) the price per
share of Issuer Common Stock at which a Tender Offer or an Exchange
Offer therefor has been made, (y) the price per share of Issuer Common
Stock to be paid by any third party pursuant to an agreement with
Issuer, and (z) the highest closing price for shares of Issuer Common
Stock within the six-month period immediately preceding the
consolidation, merger, or sale in question. In the event that a Tender
Offer or an Exchange Offer is made for Issuer Common Stock or an
agreement is entered into for a merger or consolidation involving
consideration other than cash, the value of the securities or other
property issuable or deliverable in exchange for Issuer Common Stock
shall be determined by a nationally recognized investment banking firm
selected by Holder or Owner, as the case may be (and if there are both a
Holder and and Owner, the Holder).
(4) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger, or sale in question, but in no event higher
than the closing price of the shares of the Substitute Common Stock on
the day preceding such consolidation, merger, or sale; provided that if
Issuer is the issuer of the Substitute Option, the Average Price shall
be computed with respect to a share of common stock issued by Issuer,
the person merging into Issuer or by any company which controls such
person, as the Holder may elect.
(f) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.9% of the aggregate
of the shares of the Substitute Common Stock outstanding prior to exercise
of the Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the aggregate of the shares of
Substitute Common Stock but for the limitation in the first sentence of
this subsection (f), the Substitute Option Issuer shall make a cash payment
to the Holder equal to the excess of (i) the value of the Substitute Option
without giving effect to the limitation in the first sentence of this
subsection (f) over (ii) the value of the Substitute Option after giving
effect to the limitation in the first sentence of this subsection (f). This
difference in value shall be determined by a nationally-recognized
investment banking firm selected by the Holder.
(g) Issuer shall not enter into any transaction described in
subsection (b) of this Section 7 unless the Acquiring Corporation and any
person that controls the Acquiring Corporation assume in writing all the
obligations of Issuer hereunder and take all other actions that may be
necessary so that the provisions of this Section 7 are given full force and
effect (including, without limitation, any action that may be necessary so
that the holders of the other shares of common stock issued by the
Substitute Option Issuer are not entitled to exercise any rights by reason
of the issuance or exercise of the Substitute Option and the shares of
Substitute Common Stock are otherwise in no way distinguishable from or
have lesser economic value than other shares of common stock issued by the
Substitute Option Issuer).
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(h) Issuer shall not enter into any agreement of the type described in
subsection (b) of this Section 7 unless the other party thereto commits to
provide the funding required for Issuer to pay either the Option Repurchase
Price or the Option Share Repurchase Price and otherwise to be bound by the
terms hereof.
(i) Nothing in this Section 7 shall be deemed to affect or change any
of the covenants or representations in the Plan or represent an exclusive
or alternative remedy.
8. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. Issuer shall, subject to the
conditions of subparagraph (c) below, if requested by any Holder or Owner,
as applicable, including Grantee and any permitted transferee (the "Selling
Shareholder"), as expeditiously as possible prepare and file an offering
circular, registration statement or other document (a "registration
statement") under applicable federal law if such filing is necessary in
order to permit the sale or other disposition of any or all shares of
Issuer Common Stock or other securities that have been acquired by or are
issuable to the Selling Shareholder upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
the Selling Shareholder in such request, including without limitation to
the extent available, a "shelf registration statement" under Rule 415 under
the Securities Act or any successor provision, and Issuer shall use its
best efforts to qualify such shares or other securities for sale under any
applicable state securities laws.
(b) ADDITIONAL REGISTRATION RIGHTS. If Issuer at any time after the
exercise of the Option proposes to offer for sale any shares of Issuer
Common Stock under applicable federal law in connection with an
underwritten public offering of such Issuer Common Stock, Issuer will
promptly give written notice to the Selling Shareholder of its intention to
do so and, upon the written request of the Selling Shareholder given within
30 days after receipt of any such notice (which request shall specify the
number of shares of Issuer Common Stock intended to be included in such
underwritten public offering by the Selling Shareholder), Issuer will cause
all such shares for which the Selling Shareholder requests participation in
such offering, to be so included in such underwritten public offering;
PROVIDED, HOWEVER, that Issuer may elect to not cause any such shares to be
so included (i) if the underwriters in good faith object for valid business
reasons, or (ii) in the case of an offering solely to implement an employee
benefit plan or a merger transaction; PROVIDED, FURTHER, HOWEVER, that such
election pursuant to (i) may only be made one time. If some but not all the
shares of Issuer Common Stock, with respect to which Issuer shall have
received requests for inclusion in an offering pursuant to this subsection
(b), shall be excluded from such offering, Issuer shall make appropriate
allocation of shares to be registered among the Selling Shareholders
desiring to include their shares pro rata in the proportion that the number
of shares requested to be included by each such Selling Shareholder bears
to the total number of shares requested to be included by all such Selling
Shareholders then desiring to have Issuer Common Stock included.
