<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1995
REGISTRATION NO. 33-62399
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:
BARRY P. TAFF, ESQ.
SILVER, FREEDMAN & TAFF, L.L.P.
1100 NEW YORK AVENUE, N.W.
WASHINGTON, D.C. 20005
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; THE MERGER; PRO FORMA FINANCIAL
INFORMATION
4. Terms of the Transaction................................................ SUMMARY; GENERAL INFORMATION; THE MERGER;
DESCRIPTION OF FUNC CAPITAL STOCK; CERTAIN
DIFFERENCES IN THE RIGHTS OF COLUMBIA AND
FUNC STOCKHOLDERS; ANNEX B; ANNEX C
5. Pro Forma Financial Information......................................... INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY; 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; RECENT DEVELOPMENTS; PRO
FORMA FINANCIAL INFORMATION; 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-3 or
S-2 Companies........................................................... INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY; RECENT DEVELOPMENTS;
COLUMBIA; ANNEX A
18. Information if Proxies, Consents or Authorizations are to
be Solicited............................................................ INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY; GENERAL INFORMATION; THE
MERGER
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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COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK
1560 WILSON BOULEVARD
ARLINGTON, VIRGINIA 22209-2409
(703) 247-5000
October 5, 1995
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 Columbia First Bank, a
Federal Savings Bank ("Columbia"). The meeting will be held at 10:00 a.m., local
time, on Friday, November 3, 1995, at Columbia's headquarters located at 1560
Wilson Boulevard, Arlington, Virginia 22209-2409.
The purpose of the meeting is to vote on a proposal to approve (i) the
Agreement and Plan of Acquisition, dated as of April 5, 1995 (the "Acquisition
Agreement"), among Columbia, First Union Corporation ("FUNC") and First Union
Corporation of Virginia ("FUNC-VA"), and (ii) the Plan of Merger, dated as of
April 5, 1995 (the "Plan of Merger" and, together with the Acquisition
Agreement, the "Merger Agreement"), among Columbia, FUNC, FUNC-VA and First
Union National Bank of Virginia ("FUNB-VA"), pursuant to which FUNC-VA would
acquire Columbia by means of a merger (the "Merger") of Columbia with and into
FUNB-VA. FUNC is the ninth largest bank holding company in the nation, based on
total assets of $83.1 billion at June 30, 1995.
On June 19, 1995, FUNC announced that it had entered into an agreement to
acquire First Fidelity Bancorporation, a bank holding company based in Newark,
New Jersey and Philadelphia, Pennsylvania. Certain information relating to this
transaction is set forth in the accompanying Prospectus/Proxy Statement under
"SUMMARY", "RECENT DEVELOPMENTS" and "PRO FORMA FINANCIAL INFORMATION".
Upon consummation of the Merger each outstanding share of Columbia common
stock (excluding certain shares held by Columbia or FUNC) would be converted
into the right to receive 1.1852 of shares of FUNC common stock (I.E., the
result obtained by dividing $60.00 by the average of the daily closing sales
prices of FUNC common stock on the New York Stock Exchange (the "NYSE")
Composite Transactions tape (the "NYSE Tape") for the ten trading days ending on
the first trading day immediately following the receipt of the last required
regulatory approval with respect to the Merger and the expiration of all waiting
periods required by such regulatory approval), in a transaction that is
generally tax-free for federal income tax purposes, all as more fully discussed
in the accompanying Prospectus/Proxy Statement. The common stock of FUNC is
actively traded and is listed on the NYSE. The last reported sale price of FUNC
common stock on the NYSE Tape on October 2, 1995 was $51.125 per share.
Consummation of the Merger is subject to certain conditions, including
approval of the Merger Agreement by Columbia stockholders and approval of the
Merger by various regulatory agencies. Approval of the Merger Agreement requires
the affirmative vote of at least 66 2/3 percent of the votes entitled to be cast
at the meeting by the holders of Columbia common stock.
The accompanying Notice of Special Meeting and Prospectus/Proxy Statement
contain information about the Merger. I urge you to review carefully such
information and the information in FUNC's 1994 Annual Report on Form 10-K, 1995
First and Second Quarter Reports on Form 10-Q, 1995 Current Reports on Form 8-K,
and 1995 Annual Meeting Proxy Statement, copies of which are available as
indicated in the accompanying Prospectus/Proxy Statement under "AVAILABLE
INFORMATION".
THE BOARD OF DIRECTORS OF COLUMBIA HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF COLUMBIA 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. EVEN IF YOU PLAN TO ATTEND THE MEETING IN
PERSON, PLEASE COMPLETE THE ENCLOSED PROXY, SIGN AND DATE IT AND MAIL IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID, RETURN ADDRESSED ENVELOPE.
Yours very truly,
MELVIN LENKIN
CHAIRMAN OF THE BOARD
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COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK
1560 WILSON BOULEVARD
ARLINGTON, VIRGINIA 22209-2409
(703) 247-5000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 3, 1995
October 5, 1995
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Columbia
First Bank, a Federal Savings Bank ("Columbia") will be held at 10:00 a.m.,
local time, on Friday, November 3, 1995, at Columbia's headquarters located at
1560 Wilson Boulevard, Arlington, Virginia 22209-2409 for the following purpose:
To consider and vote upon a proposal to approve (i) the Agreement and Plan
of Acquisition, dated as of April 5, 1995 (the "Acquisition Agreement"),
among Columbia, First Union Corporation ("FUNC") and First Union Corporation
of Virginia ("FUNC-VA"), and (ii) the Plan of Merger, dated as of April 5,
1995 (the "Plan of Merger" and, together with the Acquisition Agreement, the
"Merger Agreement"), among Columbia, FUNC, FUNC-VA and First Union National
Bank of Virginia ("FUNB-VA"), pursuant to which (a) FUNC-VA would acquire
Columbia by means of a merger of Columbia with and into FUNB-VA, and (b)
each outstanding share of Columbia common stock (excluding certain shares
held by Columbia or FUNC) would be converted into the right to receive
1.1852 shares of FUNC common stock, all on and subject to the terms and
conditions contained therein.
A copy of the Merger Agreement is set forth in ANNEX B to the accompanying
Prospectus/Proxy Statement.
The Board of Directors of Columbia has fixed September 18, 1995, 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 Columbia common
stock at the close of business on that date will be entitled to notice of and to
vote at the meeting.
Approval of the Merger Agreement requires the affirmative vote of at least
66 2/3 percent of the votes entitled to be cast at the meeting by the holders of
Columbia common stock.
If you have questions about or require assistance with respect to the
meeting, please call Corporate Investor Communications, Inc., who are assisting
Columbia in the solicitation of proxies, at (800) 242-4410.
THE BOARD OF DIRECTORS OF COLUMBIA UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors of
COLUMBIA FIRST BANK, A FEDERAL SAVINGS
BANK
MELVIN LENKIN
CHAIRMAN OF THE BOARD
STOCKHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. 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 COLUMBIA FIRST BANK,
A FEDERAL SAVINGS BANK
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This Prospectus/Proxy Statement is being furnished by Columbia First Bank,
a Federal Savings Bank ("Columbia"), to the holders of Columbia common stock,
par value $0.01 per share ("Columbia Common Stock"), as a proxy statement in
connection with the solicitation of proxies by the Board of Directors of
Columbia (the "Columbia Board") for use at a special meeting of stockholders of
Columbia to be held at 10:00 a.m., Arlington time, on Friday, November 3, 1995,
at Columbia's headquarters located at 1560 Wilson Boulevard, Arlington,
Virginia 22209-2409 (the "Special Meeting"), and at any adjournments or
postponements thereof.
This Prospectus/Proxy Statement, the accompanying Notice of Special Meeting
and form of proxy are first being mailed to the stockholders of Columbia on or
about October 5, 1995.
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve (i) the Agreement and Plan of Acquisition, dated as of April 5, 1995
(the "Acquisition Agreement"), among Columbia, First Union Corporation, a North
Carolina corporation ("FUNC"), and First Union Corporation of Virginia, a
Virginia corporation ("FUNC-VA"), and (ii) the Plan of Merger, dated as of April
5, 1995 (the "Plan of Merger" and, together with the Acquisition Agreement, the
"Merger Agreement"), among Columbia, FUNC, FUNC-VA and First Union National Bank
of Virginia ("FUNB-VA"), pursuant to which FUNC-VA would acquire Columbia by
means of a merger (the "Merger") of Columbia with and into FUNB-VA, 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 Columbia Common
Stock (excluding certain shares held by Columbia or FUNC) would be converted
into the right to receive 1.1852 shares (the "Exchange Ratio") 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"). The Exchange Ratio
is equal to the result obtained by dividing $60.00 by the average of the last
reported sale prices per share (the "Average Closing Price") of FUNC Common
Stock on the NYSE Tape (as hereinafter defined) for the ten trading days ending
on the first trading day immediately following the receipt of the last required
regulatory approval with respect to the Merger and the expiration of all waiting
periods required by such regulatory approval (I.E., $50.625).
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 COLUMBIA AND FUNC STOCKHOLDERS".
Based on the (i) 3,780,507 shares of Columbia Common Stock outstanding on
the Record Date (as hereinafter defined), and (ii) 290,539 shares of Columbia
Common Stock issuable upon the exercise of all outstanding employee and director
stock options to purchase such shares on such date (assuming all such options
are so exercisable), approximately 4.8 million FUNC Common Shares would be
issuable upon consummation of the Merger.
On June 19, 1995, FUNC announced that it had entered into an agreement to
acquire First Fidelity Bancorporation ("FFB"), a bank holding company based in
Newark, New Jersey and Philadelphia, Pennsylvania. In addition, since January 1,
1994, FUNC has completed, or currently has pending, a total of ten acquisitions
that have been or will be accounted for on a purchase accounting basis (the
"Purchase Acquisitions"), which are reflected in certain of the pro forma
financial information presented herein, including the acquisitions of Columbia,
American Savings of Florida, F.S.B. ("American Savings"), United Financial
Corporation of South Carolina, Inc. ("United Financial"), North Carolina-based
RS Financial Corp. ("RS Financial"), and Tennessee-based Brentwood National Bank
("Brentwood"), which were pending at June 30, 1995, or announced between July 1,
1995 and the date of this Prospectus/Proxy Statement. See "SUMMARY -- Comparison
of Certain Unaudited Per Share Data" and " -- Selected Financial Data", "RECENT
DEVELOPMENTS" and "PRO FORMA FINANCIAL INFORMATION".
FUNC Common Stock is listed and traded on the New York Stock Exchange
("NYSE") and Columbia Common Stock is listed and traded on the Nasdaq National
Market. On April 5, 1995, 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
the last sale price of Columbia Common Stock on the Nasdaq National Market were
$43.375 and $45.50, respectively. On October 2, 1995, such prices were $51.125
and $60.375, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION,
THE OFFICE OF THRIFT SUPERVISION 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 DATE OF THIS PROSPECTUS/PROXY STATEMENT IS OCTOBER 5, 1995
<PAGE>
AVAILABLE INFORMATION
FUNC, FFB and Columbia 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 FFB, and with the Office of Thrift
Supervision (the "OTS"), as to Columbia. Reports, proxy statements and other
information filed by FUNC and FFB 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 Columbia 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. Since FUNC Common Stock and FFB common stock are listed on the NYSE,
reports, proxy statements and other information relating to FUNC and FFB 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 (No. 33-62399), 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 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
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS/PROXY STATEMENT
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO: 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 27, 1995.
All information contained or incorporated by reference in this
Prospectus/Proxy Statement with respect to FUNC and FFB was supplied by FUNC,
and all information contained in this Prospectus/Proxy Statement with respect to
Columbia was supplied by Columbia.
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 Columbia. Neither the delivery of this
Prospectus/Proxy Statement nor any distribution of the FUNC Common Shares shall,
under any circumstances, create any implication that there has been no change in
the affairs of FUNC, FFB or Columbia 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 FUNC Common Shares
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 (the
"Commissioner") has not approved or disapproved this offering nor has the
Commissioner passed upon the accuracy or adequacy of this Prospectus/Proxy
Statement.
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.
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,
1994;
(ii) FUNC's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1995 (as amended by Form 10-Q/A, Amendment No. 1 dated
May 16, 1995), and June 30, 1995; and
(iii) FUNC's Current Reports on Form 8-K dated June 19, 1995, June 20,
1995, June 21, 1995, June 30, 1995 and August 30, 1995.
All documents filed by FUNC pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
earlier of the Effective Date or the termination of the Merger Agreement
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 Columbia 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
RECENT DEVELOPMENTS................................................................................................... 20
FFB Merger.......................................................................................................... 20
1995 and 1996 Earnings Estimates.................................................................................... 20
GENERAL INFORMATION................................................................................................... 21
General............................................................................................................. 21
Record Date; Vote Required.......................................................................................... 22
THE MERGER............................................................................................................ 23
General; Exchange Ratio............................................................................................. 23
Effective Date...................................................................................................... 23
Exchange of Columbia Certificates................................................................................... 23
Background and Reasons.............................................................................................. 24
Opinions of Financial Advisors to Columbia.......................................................................... 26
Interests of Certain Persons........................................................................................ 33
Certain Federal Income Tax Consequences............................................................................. 35
Business Pending Consummation....................................................................................... 36
Regulatory Approvals................................................................................................ 36
Conditions to Consummation; Termination............................................................................. 37
Waiver; Amendment................................................................................................... 37
Accounting Treatment................................................................................................ 37
Expenses; Termination Fee........................................................................................... 38
Voting Agreement.................................................................................................... 39
No Appraisal Rights................................................................................................. 39
Market Prices....................................................................................................... 40
Dividends........................................................................................................... 41
PRO FORMA FINANCIAL INFORMATION....................................................................................... 42
COLUMBIA.............................................................................................................. 47
General............................................................................................................. 47
History and Business................................................................................................ 47
Certain Regulatory Considerations................................................................................... 48
FUNC.................................................................................................................. 49
General............................................................................................................. 49
History and Business................................................................................................ 49
Certain Regulatory Considerations................................................................................... 50
DESCRIPTION OF FUNC CAPITAL STOCK..................................................................................... 53
Authorized Capital.................................................................................................. 53
FUNC Common Stock................................................................................................... 53
FUNC Preferred Stock................................................................................................ 54
FUNC Class A Preferred Stock........................................................................................ 54
Rights Plan......................................................................................................... 55
Other Provisions.................................................................................................... 56
CERTAIN DIFFERENCES IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS................................................... 57
General............................................................................................................. 57
Authorized Capital.................................................................................................. 57
Amendment to Articles of Incorporation, Charter or Bylaws........................................................... 57
Size and Classification of Board of Directors; Cumulative Voting.................................................... 58
Removal of Directors................................................................................................ 58
Director Exculpation................................................................................................ 58
</TABLE>
4
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</TABLE>
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Conflict of Interest Transactions................................................................................... 59
Stockholder Meetings................................................................................................ 59
Director Nominations................................................................................................ 59
Stockholder Proposals............................................................................................... 60
Stockholder Protection Rights Plan.................................................................................. 60
Stockholder Inspection Rights; Stockholder Lists.................................................................... 60
Required Stockholder Vote for Certain Actions....................................................................... 61
Anti-Takeover Provisions............................................................................................ 61
Dissenters' or Appraisal Rights..................................................................................... 62
Dividends and Other Distributions................................................................................... 63
Voluntary Dissolution............................................................................................... 63
RESALE OF FUNC COMMON SHARES.......................................................................................... 63
ADDITIONAL MATTERS.................................................................................................... 64
VALIDITY OF FUNC COMMON SHARES........................................................................................ 64
EXPERTS............................................................................................................... 64
OTHER MATTERS......................................................................................................... 64
ANNEX A -- INFORMATION FOR COLUMBIA................................................................................... A-1
Certain Financial and Other Information for the Year Ended September 30, 1994............................ A-2
Certain Financial and Other Information for the Quarter Ended June 30, 1995.............................. A-57
ANNEX B -- AGREEMENT AND PLAN OF ACQUISITION, INCLUDING THE PLAN OF MERGER AND THE VOTING AGREEMENT................... B-1
ANNEX C -- OPINIONS OF SCHRODER WERTHEIM & CO. INC. AND FRIEDMAN, BILLINGS, RAMSEY & CO., INC......................... C-1
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5
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SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN INFORMATION RELATING TO THE MERGER IS NOT
INTENDED TO BE A SUMMARY OF ALL MATERIAL INFORMATION RELATING TO THE MERGER AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE 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 ACQUISITION AGREEMENT
AND THE PLAN OF MERGER) AND THE VOTING 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",
"FUNC-VA", "FUNB-VA", "FFB" AND "COLUMBIA" REFER TO SUCH ORGANIZATIONS,
RESPECTIVELY, AND, UNLESS THE CONTEXT OTHERWISE REQUIRES, TO THEIR RESPECTIVE
CONSOLIDATED SUBSIDIARIES.
PARTIES TO THE MERGERS
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 ("BHCA"). FUNC provides a wide range of commercial and retail banking
services and trust services through national bank subsidiaries 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, leasing, investment banking, insurance
and securities brokerage services, through other subsidiaries. As of June 30,
1995, and for the six months then ended, FUNC reported assets of $83.1 billion,
net loans of $60.0 billion, deposits of $58.8 billion, stockholders' equity of
$5.7 billion and net income applicable to common stockholders of $479 million,
and as of such date FUNC operated through approximately 1,500 offices in 37
states and three foreign countries. FUNC is the ninth largest bank holding
company in the United States, based on total assets at June 30, 1995. 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.
On June 18, 1995, FUNC entered into an Agreement and Plan of Merger (the
"FFB Merger Agreement"), pursuant to which FUNC would acquire FFB by means of a
merger (the "FFB Merger") of FFB with and into a wholly-owned subsidiary of
FUNC. As of June 30, 1995, FFB had assets of $35.4 billion. The FFB Merger will
be accounted for as a pooling of interests. In addition, since January 1, 1994,
FUNC had completed, or currently has pending, the Purchase Acquisitions, which
are reflected in certain of the pro forma financial information presented
herein, including the acquisitions of Columbia, American Savings, United
Financial, RS Financial and Brentwood, which were pending at June 30, 1995, or
announced between July 1, 1995 and the date of this Prospectus/Proxy Statement.
As of June 30, 1995, Columbia, American Savings, United Financial, RS Financial
and Brentwood had aggregate assets of $8.0 billion.
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 " -- Comparison of Certain Unaudited Per Share Data", " -- Selected
Financial Data", "RECENT DEVELOPMENTS", "PRO FORMA FINANCIAL INFORMATION" and
"FUNC -- History and Business".
FUNC-VA AND FUNB-VA
FUNC-VA is the parent corporation of FUNB-VA, a national banking
association that provides a wide range of commercial and retail banking services
and trust services in Virginia. As of June 30, 1995, and for the six months then
ended, FUNB-VA's call report reflected assets of $9.2 billion, net loans of $6.4
billion, deposits of $6.6 billion, stockholder's equity of $621 million and net
income of $49 million, and as of such date FUNB-VA operated through 178 banking
offices in Virginia.
COLUMBIA
Columbia is a federal savings bank organized under the Home Owners Loan
Act, as amended ("HOLA"). Columbia provides commercial and retail banking
services in Virginia, Maryland and Washington, D.C. As of June 30, 1995, and for
the six months then ended, Columbia had assets of $2.8 billion, net loans of
$2.2 billion, deposits of $1.6 billion, stockholders' equity of $142 million and
net income of $6 million, and as of such date Columbia operated through 33
offices in
6
<PAGE>
Virginia, Maryland and Washington, D.C. The principal executive offices of
Columbia are located at 1560 Wilson Boulevard, Arlington, Virginia 22209-2409,
and its telephone number is (703) 247-5000. See "COLUMBIA" and ANNEX A.
SPECIAL MEETING; RECORD DATE
The Special Meeting will be held on Friday, November 3, 1995, at 10:00
a.m., Arlington, Virginia time, at Columbia's headquarters located at 1560
Wilson Boulevard, Arlington, Virginia 22209-2409 for the purpose of stockholders
considering and voting upon a proposal to approve the Merger Agreement.
The Columbia Board has fixed September 18, 1995, as the record date for
determining stockholders entitled to notice of and to vote at the Special
Meeting (the "Record Date"). As of such date, there were 3,780,507 shares of
Columbia 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, FUNC-VA would acquire Columbia by
means of the Merger of Columbia with and into FUNB-VA. Upon consummation of the
Merger, each outstanding share of Columbia Common Stock (excluding any shares of
stock held by FUNC or Columbia, other than in a fiduciary capacity or in
satisfaction of a debt previously contracted ("Excluded Shares")) would be
converted into the right to receive 1.1852 shares of FUNC Common Stock. See "THE
MERGER -- General; Exchange Ratio", "DESCRIPTION OF FUNC CAPITAL STOCK" and
"CERTAIN DIFFERENCES IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS".
In addition, immediately following the Merger, certain assets and deposits
of FUNB-VA (relating to branches operated by Columbia in Maryland and
Washington, D.C.) will be purchased and assumed by (i) First Union National Bank
of Maryland ("FUNB-MD") with respect to the Maryland operations of Columbia, and
(ii) First Union National Bank of Washington, D.C. ("FUNB-DC") with respect to
the Washington, D.C. operations of Columbia (collectively, the "Purchase &
Assumption"). The Purchase & Assumption will be accomplished pursuant to the
terms of a Purchase and Assumption Agreement, among FUNB-VA, FUNB-MD and FUNB-DC
(the "P&A Agreement").
VOTE REQUIRED
Approval of the Merger Agreement requires the affirmative vote of at least
66 2/3 percent of the votes entitled to be cast at the Special Meeting by the
holders of Columbia Common Stock.
The directors and executive officers of Columbia (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting, 1,515,219 shares of Columbia Common
Stock, which represents 40.08 percent of the outstanding shares of Columbia
Common Stock entitled to be voted at the Special Meeting. As a condition to
FUNC's willingness to enter into the Merger Agreement, CF Financial Associates,
L.P. ("CF Financial"), the holder of 1,411,000, or approximately 37.32 percent,
of the outstanding shares of Columbia Common Stock entitled to be voted at the
Special Meeting, agreed to vote all such shares in favor of approval of the
Merger Agreement at the Special Meeting (the "Voting Agreement", a copy of which
is included as Exhibit A to ANNEX B to this Prospectus/Proxy Statement), subject
to certain exceptions. Melvin Lenkin, Chairman of the Board of Columbia, is also
the President of the general partner of CF Financial, and accordingly, may be
deemed to beneficially own the shares of Columbia Common Stock held by CF
Financial. As such, the shares of Columbia Common Stock held by CF Financial
have been included in the number of shares beneficially owned by the directors
and executive officers of Columbia stated above. Accordingly, assuming such
shares are so voted and that the directors and executive officers of Columbia
vote the other shares of Columbia Common Stock beneficially owned by them in
favor of approval of the Merger Agreement, approval of the Merger Agreement will
require the affirmative vote of the holders of an additional 26.59 percent of
the outstanding shares of Columbia Common Stock entitled to be voted at the
Special Meeting in order for the Merger Agreement to be approved at the Special
Meeting.
See "GENERAL INFORMATION -- Record Date; Vote Required".
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.
7
<PAGE>
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Merger and to certain other conditions, the Merger will become effective (the
"Effective Date") on such date as FUNC notifies Columbia in writing not less
than five days prior thereto. Subject to the foregoing, it is currently
anticipated that the Merger will be consummated in the fourth quarter of 1995.
If the Merger is consummated in such quarter, or in any other quarter, Columbia
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 Columbia Certificates" and " -- Conditions to Consummation; Termination".
RECOMMENDATION OF THE COLUMBIA BOARD
THE COLUMBIA BOARD HAS ADOPTED THE MERGER AGREEMENT BY UNANIMOUS VOTE,
BELIEVES IT IS IN THE BEST INTERESTS OF COLUMBIA AND ITS STOCKHOLDERS AND
RECOMMENDS ITS APPROVAL BY COLUMBIA STOCKHOLDERS. SEE "THE MERGER -- BACKGROUND
AND REASONS; COLUMBIA".
OPINIONS OF FINANCIAL ADVISORS TO COLUMBIA
Schroder Wertheim & Co. Incorporated ("Schroder Wertheim") and Friedman,
Billings, Ramsey & Co., Inc. ("FBR") have jointly served as financial advisors
to Columbia and have each rendered an opinion to the Columbia Board that the
consideration to be received by Columbia's stockholders in the Merger is fair to
Columbia's stockholders from a financial point of view. Copies of such opinions
are attached hereto as ANNEX C and should be read in their entirety with respect
to the assumptions made, other matters considered and limitations on the reviews
undertaken. See "THE MERGER -- Opinions of Financial Advisors to Columbia".
INTERESTS OF CERTAIN PERSONS
Certain directors and executive officers of Columbia may be deemed to have
interests in the Merger in addition to their interests as stockholders of
Columbia generally. These include, among other things, provisions in the Merger
Agreement relating to indemnification, directors' and officers' liability
insurance, and certain other benefits.
Directors Franklin and Lorenz shall each be paid $29,000 in cash upon
consummation of the Merger, as equivalent amounts to what they would have
received if such non-employee directors had been awarded stock options on
November 17, 1994, under the 1993 Premium Price Stock Option Plan, as other
non-employee directors were awarded (which Columbia would have otherwise
provided to such individuals in the form of stock options of equivalent value in
the ordinary course of business on or about December 1, 1995).
In connection with the existing employment agreements of Columbia with
Melvin Lenkin and Thomas J. Schaefer (the "Senior Officers Employment
Agreements") (i) in consideration of such officers each entering into an
agreement not to compete with Columbia or FUNC (and each of their successors and
subsidiaries) for a period from the Effective Date to December 31, 1998, the
term of the Senior Officers Employment Agreements shall be extended for one year
(I.E., through December 31, 1998) by Columbia if the Effective Date is on or
after December 1, 1995, or by FUNB-VA if the Effective Date is prior to December
1, 1995, (ii) the FUNC subsidiaries that are obligated to honor and perform the
obligations under the Senior Officers Employment Agreements shall, subject to
the mitigation provisions of the Senior Officers Employment Agreements and
subject to satisfactory performance under the agreement not to compete, make
annual salary payments to Messrs. Lenkin and Schaefer of $373,256 and $488,280,
respectively, in monthly installments, through December 31, 1998 (or if either
should die prior thereto the full salary payments shall be made to his estate),
(iii) during the actual employment of Messrs. Lenkin and Schaefer, all of the
benefits set forth in the Senior Officers Employment Agreements will be
provided, (iv) after termination of Messrs. Lenkin's and Schaefer's actual
employment, the post-separation health benefits set forth in the Senior Officers
Employment Agreements will be provided to each of Messrs. Lenkin and Schaefer
and their surviving spouses for their respective lifetimes, and (v) in lieu of
any other benefits to which Messrs. Lenkin and Schaefer would be entitled a lump
sum payment will be made of $11,853 in the case of Mr. Lenkin, and $11,853 in
the case of Mr. Schaefer. Additionally, group term life insurance in the amount
of $500,000 of coverage shall be provided to each of Messrs. Lenkin and Schaefer
through December 31, 1998. Messrs. Lenkin and Schaefer shall be permitted, at
the Effective Date to purchase their currently provided vehicles at their
trade-in value.
In connection with the existing supplemental retirement agreements of
Messrs. Lenkin and Schaefer (the "SRA's"), the FUNC subsidiaries which are
obligated to honor and perform the obligations of Columbia thereunder shall, in
accordance with the terms of such SRA's, make a payment of $20,000 per month to
Mr. Lenkin and $10,000 per month to Mr. Schaefer,
8
<PAGE>
less any required withholding, for their lifetimes and one half of such amount
to their respective surviving spouses for their lifetimes, commencing on January
31, 1999, one month after the last salary payment is required to be made under
the Senior Officer Employment Agreements. Subsequent to execution of the Merger
Agreement, Columbia paid its remaining obligations to the Thomas J. Schaefer
Secular Trust, including tax gross-up payments, in the amount of $240,779.
The employment by Columbia of Susan Riel, David Fleming, Garrett Burke and
Robert Creighton (each an executive officer of Columbia) will terminate
immediately prior to the Effective Date, pursuant to the respective Change in
Control Severance Agreements with such officers (the "Severance Agreements"). At
the time of such termination, Columbia shall make payments in satisfaction of
Columbia's obligations under such Severance Agreements and FUNC-VA and FUNB-VA
and their respective successors in interest shall honor and perform the
obligations set forth in such Severance Agreements regarding health and other
benefits for the benefit of the named executives without cost to such named
executives for the period through November 16, 1997. The estimated amounts which
would be payable under such Severance Agreements to Ms. Riel and Messrs.
Fleming, Burke and Creighton are $320,008, $380,380, $239,148 and $195,000,
respectively. In addition, each of these executive officers will be paid a
$25,000 bonus by Columbia as an incentive to continue in their respective
capacities with Columbia until completion of the Merger.
In the Merger Agreement, FUNC has agreed to assume all options to purchase
shares of Columbia Common Stock granted pursuant to option plans maintained by
Columbia ("Columbia Option Plans"), which are outstanding under the Columbia
Option Plans, in accordance with the terms of the Columbia Option Plans, except
that the shares acquired upon exercise of such options shall be shares of FUNC
Common Stock. The number of shares of FUNC Common Stock covered by each option
outstanding under the Columbia Option Plans will be equal to the number of
shares of Columbia Common Stock covered thereby, multiplied by the Exchange
Ratio and rounded to the nearest whole share, and the option exercise price
would be appropriately adjusted. As of the Record Date, the directors and
executive officers of Columbia, together with certain of their related
interests, beneficially owned 1,515,219 shares of Columbia Common Stock and held
options to purchase an aggregate of 288,239 shares of Columbia Common Stock at a
weighted average exercise price of $38.22, with an aggregate value of
approximately $6.3 million, including $1.4 million for Mr. Lenkin and $1.5
million for Mr. Schaefer.
Options to purchase 37,543 shares of Columbia Common Stock at a weighted
average exercise price of $36.04 per share will become exercisable upon
consummation of the Merger. These options are held by seven executive officers
with the largest amount being held by each of five executive officers (each
having a value of approximately $137,500).
Melvin Lenkin, Chairman of the Columbia Board, is also President of the
general partner of CF Financial and may accordingly be deemed to beneficially
own the 1,411,000 shares of Columbia Common Stock held by CF Financial as of the
Record Date. As such, the shares of Columbia Common Stock held by CF Financial
have been included in the number of shares beneficially owned by the directors
and executive officers of Columbia stated above.
See "THE MERGER -- Interests of Certain Persons".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned, among other things, on receipt
by FUNC and Columbia of an opinion of Sullivan & Cromwell, special counsel for
FUNC, dated as of the Effective Date, to the effect that no gain or loss will be
recognized for federal income tax purposes by stockholders of Columbia who
receive FUNC Common Shares in exchange for their shares of Columbia Common
Stock, except that gain or loss may be recognized as to 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 COLUMBIA STOCKHOLDER, IT IS RECOMMENDED THAT COLUMBIA
STOCKHOLDERS CONSULT THEIR TAX ADVISERS CONCERNING THE FEDERAL (AND ANY STATE
AND LOCAL) TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
9
<PAGE>
BUSINESS PENDING CONSUMMATION
Columbia has agreed in the Merger Agreement not to take certain actions
relating to the operation of Columbia pending consummation of the Merger,
without the prior written consent of FUNC, except as otherwise permitted by the
Merger Agreement. These actions include, without limitation: (i) paying any
dividends, or redeeming or otherwise acquiring any shares of its capital stock,
or issuing any additional shares of its capital stock (other than upon exercise
of outstanding options) or giving any person the right to acquire any such
shares; (ii) incurring any indebtedness for borrowed money or becoming liable
for the obligations of any other entity; (iii) increasing the rate of
compensation or paying any bonus to any of its directors, officers or employees;
(iv) entering into or modifying any employment agreements or employee benefit
plans; (v) disposing of any material portion of its assets or acquiring any
material portion of the business or property of any other entity; (vi) changing
its lending, investment, liability management or other material banking policies
in any material respect; (vii) settling any claim, action or proceeding
involving any liability for material money damages; (viii) taking any other
action not in the ordinary course of business; or (ix) entering into,
terminating or changing any material contract, agreement or lease, except in the
ordinary course of business consistent with past practice and that are
terminable by Columbia without penalty upon not more than 60 days prior written
notice.
Columbia also has agreed that, no sooner than the day immediately prior to
the Effective Date, it will use its best efforts to modify its loan, litigation
and other reserve 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 receipt of certain prior approvals from the
Office of the Comptroller of the Currency (the "OCC"), and to prior notice to
the OTS. Applications have been filed with the OCC and a notice has been given
to the OTS. The OCC approved the application for the Merger on August 11, 1995,
and the OTS informed FUNC on July 12, 1995 that the OTS had no objection to the
notice provisions submitted in connection with the Merger. See "THE
MERGER -- Regulatory Approvals".
NO APPRAISAL RIGHTS
Holders of Columbia Common Stock do not have appraisal rights in connection
with the Merger. See "THE MERGER -- No Appraisal Rights".
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 Columbia;
(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 Columbia of the opinion of
Sullivan & Cromwell, dated as of the Effective Date, as to certain federal
income tax consequences of the Merger; (v) receipt by FUNC of a letter from
Columbia's independent auditors, dated as of or shortly prior to the Effective
Date, with respect to Columbia's consolidated financial position and results of
operations; 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 Columbia. The Merger Agreement may also be terminated by
the Board of Directors of either FUNC or Columbia if the Merger does not occur
on or before January 1, 1996, or if certain conditions set forth in the Merger
Agreement are not met.
See "THE MERGER -- Conditions to Consummation; Termination" and
" -- Expenses; Termination Fee".
EXPENSES; TERMINATION FEE
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby shall be borne by the
party incurring the same, except that printing expenses will be shared equally
by FUNC and Columbia.
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<PAGE>
FUNC-VA shall be entitled to a fee of $11.5 million (the "Termination Fee")
following the occurrence of a Fee Trigger Event (as hereinafter defined),
provided FUNC-VA shall have sent written notice of such entitlement within 90
days after its awareness of such occurrence. FUNC-VA's right to receive the
Termination Fee shall terminate if any of the following occurs prior to a Fee
Trigger Event: (i) the Effective Date; (ii) termination of the Merger Agreement
in accordance with its terms if such termination occurs prior to the occurrence
of a Preliminary Event (as hereinafter defined), except for termination by FUNC
due to a breach by Columbia; (iii) termination of the Merger Agreement following
the occurrence of a Preliminary Event and the passage of 18 months after such
termination; or (iv) termination of the Merger Agreement by FUNC due to a breach
by Columbia and the passage of 12 months after such termination. See "THE
MERGER -- Expenses; Termination Fee".
VOTING AGREEMENT
As an inducement to and a condition of FUNC's willingness to enter into the
Merger Agreement, CF Financial entered into the Voting Agreement with FUNC. The
Voting Agreement provides, among other things, that CF Financial will vote its
shares of Columbia Common Stock in favor of approval of the Merger Agreement.
See "GENERAL INFORMATION -- Record Date; Vote Required", "THE MERGER -- Voting
Agreement" and ANNEX B.
ACCOUNTING TREATMENT
It is intended that the Merger and the other pending Purchase Acquisitions
will be accounted for as purchases under generally accepted accounting
principles, and that the FFB Merger will be accounted for as a pooling of
interests under generally accepted accounting principles. See "THE
MERGER -- Accounting Treatment" and "PRO FORMA FINANCIAL INFORMATION".
CERTAIN DIFFERENCES IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS
The rights of stockholders of Columbia are currently determined by
reference to the HOLA and Columbia's Charter and Bylaws. On the Effective Date,
stockholders of Columbia will become stockholders of FUNC and their rights as
stockholders of FUNC will be determined by reference to the North Carolina
Business Corporation Act (the "NCBCA") and by FUNC's Articles of Incorporation
(as amended, the "Articles") and Bylaws. See "DESCRIPTION OF FUNC CAPITAL STOCK"
and "CERTAIN DIFFERENCES IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS".
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 Columbia under applicable federal securities
laws. See "RESALE OF FUNC COMMON SHARES".
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 Columbia; (ii) on a pro forma combined basis per
share of FUNC Common Stock reflecting consummation of (a) the Merger, (b) the
Purchase Acquisitions (including the Merger), and (c) the Purchase Acquisitions
(including the Merger) and the FFB Merger; and (iii) on an equivalent pro forma
basis per share of Columbia Common Stock reflecting consummation of (x) the
Merger, (y) the Purchase Acquisitions (including the Merger), and (z) the
Purchase Acquisitions (including the Merger) and the FFB Merger. Such pro forma
information has been prepared giving effect to the Merger and the other Purchase
Acquisitions on a purchase accounting basis, and the FFB Merger on a pooling of
interests accounting basis. See "THE MERGER -- Accounting Treatment". Columbia's
fiscal year-end is September 30 of each year; however, all per share financial
information set forth below related to Columbia as of and for periods ended
December 31 has been adjusted herein to reflect the results of operations on a
calendar year-end basis, as appropriate.
Pro forma financial information for the Purchase Acquisitions (including
the Merger) assumes such acquisitions were consummated on January 1, 1994, and,
except as otherwise indicated, reflects information from such date to their
respective consummation dates (or to June 30, 1995, with respect to the Purchase
Acquisitions (including the Merger) pending as of June 30, 1995, or announced
between July 1, 1995 and the date of this Prospectus/Proxy Statement). Pro forma
financial information with respect to the FFB Merger assumes such merger was
consummated as of the beginning of each of the periods indicated.
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<PAGE>
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Merger or any of the other Purchase
Acquisitions, consummation of the Merger or any of the other Purchase
Acquisitions will not affect FUNC's historical results for the periods
indicated. Pro forma financial information is intended to show how the Purchase
Acquisitions (including the Merger) and the FFB Merger might have affected
historical financial statements if the Purchase Acquisitions (including the
Merger) and the FFB Merger had been consummated at an earlier time. The pro
forma combined selected financial information does not purport to be indicative
of the results that actually would have been realized had the Purchase
Acquisitions (including the Merger) and the FFB Merger taken place at the
beginning of the applicable periods indicated, nor is it indicative of the
combined financial position or results of operations for future periods.
The information shown below should be read in conjunction with the
historical financial statements of FUNC, Columbia and FFB, including the
respective notes thereto, the unaudited pro forma financial information
appearing elsewhere in this Prospectus/Proxy Statement, including the notes
thereto, and the documents incorporated herein by reference. See "AVAILABLE
INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", "PRO FORMA
FINANCIAL INFORMATION" and ANNEX A.
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
<S> <C> <C>
BOOK VALUE PER SHARE:
Historical per share of:
FUNC Common Stock...................................................................... $ 33.39 30.66
Columbia Common Stock.................................................................. 37.66 35.93
Pro forma combined per share of FUNC Common Stock (1):
FUNC and Columbia...................................................................... 33.42 30.69
FUNC and the Purchase Acquisitions (including the Merger).............................. 33.91 30.49
FUNC, the Purchase Acquisitions (including the Merger) and the FFB Merger.............. 30.82 28.11
Equivalent pro forma per share of Columbia Common Stock (2):
FUNC and Columbia...................................................................... 39.61 36.37
FUNC and the Purchase Acquisitions (including the Merger).............................. 40.19 36.14
FUNC, the Purchase Acquisitions (including the Merger) and the FFB Merger.............. $ 36.53 33.32
</TABLE>
(1) The pro forma combined book value per share of FUNC Common Stock amounts
represent the sum of the pro forma combined stockholders' equity amounts,
divided by the pro forma combined period-end number of shares outstanding.
(2) The equivalent pro forma book value per share of Columbia Common Stock
amounts represent the pro forma combined book value per share of FUNC Common
Stock amounts, multiplied by the Exchange Ratio.
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1995 1994 1993 1992
<S> <C> <C> <C> <C>
CASH DIVIDENDS PAID PER SHARE:
Historical per share of:
FUNC Common Stock............................................................... $ .92 1.72 1.50 1.28
Columbia Common Stock........................................................... -- -- -- --
Pro forma combined per share of FUNC Common Stock (3):
FUNC and Columbia............................................................... .92 1.73
FUNC, the Purchase Acquisitions (including the Merger) and the FFB Merger....... .84 1.56 1.30 1.00
Equivalent pro forma per share of Columbia Common Stock (4):
FUNC and Columbia............................................................... 1.09 2.05
FUNC, the Purchase Acquisitions (including the Merger) and the FFB Merger....... $ 1.00 1.85 1.54 1.19
</TABLE>
(3) The pro forma combined cash dividends paid per share of FUNC Common Stock
amounts represent pro forma combined cash dividends paid on common stock
outstanding, divided by pro forma combined average number of common shares
outstanding, rounded to the nearest cent.
(4) The equivalent pro forma cash dividends paid per share of Columbia Common
Stock amounts represent the pro forma combined per share of FUNC Common
Stock amounts multiplied by the 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 $.52 per share
paid on September 15, 1995, would be $2.08. On an equivalent pro forma
basis, such current annualized FUNC dividend per share of Columbia Common
Stock would be $2.46, based on the Exchange Ratio, rounded down to the
nearest cent. Future FUNC and Columbia dividends are dependent upon their
respective earnings and financial conditions, government regulations and
policies and other factors. See "THE MERGER -- Exchange of Columbia
Certificates", " -- Business Pending Consummation" and " -- Dividends".
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1995 1994 1993 1992
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS (AFTER FUNC REDEMPTION PREMIUM):
Historical per share of:
FUNC Common Stock............................................................... $ 2.77 4.98 4.73 2.23
Columbia Common Stock........................................................... 1.44 2.91 3.09 2.24
Pro forma combined per share of FUNC Common Stock (5):
FUNC and Columbia............................................................... 2.75 4.94
FUNC and the Purchase Acquisitions (including the Merger)....................... 2.32 4.82
FUNC, the Purchase Acquisitions (including the Merger) and the FFB Merger....... 2.22 4.48 4.30 2.53
Equivalent pro forma per share of Columbia Common Stock (6):
FUNC and Columbia............................................................... 3.26 5.85
FUNC and the Purchase Acquisitions (including the Merger)....................... 2.75 5.71
FUNC, and the Purchase Acquisitions (including the Merger) and the FFB Merger... $ 2.63 5.31 5.10 3.00
</TABLE>
(5) The pro forma combined income per share of FUNC Common Stock amounts
represent the pro forma combined net income (after redemption premium on
preferred stock) applicable to holders of FUNC Common Stock, divided by the
pro forma combined average number of shares of FUNC Common Stock
outstanding.
(6) The equivalent pro forma income per share of Columbia Common Stock amounts
represent the pro forma combined income per share of FUNC Common Stock
amounts, multiplied by the Exchange Ratio.
13
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL EQUIVALENT PRO FORMA
FUNC COMMON STOCK COLUMBIA COMMON STOCK PER SHARE OF COLUMBIA COMMON STOCK (7)
<S> <C> <C> <C>
MARKET VALUE PER SHARE:
April 5, 1995....................... $43.375 45.50 51.375
October 2, 1995..................... $51.125 60.375 60.50
</TABLE>
(7) The equivalent pro forma market values per share of Columbia Common Stock
represent the historical market values per share of FUNC Common Stock,
multiplied by the Exchange Ratio, rounded down to the nearest one-eighth.
The FUNC and Columbia historical market values per share represent the last
reported sale prices per share of FUNC Common Stock and Columbia Common
Stock on the NYSE Tape and the Nasdaq National Market, respectively: (i) on
April 5, 1995, the last business day preceding public announcement of the
execution of the Merger Agreement; and (ii) on October 2, 1995. See "THE
MERGER -- Market Prices" and Notes (3) and (4) to "PRO FORMA FINANCIAL
INFORMATION".