(c) CONDITIONS TO REQUIRED REGISTRATION. Issuer shall use all
reasonable efforts to cause each registration statement referred to in
subparagraph (a) above to become effective and to obtain all consents or
waivers of other parties which are required therefor and to keep such
registration statement effective, provided, however, that Issuer may delay
any filing of Option Shares required pursuant to subparagraph (a) above for
a period not exceeding 90 days provided Issuer shall in good faith
determine that any such filing would adversely affect an offering or
contemplated offering of other securities by Issuer, and Issuer shall not
be required to effect any filing pursuant to subsection (a) above:
(i) prior to the earliest of (a) termination of the Plan pursuant
to Article VII thereof, (b) failure to obtain the requisite stockholder
approval pursuant to Section 6.01 of Article VI of the Plan, and (c) a
Purchase Event or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of an offering
referred to in subsection (b) above pursuant to which the Selling
Shareholder or Selling Shareholders concerned were afforded the
opportunity to include such shares in such offering and such shares were
included as requested; and
(v) unless a request therefor is made to Issuer by Selling
Shareholders that hold at least 25% or more of the aggregate number of
Option Shares (including shares of Issuer Common Stock issuable upon
exercise of the Option) then outstanding.
In addition to the foregoing, Issuer shall not be required to maintain
the effectiveness of any registration statement after the expiration of
nine months from the effective date of such registration statement. Issuer
shall use all reasonable
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efforts to make any filings, and take all steps, under all applicable state
securities laws to the extent necessary to permit the sale or other
disposition of the Option Shares included in such filing in accordance with
the intended method of distribution for such shares, provided, however,
that Issuer shall not be required to consent to general jurisdiction or
qualify to do business in any state where it is not otherwise required to
so consent to such jurisdiction or to so qualify to do business.
(d) EXPENSES. Except where applicable state law prohibits such
payments, Issuer will pay all expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses
(including the fees and expenses of counsel), legal expenses including the
reasonable fees and expenses of one counsel to the holders whose Option
Shares are being included in a registration statement, printing expenses
and the costs of special audits or "cold comfort" letters, expenses of
underwriters, excluding discounts and commissions but including liability
insurance if Issuer so desires or the underwriters so require, and the
reasonable fees and expenses of any necessary special experts) in
connection with each offering pursuant to subsection (a) or (b) above
(including the related offerings and sales by holders of Option Shares) and
all other qualifications, notifications or exemptions pursuant to
subsection (a) or (b) above.
(e) INDEMNIFICATION. In connection with any offering under
subparagraph (a) or (b) above Issuer hereby indemnifies the Selling
Shareholders, and each underwriter thereof, including each person, if any,
who controls such holder or underwriter within the meaning of Section 15 of
the Securities Act, against all expenses, losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement of a
material fact contained in any registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission, or
alleged omission, to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments
or supplements thereto) in reliance upon and in conformity with,
information furnished in writing to Issuer by such indemnified party
expressly for use therein, and Issuer and each officer, director and
controlling person of Issuer shall be indemnified by such Selling
Shareholders, or by such underwriter, as the case may be, for all such
expenses, losses, claims, damages and liabilities caused by any untrue, or
alleged untrue, statement, that was included by Issuer in any such
registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) in reliance upon, and in
conformity with, information furnished in writing to Issuer by such holder
or such underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this subsection (e)
of notice of the commencement of any action against such indemnified party
in respect of which indemnity or reimbursement may be sought against any
indemnifying party under this subsection (e), such indemnified party shall
notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not
relieve it of any liability which it may otherwise have to any indemnified
party under this subsection (e). In case notice of commencement of any such
action shall be given to the indemnifying party as above provided, the
indemnifying party shall be entitled to participate in and, to the extent
it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such indemnified party. The indemnified
party shall have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of such
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) the indemnifying party either agrees to pay
the same, (ii) the indemnifying party fails to assume the defense of such
action with counsel satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal
defenses may be available to the indemnifying party that may be contrary to
the interest of the indemnified party, in which case the indemnifying party
shall be entitled to assume the defense of such action notwithstanding its
obligation to bear fees and expenses of such counsel. No indemnifying party
shall be liable for any settlement entered into without its consent, which
consent may not be unreasonably withheld.