Because the market price of FUNC Common Stock is subject to fluctuation,
the market value of the shares of FUNC Common Stock that holders of Columbia
Common Stock would receive upon consummation of the Merger may increase or
decrease prior to and after the receipt of such shares. Columbia stockholders
are urged to obtain current market quotations for FUNC Common Stock.
SELECTED FINANCIAL DATA
The following tables set forth certain unaudited historical consolidated
selected financial information for FUNC and Columbia and certain unaudited pro
forma combined selected financial data, reflecting consummation of (i) the
Merger, (ii) the Purchase Acquisitions (including the Merger), and (iii) the
Purchase Acquisitions (including the Merger) and the FFB Merger. Such
information has been prepared giving effect to the Merger and the other Purchase
Acquisitions on a purchase accounting basis, and the FFB Merger 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, Columbia and FFB, including the respective notes thereto,
the unaudited pro forma financial information appearing elsewhere in this
Prospectus/Proxy Statement, including the notes thereto, and the documents
incorporated herein by reference. See "AVAILABLE INFORMATION", "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE", "PRO FORMA FINANCIAL INFORMATION" and ANNEX A.
Columbia's fiscal year-end is September 30 of each year; however, all financial
information related to Columbia as of and for the periods ended December 31 has
been adjusted herein to reflect the results of operations on a calendar year-end
basis, as appropriate. Interim unaudited historical data of FUNC and Columbia
reflect, in the respective opinions of FUNC's and Columbia's management, all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of such data. The unaudited pro forma combined condensed
financial information is presented for information purposes only, does not
reflect any direct costs or potential savings that may result from the Merger,
the other Purchase Acquisitions or the FFB Merger, and is not necessarily
indicative of the combined financial position or results of operations which
would have actually occurred if the Merger, the other Purchase Acquisitions or
the FFB Merger had been consummated in the past or which may be obtained in the
future.
Pro forma financial information for the Purchase Acquisitions (including
the Merger) assumes such acquisitions were consummated on January 1, 1994, and,
except as otherwise indicated, reflects information from such date to their
respective consummation dates (or to June 30, 1995, with respect to the Purchase
Acquisitions (including the Merger) pending as of June 30, 1995, or announced
between July 1, 1995 and the date of this Prospectus/Proxy Statement). Pro forma
financial information with respect to the FFB Merger assumes such merger was
consummated as of the beginning of each of the periods indicated.
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Merger or any of the other Purchase
Acquisitions, consummation of the Merger or any of the other Purchase
Acquisitions will not affect FUNC's historical results for the periods
indicated. Pro forma financial information is intended to show how the Purchase
Acquisitions (including the Merger) and the FFB Merger might have affected
historical financial statements if the Purchase Acquisitions (including the
Merger) and the FFB Merger had been consummated at an earlier time. The pro
forma combined selected financial information does not purport to be indicative
of the results that actually would have been realized had the Purchase
Acquisitions (including the Merger) and the FFB Merger taken place at the
beginning of the applicable periods indicated, nor is it indicative of the
combined financial position or results of operations for future periods.
14
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1995 1994 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
FUNC (HISTORICAL)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands except per share data)
Interest income..................................... $ 3,000,417 2,397,814 5,094,661 4,556,332 4,479,385 4,647,440
Interest expense.................................... 1,406,547 919,916 2,060,946 1,790,439 2,020,968 2,742,996
Net interest income................................. 1,593,870 1,477,898 3,033,715 2,765,893 2,458,417 1,904,444
Provision for loan losses........................... 76,500 50,000 100,000 221,753 414,708 648,284
Net interest income after provision for loan
losses............................................ 1,517,370 1,427,898 2,933,715 2,544,140 2,043,709 1,256,160
Securities available for sale transactions.......... 4,878 1,365 (11,507) 25,767 34,402 --
Investment security transactions.................... 1,450 1,309 4,006 7,435 (2,881) 155,048
Noninterest income.................................. 628,042 551,792 1,166,470 1,165,086 1,032,651 914,511
Noninterest expense................................. 1,399,441 1,291,061 2,677,228 2,521,647 2,526,678 1,905,918
Income before income taxes.......................... 752,299 691,303 1,415,456 1,220,781 581,203 419,801
Income taxes........................................ 266,254 239,224 490,076 403,260 196,152 71,070
Net income.......................................... 486,045 452,079 925,380 817,521 385,051 348,731
Dividends on preferred stock........................ 7,029 11,927 25,353 24,900 31,979 34,570
Net income applicable to common stockholders before
redemption premium................................ 479,016 440,152 900,027 792,621 353,072 314,161
Redemption premium on preferred stock............... -- -- 41,355 -- -- --
Net income applicable to common stockholders after
redemption premium................................ $ 479,016 440,152 858,672 792,621 353,072 314,161
PER COMMON SHARE DATA
Net income before redemption premium................ $ 2.77 2.59 5.22 4.73 2.23 2.24
Net income after redemption premium................. 2.77 2.59 4.98 4.73 2.23 2.24
Cash dividends...................................... .92 .80 1.72 1.50 1.28 1.12
Book value.......................................... 33.39 29.54 30.66 28.90 25.25 23.23
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)...................................... 158,418 135,520 297,902 243,845 167,601 126,029
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets.............................................. 83,101,612 72,604,401 77,313,505 70,786,969 63,828,031 59,273,177
Loans, net of unearned income....................... 60,020,507 48,925,495 54,029,752 46,876,177 41,923,767 41,383,580
Deposits............................................ 58,842,024 53,772,260 58,958,273 53,742,411 49,150,965 47,176,223
Long-term debt...................................... 5,376,283 3,129,444 3,428,514 3,061,944 3,151,260 2,630,930
Preferred stockholders' equity...................... -- 284,041 -- 284,041 297,215 397,356
Common stockholders' equity......................... 5,736,847 5,104,540 5,397,517 4,923,584 4,161,948 3,463,441
Total stockholders' equity.......................... $ 5,736,847 5,388,581 5,397,517 5,207,625 4,459,163 3,860,797
Preferred shares outstanding........................ -- 6,318 -- 6,318 6,846 10,851
Common shares outstanding........................... 171,837 172,797 176,034 170,338 164,849 149,112
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets.............................................. $78,881,692 71,088,849 72,670,694 68,101,222 61,145,974 55,095,439
Loans, net of unearned income....................... 56,153,699 46,775,003 49,055,215 43,631,410 41,270,991 37,314,358
Deposits............................................ 57,464,423 52,147,743 53,244,751 50,248,848 47,173,706 40,482,433
Long-term debt...................................... 4,264,879 3,143,570 3,213,607 3,006,560 2,789,653 2,187,595
Common stockholders' equity*........................ 5,611,065 5,062,377 5,282,412 4,550,048 3,889,256 3,131,716
Total stockholders' equity*......................... $ 5,611,065 5,346,417 5,554,390 4,839,397 4,213,896 3,467,437
Common shares outstanding........................... 172,745 169,689 172,543 167,692 158,683 140,003
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity............................................ 17.22%** 17.53** 17.04 17.42 9.08 10.03
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity............................................ 17.22** 17.53** 16.26 17.42 9.08 10.03
Net income to:
Average total stockholders' equity................ 17.47** 17.05** 16.66 16.89 9.14 10.06
Average assets.................................... 1.24** 1.28** 1.27 1.20 .63 .63
Average stockholders' equity to average assets...... 6.96 7.01 7.52 7.11 6.89 6.29
Allowance for loan losses to:
Net loans......................................... 1.61 2.06 1.81 2.18 2.24 2.06
Nonaccrual and restructured loans................. 222 192 245 147 96 72
Nonperforming assets.............................. 170 152 175 111 70 50
Net charge-offs to average net loans................ 38** 27** .33 .58 .86 1.48
Nonperforming assets to loans, net and foreclosed
properties........................................ .95 1.35 1.03 1.95 3.19 4.10
Capital ratios:***
Tier 1 capital.................................... 6.86 9.30 7.76 9.14 9.22 7.56
Total capital..................................... 11.58 14.68 12.94 14.64 14.31 11.76
Leverage.......................................... 5.74 6.67 6.12 6.13 6.55 5.31
Net interest margin................................. 4.61%** 4.78** 4.77 4.78 4.77 4.08
<CAPTION>
1990
<S> <C>
FUNC (HISTORICAL)
CONSOLIDATED SUMMARIES OF INCOME
(In thousands except per share data)
Interest income..................................... 4,829,520
Interest expense.................................... 3,094,334
Net interest income................................. 1,735,186
Provision for loan losses........................... 425,409
Net interest income after provision for loan
losses............................................ 1,309,777
Securities available for sale transactions.......... --
Investment security transactions.................... 7,884
Noninterest income.................................. 690,672
Noninterest expense................................. 1,680,973
Income before income taxes.......................... 327,360
Income taxes........................................ 64,993
Net income.......................................... 262,367
Dividends on preferred stock........................ 33,868
Net income applicable to common stockholders before
redemption premium................................ 228,499
Redemption premium on preferred stock............... --
Net income applicable to common stockholders after
redemption premium................................ 228,499
PER COMMON SHARE DATA
Net income before redemption premium................ 1.68
Net income after redemption premium................. 1.68
Cash dividends...................................... 1.08
Book value.......................................... 21.81
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)...................................... 116,696
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets.............................................. 54,588,410
Loans, net of unearned income....................... 36,050,719
Deposits............................................ 38,194,268
Long-term debt...................................... 1,850,860
Preferred stockholders' equity...................... 317,011
Common stockholders' equity......................... 2,983,361
Total stockholders' equity.......................... 3,300,372
Preferred shares outstanding........................ 7,293
Common shares outstanding........................... 136,777
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets.............................................. 52,124,595
Loans, net of unearned income....................... 35,877,585
Deposits............................................ 36,209,083
Long-term debt...................................... 1,587,497
Common stockholders' equity*........................ 2,937,441
Total stockholders' equity*......................... 3,244,473
Common shares outstanding........................... 135,622
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity............................................ 7.78
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity............................................ 7.78
Net income to:
Average total stockholders' equity................ 8.09
Average assets.................................... .50
Average stockholders' equity to average assets...... 6.22
Allowance for loan losses to:
Net loans......................................... 1.95
Nonaccrual and restructured loans................. 77
Nonperforming assets.............................. 56
Net charge-offs to average net loans................ .68
Nonperforming assets to loans, net and foreclosed
properties........................................ 3.42
Capital ratios:***
Tier 1 capital.................................... 6.53
Total capital..................................... 10.83
Leverage.......................................... 4.90
Net interest margin................................. 3.99
</TABLE>
* Average common stockholders' equity and total stockholders' equity exclude
net unrealized losses on debt and equity securities in 1995 and 1994.
** Annualized.
*** Risk-based capital ratio guidelines require a minimum ratio of Tier 1
capital to risk-weighted assets of four percent and total capital to
risk-weighted assets of eight percent. The minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets is from three to five percent.
Capital ratios are not restated for pooling of interests acquisitions. The
capital ratios for FUNC and for Columbia are based on risk-weighted assets
pursuant to the requirements of their respective primary federal regulators,
which requirements differ in certain respects.
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
COLUMBIA (HISTORICAL) JUNE 30, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF OPERATIONS
(In thousands)
Interest income........................................ $ 101,326 168,388 152,186 168,684 183,816
Interest expense....................................... 74,706 115,597 96,869 113,578 143,671
Net interest income.................................... 26,620 52,791 55,317 55,106 40,145
Provision for loan losses.............................. 400 410 4,955 11,940 9,965
Net interest income after provision for loan losses.... 26,220 52,381 50,362 43,166 30,180
Investment security transactions....................... 17 534 1,961 (118) 3,465
Noninterest income..................................... 4,789 8,791 10,531 10,341 8,407
Noninterest expense.................................... 21,725 44,170 50,055 42,819 36,935
Income (loss) before income taxes (benefit),
extraordinary item and cumulative effect of
accounting change.................................... 9,301 17,536 12,799 10,570 5,117
Income taxes (benefit)................................. 3,733 6,616 7,240 3,355 2,814
Net income (loss) before extraordinary item and
cumulative effect of accounting change............... 5,568 10,920 5,559 7,215 2,303
Extraordinary item..................................... -- -- (20) 41 386
Net income (loss) before cumulative effect of
accounting change.................................... 5,568 10,920 5,539 7,256 2,689
Cumulative effect of accounting change................. -- -- 5,483 -- --
Net income (loss)...................................... 5,568 10,920 11,022 7,256 2,689
Dividends on permanent income capital certificates..... -- -- -- -- 86
Net income (loss) applicable to common stockholders.... $ 5,568 10,920 11,022 7,256 2,603
PER COMMON SHARE DATA
Net income (loss)...................................... $ 1.44 2.91 3.09 2.24 .87
Cash dividends......................................... -- -- -- -- --
Book value............................................. 37.66 35.93 33.55 31.84 30.01
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)......................................... -- -- -- -- --
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................................. 2,830,543 2,911,221 2,458,138 2,311,081 2,178,608
Loans, net of unearned income.......................... 2,209,926 2,225,084 1,492,670 1,355,820 1,278,128
Deposits............................................... 1,601,695 1,518,504 1,355,781 1,358,925 1,304,513
Long-term debt......................................... 146,200 267,926 233,175 350,183 342,738
Common stockholders' equity............................ 141,962 132,998 123,639 103,909 93,905
Total stockholder's equity............................. $ 141,962 132,998 123,639 103,909 93,905
Common shares outstanding.............................. 3,770 3,701 3,686 3,264 3,129
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets................................................. $2,894,134 2,692,337 2,368,719 2,246,206 2,059,956
Loans, net of unearned income.......................... 2,239,943 1,856,634 1,425,513 1,356,869 1,340,707
Deposits............................................... 1,549,438 1,420,353 1,353,115 1,347,304 1,261,257
Long-term debt......................................... 205,093 233,160 352,385 352,538 372,375
Common stockholders' equity............................ 139,367 130,164 114,518 99,128 88,717
Total stockholders' equity............................. $ 139,367 130,164 114,518 99,128 90,681
Common shares outstanding.............................. 3,733 3,693 3,491 3,205 3,016
CONSOLIDATED PERCENTAGES
Net income (loss) applicable to common stockholders to
average common stockholders' equity.................. 8.06% 8.39 9.62 7.32 2.93
Net income (loss) to:
Average stockholders' equity......................... 8.06* 8.39 9.62 7.32 2.87
Average assets....................................... .39* .41 .47 .32 .13
Average stockholders' equity to average assets......... 4.82 4.83 4.83 4.41 4.40
Allowance for loan losses to:
Net loans............................................ .75 .74 1.34 1.52 1.11
Nonaccrual and restructured loans.................... 63 123 118 38 35
Nonperforming assets................................. 47 67 61 25 20
Net charge-offs to average net loans................... .01* .22 .39 .41 .93
Nonperforming assets to loans, net and foreclosed
properties........................................... 1.59 1.10 2.18 5.88 5.49
Capital ratios:**
Tier 1 capital....................................... 8.33 8.24 9.74 8.63 7.68
Total capital........................................ 9.27 9.15 10.99 10.65 9.20
Leverage............................................. 4.78% 4.63 5.03 4.51 4.30
<CAPTION>
COLUMBIA (HISTORICAL) 1990
<S> <C>
CONSOLIDATED SUMMARIES OF OPERATIONS
(In thousands)
Interest income........................................ 201,359
Interest expense....................................... 165,996
Net interest income.................................... 35,363
Provision for loan losses.............................. 21,215
Net interest income after provision for loan losses.... 14,148
Investment security transactions....................... --
Noninterest income..................................... 7,976
Noninterest expense.................................... 33,871
Income (loss) before income taxes (benefit),
extraordinary item and cumulative effect of
accounting change.................................... (11,747)
Income taxes (benefit)................................. (2,191)
Net income (loss) before extraordinary item and
cumulative effect of accounting change............... (9,556)
Extraordinary item..................................... 3,401
Net income (loss) before cumulative effect of
accounting change.................................... (6,155)
Cumulative effect of accounting change................. --
Net income (loss)...................................... (6,155)
Dividends on permanent income capital certificates..... 1,190
Net income (loss) applicable to common stockholders.... (7,345)
PER COMMON SHARE DATA
Net income (loss)...................................... (2.53)
Cash dividends......................................... --
Book value............................................. 31.28
CASH DIVIDENDS PAID ON COMMON STOCK
(In thousands)......................................... --
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................................. 2,101,941
Loans, net of unearned income.......................... 1,431,576
Deposits............................................... 1,351,662
Long-term debt......................................... 387,339
Common stockholders' equity............................ 78,614
Total stockholder's equity............................. 94,321
Common shares outstanding.............................. 3,015
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
(In thousands)
Assets................................................. 2,132,103
Loans, net of unearned income.......................... 1,428,155
Deposits............................................... 1,279,129
Long-term debt......................................... 486,960
Common stockholders' equity............................ 82,034
Total stockholders' equity............................. 97,741
Common shares outstanding.............................. 2,915
CONSOLIDATED PERCENTAGES
Net income (loss) applicable to common stockholders to
average common stockholders' equity.................. (8.95)
Net income (loss) to:
Average stockholders' equity......................... (7.51)
Average assets....................................... (.34)
Average stockholders' equity to average assets......... 4.58
Allowance for loan losses to:
Net loans............................................ 1.16
Nonaccrual and restructured loans.................... 44
Nonperforming assets................................. 34
Net charge-offs to average net loans................... .66
Nonperforming assets to loans, net and foreclosed
properties........................................... 3.40
Capital ratios:**
Tier 1 capital....................................... 6.41
Total capital........................................ 9.38
Leverage............................................. 3.73
</TABLE>
* Annualized.
** The capital ratios for Columbia 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.
16
<PAGE>
FUNC AND COLUMBIA
PRO FORMA COMBINED SELECTED FINANCIAL DATA*
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED DECEMBER
JUNE 30, 1995 31, 1994
<S> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Interest income........................................................................... $ 3,092,976 5,247,322
Interest expense.......................................................................... 1,481,253 2,176,543
Net interest income....................................................................... 1,611,723 3,070,779
Provision for loan losses................................................................. 76,900 100,410
Net interest income after provision for loan losses....................................... 1,534,823 2,970,369
Securities available for sale transactions................................................ 4,895 (10,973)
Investment security transactions.......................................................... 1,450 4,006
Noninterest income........................................................................ 632,831 1,175,261
Noninterest expense....................................................................... 1,425,532 2,730,830
Income before income taxes................................................................ 748,467 1,407,833
Income taxes.............................................................................. 266,300 489,923
Net income................................................................................ 482,167 917,910
Dividends on preferred stock.............................................................. 7,029 25,353
Net income applicable to common stockholders before redemption premium.................... 475,138 892,557
Redemption premium on preferred stock..................................................... -- 41,355
Net income applicable to common stockholders after redemption premium..................... $ 475,138 851,202
PER COMMON SHARE DATA
Net income applicable to common stockholders before redemption premium.................... $ 2.75 5.18
Net income applicable to common stockholders after redemption premium..................... 2.75 4.94
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets.................................................................................... 85,794,760 80,084,556
Loans, net of unearned income............................................................. 62,230,433 56,254,836
Deposits.................................................................................. 60,443,719 60,476,777
Long-term debt............................................................................ 5,522,483 3,696,440
Stockholders' equity...................................................................... $ 5,742,843 5,399,403
CONSOLIDATED PERCENTAGES
Allowance for loan losses to:
Net loans.............................................................................. 1.58% 1.77
Nonperforming assets................................................................... 163 171
Net charge-offs to average net loans...................................................... .37** .33
Nonperforming assets to loans, net and foreclosed properties.............................. .97% 1.03
</TABLE>
* See "PRO FORMA FINANCIAL INFORMATION".
** Annualized.
17
<PAGE>
FUNC AND THE PURCHASE ACQUISITIONS (INCLUDING THE MERGER)
PRO FORMA COMBINED SELECTED FINANCIAL DATA*
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
<S> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
(In thousands)
Interest income....................................................................... $ 3,337,895 5,800,981
Interest expense...................................................................... 1,647,243 2,514,910
Net interest income................................................................... 1,690,652 3,286,071
Provision for loan losses............................................................. 80,630 101,643
Net interest income after provision for loan losses................................... 1,610,022 3,184,428
Securities available for sale transactions............................................ 1,199 (8,860)
Investment security transactions...................................................... 1,450 4,006
Noninterest income.................................................................... 657,381 1,221,488
Noninterest expense................................................................... 1,598,868 3,000,398
Income before income taxes............................................................ 671,184 1,400,664
Income taxes.......................................................................... 247,535 487,660
Net income............................................................................ 423,649 913,004
Dividends on preferred stock.......................................................... 7,029 25,353
Net income applicable to common stockholders before redemption premium................ 416,620 887,651
Redemption premium on preferred stock................................................. -- 41,355
Net income applicable to common stockholders after redemption premium................. $ 416,620 846,296
PER COMMON SHARE DATA
Net income applicable to common stockholders before redemption premium................ $ 2.32 5.06
Net income applicable to common stockholders after redemption premium................. 2.32 4.82
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
(In thousands)
Assets................................................................................ 90,879,217 88,423,716
Loans, net of unearned income......................................................... 65,589,948 62,217,003
Deposits.............................................................................. 64,166,837 67,055,831
Long-term debt........................................................................ 5,624,112 4,524,214
Stockholders' equity.................................................................. $ 6,050,144 5,458,336
CONSOLIDATED PERCENTAGES
Allowance for loan losses to:
Net loans.......................................................................... 1.55% 1.68
Nonperforming assets............................................................... 153 140
Net charge-offs to average net loans.................................................. .36** .30
Nonperforming assets to loans, net and foreclosed properties.......................... 1.01% 1.20
</TABLE>
* See "PRO FORMA FINANCIAL INFORMATION".
** Annualized.
18
<PAGE>
FUNC, THE PURCHASE ACQUISITIONS (INCLUDING THE MERGER) AND THE FFB MERGER
PRO FORMA COMBINED SELECTED FINANCIAL DATA*
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, JUNE 30, YEARS ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................... $ 4,493,006 3,434,281 7,937,133 6,601,528 6,608,666 7,031,400 7,549,088
Interest expense.................. 2,112,573 1,254,749 3,246,946 2,481,952 2,941,680 4,070,885 4,806,471
Net interest income............... 2,380,433 2,179,532 4,690,187 4,119,576 3,666,986 2,960,515 2,742,617
Provision for loan losses......... 100,630 94,000 180,643 369,753 642,708 946,284 923,409
Net interest income after
provision for loan losses....... 2,279,803 2,085,532 4,509,544 3,749,823 3,024,278 2,014,231 1,819,208
Securities available for sale
transactions.................... 15,242 10,173 8,860 25,767 34,402 -- --
Investment security
transactions.................... 1,450 1,309 4,006 14,452 1,944 208,614 32,271
Noninterest income................ 864,592 738,949 1,620,712 1,541,569 1,360,202 1,254,635 1,028,755
Noninterest expense............... 2,135,961 1,816,102 4,070,027 3,536,346 3,443,524 2,777,665 2,564,124
Income before income taxes........ 1,025,126 1,019,861 2,073,095 1,795,265 977,302 699,815 316,110
Income taxes...................... 373,284 347,323 709,028 578,912 278,514 129,843 59,868
Net income........................ 651,842 672,538 1,364,067 1,216,353 698,788 569,972 256,242
Dividends on preferred stock...... 17,350 22,204 46,020 45,553 53,040 51,746 47,151
Net income applicable to common
stockholders before redemption
premium......................... 634,492 650,334 1,318,047 1,170,800 645,748 518,226 209,091
Redemption premium on preferred
stock........................... -- -- 41,355 -- -- -- --
Net income applicable to common
stockholders after redemption
premium......................... $ 634,492 650,334 1,276,692 1,170,800 645,748 518,226 209,091
PRO FORMA PER COMMON SHARE DATA
Net income applicable to common
stockholders before redemption
premium....................... $ 2.22 2.32 4.63 4.30 2.53 2.34 .97
Net income applicable to common
stockholders after redemption
premium....................... 2.22 2.32 4.48 4.30 2.53 2.34 .97
CONSOLIDATED PERIOD-END BALANCE
SHEET ITEMS
(In thousands)
Assets.......................... 126,240,998 106,512,707 124,639,412 104,549,554 95,308,328 89,488,406 83,698,754
Loans, net of unearned income... 89,589,095 70,533,561 86,018,244 68,263,088 60,301,462 58,725,097 54,581,023
Deposits........................ 92,985,760 81,214,406 95,962,683 81,885,433 76,155,800 72,394,773 61,274,378
Long-term debt.................. 6,300,862 3,942,321 5,337,837 3,675,002 3,732,768 3,549,815 2,967,847
Stockholders' equity............ $ 8,989,461 8,208,885 8,335,311 7,946,053 6,716,813 5,805,579 4,782,825
CONSOLIDATED PERCENTAGES
Allowance for loan losses to:
Net loans..................... 1.76% 2.27 1.91 2.38 2.57 2.49 2.31
Nonperforming assets.......... 168 147 153 115 76 55 58
Net charge-offs to average net
loans......................... .39** .36** .37 .78 1.03 1.53 1.05
Nonperforming assets to loans,
net and foreclosed
properties.................... 1.05% 1.53 1.25 2.06 3.36 4.45 3.91
</TABLE>
* See "PRO FORMA FINANCIAL INFORMATION".
** Annualized.
19
<PAGE>
RECENT DEVELOPMENTS
FFB MERGER
On June 18, 1995, FUNC entered into the FFB Merger Agreement, which
provides, among other things, for (i) the merger of FFB with and into a
wholly-owned subsidiary of FUNC, (ii) the exchange of each outstanding share of
FFB common stock for 1.35 shares of newly issued FUNC Common Stock, subject to
possible increase in certain circumstances, and (iii) the exchange of each share
of the three outstanding series of FFB preferred stock for one share of one of
three corresponding new series of FUNC's Class A Preferred Stock having
substantially identical terms as the relevant series of FFB preferred stock, all
subject to the terms and conditions contained in the the FFB Merger Agreement.
In connection with the execution of the FFB Merger Agreement, FFB granted
an option to FUNC to purchase, under certain circumstances, up to 19.9 percent
of the outstanding shares of FFB common stock at a per share exercise price
equal to $59.00, and FUNC granted an option to FFB to purchase, under certain
circumstances, up to 19.9 percent of the outstanding shares of FUNC Common Stock
at a per share exercise price equal to $45.625.
Also, in connection with the execution of the FFB Merger Agreement, Banco
Santander, S.A. ("Santander"), the owner of approximately 30 percent of the
outstanding shares of FFB common stock, agreed, among other things, to vote the
FFB shares held by it in favor of the FFB Merger Agreement. Following
consummation of the FFB Merger, Santander is expected to own approximately 11
percent of the outstanding shares of FUNC Common Stock. The required FFB and
FUNC stockholder approvals with respect to the FFB Merger were obtained on
October 3, 1995.
The FFB Merger, which will be accounted for as a pooling of interests, is
expected to be consummated on or before January 1, 1996, subject to the receipt
of regulatory approvals and to other conditions set forth in the FFB Merger
Agreement. No assurance can be given that the FFB Merger will be consummated or
as to the timing of such consummation.
Based on the $47.625 closing price of FUNC Common Stock on the NYSE Tape on
June 16, 1995, the transaction would be valued at approximately $5.4 billion and
represent a purchase price of $64.29 for each share of FFB common stock.
Prior to consummation of the FFB Merger, FFB and FUNC may purchase up to
5.5 million shares of FFB common stock or 7.4 million shares of FUNC Common
Stock, or some combination of the two. Approximately 105 million shares of FUNC
Common Stock are expected to be issued in the FFB Merger (net of the foregoing
purchases). From June 19, 1995 to the date hereof, FUNC has purchased 2.9
million shares of FFB common stock at a cost of $181 million, and 250,000 shares
of FFB convertible preferred stock at a cost of $12 million. See Notes (3) and
(4) to "PRO FORMA FINANCIAL INFORMATION".
Following consummation of the FFB Merger, the current Chairman and Chief
Executive Officer of FFB, Anthony P. Terracciano, will join Edward E.
Crutchfield and John R. Georgius in an "Office of the Chairman" of FUNC. Mr.
Crutchfield will continue to serve as Chairman and Chief Executive Officer, Mr.
Georgius, the current President of FUNC, will serve as Vice Chairman and Mr.
Terracciano will serve as President of FUNC. Additionally, six FFB directors,
including Mr. Terracciano and a representative of Santander, will join the FUNC
Board of Directors following consummation of the FFB Merger.
See "PRO FORMA FINANCIAL INFORMATION".
1995 AND 1996 EARNINGS ESTIMATES
FUNC estimates stand-alone earnings for 1995 and 1996 of approximately
$5.75 and $6.55 in net income per share of FUNC Common Stock, respectively.
These estimates are based on several assumptions, including FUNC management's
expectations for its existing markets and for the Purchase Acquisitions
(including the Merger), in addition to certain other purchase accounting
acquisitions that were completed in 1994. See Note (4) to "PRO FORMA FINANCIAL
INFORMATION".
FUNC also estimates post-FFB Merger net income per share of FUNC Common
Stock of approximately $5.29 for 1995, excluding a currently estimated after-tax
FFB Merger-related charge of approximately $270 million, or $.97 per share of
FUNC Common Stock, and approximately $6.31 for 1996. The FUNC estimates of
post-FFB Merger earnings for 1995 and 1996 are based, in part, on estimated
stand-alone earnings for FFB for 1995 and 1996 of approximately $5.45 and $5.90,
respectively, in fully-diluted net income per share of FFB common stock. As is
the case with the FUNC stand-alone estimates, the estimates for FFB are based on
several assumptions, including expectations for its existing markets. The FUNC
post-FFB Merger estimates are based on several assumptions in addition to the
assumptions referred to above with respect to the stand-alone earnings estimates
for FUNC and FFB, including, without limitation, the following:
20
<PAGE>
(Bullet) The FFB Merger will be consummated on or before January 1, 1996.
(Bullet) FUNC will have average shares of FUNC Common Stock outstanding of
approximately 279 million in 1995 and 284 million in 1996,
including an estimated 105 million shares to be issued in the FFB
Merger (net of the purchases referred to above under " -- FFB
Merger").
(Bullet) Before-tax expense savings relating the FFB Merger of
approximately $16 million in 1995 and $106 million in 1996, or
approximately $10 million and $64 million, respectively, after
tax. These estimates assume that approximately five percent of
combined FUNC/FFB's pre-FFB Merger annual expenses, are eliminated
within 18 months of the effective date of the FFB Merger.
(Bullet) Before-tax revenue enhancements relating the FFB Merger of
approximately $79 million in 1996, or approximately $48 million
after tax. These estimates are primarily based on an analysis of
fee income generating products currently offered by FUNC which
either are not offered by FFB or are offered on a more limited
basis by FFB.
(Bullet) Before-tax earnings resulting from excess capital generated by the
FFB Merger of approximately $25 million in 1996, or approximately
$15 million after tax. These estimates assume that all tangible
common equity generated by the FFB Merger in excess of 5.50
percent is converted into assets which earn a 100 basis points
before-tax spread, or a 60 basis points after-tax spread.
The estimated $270 million FFB Merger-related charge is summarized below:
<TABLE>
<CAPTION>
(In millions, after tax)
<S> <C>
Severance and change in control related obligations........................................... $105
Fixed asset write-downs and vacant space accrual.............................................. 40
Accelerated disposition of owned real estate.................................................. 30
Service contract terminations................................................................. 30
Professional fees............................................................................. 30
Other......................................................................................... 35
Total......................................................................................... $270
</TABLE>
The FFB Merger-related charge includes approximately $65 million in
non-cash charges. Cash payments included in the FFB Merger-related charge are
expected to be completed by the end of the second quarter of 1996. The "Other"
category includes FFB Merger-related amounts, none of which exceeds $8 million.
The amounts included in the $270 million FFB Merger-related charge are subject
to change prior to the consummation date for the FFB Merger. The estimates
include assumptions about the timing and number of employees that will be
voluntarily or involuntarily terminated. Changes in those assumptions could
result in a change in the FFB Merger-related charge.
Like all estimates of the type indicated above, there are many factors,
such as changes in economic or competitive conditions, changes in legislation or
regulation, or the failure of any of the underlying assumptions to be correct,
that are beyond FUNC's and FFB's control. These factors could affect actual
results. As a result, and because of the subjective aspect of any estimate,
there are likely to be differences between such estimates and the actual
results, which could be material. These estimates are necessarily speculative in
nature and no assurance can be given that these estimates will be realized. The
foregoing estimates are not included in any pro forma financial information
presented elsewhere in this Prospectus/Proxy Statement.
GENERAL INFORMATION
GENERAL
This Prospectus/Proxy Statement is being furnished by Columbia to its
stockholders as a Proxy Statement in connection with the solicitation of proxies
by the Columbia Board for use at the Special Meeting to be held on November 3,
1995, and any adjournments or postponements thereof, to consider and vote upon a
proposal to approve the Merger Agreement.
This document is also furnished by FUNC to the holders of Columbia Common
Stock as a Prospectus in connection with the issuance by FUNC 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 Columbia; (ii) submitting
a proxy having a later date; or (iii) appearing at the Special Meeting and
requesting a return of the proxy. All shares represented by
21
<PAGE>
valid proxies will be exercised in the manner specified thereon, and otherwise
in the discretion of the proxyholders in accordance with their best judgment as
to any other matters which may come before the Special Meeting, including, among
other things, a motion to adjourn or postpone the Special Meeting to another
time and/or place for the purpose of soliciting additional proxies or otherwise;
PROVIDED, HOWEVER, THAT NO PROXY WHICH IS VOTED AGAINST THE PROPOSAL TO APPROVE
THE MERGER AGREEMENT WILL BE VOTED IN FAVOR OF ANY SUCH ADJOURNMENT OR
POSTPONEMENT. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED IN FAVOR OF
APPROVAL OF THE MERGER AGREEMENT.
Directors, officers and employees of Columbia and FUNC may solicit proxies
from Columbia stockholders, either personally or by telephone, telegraph or
other form of communication. Such persons will receive no additional
compensation for such services. Columbia has retained Corporate Investor
Communications, Inc. to assist in soliciting proxies and to send proxy materials
to brokerage houses and other custodians, nominees and fiduciaries for
transmittal to their principals, at a cost of $2,500, plus out-of-pocket
expenses. 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 Columbia.
THE COLUMBIA BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT, BELIEVES
THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF COLUMBIA AND ITS STOCKHOLDERS
AND IS FAIR TO THE STOCKHOLDERS, AND RECOMMENDS APPROVAL OF THE MERGER AGREEMENT
BY COLUMBIA STOCKHOLDERS. SEE "THE MERGER -- BACKGROUND AND REASONS; COLUMBIA".
RECORD DATE; VOTE REQUIRED
The Columbia Board has fixed September 18, 1995, as the Record Date for
determining stockholders entitled to notice of and to vote at the Special
Meeting, and accordingly, only holders of Columbia 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 Columbia Common Stock outstanding on
the Record Date was 3,780,507, each of such shares being entitled to one vote.
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares is necessary to constitute a quorum at the Special
Meeting. Abstentions and broker non-votes (I.E., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons as to certain proposals on which such
beneficial owners or persons are entitled to vote their shares but with respect
to which the brokers or nominees have no discretionary power to vote without
such instructions) will be treated as shares present at the Special Meeting for
purposes of determining the presence of a quorum. Approval of the Merger
Agreement requires the affirmative vote of at least 66 2/3 percent of the votes
entitled to be cast at the Special Meeting by the holders of Columbia Common
Stock. There-
fore, abstentions and broker non-votes will have the same effect as votes
against approval of the Merger Agreement.
The directors and executive officers of Columbia (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting 1,515,219 shares of Columbia Common
Stock, which represents 40.08 percent of the outstanding shares of Columbia
Common Stock entitled to be voted at the Special Meeting. As a condition to
FUNC's willingness to enter into the Merger Agreement, CF Financial, the holder
of 1,411,000, or approximately 37.32 percent, of the outstanding shares of
Columbia Common Stock entitled to be voted at the Special Meeting, agreed to
vote such shares in favor of approval of the Merger Agreement at the Special
Meeting pursuant to the terms of the Voting Agreement, subject to certain
exceptions. Melvin Lenkin, Chairman of the Board of Columbia, is also the
President of the general partner of CF Financial, and accordingly, may be deemed
to beneficially own the shares of Columbia Common Stock held by CF Financial. As
such, the shares of Columbia Common Stock held by CF Financial have been
included in the number of shares beneficially owned by the directors and
executive officers of Columbia stated above. Accordingly, assuming such shares
are so voted and that the directors and executive officers of Columbia vote the
other shares of Columbia Common Stock beneficially owned by them in favor of
approval of the Merger Agreement, approval of the Merger Agreement will require
the affirmative vote of the holders of an additional 26.59 percent of the
outstanding shares of Columbia Common Stock entitled to be voted at the Special
Meeting.
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.
22
<PAGE>
THE MERGER
THE FOLLOWING INFORMATION RELATING TO THE MERGER IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES HERETO, AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. COPIES OF THE MERGER AGREEMENT AND THE VOTING
AGREEMENT ARE 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 COLUMBIA ARE URGED TO READ THE MERGER AGREEMENT CAREFULLY.
GENERAL; EXCHANGE RATIO
Under the terms of the Merger Agreement, FUNC-VA would acquire Columbia by
means of the Merger of Columbia with and into FUNB-VA. Upon consummation of the
Merger, each outstanding share of Columbia Common Stock (excluding any Excluded
Shares) would be converted, automatically and without any action on the part of
the holder thereof, into the right to receive 1.1852 shares of FUNC Common Stock
(I.E., the result obtained by dividing $60.00 by the Average Closing Price). The
Average Closing Price was determined by the last reported sales prices of FUNC
Common Stock on the NYSE Tape for the ten trading days beginning on August 14,
1995, and ending on August 25, 1995. The Average Closing Price was $50.625. Each
holder of Columbia 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 (1) 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 (2) the fraction of a share of FUNC Common Stock to which such holder
would otherwise be entitled. The Exchange Ratio was negotiated on an arm's
length basis between representatives of FUNC and Columbia.
In addition, immediately following the Merger, certain assets and deposits
of FUNB-VA (relating to branches operated by Columbia in Maryland and
Washington, D.C.) will be purchased and assumed (in the Purchase & Assumption)
by (i) FUNB-MD with respect to the Maryland operations of Columbia, and (ii)
FUNB-DC with respect to the Washington, D.C. operations of Columbia. The
Purchase & Assumption will be accomplished pursuant to the terms of the P&A
Agreement.
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Merger and to certain other conditions, the Effective Date will occur on such
date as FUNC notifies Columbia in writing not less than five days prior thereto.
Subject to the foregoing, it is currently anticipated that the Merger will be
consummated in the fourth quarter of 1995. If the Merger is consummated in such
quarter, or in any other quarter, Columbia 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 Columbia may terminate
the Merger Agreement if the Effective Date does not occur on or before January
1, 1996. See " -- Exchange of Columbia Certificates" and " -- Conditions to
Consummation; Termination".
EXCHANGE OF COLUMBIA CERTIFICATES
As promptly as practicable after the Effective Date, FUNC will send or
cause to be sent to each holder of record of Columbia Common Stock as of the
Effective Date, transmittal materials for use in exchanging all of such holder's
certificates representing Columbia 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 and any
dividends to which such holder is entitled, as appropriate. The transmittal
materials will contain information and instructions with respect to the
surrender and exchange of such certificates.
COLUMBIA 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 Columbia 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
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 Columbia Common Stock
pursuant to the Merger will be deemed issued as of the Effective Date. After the
Effective Date, former holders of record of Columbia Common Stock will be
23
<PAGE>
entitled to vote at any meeting of holders of FUNC Common Stock the number of
FUNC Common Shares into which their Columbia shares have been converted,
regardless of whether they have surrendered their Columbia 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 at or as of any time after the Effective Date will be distributed to the
holder of any Columbia 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 will not include dividends on the FUNC Common Shares
issued in the Merger. After the Effective Date, the stock transfer books of
Columbia will be closed, and there will be no transfers of the shares of
Columbia Common Stock that were outstanding immediately prior to the Effective
Date.
The Merger Agreement provides that Columbia will use its best efforts to
obtain from each person who may be deemed to be an "affiliate" (as defined in
the Securities Act) to execute and deliver to FUNC on or before the date hereof
an agreement restricting the disposition of such affiliate's shares of Columbia
Common Stock and FUNC Common Stock received by such person in exchange for such
person's shares of Columbia Common Stock. The Merger Agreement further provides
that shares of Columbia Common Stock held by such affiliates of Columbia will
not be exchanged for FUNC Shares until FUNC receives such an agreement.
BACKGROUND AND REASONS
COLUMBIA
Management of Columbia has historically focused its attention primarily on
increasing its core business while reviewing, from time to time, its strategic
alternatives in light of its size, the increasing consolidation of the financial
services industry and other relevant considerations. During the first quarter of
1994, representatives of Columbia and FUNC had informal conversations in which
FUNC indicated that it might be interested in acquiring Columbia. Based on
market conditions prevailing at that time, among other factors, Columbia
determined not to pursue further discussions with FUNC at that time. Following
these informal conversations, bank and thrift stock market indices declined
broadly, due in large part to investor concerns that rising interest rates would
impair future earnings momentum.
In October 1994, the Columbia Board determined to maintain an informed
position with respect to its strategic alternatives by, among other things,
retaining financial advisors. In December 1994, Columbia engaged Schroder
Wertheim and FBR to serve as its joint financial advisors on financial and
strategic matters relating to the enhancement of stockholder value; and the
Columbia Board appointed a Special Committee (consisting of Melvin Lenkin,
Calvin G. Franklin and Dewitt T. Hartwell) to supervise and guide this process.
While considering the alternative of remaining independent and deciding not
to put Columbia up for sale, the Columbia Board, with the assistance of its
financial advisors, Schroder Wertheim and FBR, decided to determine the level of
interest that might exist on the part of potential acquirors of Columbia. At a
meeting in February 1995, the Columbia Board authorized Schroder Wertheim and
FBR to solicit indications of value from prospective acquirors of Columbia,
including FUNC, as part of the evaluation of Columbia's strategic alternatives.
Schroder Wertheim and FBR contacted approximately 20 prospective acquirors that
Schroder Wertheim and FBR, along with the management of Columbia, believed were
likely to have a strategic and/or financial interest in the potential
acquisition of Columbia.
Of the approximately 20 prospective acquirors contacted initially, eight
signed confidentiality agreements and received confidential evaluation materials
compiled by Schroder Wertheim, FBR and Columbia, including certain public and
non-public financial and operating data regarding Columbia. Each of these
parties was instructed by Schroder Wertheim and FBR to submit preliminary
indications of interest to Columbia by March 23, 1995. On or before March 23,
1995, Schroder Wertheim and FBR received responses from five of these parties,
including FUNC, indicating that they would be interested in pursuing an
acquisition of Columbia. FUNC submitted an indication of value of $60.00 per
share of Columbia Common Stock, but stated that this proposal would be withdrawn
unless Columbia promptly agreed to enter into negotiations on a confidential and
exclusive basis with FUNC. Three of the other interested parties submitted
indications of value substantially less than $60.00 per share. The fifth
responding party, who was not prepared to give an indication of price, stated
that it would need at least two additional weeks to determine whether it would
have sufficient interest to submit a formal response, but did indicate that it
was tentatively considering a range of possible prices centered on $60.00 per
share. Schroder Wertheim and FBR believed, and Columbia's management agreed,
that in view of the other proposals received, and considering
24
<PAGE>
the fact that FUNC's proposal was likely to be withdrawn if not promptly agreed
to, it would not be advisable to delay the Columbia Board's consideration of
these proposals.
On March 23, 1995, the Special Committee and the Columbia Board met with
Schroder Wertheim and FBR to assess and consider, among other things, the terms
and conditions of the responses received from these parties, as well as other
strategic options, including remaining independent. At these meetings, Schroder
Wertheim and FBR made detailed presentations relating to the responses received
and the financial institutions and holding companies which had submitted them,
as well as updated background information relating to the value of Columbia and
recent merger and acquisition pricing. After considerable discussion and review
of the strategic alternatives and options available to Columbia, Schroder
Wertheim and FBR were instructed to contact FUNC and the interested party that
had submitted the next highest indication of value to solicit their final and
best indications of interest for Columbia. Schroder Wertheim and FBR then left
the meeting and held discussions with FUNC and the other interested party by
telephone. In these discussions, both FUNC and the other interested party
declined to increase their indications of interest or otherwise to improve the
terms of their proposals. Schroder Wertheim and FBR then returned to the meeting
and reported the results of these discussions. Schroder Wertheim and FBR advised
the Columbia Board that, based on their previous discussions with FUNC, they
believed that FUNC probably would not be willing to pursue further discussions
with Columbia unless Columbia agreed to do so on an exclusive basis and that the
other indications of value (taking into account the prices indicated and the
uncertainties involved) did not warrant risking the loss of FUNC's proposal.
After further discussion and review, the Columbia Board then determined to enter
into exclusive negotiations with FUNC with a view towards concluding a
definitive merger agreement.
Subsequent discussions and negotiations over the next two weeks between
FUNC, Columbia and their financial and legal advisors and on-site due diligence
by both parties resulted in a formal offer for Columbia, as set forth in the
Merger Agreement.
On April 5, 1995, at a meeting of the Columbia Board that included the
participation of Schroder Wertheim, FBR and Columbia's outside legal counsel,
the Columbia Board reviewed the terms of the proposed Merger Agreement,
unanimously approved the offer from FUNC and authorized the execution and
delivery of the Merger Agreement.
The terms of the Merger Agreement, including the consideration to be paid
to Columbia's stockholders, were the result of arm's-length negotiations between
the representatives of FUNC and Columbia. In the course of reaching its
determination to approve the Merger Agreement, the Columbia Board, without
assigning any relative or specific weights, considered a number of factors,
including the following material factors: (i) the financial and valuation
analyses prepared by Schroder Wertheim and FBR, (ii) the fairness opinions
rendered by Schroder Wertheim and FBR, (iii) the terms of the Merger Agreement
and the other documents executed in connection with the Merger Agreement as
negotiated (including the transaction structure, the form and amount of the
Merger consideration, and the potential impact of the proposed Merger Agreement
and the Voting Agreement on other institutions that might have an interest in a
business combination with Columbia), (iv) the financial condition, operations
and prospects of FUNC and the anticipated effect thereon of the proposed
transaction, (v) industry and economic factors, (vi) the nature and
compatibility of FUNC's management and business philosophy, (vii) the prospects
for growth and expanded products and services, and other anticipated impacts on
depositors, employees, customers and communities served by Columbia, and (viii)
regulatory and similar factors.
In approving the Merger Agreement, the Columbia Board was aware that (i)
the Merger Agreement contains certain provisions prohibiting Columbia from
soliciting, facilitating or accepting other offers or agreements to acquire
Columbia (see " -- Business Pending Consummation"), and (ii) FUNC would be
entitled to receive the Termination Fee from Columbia under certain
circumstances generally relating to a failure of Columbia to consummate the
Merger because of another offer for Columbia or a material change or potential
material change in the ownership of Columbia (see " -- Expenses; Termination
Fee" and " -- Voting Agreement"). However, the Columbia Board was also aware
that such terms were specifically bargained for and inducements for FUNC to
enter into the Merger Agreement, and that the Columbia Board's obligation under
the Merger Agreement to recommend approval of the Merger Agreement by its
stockholders was explicitly made subject to the Columbia Board's fiduciary
duties under applicable law. Accordingly, the Merger Agreement expressly permits
the Columbia Board, if required by the exercise of its fiduciary duties under
applicable law, to withdraw, modify or change such recommendations (it should be
noted, however, that in such circumstances FUNC might still be entitled to the
payment of the Termination Fee). See " -- Expenses; Termination Fee". In
addition, in connection with its approval of the proposed Merger, the Columbia
Board was advised by Schroder Wertheim and FBR that (i) the indicated value of
the Merger exceeded the upper end of Schroder Wertheim and FBR's range of
estimates of Columbia's stand-alone value (I.E., the market price of Columbia
Common Stock if Columbia remained an independent company) and (ii) Schroder
Wertheim and FBR believed that the process followed by Columbia in soliciting
proposals and negotiating the Merger Agreement had been fair and
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effective and that it had obtained as high a price for Columbia as could have
been obtained through other techniques. In presenting this advice, Schroder
Wertheim and FBR stated that these findings were necessarily based upon
economic, market, monetary and other conditions as they existed and could be
evaluated at the time, represented their best business judgment under the
circumstances and should not be construed in any way as a financial fairness or
other form of expert opinion. Schroder Wertheim's and FBR's fairness opinions
are described below and included as ANNEX C to this Prospectus/Proxy Statement.
See " -- Opinions of Financial Advisors to Columbia".
THE COLUMBIA BOARD UNANIMOUSLY RECOMMENDS THAT COLUMBIA 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 banking favor such an organization as a way of
gaining efficiency and spreading costs over a large geographic 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 eastern region of the
United States and on advantageous ways of entering or expanding its presence in
those markets. FUNC believes that joining with Columbia is an excellent way to
significantly expand FUNC's presence in the Virginia, Maryland and Washington,
D.C. markets.
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
"RECENT DEVELOPMENTS", "PRO FORMA FINANCIAL INFORMATION" and "FUNC -- History
and Business".
OPINIONS OF FINANCIAL ADVISORS TO COLUMBIA
Schroder Wertheim and FBR (together, the "Financial Advisors") have
delivered their written opinions to the Columbia Board that, as of April 5,
1995, and as of the date of this Prospectus/Proxy Statement, the consideration
to be paid to the holders of shares of Columbia Common Stock pursuant to the
Merger Agreement (the "Merger Consideration") is fair, from a financial point of
view, to the stockholders of Columbia. No limitations were imposed by the
Columbia Board upon the Financial Advisors with respect to the investigations
made or procedures followed by the Financial Advisors in rendering their
opinions.
COPIES OF THE OPINIONS OF SCHRODER WERTHEIM AND FBR, DATED THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT, WHICH SET FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEWS UNDERTAKEN BY SCHRODER WERTHEIM AND FBR,
ARE ATTACHED HERETO AS ANNEX C, AND ARE SUBSTANTIALLY IDENTICAL TO THE OPINIONS
OF SCHRODER WERTHEIM AND FBR, DATED APRIL 5, 1995. THE SUMMARY OF THE OPINIONS
OF SCHRODER WERTHEIM AND FBR SET FORTH IN THIS PROSPECTUS/PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINIONS ATTACHED HERETO AS ANNEX
C. COLUMBIA STOCKHOLDERS ARE URGED TO READ THESE OPINIONS IN THEIR ENTIRETY.
The Financial Advisors' opinions are directed only to the fairness, from a
financial point of view, to Columbia stockholders of the Merger Consideration
and do not address Columbia's underlying business decision to effect the Merger.
The Financial Advisors' opinions were rendered only to the Columbia Board and do
not constitute, and should not be construed as, a recommendation to any Columbia
stockholder as to how such stockholder should vote with respect to the Merger.
Schroder Wertheim is an investment banking firm that is frequently engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. FBR, as part of its
institutional brokerage, research and investment banking business, is regularly
engaged in the valuation of securities and the evaluation of transactions in
connection with initial and secondary offerings, mutual-to-stock conversions of
savings institutions, mergers and acquisitions of commercial banks, savings
institutions and savings and loan holding companies, as well as business
valuations for other corporate purposes for financial institutions and real
estate-related companies. As a specialist in the valuation of securities of
financial institutions, FBR has experience in, and knowledge of, Virginia and
the surrounding regional markets for thrift and bank securities and institutions
operating in Virginia and the surrounding regional areas.
Pursuant to a letter agreement, dated December 15, 1994 (the "Engagement
Letter"), Columbia engaged Schroder Wertheim and FBR to serve as financial
advisors. Pursuant to the Engagement Letter, Columbia paid $50,000 to each of
Schroder
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Wertheim and FBR and agreed to pay to each of them an additional fee of
approximately $700,000 payable in cash at the closing of the Merger. Columbia
also agreed to indemnify Schroder Wertheim and FBR against certain liabilities,
including liabilities under the federal securities laws, and to pay their legal
and other out-of-pocket expenses.
SCHRODER WERTHEIM
In connection with rendering its opinions, Schroder Wertheim, among other
things, (i) reviewed the Annual Reports to Stockholders and Annual Reports on
Form 10-K filed with the OTS for the fiscal years ended September 30, 1992, 1993
and 1994 by Columbia, (ii) reviewed the Annual Reports to Stockholders and
Annual Reports on Form 10-K filed with the Commission for the fiscal years ended
December 31, 1992, 1993 and 1994 by FUNC, (iii) reviewed the Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 1994, filed with the OTS by
Columbia, (iv) discussed the past and current operations, financial condition
and prospects of Columbia and FUNC with the managements of Columbia and FUNC,
respectively, (v) reviewed the reported prices and trading activity for Columbia
Common Stock and FUNC Common Stock and compared them with those of certain
companies which Schroder Wertheim deemed to be reasonably similar to Columbia
and FUNC, respectively, (vi) compared the results of operations and financial
condition of Columbia and FUNC with those of certain companies which the
Financial Advisors deemed to be reasonably similar to Columbia and FUNC,
respectively, (vii) reviewed the financial terms, to the extent publicly
available, of certain acquisition transactions which the Financial Advisors
deemed to be reasonably comparable, (viii) participated in discussions and
negotiations among representatives of Columbia, representatives of FUNC,
Columbia's legal advisors and the legal advisors to FUNC, (ix) reviewed
execution copies of each of the Merger Agreement and the Voting Agreement, and
(x) performed such other analyses and reviewed and analyzed such other
information as Schroder Wertheim deemed appropriate.
In addition, in rendering its opinions as of the date of this
Prospectus/Proxy Statement, Schroder Wertheim also reviewed certain information
that was not available as of the date of the April 5, 1995 opinion, including
certain information contained in this Prospectus/Proxy Statement and in (i) the
Form 8-K filed with the OTS by Columbia on April 20, 1995, (ii) the Quarterly
Reports for the fiscal quarters ended March 31, 1995, and June 30, 1995 filed
with the OTS by Columbia, (iii) the Forms 8-K filed with the Commission by FUNC
on June 19, 1995, June 20, 1995, June 21, 1995, June 30, 1995 and August 30,
1995, and (iv) the Quarterly Reports for the fiscal quarters ended March 31,
1995 (as amended by Form 10-Q/A Amendment No. 1, dated May 16, 1995), and June
30, 1995, filed with the Commission by FUNC. Schroder Wertheim also reviewed, in
connection with rendering such opinion, (a) the Annual Report to Stockholders
and Annual Report on Form 10-K for the fiscal year ended December 31, 1994 filed
by FFB with the Commission, (b) the Quarterly Reports on Form 10-Q for the
fiscal quarters ended March 31, 1995 and June 30, 1995 filed by FFB with the
Commission, and (c) the Form 8-K filed by FFB with the Commission on June 23,
1995.
In rendering its opinions, Schroder Wertheim did not assume any
responsibility for independently verifying the accuracy and completeness of the
information concerning Columbia and FUNC as furnished by Columbia and FUNC,
respectively, or the publicly available information regarding other financial
institutions and economic data. Schroder Wertheim further relied on the
assurance of management of Columbia and FUNC that they were not aware of any
facts that would make such information inaccurate or misleading. Schroder
Wertheim did not undertake an independent appraisal of the assets or liabilities
of Columbia or FUNC nor was Schroder Wertheim furnished with any such
appraisals. Schroder Wertheim is not an expert in the evaluation of allowances
for loan losses and did not review any individual credit files of Columbia or
FUNC. Schroder Wertheim's opinions were necessarily based upon economic, market
and other conditions as they existed on, and the information made available to
Schroder Wertheim as of, the dates thereof. Schroder Wertheim expresses no
opinion on matters of a legal, regulatory, tax or accounting nature related to
the Merger and related transactions as set forth in the Merger Agreement and the
Voting Agreement.
The preparation of a fairness opinion is a complex project and is not
necessarily susceptible to partial or summary description. No single analytical
methodology used by Schroder Wertheim was critical to its overall conclusions,
as each analytical technique has inherent strengths and weaknesses. The nature
of available information may further affect the value of any particular
methodology or technique. Schroder Wertheim's conclusions are based upon all the
analyses and factors that it considered, taken as a whole, and also on the
application of Schroder Wertheim's experience and judgment. Schroder Wertheim's
conclusions involve significant elements of subjective judgment and qualitative
analysis. No single technique was assigned any special value, merit or weight.
Accordingly, Schroder Wertheim believes that its analyses must be considered as
a whole and that to focus upon specific portions of such analyses and factors
would create an incomplete and misleading view of the process underlying the
preparation of its opinions. Schroder Wertheim's analyses and opinions are based
in part upon forecasts and projections of future results of operations of FUNC
provided by management of FUNC. These forecasts and projections may not be
indicative of actual results, which may be significantly more or less favorable
then the
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projected or forecasted results. Columbia did not provide forecasts or
projections of its future results to Schroder Wertheim for use in its analyses,
nor did Schroder Wertheim prepare its own forecasts or projections for that
purpose. In preparing its analyses, however, Schroder Wertheim did make numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond Schroder Wertheim's
control and are inherently imprecise.
The following is a brief summary of the analyses performed by Schroder
Wertheim in connection with rendering its opinion dated April 5, 1995.
COMPARABLE COMPANY ANALYSIS. Schroder Wertheim compared certain
valuation ratios and operating, profitability, credit quality and capital
ratios for Columbia with (1) the average ratios (excluding in each case the
low and high ratio) for American Federal Bank, F.S.B., First Financial
Holdings, Inc., Loyola Capital Corporation, Maryland Federal Bancorp, Inc.
and Sovereign Bancorp (the "Comparable Companies"), using market prices of
Columbia Common Stock and the common stock of the Comparable Companies as
of April 4, 1995 and publicly reported financial data as of December 31,
1994, and for the 12 months ended as of that date, and (2) the average
ratios for thrifts nationwide, based on information published by SNL
Datasource, which is a data service that monitors and publishes a
compilation of financial information about certain publicly traded
companies. Among the valuation ratios considered were (a) the ratio of
market price to last 12 months earnings per share, which was 15.1 for
Columbia and averaged 10.5 for the Comparable Companies and 12.5 for
thrifts nationwide, (b) the ratio of market price to estimated 1995
earnings per share, which was 13.8 for Columbia and averaged 10.1 for the
Comparable Companies (the ratio for thrifts nationwide was not available),
(c) the ratio of market price to December 31, 1994 book value, which was
1.22 for Columbia and averaged 1.35 for the Comparable Companies and 1.01
for thrifts nationwide, and (d) the ratio of market price to December 31,
1994 tangible book value, which was 1.29 for Columbia and averaged 1.42 for
the Comparable Companies and 1.04 for thrifts nationwide. Using these
valuation multiples, Schroder Wertheim calculated the indicated acquisition
values for Columbia that would result by multiplying, respectively, the
next-to-lowest, the next-to-highest and the average (excluding the lowest
and the highest) of each of these valuation multiples for the Comparable
Companies by the relevant information for Columbia and assuming an
acquisition premium of 33 percent (which was the average premium paid in
all U.S. thrift acquisitions since January 1, 1994; see ";THRIFT MERGER
TRANSACTION ANALYSIS") over the values resulting from this multiplication.
This calculation resulted in a range of average indicated acquisition
values from $166.7 million to $223.0 million for Columbia. The figures used
for estimated 1995 earnings per share were based on earnings estimates
published by First Call, which is a data service that monitors and
publishes a compilation of earnings estimates produced by selected research
analysts regarding companies of interest to certain investors. The estimate
of 1995 earnings per share for Columbia used by Schroder Wertheim in these
comparisons was $3.20 per share, based on estimates published by First
Call. Among the profitability, operations, credit quality and capital
ratios compared by Schroder Wertheim were (i) return on average assets for
the 12 months ended December 31, 1994, which was 0.40 percent for Columbia
and averaged 0.92 percent for the Comparable Companies and 0.79 percent for
thrifts nationwide, (ii) return on average common equity for the 12 months
ended December 31, 1994, which was 8.40 percent for Columbia and averaged
14.07 percent for the Comparable Companies and 8.22 percent for thrifts
nationwide, (iii) net interest margin for the 12 months ended December 31,
1994, which was 2.00 percent for Columbia and averaged 3.20 percent for the
Comparable Companies and 3.51 percent for thrifts nationwide, (iv) the
ratio of noninterest expense to average assets for the 12 months ended
December 31, 1994, which was 1.53 percent for Columbia and averaged 2.17
percent for the Comparable Companies and 2.46 percent for thrifts
nationwide, (v) the ratio of nonperforming loans to total loans at December
31, 1994, which was 0.60 percent for Columbia and averaged 0.62 percent for
the Comparable Companies and 1.57 percent for thrifts nationwide, (vi) the
ratio of loan loss reserves to nonperforming loans at December 31, 1994,
which was 123.3 percent for Columbia and averaged 153.4 percent for the
Comparable Companies and 155.0 percent for thrifts nationwide, (vii) the
ratio of tangible common equity to tangible assets as December 31, 1994,
which was 4.34 percent for Columbia and averaged 7.35 percent for the
Comparable Companies and 10.28 percent for thrifts nationwide, and (viii)
the risk-based capital ratio at December 31, 1994, which was 9.15 percent
for Columbia and averaged 13.33 percent for the Comparable Companies and
20.28 percent for thrifts nationwide.
THRIFT MERGER TRANSACTION ANALYSIS. Schroder Wertheim calculated
certain ratios for acquisitions of U.S. thrifts with assets of $500 million
to $5 billion announced since January 1, 1994, and for acquisitions of
Mid-Atlantic thrifts of that size announced since that date. Approximately
34 transactions (three of which involved Mid-Atlantic thrifts) were
considered in this analysis, including all of the transactions of this
nature of which Schroder Wertheim was aware at the time of its analysis.
The ratios considered included the following: (i) acquisition price as a
multiple of the market price of the acquired company's stock as of one
month before announcement of the transaction, which was 145 percent for
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Columbia and averaged 126 percent for Mid-Atlantic thrift acquisitions and
133 percent for all U.S. thrift acquisitions, (ii) the ratio of acquisition
price to common book value per share as of the most recently reported date
prior to announcement of the acquisition, which was 1.75 for Columbia and
averaged 1.76 for Mid-Atlantic thrift acquisitions and 1.62 for all U.S.
thrift acquisitions, (iii) the ratio of acquisition price to tangible book
value per share of the most recently reported date prior to announcement of
the acquisition, which was 1.85 for Columbia and averaged 1.90 for
Mid-Atlantic thrift acquisitions and 1.72 for all U.S. thrift acquisitions,
(iv) the ratio of acquisition price to earnings per share for the 12 months
ended as of the most recently reported date prior to announcement of the
acquisition, which was 21.3 for Columbia and averaged 22.1 for Mid-Atlantic
thrift acquisitions and 15.2 for all U.S. thrift acquisitions, and (v) the
core deposit premium paid by the acquiror (the ratio of the excess of the
acquisition price over tangible book value to core deposits as of the most
recently reported date prior to announcement of the acquisition), which was
7.7 percent for Columbia and averaged 10.9 percent for Mid-Atlantic thrift
acquisitions and 7.9 percent for all U.S. thrift acquisitions.
MARKET PREMIUM ANALYSIS. Schroder Wertheim calculated the average
premium paid over market prices in acquisitions of publicly traded
companies in the United States since the beginning of 1992 and for publicly
traded financial services companies during that period. Approximately 462
transactions (192 of which involved financial services companies) were
considered in this analysis, including all of the transactions of this
nature of which Schroder Wertheim was aware at the time of its analysis.
This analysis showed that, based on a $60.00 acquisition price in the
Merger, FUNC was paying a premium equal to 36.5 percent over the $44.00
market price per share of Columbia Common Stock on April 5, 1995, the day
prior to announcement of the Merger, compared to an average premium over
the market price on the day prior to announcement of 41.7 percent for
financial services acquisitions and 35.0 percent for all acquisitions.
Using market prices one week and four weeks prior to announcement,
respectively, Schroder Wertheim calculated premiums of 46.3 percent and
44.6 percent for Columbia, compared to premiums of 45.7 percent and 53.1
percent for financial services acquisitions and 38.4 percent and 44.6
percent for all acquisitions.
CONTRIBUTION ANALYSIS. Schroder Wertheim analyzed the contribution of
each of Columbia and FUNC to the income statement and balance sheet of the
pro forma combined company (see "SUMMARY -- Pro Forma Combined Selected
Financial Data"). Among the various balance sheet and income statement
items analyzed were the relative contribution to the pro forma company of
each of Columbia's and FUNC's (i) net interest income and net income before
extraordinary items for the 12 months ended December 31, 1994, (ii)
estimated 1995 net income, (iii) estimated 1996 net income, (iv) loans,
assets, deposits, common book value and tangible book value as of December
31, 1994, and (v) market capitalization as of April 4, 1995. The figures
used for estimated 1995 and 1996 net income were based on estimates for
Columbia published by First Call and for FUNC provided by FUNC management.
The contribution analysis produced a range of relative contributions by
Columbia to the pro forma company from a minimum of 1.1 percent (for
estimated 1996 net income) to a maximum of 4.0 percent (for loans), while
Columbia stockholders would receive approximately 2.9 percent of the total
shares of FUNC Common Stock estimated to be outstanding upon consummation
of the Merger.
PER SHARE VALUE ANALYSIS. Schroder Wertheim compared various data per
share of Columbia Common Stock with the data per equivalent number of
shares of FUNC Common Stock, based on the closing price of $44.00 per share
of Columbia Common Stock on April 4, 1995, and the ten-day average closing
price of $43.50 per share of FUNC Common Stock during the ten-day period
ended April 4, 1995. Schroder Wertheim calculated that, on a share
equivalent basis, the Merger would result in a 36.4 percent increase in
market value, a 147.8 percent increase in estimated 1995 earnings per share
(using earnings estimates for Columbia published by First Call and for FUNC
provided by FUNC management), a 14.3 percent increase in book value and a
10.7 percent decrease in tangible book value. Schroder Wertheim also noted
that, while Columbia was not currently paying dividends to the holders of
Columbia Common Stock, FUNC would be paying an annual dividend of $2.54 per
equivalent number of shares of FUNC Common Stock based on the last reported
sale price of FUNC Common Stock on the NYSE Tape on April 5, 1995, assuming
that FUNC continued to pay dividends at the same annual rate as it was then
paying (I.E., $1.84 per share of FUNC Common Stock). Such annual pro forma
dividend is actually $2.46 based on the Exchange Ratio.
IMPLIED EARNINGS ANALYSIS. Schroder Wertheim analyzed the implied
earnings per share of Columbia Common Stock that would need to be generated
in the 1996 fiscal year in order for the Columbia Common Stock to trade at
a market price at the end of that fiscal year that would have a discounted
present value, as of April 5, 1995, of $60.00 per share of Columbia Common
Stock. Using a range of discount rates from 14.0 percent to 16.0 percent
per annum and a range of ratios of market price to earnings per share from
8.0 to 14.0, Schroder Wertheim calculated a range of implied fiscal year
earnings per share for fiscal year 1996 from $5.22 to $9.37 per share,
which implied a compound annual rate
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of growth in earnings per share (based on reported earnings per share of
$2.87 for fiscal year 1994) of 34.8 percent to 80.6 percent per annum.
FUNC COMPARABLE COMPANY ANALYSIS. Schroder Wertheim compared certain
valuation ratios and profitability, operations, credit quality and capital
ratios, for FUNC with the average ratios (excluding in each case the low
and high ratio) for Barnett Banks, Inc., NationsBank Corporation, SunTrust
Banks, Inc. and Wachovia Corporation (the "FUNC Comparable Companies"),
using market data as of April 4, 1995, and publicly reported financial data
as of December 31, 1994 and for the 12 months ended as of that date. Among
the valuation ratios considered were (a) the ratio of market price to last
12 months earnings per share, which was 8.3 for FUNC and averaged 10.8 for
the FUNC Comparable Companies, (b) the ratio of market price to estimated
1995 earnings per share, which was 7.7 for FUNC and averaged 9.8 for the
FUNC Comparable Companies, (c) the ratio of market price to December 31,
1994 book value, which was 1.40 for FUNC and averaged 1.65 for the FUNC
Comparable Companies, and (d) the ratio of market price to December 31,
1994 tangible book value, which was 1.86 for FUNC and averaged also 1.86
for the FUNC Comparable Companies. The figures used for estimated 1995
earnings per share were based on earnings estimates for FUNC as provided by
FUNC management and for the FUNC Comparable Companies as published by First
Call. Among the profitability, operations, credit quality and capital
ratios compared by Schroder Wertheim were (i) return on average assets for
the 12 months ended December 31, 1994, which was 1.24 percent for FUNC and
averaged 1.26 percent for the FUNC Comparable Companies, (ii) return on
average common equity for the 12 months ended December 31, 1994, which was
16.51 percent for FUNC and averaged 16.48 percent for the FUNC Comparable
Companies, (iii) net interest margin for the 12 months ended December 31,
1994, which was 4.63 percent for FUNC and averaged 4.26 percent for the
FUNC Comparable Companies, (iv) the ratio of noninterest expense to average
assets for the 12 months ended December 31, 1994, which was 3.65 percent
for FUNC and averaged 3.22 percent for the FUNC Comparable Companies, (v)
the ratio of nonperforming loans to total loans at December 31, 1994, which
was 0.74 percent for FUNC and averaged 0.68 percent for the FUNC Comparable
Companies, (vi) the ratio of loan loss reserves to nonperforming loans at
December 31, 1994, which was 245.0 percent for FUNC and averaged 308.9
percent for the FUNC Comparable Companies, (vii) the ratio of tangible
common equity to tangible assets as December 31, 1994, which was 5.34
percent for FUNC and averaged 6.75 percent for the FUNC Comparable
Companies, and (viii) the risk-based capital ratio at December 31, 1994,
which was 12.94 percent for FUNC and averaged 11.95 percent for the FUNC
Comparable Companies.
FUNC DIVIDEND HISTORY. Schroder Wertheim analyzed the dividend history
of FUNC since September 1984, noting that during that period FUNC has paid
a dividend to the holders of shares of FUNC Common Stock every quarter and
has increased its dividend rate at least once each calendar year. Schroder
Wertheim noted that FUNC's most recent quarterly dividend was $.46 per
share and that Columbia does not currently pay a dividend to holders of
Columbia Common Stock.
FBR
In connection with rendering its opinions, FBR, among other things, (i)
reviewed the Columbia Annual Reports to Stockholders and Columbia Annual Reports
on Form 10-K filed with the OTS for the fiscal years ended September 30, 1992,
1993 and 1994, (ii) reviewed the FUNC Annual Reports to Stockholders and FUNC
Annual Reports on Form 10-K filed with the Commission for the fiscal years ended
December 31, 1992, 1993 and 1994, (iii) reviewed the Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1994, filed with the OTS by
Columbia, (iv) discussed the past and current operations, financial condition
and prospects of Columbia and FUNC with the managements of Columbia and FUNC,
(v) reviewed the reported prices and trading activity for the Columbia Common
Stock and the FUNC Common Stock and compared them with those of certain
companies which FBR deemed to be reasonably comparable to Columbia and FUNC,
respectively, (vi) compared the results of operations and financial condition of
Columbia and FUNC with those of certain companies which FBR deemed to be
reasonably comparable to Columbia and FUNC, respectively, (vii) reviewed the
financial terms, to the extent publicly available, of certain acquisition
transactions which FBR deemed to be reasonably comparable, (viii) participated
in discussions and negotiations among representatives of Columbia,
representatives of FUNC, legal counsel for Columbia and legal counsel for FUNC,
(ix) reviewed execution copies of each of the Merger Agreement and the Voting
Agreement, and (x) performed such other analyses and reviewed and analyzed such
other information as FBR deemed was appropriate.
In addition, in rendering its opinion as of the date of this
Prospectus/Proxy Statement, FBR also reviewed certain information that was not
available as of the date of the April 5, 1995 opinion, including certain
information contained in this Prospectus/Proxy Statement and in (i) the Form 8-K
filed with the OTS by Columbia on April 20, 1995, (ii) the Quarterly
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Reports for the fiscal quarters ended March 31, 1995, and June 30, 1995, filed
with the OTS by Columbia, (iii) the Forms 8-K filed with the Commission by FUNC
on June 19, 1995, June 20, 1995, June 21, 1995, June 30, 1995 and August 30,
1995, and (iv) the Quarterly Reports for the fiscal quarters ended March 31,
1995 (as amended by Form 10-Q/A Amendment No. 1, dated May 16, 1995), and June
30, 1995, filed with the Commission by FUNC. FBR also reviewed, in connection
with rendering such opinion, (a) the Annual Report to Stockholders and Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 filed by FFB
with the Commission, (b) the Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1995, and June 30, 1995, filed by FFB with the
Commission, and (c) the Form 8-K filed by FFB with the Commission on June 23,
1995.
In rendering its opinions, FBR did not assume any responsibility for
independently verifying the accuracy and completeness of the information
concerning Columbia and FUNC as furnished by Columbia and FUNC, respectively, or
the publicly available information regarding other financial institutions and
economic data. FBR further relied on the assurance of management of Columbia and
FUNC that they were not aware of any facts that would make such information
inaccurate or misleading. FBR did not undertake an independent appraisal of the
assets or liabilities of Columbia or FUNC nor was FBR furnished with any such
appraisals. FBR is not an expert in the evaluation of allowances for loan losses
and did not review any individual credit files of Columbia or FUNC. FBR's
opinions were necessarily based upon economic, market and other conditions as
they existed on, and the information made available to FBR as of, the dates
thereof. FBR expresses no opinion on matters of a legal, regulatory, tax or
accounting nature related to the Merger and related transactions as set forth in
the Merger Agreement and the Voting Agreement.
The preparation of a fairness opinion is a complex project and is not
necessarily susceptible to partial or summary description. No single analytical
methodology used by FBR was critical to its overall conclusions, as each
analytical technique has inherent strengths and weaknesses. The nature of
available information may further affect the value of any particular methodology
or technique. FBR's conclusions are based upon all the analyses and factors that
it considered, taken as a whole, and also on the application of FBR's experience
and judgment. FBR's conclusions involve significant elements of subjective
judgment and qualitative analysis. No single technique was assigned any special
value, merit or weight. Accordingly, FBR believes that its analyses must be
considered as a whole and that to focus upon specific portions of such analyses
and factors would create an incomplete and misleading view of the process
underlying the preparation of its opinions. FBR's analyses and opinions were
based in part upon forecasts and projections of future results of operations
provided by management of FUNC. These forecasts and projections may not be
indicative of actual results, which may be significantly more or less favorable
than the projected or forecasted results. Columbia did not provide forecasts or
projections of its future results to FBR for use in its analyses, nor did FBR
prepare its own forecasts or projections for that purpose. In preparing its
analyses, however, FBR did make numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond FBR's control and are inherently imprecise.
The following is a brief summary of the analyses performed by FBR in
connection with rendering its opinion dated April 5, 1995.
COMPARABLE COMPANY ANALYSIS. FBR compared certain valuation ratios and
operating, profitability, credit quality and capital ratios for Columbia
with (1) the ratios for the Comparable Companies, using market prices of
Columbia Common Stock and the common stock of the Comparable Companies as
of April 4, 1995, and publicly reported financial data as of December 31,
1994, and for the 12 months ended as of that date, and (2) the median
ratios for thrifts nationwide, based on information published by SNL
Datasource. Among the ratios considered were (i) the ratio of market price
to last 12 months earnings per share, which was 15.0 for Columbia, ranged
from 8.1 to 13.5 for the Comparable Companies and was a median of 10.5 for
thrifts nationwide, (ii) the ratio of market price to December 31, 1994
book value, which was 1.22 for Columbia, ranged from 0.88 to 1.69 for the
Comparable Companies and was a median of 0.96 for thrifts nationwide, (iii)
the ratio of market price to December 31, 1994 tangible book value, which
was 1.28 for Columbia, ranged from 0.88 to 1.80 for the Comparable
Companies and was a median of 0.98 for thrifts nationwide, (iv) net
interest margin for the 12 months ended December 31, 1994, which was 1.86
percent for Columbia, ranged from 2.92 percent to 4.12 percent for the
Comparable Companies and was a median of 3.52 percent for thrifts
nationwide, (v) the efficiency ratio (which is the ratio of noninterest
expense to the sum of net interest revenue and noninterest income) for the
12 months ended December 31, 1994, which was 66.94 percent for Columbia,
ranged from 50.24 percent to 69.83 percent for the Comparable Companies and
was a median of 60.61 percent for thrifts nationwide, (vi) the ratio of
noninterest expense to average assets for the 12 months ended December 31,
1994, which was 1.40 percent for Columbia, ranged from 0.64 percent to 2.52
percent for the Comparable Companies and was a median of 2.30 percent for
thrifts nationwide, (vii) the ratio of net interest income to average
earning assets for the 12 months ended December 31, 1994, which was 0.05
percent for Columbia, ranged from 0.16 percent to 0.79 percent for the
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Comparable Companies and was a median of 0.36 percent for all thrifts
nationwide, (viii) return on average assets for the 12 months ended
December 31, 1994, which was 0.35 percent for Columbia, ranged from 0.65
percent to 1.30 percent for the Comparable Companies and was a median of
0.88 percent for thrifts nationwide, (ix) return on average common equity
for the 12 months ended December 31, 1994, which was 7.47 percent for
Columbia, ranged from 9.25 percent to 17.61 percent for the Comparable
Companies and was a median of 8.64 percent for thrifts nationwide, (x) the
ratio of net charge-offs to average loans for the 12 months ended December
31, 1994, which was negative 0.08 percent for Columbia and ranged from 0.00
percent to 0.16 percent for the Comparable Companies (this ratio was not
available for thrifts nationwide), (xi) the ratio of nonperforming assets
to total loans and other real estate owned at December 31, 1994, which was
1.08 percent for Columbia and ranged from 0.32 percent to 2.46 percent for
the Comparable Companies (this ratio was not available for thrifts
nationwide), (xii) the ratio of nonperforming assets to total assets at
December 31, 1994, which was 0.84 percent for Columbia, ranged from 0.27
percent to 1.91 percent for the Comparable Companies and was a median of
0.80 percent for thrifts nationwide, (xiii) the ratio of loan loss reserves
to total loans and leases at December 31, 1994, which was 0.74 percent for
Columbia, ranged from 0.52 percent to 1.27 percent for the Comparable
Companies and was a median of 0.95 percent for thrifts nationwide, (xiv)
the ratio of tangible common equity to tangible assets at December 31,
1994, which was 4.40 percent for Columbia, ranged from 3.68 percent to 8.21
percent for the Comparable Companies and was a median of 8.47 percent for
thrifts nationwide, (xv) the tier I capital ratio at December 31, 1994,
which was 4.63 percent for Columbia, ranged from 3.75 percent to 7.82
percent for the Comparable Companies and was a median of 7.85 percent for
thrifts nationwide, and (xvi) the ratio of risk-based capital to total
assets at December 31, 1994, which was 9.15 percent for Columbia, ranged
from 10.19 percent to 16.00 percent for the Comparable Companies and was a
median of 16.36 percent for thrifts nationwide.
PREMIUM ANALYSIS. FBR calculated certain ratios for acquisitions of
U.S. thrifts with assets of $500 million to $5 billion announced since
January 1, 1994. Approximately 34 transactions were considered in this
analysis, including all of the transactions of this nature of which FBR was
aware at the time of its analysis. The ratios considered included the
following: (i) the ratio of acquisition price to common book value per
share as of the most recently reported date prior to announcement of the
acquisition, which was 175.07 percent for Columbia and averaged 162.27
percent for all U.S. thrift acquisitions, (ii) the ratio of acquisition
price to tangible book value per share as of the most recently reported
date prior to announcement of the acquisition, which was 184.75 percent for
Columbia and averaged 172.49 percent for all U.S. thrift acquisitions,
(iii) the ratio of acquisition price to earnings per share for the 12
months ended as of the most recently reported date prior to announcement of
the acquisition, which was 22 for Columbia and averaged 15 for all U.S.
thrift acquisitions, (iv) the core deposit premium paid by the acquiror,
which was 7.66 percent for Columbia and averaged 7.88 percent for all U.S.
thrift acquisitions, and (v) acquisition price as a multiple of the market
price of the acquired company's stock one month before announcement of the
transaction, which was 144.58 percent for Columbia and averaged 133.07
percent for all U.S. thrift acquisitions. FBR also calculated the ratio of
the acquisition price to the reported sales prices of Columbia Common Stock
as of various dates prior to the public announcement of the execution of
the Merger Agreement and compared these ratios to the average ratios for
all U.S. thrift acquisitions. In this regard, for example, FBR found that
as of one day, one month, three months and one year prior to the
announcement date, this ratio for Columbia was 136.36 percent, 144.58
percent, 173.91 percent and 187.50 percent, respectively, compared with
average ratios for all U.S. thrift acquisitions of 122.87 percent, 133.35
percent, 140.43 percent and 183.87 percent, respectively.
CONTRIBUTION ANALYSIS. FBR analyzed the contribution of each of
Columbia and FUNC to the income statement and balance sheet of the pro
forma combined company (see "SUMMARY -- Pro Forma Combined Selected
Financial Data"). Among the various balance sheet and income statement
items analyzed were the relative contribution to the pro forma company of
each of Columbia's and FUNC's (i) net interest margin and net income before
extraordinary items for the 12 months ended December 31, 1994, (ii)
estimated 1995 net income, (iii) estimated 1996 net income, (iv) loans,
assets, deposits, common book value and tangible book value as of December
31, 1994, and (v) market capitalization as of April 4, 1995. The figures
used for estimated 1995 and 1996 net income were based on estimates for
Columbia published by First Call and for FUNC provided by FUNC management.
The contribution analysis produced a range of related contribution to the
pro forma company from a minimum of 1.1 percent (for estimated 1996 net
income) to a maximum of 4.0 percent (for loans), while Columbia
stockholders would receive approximately 2.9 percent of the total shares of
FUNC Common Stock estimated to be outstanding upon consummation of the
Merger.
FUNC COMPARABLE COMPANY ANALYSIS. FBR compared certain valuation
ratios and operating, profitability, credit quality and capital ratios for
FUNC with (1) the ratios for the FUNC Comparable Companies, using market
prices of FUNC Common Stock and the common stock of the FUNC Comparable
Companies as of April 4, 1995, and publicly
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reported financial data as of December 31, 1994 and for the 12 months ended
as of that date, and (2) the median ratios for major banks nationwide,
based on information published by SNL Datasource. Among the ratios
considered were (i) the ratio of market price to last 12 months earnings
per share, which was 8.31 for FUNC, ranged from 8.27 to 12.30 for the FUNC
Comparable Companies and was a median of 11.33 for major banks nationwide,
(ii) the ratio of market price to estimated 1995 earnings per share, which
was 7.7 for FUNC and ranged from 7.5 to 11.0 for the FUNC Comparable
Companies (this ratio was not available for major banks nationwide), (iii)
the ratio of market price to estimated 1996 earnings per share, which was
7.0 for FUNC and ranged from 6.8 to 10.0 for the FUNC Comparable Companies
(this ratio was not available for major banks nationwide), (iv) the ratio
of market price to December 31, 1994 book value, which was 1.41 for FUNC,
ranged from 1.28 to 1.87 for the FUNC Comparable Companies and was a median
of 1.41 for major banks nationwide, (v) the ratio of market price to
December 31, 1994 tangible book value, which was 1.88 for FUNC, ranged from
1.51 to 1.93 for the FUNC Comparable Companies and was a median of 1.50 for
major banks nationwide, (vi) net interest margin for the 12 months ended
December 31, 1994, which was 4.77 percent for FUNC, ranged from 3.58
percent to 4.87 percent for the FUNC Comparable Companies and was a median
of 4.91 percent for major banks nationwide, (vii) the efficiency ratio for
the 12 months ended December 31, 1994, which was 63.85 percent for FUNC,
ranged from 56.86 percent to 63.29 percent for the FUNC Comparable
Companies and was a median of 63.65 for major banks nationwide, (viii) the
ratio of noninterest expense to average assets for the 12 months ended
December 31, 1994, which was 3.46 percent for FUNC, ranged from 2.80
percent to 3.30 percent for the FUNC Comparable Companies and was a median
of 3.65 percent for major banks nationwide, (ix) the ratio of net interest
income to average earning assets for the 12 months ended December 31, 1994,
which was 3.70 percent for FUNC, ranged from 1.58 percent to 1.84 percent
for the FUNC Comparable Companies and was a median of 4.39 percent for
major banks nationwide, (x) return on average assets for the 12 months
ended December 31, 1994, which was 1.27 percent for FUNC, ranged from 1.02
percent to 1.46 percent for the FUNC Comparable Companies and was a median
of 1.15 percent for major banks nationwide, (xi) return on average common
equity for the 12 months ended December 31, 1994, which was 17.04 percent
for FUNC, ranged from 14.63 percent to 17.37 percent for the FUNC
Comparable Companies and was a median of 13.13 percent for major banks
nationwide, (xii) the ratio of net charge-offs to average loans for the 12
months ended December 31, 1994, which was 0.33 percent for FUNC, ranged
from 0.23 percent to 0.34 percent for the FUNC Comparable Companies and was
a median of 0.25 percent for major banks nationwide, (xiii) the ratio of
nonperforming assets to total loans and other real estate owned at December
31, 1994, which was 1.03 percent FUNC, ranged from 0.43 percent to 1.10
percent for the FUNC Comparable Companies and was a median of 1.04 percent
for major banks nationwide, (xiv) the ratio of nonperforming assets to
total assets at December 31, 1994, which was 0.72 percent for FUNC, ranged
from 0.26 percent to 0.70 percent for the FUNC Comparable Companies and was
a median of 0.63 percent for major banks nationwide, (xv) the ratio of loan
loss reserves to total loans and leases at December 31, 1994, which was
1.85 percent for FUNC, ranged from 1.57 percent to 2.32 percent for the
FUNC Comparable Companies and was a median of 1.69 percent for major banks
nationwide, (xvi) the ratio of tangible common equity to tangible assets at
December 31, 1995, which was 5.34 percent for FUNC, ranged from 5.85
percent to 8.20 percent for the FUNC Comparable Companies and was a median
of 7.83 percent for major banks nationwide, (xvii) the tier I capital ratio
at December 31, 1994, which was 7.76 percent for FUNC, ranged from 7.43
percent to 9.68 percent for the FUNC Comparable Companies and was a median
of 7.95 percent for major banks nationwide and (xviii) the ratio of
risk-based capital to total assets at December 31, 1994, which was 12.94
percent for FUNC, ranged from 10.05 percent to 12.73 percent for the FUNC
Comparable Companies and was a median of 14.05 percent for major banks
nationwide.