If the indemnification provided for in this subsection (e) is
unavailable to a party otherwise entitled to be indemnified in respect of
any expenses, losses, claims, damages or liabilities referred to herein,
then the indemnifying party, in lieu of indemnifying such party otherwise
entitled to be indemnified, shall contribute to the amount paid or payable
by such party to be indemnified as a result of such expenses, losses,
claims, damages or liabilities in such proportion as is appropriate to
reflect the relative benefits received by Issuer, the Selling Shareholders
and the underwriters from the offering of the securities and also the
relative fault of Issuer, the Selling Shareholders and the underwriters in
connection with the statements or omissions which resulted in such
expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as
a result of the expenses, losses, claims,
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damages and liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim; PROVIDED,
HOWEVER, that in no case shall any Selling Shareholder be responsible, in
the aggregate, for any amount in excess of the net offering proceeds
attributable to its Option Shares included in the offering. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Any obligation by
any holder to indemnify shall be several and not joint with other holders.
In connection with any offering pursuant to subsection (a) or (b)
above, Issuer and each Selling Shareholder (other than Grantee) shall enter
into an agreement containing the indemnification provisions of this
subsection (e).
(f) MISCELLANEOUS REPORTING. Issuer shall comply with all reporting
requirements and will do all such other things as may be necessary to
permit the expeditious sale at any time of any Option Shares by the Selling
Shareholder thereof in accordance with and to the extent permitted by any
rule or regulation promulgated by the OTS or other applicable federal
agency from time to time. Issuer shall at its expense provide the Selling
Shareholder with any information necessary in connection with the
completion and filing of any reports or forms required to be filed by them
under applicable federal law, or required pursuant to any state securities
laws or the rules of any stock exchange.
(g) ISSUER TAXES. Issuer will pay all stamp taxes in connection with
the issuance and the sale of the Option Shares and in connection with the
exercise of the Option, and will save the Selling Shareholders harmless,
without limitation as to time, against any and all liabilities, with
respect to all such taxes.
9. QUOTATION; LISTING. If Issuer Common Stock or any other securities to be
acquired upon exercise to the Option are then authorized for quotation or
trading or listing on the NASDAQ/NMS or any securities exchange, Issuer, upon
the request of the Holder, will promptly file an application, if required, to
authorize for quotation or trading or listing the shares of Issuer Common Stock
or other securities to be acquired upon exercise of the Option on the NASDAQ/NMS
or such other securities exchange and will use its best efforts to obtain
approval, if required, of such quotation or listing as soon as practicable.
10. DIVISION OF OPTION. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
11. MISCELLANEOUS.
(a) EXPENSES. Each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, including fees and expenses of its own
financial consultants, investment bankers, accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be
waived at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
(c) ENTIRE AGREEMENT: NO THIRD-PARTY BENEFICIARY; SEVERABILITY. This
Agreement, together with the Plan and the other documents and instruments
referred to herein and therein, between Grantee and Issuer (a) constitutes
the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to
the subject matter hereof and (b) is not intended to confer upon any person
other than the parties hereto (other than any transferees of the Option
Shares or any permitted transferee of this Agreement pursuant to subsection
(h) of this Section 11) any rights or remedies hereunder. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or a federal or state regulatory agency to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. If for any
reason such court or regulatory agency determines that the Option does not
permit the Holder or Owner to acquire, or does not require Issuer to
repurchase, the full number of
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<PAGE>
shares of Issuer Common Stock as provided in Section 3 (as adjusted
pursuant to Section 7), it is the express intention of Issuer to allow the
Holder or Owner to acquire or to require Issuer to repurchase such lesser
number of shares as may be permissible without any amendment or
modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina without regard to
any applicable conflict of law principles.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein
are for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
(f) 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):
<TABLE>
<S> <C>
If to Issuer to: Home Federal Savings Bank
5225 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Telecopy Number: (202) 537-8831
Attention: Chief Executive Officer
with a copy to: Thomas J. Haggerty, Esq.