THE FULL TEXTS OF THE OPINIONS OF SCHRODER WERTHEIM AND FBR, DATED AS OF
THE DATE HEREOF, WHICH SET FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN BY SCHRODER WERTHEIM AND FBR, ARE ATTACHED
HERETO AS ANNEX C AND ARE INCORPORATED HEREIN BY REFERENCE. COLUMBIA
STOCKHOLDERS ARE URGED TO READ THE OPINIONS IN THEIR ENTIRETY. THE FOREGOING
SUMMARIES OF THE OPINIONS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE
FULL TEXTS OF THE OPINIONS.
INTERESTS OF CERTAIN PERSONS
Certain directors and executive officers of Columbia may be deemed to have
interests in the Merger in addition to their interests as stockholders of
Columbia generally. These include, among other things, provisions in the Merger
Agreement relating to indemnification, directors' and officers' liability
insurance, and certain other benefits.
The Merger Agreement provides that for the six-year period following the
Effective Date, FUNC will indemnify the directors, officers and employees of
Columbia and its subsidiaries holding such positions on or prior to the date of
the Merger
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Agreement, against certain liabilities to the extent such persons were
indemnified under OTS regulations and Columbia's Charter and Bylaws as in effect
on the date of the Merger Agreement.
In addition, FUNC agreed in the Merger Agreement to use its reasonable best
efforts to maintain Columbia's existing directors' and officers' liability
insurance policy for persons who were covered by such insurance maintained by
Columbia on the date of the Merger Agreement for a period of three years after
the Effective Date at an annual cost not to exceed 150 percent of the annual
premium payment for Columbia's current policy.
FUNC agreed in the Merger Agreement that as soon as administratively
practicable following the Effective Date, employees of Columbia will generally
be entitled to participate in FUNC's pension, benefit and similar plans on
substantially the same terms and conditions as employees of FUNC, giving effect,
for eligibility and vesting and accrual of benefits, to years of service with
Columbia as if such service were with FUNC.
The aggregate value of cash payments which may be made to directors and
executive officers following the Merger as a result of their termination of
service, excluding continued health and life insurance and retirement benefits,
is currently estimated to be approximately $4.0 million, including $1.2 million
to Mr. Lenkin and $1.5 million to Mr. Schaefer.
Directors Franklin and Lorenz shall each be paid $29,000 in cash upon
consummation of the Merger, as equivalent amounts to what they would have
received if such non-employee directors had been awarded stock options on
November 17, 1994, under the 1993 Premium Price Stock Option Plan, as other
non-employee directors were awarded (which Columbia would have otherwise
provided to such individuals in the form of stock options of equivalent value in
the ordinary course of business on or about December 1, 1995).
In connection with the existing Senior Officers Employment Agreements of
Columbia with Messrs. Lenkin and Schaefer, (i) in consideration of such officers
each entering into an agreement not to compete with Columbia or FUNC (and each
of their successors and subsidiaries) for a period from the Effective Date to
December 31, 1998, the term of the Senior Officers Employment Agreements shall
be extended for one year (I.E., through December 31, 1998) by Columbia if the
Effective Date takes place on or after December 1, 1995, or by FUNB-VA if the
Effective Date takes place prior to December 1, 1995, (ii) the FUNC subsidiaries
that are obligated to honor and perform the obligations under the Senior
Officers Employment Agreements shall, subject to the mitigation provisions of
the Senior Officers Employment Agreements and subject to satisfactory
performance under the agreement not to compete, make annual salary payments to
Messrs. Lenkin and Schaefer of $373,256 and $488,280, respectively, in monthly
installments, through December 31, 1998 (or if either should die prior thereto,
the full salary payments shall be made to his estate), (iii) during the actual
employment of Messrs. Lenkin and Schaefer, all of the benefits set forth in the
Senior Officers Employment Agreements will be provided, and (iv) after
termination of Messrs. Lenkin and Schaefer actual employment, the
post-separation health benefits set forth in the Senior Officers Employment
Agreements will be provided to each of Messrs. Lenkin and Schaefer and their
surviving spouses for their respective lifetimes, and in lieu of any other
benefits to which Messrs. Lenkin and Schaefer would be entitled, a lump sum
payment will be made of $11,853 in the case of Mr. Lenkin, and $11,853 in the
case of Mr. Schaefer. Additionally, group term life insurance in the amount of
$500,000 of coverage shall be provided to each of Messrs. Lenkin and Schaefer
through December 31, 1998. Messrs. Lenkin and Schaefer shall be permitted, at
the Effective Date to purchase their currently provided vehicles at such
vehicles' trade-in values.
In connection with the existing SRA's of Messrs. Lenkin and Schaefer, the
FUNC subsidiaries which are obligated to honor and perform the obligations of
Columbia thereunder shall, in accordance with the terms of such SRA's, make a
payment of $20,000 per month to Mr. Lenkin and $10,000 per month to Mr.
Schaefer, less any required withholding, for their lifetimes and one half of
such amount to their respective surviving spouses for their lifetimes,
commencing on January 31, 1999, one month after the last salary payment is
required to be made under the Senior Officer Employment Agreements. Subsequent
to execution of the Merger Agreement, Columbia paid its remaining obligations to
the Thomas J. Schaefer Secular Trust, including tax gross-up payments, in the
amount of $240,779.
The employment by Columbia of Ms. Riel, and Messrs. Fleming, Burke and
Creighton (each an executive officer of Columbia) will terminate immediately
prior to the Effective Date, pursuant to the respective Severance Agreements
with such officers. At the time of such termination, Columbia shall make
payments in satisfaction of Columbia's obligations under such Severance
Agreements and FUNC-VA and FUNB-VA and their respective successors in interest
shall honor and perform the obligations set forth in such Severance Agreements
regarding health and other benefits for the benefit of the named executives
without cost to such named executives for the period through November 16, 1997.
The estimated amounts which would be payable under such Severance Agreements to
Ms. Riel and Messrs. Fleming, Burke and Creighton are $320,008,
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$380,380, $239,148 and $195,000, respectively. In addition, each of these
executive officers will be paid a $25,000 bonus by Columbia as an incentive to
continue in their respective capacities with Columbia until the Effective Date.
In the Merger Agreement, FUNC has agreed to assume all options to purchase
shares of Columbia Common Stock granted pursuant to the Columbia Option Plans,
which are outstanding under the Columbia Option Plans, in accordance with the
terms of the Columbia Option Plans, except that the shares acquired upon
exercise of such options shall be shares of FUNC Common Stock. The number of
shares of FUNC Common Stock covered by each option outstanding under the
Columbia Option Plans will be equal to the number of shares of Columbia Common
Stock covered thereby, multiplied by the Exchange Ratio and rounded to the
nearest whole share, and the option exercise price would be appropriately
adjusted. As of the Record Date, the directors and executive officers of
Columbia, together with certain of their related interests, beneficially owned
1,515,219 shares of Columbia Common Stock and held options to purchase an
aggregate of 288,239 shares of Columbia Common Stock at a weighted average
exercise price of $38.22, with an aggregate value of approximately $6.3
million, including $1.4 million for Mr. Lenkin and $1.5 million for
Mr. Schaefer.
Options to purchase 37,543 shares of Columbia Common Stock at a weighted
average exercise price of $36.04 per share will become exercisable upon
consummation of the Merger. These options are held by seven executive officers
with the largest amount being held by each of five executive officers (each
having a value of approximately $137,500).
Melvin Lenkin, Chairman of the Columbia Board, is also the President of the
general partner of CF Financial and may accordingly be deemed to beneficially
own the 1,411,000 shares of Columbia Common Stock held by CF Financial as of the
Record Date. As such, the shares of Columbia Common Stock held by CF Financial
have been included in the number of shares beneficially owned by the directors
and executive officers of Columbia stated above.
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 COLUMBIA STOCKHOLDERS, IF ANY, WHO
RECEIVED THEIR COLUMBIA COMMON STOCK UPON THE EXERCISE OF EMPLOYEE STOCK OPTIONS
OR OTHERWISE AS COMPENSATION, THAT HOLD THEIR COLUMBIA COMMON STOCK AS PART OF A
"STRADDLE" OR "CONVERSION TRANSACTION", OR THAT ARE INSURANCE COMPANIES,
SECURITIES DEALERS, FINANCIAL INSTITUTIONS OR FOREIGN PERSONS.
Sullivan & Cromwell, special counsel for FUNC, has advised FUNC and
Columbia that, in its opinion:
(i) No gain or loss will be recognized for federal income tax
purposes by Columbia stockholders upon the exchange in the Merger of shares
of Columbia Common Stock solely for FUNC Common Shares (except with respect
to cash received in lieu of a fractional share interest in FUNC Common
Stock).
(ii) The basis of FUNC Common Shares received in the Merger by
Columbia stockholders (including the basis of any fractional share interest
in FUNC Common Stock) will be the same as the basis of the shares of
Columbia Common Stock surrendered in exchange therefor.
(iii) The holding period of the FUNC Common Shares received in the
Merger by a Columbia stockholder (including the holding period of any
fractional share interest in FUNC Common Stock) will include the holding
period during which the shares of Columbia Common Stock surrendered in
exchange therefor were held by the Columbia stockholder, provided such
shares of Columbia Common Stock were held as capital assets.
(iv) Cash received by a holder of Columbia Common Stock in lieu of a
fractional share interest in FUNC Common Stock 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 Columbia Common Stock allocable to the
fractional share interest.
In contrast to the treatment described above in (i), (ii) and (iii),
Columbia stockholders that hold their shares of Columbia Common Stock as a
capital asset and that dispose of such shares prior to the Effective Date will
generally recognize capital gain or loss in an amount equal to the difference
between the amount realized upon the disposition and the basis in
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such shares. Such capital gain or loss will generally be long-term capital gain
or loss if the Columbia stockholder is deemed to have held such shares for more
than one year, and otherwise will be short-term capital gain or loss.
In addition, consummation of the Merger is conditioned, among other things,
on receipt by FUNC and Columbia of an opinion of Sullivan & Cromwell, dated as
of the Effective Date, to the effect that (i) the Merger constitutes a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended, and (ii) no gain or loss will be recognized by Columbia stockholders
who receive FUNC Common Shares in exchange for their shares of Columbia Common
Stock, except that gain or loss may be recognized as to cash received in lieu of
fractional share interests. The tax opinions of Sullivan & Cromwell summarized
above are or will be based, among other things, on representations relating to
certain facts and circumstances of, and the intentions of the parties to, the
Merger.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH STOCKHOLDER
OF COLUMBIA IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO DETERMINE THE
PARTICULAR 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
Columbia has agreed in the Merger Agreement not to take certain actions
relating to the operation of Columbia pending consummation of the Merger,
without the prior written consent of FUNC, except as otherwise permitted in the
Merger Agreement. These actions include, without limitation: (i) paying or
declaring any dividends, or redeeming or otherwise acquiring any shares of its
capital stock, or issuing any additional shares of its capital stock (other than
upon exercise of outstanding options) or giving any person the right to acquire
any such shares; (ii) incurring any indebtedness for borrowed money or becoming
liable for the obligations of any other entity other than in the ordinary course
of business consistent with past practice; (iii) increasing the rate of
compensation or paying any bonus to any of its directors, officers or employees
other than normal increases in regular compensation to employees in the ordinary
course of business consistent with past practice; (iv) entering into or
modifying any employment agreements or employee benefit plans; (v) disposing of
any material portion of its assets or acquiring any material portion of the
business or property of any other entity other than foreclosures in the ordinary
course of business consistent with past practice; (vi) changing its lending,
investment, liability management or other material banking policies in any
material respect; (vii) settling any claim, action or proceeding involving any
liability for material money damages; (viii) entering into, terminating or
changing any material contract, agreement, or lease except in the ordinary
course of business consistent with past practice and that is terminable by
Columbia without penalty upon not more than 60 days' prior written notice; or
(ix) taking any other action not in the ordinary course of business.
The Merger Agreement also provides that, consistent with generally accepted
accounting principles, Columbia will use its best efforts to record any
accounting adjustments required to conform its loan, litigation, and other
reserve 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; provided that Columbia shall not be
obligated to record any such accounting adjustments (i) unless and until
Columbia is satisfied that the conditions to the obligations of the parties to
consummate the Merger will be satisfied or waived on or before the Effective
Date, and (ii) in no event until the day prior to the Effective Date.
REGULATORY APPROVALS
Consummation of the Merger is subject to receipt of the prior approval of
both the Merger and the Purchase and Assumption from the OCC under both the Bank
Merger Act (the "BMA") and Section 5(d)(3) of the Federal Deposit Insurance Act
(the "FDI Act"). 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 or the Purchase and Assumption (i) if such transaction
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 the effect of such transaction 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 transaction 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 15th day following the dates of each of the requisite
approvals during which periods the United States Department of
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Justice may comment adversely on the transaction (which has the effect of
extending the waiting period to the 30th day following approval) or 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. The Merger is also subject to prior notice being given to the OTS and
the failure of the OTS to disapprove such notice within 60 days of its receipt.
The OCC informed FUNC on August 11, 1995, that the OCC had approved the
application previously submitted in connection with the Merger and the Purchase
and Assumption. The OTS informed FUNC on July 12, 1995, that the OTS had no
objection to the notice previously submitted in connection with the Merger.
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 Columbia;
(ii) receipt of the regulatory approvals referred to above without any
restrictions or conditions which, in the opinion of FUNC, 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; and (iii) no court or governmental or regulatory
authority having taken any action which enjoins or prohibits the Merger; (iv)
receipt by FUNC and Columbia of the opinion of Sullivan & Cromwell, dated as of
the Effective Date, as to certain federal income tax consequences of the Merger;
and (v) 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 Columbia 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
Columbia's independent certified public accountants, dated as of or shortly
prior to the Effective Date, with respect to Columbia's consolidated financial
position and results of operations.
The Merger Agreement provides that, whether before or after the Special
Meeting and notwithstanding the approval of the Merger Agreement by the
stockholders of Columbia, 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 Columbia; or (ii) by either the Board of
Directors of FUNC or the Board of Directors of Columbia (a) if the stockholders
of Columbia fail to approve the Merger Agreement, (b) in the event of a material
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 January 1, 1996. See " -- Expenses; Termination
Fee".
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 Columbia, the type of consideration to be
received by the stockholders of Columbia may not be changed or the value of the
consideration decreased and no change may be made that adversely affects the
intended tax-free treatment to the Columbia stockholders. As of the date of this
Prospectus/Proxy Statement, no provisions of the Merger Agreement are expected
to be waived or amended.
ACCOUNTING TREATMENT
It is expected that the purchase method of accounting will be used to
reflect the Merger and the other Purchase Acquisitions upon consummation. As
required by generally accepted accounting principles, under purchase accounting,
the assets and liabilities of the acquired company as of the effective date of
the acquisition are recorded at their respective fair market values and added to
those of FUNC. Financial statements of FUNC issued after consummation of the
Merger and the other Purchase Acquisitions would reflect such values. Financial
statements of FUNC issued before consummation of the Merger and the other
Purchase Acquisitions would not be restated retroactively to reflect the
acquired company's historical financial position or results of operations. The
unaudited pro forma financial information contained in this Prospectus/Proxy
Statement has been prepared using purchase accounting to account for the Merger
and the other Purchase Acquisitions.
37
<PAGE>
It is expected that the pooling of interests method of accounting will be
used to reflect the FFB Merger. As required by generally accepted accounting
principles, under pooling of interests accounting, as of the effective date of
the FFB Merger, the assets and liabilities of FFB would be added to those of
FUNC at their recorded book values and the stockholders' equity accounts of FUNC
and FFB 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 FFB Merger would be restated retroactively to reflect
the consolidated combined financial position and results of operations of FUNC
and FFB as if the FFB Merger had taken place prior to the periods covered by
such financial statements. The unaudited pro forma financial information
contained in this Prospectus/Proxy Statement has been prepared using pooling of
interests accounting to account for the FFB Merger.
See "PRO FORMA FINANCIAL INFORMATION".
EXPENSES; TERMINATION FEE
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby shall be borne by the
party incurring the same, except that printing expenses will be shared equally
by FUNC and Columbia.
FUNC-VA shall be entitled to the Termination Fee of $11.5 million from
Columbia following the occurrence of a Fee Trigger Event (as hereinafter
defined) provided FUNC-VA shall have sent written notice of such entitlement
within 90 days after its awareness of such occurrence. FUNC-VA's right to
receive the Termination Fee shall terminate if any of the following occurs prior
to a Fee Trigger Event: (i) the Effective Date; (ii) termination of the Merger
Agreement in accordance with its terms if such termination occurs prior to the
occurrence of a Preliminary Event (as hereinafter defined), except termination
by FUNC due to a breach by Columbia; (iii) termination of the Merger Agreement
following the occurrence of a Preliminary Event and the passage of 18 months
after such termination; or (iv) termination of the Merger Agreement by FUNC due
to a breach by Columbia and the passage of 12 months after such termination.
A Preliminary Event refers to any of the following events or transactions
occurring after the date of the Merger Agreement:
(i) Columbia, without having received FUNC-VA's prior written consent,
shall have entered into an agreement to engage in any Acquisition
Transaction (as hereinafter defined) with any person other than FUNC, or
the Columbia Board shall have recommended that the stockholders of Columbia
approve or accept any Acquisition Transaction with any person other than
FUNC. For purposes of the Merger Agreement, "Acquisition Transaction" means
(a) a merger or consolidation, or any similar transaction, involving
Columbia, (b) a purchase, lease or other acquisition of all or
substantially all of the assets or deposits of Columbia, (c) a purchase or
other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20 percent or more of the
voting power of Columbia; provided that the term "Acquisition Transaction"
does not include (x) any internal merger or consolidation involving only
Columbia or a holding company formation or (y) any acquisition of
additional shares of Columbia Common Stock by the "Principal Stockholders"
(which shall include each of Melvin Lenkin, Edward J. Lenkin, Manuel V.
Fernandez, David H. Hillman, Thomas J. Schaefer, Judy Lerner, Mark Lerner
or trusts established by the aforesaid individuals for their spouses and/or
descendants with respect to shares of Columbia Common Stock beneficially
owned, or subject to an option held, by any of them as of the date hereof
as a result of such person's being a director, officer or employee of
Columbia or such person or such trust being a director, officer, partner or
stockholder of CF Financial or CF Holdings, Inc. or being included in a
"group" (as defined in Section 13(d)(3) of the Exchange Act) including only
other Principal Stockholders so long as none of them is in breach of any
material representation, warranty or agreement contained in the Voting
Agreement, (to the extent such shares are subject to the voting obligation
set forth in Section 1 thereof);
(ii)(a) any person (other than FUNC or the Principal Stockholders (so
long as none of them is in breach of any material representation, warranty
or agreement in the Voting Agreement)) shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 20 percent or
more of the outstanding shares of Columbia Common Stock, or (b) any group,
other than a group of which any of FUNC, or a group including only
Principal Stockholders (so long as none of them is in breach of any
material representation, warranty or agreement in the Voting Agreement), is
a member, shall have been formed that beneficially owns 20 percent or more
of the shares of Columbia Common Stock then outstanding;
(iii) any person other than FUNC shall have made a bona fide proposal
to Columbia or its stockholders, by public announcement or written
communication that is or becomes the subject of public disclosure, to
engage in an Acquisition
38
<PAGE>
Transaction (including, without limitation, any situation in which any
person other than FUNC 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 Columbia Common Stock such that,
upon consummation of such offer, such person would own or control 20
percent or more of the then outstanding shares of Columbia Common Stock
(such an offering referred to herein as a "Tender Offer" or an "Exchange
Offer", respectively));
(iv) after a proposal is made by a third party to Columbia or its
stockholders to engage in an Acquisition Transaction, or such third party
states its intention to Columbia to make such a proposal if the Merger
Agreement terminates, Columbia shall have knowingly or willfully breached
any representation, covenant or obligation contained in the Merger
Agreement and such breach would entitle FUNC to terminate the Merger
Agreement (without regard to the cure period provided for in the Merger
Agreement unless such cure is promptly effected without jeopardizing
consummation of the Acquisition);
(v) the holders of shares of Columbia Common Stock shall not have
approved the Merger Agreement at the Special Meeting or the Special Meeting
shall not have been held or shall have been canceled prior to termination
of the Merger Agreement, in each case after any person (other than FUNC)
shall have (a) made in writing, or publicly disclosed an intention to make,
a bona fide proposal to engage in an Acquisition Transaction or (b)
commenced a Tender Offer or filed a registration statement under the
Securities Act, with respect to an Exchange Offer; or
(vi) the Columbia Board shall have failed to recommend the approval of
the Merger Agreement to the holders of Columbia Common Stock, or withdraws,
modifies or changes its recommendation in a manner adverse to FUNC.
The term "Fee Trigger Event" shall mean either of the following events or
transactions occurring after the date of the Merger Agreement:
(i) the acquisition by any person, other than FUNC or the Principal
Stockholders (so long as neither of them is in breach of any material
representation, warranty or agreement in the Voting Agreement), alone or
together with such person's affiliates and associates, or any group, other
than a group of which FUNC is a member, or a group including only Principal
Stockholders (so long as none of them is in breach of any material
representation, warranty or agreement in the Voting Agreement), of
beneficial ownership of 35 percent or more of the outstanding shares of
Columbia Common Stock;
(ii) the occurrence of a Preliminary Event described in clause (i)
above, except that the percentage referred thereof shall be 35 percent; or
(iii) the termination of the Merger Agreement pursuant to Sections
7.01(E) or 7.01(F)(1) thereof.
See ANNEX B.
VOTING AGREEMENT
As an inducement to and a condition of FUNC's willingness to enter into the
Merger Agreement, CF Financial entered into the Voting Agreement with FUNC. The
Voting Agreement provides, among other things, that CF Financial will vote its
1,411,000 shares of Columbia Common Stock in favor of approval of the Merger
Agreement, subject to certain exceptions set forth therein. See "GENERAL
INFORMATION -- Record Date; Vote Required" and ANNEX B.
A copy of the Voting 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 Voting Agreement. The
foregoing discussion is qualified in its entirety by reference to the Voting
Agreement.
NO APPRAISAL RIGHTS
In connection with the Merger, holders of Columbia 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 Columbia stockholders have any
appraisal rights. In accordance with OTS regulations, holders of Columbia Common
Stock will have no appraisal rights if the FUNC Common Stock remains listed on
the NYSE on the Effective Date and the Columbia Common Stock remains quoted on
the Nasdaq National Market on the date of the Meeting. See "CERTAIN DIFFERENCES
IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS -- Dissenters' or Appraisal
Rights; COLUMBIA".
39
<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 (trading symbol, FTU) and
of Columbia Common Stock on the Nasdaq National Market (trading symbol, CFFS),
with respect to each quarterly period since January 1, 1993, and (ii) the
equivalent pro forma market values per share of Columbia Common Stock, based on
the Exchange Ratio.
<TABLE>
<CAPTION>
FUNC COLUMBIA COMMON STOCK
COMMON STOCK
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1993
First quarter...................................................... $ 50 7/8 42 1/4 24 1/4 19
Second quarter..................................................... 51 1/2 40 30 23
Third quarter...................................................... 49 5/8 43 1/2 35 26 3/4
Fourth quarter..................................................... 48 1/8 37 7/8 35 30 1/2
1994
First quarter...................................................... 43 3/4 39 3/4 34 1/2 29 1/2
Second quarter..................................................... 47 5/8 41 1/4 42 1/2 29 1/2
Third quarter...................................................... 47 1/4 43 1/4 46 1/2 39 5/8
Fourth quarter..................................................... 45 1/4 39 3/8 40 33 3/8
1995
First quarter...................................................... 45 1/8 41 3/8 43 33 1/4
Second quarter..................................................... 49 3/4 42 7/8 57 3/4 43
Third quarter...................................................... $ 51 3/8 45 1/4 60 1/4 57 3/8
<CAPTION>
EQUIVALENT PRO FORMA PER
SHARE OF COLUMBIA COMMON
STOCK(1)
HIGH LOW
<S> <C<C> <C>
1993
First quarter...................................................... 60 1/4 50
Second quarter..................................................... 61 47 3/8
Third quarter...................................................... 58 3/4 51 1/2
Fourth quarter..................................................... 57 44 7/8
1994
First quarter...................................................... 51 3/4 47
Second quarter..................................................... 56 3/8 48 7/8
Third quarter...................................................... 56 51 1/4
Fourth quarter..................................................... 53 5/8 46 5/8
1995
First quarter...................................................... 53 3/8 49
Second quarter..................................................... 58 7/8 50 3/4
Third quarter...................................................... 60 7/8 53 5/8
</TABLE>
(1) Equivalent pro forma market values per share of Columbia Common Stock
amounts represent the high and low last reported sales prices per share of
FUNC Common Stock multiplied by the Exchange Ratio, rounded down to the
nearest one-eighth.
On April 5, 1995, the last business day prior to public announcement of the
execution of the Merger Agreement, the last reported sale prices per share of
FUNC Common Stock on the NYSE Tape and of Columbia Common Stock on the Nasdaq
National Market were $43.375 and $45.50, respectively. On October 2, 1995, such
prices were $51.125 and $60.375, respectively.
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".
40
<PAGE>
DIVIDENDS
The following table sets forth the cash dividends paid on shares of FUNC
Common Stock and Columbia Common Stock with respect to each calendar quarter
since January 1, 1993, and the equivalent pro forma cash dividends paid per
share of Columbia Common Stock, based on the Exchange Ratio.
<TABLE>
<CAPTION>
FUNC COLUMBIA EQUIVALENT PRO FORMA PER
COMMON STOCK COMMON STOCK SHARE OF COLUMBIA COMMON STOCK (1)
<S> <C> <C> <C>
1993
First quarter............................................ $.35 -- .415
Second quarter........................................... .35 -- .415
Third quarter............................................ .40 -- .475
Fourth quarter........................................... .40 -- .475
1994
First quarter............................................ .40 -- .475
Second quarter........................................... .40 -- .475
Third quarter............................................ .46 -- .545
Fourth quarter........................................... .46 -- .545
1995
First quarter............................................ .46 -- .545
Second quarter........................................... .46 -- .545
Third quarter............................................ $.52 -- .615
</TABLE>
(1) Equivalent pro forma cash dividends paid per share of Columbia Common Stock
amounts represent FUNC historical dividend rates per share multiplied by the
Exchange Ratio, rounded to the nearest one-half cent. The current annualized
dividend rate per share for FUNC Common Stock, based upon the most recently
declared quarterly dividend of $.52 per share paid on September 15, 1995,
would be $2.08. On an equivalent pro forma basis, such current annualized
FUNC dividend per share of Columbia Common Stock would be $2.46, based on
the Exchange Ratio, rounded down to the nearest cent. Future FUNC and
Columbia dividends are dependent upon their respective earnings and
financial condition, government regulations and policies and other factors.
See "FUNC -- Certain Regulatory Considerations; PAYMENT OF DIVIDENDS" and
"DESCRIPTION OF FUNC CAPITAL STOCK".
41
<PAGE>
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(FUNC, THE PURCHASE ACQUISITIONS (INCLUDING THE MERGER) AND FFB)
JUNE 30, 1995
(UNAUDITED)
The following unaudited pro forma combined condensed balance sheet combines
the consolidated historical balance sheets of FUNC, the companies involved in
certain of the Purchase Acquisitions (including Columbia) and FFB, assuming the
companies had been combined as of June 30, 1995, on a purchase accounting basis
with respect to the Purchase Acquisitions (including the Merger) pending at June
30, 1995, or announced between July 1, 1995, and the date of this
Prospectus/Proxy Statement, and on a pooling of interests accounting basis with
respect to the FFB Merger.
<TABLE>
<CAPTION>
PURCHASE PRO FORMA PRO FORMA PRO FORMA
(IN THOUSANDS) FUNC ACQUISITIONS ADJUSTMENTS COMBINED FFB ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 3,191,431 84,413 (595,981) 2,679,863 1,750,833 --
Interest-bearing balances................... 446,712 67,273 -- 513,985 455,033 --
Federal funds sold and securities purchased
under resale agreements................... 2,052,236 8,275 -- 2,060,511 703,375 --
Total cash and cash equivalents........... 5,690,379 159,961 (595,981) 5,254,359 2,909,241 --
Trading account assets...................... 1,559,021 -- -- 1,559,021 100,529 --
Securities available for sale............... 7,353,926 381,101 -- 7,735,027 2,409,976 --
Investment securities....................... 3,583,906 1,577,325 (28,790) 5,132,441 3,877,896 --
Loans, net of unearned income............... 60,020,507 5,575,914 (6,473) 65,589,948 23,999,147 --
Allowance for loan losses................. (969,122) (45,706) -- (1,014,828) (565,450) --
Loans, net................................ 59,051,385 5,530,208 (6,473) 64,575,120 23,433,697 --
Premises and equipment...................... 1,881,947 59,022 (14,645) 1,926,324 428,328 --
Due from customers on acceptances........... 383,289 -- -- 383,289 161,355 --
Mortgage servicing rights................... 101,024 12,694 8,792 122,510 47,101 --
Credit card premium......................... 51,005 -- -- 51,005 -- --
Other intangible assets..................... 1,395,368 70,814 412,390 1,878,572 809,040 --
Other assets................................ 2,050,362 210,032 1,155 2,261,549 1,184,618 --
Total assets.............................. $83,101,612 8,001,157 (223,552) 90,879,217 35,361,781 --
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................... 10,854,459 115,570 -- 10,970,029 5,195,045 --
Interest-bearing.......................... 47,987,565 5,209,243 -- 53,196,808 23,623,878 --
Total deposits.......................... 58,842,024 5,324,813 -- 64,166,837 28,818,923 --
Short-term borrowings....................... 11,012,715 1,750,452 -- 12,763,167 2,020,966 --
Bank acceptances outstanding................ 383,289 -- -- 383,289 161,355 --
Other liabilities........................... 1,750,454 144,846 (3,632) 1,891,668 744,470 --
Long-term debt.............................. 5,376,283 247,829 -- 5,624,112 676,750 --
Total liabilities....................... 77,364,765 7,467,940 (3,632) 84,829,073 32,422,464 --
STOCKHOLDERS' EQUITY
Preferred stock............................. -- -- -- -- 219,219 --
Common stock................................ 572,790 16,907 4,973 594,670 81,999 271,939
Paid-in capital............................. 1,260,261 390,804 (99,387) 1,551,678 1,255,143 (437,293)
Retained earnings........................... 3,912,179 128,674 (128,674) 3,912,179 1,556,804 --
Less: Treasury stock........................ -- (3,329) 3,329 -- (165,354) 165,354
Unrealized gain (loss) on debt and equity
securities................................ (8,383) 161 (161) (8,383) (8,494) --
Total stockholders' equity.............. 5,736,847 533,217 (219,920) 6,050,144 2,939,317 --
Total liabilities and stockholders'
equity................................ $83,101,612 8,001,157 (223,552) 90,879,217 35,361,781 --
<CAPTION>
PRO FORMA
(IN THOUSANDS) COMBINED
<S> <C>
ASSETS
Cash and due from banks..................... 4,430,696
Interest-bearing balances................... 969,018
Federal funds sold and securities purchased
under resale agreements................... 2,763,886
Total cash and cash equivalents........... 8,163,600
Trading account assets...................... 1,659,550
Securities available for sale............... 10,145,003
Investment securities....................... 9,010,337
Loans, net of unearned income............... 89,589,095
Allowance for loan losses................. (1,580,278)
Loans, net................................ 88,008,817
Premises and equipment...................... 2,354,652
Due from customers on acceptances........... 544,644
Mortgage servicing rights................... 169,611
Credit card premium......................... 51,005
Other intangible assets..................... 2,687,612
Other assets................................ 3,446,167
Total assets.............................. 126,240,998
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing....................... 16,165,074
Interest-bearing.......................... 76,820,686
Total deposits.......................... 92,985,760
Short-term borrowings....................... 14,784,133
Bank acceptances outstanding................ 544,644
Other liabilities........................... 2,636,138
Long-term debt.............................. 6,300,862
Total liabilities....................... 117,251,537
STOCKHOLDERS' EQUITY
Preferred stock............................. 219,219
Common stock................................ 948,608
Paid-in capital............................. 2,369,528
Retained earnings........................... 5,468,983
Less: Treasury stock........................ --
Unrealized gain (loss) on debt and equity
securities................................ (16,877)
Total stockholders' equity.............. 8,989,461
Total liabilities and stockholders'
equity................................ 126,240,998
</TABLE>
See accompanying notes to pro forma financial information.
42
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(FUNC AND THE PURCHASE ACQUISITIONS (INCLUDING THE MERGER))
(UNAUDITED)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC and the companies involved in
the Purchase Acquisitions (including Columbia), assuming the companies had been
combined for each period presented on a purchase accounting basis (effective as
of January 1, 1994).
<TABLE>
<CAPTION>
PURCHASE PRO FORMA PRO FORMA
(IN THOUSANDS EXCEPT PER SHARE DATA) FUNC ACQUISITIONS ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1995
Interest income.......................................................... $3,000,417 377,671 (40,193) 3,337,895
Interest expense......................................................... 1,406,547 240,696 -- 1,647,243
Net interest income...................................................... 1,593,870 136,975 (40,193) 1,690,652
Provision for loan losses................................................ 76,500 4,130 -- 80,630
Net interest income after provision for loan losses...................... 1,517,370 132,845 (40,193) 1,610,022
Securities available for sale transactions............................... 4,878 (3,679) -- 1,199
Investment security transactions......................................... 1,450 -- -- 1,450
Noninterest income....................................................... 628,042 29,339 -- 657,381
Noninterest expense...................................................... 1,399,441 179,316 20,111 1,598,868
Income before income taxes............................................... 752,299 (20,811) (60,304) 671,184
Income taxes............................................................. 266,254 990 (19,709) 247,535
Net income............................................................... 486,045 (21,801) (40,595) 423,649
Dividends on preferred stock............................................. 7,029 -- -- 7,029
Net income applicable to common stockholders............................. 479,016 (21,801) (40,595) 416,620
Pro forma per common share data
Net income available to common stockholders............................ $ 2.77 2.32
Average common shares (in thousands)................................... 172,745 179,310
<CAPTION>
PURCHASE PRO FORMA PRO FORMA
(IN THOUSANDS EXCEPT PER SHARE DATA) FUNC ACQUISITIONS ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Interest income.......................................................... $5,094,661 786,606 (80,286) 5,800,981
Interest expense......................................................... 2,060,946 453,964 -- 2,514,910
Net interest income...................................................... 3,033,715 332,642 (80,286) 3,286,071
Provision for loan losses................................................ 100,000 1,643 -- 101,643
Net interest income after provision for loan losses...................... 2,933,715 330,999 (80,286) 3,184,428
Securities available for sale transactions............................... (11,507) 2,647 -- (8,860 )
Investment security transactions......................................... 4,006 -- -- 4,006
Noninterest income....................................................... 1,166,470 55,018 -- 1,221,488
Noninterest expense...................................................... 2,677,228 270,493 52,677 3,000,398
Income before income taxes............................................... 1,415,456 118,171 (132,963) 1,400,664
Income taxes............................................................. 490,076 38,119 (40,535) 487,660
Net income............................................................... 925,380 80,052 (92,428) 913,004
Dividends on preferred stock............................................. 25,353 -- -- 25,353
Net income applicable to common stockholders before redemption
premium................................................................ 900,027 80,052 (92,428) 887,651
Redemption premium on preferred stock.................................... 41,355 -- -- 41,355
Net income applicable to common stockholders after redemption premium.... $ 858,672 80,052 (92,428) 846,296
Pro forma per common share data
Net income available to common stockholders before redemption
premium.............................................................. $ 5.22 5.06
Net income available to common stockholders after redemption premium... $ 4.98 4.82
Average common shares (in thousands)................................... 172,543 175,554
</TABLE>
See accompanying notes to pro forma financial information.
43
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(FUNC, THE PURCHASE ACQUISITIONS (INCLUDING THE MERGER) AND FFB)
(UNAUDITED)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC, the companies involved in the
Purchase Acquisitions (including Columbia) and FFB, assuming the companies had
been combined for each period presented on a purchase accounting basis with
respect to the Purchase Acquisitions (including the Merger) (for the six months
ended June 30, 1995, and the year ended December 31, 1994, only) and on a
pooling of interests accounting basis with respect to the FFB Merger.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, JUNE 30, YEARS ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 1995 1994 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income............................... $4,493,006 3,434,281 7,937,133 6,601,528 6,608,666 7,031,400 7,549,088
Interest expense.............................. 2,112,573 1,254,749 3,246,946 2,481,952 2,941,680 4,070,885 4,806,471
Net interest income........................... 2,380,433 2,179,532 4,690,187 4,119,576 3,666,986 2,960,515 2,742,617
Provision for loan losses..................... 100,630 94,000 180,643 369,753 642,708 946,284 923,409
Net interest income after provision for loan
losses...................................... 2,279,803 2,085,532 4,509,544 3,749,823 3,024,278 2,014,231 1,819,208
Securities available for sale transactions.... 15,242 10,173 8,860 25,767 34,402 -- --
Investment security transactions.............. 1,450 1,309 4,006 14,452 1,944 208,614 32,271
Noninterest income............................ 864,592 738,949 1,620,712 1,541,569 1,360,202 1,254,635 1,028,755
Noninterest expense........................... 2,135,961 1,816,102 4,070,027 3,536,346 3,443,524 2,777,665 2,564,124
Income before income taxes.................... 1,025,126 1,019,861 2,073,095 1,795,265 977,302 699,815 316,110
Income taxes.................................. 373,284 347,323 709,028 578,912 278,514 129,843 59,868
Net income.................................... 651,842 672,538 1,364,067 1,216,353 698,788 569,972 256,242
Dividends on preferred stock.................. 17,350 22,204 46,020 45,553 53,040 51,746 47,151
Net income applicable to common stockholders
before redemption premium................... 634,492 650,334 1,318,047 1,170,800 645,748 518,226 209,091
Redemption premium on preferred stock......... -- -- 41,355 -- -- -- --
Net income applicable to common stockholders
after redemption premium.................... $ 634,492 650,334 1,276,692 1,170,800 645,748 518,226 209,091
Pro forma per common share data:
Net income applicable to common stockholders
before redemption premium................. $ 2.22 2.32 4.63 4.30 2.53 2.34 .97
Net income applicable to common stockholders
after redemption premium.................. $ 2.22 2.32 4.48 4.30 2.53 2.34 .97
Average common shares (in thousands).......... 285,492 280,153 284,673 272,439 255,384 221,469 215,529
FUNC historical per common
share data:
Net income applicable to
common stockholders before
redemption premium...................... $ 2.77 2.59 5.22 4.73 2.23 2.24 1.68
Net income applicable to common
stockholders after redemption premium... $ 2.77 2.59 4.98 4.73 2.23 2.24 1.68
Average common shares (in thousands).......... 172,745 169,689 172,543 167,692 158,683 140,003 135,622
</TABLE>
See accompanying notes to pro forma financial information.
44
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) The pro forma information presented is not necessarily indicative of
the results of operations or the combined financial position that would
have resulted had the Purchase Acquisitions (including the Merger) and
the FFB Merger been consummated at the beginning of the applicable
periods indicated, nor is it necessarily indicative of the results of
operations in future periods or the future financial position of the
combined entities. Consummation of the FFB Merger or any of the pending
Purchase Acquisitions (including the Merger) is not contingent upon
consummation of any other of such acquisitions. Consummation of one or
all of the pending Purchase Acquisitions (including the Merger) prior
to consummation of the FFB Merger would not materially impact the
results of operations of FUNC. Pro forma financial information for the
Purchase Acquisitions (including the Merger) assumes such acquisitions
were consummated on January 1, 1994, and, except as otherwise
indicated, reflects information from such date to their respective
consummation dates (or to June 30, 1995, with respect to the Purchase
Acquisitions (including the Merger) pending as of June 30, 1995, or
announced between July 1, 1995 and the date of this Prospectus/Proxy
Statement). Pro forma financial information with respect to the FFB
Merger assumes such merger was consummated as of the beginning of each
of the periods indicated. It is currently anticipated that all pending
acquisitions will be consummated in accordance with the terms of the
respective acquisition agreements. Information related to certain of
the Purchase Acquisitions whose year end was not a calendar year end
was adjusted to a calendar year-end basis. Since the survivor in the
Merger is a subsidiary of FUNC, FUNC's calendar year-end reporting
basis has been used in the presentation of the pro forma financial
information.
(2) In addition to the pro forma assumptions indicated below with respect
to the Purchase Acquisitions (including the Merger), pro forma
assumptions related to Columbia include (i) a 1.1852 Exchange Ratio;
(ii) the issuance of 4.9 million shares of FUNC Common Stock; (iii) the
repurchase of such shares in the open market at a cost of $233 million;
and (iv) an increase in goodwill and deposit base premium of $149
million and $17 million, respectively.
Columbia's loans and deposits are considered immaterial to FUNC on a
consolidated basis, and accordingly, were not adjusted to fair value.
It is not anticipated that such adjustment would be material to FUNC on
a consolidated basis. See "SUMMARY -- Selected Financial Data; COLUMBIA
(HISTORICAL)" and "; FUNC AND COLUMBIA".
(3) It is assumed that the FFB Merger will be accounted for on a pooling of
interests accounting basis, and accordingly, the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of (i)
1.35 shares of FUNC Common Stock for each of the 81,998,930 shares of
FFB common stock (less 3,345,884 treasury shares) which were
outstanding at June 30, 1995; and (ii) one share of one of three
corresponding new series of FUNC Class A Preferred Stock for each share
of the related three series of FFB preferred stock outstanding at June
30, 1995, one series of which includes 4,368,848 shares of convertible
preferred stock, which were then convertible into 3,408,138 shares of
FFB common stock. The three new series of FUNC Class A Preferred Stock
will have substantially identical terms as the related series of FFB
preferred stock to be exchanged therefor. The 1.35 exchange ratio is
subject to possible increase under certain circumstances.
As a result, information was adjusted for the FFB Merger by the (i)
addition of 106,181,612 shares of FUNC Common Stock amounting to
$353,938,000; (ii) elimination of 81,998,930 shares of FFB common stock
amounting to $81,999,000; (iii) cancellation of 3,345,884 treasury
shares of FFB at a cost of $165,354,000; and (iv) recordation of the
remaining net amount of $437,293,000 as a reduction in paid-in capital
at June 30, 1995.
The pro forma financial information presented herein does not give
effect to the possible purchase by FUNC and/or FFB of up to 5.5 million
shares of FFB common stock or 7.4 million shares of FUNC Common Stock,
or some combination of the two (the "FFB Acquisition Shares"), prior to
consummation of the FFB acquisition. As of the date hereof, FUNC has
purchased 2.9 million shares of FFB common stock at a cost of $181
million, and 250,000 shares of FFB convertible preferred stock at a
cost of $12 million. The number of shares that may actually be
purchased is subject to pooling of interests accounting for the FFB
Merger, which is a condition to consummation of the FFB Merger, and to
regulatory restrictions.
As of June 30, 1995, FUNC and FFB had 14,441,144 and 6,788,278 shares
of common stock reserved for issuance, respectively, (excluding, as to
FUNC, shares reserved for issuance in connection with the FFB Merger,
the Purchase Acquisitions then pending (including the Merger), or upon
exercise of the rights attached to shares of FUNC Common Stock), which
are not included in the pro forma financial information presented
herein.
For the six months ended June 30, 1995, FFB had net income applicable
to common stockholders of $217,872,000.
45
<PAGE>
(4) During the period from January 1, 1994 through the date of this
Prospectus/Proxy Statement, FUNC completed or has pending the following
Purchase Acquisitions: (i) the acquisition of BancFlorida Financial
Corporation (completed in August 1994) with assets of $1.6 billion for
3.6 million shares of FUNC Common Stock valued at $161 million, (ii)
the acquisitions of First Florida Savings Bank, FSB (completed in April
1995), Ameribanc Investors Group (completed in April 1995), Coral
Gables Fedcorp, Inc. (completed in May 1995), and Home Federal Savings
Bank of Rome, Georgia (completed in August 1995), at an aggregate cost
of $623 million in cash, and (iii) the acquisitions of American Savings
(completed in July 1995) and Columbia, United Financial, RS Financial
and Brentwood (each of which is pending) for an estimated 16.5 million
shares of FUNC Common Stock valued at an estimated $785 million (or
excluding Columbia, an estimated 11.6 million shares valued at an
estimated $552 million).
In addition to the foregoing Purchase Acquisitions, during 1994, FUNC
completed the following purchase accounting acquisitions: (i) the
December 1994 purchase of a DE MINIMUS amount of loans, and the
purchase of deposits from Chase Manhattan Bank of Florida, N.A.
("Chase") and Great Western Federal Savings Bank ("Great Western"),
which in the aggregate amounted to $1.8 billion, at an aggregate cost
of approximately $137 million, and (ii) the purchase of deposits of
Jacksonville Federal Savings Association, Citizens Federal Savings
Association, Cobb Federal Savings Association and Hollywood Federal
Savings Association from the Resolution Trust Corporation ("RTC") in
the aggregate amount of $640 million, at an aggregate cost of $68
million. Purchases of deposits from Chase, Great Western and the RTC do
not constitute a sufficient continuity of operations, and moreover,
additional financial data is not available to develop meaningful and
reliable pro forma income statement information with respect to such
acquisitions. Accordingly, the pro forma financial information
presented herein includes such acquisitions at their recorded costs and
does not include any pro forma adjustments related thereto.
Goodwill and deposit base premium of approximately $701 million and
$378 million, respectively, are currently expected to result from the
Purchase Acquisitions (including the Merger).
In connection with the Purchase Acquisitions (including the Merger) in
which the consideration involved or will involve the issuance of FUNC
Common Stock, the pro forma financial information presented herein
includes actual and estimated repurchases of FUNC Common Stock that in
the aggregate are estimated to amount to 20.5 million shares at an
estimated cost of $932 million. During 1994, FUNC purchased 4.9 million
shares of FUNC Common Stock at a cost of $212 million; during the first
six months of 1995, 5.7 million shares at a cost of $249 million; and
from July 1, 1995 to the date of this Prospectus/Proxy Statement, 9.9
million shares at a cost of $471 million.
In April 1995, the FUNC Board of Directors authorized the purchase of
up to 15 million shares of FUNC Common Stock, which is in addition to
the possible purchase of the FFB Acquisition Shares. As of the date
hereof, FUNC has remaining authority to purchase up to 4.2 million
shares of FUNC Common Stock, in addition to the FFB Acquisition Shares.
(5) The pro forma adjustment amounts related to the unaudited pro forma
combined condensed statements of income reflect a 5.84 percent and 4.08
percent cost of funds for the six months ended June 30, 1995, and the
year ended December 31, 1994, respectively, a six-to-ten year
straight-line life related to investment securities, a nine-year
straight-line life related to loans, a 10-year straight-line life
related to premises and equipment and mortgage servicing rights, a
10-year sum-of-the-years digits method related to deposit base premium,
and a 25-year straight-line life related to goodwill.
46
<PAGE>
For the six months ended June 30, 1995, and the year ended December 31,
1994, these adjustments resulted in: reductions in interest income, net
interest income and net interest income after provision for loan losses
of $40,193,000 and $80,286,000, respectively; increases in noninterest
expense of $20,111,000 and $52,677,000, respectively; reductions in
income before income taxes of $60,304,000 and $132,963,000,
respectively; reductions in income taxes of $19,709,000 and
$40,535,000, respectively; and reductions in net income applicable to
common stockholders of $40,595,000 and $92,428,000, respectively. The
components of the pro forma adjustments related to interest income and
noninterest expense for the six months ended June 30, 1995, and the
year ended December 31, 1994, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
(IN THOUSANDS) JUNE 30, 1995 DECEMBER 31, 1994
<S> <C> <C>
Interest income
Interest and fees on loans.................................... $ (2,237) 350
Interest and dividends on investment securities............... (2,578) (19,999)
Interest-bearing bank balances................................ (35,378) (60,637)
Total interest income...................................... (40,193) (80,286)
Noninterest expense
Equipment rentals, depreciation and maintenance............... (1,125) (3,190)
Mortgage servicing amortization............................... 2,088 5,437
Other amortization
Goodwill................................................... 10,585 27,225
Deposit base premium....................................... 8,563 23,205
Total noninterest expense................................ 20,111 52,677
Income before income taxes...................................... $(60,304) (132,963)
</TABLE>
(6) Income per share data has been computed based on the combined
historical net income applicable to common stockholders of FUNC, FFB
and the companies involved in the Purchase Acquisitions (including the
Merger) using the historical weighted average shares outstanding of
FUNC Common Stock and the weighted average outstanding shares, adjusted
to equivalent shares of FUNC Common Stock, as of the earliest
applicable period presented.
(7) Certain insignificant reclassifications have been included herein to
conform statement presentations. Transactions conducted in the ordinary
course of business between the companies are immaterial, and
accordingly, have not been eliminated.
(8) The unaudited pro forma financial information does not include any FFB
Merger-related expenses or any material expenses related to the
Purchase Acquisitions (including the Merger). A currently estimated
after-tax FFB Merger-related charge of approximately $270 million, or
$.97 per share of FUNC Common Stock, is expected to be taken in the
fourth quarter of 1995. See "RECENT DEVELOPMENTS -- 1995 and 1996
Earnings Estimates".
(9) As indicated by the foregoing unaudited pro forma financial information
and based solely on the foregoing assumptions, consummation of the FFB
Merger and the Purchase Acquisitions (including the Merger) would have
diluted FUNC's historical net income per common share (after redemption
premium) for the six months ended June 30, 1995 and the year ended
December 31, 1994, by 20 percent and 10 percent, respectively. It
should not necessarily be assumed, however, that the foregoing data
will represent actual dilution with respect to the FFB Merger or the
Purchase Acquisitions (including the Merger).
COLUMBIA
GENERAL
Columbia is a federally chartered stock savings bank conducting business
from 33 full-service banking offices at June 30, 1995. Thirteen offices are
located in Washington, D.C., 11 offices are located in Maryland, and nine
offices are located in Virginia.
HISTORY AND BUSINESS
Columbia was formed on March 1, 1981, by the merger of Columbia Federal
Savings and Loan Association and First Federal Savings and Loan Association of
Washington, D.C. Columbia completed its conversion from mutual to stock form on
47
<PAGE>
November 27, 1985. On September 13, 1989, the federal stock charter was amended
to change the institution's name to Columbia First Bank, a Federal Savings Bank,
from Columbia First Federal Savings and Loan Association.
At June 30, 1995, Columbia had assets of $2.8 billion, deposits of $1.6
billion and stockholders' equity of $142 million. At June 30, 1995, based on
assets, Columbia was the largest savings institution headquartered in Virginia.
Columbia operates four wholly-owned subsidiaries, including an insurance company
and a finance subsidiary. Two other subsidiaries, encompassing real estate and
appraisal activities, are presently inactive.
Columbia is a member of the Federal Home Loan Bank of Atlanta, which is one
of the 12 regional banks comprising the Federal Home Loan Bank System. Columbia
is subject to regulations of the Federal Reserve Board, governing reserves
required to be maintained against deposits and certain other matters. The
primary regulator for Columbia is the OTS, with secondary responsibility resting
with the FDIC.
The executive offices of Columbia are located at 1560 Wilson Boulevard,
Arlington, Virginia 22209-2409. Its telephone number is (703) 247-5000. For
additional information regarding Columbia, see ANNEX A.
CERTAIN REGULATORY CONSIDERATIONS
The deposits of savings institutions such as Columbia are presently insured
by the Savings Association Insurance Fund (the "SAIF") which, along with the
Bank Insurance Fund (the "BIF"), are the two insurance funds administered by the
FDIC. Financial institutions which are members of the BIF are experiencing
substantially lower deposit insurance premiums because the BIF has achieved its
required level of reserves while the SAIF has not yet achieved its required
reserves. Proposed legislation under consideration by Congress provides for a
special, one-time assessment to be imposed on all SAIF insured deposits to
enable the SAIF to achieve its required level of reserves. The special,
one-time assessment rate is anticipated to be between 85 and 95 cents per
$100.00 of deposits. In addition, the BIF and SAIF would be merged effective
January 1, 1998. If the anticipated special, one-time assessment of between
85 and 95 cents per $100.00 of deposits was effected based on deposits as of
June 30, 1995 (as proposed), Columbia's special, one-time assessment would
range from approximately $13 million to $15 million, before taxes,
respectively. Accordingly, this special, one-time assessment would significantly
increase noninterest expense and adversely affect Columbia's results of
operations. Conversely, depending upon Columbia's capital level and supervisory
rating, and assuming, although there can be no assurance, that the insurance
premium levels for BIF and SAIF members are again equalized, future deposit
insurance premiums could decrease significantly for future periods, to as low
as 4 cents per $100.00 of deposits from the 29 cents per $100.00 of deposits
currently paid by Columbia. If the legislation is enacted, it is anticipated
that the special, one-time assessment would be payable in early 1996.
As part of the legislation, Congress also is considering requiring all
federal thrift institutions, such as Columbia, to either convert to a national
bank or a state chartered depository institution by January 1, 1998. The OTS
also would be abolished and its functions distributed among the other federal
banking regulators. Certain aspects of the legislation remain to be resolved,
and therefore, no assurance can be given as to whether or in what form the
legislation will be enacted or its effect on Columbia.
48
<PAGE>
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 1994
Annual Report on Form 10-K, 1995 First and Second Quarter Reports on Form 10-Q
and 1995 Annual Meeting Proxy Statement and 1995 Current Reports on Form 8-K,
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 Virginia, Maryland, Washington, D.C. and North Carolina,
FUNC also operates banks in South Carolina, Florida, Georgia and Tennessee. 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, leasing,
investment banking, insurance and securities brokerage, 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 eastern region of the United States. Since November 1985, FUNC
has completed 57 banking related acquisitions, and currently has pending five
banking related acquisitions, including the more significant acquisitions (I.E.,
involving the acquisition of $3.0 billion or more of assets or deposits) set
forth in the following table.
<TABLE>
<CAPTION>
ASSETS/ CONSIDERATION/
NAME HEADQUARTERS DEPOSITS(1)(2) 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
First Railroad & Banking Company of
Georgia.................................... Georgia 3.7 billion common stock/pooling November 1986
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
Resolution Trust Company ("RTC") 5.3 billion cash/purchase 1991-1994
acquisitions............................... Florida,
Georgia,
Virginia
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
American Savings............................. Florida 3.6 billion common stock/purchase July 1995
FFB.......................................... New Jersey, $ 35.4 billion common stock and
Pennsylvania preferred stock/pooling
</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 RTC acquisitions, which represents
savings and loan deposits acquired from the RTC, and (ii) the dollar amount
relating to Southeast banks, which represent assets of the two banking
subsidiaries of Southeast Banking Corporation acquired from the FDIC.
(2) In addition, FUNC purchased Lieber & Company ("Lieber"), a mutual fund
advisory company with approximately $3.4 billion in assets under management,
in June 1994. Since such assets are not owned by Lieber, they are not
reflected on FUNC's balance sheet.
49
<PAGE>
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 "PRO
FORMA FINANCIAL INFORMATION" and " -- Certain Regulatory Considerations;
INTERSTATE BANKING AND BRANCHING LEGISLATION".
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 STATUTES, REGULATIONS OR REGULATORY POLICY 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. 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, 1995,
FUNC's subsidiaries, without obtaining affirmative governmental approvals, could
pay aggregate dividends of $153 million to FUNC. During the first half of 1995,
FUNC's subsidiaries paid $394 million in cash dividends to FUNC.
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.
50
<PAGE>
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 March 31, 1995, FUNC's tier 1 and total capital ratios
were 6.86 percent and 11.58 percent, respectively. On an FUNC and Columbia
combined basis, such ratios at June 30, 1995, would have been 6.26 percent and
10.90 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,
1995, was 5.74 percent. On an FUNC and Columbia combined basis, such ratio at
June 30, 1995, would have been 4.94 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. Each of FUNC's subsidiary banks had a leverage
ratio in excess of 5.14 percent, as of June 30, 1995. The OCC has not advised
any of the subsidiary national banks of any specific minimum leverage ratio
applicable to it.
As of June 30, 1995, 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-DC, FUNB-MD, First Union National
Bank of Tennessee ("FUNB-TN"), FUNB-VA and First Union Home Equity Bank, N.A.
("FUHEB") were as follows:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM FUNB-NC FUNB-SC FUNB-GA FUNB-FL FUNB-DC FUNB-MD FUNB-TN FUNB-VA FUHEB
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital ratio......... 4% 6.65 7.86 8.72 6.55 17.46 20.14 11.62 6.81 5.28
Total capital ratio.......... 8 10.32 11.79 11.52 10.01 18.74 21.42 12.88 10.39 8.28
Leverage ratio............... 3-5% 5.81 5.94 6.40 5.15 7.70 13.08 7.71 5.28 5.53
</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.
FIRREA
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("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 banks. 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.
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FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 (as
amended, "FDICIA"), among other things, requires the federal banking agencies to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. 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.
The OCC has adopted 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
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 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, 1995, all
of FUNC's deposit-taking subsidiary banks had capital levels that qualify them
as being "well capitalized" under such regulations. FUHEB is not a
deposit-taking bank.
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.
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.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, beginning June 1, 1997, a bank may merge with a bank in another state
as long as neither of the states has opted out of interstate branching between
the date of enactment of the IBBEA and May 31, 1997. The IBBEA further provides
that states may enact laws permitting interstate merger transactions prior to
June 1, 1997. A bank may establish and operate a DE NOVO branch in a state in
which the bank does not maintain a branch if that state expressly permits DE
NOVO branching. Once a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where any bank involved in the interstate
merger transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through DE
NOVO
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branching may establish and acquire additional branches in such state in the
same manner and to the same extent as a bank having a branch in such state as a
result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out state, whether through an acquisition or DE NOVO.
FDIC INSURANCE ASSESSMENTS
On August 8, 1995, the FDIC amended its regulations on insurance
assessments to establish a new assessment rate schedule of 4 to 31 cents per
$100.00 of deposits in replacement of the existing schedule of 23 to 31 cents
per $100.00 of deposits for institutions whose deposits are subject to
assessment by the BIF. The FDIC has maintained the current assessment rate
schedule of 23 to 31 cents per $100.00 of deposits for institutions whose
deposits are subject to assessment by the SAIF. The new BIF schedule will become
effective on the first day of the month after the month in which the BIF reaches
its "designated reserve ratio" of 1.25 percent which the FDIC has estimated
occurred sometime in the second quarter of 1995. Assessments collected at the
previous assessment schedule that exceed the amount due under the new schedule
will be refunded, with interest, from the effective date of the new schedule. As
of March 31, 1995, FUNC had a BIF deposit assessment base of $40.5 billion and a
SAIF deposit assessment base of $14.7 billion. Various legislative proposals
regarding the future of the BIF and the SAIF have been reported recently.
Several of these proposals include a one-time special assessment for SAIF
deposits and a subsequent comparable and reduced level of annual premiums for
SAIF and BIF deposits. For a description of such proposals, see
"COLUMBIA -- Certain Regulatory Considerations". FUNC does not know when and if
any such proposal or any other related proposal may be adopted.
BHCA LEGISLATION
Various bills have been introduced into the United States Congress that
would repeal in some respects the provisions of the Glass-Steagall Act
prohibiting certain banking organizations from engaging in certain securities
activities and the provisions of the BHCA prohibiting affiliations between
banking organizations and nonbanking organizations. FUNC cannot predict if and
when any such legislation or any similar legislation may be enacted.
DESCRIPTION OF FUNC CAPITAL STOCK
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
NORTH CAROLINA BUSINESS CORPORATION ACT (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 July 31, 1995,
there were 171,851,544 shares of FUNC Common Stock, and no shares of FUNC
Preferred Stock or 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. On March 31, 1995, FUNC redeemed a series of
FUNC Preferred Stock at an aggregate redemption price of $325 million.
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".
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 Columbia 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 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. 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.
In the FFB Merger Agreement, upon consummation of the FFB Merger, FUNC
agreed to issue three corresponding new series of FUNC Class A Preferred Stock
with terms substantially identical to those of the three outstanding series of
FFB preferred stock to be exchanged therefor. The following is a brief
description of certain terms of the three outstanding series of FFB preferred
stock, based on information filed by FFB with, and publicly available from, the
Commssion and the NYSE.
FFB SERIES B PREFERRED STOCK
The FFB Series B Convertible Preferred Stock (the "FFB Series B Preferred
Stock") bears a cumulative annual dividend of $2.15 per share, has a liquidation
preference of $25.00 per share, is redeemable in whole or in part at the option
of FFB at $25.00 per share plus accrued but unpaid dividends to the the
redemption date, and is currently convertible at the option of the holder
thereof into .7801 of a share of FFB common stock per share, subject to
adjustment in certain events. Upon consummation of the FFB Merger, such
conversion ratio would be adjusted in accordance with the FFB Merger exchange
ratio (1.35 shares of FUNC Common Stock for each share of FFB common stock
outstanding at the time the FFB Merger is consummated, subject to increase in
certain circumstances). Holders of FFB Series B Preferred Stock are entitled to
vote on all matters on which the holders of FFB common stock vote, together with
FFB common stock as a single class, and in such circumstances each holder of FFB
Series B Preferred Stock is entitled to such number of votes as is equal to
one-half of the number of shares of FFB common stock into which such holder's
shares of FFB Series B Preferred stock are then convertible. Holders of FFB
Series B Preferred Stock are also entitled to vote as a separate class (with
other similarly situated holders of preferred stock) (i) to elect directors in
the event of extended dividend arrearages, (ii) with respect to any amendment of
the FFB Certificate of Incorporation which adversely affects the rights of
holders of FFB Series B Preferred Stock, (iii) for FFB to redeem fewer than all
shares of FFB Series B Preferred Stock at any time when any dividends thereon
have not been paid for past periods, and (iv) in certain circumstances with
respect to the authorization or creation of more than ten million shares of any
FFB preferred stock or the authorization or creation of any securities ranking
prior to FFB Series B Preferred Stock.
FFB SERIES D PREFERRED STOCK
The FFB Series D Adjustable Rate Cumulative Preferred Stock (the "FFB
Series D Preferred Stock") is non-voting, subject to certain limited exceptions,
has a liquidation preference of $100.00 per share and is redeemable in whole or
in part at the option of FFB at a redemption price of $100.00 per share plus
accrued but unpaid dividends to the redemption date. FFB Series D Preferred
Stock cannot be converted into any other class of capital stock of FFB. FFB
Series D Preferred Stock bears cumulative dividends at an annual rate (the
"applicable rate") equal to .75 percent less than the highest of the three-month
U.S. Treasury Bill rate, the U.S. Treasury 10-year constant maturity rate or the
U.S. Treasury 20-year constant maturity rate, adjusted quarterly; however, in no
event may the applicable rate be less than 6.25 percent or more than 12.75
percent per annum. Holders of FFB Series D Preferred Stock are also entitled to
vote as a separate class (with other similarly situated holders of FFB preferred
stock) (i) to elect directors in the event of extended dividend arrearages, (ii)
with respect to any amendment of the FFB Certificate of Incorporation which
adversely affects the rights of holders of FFB Series D Preferred Stock, and
(iii) with respect to the authorization or creation of any securities ranking
prior to FFB Series D Preferred Stock.
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FFB SERIES F PREFERRED STOCK
The FFB Series F 10.64% Preferred Stock (the "FFB Series F Preferred
Stock") bears a cumulative annual dividend rate of 10.64 percent, is non-voting,
subject to certain limited exceptions, has a liquidation preference of $1,000.00
per share and is redeemable in whole or in part at the option of FFB on or after
July 1, 1996, at $1,000.00 per share plus accrued and unpaid dividends to the
redemption date. FFB Series F Preferred Stock cannot be converted into any other
class of capital stock of FFB. The shares of FFB Series F Preferred Stock are
represented by depositary shares, with each depositary share representing a
1/40th interest in a share of FFB Series F Preferred Stock. Holders of the
depositary shares are entitled to all rights and preferences of FFB Series F
Preferred Stock proportionate to the ownership interest represented by the
number of depositary shares owned by them. Holders of FFB Series F Preferred
Stock are also entitled to vote as a separate class (with other similarly
situated holders of FFB preferred stock) (i) to elect directors in the event of
extended dividend arrearages, (ii) with respect to any amendment of the FFB
Certificate of Incorporation which adversely affects the rights of holders of
FFB Series F Preferred Stock, and (iii) with respect to the authorization or
creation of any securities ranking prior to FFB Series F Preferred Stock.
RIGHTS PLAN
Each outstanding share of FUNC Common Stock currently has attached to it
one right (a "FUNC Right") issued pursuant to a Shareholder Protection Rights
Agreement (as amended, the "FUNC Rights Agreement"). Accordingly, in the Merger,
holders of Columbia Common Stock would receive one FUNC Right with respect to
each share of FUNC Common Stock they receive, which FUNC Right will be attached
to the related shares of FUNC Common Stock, unless the Separation Time (as
defined below) has occurred, in which case holders of Columbia Common Stock
would receive separate certificates with respect to such FUNC Rights. Each FUNC
Right entitles its registered holder to purchase 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, subject to adjustment (the "Rights Exercise Price", but only after the
earlier to occur (the "Separation Time") of: (i) the tenth business day (subject
to extension) after any person (an "Acquiring Person") (x) commences a tender or
exchange offer, which, if consummated, would result in such person becoming the
beneficial owner of 15 percent or more of the outstanding shares of FUNC Common
Stock, or (y) is determined by the Federal Reserve Board to "control" FUNC
within the meaning of the BHCA (see " -- Other Provisions" below), subject to
certain exceptions; 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. The FUNC Rights will not trade separately from the shares of FUNC Common
Stock unless and until the Separation Time occurs.
The FUNC Rights Agreement provides that a person will not become an
Acquiring Person under the BHCA control test described above if either (i) the
Federal Reserve Board's control determination would not have been made but for
such persons's failure to make certain customary passivity commitments, or such
person's violation of such commitments made, to the Federal Reserve Board, so
long as the Federal Reserve Board determines that such person no longer controls
FUNC within 30 days (or 60 days in certain circumstances), or (ii) the Federal
Reserve Board's control determination was not based on such a failure or
violation and such person (x) obtains a noncontrol determination within three
years, and (y) is using its best efforts to allow FUNC to make any acquisition
or engage in any legally permissible activity notwithstanding such person's
being deemed to control FUNC for purposes of the BHCA.
The Third Amendment to the FUNC Rights Agreement, effective as of June 18,
1995, exempts the grant by FUNC to FFB of an option to purchase up to 19.9
percent of the outstanding shares of FUNC Common Stock (the "FUNC Option"), and
the purchase of shares of such common stock pursuant to the FUNC Option, from
causing the holder of the FUNC Option or such shares from becoming an Acquiring
Person as a result thereof.
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
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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 (or that acquires "control" of FUNC within
the meaning of the BHCA) 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 foregoing description of the FUNC Rights and the FUNC Rights
Agreement is qualified in its entirety by reference to such document. 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 FUNC Articles and Bylaws 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 FUNC 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 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 FUNC 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.
The foregoing provision could impede a change of control of FUNC. In
particular, classification of the Board of Directors has the effect of
decreasing the number of directors that could be elected in a single year by any
person who seeks to elect its designees to a majority of the seats on the Board
of Directors.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been given 60 days' prior written notice of such proposed acquisition and
within that time period the Federal Reserve Board has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued, or unless the acquisition
is subject to Federal Reserve Board approval under the BHCA. An acquisition may
be made prior to the expiration of the disapproval period if the Federal Reserve
Board issues written notice of its intent not to disapprove the action. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition
of more than ten percent of a class of voting stock of a
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bank holding company with a class of securities registered under Section 12 of
the Exchange Act, such as FUNC, would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25 percent (five percent
in the case of an acquiror that is a bank holding company) or more of the
outstanding shares of FUNC Common Stock, or otherwise obtaining "control" over
FUNC. Under the BHCA, "control" generally means (i) the ownership or control of
25 percent or more of any class of voting securities of the bank holding
company, (ii) the ability to elect a majority of the bank holding company's
directors, or (iii) the ability otherwise to exercise a controlling influence
over the management and policies of the bank holding company. See "The
Merger -- Regulatory Approvals" for a description of the standards applicable to
the Merger under the BHCA.
Two North Carolina "anti-takeover" statutes adopted in 1987, 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. The authority of
the Board of Directors to issue FUNC Preferred Stock or FUNC Class A Preferred
Stock with rights and privileges, including voting rights, as it may deem
appropriate, may enable the Board of Directors to prevent a change of control
despite a shift in ownership of FUNC Common Stock. In addition, the Board of
Directors' authority to issue additional shares of FUNC Common Stock may help
deter or delay a change of control by increasing the number of shares needed to
gain control.
CERTAIN DIFFERENCES IN THE RIGHTS OF COLUMBIA AND FUNC STOCKHOLDERS
GENERAL
FUNC is a North Carolina corporation subject to the provisions of the
NCBCA. Columbia is a federal savings bank subject to the provisions of the HOLA
and the rules and regulations of the OTS promulgated thereunder. Stockholders of
Columbia 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 the material differences between the rights of a
Columbia stockholder under Columbia's Charter and Bylaws and the HOLA, on the
one hand, and the rights of an FUNC stockholder under the FUNC Articles and
Bylaws and under the NCBCA, on the other hand. THIS SUMMARY DOES NOT PURPORT TO
BE A COMPLETE DISCUSSION OF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO,
THE GOVERNING LAW AND THE ARTICLES OF INCORPORATION, CHARTER AND BYLAWS OF EACH
CORPORATION.
AUTHORIZED CAPITAL
COLUMBIA. The Charter of Columbia authorizes the issuance of up to 12.5
million shares of Columbia Common Stock, 3,780,507 shares of which were issued
and outstanding as of September 18, 1995, and up to 7.5 million shares of
preferred stock, par value $.01 per share, none of which were outstanding as of
September 18, 1995.
FUNC. FUNC's authorized capital is set forth under "DESCRIPTION OF FUNC
CAPITAL STOCK -- Authorized Capital".
AMENDMENT TO ARTICLES OF INCORPORATION, CHARTER OR BYLAWS
COLUMBIA. Columbia's Charter may be amended only if the amendment is first
proposed by the Columbia Board, then preliminarily approved by the OTS (which
preliminary approval may be granted by the OTS pursuant to regulations
specifying preapproved charter amendments) and is thereafter approved by the
holders of at least a majority of the outstanding shares of Columbia Common
Stock. In addition, any amendment to Columbia's Charter that would adversely
change the specific terms of any class or series of capital stock, including any
amendment which would create or enlarge any class or series ranking prior
thereto in rights and preferences, requires the approval of the holders of at
least a majority of the outstanding shares of the affected class or series of
capital stock. Columbia's Bylaws may be amended consistent with OTS regulations
by a majority of the Columbia Board or by a majority of the votes cast by
stockholders at any legal meeting.
FUNC. Under North Carolina law, an amendment to the FUNC Articles generally
requires the recommendation of the Board of Directors 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
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requires the approval of either the stockholders or the Board of Directors of
FUNC. The Board of Directors of 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 FUNC
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. Accordingly, while no amendments to the FUNC
Articles and Bylaws are subject to regulatory approval, certain amendments are
subject to a supermajority vote of stockholders. See "DESCRIPTION OF FUNC
CAPITAL STOCK".
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS; CUMULATIVE VOTING
COLUMBIA. Columbia's Charter provides that the number of directors will be
as set forth in the Bylaws, which number may not be fewer than seven or more
than 15 unless a greater number is approved by the OTS. Columbia's Bylaws
provide for 12 directors who are elected to serve one-year terms and until their
successors are elected and qualified. The Columbia Board currently has one
vacant seat. Columbia's Charter and Bylaws provide for cumulative voting in the
election of directors which entitles each stockholder to cast a number of votes
in the election of directors equal to the number of such stockholder's shares of
stock multiplied by the number of directors to be elected, and to distribute
such votes in favor of one nominee or among two or more of the nominees to be
elected.
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. While cumulative voting may be deemed
desirable to certain stockholders, FUNC stockholders may not cumulate their
votes in the election of directors. See also "DESCRIPTION OF FUNC CAPITAL
STOCK".
REMOVAL OF DIRECTORS
COLUMBIA. Under Columbia's Bylaws, any director may be removed for cause by
the holders of at least a majority of the outstanding shares entitled to vote in
an election of directors.
FUNC. Except for directors elected 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, 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. Therefore,
holders of Columbia Common Stock and FUNC Common Stock enjoy substantially the
same voting rights with respect to the removal of directors.
DIRECTOR EXCULPATION
COLUMBIA. OTS regulations provide for indemnification of directors,
officers and employees of federal savings banks, such as Columbia (including for
service with respect to employee benefit plans), against expenses (including
reasonable attorneys' fees), judgments, fines and settlements in connection with
litigation. Such indemnification is available if final judgment on the merits is
rendered in favor of the indemnitee; or, in the case of settlement, final
judgment against the indemnitee or final judgment in favor of the indemnitee
other than on the merits, indemnification is available if a majority of the
disinterested directors of the savings bank determine that the indemnitee was
acting in good faith within the scope of his or her employment or authority as
he or she could reasonably have perceived it under the circumstances and for a
purpose he or she could reasonably have believed under the circumstances was in
the best interests of the savings bank and its stockholders. However, no
indemnification is available unless the federal savings bank provides the OTS
with at least 60 days notice of its intention to provide such indemnification.
Such notice must state the facts on which the action arose and the terms of any
settlement or disposition. No such indemnification may be made if the OTS
advises the federal savings bank of its objection thereto. The federal savings
bank may obtain insurance to protect it and its directors, officers and
employees from potential losses arising from claims against any of them for
alleged wrongful acts or wrongful acts committed in their capacity as directors,
officers or employees; provided, however, that no such insurance may be obtained
that provides for payment of losses of any person incurred as a consequence of
his or her willful or criminal misconduct.
FUNC. The FUNC 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
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permit the elimination of such liability with respect to (i) acts or omissions
the director knew or 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.
CONFLICT OF INTEREST TRANSACTIONS
COLUMBIA. Certain transactions with directors, officers or controlling
persons of Columbia are subject to conflict of interest regulations enforced by
the OTS. These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans to
unaffiliated persons.
In addition, Columbia's Charter provides that no shares of capital stock
(including shares issuable upon conversion, exchange or exercise of other
securities) may be issued, directly or indirectly, to officers, directors or
controlling persons of Columbia other than as a part of a general public
offering or as qualifying shares to a director, unless such issuance has been
approved by a majority of the total votes eligible to be cast at a legal meeting
of stockholders.
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 of loans and guarantees by the corporation. Accordingly, certain
transactions may be permissible under North Carolina law applicable to FUNC
which would not be permissible under federal law applicable to Columbia,
provided certain approvals are obtained or conditions met.
STOCKHOLDER MEETINGS
COLUMBIA. Pursuant to Columbia's Bylaws, unless otherwise prescribed by OTS
regulations, special meetings of stockholders of Columbia may be called by the
Chairman of the Board, the President or a majority of the Columbia 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 ten percent of the
outstanding capital stock of Columbia entitled to vote at the meeting.
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 the FUNC 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. Therefore, to the extent a group of stockholders desires to call a meeting
of stockholders, they would not be entitled to do so.
DIRECTOR NOMINATIONS
COLUMBIA. Columbia's Bylaws provide that the Columbia Board will act as a
nominating committee for selecting management nominees for election as
directors. No nominations for directors except those made by the nominating
committee may be voted on at the annual meeting unless other nominations by
stockholders are made in writing and delivered to the Secretary of Columbia at
least five days prior to the date of the annual meeting. Ballots bearing the
names of all persons nominated by the nominating committee and by stockholders
will be provided for use at the annual meeting. If the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any stockholder
entitled to vote and will be voted upon at the meeting.
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
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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. Therefore, FUNC
stockholders must deliver nominations at an earlier date than Columbia
stockholders.
STOCKHOLDER PROPOSALS
COLUMBIA. Columbia's Bylaws provide that any new business to be considered
at an annual meeting of stockholders must be stated in writing and filed with
the Secretary of Columbia at least five days prior to the date of the meeting.
Any stockholder may make another proposal at the annual meeting, but unless
stated in writing and filed with the Secretary of Columbia at least five days
prior to the date of the meeting, such proposal will be laid over for action at
any adjourned, special or annual meeting of stockholders taking place 30 days or
more thereafter.
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 stock 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.
Accordingly, FUNC stockholders must provide notice of proposals at an earlier
date than Columbia stockholders, and such notice is subject to certain technical
requirements.
STOCKHOLDER PROTECTION RIGHTS PLAN
COLUMBIA. Columbia has not adopted a stockholder protection rights plan.
FUNC. FUNC has adopted the FUNC Rights Agreement which may be deemed to
have an anti-takeover effect. See "DESCRIPTION OF FUNC CAPITAL STOCK -- FUNC
Rights Plan".
STOCKHOLDER INSPECTION RIGHTS; STOCKHOLDER LISTS
COLUMBIA. OTS regulations applicable to Columbia provide that any
stockholder or group of stockholders holding of record (i) voting shares having
a cost of $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 voting 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.
Columbia's Bylaws provide that for a period of 20 days prior to a meeting
of stockholders, as well as at the meeting, Columbia must make available to
stockholders a list of all stockholders (including each stockholder's address
and number of shares held) entitled to vote at such meeting. In lieu thereof,
the Bylaws provide that Columbia may follow certain procedures outlined in the
Exchange Act, which, upon written request by a stockholder, would require
Columbia either to provide a list of stockholders and certain other data to the
requesting stockholder or to mail proxy solicitation materials to stockholders
on behalf of the requesting stockholder.
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
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not only to stockholders of record but also to beneficial owners whose
beneficial ownership 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 of 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. Such list must be
available at the stockholders' meeting, and any stockholder, his agent or
attorney, may inspect such list at any time during the meeting or any
adjournment thereof.
REQUIRED STOCKHOLDER VOTE FOR CERTAIN ACTIONS
COLUMBIA. Federal law applicable to Columbia generally requires the
affirmative vote of the holders of at least two-thirds of the outstanding
Columbia voting stock for approval of mergers and consolidations or the sale or
exchange of all or substantially all of Columbia's assets.
FUNC. Under North Carolina law, except as otherwise provided below or in
the NCBCA, any plan of merger or share exchange to which FUNC is a party, would
require adoption by the Board of Directors, who would generally be required to
recommend its approval to the stockholders, who in turn would be required to
approve the plan by a vote of a simple majority of the outstanding shares.
Except as otherwise provided below or in the NCBCA, any sale, 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 to which FUNC is a party, no vote of the
stockholders of FUNC is required if FUNC is the surviving corporation and: (i)
the FUNC 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 of 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.
In addition, no vote of the stockholders of FUNC would be required to merge
a subsidiary of which FUNC owns at least 90 percent of the outstanding shares of
each class of subsidiary shares, into FUNC, as long as no amendment is made to
the FUNC Articles that could not be made without approval of FUNC's
stockholders.
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.
As described above, the approval threshold for certain mergers and
consolidations is generally higher for Columbia stockholders than FUNC
stockholders.
ANTI-TAKEOVER PROVISIONS
COLUMBIA. Federal law provides that no company, "directly or indirectly or
acting in concert with one or more persons, or through one or more subsidiaries,
or through one or more transactions", may acquire "control" of a savings
association at
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any time without the prior approval of the OTS. In addition, federal regulations
require that, prior to obtaining control of a savings association, a person,
other than a company, must give 60 days' prior notice to the OTS and must have
received no OTS objection to such acquisition of control. Any company that
acquires such control becomes a "thrift holding company" subject to
registration, examination and regulation as a thrift holding company. Under
federal law (as well as the regulations referred to below) the term "savings
association" includes state and federally chartered SAIF-insured institutions
and federally chartered thrift institutions whose accounts are insured by the
FDIC's Bank Insurance Fund and holding companies thereof.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25 percent of any class of
voting stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
ten percent of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors", constitutes a
rebuttable determination of control under the regulations. Such control factors
include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The regulations provide that persons or companies which
acquire beneficial ownership exceeding ten percent or more of any class of a
savings association's stock must file with the OTS a certification form that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
Under applicable OTS regulations, however, FUNC is only required to provide
notice of the Merger to the OTS, 30 days prior to the Effective Date since
Columbia will merge directly into FUNB-VA pursuant to the Merger Agreement.
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. In addition, North Carolina has a Tender Offer
Disclosure Act, which contains certain prohibitions against deceptive practices
in connection with making a tender offer and also contains a filing requirement
with the North Carolina Secretary of State that has been held unenforceable as
to its 30-day waiting period.
DISSENTERS' OR APPRAISAL RIGHTS
COLUMBIA. The rights of appraisal of dissenting stockholders of Columbia
are governed by federal regulations applicable to federally chartered savings
banks. Pursuant thereto, except as described below, any stockholder has the
right to demand payment of the fair or appraised value of such holder's stock in
the event that Columbia enters into any combination permissible for a federally
chartered savings bank, including permissible mergers, consolidations and bulk
purchases of assets or assumptions of deposit liabilities. No appraisal rights
are available to a stockholder who is required to accept only "qualified
consideration" (cash, shares of stock of any association or corporation that, at
the effective date of the combination, would be listed on a national securities
exchange or quoted on the Nasdaq National Market or any combination of such cash
and stock) for such holder's stock, if that stock were listed on a national
securities exchange or quoted on the Nasdaq National Market on the date of the
meeting at which the combination was acted upon or if the combination is one of
a specified type for which stockholder action is not required. Because Columbia
Common Stock currently is quoted on the Nasdaq National Market, stockholders of
Columbia generally do not have appraisal rights in the event of any combination
involving Columbia, unless those stockholders are required to accept something
other than "qualified consideration" for the Columbia Common Stock. Since FUNC
Common Stock is listed on the NYSE, it will be "qualified consideration".
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.
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DIVIDENDS AND OTHER DISTRIBUTIONS
COLUMBIA. OTS regulations impose various restrictions or requirements on
savings associations with respect to their ability to pay dividends or make
other distributions of capital. OTS regulations prohibit a savings association
from declaring or paying any dividends or from repurchasing any of its stock if,
as a result, the regulatory capital of the savings association would be reduced
below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit savings associations,
based on their capital level and supervisory condition, to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital account.
Generally, Tier 1 associations, which are savings associations that before
and after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100 percent of net income for the year-to-date plus 50 percent of
the amount by which the lesser of the association's tangible, core or risk-based
capital exceeds its fully phased-in capital requirement for such capital
component, as measured at the beginning of the calendar year, or the amount
authorized for a Tier 2 association. However, a Tier 1 association deemed to be
in need of more than normal supervision by the OTS may be downgraded to a Tier 2
or Tier 3 association as a result of such a determination. Tier 2 associations
(such as Columbia), which are savings associations that before and after the
proposed distribution meet their current minimum capital requirements, may make
capital distributions of up to 75 percent of net income over the most recent
four quarter period.
Tier 3 associations (which are savings associations that do not meet
current minimum capital requirements) that propose to make any capital
distribution and Tier 2 associations that propose to make a capital distribution
in excess of the noted safe harbor level must obtain OTS approval prior to
making such distribution. Tier 2 associations proposing to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution. The OTS may object to the distribution during
that 30-day period based on safety and soundness concerns.
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. Accordingly, the limitations on dividends of FUNC are
generally less restrictive than the limitations applicable to Columbia. See
"FUNC -- Certain Regulatory Considerations; PAYMENT OF DIVIDENDS" and
"DESCRIPTION OF FUNC CAPITAL STOCK".
VOLUNTARY DISSOLUTION
COLUMBIA. Under federal law, voluntary dissolution of a stock savings
association or savings bank requires the adoption of a resolution by a majority
of the members of the board of directors and the affirmative vote of the holders
of a majority of the outstanding shares of capital stock entitled to vote
thereon.
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 Columbia 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 Columbia or FUNC. The Merger
Agreement provides that Columbia will use its best efforts to obtain from each
holder of Columbia Common Stock who is deemed by Columbia to be an affiliate
an agreement with FUNC prior to the date of this Prospectus/Proxy Statement
providing, among other things, that such affiliate will not transfer any FUNC
Common Shares received by such affiliate in the Merger except in compliance
with the Securities Act. This Prospectus/Proxy Statement does not cover any
resales of FUNC Common Shares received by affiliates of Columbia. See "THE
MERGER-Exchange of Columbia Certificates".
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ADDITIONAL MATTERS
From time to time FUNC and its subsidiaries (including FUNB-VA, FUNB-MD and
FUNB-DC) have entered into transactions with certain of the directors of
Columbia and their affiliates in the ordinary course of business, including,
without limitation, maintaining deposit and lending relationships.
VALIDITY OF FUNC COMMON SHARES
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.
EXPERTS
The consolidated balance sheets of Columbia as of September 30, 1994 and
1993, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1994, included in Columbia's 1994 Annual Report to Stockholders which is
incorporated by reference in Columbia's 1994 Annual Report on Form 10-K and
incorporated by reference herein, have been incorporated by reference 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. The aforementioned report of KPMG
Peat Marwick LLP covering Columbia's consolidated financial statements refers to
a change in the method of accounting for income taxes in 1994.
The consolidated balance sheets of FUNC as of December 31, 1994 and 1993,
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, 1994, included in FUNC's 1994 Annual Report to Stockholders which
is incorporated by reference in FUNC's 1994 Annual Report on Form 10-K and
incorporated by reference herein, have been incorporated by reference 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. The aforementioned report of KPMG
Peat Marwick LLP covering FUNC's consolidated financial statements refers to a
change in the method of accounting for investments in 1994.
The consolidated statements of condition of FFB as of December 31, 1994 and
1993, 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, 1994, included in FFB's 1994 Annual Report on Form
10-K and incorporated by reference herein, have been incorporated by reference
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. The aforementioned
report of KPMG Peat Marwick LLP covering FFB's consolidated financial statements
refers to changes in the methods of accounting for income taxes, postretirement
benefits other than pensions, postemployment benefits, and investments in 1993.
OTHER MATTERS
Any Columbia stockholder who wishes to present a proposal for inclusion in
the proxy materials for Columbia's 1996 Annual Meeting of Stockholders (in the
event the Merger is not consummated prior to such meeting) must comply with the
rules and regulations of the OTS then in effect. As disclosed in Columbia's
proxy statement for its 1995 Annual Meeting of Stockholders, any such proposal
must have been received by Columbia no later than August 30, 1995.