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Telecopy Number: (202) 362-1333
If to Grantee to: First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Telecopy Number: (704) 374-3425
Attention: Edward E. Crutchfield, Jr.
Chairman and Chief Executive Officer
with a copy to: First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Telecopy Number: (704) 374-3425
Attention: Marion A. Cowell, Jr.
General Counsel
</TABLE>
(g) COUNTERPARTS. This Agreement and any amendments hereto may be
executed in two counterparts, each of which shall be considered one and the
same agreement and shall become effective when both counterparts have been
signed, it being understood that both parties need not sign the same
counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder or under the Option shall be assigned by
any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other party, except that the
Holder may assign this Agreement to a wholly-owned subsidiary of the Holder
and the Holder may assign its rights hereunder in whole or in part after
the occurrence of a Purchase Event. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
the Holder, Issuer and the Holder shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
B-31
<PAGE>
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement
may be enforced by either party through specific performance, injunctive
relief and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
HOME FEDERAL SAVINGS BANK
By: /s/ ELWYN G. RAIDEN, JR.
Name: Elwyn G. Raiden, Jr.
Title: President and Chief Executive
Officer
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
Name: Kenneth R. Stancliff
Title: Senior Vice President
B-32
<PAGE>
ANNEX C
HOVDE FINANCIAL, INC.
INVESTMENT BANKERS & FINANCIAL ADVISORS
May 27, 1994
Board of Directors
Home Federal Savings Bank
5225 Wisconsin Avenue, N.W.
Washington, D.C. 20015
Members of the Board:
Home Federal Savings Bank ("Home Federal") is considering entering into an
Agreement and Plan of Acquisition ("Agreement") dated as of the date hereof with
First Union Corporation ("First Union"). As is set forth in the proposed
Agreement, each outstanding share of Home Federal common stock will be exchanged
for .4835 common shares of First Union's common stock ("Merger Consideration").
In connection therewith, you have requested our opinion as to the fairness of
the proposed transaction, from a financial point of view, to the shareholders of
Home Federal.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
Pursuant to a Consulting Agreement dated January 26, 1994 between Home Federal
and Hovde, Hovde was engaged to assist Home Federal in exploring various
strategic options including a potential sale of Home Federal. Therefore, we are
familiar with Home Federal, having acted as its financial advisor in connection
with, and having participated in the negotiations leading to, the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Home Federal and First
Union and material prepared in connection with the proposed transaction,
including the following: the Agreement; certain publicly available information
concerning Home Federal and First Union, including financial statements and
Consolidated Reports of Condition and Income for each of the three years ended
December 31, 1993; the nature and terms of recent sale and merger transactions
involving thrifts and thrift holding companies that we consider relevant;
historical and current market data for the common stock of Home Federal and
First Union; and financial and other information provided to us by management of
Home Federal and First Union.
In addition, we have conducted meetings with members of the senior
management of Home Federal for the purpose of reviewing the future prospects of
Home Federal. We also evaluated the pro forma ownership of First Union's common
stock by Home Federal's shareholders relative to the pro forma contribution of
Home Federal's assets, liabilities, equity and earnings to the pro forma
company. We also took into account our assessment of general economic, market
and financial conditions and our experience in other transactions, as well as
our knowledge of the thrift industry and our general experience in securities
valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
Home Federal and First Union and in the discussions with Home Federal's
management.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the Merger Consideration to be received
by the shareholders of Home Federal as described in the Agreement is fair from a
financial point of view.
Sincerely,
(Signature of Hovde Financial, Inc.
appears here)
HOVDE FINANCIAL, INC.
1826 Jefferson Place, N.W. (Bullet) Washington, DC 20036 (Bullet) Telephone
(202) 775-8109 (Bullet) Telecopier (202) 775-8365
1110 Lake Cook Road (Bullet) Suite 165 (Bullet) Buffalo Grove, IL 60089 (Bullet)
Telephone (708) 808-0888 (Bullet) Telecopier (708) 808-0930
C-1
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 55-8-50 through 55-8-58 of the NCBCA contain specific provisions
relating to indemnification of directors and officers of North Carolina
corporations. In general, the statute provides that (i) a corporation must
indemnify a director or officer who is wholly successful in his defense of a
proceeding to which he is a party because of his status as such, unless limited
by the articles of incorporation, and (ii) a corporation may indemnify a
director or officer if he is not wholly successful in such defense, if it is
determined as provided in the statute that the director or officer meets a
certain standard of conduct, provided when a director or officer is liable to
the corporation, the corporation may not indemnify him. The statute also permits
a director or officer of a corporation who is a party to a proceeding to apply
to the courts for indemnification, unless the articles of incorporation provide
otherwise, and the court may order indemnification under certain circumstances
set forth in the statute. The statute further provides that a corporation may in
its articles of incorporation or bylaws or by contract or resolution provide
indemnification in addition to that provided by the statute, subject to certain
conditions set forth in the statute.
FUNC's Bylaws provide for the indemnification of FUNC's directors and
executive officers by FUNC against liabilities arising out of his status as
such, excluding any liability relating to activities which were at the time
taken known or believed by such person to be clearly in conflict with the best
interests of FUNC.
FUNC's Articles provide for the elimination of the personal liability of
each director of FUNC to the fullest extent permitted by the provisions of the
NCBCA, as the same may from time to time be in effect.
FUNC maintains directors and officers liability insurance, which provides
coverage of up to $80,000,000, subject to certain deductible amounts. In
general, the policy insures (i) FUNC's directors and officers against loss by
reason of any of their wrongful acts, and/or (ii) FUNC against loss arising from
claims against the directors and officers by reason of their wrongful acts, all
subject to the terms and conditions contained in the policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
(2) The Merger Agreement, including the related Stock Option Agreement. (Incorporated by reference to ANNEX B to the
Prospectus/Proxy Statement included in this Registration Statement.)*
(3)(i) Articles of Incorporation of FUNC, as amended. (Incorporated by reference to Exhibit (4) to FUNC's 1990 First
Quarter Report on Form 10-Q and to Exhibit (99)(a) to FUNC's 1993 First Quarter Report on Form 10-Q.)
(3)(ii) By-laws of FUNC, as amended. (Incorporated by reference to Exhibit (4)(b) to FUNC's Form 8-K dated September 20,
1991.)
(4)(a) Statement of Classification of Shares creating the FUNC Series 1990 Preferred Stock. (Incorporated by reference to
Exhibit (3)(c) to FUNC's Registration Statement No. 33-42865.)
(4)(b) Shareholder Protection Rights Agreement, as amended. (Incorporated by reference to Exhibits (4)(b) to FUNC's Forms
8-K dated December 18, 1990 and October 20, 1992.)
(4)(c) All instruments defining the rights of holders of long-term debt of FUNC and its subsidiaries. (Not filed pursuant
to (4)(iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the Commission.)
(5) Opinion of Marion A. Cowell, Jr., Esq.**
(8) Tax opinion of Sullivan & Cromwell.**
(12) Computation of Ratio of Earnings to Fixed Charges. (Incorporated by reference to Exhibit (12)(a) to FUNC's 1994
Second Quarter Report on Form 10-Q.)
(23)(a) Consent of KPMG Peat Marwick LLP.**
(23)(b) Independent Auditors' Consent of Deloitte & Touche LLP.**
(23)(c) Consent of Councilor, Buchanan and Mitchell, P.C.**
(23)(d) Consent of Marion A. Cowell, Jr., Esq. (Included in Exhibit (5).)
(23)(e) Consent of Sullivan & Cromwell. (Included in Exhibit (8).)
(23)(f) Consent of Hovde Financial, Inc.**
(24) Power of Attorney.**
(27) Financial Data Schedule of FUNC as of and for the three months ended June 30, 1994.
(99) Form of proxy for the Special Meeting of Stockholders of Home Federal.
</TABLE>
* Omitted exhibits to be furnished upon request of the Commission.
** Previously filed.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
(a)(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (as amended and the
rules and regulations thereunder, the "Securities Act"), each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (as amended and the rules and regulations
thereunder, 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.
(2) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c)
promulgated pursuant to the Securities Act, 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.
(3) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415 promulgated
pursuant to the Securities Act, 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.
(4) 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 of this Item 22, or otherwise
(other than insurance), the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(b) 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.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to Registration Statement No. 33-54739 on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Charlotte, State of North Carolina, on September 7, 1994.