As of the date of this Prospectus/Proxy Statement, the Columbia 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
Special Meeting or any adjournments or postponements 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
INFORMATION FOR COLUMBIA
<TABLE>
<S> <C>
Certain Financial and Other Information for the Year Ended September 30, 1994...................................... A-2
Certain Financial and Other Information for the Quarter Ended June 30, 1995........................................ A-57
</TABLE>
A-1
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks........................................................................... $ 24,328 $ 13,641
Interest-bearing deposits with other banks........................................................ 10,754 1,592
Loans held for sale............................................................................... 3,164 40,374
Investment securities, market values of $140,675 and $121,487 at September 30, 1994 and 1993,
respectively.................................................................................... 144,588 120,909
Mortgage-backed securities, market values of $459,843 and $751,536 at September 30, 1994 and 1993,
respectively.................................................................................... 471,452 736,777
Loans, net of unearned income..................................................................... 2,155,381 1,439,854
Allowance for loan losses....................................................................... (15,949) (17,889)
Net loans....................................................................................... 2,139,432 1,421,965
Accrued interest receivable....................................................................... 16,486 15,345
Real estate owned................................................................................. 12,758 17,936
Office properties and equipment, net.............................................................. 11,397 10,842
Excess cost over net tangible assets acquired..................................................... 7,275 12,820
Prepaid expenses and other assets................................................................. 6,814 5,268
Total assets.................................................................................... $2,848,448 $2,397,469
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing............................................................................. $ 28,905 $ 14,241
Interest-bearing................................................................................ 1,435,192 1,341,490
Total deposits.................................................................................. 1,464,097 1,355,731
Securities sold under agreements to repurchase.................................................... 271,091 49,595
Advances from Federal Home Loan Bank of Atlanta................................................... 917,480 791,737
Other borrowings.................................................................................. 25,282 37,030
Advance payments by borrowers for taxes and insurance............................................. 8,924 5,043
Accrued interest payable.......................................................................... 7,806 4,531
Accrued expenses and other liabilities............................................................ 21,545 33,504
Total liabilities............................................................................... 2,716,225 2,277,171
STOCKHOLDERS' EQUITY
Common stock $.01 par 12,500,000 shares authorized; 3,701,407 and 3,667,607 shares issued and
outstanding, at September 30, 1994 and 1993, respectively....................................... 37 37
Additional paid-in capital........................................................................ 58,626 58,273
Retained earnings, substantially restricted....................................................... 73,560 61,988
Total stockholders' equity...................................................................... 132,223 120,298
Total liabilities and stockholders' equity...................................................... $2,848,448 $2,397,469
</TABLE>
See accompanying notes to consolidated financial statements.
A-2
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Interest income
Loans..................................................................................... $ 117,940 $108,618 $119,042
Mortgage-backed securities................................................................ 32,287 41,046 47,112
Investment securities..................................................................... 6,901 6,220 6,151
Interest-bearing deposits with other banks................................................ 450 322 675
Federal funds sold........................................................................ -- -- 79
Total interest income................................................................. 157,578 156,206 173,059
Interest expense
Deposit accounts.......................................................................... 55,379 58,463 75,175
Borrowings................................................................................ 49,746 40,262 46,474
Total interest expense................................................................ 105,125 98,725 121,649
Net interest income................................................................... 52,453 57,481 51,410
Provision for loan losses................................................................... 2,010 5,055 13,282
Net interest income after provision for loan losses................................... 50,443 52,426 38,128
Noninterest income
Service charges on deposit accounts....................................................... 2,408 2,068 1,597
Fees and charges on loan accounts......................................................... 1,169 1,190 1,541
Gain on sale of assets, net............................................................... 5,245 6,825 5,679
Miscellaneous............................................................................. 2,192 1,989 2,601
Total noninterest income.............................................................. 11,014 12,072 11,418
Noninterest expense
Personnel................................................................................. 19,732 18,321 16,126
Occupancy and equipment................................................................... 8,928 8,481 7,982
Deposit insurance premium................................................................. 3,578 2,870 2,735
Amortization of excess cost over net tangible assets acquired............................. 5,851 2,582 2,878
Real estate owned -- Net costs of operations.............................................. 2,576 1,750 1,903
-- Provision for losses................................................. 287 3,590 2,910
Data processing........................................................................... 2,005 1,686 1,532
Marketing................................................................................. 1,797 1,647 989
Other..................................................................................... 4,520 4,438 3,787
Total noninterest expense............................................................... 49,274 45,365 40,842
Income before income taxes and extraordinary items...................................... 12,183 19,133 8,704
Income tax expense.......................................................................... 6,094 9,034 2,806
Net income before extraordinary items................................................... 6,089 10,099 5,898
Extraordinary items
Loss on extinguishment of debt, net of income tax benefit of $(11), $(59) for the
periods shown, respectively............................................................ -- (18) (95)
Effect of change in method of accounting for income taxes............................... 5,483 -- --
Net income........................................................................ $ 11,572 $ 10,081 $ 5,803
Earnings per share
Primary:
Net income before extraordinary items..................................................... $ 1.62 $ 2.94 $ 1.87
Extraordinary items:
Loss on extinguishment of debt, net of income taxes..................................... -- -- (.03)
Effect of change in method of accounting for income taxes............................... 1.46 -- --
Net income............................................................................ $ 3.08 $ 2.94 $ 1.84
Fully-diluted:
Net income before extraordinary items..................................................... $ 1.62 $ 2.78 $ 1.76
Extraordinary items:
Loss on extinguishment of debt, net of income taxes..................................... -- -- (.03)
Effect of change in method of accounting for income taxes............................... 1.46 -- --
Net income............................................................................ $ 3.08 $ 2.78 $ 1.73
</TABLE>
See accompanying notes to consolidated financial statements.
A-3
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, September 30, 1991................................................... $ 30 $ 44,496 $ 46,104 $ 90,630
Net income.................................................................... -- -- 5,803 5,803
Common stock issued under stock option plan................................... -- 10 -- 10
Sale of 241,546 shares of common stock........................................ 3 5,179 -- 5,182
Balance, September 30, 1992................................................... 33 49,685 51,907 101,625
Net income.................................................................... -- -- 10,081 10,081
Common stock issued under stock option plan................................... -- 177 -- 177
Conversion of subordinated debentures to 391,380 shares of
common stock................................................................ 4 8,411 -- 8,415
Balance, September 30, 1993................................................... 37 58,273 61,988 120,298
Net income.................................................................... -- -- 11,572 11,572
Common stock issued under stock option plan................................... -- 353 -- 353
Balance, September 30, 1994................................................... $ 37 $ 58,626 $ 73,560 $ 132,223
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income.............................................................................. $ 11,572 $ 10,081 $ 5,803
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan losses............................................................. 2,010 5,055 13,282
Depreciation and amortization......................................................... 2,280 2,138 1,809
Accretion of loan fees................................................................ (4,743) (6,318) (4,437)
Net amortization of premium/discount on mortgage-backed securities.................... 3,570 5,209 3,498
Amortization of excess cost over net tangible assets acquired......................... 5,851 2,582 2,878
FHLB of Atlanta stock dividend........................................................ (1,017) (2,117) (2,280)
Decrease (increase) in loans held for sale............................................ 37,210 (5,196) (21,409)
Decrease (increase) in accrued interest receivable.................................... (1,141) 2,664 2,913
Decrease (increase) in prepaid expenses and other assets.............................. (1,546) (1,095) 807
Increase (decrease) in accrued expenses and other liabilities......................... (11,959) 1,122 5,151
Increase (decrease) in accrued interest payable....................................... 3,275 (2,358) (4,088)
Gain on sale of assets, net........................................................... (5,245) (6,825) (5,679)
Loss on debt retirement............................................................... -- 29 154
Provision for losses on real estate owned............................................. 287 3,590 2,910
Net cash provided by operating activities........................................... 40,404 8,561 1,312
INVESTING ACTIVITIES
Purchase of insurance accounts........................................................ (306) -- --
Redemption of FHLB stock.............................................................. 2,821 -- --
Purchase of FHLB stock................................................................ (7,642) (2,722) --
Decrease (increase) in interest-bearing deposits with other banks..................... (9,162) 7,483 22,288
Proceeds from the repayment and maturity of investment securities..................... 34,600 40,494 32,273
Purchases of investment securities.................................................... (52,489) (50,510) (44,185)
Net decrease in federal funds sold.................................................... -- -- 5,000
Principal collected on loans.......................................................... 337,923 334,284 334,200
Principal collected on mortgage-backed securities..................................... 143,320 159,992 152,790
Purchases of mortgage-backed securities............................................... (61,452) (246,909) (430,588)
Proceeds from sale of mortgage-backed securities...................................... 180,469 77,582 83,683
Proceeds from sale of loans........................................................... 179,038 292,170 222,296
Loans originated or acquired.......................................................... (1,235,080) (711,815) (636,767)
Capitalized costs of real estate owned................................................ (3,170) (4,525) (1,454)
Proceeds from sale of real estate owned............................................... 16,193 23,344 9,799
Purchase of office properties and equipment........................................... (2,955) (2,099) (1,828)
Proceeds from sale of office properties and equipment................................. 84 5 36
Net cash used by investing activities............................................... (477,808) (83,226) (252,457)
FINANCING ACTIVITIES
Increase in advance payments by borrowers for taxes and insurance..................... 3,881 750 194
Net increase in deposits.............................................................. 108,366 3,892 112,428
Net increase (decrease) in securities sold under agreements to repurchase............. 221,496 (62,742) 109,764
Proceeds from advances from FHLB of Atlanta........................................... 1,388,903 799,246 500,264
Repayment of advances from FHLB of Atlanta............................................ (1,263,160) (659,008) (402,450)
Repayment of other borrowings......................................................... (11,748) (11,648) (11,780)
Repurchase of collateralized floating rate notes...................................... -- -- (60,000)
Repurchase of convertible subordinated debentures..................................... -- (430) (402)
Proceeds from issuance of common stock................................................ 353 177 5,192
Net cash provided by financing activities........................................... 448,091 70,237 253,210
Increase (decrease) in cash......................................................... 10,687 (4,428) 2,065
Cash at beginning of year........................................................... 13,641 18,069 16,004
Cash at end of year................................................................. $ 24,328 $ 13,641 $ 18,069
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
SUPPLEMENTAL DISCLOSURE OF INFORMATION
1. Columbia First Bank, a Federal Savings Bank (the Bank) made income tax
payments of $3.8 million, $9 million, and $5.9 million during the years
ended September 30, 1994, 1993 and 1992, respectively.
2. The Bank paid $101.9 million, $101 million and $126 million in interest
on deposits and borrowings during the years ended September 30, 1994,
1993 and 1992, respectively.
3. The conversion of $8.4 million of subordinated debentures, net of $297
thousand in unamortized issuance costs which were written off and $282
thousand in accrued interest expense which was reversed, resulted in an
$8.4 million increase to stockholders' equity during the year ended
September 30, 1993.
4. Additions to real estate acquired in settlement of loans through
foreclosure were $8.8 million, $9.5 million and $9.1 million during the
years ended September 30, 1994, 1993 and 1992, respectively.
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following comprise the significant accounting policies which Columbia
First Bank, a Federal Savings Bank, and its subsidiaries follow in preparing and
presenting its consolidated financial statements:
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Columbia
First Bank, a Federal Savings Bank and its wholly owned subsidiaries. Following
is a summary of each wholly owned subsidiary and its primary business activity:
<TABLE>
<CAPTION>
SUBSIDIARY PRIMARY BUSINESS ACTIVITY
<S> <C>
Columbia First Insurance Services, Inc. Sales of multiple lines of insurance to the public
(Prior to September 27, 1993 Home Service Insurance
Agency, Inc.)
CFF Financial Corporation Finance subsidiary
CFS Appraisal Corporation (inactive April 1, 1992) Real estate appraisal
Century Financial Corporation ATM network investment
</TABLE>
All significant intercompany balances and transactions have been
eliminated.
(B) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and the evaluation of real estate
acquired in connection with foreclosures or in satisfaction of loans. Actual
results could differ significantly from those estimates. In addition, the
regulatory agencies which supervise the financial services industry periodically
review the Bank's allowance for losses on loans. This review, which is an
integral part of their examination process, may result in additions to the
allowance for losses based on judgments in regards to available information
provided at the time of their examinations.
(C) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Securities are carried at cost, adjusted for amortization of premium and
accretion of discount using methods which approximate the interest method over
the term of each security. The Bank has the ability and intends to hold the
securities to maturity for long-term investment purposes, subject to the Bank's
investment policy, and accordingly they are not adjusted for temporary declines
in market values. Gains or losses on sales are recognized at the time of such
sales and the determination of cost of such securities sold is based upon the
specific identification method.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115) establishes
standards of financial accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. SFAS No. 115, which was issued in May 1993, significantly
changes the investment classification methodology used within the Consolidated
Balance Sheets, as well as the measurement and recognition of fluctuations in
the investment's fair value. Management has adopted SFAS No. 115 prospectively,
as of October 1, 1994, and the effects of the adoption are not included in the
Consolidated Balance Sheets as of September 30, 1994. Upon adoption of SFAS
No.115, $151.8 million of mortgage-backed securities were reclassified as
"available-for-sale", and stockholders' equity was reduced by approximately $.9
million, which represents the tax effected unrealized loss of approximately $1.4
million on the mortgage-backed securities which were reclassifed as "available
for sale" at October 1, 1994. There were no securities classified by management
upon the implementation of SFAS No. 115 as "trading account" securities, which
would have required a valuation at lower of cost or fair value to be reflected
in the Consolidated Statements of Income.
A-7
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- Continued
(D) LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or estimated
market value, as determined by outstanding commitments from investors or current
investor yield requirements as calculated on an aggregate loan basis.
(E) ALLOWANCE FOR LOAN LOSSES
The loan portfolio is carried at cost and reviewed by management on a
monthly basis and provisions for estimated losses on loans, if any, are charged
to earnings in the current period. In this review, particular attention is paid
to delinquent loans, loans under foreclosure and, when collectibility is in
doubt, any loans where there is evidence of a decline in the market value of the
underlying security to less than the related loan balance. The allowance and
provision for loan losses are based on several factors, including continuing
examinations and appraisals of the loan portfolio by the Bank's loan review
department; examinations by supervisory authorities; continuing reviews of
problem loans and overall portfolio quality; analytical reviews of loan loss
experience in relation to outstanding loans; and management's judgment with
respect to economic conditions and its impacts on the existing loan portfolio.
(F) NONPERFORMING/UNDERPERFORMING ASSETS
Nonperforming/underperforming assets consist of loans on which interest is
no longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate acquired
by foreclosure and real estate upon which deeds in lieu of foreclosure have been
accepted. Interest previously accrued but not collected on nonaccrual loans is
reversed against current income when a loan is placed on a nonaccrual basis.
Accretion of deferred fees is discontinued for nonaccrual loans.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS No. 114) was issued in May 1993. SFAS
No. 114 requires that impaired loans be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures" (SFAS No. 118) was issued in October
1994. SFAS No. 118 amends the disclosure requirements of SFAS No. 114 to require
information about the recorded investment in certain impaired loans, and about
how a creditor recognizes interest income related to those impaired loans.
Management has analyzed the impact that SFAS No. 114 and SFAS No. 118 would have
on Columbia First's Consolidated Balance Sheets and Statements of Income, and
has concluded that, if adopted as of September 30, 1994, there would not be an
adverse impact on the financial condition or results of operations. SFAS No. 114
and SFAS No. 118 are required to be implemented for the year ended September 30,
1996.
(G) REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded on the date acquired
at the lower of cost or fair value. Losses estimated at the time of acquisition
are charged to the Allowance for Loan Losses. Subsequent writedowns are charged
to current earnings if a determination is made that further impairment in the
value of the real estate has occurred. Gains, if any, on sales of such real
estate owned are recognized upon disposition of the property. Loans secured by
property on which there is an indication that the borrower no longer has the
ability to repay the loan and it is doubtful that equity will be rebuilt in the
foreseeable future are classified as "in-substance foreclosures." In-substance
foreclosures are recorded as though foreclosure had taken place at the date of
the Consolidated Balance Sheets.
A-8
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- Continued
(H) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<CAPTION>
ESTIMATED LIFE
<S> <C>
Office buildings....................................................................... 30-50 years
Furniture, fixtures and equipment...................................................... 3-10 years
Leasehold improvements................................................................. Life of lease
Vehicles............................................................................... 3 years
</TABLE>
(I) LOAN FEES, DISCOUNTS AND PREMIUMS
The Bank defers loan origination and commitment fees net of certain direct
loan origination costs, and the net deferred fees are accreted into interest
income using a method which approximates the interest method over future periods
as yield adjustments. Premiums and discounts on loans purchased are amortized or
accreted, respectively, into income using a method which approximates the
interest method.
(J) INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) was issued in February 1992 and it significantly changes
accounting practices for the computation of income tax expense. This statement
requires, among other things, that deferred taxes be stated based on the
cumulative temporary differences between the financial reporting and income tax
basis of Columbia First's assets and liabilities at the income tax rate that
will be in effect when the deferred taxes are expected to be paid. Columbia
First adopted SFAS No. 109 during the fiscal quarter ended December 31, 1993,
and the adoption resulted in a reduction of the net deferred tax liability by
approximately $5.5 million, or $1.46 per share. This amount is reported
separately as the cumulative effect of the change in the method of accounting
for income taxes in the Consolidated Statements of Income for the year ended
September 30, 1994.
Prior to the adoption of SFAS No. 109, a provision for deferred income
taxes was made for revenues and expenses in the consolidated financial
statements that were reported in different periods for tax purposes than for
financial reporting purposes.
(K) EARNINGS PER SHARE
The weighted average number of common shares outstanding is used in the
calculation of primary earnings per common share. The weighted average number of
common shares including common stock equivalents was 3,760,803, 3,434,013 and
3,154,398 for the years ended September 30, 1994, 1993 and 1992, respectively.
Fully diluted earnings per share give effect to the contingent issuance of
common shares on the convertible subordinated debentures, which were redeemed
during the year ended September 30, 1993, and the effect of stock options and
stock purchase agreements.
(L) RECLASSIFICATIONS
Certain reclassifications of prior years' information have been made to
conform with the 1994 presentation.
(2) BUSINESS COMBINATIONS
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition, and the resulting premiums and discounts
are being amortized or accreted over the estimated remaining lives of the
underlying assets and liabilities.
The excess cost over the fair value of the net tangible assets acquired and
the specifically identified intangible assets arising from each of the
transactions has been reflected as "excess cost over net tangible assets
acquired" ("goodwill") in the accompanying Consolidated Balance Sheets. The
various components are being amortized over periods, from four to twenty-
A-9
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) BUSINESS COMBINATIONS -- Continued
five years, using the interest method or on a straight-line basis in the
accompanying Consolidated Statements of Income. Total unamortized excess cost
over net tangible assets acquired was $7.3 million and $12.8 million at
September 30, 1994 and 1993, respectively.
Management completed a reevaluation of the underlying assumptions within
the amortization of goodwill and the marketplaces in which Columbia First
transacts business during the year ended September 30, 1994. The result of this
reevaluation was the writeoff of approximately $4.3 million in goodwill. This
goodwill originated during three acquisitions in prior fiscal years, and
generally related to the assets acquired and the liabilities assumed in these
transactions. Management determined that a significant portion of the underlying
assets and liabilities were no longer outstanding, and the writeoff of the
related goodwill asset was considered appropriate. Management also reevaluated
certain branch locations, the acquisition of which had resulted in the original
recognition of goodwill. In addition to the above noted writeoff, Columbia First
accelerated the writeoff of approximately $.4 million in goodwill as a result of
this reevaluation.
(3) INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
United States Government and agency obligations due:
12 months or less............................................ $ 14,143 $-- $ (92) $ 14,051
Beyond 12 months, but within 5 years......................... 74,439 -- (3,145) 71,294
Beyond 5 years, but within 10 years.......................... 10,131 -- (676) 9,455
Federal Home Loan Bank stock, at cost.......................... 45,875 -- -- 45,875
$ 144,588 $-- $ (3,913) $ 140,675
<CAPTION>
WEIGHTED
AVERAGE
INTEREST RATE
<S> <C>
United States Government and agency obligations due:
12 months or less............................................ 4.95%
Beyond 12 months, but within 5 years......................... 5.02
Beyond 5 years, but within 10 years.......................... 5.81
Federal Home Loan Bank stock, at cost.......................... 5.00
5.06%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
United States Government and agency obligations due:
12 months or less............................................ $ 17,039 $ 169 $ -- $ 17,208
Beyond 12 months, but within 5 years......................... 53,601 375 (32) 53,944
Beyond 5 years, but within 10 years.......................... 10,232 66 -- 10,298
Federal Home Loan Bank stock, at cost.......................... 40,037 -- -- 40,037
$ 120,909 $ 610 $ (32) $ 121,487
<CAPTION>
WEIGHTED
AVERAGE
INTEREST RATE
<S> <C>
United States Government and agency obligations due:
12 months or less............................................ 6.23%
Beyond 12 months, but within 5 years......................... 4.85
Beyond 5 years, but within 10 years.......................... 5.79
Federal Home Loan Bank stock, at cost.......................... 5.00
5.17%
</TABLE>
There was a loss of $73 thousand on the sale of investment securities
during the year ended September 30, 1994. There were no sales of investment
securities for the years ended September 30, 1993 and 1992.
The book and market values of pledged securities for outstanding borrowings
at September 30, 1994 were $57.4 million and $56.7 million, respectively, and
$52.6 million and $52.7 million at September 30, 1993, respectively. The pledged
securities are primarily used as collateral for the Bank's advances from Federal
Home Loan Bank of Atlanta and securities sold under agreements to repurchase.
See notes 9 and 10.
Accrued interest receivable on investment securities totaled $2 million and
$1.4 million at September 30, 1994 and 1993, respectively.
A-10
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLMC participation certificates............................... $ 199,386 $ 223 $ (3,198) $ 196,411
GNMA mortgage-backed securities................................ 129,653 20 (5,040) 124,633
FNMA mortgage-backed securities................................ 89,899 -- (1,860) 88,039
Collateralized mortgage obligations............................ 52,514 -- (1,754) 50,760
$ 471,452 $ 243 $(11,852) $ 459,843
<CAPTION>
WEIGHTED
AVERAGE
INTEREST RATE
<S> <C>
FHLMC participation certificates............................... 5.46%
GNMA mortgage-backed securities................................ 5.13
FNMA mortgage-backed securities................................ 5.05
Collateralized mortgage obligations............................ 5.14
5.26%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLMC participation certificates............................... $ 416,461 $ 9,234 $ (33) $ 425,662
GNMA mortgage-backed securities................................ 147,895 4,110 -- 152,005
FNMA mortgage-backed securities................................ 136,364 1,597 (147) 137,814
Collateralized mortgage obligations............................ 36,057 57 (59) 36,055
$ 736,777 $ 14,998 $ (239) $ 751,536
<CAPTION>
WEIGHTED
AVERAGE
INTEREST RATE
<S> <C>
FHLMC participation certificates............................... 5.21%
GNMA mortgage-backed securities................................ 4.47
FNMA mortgage-backed securities................................ 4.39
Collateralized mortgage obligations............................ 4.89
4.88%
</TABLE>
Net gains on sales of mortgage-backed securities were $.6 million, $2
million and $2 million for the years ended September 30, 1994, 1993, and 1992,
respectively. Gross gains of $2 million, $2 million and $2.2 million,
respectively, were offset by gross losses of $1.4 million, $31 thousand and $.2
million, respectively, for the years ended September 30, 1994, 1993 and 1992.
The book and market values of pledged mortgage-backed securities for
outstanding borrowings at September 30, 1994 were $420.2 million and $410.1
million, respectively, and $714.3 million and $728.9 million at September 30,
1993, respectively. The pledged mortgage-backed securities are primarily used as
collateral for the Bank's advances from Federal Home Loan Bank of Atlanta,
securities sold under agreements to repurchase and other borrowings. See notes
9, 10 and 11.
Proceeds from the sale of mortgage-backed securities were $180.5 million,
$77.6 million and $83.7 million for the years ended September 30, 1994, 1993 and
1992, respectively.
Accrued interest receivable on mortgage-backed securities totaled $3.4
million and $5.9 million at September 30, 1994 and 1993, respectively.
The contractual maturity of mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
NET NET
UNREALIZED UNREALIZED
BOOK MARKET GAINS/ BOOK MARKET GAINS/
VALUE VALUE (LOSSES) VALUE VALUE (LOSSES)
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
After 1 year through 5 years........................ $ 4,509 $ 4,275 $ (234) $ 5,248 $ 5,312 $ 64
After 5 years through 10 years...................... 2,906 2,790 (116) 1,373 1,421 48
After 10 years...................................... 464,037 452,778 (11,259) 730,156 744,803 14,647
$471,452 $459,843 $(11,609) $736,777 $751,536 $ 14,759
</TABLE>
A-11
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Real Estate:
Permanent............................................................... $1,992,870 $1,303,106
Construction............................................................ 38,365 34,885
Commercial................................................................ 111,165 95,333
Consumer.................................................................. 14,594 11,610
2,156,994 1,444,934
Less:
Unearned income......................................................... 1,613 5,080
Allowance for loan losses............................................... 15,949 17,889
$2,139,432 $1,421,965
</TABLE>
At September 30, 1994 and 1993, amounts due borrowers on loans in process
were $53.1 million and $43.5 million, respectively. At September 30, 1994 and
1993, loans in the amount of $1.5 billion and $.3 billion, respectively, were
pledged as collateral for advances at the Federal Home Loan Bank of Atlanta.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of year........................................... $17,889 $18,946 $11,174
Provision for loan losses.......................................... 2,010 5,055 13,282
Charge-offs........................................................ (4,776) (6,222) (6,814)
Recoveries......................................................... 826 110 1,304
Balance, end of year................................................. $15,949 $17,889 $18,946
</TABLE>
At September 30, 1994 and 1993, the Bank had $3.4 million and $6 million in
nonaccrual loans, respectively. At September 30, 1994 and 1993, the Bank had
$7.7 million and $11 million in restructured loans, respectively.
There were no material commitments to lend additional funds to customers
whose loans were classified as nonaccrual or restructured at September 30, 1994.
The effect of nonaccrual loans and restructured loans on interest income is
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Expected interest income................................................... $547 $1,237 $2,929
Actual interest income..................................................... 167 213 1,435
Reduction in interest income............................................... $380 $1,024 $1,494
</TABLE>
Net gains on sales of loans were $3 million, $4.9 million and $3.7 million
for the years ended September 30, 1994, 1993 and 1992, respectively. Net gains
from fiscal 1994, 1993 and 1992, resulted from the sale of loans originated as
held for sale.
Accrued interest receivable on loans totaled $11.1 million and $8 million
at September 30, 1994 and 1993, respectively.
At September 30, 1994 and 1993, loans receivable were predominantly to
borrowers located in the Washington, D.C. metropolitan area.
The amount of loans serviced for others totaled $136 million, $183.3
million and $250 million as of September 30, 1994, 1993 and 1992, respectively.
A-12
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) REAL ESTATE OWNED
Real estate owned consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Foreclosed property............................................................ $ 9,782 $ 9,794
In-substance foreclosure....................................................... 2,976 8,142
$12,758 $17,936
</TABLE>
Net gains (losses) recognized on the sale of real estate owned were $1.8
million, $(27) thousand and $75 thousand for the years ended September 30, 1994,
1993 and 1992, respectively.
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at cost less accumulated depreciation and
amortization are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Land........................................................................... $ 2,017 $ 1,390
Office buildings............................................................... 3,528 2,614
Furniture, fixtures and equipment.............................................. 10,024 9,843
Leasehold improvements......................................................... 7,892 7,331
Vehicles....................................................................... 111 111
23,572 21,289
Less accumulated depreciation and amortization................................. 12,175 10,447
$11,397 $10,842
</TABLE>
Net losses on disposition of office properties and equipment were $36
thousand, $7 thousand and $58 thousand for the years ended September 30, 1994,
1993 and 1992, respectively.
(8) DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE % AMOUNT RATE %
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Savings accounts....................................... $ 115,299 3.00% 8% $ 113,787 3.00% 8%
Checking accounts...................................... 131,264 2.15 9 102,731 2.38 8
Money market deposit accounts.......................... 347,946 3.20 24 406,320 3.23 30
Total demand deposits................................ 594,509 2.93 41 622,838 3.05 46
Time deposits.......................................... 869,588 4.94 59 732,893 4.83 54
Total deposit accounts............................... $1,464,097 4.12% 100% $1,355,731 4.01% 100%
</TABLE>
Jumbo deposits, which are those accounts exceeding $100,000 and are
included in time deposits, were $130.6 million and $111 million at September 30,
1994 and 1993, respectively. The Bank has not sought deposits in institutional
brokerage programs and does not pay any fees to deposit brokers.
A-13
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) DEPOSIT ACCOUNTS -- Continued
Time deposits mature as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE %
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Within 12 months....................................................... $461,305 4.44% 53%
12-24 months........................................................... 235,946 5.38 27
25-36 months........................................................... 66,671 5.70 8
37-48 months........................................................... 44,711 5.50 5
49-60 months........................................................... 59,894 5.76 7
Beyond 60 months....................................................... 1,061 8.19 --
$869,588 4.94% 100%
</TABLE>
Interest expense on deposit accounts consisted of the following for each of
the years ended September 30:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Savings accounts..................................................... $ 3,520 $ 3,754 $ 5,007
Checking accounts.................................................... 2,706 2,400 2,761
Money market deposit accounts........................................ 13,014 13,722 14,560
Time deposits........................................................ 36,139 38,587 52,847
$55,379 $58,463 $75,175
</TABLE>
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of the securities sold under agreements to repurchase follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase mortgage-backed securities with
book values including accrued interest of $278.9 million and $39.2 million and
market values of $271.2 million and $40.1 million at September 30, 1994 and
1993, respectively............................................................. $256,534 5.05% $38,166 3.25%
Repo sweep account agreements.................................................... 14,557 4.56 11,429 3.01
$271,091 5.02% $49,595 3.20%
</TABLE>
The bank enters into sales of securities under agreements to repurchase
("agreements"). Fixed-coupon agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as liabilities on the
Consolidated Balance Sheets. The dollar amount of securities underlying the
agreements remains in the asset accounts. These agreements mature within one
year. The mortgage-backed certificates underlying the agreements were delivered
to the dealers with whom the transactions were arranged. No transactions with
any one dealer exceeded $74.4 million and $38.2 million at September 30, 1994
and 1993, respectively. The dealers may have sold, loaned, or otherwise disposed
of such securities to other parties in the normal course of their operations,
and have agreed to resell to the Bank identical securities at the maturities of
the agreements. Securities sold under agreements to repurchase averaged $115.7
million and $66.5 million during fiscal 1994 and fiscal 1993, respectively, and
the maximum amounts outstanding at any month-end during fiscal 1994 and fiscal
1993 were $256.5 million and $106.3 million, respectively.
A-14
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -- Continued
The Bank offers Repo Sweep Accounts which are treated as borrowings of the
Bank and are represented as liabilities on the Consolidated Balance Sheets. The
agreement states that the amount of the borrowings may not fall below $100,000
at any time, and that these borrowings are to be collateralized with
mortgage-backed securities. In addition, the market values of these securities
may not fall below 105% of the total amount of the borrowings. The securities
pledged pursuant to these agreements are held in safekeeping at the Federal Home
Loan Bank of Atlanta and third party securities dealers, and are segregated as
such on the books and records of the Bank. At September 30, 1994 and 1993, only
agency securities, specifically issues guaranteed by Government National
Mortgage Association, Federal Home Loan Mortgage Corporation and Federal
National Mortgage Association, were used to secure these borrowings. These
securities had book values of $24.3 million and market values of $23.3 million
at September 30, 1994, and book values of $23.1 million and market values of
$24.0 million at September 30, 1993. The annual average outstanding borrowing
under this program during fiscal 1994 and 1993 was $17 million and $9 million,
respectively. The maximum amount outstanding at any month-end during fiscal 1994
and 1993 was $36.2 million and $14.1 million, respectively.
Interest expense on securities sold under agreements to repurchase was $4.9
million, $2.2 million and $2.7 million for the years ended September 30, 1994,
1993 and 1992, respectively. Interest expense on the Repo Sweep program amounted
to $589 thousand, $267 thousand and $141 thousand for the years ended September
30, 1994, 1993 and 1992, respectively.
(10) ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA
A summary of the Bank's borrowings from the Federal Home Loan Bank of
Atlanta follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
WEIGHTED WEIGHTED
MATURING DURING AVERAGE AVERAGE
THE YEAR ENDED INTEREST INTEREST
SEPTEMBER 30, AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1994............................................................................ $ -- -- % $527,500 3.61%
1995............................................................................ 716,000 5.37 151,000 5.38
1996............................................................................ 140,000 5.93 60,000 7.33
1997............................................................................ 20,000 5.97 20,000 5.97
Beyond 1998..................................................................... 41,480 6.30 33,237 6.11
$917,480 5.51% $791,737 4.39%
</TABLE>
At September 30, 1994 and 1993, first mortgage loans, investments and
mortgage-backed securities with aggregate principal balances totaling $1.6
billion and $.9 billion, respectively, were pledged as collateral under a
security agreement to secure the FHLB advances.
Interest expense on advances from the FHLB was $41.3 million, $32.8 million
and $37.1 million for the years ended September 30, 1994, 1993 and 1992,
respectively.
(11) OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
CFF Financial Corporation notes payable, net of discount of $1.0 million
and $1.5 million in 1994 and 1993, respectively.............................. $24,216 $36,288
Other borrowings............................................................... 1,066 742
$25,282 $37,030
</TABLE>
A-15
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) OTHER BORROWINGS -- Continued
On March 20, 1986, CFF Financial Corporation, a finance subsidiary of the
Bank, issued notes payable with a gross balance of $127.5 million, and with an
effective interest rate of 9.16% to Salomon Capital Access Corporation ("Capital
Access"). Capital Access issued collateralized mortgage obligations secured by
the notes issued by CFF Financial. The notes are collateralized by $29.1 million
of FHLMC participation certificates at September 30, 1994. The maturity of the
notes corresponds to the principal repayment of the collateral.
On November 20, 1986, the Bank issued $150 million of collateralized
floating rate notes due in November, 1996. The notes, which were issued in
Europe, were general obligations of the Bank, and required semiannual interest
payments of 1/16th of 1% per annum plus the arithmetic mean of London interbank
offered quotations (LIBOR) for six-month Eurodollar deposits prevailing two
business days before the beginning of each interest period. The notes were
collateralized primarily by mortgage-backed securities, which were deposited
with Bankers Trust Company of New York, the Trustee. The indenture provided the
Trustee with a lien on the pledged property superior to that of the Bank, and in
the event of a deficiency at the time of a default, the note-holders would have
been general creditors of the Bank.
The Bank repurchased $90 million of the notes prior to fiscal 1992. The
Bank retired the remaining $60 million of notes on the semi-annual interest
payment date of November 25, 1991. The retirement of the remaining notes was
funded by a special sub-LIBOR advance from FHLB which has resulted in reduced
borrowing costs for Columbia First. The retirement of the remaining notes at par
resulted in a loss of $134 thousand, net of $83 thousand in income tax benefits,
related to the writeoff of the remaining unamortized issuance costs.
In July 1986, Columbia First issued $27.8 million of convertible
subordinated debentures, which were unsecured obligations of the Bank. The
debentures carried an interest rate of 7.50%, and were convertible at any time,
prior to maturity in 2011 unless previously redeemed, into common stock of the
Bank at a conversion price of $21.50 per share.
The Bank repurchased $18.3 million of the debentures prior to fiscal 1992,
and an additional $200 thousand of the debentures were converted into common
stock prior to fiscal 1992. During the year ended September 30, 1992, the Bank
repurchased $402 thousand of the debentures at a gain of $39 thousand, net of
$24 thousand in income taxes. On May 14, 1993, the Bank announced the June 15,
1993 redemption of the remaining convertible subordinated debentures. During
fiscal 1993 and prior to the announcement, the Bank repurchased $280 thousand of
the debentures. A total of $68 thousand of the debentures were converted into
3,162 shares of common stock prior to the call for redemption. The call for
redemption resulted in the conversion of $8.3 million of the debentures into
388,218 shares of common stock, and a cash payment to retire the remaining $149
thousand of debentures. The cash payment to retire the $149 thousand in
debentures also included a three percent premium and accrued interest through
June 14, 1993. The repurchase, redemption and conversion transactions during the
year ended September 30, 1993 resulted in a loss of $18 thousand, net of $11
thousand in income tax benefits.
Interest expense on other borrowings was $2.9 million, $4.9 million and
$6.5 million for the years ended September 30, 1994, 1993 and 1992,
respectively.
A-16
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) INCOME TAXES
The following is a summary of the provision for income tax expense
(benefit), including income tax on extinguishment of debt:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Year ended September 30, 1994:
Federal income tax expense.................................................................... $5,196 $ 327 $5,523
State and local income tax expense............................................................ 509 62 571
$5,705 $ 389 $6,094
Year ended September 30, 1993:
Federal income tax expense.................................................................... $7,107 $ 705 $7,812
State and local income tax expense............................................................ 1,062 149 1,211
$8,169 $ 854 $9,023
Year ended September 30, 1992:
Federal income tax expense (benefit).......................................................... $2,919 $ (1,434) $1,485
State and local income tax expense............................................................ 1,234 28 1,262
$4,153 $ (1,406) $2,747
</TABLE>
Income tax expense attributable to income from continuing operations was
$6,094, $9,023, and $2,747 for the years ended September 30, 1994, 1993 and
1992, respectively, and differed from the amounts computed by applying the U.S.
federal income tax rate of 35 percent, 34.8 percent and 34 percent,
respectively, to pretax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Computed "expected" tax expense................................................................ $4,264 $ 6,658 $ 2,959
Bad debt deduction............................................................................. -- (2,105) (2,263)
State and local income taxes, net of income tax benefit........................................ 371 784 774
Amortization of excess cost over net tangible assets acquired.................................. 1,512 765 1,436
Gain on sale of loans and amortization of discounts............................................ -- (57) (330)
Provision for loan losses...................................................................... -- 3,014 4,596
Revision of tax provision estimates............................................................ -- -- (3,804)
Other.......................................................................................... (53) (36) (621)
$6,094 $ 9,023 $ 2,747
</TABLE>
A-17
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) INCOME TAXES -- Continued
For the years ended September 30, 1993 and 1992, deferred income tax
expense (benefit) of $854 and $(1,406), respectively, results from timing
differences in the recognition of income and expense for income tax and
financial reporting purposes. The sources and tax effects of those timing
differences are presented below:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Loan origination and commitment fees, deferred for financial statement purposes, recognized on the cash
basis for tax purposes................................................................................... $ 519 $ (997)
FHLB stock dividends, recognized currently for financial statement purposes, deferred for
tax purposes............................................................................................. 820 876
Employee benefit expense recognized on the accrual basis for financial statement purposes, recognized on
the cash basis for tax purposes.......................................................................... (241) 192
Tax loss from limited partnership ownership of main office................................................. 35 107
Revision of tax provision estimates........................................................................ -- (1,568)
Other timing differences................................................................................... (279) (16)
$ 854 $(1,406)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1994 are presented below:
<TABLE>
<S> <C>
Deferred Tax Assets:
Net book reserves for loan losses & doubtful accounts..................................... $ 4,401
Loan fees deferred for book purposes...................................................... 2,884
Compensation expense deferred for tax purposes............................................ 741
Accrued employee retirement expense....................................................... 209
Differences in depreciation of premises and equipment..................................... 375
Intangibles capitalized for tax purposes.................................................. 154
Other 48
Total Gross Deferred Assets................................................................. 8,812
Deferred Tax Liabilities:
FHLB stock dividends deferred for tax purposes............................................ (5,289)
Tax bad debt reserve in excess of base year............................................... (789)
Partnership loss basis difference......................................................... (783)
Prepaid expenses deferred for book purposes............................................... (472)
Other..................................................................................... (235)
Total Gross Deferred Liabilities............................................................ (7,568)
Net deferred tax asset...................................................................... $ 1,244
</TABLE>
(13) BENEFIT PLANS
EMPLOYEE PENSION PLAN
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. The benefits in fiscal 1992 were based on years of
service and average earnings for the 36 highest consecutive months preceding
retirement. Effective October 1, 1992, the plan was amended to calculate
benefits based upon an employee's career average earnings.
A-18
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(13) BENEFIT PLANS -- Continued
The following items are the components of the net pension cost for the
years ended September 30, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Service cost for the period......................................................................... $ 412 $ 189 $ 331
Interest cost on the projected benefit obligation................................................... 369 298 408
Actual return on plan assets........................................................................ (319) (388) (364)
Amortization of unrecognized net obligation......................................................... (146) (119) (16)
Net pension cost (credit)........................................................................... $ 316 $ (20) $ 359
</TABLE>
The pension plan assumed an annual weighted average discount rate of 7%,
6.5% and 9% for the years ended September 30, 1994, 1993 and 1992, respectively.
The weighted average discount rate is used to determine the actuarial present
value of the projected benefit obligation. The annual rate of increase in future
compensation was 5.5% for the years ended September 30, 1994, 1993 and 1992. The
expected long-term annual rate of return on assets was 8.5% for the years ended
September 30, 1994, 1993 and 1992.
At September 30, 1994 and 1993, plan assets consisted of various money
market, equity and fixed income investments administered by a registered
investment advisor.
The following table sets forth the funded status at September 30, 1994 and
1993:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Actuarial present value of accumulated plan benefits:
Vested................................................................................................ $ 4,261 $ 5,074
Non-vested............................................................................................ 347 402
$ 4,608 $ 5,476
Projected benefit obligation for service rendered to date............................................... $(5,100) $(6,010)
Fair value of plan assets............................................................................... 5,214 5,192
Funded status -- Plan assets over (under) projected benefit obligation.................................. 114 (818)
Unrecognized net (gain) loss............................................................................ (239) 890
Unrecognized net transition asset....................................................................... (527) (573)
Unfunded accrued pension cost included as a liability in the Consolidated Balance Sheets................ $ (652) $ (501)
</TABLE>
STOCK OPTION PLANS
The Bank has adopted an employee stock option plan for which 244,662
shares, or 10% of the original number of shares issued, have been reserved. The
plan provides that options may be granted for a term of up to ten years, that no
options may be exercised within two years of the date of the granting of the
option, and that the options can be exercisable in installments. At September
30, 1994, there were 98,254 shares available for grant. The following table
summarizes information on the stock option plan:
A-19
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(13) BENEFIT PLANS -- Continued
<TABLE>
<CAPTION>
AVERAGE PRICE
PER SHARE SHARES
<S> <C> <C>
Outstanding at September 30, 1991................................................................... $ 11.34 113,600
Granted........................................................................................... -- --
Exercised......................................................................................... 10.00 (1,000)
Canceled.......................................................................................... 10.00 (3,300)
Outstanding at September 30, 1992................................................................... 11.40 109,300
Granted........................................................................................... 14.75 4,000
Exercised......................................................................................... 9.72 (18,200)
Canceled.......................................................................................... 10.00 (300)
Outstanding at September 30, 1993................................................................... 11.87 94,800
Granted........................................................................................... 33.50..... 26,593
Exercised......................................................................................... 10.47..... (33,800)
Canceled.......................................................................................... 31.35..... (3,285)
Outstanding at September 30, 1994................................................................... $ 18.49 84,308
Shares exercisable at September 30, 1994............................................................ $ 12.50 56,700
</TABLE>
The Bank adopted in fiscal 1994 the premium price stock option plan for
which 273,493 shares have been reserved. The plan provides that options may be
granted under terms similar to the employee stock option plan described above,
except that options may only be granted with an exercise price of at least 120%
of the market price at the date of grant. At September 30, 1994, there were
124,357 shares available for grant under the premium price stock option plan,
and 149,136 of the reserved shares have been awarded with an exercise price of
$40.20. As of September 30, 1994, no shares had been exercised.