FIRST UNION CORPORATION
By: /s/ KENT S. HATHAWAY
KENT S. HATHAWAY
SENIOR VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement No. 33-54739 on Form S-4 has been signed by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
EDWARD E. CRUTCHFIELD, JR.* Chairman and Chief Executive Officer and Director
EDWARD E. CRUTCHFIELD, JR.
ROBERT T. ATWOOD* Executive Vice President and Chief Financial Officer
ROBERT T. ATWOOD
JAMES H. HATCH* Senior Vice President and Corporate Controller (Principal Accounting
Officer)
JAMES H. HATCH
G. ALEX BERNHARDT* Director
G. ALEX BERNHARDT
W. WALDO BRADLEY* Director
W. WALDO BRADLEY
ROBERT J. BROWN* Director
ROBERT J. BROWN
ROBERT D. DAVIS* Director
ROBERT D. DAVIS
R. STUART DICKSON* Director
R. STUART DICKSON
B. F. DOLAN* Director
B. F. DOLAN
RODDEY DOWD, SR.* Director
RODDEY DOWD, SR.
JOHN R. GEORGIUS* Director
JOHN R. GEORGIUS
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
WILLIAM N. GOODWIN, JR.* Director
WILLIAM N. GOODWIN, JR.
BRENTON S. HALSEY* Director
BRENTON S. HALSEY
HOWARD H. HAWORTH* Director
HOWARD H. HAWORTH
TORRENCE E. HEMBY, JR.* Director
TORRENCE E. HEMBY, JR.
Director
LEONARD G. HERRING
JACK A. LAUGHERY* Director
JACK A. LAUGHERY
MAX LENNON* Director
MAX LENNON
RADFORD D. LOVETT* Director
RADFORD D. LOVETT
HENRY D. PERRY, JR.* Director
HENRY D. PERRY, JR.
RANDOLPH N. REYNOLDS* Director
RANDOLPH N. REYNOLDS
RUTH G. SHAW* Director
RUTH G. SHAW
LANTY L. SMITH* Director
LANTY L. SMITH
Director
DEWEY L. TROGDON
Director
JOHN D. UIBLE
B. J. WALKER* Director
B. J. WALKER
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
KENNETH G. YOUNGER* Director
KENNETH G. YOUNGER
</TABLE>
*By Kent S. Hathaway, Attorney-in-Fact
/s/ KENT S. HATHAWAY
KENT S. HATHAWAY
Date: September 7, 1994
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>
(2) The Merger Agreement, including the related Stock Option Incorporated by reference to ANNEX B to the
Agreement. Prospectus/Proxy Statement included in this Registration
Statement.*
(3)(i) Articles of Incorporation of FUNC, as amended. Incorporated by reference to Exhibit (4) to FUNC's 1990
First Quarter Report on Form 10-Q and to Exhibit (99)(a)
to FUNC's 1993 First Quarter Report on Form 10-Q.
(3)(ii) By-laws of FUNC, as amended. Incorporated by reference to Exhibit (4)(b) to FUNC's
Form 8-K dated September 20, 1991.
(4)(a) Statement of Classification of Shares creating the FUNC Incorporated by reference to Exhibit (3)(c) to FUNC's
Series 1990 Preferred Stock. Registration Statement No. 33-42865.
(4)(b) Shareholder Protection Rights Agreement, as amended. Incorporated by reference to Exhibits (4)(b) to FUNC's
Forms 8-K dated December 18, 1990 and October 20, 1992.
(4)(c) All instruments defining the rights of holders of Not filed pursuant to (4)(iii) of Item 601(b) of
long-term debt of FUNC and its subsidiaries. Regulation S-K; to be furnished upon request of the
Commission.
(5) Opinion of Marion A. Cowell, Jr., Esq. **
(8) Tax opinion of Sullivan & Cromwell. **
(12) Computation of Ratio of Earnings to Fixed Charges. Incorporated by reference to Exhibit (12)(a) to FUNC's
1994 Second Quarter Report on Form 10-Q.
(23)(a) Consent of KPMG Peat Marwick LLP. **
(23)(b) Independent Auditors' Consent of Deloitte & Touche LLP. **
(23)(c) Consent of Councilor, Buchanan and Mitchell, P.C. **
(23)(d) Consent of Marion A. Cowell, Jr., Esq. Included in Exhibit (5).
(23)(e) Consent of Sullivan & Cromwell. Included in Exhibit (8).
(23)(f) Consent of Hovde Financial, Inc. **
(24) Power of Attorney. **
(27) Financial Data Schedule of FUNC as of and for Filed herewith.
the three months ended June 30, 1994.
(99) Form of proxy for the Special Meeting of Stockholders of Filed herewith.
Home Federal.
</TABLE>
* Omitted exhibits to be furnished upon request of the Commission.
** Previously filed.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> APR-1-1994
<PERIOD-END> JUN-30-1994
<CASH> 2,809,958
<INT-BEARING-DEPOSITS> 1,387,532
<FED-FUNDS-SOLD> 1,909,486
<TRADING-ASSETS> 933,011
<INVESTMENTS-HELD-FOR-SALE> 9,709,341
<INVESTMENTS-CARRYING> 2,995,102
<INVESTMENTS-MARKET> 3,104,804
<LOANS> 49,252,202
<ALLOWANCE> (1,007,839)
<TOTAL-ASSETS> 72,604,401
<DEPOSITS> 53,772,260
<SHORT-TERM> 8,959,378
<LIABILITIES-OTHER> 1,260,203
<LONG-TERM> 3,129,444
<COMMON> 575,989
0
31,592
<OTHER-SE> 4,781,000
<TOTAL-LIABILITIES-AND-EQUITY> 72,604,401
<INTEREST-LOAN> 999,611
<INTEREST-INVEST> 198,728
<INTEREST-OTHER> 23,490
<INTEREST-TOTAL> 1,235,206
<INTEREST-DEPOSIT> 333,182
<INTEREST-EXPENSE> 483,913
<INTEREST-INCOME-NET> 751,293
<LOAN-LOSSES> 25,000
<SECURITIES-GAINS> (2,241)
<EXPENSE-OTHER> 651,220
<INCOME-PRETAX> 348,843
<INCOME-PRE-EXTRAORDINARY> 229,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229,620
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 4.78
<LOANS-NON> 523,291
<LOANS-PAST> 85,948
<LOANS-TROUBLED> 2,730
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,014,001
<CHARGE-OFFS> 54,516
<RECOVERIES> 22,745
<ALLOWANCE-CLOSE> 1,007,839
<ALLOWANCE-DOMESTIC> 637,300
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 370,539
</TABLE>
<PAGE>
EXHIBIT (99)
REVOCABLE PROXY
HOME FEDERAL SAVINGS BANK
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of shares of common stock of Home Federal Savings
Bank ("Home Federal") hereby constitutes and appoints Ralph S. Childs and Elwyn
G. Raiden, Jr., or either of them, the true and lawful attorneys and proxies of
the undersigned, each with full power of substitution, for and on behalf of the
undersigned, to act and vote as specified below, all of the shares of Home
Federal common stock held of record by the undersigned on September 1, 1994, at
the Special Meeting of Stockholders of Home Federal to be held on October ,
1994, at 9:00 a.m., Washington, D.C. time, at the Embassy Suites Hotel, Chevy
Chase Pavilion, 4300 Military Road, N.W., Washington, D.C., and at any
adjournment or adjournments thereof:
1. FOR ( ) AGAINST ( ) ABSTAIN ( )
Approval of an Agreement and Plan of Acquisition, dated as of May 27,
1994, among Home Federal, First Union Corporation ("FUNC"), First Union
Corporation of Virginia and First Union National Bank of Washington, D.C.
("FUNB-DC"), pursuant to which (i) Home Federal would merge with and into
FUNB-DC, and (ii) each outstanding share of Home Federal common stock
would be converted into the right to receive 0.4835 shares of FUNC common
stock, subject to possible adjustment under certain circumstances, all on
and subject to the terms and conditions contained therein.
2. In their discretion, to act and vote upon such other business as may come
before the meeting or any adjournment or adjournments thereof.
(Continued, and to be signed, on the other side)
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS SPECIFIED ABOVE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 SET FORTH ABOVE.
The undersigned hereby acknowledges receipt of the combined Notice of
Special Meeting of Stockholders and Prospectus/Proxy Statement that accompanied
this Proxy and ratifies all lawful action taken by the above-named attorneys and
proxies.
<TABLE>
<S> <C>
Date: , 1994 (SEAL)
(SEAL)
NOTE: Signatures(s) should agree with name(s) on Home
Federal stock certificate(s). Executors, administrators,
trustees and other fiduciaries, and persons signing on
behalf of corporations or partnerships, should so indicate
when signing.
</TABLE>