The Bank adopted in fiscal 1994 the contractual stock option plan to meet
the Bank's contractual obligation with an executive officer. The executive
officer had been entitled to options to purchase 25,000 shares at an exercise
price of $17.00 per share and 25,000 shares at an exercise price of $19.00 per
share. The plan provides that options may be exercised for a term of ten years
from the date of the grant. As of September 30, 1994, the options to purchase
the 50,000 shares granted under the contractual stock option plan are
exercisable; however, none had been exercised.
DEFERRED COMPENSATION AGREEMENTS
Columbia First has entered into deferred compensation agreements with
certain individuals, and has purchased life insurance policies to cover the
unfunded liability of the deferred compensation agreements.
OTHER BENEFITS
Columbia First provides certain health care and life insurance benefits to
active employees. The cost of these benefits was $1.2 million, $1.2 million and
$982 thousand for the fiscal years ended September 30, 1994, 1993 and 1992,
respectively. The majority of Columbia First's employees may become eligible for
the continuation of health care coverage if they reach normal retirement age
while working for Columbia First; however, the program is optional and all costs
for retirees' participation in these programs are paid by the retirees. Certain
life insurance benefits are available to retirees; however, the cost of these
benefits is not material. The impact of Statement of Financial Accounting
Standards No. 106, which addresses the accounting for post-retirement benefits
other than pensions, is not material upon the Consolidated Balance Sheets and
the Consolidated Statements of Income.
Effective October 1, 1992, a qualified 401(k) plan was established allowing
substantially all employees to participate in this contributory savings plan
after satisfaction of service requirements. The plan provides for an employee
salary reduction feature pursuant to section 401(k) of the Internal Revenue
Code. Employee contributions are voluntary, and the employee can elect to defer
up to 15% of compensation, subject to certain limitations. Columbia First will
provide a 50% matching contribution upon the first 6% of the employee's
contribution, for a total maximum matching contribution of 3%. The cost of this
A-20
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(13) BENEFIT PLANS -- Continued
contributory savings plan for the fiscal years ended September 30, 1994 and 1993
amounted to $231 thousand and $247 thousand, respectively.
(14) COMMITMENTS
CREDIT FACILITY COMMITMENTS
Columbia First is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Balance Sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments. The Bank's exposure to credit loss in the event of
nonperformance by other parties to the financial instrument for commitments to
extend credits and standby letters of credit is represented by the contractual
or notional amounts of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. Unless noted otherwise, the Bank does not require collateral
or other security to support financial instruments with credit risk.
At September 30, 1994, the Bank had outstanding commitments to originate
and purchase loans at variable interest rates aggregating approximately $83.0
million and at fixed interest rates aggregating approximately $4.4 million.
Fixed interest rate commitments are at market rates as of the commitment date
and generally expire within 60 days. The Bank had no outstanding commitments to
purchase or sell mortgage-backed securities.
At September 30, 1994, the Bank had outstanding commitments to sell
fixed-rate mortgage loans in the amount of $3.0 million, at net prices which
exceeded the carrying value of the loans.
At September 30, 1994, the Bank was contingently liable under standby
letters of credit aggregating $13.8 million, generally expiring in three years
or less.
LITIGATION
Columbia First is a defendant in or party to a number of pending and
threatened legal actions and proceedings. Management believes, based upon the
opinion of counsel, that the actions and liability or loss, if any, resulting
from the final outcome of these proceedings will not have a material effect on
the accompanying Consolidated Balance Sheets and the Consolidated Statements of
Income.
LEASE COMMITMENTS
Columbia First leases certain properties for branch offices and various
other operations under non-cancelable operating leases. These leases expire at
various dates through 2003 with options for renewal and contain escalation
clauses comparable to increases in the consumer price index. The future minimum
rental payments under the terms of the leases at September 30, 1994 are as
follows:
<TABLE>
<CAPTION>
SUBLEASE
RENTAL RENTAL NET RENTAL
YEAR ENDED SEPTEMBER 30, PAYMENTS INCOME PAYMENTS
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1995................................................................. $5,008 $292 $4,716
1996................................................................. 4,694 297 4,397
1997................................................................. 4,187 276 3,911
1998................................................................. 1,439 -- 1,439
1999................................................................. 1,306 -- 1,306
2000 and thereafter.................................................. 4,320 -- 4,320
</TABLE>
Rental expense, net of sublease income, under all operating leases was
approximately $4.8 million, $4.5 million and $4.2 million for the years ended
September 30, 1994, 1993 and 1992, respectively.
A-21
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" (SFAS No. 107), requires the disclosure of
estimated fair values for financial instruments. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a portion of Columbia
First's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of Columbia First taken as a whole.
The following methods and assumptions were used by Columbia First in
estimating the fair value for its financial instruments and other required items
as defined by SFAS No. 107:
CASH AND INTEREST-BEARING DEPOSITS WITH OTHER BANKS
For cash and due from banks and interest-bearing deposits with other banks,
the carrying amount approximates fair value.
LOANS HELD FOR SALE
For loans held for sale, fair values are based on outstanding commitments
from investors or current investor yield requirements as calculated on an
aggregate basis.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
For these instruments, fair values are based on published market prices or
dealer quotes.
LOANS, NET
The fair value of loans is estimated by discounting the future cash flows,
including estimated prepayments of principal, using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. The fair value of nonaccrual loans, in the amount of
$3.4 million, in the portfolio reflects the credit adjustment that would be
applied in the marketplace for such loans.
ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.
NONINTEREST-BEARING DEPOSITS
The fair value of these deposits is the amount payable on demand at the
reporting date.
INTEREST-BEARING DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits with no defined maturity is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated by
discounting the future cash flows using the current rates at which similar
deposits would be accepted.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
For these short-term instruments, the carrying amount approximates fair
value.
ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA AND OTHER BORROWINGS
The carrying amounts for variable rate borrowings approximate the fair
values at the reporting date. The fair values of the fixed-rate borrowings are
estimated by discounting the future cash flows using interest rates currently
available for borrowings with similar terms and remaining maturities.
A-22
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE
The carrying amount approximates fair value.
ACCRUED INTEREST PAYABLE
The carrying amount approximates fair value.
OFF-BALANCE SHEET ITEMS
Columbia First has reviewed the unfunded portion of commitments to extend
credit, as well as, standby and other letters of credit, and has determined that
the fair value of such instruments is not material.
INTANGIBLES
The provisions of SFAS No. 107 do not require the disclosure of intangible
assets. While the value of such intangibles is significant, Columbia First does
not routinely compute their estimated fair values. Such intangibles include core
deposit and mortgage servicing rights.
The estimated fair values of Columbia First financial instruments required
to be disclosed under SFAS No. 107 follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets:
Cash and interest-bearing deposits with other banks.................. $ 35,082 $ 35,082 $ 15,233 $ 15,233
Loans held for sale.................................................. 3,164 3,207 40,374 41,177
Investment securities................................................ 144,588 140,675 120,909 121,487
Mortgage-backed securities........................................... 471,452 459,843 736,777 751,536
Loans, net........................................................... 2,155,381 2,172,390 1,439,854 1,492,764
Accrued interest receivable.......................................... 16,486 16,486 15,345 15,345
Liabilities:
Noninterest-bearing deposits......................................... 28,905 28,905 14,241 14,241
Interest-bearing deposits............................................ 1,435,192 1,435,873 1,341,490 1,353,693
Securities sold under repurchase agreements.......................... 271,091 271,091 49,595 49,595
Advances from FHLB of Atlanta........................................ 917,480 916,447 791,737 803,858
Other borrowings..................................................... 25,282 26,391 37,030 41,663
Advance payments by borrowers for taxes and insurance................ 8,924 8,924 5,043 5,043
Accrued interest payable............................................. 7,806 7,806 4,531 4,531
</TABLE>
(16) STOCKHOLDERS' EQUITY
As mandated by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"), the Director of the Office of Thrift Supervision ("OTS")
requires all thrift institutions to maintain capital in accordance with capital
standards which include maintenance of: (1) tangible capital equal to at least
1.5% of adjusted total assets, (2) core capital equal to at least 3% of adjusted
total assets, (3) core capital equal to at least 4% of risk-weighted assets
(tier 1 capital ratio), and (4) total capital and loan loss allowances equal to
at least 8% of risk-weighted assets. There are limitations to the amount of the
loan loss allowance which may be includable in regulatory capital, and there is
an "interest rate risk" component to the risk-based capital standard. There is
also a phase-in period, through December 31, 1994, for the exclusion of
supervisory goodwill from core capital.
A-23
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) STOCKHOLDERS' EQUITY -- Continued
At September 30, 1994, the Bank exceeded all current and fully phased-in
capital requirements promulgated by the OTS. The Federal Deposit Insurance
Improvement Act of 1991 (FDICIA) required each federal regulatory agency to
mandate minimum capital levels at which an institution is considered well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Certain prompt corrective
action is required to be taken with respect to those institutions which fall
below minimum regulatory capital standards. Under the prompt corrective action
regulations adopted by the OTS, which became effective in December 1992, the
following capital standards were required in order to be considered well
capitalized: (1) core capital of at least 5%, (2) tier 1 risk-based capital of
at least 6%, and (3) risk-based capital of at least 10%. The Bank is considered
to be adequately capitalized at September 30, 1994 under the prompt corrective
action regulations.
The required and actual amounts and ratios of capital pertaining to the
Bank as of September 30, 1994 are set forth as follows:
<TABLE>
<CAPTION>
(UNAUDITED) COLUMBIA FIRST
CURRENT REGULATORY CAPITAL IN
TYPE OF REQUIREMENTS COMPUTED COMPUTED EXCESS OF
CAPITAL PERCENT AMOUNT PERCENT AMOUNT REQUIREMENT
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible......................................................... 1.5% $ 42,613 4.39% $ 124,639 $82,026
Core............................................................. 3.0 85,228 4.63 131,602 46,374
Tier 1 risk-based................................................ 4.0 62,542 8.42 131,602 69,060
Risk-based....................................................... 8.0 125,085 9.34 146,028 20,943
</TABLE>
The Bank is authorized to issue up to 7.5 million shares of preferred stock
with a par value of $.01 per share. No preferred stock has been issued by the
Bank.
Retained earnings at September 30, 1994 included approximately $31.4
million, which constitutes actual and anticipated additions to bad debt reserves
for Federal income tax purposes and, therefore, may be subject to income taxes
at the then current Federal income tax rate if used for any purpose other than
to absorb bad debt losses. Management does not anticipate that this portion of
retained earnings will be used in a manner that will create any additional
income tax liability. In accordance with the provisions of FIRREA and FDICIA,
the Bank may be restricted from the payment of dividends.
A-24
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended September 30, 1994
and 1993 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DEC. MAR. JUNE SEPT.
31, 31, 30, 30,
1994 1993 1994 1994 1994
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total interest income............................................................. $36,543 $37,086 $40,111 $43,838
Total interest expense............................................................ 23,844 24,104 27,081 30,096
Net interest income............................................................. 12,699 12,982 13,030 13,742
Provision for loan losses......................................................... 1,600 210 200 --
Net interest income after provision for loan losses............................. 11,099 12,772 12,830 13,742
Noninterest income................................................................ 3,226 2,148 2,678 2,962
Noninterest expense............................................................... 15,719 10,373 11,142 12,040
Income (loss) before income tax expense and extraordinary item.................... (1,394) 4,547 4,366 4,664
Income tax expense................................................................ 920 1,938 1,500 1,736
Income (loss) before extraordinary item........................................... (2,314) 2,609 2,866 2,928
Extraordinary item: effect of change in method of accounting
for income taxes................................................................ 5,483 -- -- --
Net income...................................................................... $ 3,169 $ 2,609 $ 2,866 $ 2,928
Earnings per share
Primary:
Net income (loss) before extraordinary item..................................... $ (.62) $ .70 $ .76 $ .78
Extraordinary item: effect of change in method of accounting
for income taxes............................................................. 1.46 -- -- --
Net income...................................................................... $ .84 $ .70 $ .76 $ .78
Fully diluted:
Net income (loss) before extraordinary item..................................... $ (.62) $ .70 $ .76 $ .78
Extraordinary item: effect of change in method of accounting for income taxes... 1.46 -- -- --
Net income...................................................................... $ .84 $ .70 $ .76 $ .78
</TABLE>
A-25
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DEC. MAR. JUNE SEPT.
31, 31, 30, 30,
1993 1992 1993 1993 1993
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total interest income............................................................. $40,563 $39,203 $38,424 $38,016
Total interest expense............................................................ 25,700 24,745 24,526 23,754
Net interest income............................................................. 14,863 14,458 13,898 14,262
Provision for loan losses......................................................... 1,700 1,710 990 655
Net interest income after provision for loan losses............................. 13,163 12,748 12,908 13,607
Noninterest income................................................................ 2,806 2,234 4,327 2,705
Noninterest expense............................................................... 11,029 10,920 12,216 11,200
Income before income tax expense and extraordinary item........................... 4,940 4,062 5,019 5,112
Income tax expense................................................................ 2,714 1,659 2,388 2,273
Income before extraordinary item.................................................. 2,226 2,403 2,631 2,839
Extraordinary item: gain (loss) on extinguishment of debt......................... 2 (5) (15) --
Net income...................................................................... $ 2,228 $ 2,398 $ 2,616 $ 2,839
Earnings per share
Primary:
Net income before extraordinary item............................................ $ .68 $ .72 $ .78 $ .76
Extraordinary item, net of taxes................................................ -- -- -- --
Net income...................................................................... $ .68 $ .72 $ .78 $ .76
Fully diluted:
Net income before extraordinary item $ .63 $ .67 $ .72 $ .76
Extraordinary item, net of taxes -- -- -- --
Net income...................................................................... $ .63 $ .67 $ .72 $ .76
</TABLE>
A-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK
We have audited the accompanying consolidated balance sheets of Columbia
First Bank, a Federal Savings Bank and subsidiaries as of September 30, 1994 and
1993, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended September
30, 1994. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
a 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 aspects, the financial position of Columbia
First Bank, a Federal Savings Bank and subsidiaries at September 30, 1994 and
1993, the results of their operations and their cash flows for each of the years
in the three year period ended September 30, 1994 in conformity with generally
accepted accounting principles.
As discussed in note 1(j) to the consolidated financial statements, the
Bank prospectively adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" in fiscal 1994.
KPMG PEAT MARWICK LLP
Washington, D.C.
October 20, 1994
A-27
<PAGE>
1994 ANNUAL REPORT ON FORM 10-K
SELECTED INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Columbia First Bank, a Federal Savings Bank ("Columbia First" or "the
Bank") is a federally-chartered stock savings bank conducting business from 33
banking offices and 3 mortgage lending offices located in the District of
Columbia, Maryland and Virginia. At September 30, 1994, Columbia First had total
assets of $2.8 billion, deposits of $1.5 billion and total equity of $132.2
million. The Bank offers insurance products through one of its wholly-owned
subsidiaries, and has one other active wholly-owned subsidiary principally used
for financing activities.
The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB"),
which is one of the twelve regional banks comprising the Federal Home Loan Bank
System. The Bank's primary regulators are the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). Columbia First
is also regulated by the Federal Reserve Bank System ("FRB") with respect to
deposit reserve balances and certain other matters.
The Bank provides an array of services to its consumer and commercial
customer base through its retail branch network and is a member and part owner
of a shared regional network of over 40,200 automated teller machines and
point-of-sale devices under the registered trademark MOST.
The following financial review presents management's analysis of the
consolidated financial condition and results of operations of Columbia First,
and should be read together with the consolidated financial statements and
accompanying notes.
EARNING ASSETS
Management monitors the mix of earning assets on a continuous basis in
order to react to interest rate movements and to maximize return on the earning
assets. Risk-based capital guidelines, and the corresponding asset risk
weighting, have resulted in a certain form of incentive to invest in U.S.
Treasury securities and mortgage-backed securities, particularly those issued by
government sponsored enterprises such as FNMA, GNMA and FHLMC. In addition, the
favorable risk weighting assigned to residential loans provides the incentive to
invest in these assets. This asset mix has always been the base upon which the
Bank has focused, and it is this base which continues to perform well and
generate significant profitability. Average earning assets of the Bank were $2.5
billion for the year ended September 30, 1994. This compares to balances of $2.3
billion and $2.1 billion for the years ended September 30, 1993 and 1992,
respectively. The Consolidated Average Balance Sheets, along with income and
expense and related interest yields and rates for each of the preceding three
fiscal years are as shown on the following page.
A-28
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS,
INTEREST INCOME/EXPENSE AND YIELDS/RATES
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1993 1992
YIELDS/RATES YIELDS/RATES
DURING AT END DURING AT END
AVERAGE INCOME/ THE OF AVERAGE INCOME/ THE OF AVERAGE
BALANCES EXPENSE PERIOD PERIOD BALANCES EXPENSE PERIOD PERIOD BALANCES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
EARNING ASSETS:
Loans................... $1,724,329 $117,940 6.84 % 6.94 % $1,401,677 $108,618 7.75 % 7.51 % $1,337,127
Mortgage-backed
securities............ 653,229 32,287 4.94 5.26 749,469 41,046 5.48 4.88 655,860
Investments............. 131,911 6,901 5.23 5.06 111,014 6,220 5.60 5.17 94,331
Federal funds sold...... -- -- -- -- -- -- -- -- 1,544
Deposits with other
banks................. 11,969 450 3.76 5.45 10,937 322 2.94 3.45 16,852
Total earning
assets............ 2,521,438 157,578 6.25 6.56 2,273,097 156,206 6.87 6.56 2,105,714
Other assets.............. 80,172 84,623 97,731
Allowance for loan
losses.................. (17,271) (18,435) (14,163)
$2,584,339 $2,339,285 $2,189,282
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST-BEARING
LIABILITIES:
Deposits:
Savings accounts........ $ 115,968 $ 3,520 3.04 % 3.00 % $ 119,276 $ 3,754 3.15 % 3.00 % $ 113,444
Checking accounts....... 98,201 2,706 2.76 2.15 83,905 2,400 2.86 2.38 69,275
Money market deposit
accounts.............. 398,557 13,014 3.27 3.20 409,472 13,722 3.35 3.23 326,290
Time deposits........... 753,469 36,139 4.80 4.94 731,846 38,587 5.27 4.83 807,977
Total deposits...... 1,366,195 55,379 4.05 4.12 1,344,499 58,463 4.35 4.01 1,316,986
Borrowings:
Reverse repurchase
agreements............ 132,682 5,525 4.16 5.02 75,475 2,484 3.29 3.20 69,540
FHLB advances........... 871,211 41,306 4.74 5.51 708,988 32,830 4.63 4.39 583,167
Other................... 31,625 2,915 9.22 9.03 50,123 4,948 9.87 9.03 73,508
Total borrowings.... 1,035,518 49,746 4.80 5.47 834,586 40,262 4.82 4.52 726,215
Total
interest-bearing
liabilities....... 2,401,713 105,125 4.38 4.74 2,179,085 98,725 4.53 4.21 2,043,201
Noninterest-bearing
deposits................ 18,944 11,651 6,632
Other liabilities......... 35,952 39,421 43,247
Stockholders' equity...... 127,730 109,128 96,202
$2,584,339 $2,339,285 $2,189,282
Net interest
income/spread........... $ 52,453 1.87 % 1.82 % $ 57,481 2.34 % 2.35 %
Net interest yield on
earning assets.......... 2.08 % 2.53 %
<CAPTION>
YIELDS/RATES
DURING AT END
INCOME/ THE OF
EXPENSE PERIOD PERIOD
<S> <C> <C> <C>
ASSETS
EARNING ASSETS:
Loans................... $119,042 8.90 % 8.35 %
Mortgage-backed
securities............ 47,112 7.18 6.70
Investments............. 6,151 6.52 5.90
Federal funds sold...... 79 5.12 --
Deposits with other
banks................. 675 4.01 3.50
Total earning
assets............ 173,059 8.21 7.67
Other assets..............
Allowance for loan
losses..................
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST-BEARING
LIABILITIES:
Deposits:
Savings accounts........ $ 5,007 4.41 % 3.34 %
Checking accounts....... 2,761 3.99 3.07
Money market deposit
accounts.............. 14,560 4.46 3.47
Time deposits........... 52,847 6.54 5.66
Total deposits...... 75,175 5.71 4.63
Borrowings:
Reverse repurchase
agreements............ 2,840 4.08 3.33
FHLB advances........... 37,115 6.36 4.93
Other................... 6,519 8.87 8.79
Total borrowings.... 46,474 6.40 4.98
Total
interest-bearing
liabilities....... 121,649 5.95 4.76
Noninterest-bearing
deposits................
Other liabilities.........
Stockholders' equity......
Net interest
income/spread........... $ 51,410 2.26 % 2.91
Net interest yield on
earning assets.......... 2.44 %
</TABLE>
Average earning assets increased $248.3 million, or 10.9%, during the
period ended September 30, 1994. Loan growth of $322.7 million, principally in
the single-family residential category, was particularly noteworthy. The
interest rate environment during the second half of the Bank's fiscal year
created a strong demand for adjustable-rate loans, and the Bank currently
retains all adjustable-rate loan production. Rapidly rising interest rates
during this period stimulated borrowers to prefer the adjustable-rate loans.
Partially offsetting this increase was a $96.2 million, or 12.8%, decline
in the average balances of mortgage-backed securities. The Bank sold $179.9
million of these securities during fiscal 1994, approximately $138.9 million of
which were adjustable-rate securities. These securities exhibited a prepayment
speed which exceeded the maximum acceptable limitation as outlined in the Bank's
investment policy. The remaining $41 million of mortgage-backed securities sold
were fixed-rate, and represent the entire remaining fixed-rate securities which
were not specifically pledged by the Bank's finance subsidiary. Those
securities, pledged by CFF Financial in a collateralized mortgage obligation
originated in 1985, cannot be sold as the repayments are used to repay the notes
issued by CFF Financial.
A-29
<PAGE>
The historically low interest rate environment during the first half of
fiscal 1994 created the opportunity for borrowers to refinance their mortgage
loans and obtain new loans at attractive lower interest rates. In the case of
these securities, the Bank does not have the ability to offer a refinancing
opportunity to the borrower and, as such, has no control over the early
prepayment of the asset. The prepayment of the adjustable-rate loan creates an
earlier than expected receipt by the investor of the loan principal, which must
then be reinvested at an interest rate generally lower than the loan which was
prepaid.
The Bank attempts to minimize this risk through the almost exclusive
investment in mortgage-backed securities which are collateralized by loans which
are not convertible from an adjustable-rate to a fixed-rate. Nonetheless,
borrowers had been able to easily refinance their adjustable-rate loans during
the first half of fiscal 1994, and the lack of a conversion option on their loan
did not prove to be a hindrance in the prepayment of the adjustable-rate loan.
Management periodically reviews the prepayment experience within the
mortgage-backed securities portfolio, and the portfolio is primarily performing
as expected. Those securities which have experienced unacceptable prepayments
have been sold. Many of the securities have been purchased at a premium, and
management monitors the prepayment experience to ensure that premiums are
properly amortized against income.
The Bank's investment portfolio registered an increase in average balances
of $20.9 million, or 18.8%, during fiscal 1994. This was primarily a result of
increased liquidity requirements as a result of the higher level of short-term
borrowings.
Average earning assets increased $167.4 million, or 7.9%, during the period
ended September 30, 1993. The Bank's new loan origination volume was sufficient
to more than offset loan repayment activity, as average loan balances increased
$64.6 million, or 4.8%, compared to fiscal 1992. Mortgage-backed securities
registered an increase of $93.6 million, or 14.3%, during fiscal 1993. The Bank
purchases these securities from time to time to augment net interest income;
however, management prefers to invest in loans in order to maximize earnings.
The low interest rate environment during much of fiscal 1993, however, provided
obstacles to increasing loan balances because of the Bank's policy of
originating for portfolio only adjustable-rate loans.
Fixed-rate loans originated are sold in order to minimize interest rate
risk, and fixed-rate loans are typically more popular to borrowers during
periods of low interest rates such as that experienced during fiscal 1993.
Therefore, adjustable-rate loan production did not meet budgeted growth targets;
and average loan balances, although increased during fiscal 1993, were not as
high as had been expected.
Investment securities average balances increased $16.7 million, or 17.7%,
in order to maximize earnings on the Bank's liquidity portfolio. Deposits with
other banks continued to decline, as the average balances were reduced by $5.9
million, or 35.1%, during fiscal 1993. These deposits are typically the lowest
yielding earning assets, and the Bank closely manages the balances.
During fiscal 1993, the Bank sold $75.6 million of mortgage-backed
securities. The securities sold were predominantly adjustable-rate assets, and
were sold because the prepayment speed exceeded the maximum acceptable
limitation as set forth in the Bank's investment policy. The adjustable-rate
securities sold totalled $61.7 million, including $1.5 million of unamortized
premiums, and the sale transactions resulted in a net gain of $1 million. The
Bank also sold $13.9 million in fixed-rate mortgage-backed securities during
fiscal 1993. These securities had been in the Bank's portfolio for a long period
of time, and the remaining balance on each of the securities was minimal. A net
gain of $1 million was recognized on these sales transactions.
LIQUIDITY MANAGEMENT AND FUNDING
Liquidity is a company's ability to maintain sufficient cash flows to fund
operations and meet existing and future obligations, including loan commitments,
maturing liabilities and depositors' withdrawals. The asset portion of the
balance sheet provides liquidity through short-term investments and maturities
and repayments of loans and investment securities. Other sources of asset
liquidity include sales of loans and asset securitization.
Liability liquidity is provided through the Bank's ability to attract and
maintain sufficient deposits and to access available funding markets. Federal
regulations require that the Bank maintain an average 5.00% liquidity ratio in
relation to certain borrowings and the deposit base. The Bank exceeded the
requirement throughout fiscal 1994 and 1993.
The Bank continues to enhance the core deposit base through a program
intended to increase the retail deposit base and to minimize the reliance upon
jumbo deposits, and intends to continue the solicitation of retail deposits
through the branch network and money center operation. Particular emphasis has
been given to transaction accounts, which are considered to be the most stable
funding source and a product which generates fee income.
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<PAGE>
The development of new deposit products responsive to our customers needs,
as well as the continued cross-marketing of deposit services, should provide a
stable funding source in future periods. The Bank does not seek third-party
funds from deposit brokers; however, funds are received from such brokers in the
normal course of business. The Bank has never solicited or paid fees for such
deposits.
The following table shows the changes in deposits for each of the prior
three fiscal periods:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits............................................................................ $4,423,958 $3,727,787 $3,288,198
Withdrawals......................................................................... 4,368,362 3,773,631 3,233,584
Net deposits (withdrawals).......................................................... 55,596 (45,844) 54,614
Interest credited................................................................... 52,770 49,736 57,814
Net increase in deposits............................................................ $ 108,366 $ 3,892 $ 112,428
</TABLE>
The historically low interest rate environment during much of fiscal 1994
and 1993 presented particular challenges to all financial institutions in their
ability to generate sufficient deposit activity to fund desired investments.
Throughout the industry, financial institutions experienced an acute level of
disintermediation, as depositors withdrew their funds in order to invest in an
array of other investment alternatives.
Management believes that the liquidity of bank deposits, as well as the
safety which is afforded to depositors through FDIC insurance, will encourage
those depositors to maintain significant portions of their funds in insured
depository accounts. Management also believes that a high level of service and
the convenience provided by a prominent branch office system with full service
capabilities will allow the Bank to effectively compete in obtaining funds from
non-financial, as well as, other financial institutions. During the latter half
of fiscal 1994, the Bank experienced an increase in deposit account balances,
particularly retail certificates of deposit, as the financial markets
experienced considerable turmoil due to rapidly rising interest rates because of
the fear of inflation.
Total deposits increased $108.4 million, or 8%, during the fiscal year
ended September 30, 1994. Transaction and savings accounts declined $28.3
million, or 4.5%, during the period. This decline is somewhat misleading,
however, as the Bank was successful in increasing by 7,500 the number of
transaction and savings accounts. A decline of approximately $58.3 million in
the transaction account category was experienced in the highest interest rate
money market account product, and management believes that these funds had been
temporarily invested in this liquid account and subsequently moved to higher
yielding certificates of deposit as interest rates increased during fiscal 1994.
Excluding this decline in the highest tier interest rate money market account
category, transaction and savings account balances increased $30 million, or
4.8%, during fiscal 1994.
The Bank is particularly pleased with the success of the "Totally Free
Checking" product, as well as a new small business checking account offering,
which contributed to the increase of non-interest-bearing deposit accounts
during fiscal 1994. These non-interest-bearing account balances increased by
$14.7 million, or 103%, at September 30, 1994 as compared to fiscal 1993
year-end balances. Management is aggressively pursuing continued growth in this
area, and expects continued success as a result of the attractive product
features.
Retail time deposit accounts, or those certificate accounts which have
balances less than $100,000, also represent a relatively stable source of funds.
Retail time deposits increased $190 million, or 33.1%, during fiscal 1994. This
increase was due to the change in the interest rate environment during the
second half of fiscal 1994 which stimulated the demand for stable, FDIC insured
deposits among our customer base. The Bank also introduced some new certificate
of deposit account products during fiscal 1994 which have proven to be popular
within our marketplace. These retail certificate of deposit accounts represent
52.1% of the total deposit base at September 30, 1994.
The remaining deposit accounts are "jumbo" deposits, or those certificate
accounts in which the balance exceeds $100,000.
Jumbo deposit accounts were $130.6 million, and represented 8.9% of the
total deposit base at September 30, 1994.
The Bank's deposit base increased $3.9 million, or 0.3%, during fiscal
1993. Transaction and savings accounts increased $29.3 million, or 4.9%, at
September 30, 1993 as compared to the prior year. These accounts totalled $622.8
million, and represented 45.9% of the Bank's total deposit base at September 30,
1993. Retail time deposits declined $25.8 million, or
A-31
<PAGE>
4.0%, during fiscal 1993. These accounts totalled $621.9 million, also 45.9% of
the total deposit base. Jumbo deposit accounts were $111 million, and
represented only 8.2% of the total deposit base.
The following is a summary of borrowings:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances.................................................. $ 917,480 $791,737 $651,499 $553,685 $454,253
Securities sold under agreements to repurchase................. 271,091 49,595 112,337 2,573 47,169
CFF Financial Corporation notes payable, (Collateralized
mortgage obligations)........................................ 24,216 36,288 47,865 58,457 67,202
Convertible subordinated debentures............................ -- -- 8,845 9,247 11,260
Collateralized floating rate notes............................. -- -- -- 60,000 92,000
Other borrowings............................................... 1,066 742 813 2,001 --
Total.......................................................... $1,213,853 $878,362 $821,359 $685,963 $671,844
</TABLE>
The Bank also relies upon borrowed funds to provide a source of liquidity
at attractive interest rates. Total borrowings increased $335.5 million, or
38.2%, during fiscal 1994, and provided the majority of the funding required for
the Bank's asset growth during the period. Advances from the FHLB increased
$125.7 million, or 15.9%, during the period. The Bank increased the
single-family residential mortgage loan collateral to the FHLB by approximately
$1.2 billion during the period, and the proceeds of the borrowings were used for
the origination of new residential loan production. In general, the Bank prefers
FHLB funding because of the attractive interest rates which are available, and
because of the comprehensive product line which is offered to FHLB member
institutions.
Repurchase agreements increased $221.5 million during fiscal 1994, an
increase of almost four and one-half times the fiscal 1993 balances.
Mortgage-backed securities are pledged as collateral for the repurchase
agreements. Management does not expect significant increases in borrowings in
future periods, because of the successes achieved in the generation of deposit
accounts and the moderate asset growth expected in future periods.
The notes payable issued by CFF Financial, a subsidiary of the Bank, were
reduced by $12.1 million during fiscal 1994 as a result of the prepayments
received on the underlying collateral on this collateralized mortgage
obligation. CFF Financial had negative net interest income of $0.4 million
during fiscal 1994, and future pre-tax losses of approximately $1 million are
expected from this subsidiary before the notes payable are paid in full.
Total borrowings increased $57 million, or 6.9%, during fiscal 1993.
Advances from the FHLB increased $140.2 million, or 21.5%, to $791.7 million.
Partially offsetting this increase was a reduction of $62.7 million, or 55.9%,
in repurchase agreements. The notes payable issued by CFF Financial were reduced
by $11.6 million in fiscal 1993, and the subsidiary had negative net interest
income of $0.9 million during the period.
During fiscal 1993, the Bank issued a call for the redemption of the
convertible subordinated debentures. The debentures carried a relatively high
interest rate of 7.50%, particularly in the interest rate environment at the
time of redemption. In addition, management believed that most of the debentures
would be converted into common stock, thus providing additional capital for
growth opportunities. Although the debentures were included in risk-based
capital, they were not included in tangible or core capital.
The debentures had been issued in fiscal 1986, and the Bank had embarked
upon a program in fiscal 1990 to repurchase the debentures in privately
negotiated transactions. Prior to fiscal 1993, a total of $18.7 million of the
debentures had been repurchased, resulting in pre-tax and after-tax net gains,
respectively, of $63 thousand and $39 thousand in fiscal 1992; of $866 thousand
and $534 thousand in fiscal 1991; and of $5.4 million and $3.3 million in fiscal
1990. In addition, $200 thousand of the debentures had been converted to common
stock of the Bank.
During fiscal 1993, and prior to the issuance of the call for redemption on
May 14, 1993, $280 thousand of the debentures were repurchased. Also during
fiscal 1993, and prior to the issuance of the call for redemption, $68 thousand
of the debentures were converted into 3,162 shares of common stock of the Bank.
Upon issuing the call for redemption, $8.3 million in debentures were converted
at a ratio of $21.50 per share into common stock of the Bank. This resulted in
the issuance of an additional 388,218 shares of common stock. There were $149
thousand of the debentures which were not converted into common stock upon the
call for redemption, and these debentures were retired with a cash payment of
par plus
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<PAGE>
a three percent premium and accrued interest through June 14, 1993. These fiscal
1993 transactions resulted in a net loss of $18 thousand, net of tax benefits of
$11 thousand.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is the measure in which the Bank's assets and
liabilities are subject to repricing in future time periods. Effective interest
rate sensitivity management seeks to ensure that net interest income is
maximized while the impact of changes in the level of market interest rates is
minimized.
A long-term objective of the Bank has been to reduce the sensitivity of its
earnings to interest rate fluctuations by diversifying the sources of funds,
improving its interest rate spread, improving the ratio of earning assets to
interest-bearing liabilities, utilizing hedging activities for the immediate
sale of newly-originated fixed-rate loans, and achieving a better matching of
the maturities and interest rate sensitivities of its assets and liabilities.
The differences between the volume of assets and liabilities in the Bank's
current portfolio that are subject to repricing in future time periods are known
as interest rate sensitivity gaps. Certain estimates and assumptions are
included in the data in the table on the following page which sets forth the
interest rate sensitivity gap analysis as of September 30, 1994.
INTEREST-SENSITIVITY ANALYSIS
AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
MATURITY-RATE SENSITIVITY (A)
TOTAL % OF 1 YEAR 1-3 3-5 OVER 5
BALANCE TOTAL OR LESS YEARS YEARS YEARS
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Earning Assets
Loans receivable:
Real Estate....................................... $2,031,235 73 % $1,512,841 $361,802 $135,178 $ 21,414
Commercial........................................ 111,165 4 101,271 1,575 1,479 6,840
Consumer.......................................... 14,594 1 2,805 4,692 4,261 2,836
Mortgage-backed securities.......................... 471,452 17 443,688 9,158 8,423 10,183
Investments......................................... 144,588 5 14,144 52,399 22,040 56,005
Loans held for sale................................. 3,164 -- 3,164 -- -- --
Interest-bearing deposits with other banks.......... 10,754 -- 10,754 -- -- --
2,786,952 100 2,088,667 429,626 171,381 97,278
Less deferred fees.................................. (1,613) -- (2,338) (19) 744 --
Total........................................ $2,785,339 100 % $2,086,329 $429,607 $172,125 $ 97,278
Interest-Bearing Liabilities (b)
Deposits.......................................... $1,435,192 54 % $1,072,722 $196,702 $123,300 $ 42,468
FHLB advances..................................... 917,480 35 796,000 80,000 24,700 16,780
Other borrowings.................................. 296,373 11 277,028 9,669 7,227 2,449
Total........................................ $2,649,045 100 % $2,145,750 $286,371 $155,227 $ 61,697
Maturity gap........................................ $ (59,421) $143,236 $ 16,898 $ 35,581
Cumulative gap...................................... $ 83,815 $100,713 $136,294
Cumulative gap as a percent of total assets......... (2.1)% 2.9% 3.5% 4.8%
</TABLE>
(a) Based on scheduled repayments, maturity or repricing of principal.
Management has estimated principal repayments based on recent experience.
(b) Liabilities with no maturity date, such as money market deposit accounts and
checking accounts, are included in the "1 year or less" category.
In prior years, Columbia First embarked upon an aggressive balance sheet
restructuring program in an attempt to reduce the fixed-rate asset portfolio.
This strategy, coupled with fixed-rate asset repayments during the most recent
three fiscal years and the policy of retaining only adjustable-rate new loan
production, has enabled the Bank to increase the adjustable-rate earning asset
portfolio to 88%, 87% and 80% of the total earning asset base at September 30,
1994, 1993 and 1992, respectively. In addition, management continues to
diversify the underlying indices upon which the adjustable-rate mortgage-
A-33
<PAGE>
backed securities are based so as to reduce the risk of all of these assets
repricing to the same indices. All of the adjustable-rate mortgage loans are
tied to one-year, three-year or five-year Treasury indices; however, these loans
have repricing intervals which are spread throughout the year.
The balance sheet restructuring has not, however, eliminated all interest
rate risk. The Bank has, during the most recent three fiscal years, primarily
funded operations with borrowings having maturities or repricing intervals of
three months or less. In a period of rapidly rising interest rates, the Bank may
experience reduced net interest income as a result of funding costs which are
increasing more rapidly than the adjustable-rate assets are repricing.
Management attempts to minimize this risk through the use of longer-term
certificates of deposit as a funding source, and intends to lengthen selected
borrowing maturities during fiscal 1995.
Financial institutions may enter into agreements which provide interest
rate risk protection. Columbia First management believes that at the current
time effective interest rate sensitivity management can best be achieved through
careful monitoring and redeployment of the underlying assets and liabilities.
The Bank has never engaged in interest rate futures or options transactions. The
Bank has no outstanding interest rate swap agreements and no current plans to
enter into interest rate swap agreements.
The table below is a summary of the Bank's one year interest rate
sensitivity, or the difference between the volume of assets and liabilities
which reprice over a period of one year or less, as of September 30, 1994, 1993
and 1992. This table illustrates the Bank's success, over these fiscal periods,
in minimizing interest rate sensitivity in the one year horizon from the levels
which existed in prior periods. The Bank has a slightly "negative gap" in its
interest rate sensitivity at September 30, 1994, meaning that more liabilities
than assets will reprice within twelve months, though not necessarily to the
same degree.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
Earning assets................................................................................... $2,086 $1,905 $1,652
Interest-bearing liabilities..................................................................... 2,146 1,701 1,589
Maturity gap..................................................................................... $ (60) $ 204 $ 63
Gap as a percent of total assets................................................................. (2.1)% 8.5% 2.7%
</TABLE>
CAPITAL ADEQUACY
The Bank's stockholders' equity at September 30, 1994 was $132.2 million.
This represents an increase of $11.9 million, or 9.9%, during fiscal 1994. The
$11.6 million in net income earned in fiscal 1994 was supplemented by the
additional $.3 million in capital derived from the exercise of employee stock
options.
Stockholders' equity was $120.3 million at September 30, 1993. This
represented an increase of $18.7 million, or 18.4%, during the fiscal year. The
$10.1 million in net income earned in fiscal 1993 was augmented by the
conversion to common stock of $8.4 million in subordinated debentures. The
exercise of employee stock options resulted in $.2 million of additional
capital.
Columbia First meets all current regulatory capital requirements as of
September 30, 1994, as outlined in the table below. The Bank also meets all
fully phased-in capital requirements, as adjusted for the changes which are
effective to the computation of risk-based capital and core capital at December
31, 1994.
The OTS has promulgated certain regulations regarding the measurement of
interest rate risk. The Bank's strategy of originating primarily one-year
adjustable-rate single-family mortgage loans has reduced, but not eliminated,
the potential adverse impact of interest rate risk in the calculation of
risk-based capital. Beginning in fiscal 1995, an interest rate risk component to
the Bank's risk-based capital calculation will be required. The Bank expects to
remain in compliance with all capital requirements upon the inclusion of this
interest rate risk component in the calculation of the risk-based capital ratio.
As noted earlier, management intends to continue to closely monitor the Bank's
interest rate risk, and develop strategies to minimize this risk.
Tangible stockholders' equity has become an important measure of a
financial institution's ability to compete in the current regulatory and
competitive environment. In calculating tangible equity, intangible assets such
as goodwill are deducted from total capital. Goodwill, or the excess cost over
net tangible assets acquired, was created at Columbia First
A-34
<PAGE>
during acquisitions in prior years which were consummated in an attempt to
obtain competitive market share. This goodwill is then amortized against future
earnings, as the competitive advantages from the acquisitions are realized.
At Columbia First, most of this goodwill is being deducted from earnings
over a relatively short period of time, and during the three years ended
September 30, 1994, a total of $11.3 million has been amortized against income.
Substantially all of this goodwill amortization expense is not tax deductible.
Future earnings, as well as the amortization of goodwill, will continue to
enhance tangible equity.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
COLUMBIA FIRST
CURRENT REGULATORY CAPITAL IN
REQUIREMENTS COMPUTED COMPUTED EXCESS OF
TYPE OF CAPITAL PERCENT AMOUNT PERCENT AMOUNT REQUIREMENT
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible.......................................................... 1.5% $ 42,613 4.39% $124,639 $82,026
Core.............................................................. 3.0 85,228 4.63 131,602 46,374
Tier 1 Risk-based................................................. 4.0 62,542 8.42 131,602 69,060
Risk-based........................................................ 8.0 125,085 9.34 146,028 20,943
</TABLE>
EARNINGS PERFORMANCE
The Bank had a second consecutive year of record profitability with net
income of $11.6 million for the year ended September 30, 1994, compared to the
$10.1 million in net income recognized in fiscal 1993. Primary and fully-diluted
earnings per share of $3.08 in fiscal 1994 compares to the fiscal 1993 primary
earnings per share of $2.94, and the fully-diluted earnings per share of $2.78.
The additional net income of $1.5 million in fiscal 1994 represents a 14.8%
increase over fiscal 1993, and was achieved despite a decline of $5 million, or
8.7%, in the Bank's net interest income and an increase of $3.9 million, or
8.6%, in noninterest expense. In addition, the Bank's noninterest income in
fiscal 1994 was $1 million, or 8.8%, lower than the previous fiscal period.
These items were partially offset by a reduction in loan loss provisions of
$3 million, or 60.2%, during fiscal 1994, as well as lower income tax expense of
$2.9 million, or 32.5%. In addition, the Bank recognized extraordinary income of
$5.5 million during fiscal 1994 as a result of the effect of the change in the
accounting for income taxes.
The Bank recorded net income of $10.1 million for the year ended September
30, 1993 compared to net income of $5.8 million in fiscal 1992. Primary earnings
per share of $2.94 in fiscal 1993 compares to the $1.84 per share in fiscal
1992. Fully-diluted earnings per share was $2.78 per share in fiscal 1993 and
$1.73 per share in fiscal 1992.
Improved net income of $4.3 million in fiscal 1993 was primarily due to a
$6.1 million, or 11.8%, increase in net interest income, and a reduction in the
provision for loan losses of $8.2 million, or 61.9%, as compared to the prior
year. These improvements were partially offset by a $4.5 million, or 11.1%,
increase in noninterest expenses and a $6.2 million, or 222%, increase in income
tax expense during fiscal 1993.
The balance of this discussion and analysis is intended to provide details
on the operating results on a comparative basis for each of the periods ended
September 30, 1994, 1993 and 1992.
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
income stream and represents the margin or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and
composition changes in earning assets and interest-bearing liabilities
materially affect net interest income.
The Bank's net interest income for the year ended September 30, 1994 was
$52.5 million, a decline of $5 million, or 8.7%, from the fiscal 1993 level of
$57.5 million. Net interest income for the year ended September 30,1993 was an
increase of $6.1 million, or 11.8%, from the previous year's level of $51.4
million. Expressed as a percentage of average earning assets, the Bank's net
interest yield was 2.08% for 1994 compared to 2.53% in 1993 and 2.44% in 1992.
The decline experienced in fiscal 1994 net interest income was the result
of increasing interest rates during the period. The Bank experienced reduced
interest income due to changes in interest rates on earning assets of $16.8
million which was only partially offset by reduced interest expense of $3.2
million on interest-bearing liabilities. This resulted in a net decline of
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<PAGE>
$13.5 million in net interest income as a result of interest rates. Increased
volume during fiscal 1994 contributed $8.5 million in net interest income,
partially offsetting the above noted interest rate factors. Volume related
interest income improved by $18.1 million during fiscal 1994, which was only
partially offset by increased interest expense of $9.6 million which was related
to volume. As previously noted, fiscal 1994 was a year in which borrowers
favored adjustable-rate loans, and the Bank originated a significant volume of
these loans for portfolio.
The improvement noted in fiscal 1993 net interest income was entirely due
to volume, as a $7.9 million increase due to volume was partially offset by a
$1.8 million decline due to interest rates. The conversion of the convertible
subordinated debentures, which had been an interest-bearing liability, to common
stock during the period also assisted the Bank in reducing interest expense. The
historically low interest rate environment during much of fiscal 1993 generally
had a negative impact upon the Bank, as the interest income on earning assets
was reduced by $29.2 million from fiscal 1992 due to interest rate adjustments,
while interest expense on interest-bearing liabilities was reduced by $27.4
million. These two factors created a net reduction of $1.8 million in net
interest income due to interest rate fluctuations. The table below illustrates
the effects of volume and interest rate upon net interest income.
<TABLE>
<CAPTION>
1994 COMPARED TO 1993 1993 COMPARED TO 1992
CHANGE DUE TO CHANGE DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Earning assets
Loans................................................... $22,038 $(12,716) $ 9,322 $ 5,499 $(15,922) $(10,423)
Mortgage-backed securities.............................. (4,979) (3,780) (8,759) 6,125 (12,191) (6,066)
Investments............................................. 1,044 (363) 681 995 (926) 69
Federal funds sold...................................... -- -- -- (79) -- (79)
Deposits with other banks............................... 33 95 128 (201) (152) (353)
Total earning assets.................................... 18,136 (16,764) 1,372 12,339 (29,191) (16,852)
Interest-bearing liabilities
Interest-bearing deposits............................... 1,154 (4,238) (3,084) (673) (16,038) (16,711)
Reverse repurchase agreements........................... 2,246 795 3,041 188 (544) (356)
FHLB advances........................................... 7,674 802 8,476 7,044 (11,329) (4,285)
Other borrowings........................................ (1,441) (592) (2,033) (2,084) 513 (1,571)
Total interest-bearing liabilities...................... 9,633 (3,233) 6,400 4,475 (27,398) (22,923)
Net interest income..................................... $ 8,503 $(13,531) $(5,028) $ 7,864 $ (1,793) $ 6,071
</TABLE>
The changes in net interest income in the above schedule due to both volume and
rate have been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of changes in each.
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the annual cost of providing an allowance
or reserve for anticipated future losses on loans. The allowance for loan losses
reflects management's judgment as to the level considered appropriate to absorb
such losses based upon a review of factors, including delinquent loan trends,
historical loss experience, economic conditions, loan portfolio mix and the
Bank's internal credit review process.
Loan review procedures are constantly utilized by the Bank in order to
ensure that potential problem loans are identified early, thereby lessening any
potentially negative impact such problem loans may have on the Bank's earnings.
Economic conditions experienced during fiscal 1993 and 1992, specifically the
deterioration of the local and regional commercial real estate markets, had an
adverse effect upon the Bank's commercial loan portfolio.
During the fiscal period ended September 30, 1994, $2 million in loan loss
provisions were recognized. This represented a significant decline from the
provisions required in previous years, as the local real estate markets
stabilized after a few years of decline. Fiscal 1993 loan loss provisions were
$5.1 million, reflecting the fact that the economy had begun to stabilize and
real estate values were no longer in significant decline. During the year ended
September 30, 1992, total provisions of $13.3 million were required in order to
reflect the deteriorating economic conditions at the time.
The allowance for loan losses was $15.9 million at September 30, 1994,
compared to $17.9 million at September 30, 1993. Management has determined that
the Bank's stable and conservative single-family residential loan portfolio
emphasis
A-36
<PAGE>
will continue in the foreseeable future, although selected commercial lending
opportunities will be actively pursued. The Bank, therefore, continues to
solicit the business of quality residential developers and commercial
enterprises.
Loan charge-offs, net of recoveries, reflect what is believed by management
to be a permanent impairment in our borrowers' ability to repay loan assets. Net
charge-offs for the year ended September 30, 1994 were $4 million, compared to
$6.1 million for fiscal 1993 and $5.5 million in fiscal 1992. In addition to
these charge-offs, $.3 million, $3.6 million and $2.9 million in real estate
owned net charge-offs, which are recorded as a noninterest expense, were
recognized during fiscal 1994, 1993 and 1992, respectively. The Bank recognized
a $2.1 million real estate owned charge-off during fiscal 1992, which is
included in the above amount, in order to comply with Statement of Position
92-3, "Accounting for Foreclosed Assets", which required real estate owned to be
carried at the lower of cost or fair value. This revised methodology was not
required to be implemented by the Bank until fiscal 1993.
Loan charge-offs during fiscal 1994 were primarily related to two credit
relationships. Charge-offs of $1.6 million were related to a credit relationship
with a residential builder involving two projects. One of the projects has been
sold, and the other project is currently classified as an in-substance
foreclosure. The project which is in-substance foreclosure has paid down
significantly, and is expected to be fully disposed of early in fiscal 1995. No
additional losses are expected on the disposal of this asset. Charge-offs of
$1.6 million were recognized in fiscal 1994 relating to the disposal of a
commercial mortgage loan at a discount. The borrower declared bankruptcy in
fiscal 1994, and the loan collateral value became questionable upon the
bankruptcy filing. Other charge-offs during fiscal 1994 were not individually
significant.
Charge-offs from the loan loss allowance during fiscal 1993 included $5.2
million, which had been previously allocated to the borrower, related to a
single-family residential development which had been classified as a
restructured loan and which was reclassified as an in-substance foreclosure
during fiscal 1993.
Charge-offs during fiscal 1992 included $2.1 million for a loan which was
secured by limited partnership interests and a number of other loan
relationships which were individually less than $1 million.
A-37
<PAGE>
The following table summarizes certain information with respect to the
Bank's loan loss experience over the recent five year period:
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loans, net of unearned income:
Year-end............................................. $2,155,381 $1,439,854 $1,358,137 $1,282,802 $1,451,124
Average outstanding during period.................... 1,714,329 1,401,677 1,337,127 1,391,442 1,413,657
Allowance for loan losses:
Balance, beginning of period......................... $ 17,889 $ 18,946 $ 11,174 $ 10,300 $ 1,090
Charge-offs:
Commercial........................................... 3,111 849 2,153 6,546 5,000
Real estate -- construction.......................... 1,142 4,797 2,370 4,387 4,000
Real estate -- permanent............................. 507 570 2,265 2,109 200
Consumer............................................. 16 6 26 29 11
Total........................................... 4,776 6,222 6,814 13,071 9,211
Recoveries:
Commercial........................................... 807 40 -- 65 --
Real estate -- construction.......................... -- 2 1,159 151 --
Real estate -- permanent............................. 4 56 127 259 --
Consumer............................................. 15 12 18 4 --
Total........................................... 826 110 1,304 479 --
Net charge-offs...................................... 3,950 6,112 5,510 12,592 9,211
Provision.............................................. 2,010 5,055 13,282 13,466 14,921
Additions due to acquisition of Maximum................ -- -- -- -- 3,500
Balance, end of period............................... $ 15,949 $ 17,889 $ 18,946 $ 11,174 $ 10,300
Allowance for loan losses to year-end loans, net of
unearned income...................................... .74% 1.24% 1.40% .87% .71%
Net charge-offs to year-end loans...................... .18 .42 .41 .98 .63
Allowance for loan losses to average outstanding
loans................................................ .92 1.28 1.42 .80 .73
Net charge-offs to average outstanding loans........... .23 .44 .41 .90 .65
Ratio of the allowance for loan losses to net
charge-offs.......................................... 4.04x 2.93x 3.44x .89x 1.12x
</TABLE>
As can be seen in the table, management has achieved a dramatic improvement
during fiscal 1994 and 1993 in each of the measurements comparing the allowance,
and net charge-offs, to loan balances. Management believes that the ratio of the
allowance to net charge-offs is perhaps the most important measure of the Bank's
ability within the allowance to absorb future losses.
NONPERFORMING/UNDERPERFORMING ASSETS
Nonperforming and underperforming assets consist of loans on which interest
is no longer accrued, loans which have been restructured in order to allow the
borrower the ability to maintain control of the collateral, real estate acquired
by foreclosure, real estate upon which deeds in lieu of foreclosure have been
accepted and real estate owned which has been classifed as in-substance
foreclosure. Restructured loans and real estate owned have been written down to
estimated fair value, based upon estimates of cash flow expected from the
underlying collateral and appropriately discounted.
The Bank experienced significant improvement, as reductions were noted in
each nonperforming/underperforming category during fiscal 1994 and 1993.
Management's primary objective during each of these fiscal periods was the
reduction of these less than fully performing assets.
Nonperforming/underperforming assets were reduced by $11.1 million, or 31.9%,
during fiscal 1994, and $46 million, or 56.8%, during fiscal 1993. As a result
of this improvement, each measurement of asset
A-38
<PAGE>
quality is significantly improved in fiscal 1994 and 1993 as compared to prior
periods. Nonaccrual loans declined by $2.6 million, or 43.7%, during fiscal
1994.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans......................... $ 2,492 .11 % $ 4,830 .33 % $ 6,463 .48 % $ 2,781 .22 % $ 1,841 .13 %
Nonaccrual loans upon which interest is
being received......................... 885 .04 1,173 .08 11,095 .82 17,836 1.39 10,250 .70
Restructured loans....................... 7,701 .36 11,045 .77 31,810 2.34 21,705 1.69 -- --
Total nonperforming/
underperforming loans............. 11,078 .51 % 17,048 1.18 % 49,368 3.64 % 42,322 3.30 % 12,091 .83 %
Real estate owned........................ 12,758 17,936 31,623 34,381 11,622
Total nonperforming/
underperforming assets............ $23,836 $34,984 $80,991 $76,703 $23,713
Loans past due 90 days still accruing
interest............................... $ 3,639 .17 % $ 4,783 .33 % $ 8,217 .61 % $ 4,968 .39 % $ 4,925 .34 %
Allowance for loan losses to loans, net
of unearned income..................... .74% 1.24% 1.40% .87% .71%
Allowance for loan losses to nonaccrual
loans.................................. 472.31 297.97 107.90 54.20 85.19
Nonperforming assets to loans, net of
unearned income........................ 1.11 2.43 5.96 5.98 1.63
Nonperforming loans to loans, net of
unearned income........................ .51 1.18 3.64 3.30 .83
Nonperforming assets to total assets..... .84 1.46 3.49 3.73 1.11
Nonperforming loans to total assets...... .39 .71 2.13 2.06 .57
Allowance to nonperforming/
underperforming loans.................. 143.97 104.93 42.25 26.40 85.19
</TABLE>
Continued improvement in this area is evidence of management's monitoring
of the loan portfolio, and also reflects the improved economic climate in the
Bank's market area. Total nonaccrual loans at September 30, 1994 were only $3.4
million. Restructured loans were $7.7 million at September 30, 1994, a reduction
of $3.3 million, or 30.3%, during fiscal 1994. This improvement was primarily
the result of two lending relationships returning to an accrual status during
the fiscal year. Nonaccrual and restructured loans resulted in the Bank
recognizing $0.4 million less in fiscal 1994 in interest income than would have
been recognized had the loans been paying in accordance with contractual terms.
Nonaccrual loans were reduced $11.6 million, or 65.8%, during fiscal 1993.
This improvement was primarily related to one lending relationship which had
never missed a payment, and which had been classified as nonaccrual due to cash
flow difficulties. The interest rate environment during fiscal 1993 resulted in
a lower interest rate on the adjustable-rate loan, and allowed the borrower to
reduce interest payments on the loan. The cash flow from the underlying property
thus became sufficient to service the debt, and the loan was no longer required
to be carried as nonaccrual. Restructured loans were reduced $20.8 million, or
65.3%, primarily through the change in status of one credit relationship with a
local residential developer and the resulting in-substance foreclosure, net of
charge-offs, during the period. This action also resulted in the elimination of
unfunded commitments to the developer totalling $4.5 million. In addition, a
$3.2 million credit experienced continued improvement in cash flow, and resumed
payments at the original contractual interest rate. Nonaccrual loans and
restructured loans resulted in the Bank recognizing $1 million less in fiscal
1993 in interest income than would have been recognized had the loans been
paying in accordance with contractual terms.
The fiscal 1994 $5.2 million decline in real estate owned follows the
fiscal 1993 decline of $13.7 million. Management is proud of the progress in
this area, and continued improvement is expected as a result of the improvement
in the real estate markets in the Washington metropolitan area. Housing starts
in the Bank's primary market area continue to be strong, and management believes
that further improvement will be recognized in the levels of real estate owned.
A-39
<PAGE>
The September 30, 1994 real estate owned portfolio primarily consisted of
four separate single-family housing construction projects which are in various
stages of development, as well as one land acquisition and development project
which has been rezoned for residential development subsequent to September 30,
1994, and which is currently being marketed for sale. The September 30, 1993
real estate owned balance was comprised primarily of two residential development
parcels, totalling $8 million, which were "in-substance foreclosures", and which
have subsequently been successfully developed and partially sold.
The Bank has been successful in reducing the level of delinquent loans. The
Bank, at September 30, 1994, reported a 30 day residential delinquency well
below regional and national averages. The Bank's 30 day residential delinquency
ratio of 0.55% to total residential loans compares to the most recently
available September 30, 1994 regional and national delinquency ratios of 4.38%
and 3.90%, respectively.
NONINTEREST INCOME
The table below summarizes noninterest income for each of the most recent
three years:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts.......................................................... $ 2,408 $ 2,068 $ 1,597
Fees and charges on loan accounts............................................................ 1,169 1,190 1,541
Gain (loss) on sale of assets, net:
Investments................................................................................ (48) -- --
Mortgage-backed securities................................................................. 582 1,960 1,979
Loans...................................................................................... 2,995 4,899 3,683
Office properties and equipment............................................................ (36) (7) (58)
Real estate owned.......................................................................... 1,752 (27) 75
5,245 6,825 5,679
Miscellaneous:
Rents received............................................................................. 326 422 489
ATM related fees........................................................................... 307 235 179
Insurance commission and fees.............................................................. 1,009 1,079 1,206
Other...................................................................................... 550 253 727
2,192 1,989 2,601
Noninterest income........................................................................... $11,014 $12,072 $11,418
</TABLE>
FISCAL 1994 COMPARED TO FISCAL 1993
Service charges earned on deposit accounts increased $340 thousand, or
16.4%, during fiscal 1994 as a result of continued growth in the Bank's core
deposit transaction account base. Management was successful in generating a net
increase of approximately 7,500 in transaction and savings accounts during
fiscal 1994. Continued expansion of the retail branch network and various sales
initiatives which have been implemented should stimulate further growth in this
area. Fees and charges on loan accounts were relatively unchanged during fiscal
1994.
The Bank recognized $582 thousand in net gains on the sale of
mortgage-backed securities during the year ended September 30, 1994. This was
the result of the sale of approximately $139 million of adjustable-rate
securities and $41 million of fixed-rate securities. The adjustable-rate
securities were those which had an unacceptably high prepayment rate and, in
accordance with Columbia First's investment policy, were eligible for sale. The
fixed-rate securities sold represented the entire remaining portfolio of
thirty-year fixed-rate securities, except for those which cannot be sold because
they are specifically pledged against notes payable issued by a subsidiary of
Columbia First.
Gain on sale of loans declined $1.9 million, or 38.9%, during fiscal 1994
as a result of lower fixed-rate loan originations. Interest rates in the Bank's
primary market area increased dramatically during fiscal 1994, thus making
adjustable-rate loans more preferable to borrowers. The Bank has a policy of
immediately selling all fixed-rate residential loans, including adjustable-rate
loans which have been converted to fixed-rate at the option of the borrower.
Because the Bank sells most production on an optional delivery basis so as to
minimize interest rate risk, the gain on sale is considered relatively
predictable as a ratio of fixed-rate production. This production is therefore
used to produce gains which "offset" fixed overhead costs of the loan
origination operation. Continued increases in interest rates would likely result
in continued declines in the
A-40
<PAGE>
Bank's gain on sale of loans in future periods. Gain on sale of real estate
owned increased $1.8 million during the year ended September 30, 1994, primarily
as a result of the disposal of one single-family residential project which
resulted in a $1.4 million gain. Various other single-family residential
properties were sold for a net gain of $.4 million.
ATM related fees increased $72 thousand, or 30.6%, during fiscal 1994 as a
result of the increased number of transaction accounts. Insurance commission and
fees declined $70 thousand, or 6.5%, as a result of the declining attractiveness
in the annuity products sold by the Bank's insurance subsidiary. At the same
time, however, an increase in commissions earned was noted during fiscal 1994,
and continued improvement in this area is expected. Other income increased $297
thousand, or 117.4%, during fiscal 1994. This increase was primarily the result
of the collection of $153 thousand related to a parcel of real estate owned
which had been disposed of in a previous period.
FISCAL 1993 COMPARED TO FISCAL 1992
Service charges earned on deposit accounts increased $471 thousand, or
29.5%, as a result of the Bank's success in increasing the core deposit
transaction account base upon which fees are earned. Partially offsetting this
improvement, however, was a decline in loan fee income of $351 thousand, or
22.8%, as compared to fiscal 1992. This decline is primarily a result of a $256
thousand decrease in mortgage servicing fee income due to lower balances of
loans serviced for others. This decline is also a result of the improving
delinquency ratios reported by the Bank during fiscal 1993. The Bank does not
earn late payment fee income when borrowers make their loan payments on a timely
basis; however, management clearly prefers that payments be made in a timely
manner.
The Bank recognized $2 million in gains on the sale of mortgage-backed
securities during fiscal 1993. Management decided to sell $61.7 million in
adjustable-rate securities, at a net gain of $1 million, because of unacceptable
prepayment experience. The securities had been purchased at a premium and the
effective yield earned on the investments was not within the parameters mandated
within the Bank's investment policy. In addition, the Bank sold sixty-three
fixed-rate securities totalling $13.9 million at a net gain of $1 million in
fiscal 1993. These securities had been in the Bank's portfolio for many years,
and the principal had significantly been reduced such that the individual
balances of each of the securities was minimal.
Gains on sale of loans increased $1.2 million during fiscal 1993 because of
increased fixed-rate loan originations. Fiscal 1993 was a period in which
borrowers preferred fixed-rate loans, and the Bank originates such loans and
immediately sells the loans in the secondary markets in order to minimize
interest rate risk.
Miscellaneous income declined $612 thousand, or 23.5%, in fiscal 1993
primarily as a result of the Bank's decision in fiscal 1992 to close the
appraisal subsidiary. There was also a $127 thousand, or 10.5%, decline in the
fees earned from the sale of insurance products through the Bank's insurance
subsidiary. Generally, annuity products being offered by Columbia First
Insurance Services, Inc. were not as popular during fiscal 1993 as were mutual
fund investments, which are not sold by the Bank or any of its subsidiaries. ATM
fee income improved $56 thousand, or 31.3%, during fiscal 1993 as a result of
the increased number of transaction deposit accounts and the increased number of
ATMs in the Bank's branch system. The Bank's sublease rental income declined $67
thousand, or 13.7%, during fiscal 1993 as a result of the Bank's growth, and the
need to utilize space which had previously been subleased.
A-41
<PAGE>
NONINTEREST EXPENSE
The table below summarizes noninterest expense for each of the past three
years:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1993 1992
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Compensation................................................................................. $12,810 $11,374 $10,654
Commissions.................................................................................. 2,716 3,084 2,032
Employee benefits and other personnel expense................................................ 4,206 3,863 3,440
19,732 18,321 16,126
Occupancy and equipment...................................................................... 8,928 8,481 7,982
Deposit insurance premium.................................................................... 3,578 2,870 2,735
Amortization of excess cost over net tangible assets acquired................................ 5,851 2,582 2,878
Real estate owned............................................................................ 2,863 5,340 4,813
Data processing.............................................................................. 2,005 1,686 1,532
Marketing.................................................................................... 1,797 1,647 989
Other:
Professional fees.......................................................................... 598 462 472
Insurance.................................................................................. 385 447 476
Printing and supplies...................................................................... 638 541 516
Postage.................................................................................... 415 387 377
ATM and related expenses................................................................... 336 281 228
Communication.............................................................................. 614 621 557
OTS assessment............................................................................. 388 376 330
Miscellaneous.............................................................................. 1,146 1,323 831
4,520 4,438 3,787
Noninterest expense........................................................................ $49,274 $45,365 $40,842
</TABLE>
FISCAL 1994 COMPARED TO FISCAL 1993
Noninterest expense increased $3.9 million, or 8.6%, during the year ended
September 30, 1994, primarily as a result of increases in personnel expenses,
amortization of excess cost over net tangible assets acquired (goodwill), and
deposit insurance premiums. These increases were partially offset by a reduction
in real estate owned expense. The following discussion provides insight into
these components, as well as other components, within the noninterest expense
category.
Personnel expense increased $1.4 million, or 7.7%, during fiscal 1994.
Personnel expense includes compensation, commissions, and benefits and other
employee expense. Compensation expense increased $1.4 million, or 12.6%, in
fiscal 1994 due primarily to the increased staff required for the additional
retail branches opened in fiscal 1994 and for the full period effects of those
branches that opened in the latter part of fiscal 1993. Additional loan
processing personnel were also required during much of fiscal 1994 due to high
loan volume. Although the number of full-time equivalent employees was reduced
during fiscal 1994 (primarily as a result of declining residential loan volume
late in the fiscal period), the Bank required more staff on an average basis
during fiscal 1994 than was required in the previous year.
Commission expense declined by $368 thousand because retail residential
loan origination volume declined $145.1 million during fiscal 1994. The Bank
pays loan offcers a commission on single-family residential loans originated
through the retail network, and a significant portion of the fiscal 1994 loan
volume was originated through the wholesale broker and correspondent network.
Significantly lower commissions are paid on wholesale loan originations.
Employee benefits and other personnel expenses increased $343 thousand during
the period, primarily as a result of the Bank's employee pension obligations.
Occupancy and equipment expense increased $447 thousand, or 5.3%, in fiscal
1994 as a result of the opening of three new retail banking offices during the
period, as well as various technology initiatives which were implemented during
the period.
Deposit insurance premiums increased $708 thousand, or 24.7%, during the
year ended September 30, 1994. This increase was primarily due to higher deposit
account balances; however, the premium assessment rate was higher during much of
the current period than was experienced during the previous fiscal year.
A-42
<PAGE>
Goodwill amortization expense increased $3.3 million, or 126.6%, during
fiscal 1994. This increase was primarily the result of management's evaluation
of the underlying assumptions of the amortization of goodwill and the assets
acquired and liabilities assumed in previous periods. As a result of this
evaluation, $4.3 million in goodwill was written off in fiscal 1994 and one
component of goodwill amortization was accelerated. Future goodwill amortization
will be significantly reduced as a result of this evaluation.
Real estate owned expense declined $2.5 million during the year ended
September 30, 1994. Real estate owned provisions for loss were $3.3 million, or
92%, lower than fiscal 1993 as a result of the improved residential real estate
market in the Bank's primary market area. Partially offsetting this improvement
was the increase of $826 thousand, or 47.2%, in real estate owned expenses. This
was primarily due to the requirement that the Bank recognize certain expenses as
incurred, although a significant portion of certain of these expenses are
expected to be recouped upon the ultimate sale of the underlying asset.
Data processing expenses increased $319 thousand, or 18.9%, during fiscal
1994 primarily as a result of the increased number of deposit and loan accounts
which were being serviced during the period. Marketing expense increased $150
thousand, or 9.1%, as a result of promotional materials related to the new
branch locations and a program to enhance the Bank's recognition in it's primary
market area. Other noninterest expense categories experienced insignificant
fluctuations during the year ended September 30, 1994.
FISCAL 1993 COMPARED TO FISCAL 1992
Noninterest expense increased $4.5 million, or 11.1%, during the twelve
months ended September 30, 1993. The largest components of this increase were
personnel expenses, marketing, real estate owned, and occupancy and equipment
expenses. The following discussion will provide details of each of these
components, as well as others, within noninterest expense.
The largest single component of noninterest expense is personnel costs
which increased $2.2 million during fiscal 1993. This includes compensation,
commissions and employee benefits. The increase of $1.1 million, or 51.8%, in
commission expense was attributable to the increased volume of residential loan
production, which increased by $92 million, or 17.5%, during the fiscal year.
Additionally, an increased ratio of the loan volume was originated from the
Bank's production offices, as opposed to originations from the Bank's wholesale
office, upon which significantly lower commissions are paid. As noted earlier,
because fixed-rate residential loan production is sold as soon as practical for
a relatively predictable profit, management considers this profit as an offset
to the costs of the loan origination function. Improved gains on sale of
fixed-rate loans more than offset the increased commissions related to the
underlying loan production. Compensation expense increased $720 thousand, or
6.8%, during fiscal 1993 primarily as a result of staffing needs for the
enhanced branch retail delivery system. Benefits and other employee expenses
increased $423 thousand, or 12.3%, primarily as a result of the higher
compensation and commission base. Higher costs of health insurance benefits and
a comprehensive training program implemented by the Bank also resulted in
increased costs in this category.
Occupancy and equipment expense increased by $499 thousand, or 6.3%, as a
result of the additional banking and loan production branch offices which were
opened during fiscal 1993. Five new full service banking offices were opened
during the fiscal year, or were in the process of being opened at fiscal year
end. In addition, another loan production office was opened during fiscal 1993.
The Bank also upgraded the branch system through various renovation projects.
Real estate owned expenses increased $527 thousand, or 10.9%, as a result
of aggressive pricing in order to rapidly dispose of the properties.
Management's primary goal during fiscal 1993 was the disposition of real estate
owned, and balances were successfully reduced $13.7 million, or 43.3%, from the
fiscal 1992 level.
Within the other noninterest expense category, marketing expenses increased
$658 thousand, or 66.5%, as a result of the marketing efforts required by the
new branch office locations, and as a result of a campaign specifically focused
on enhancing the recognition of the Bank within its market area. Miscellaneous
noninterest expenses increased $492 thousand, or 59.2%, primarily as a result of
additional consulting fees, courier expenses and litigation expenses.
The amortization of goodwill declined by $296 thousand, or 10.3%, during
fiscal 1993 as balances continued to be amortized. Deposit insurance premiums
increased $135 thousand, or 4.9%, during fiscal 1993. Deposit balances were
substantially the same during fiscal 1993 and 1992, and net premium payments did
not significantly increase during the fiscal year. Data processing expenses
increased $154 thousand, or 10.1%, during fiscal 1993 primarily as a result of
the increased number of deposit transaction accounts. There were no other
material fluctuations within noninterest expenses during fiscal 1993.
A-43
<PAGE>
TAXES
Income tax expense is computed upon, and generally varies proportionally
with, earnings before income tax expense adjusted for non-taxable income and
non-deductible expense. The Bank generally experiences a relatively high tax
rate because of the goodwill amortization which is not deductible.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109) was issued by the Financial Accounting Standards Board in
February 1992. SFAS No. 109 requires a change from the deferred method under APB
Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS No. 109, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
SFAS No. 109 was adopted prospectively by the Bank in the first quarter of
fiscal 1994, without restating prior years' financial statements. The adoption
of SFAS No. 109 resulted in the reduction of the net deferred tax liability by
approximately $5.5 million, or $1.46 per share, and this amount was reported
separately as the cumulative effect of the change in the method of accounting
for income taxes.
Income tax expense of $6.1 million was recognized during fiscal 1994. This
expense was somewhat higher than expected primarily because of approximately
$5.9 million in goodwill amortization which was recognized, approximately $4.6
million of which was non-deductible for income tax purposes. Income tax expense
of $9 million was recognized during the year ended September 30, 1993. This
expense was somewhat higher than expected because of the reversal of certain tax
benefits related to specific loan loss reserves which had been recognized in
prior periods. The Bank recorded a tax provision of $2.8 million for the year
ended September 30, 1992. The expense recognized in fiscal 1992 was less than
expected due to an adjustment made to correct differences between estimates made
on prior year tax provisions for financial statement reporting, versus more
precise amounts used in preparation of the tax return. The effective tax rates
for each of the fiscal years ended September 30, 1994, 1993 and 1992 were 50%,
47%, and 32%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
A financial institution's asset and liability structure is substantially
different from that of an industrial company in that virtually all assets and
liabilities of a bank are monetary in nature. Management believes that the
impact of inflation on financial results depends upon the Bank's ability to
manage interest rate sensitivity and, by such management, reduce the
inflationary impact upon performance. Interest rates do not necessarily move in
the same direction, or in the same magnitude, as the prices of other goods and
services. As discussed above, management seeks to manage the relationship
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.
FAIR VALUES
Disclosure of estimated fair values of financial investments as of
September 30, 1994 is provided in the notes to the consolidated financial
statements. While the fair values provided represent estimates of the amount at
which individual financial assets and liabilities could be realized, the Bank
has no current interest to liquidate a significant portion of these investments.
If, in fact, liquidation should occur, the net realizable values could be
materially different from the estimated fair values.
The Bank prospectively adopted Statement of Financial Standards No. 115
("SFAS No. 115") as of October 1, 1994. SFAS No. 115 specifies the accounting
and reporting for all investments in debt and equity securities that have
readily determinable fair value, as more fully discussed in the notes to the
consolidated financial statements. The adoption of SFAS No. 115 resulted in the
transfer of approximately $151.8 million of mortgage-backed securities from the
"held to maturity" portfolio to the "available for sale" portfolio. No
investment securities were classified as "trading". In accordance with SFAS No.
115, securities which are "available for sale" are marked-to-market based upon
their fair values, with the resulting unrealized gain or loss reflected, net of
tax effect, in the equity accounts of the Bank. The adoption of SFAS No. 115 at
October 1, 1994 resulted in a reduction of equity of $.9 million, and this
equity valuation will fluctuate with the fair values of the investments which
have been, or newly-purchased investments which will be, identified as
"available for sale".
A-44
<PAGE>
IMPACT OF INTEREST RATES ON COLUMBIA FIRST
The earnings of Columbia First depend primarily on its net interest income,
which is determined by the difference, or spread, between the return on
interest-earning assets and the cost of interest-bearing liabilities. Effective
interest rate sensitivity management is vital to ensuring that net interest
income is maximized while the impact of changes in the level of market interest
rates is minimized.
Savings institutions have typically been liability-sensitive, in that
liabilities will mature or reprice more rapidly than will assets. This has been
the case because of the asset mix, which includes long-term mortgages, typically
found in savings institutions. During periods of increasing interest rates, an
institution with a liability-sensitive position will experience a cost of funds
that will typically increase faster than the return on interest-earning assets,
resulting in a reduction of net interest income. Conversely, during periods of
declining interest rates, a liability-sensitive position will result in a return
on interest-earning assets that may decline more slowly than its cost of funds,
resulting in an increase in net interest income. Columbia First management
believes that many institutions have been reporting higher than expected
earnings during the recent low interest rate environment, because of the
mismatch of asset and liability repricing noted above. Management believes that
these institutions are now experiencing severe earnings pressure because of the
higher interest rates during much of fiscal 1994, as their cost of funds has
increased more rapidly than interest earned on assets.
At Columbia First, management has successfully restructured the balance
sheet in order to significantly reduce the institution's interest rate risk.
Adjustable-rate loans and mortgage-backed securities have been originated and
purchased, while fixed-rate loans and mortgage-backed securities have been sold.
The primary intent of this strategy has been to minimize the institution's
sensitivity to changes in interest rates. A more detailed discussion of net
interest income and interest rate sensitivity management is contained in
Management's Discussion and Analysis in the 1994 Annual Report to Stockholders.
SELECTED RATIOS
The table below presents the average return earned by Columbia First on
assets and on stockholders' equity and the average ratio of equity to assets.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
1994 1993 1992
<S> <C> <C> <C>
Return on average assets(1).................................................................... .45% .43% .27%
Return on average stockholders' equity(2)...................................................... 9.06 9.24 6.03
Equity to assets(3)............................................................................ 4.94 4.67 4.39
</TABLE>
(1) Net income divided by average total assets.
(2) Net income divided by average stockholders' equity.
(3) Average stockholders' equity divided by average total assets.
MORTGAGE-BACKED SECURITIES
Columbia First purchases mortgage-backed securities from time to time as
part of its overall investment strategy. Such securities offer greater liquidity
in the secondary market than single-family residential mortgage loans and are
more efficiently utilized as collateral for borrowings. During fiscal 1994 and
fiscal 1993, Columbia First utilized such securities as collateral for
borrowings in lieu of accepting higher-costing deposits. A summary of
investments in mortgage-backed securities is provided in Note 4 in the Notes to
Consolidated Financial Statements in Columbia First's 1994 Annual Report to
Stockholders.
The following table sets forth mortgage-backed securities by issuer and by
interest rate characteristics. The table shows Columbia First's changing mix of
securities by issuer, primarily effected by management due to changing
prepayment characteristics of the underlying loan collateral. The table also
shows the attempts to minimize interest rate risk through the sale and repayment
of fixed-rate securities. Adjustable-rate securities are primarily used to
augment residential lending volume, and Columbia First experienced significant
growth in residential loan balances during fiscal 1994. There has therefore been
a reduced reliance on adjustable-rate securities during fiscal 1994, as noted in
the table.
A-45
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
MORTGAGE-BACKED SECURITIES BY ISSUER:
FNMA mortgage-backed certificates... $ 87,321 18.5 % $132,552 18.0 % $199,450 27.3 % $ 99,940 18.6 % $ 28,644
GNMA mortgage-backed certificates... 128,282 27.2 146,367 19.9 46,754 6.4 12,622 2.3 15,110
FHLMC participation certificates.... 194,467 41.2 406,929 55.2 463,065 63.4 325,322 60.4 363,761
Private mortgage-backed
securities.......................... -- -- -- -- -- -- 85,366 15.9 100,626
CMOs................................ 52,569 11.2 36,067 4.9 2,382 .3 7,823 1.5 9,460
462,639 98.1 721,915 98.0 711,651 97.4 531,073 98.7 517,601
Premium/(discount).................... 8,813 1.9 14,862 2.0 19,040 2.6 7,021 1.3 (10)
$471,452 100.0 % $736,777 100.0 % $730,691 100.0 % $538,094 100.0 % $517,591
MORTGAGE-BACKED SECURITIES BY INTEREST
RATE CHARACTERISTICS:
Fixed rate.......................... $ 33,588 7.1 % $109,218 14.8 % $172,840 23.7 % $319,814 59.4 % $486,716
Adjustable Rate..................... 429,051 91.0 612,697 83.2 538,811 73.7 211,259 39.3 30,885
462,639 98.1 721,915 98.0 711,651 97.4 531,073 98.7 517,601
Premium/(discount).................... 8,813 1.9 14,862 2.0 19,040 2.6 7,021 1.3 (10)
$471,452 100.0 % $736,777 100.0 % $730,691 100.0 % $538,094 100.0 % $517,591
<CAPTION>
%
<S> <C>
MORTGAGE-BACKED SECURITIES BY ISSUER:
FNMA mortgage-backed certificates... 5.5 %
GNMA mortgage-backed certificates... 2.9
FHLMC participation certificates.... 70.3
Private mortgage-backed
securities.......................... 19.5
CMOs................................ 1.8
100.0
Premium/(discount).................... --
100.0 %
MORTGAGE-BACKED SECURITIES BY INTEREST
RATE CHARACTERISTICS:
Fixed rate.......................... 94.0 %
Adjustable Rate..................... 6.0
100.0
Premium/(discount).................... --
100.0 %
</TABLE>
LENDING ACTIVITIES
Columbia First's principal investment activity has been and continues to be
the origination of loans secured by residential real estate. Traditional
single-family residential real estate loans were historically made on a
long-term, fixed-rate basis, thus exposing the lender to an unacceptable level
of interest rate risk to the extent that its assets did not reprice as
frequently or to the same extent as its liabilities. In recent years, Columbia
First's asset/liability management strategy has been designed to reduce interest
rate risk, primarily through the acquisition of adjustable rate mortgage loans
("ARMs") on single-family residences. All fixed-rate loans and mortgage-backed
securities originated after April 1, 1989 are held for sale and sold as soon as
practical so that interest rate risk is minimized.
ARM loans provide for periodic adjustment of the interest rate to coincide
with changes in an index of market rates. While ARMs have the advantage of
reducing an institution's sensitivity to interest rate fluctuations, they do
present certain risks not associated with traditional fixed-rate mortgages.
These include the risk that the borrower, having qualified for the loan based
upon interest rates prevailing at the time of origination, may be unable to make
the higher payments required under the ARM if and when changes in the applicable
index rates result in upward adjustments in the rate payable on the loan.
Columbia First mitigates these risks by the use of conservative underwriting
standards and loan-to-value ratios of generally 80% or less, and by limits on
the size of the periodic adjustment in the interest rate and on the maximum
interest rate that may be charged on practically all ARMs. In addition,
borrowers are currently qualified on loan terms which include the highest
possible interest rate that could be in effect on the date of the initial
repricing of the loan.
Columbia First currently limits the types of loans originated for its own
portfolio to the following: (i) ARMs, typically on single-family residential
properties, (ii) loans, typically real estate construction and primarily secured
commercial loans, which provide for adjustable interest rates related to a
"prime" lending rate, and (iii) balloon loans and other short-term fixed-rate
loans. Such loans conform to the categories of loans which applicable federal
regulations permit federally chartered savings institutions to originate and
purchase.
The following table discloses the maturities of Columbia First's loans
receivable as of September 30, 1994. In this table, scheduled repayments are
reported in the maturity category in which the payment is due. Demand loans,
loans having no stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less.
A-46
<PAGE>
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF LOANS
THROUGH SEPTEMBER 30,
1995 1996 1997 1998 THRU 1999 2000 THRU 2004 2005 THRU 2009 THEREAFTER
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Commercial loans............. $ 42,445 $ 26,381 $14,125 $ 13,846 $ 8,225 $ 1,833 $ 4,310
Real estate loans
-Permanent................. 81,491 66,807 78,831 172,790 235,660 241,488 1,115,803
-Construction.............. 15,864 16,940 3,357 2,204 -- -- --
Consumer..................... 11,709 1,064 743 663 299 116 --
Total.................... $151,509 $111,192 $97,056 $189,503 $244,184 $243,437 $1,120,113
Less unearned income.....
Loans with floating or
adjustable rate............ $127,790 $ 94,583 $77,462 $150,294 $185,796 $231,297 $1,098,325
Loans with fixed rates....... 23,719 16,609 19,594 39,209 58,388 12,140 21,788
Total.................... $151,509 $111,192 $97,056 $189,503 $244,184 $243,437 $1,120,113
Less unearned income.....
<CAPTION>
TOTAL
<S> <C>
Commercial loans............. $ 111,165
Real estate loans
-Permanent................. 1,992,870
-Construction.............. 38,365
Consumer..................... 14,594
Total.................... 2,156,994
Less unearned income..... 1,613
$2,155,381
Loans with floating or
adjustable rate............ $1,965,547
Loans with fixed rates....... 191,447
Total.................... 2,156,994
Less unearned income..... 1,613
$2,155,381
</TABLE>
The following tables set forth the composition of Columbia First's loan
portfolio by type of collateral and by type of loan at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
LOANS BY TYPE OF COLLATERAL:
Mortgage loans:
One-to-four family........... $1,716,276 80.2 % $1,079,416 75.9 % $1,013,545 75.7 % $ 953,885 75.0 % $1,089,578
Multi-family................. 68,533 3.2 62,465 4.4 56,261 4.2 54,592 4.3 63,030
Non-residential.............. 246,426 11.5 196,110 13.8 175,672 13.1 167,232 13.1 212,704
Total mortgage loans......... 2,031,235 94.9 1,337,991 94.1 1,245,478 93.0 1,175,709 92.4 1,365,312
Deposit loans.................. 2,592 .1 2,749 .2 3,113 .2 3,968 .3 4,518
Consumer loans................. 12,002 .6 8,861 .6 8,807 .7 11,902 .9 13,833
Commercial loans............... 111,165 5.2 95,333 6.7 107,970 8.0 97,369 7.7 75,832
2,156,994 100.8 1,444,934 101.6 1,365,368 101.9 1,288,948 101.3 1,459,495
Less:
Unearned income.............. 1,613 .1 5,080 .3 7,231 .5 6,146 .5 8,371
2,155,381 100.7 1,439,854 101.3 1,358,137 101.4 1,282,802 100.8 1,451,124
Less:
Allowance for loan losses.... 15,949 .7 17,889 1.3 18,946 1.4 11,174 .8 10,300
Net loans.................... $2,139,432 100.0 % $1,421,965 100.0 % $1,339,191 100.0 % $1,271,628 100.0 % $1,440,824
LOANS BY TYPE OF LOAN:
Loans on existing property:
Fixed rate................... $ 166,660 7.8 % $ 176,802 12.4 % $ 182,865 13.6 % $ 230,983 18.2 % $ 303,617
Adjustable rate.............. 1,812,556 84.7 1,111,475 78.2 994,824 74.3 884,616 69.5 976,026
Construction, land and land
development loans............ 52,019 2.4 49,714 3.5 67,789 5.1 60,110 4.7 85,669
Deposit and consumer loans..... 14,594 .7 11,610 .8 11,920 .9 15,870 1.2 18,351
Commercial loans............... 111,165 5.2 95,333 6.7 107,970 8.0 97,369 7.7 75,832
2,156,994 100.8 1,444,934 101.6 1,365,368 101.9 1,288,948 101.3 1,459,495
Less:
Unearned income.............. 1,613 .1 5,080 .3 7,231 .5 6,146 .5 8,371
2,155,381 100.7 1,439,854 101.3 1,358,137 101.4 1,282,802 100.8 1,451,124
Less:
Allowance for loan losses.... 15,949 .7 17,889 1.3 18,946 1.4 11,174 .8 10,300
Net loans...................... $2,139,432 100.0 % $1,421,965 100.0 % $1,339,191 100.0 % $1,271,628 100.0 % $1,440,824
<CAPTION>
%
<S> <C>
LOANS BY TYPE OF COLLATERAL:
Mortgage loans:
One-to-four family........... 75.6 %
Multi-family................. 4.4
Non-residential.............. 14.8
Total mortgage loans......... 94.8
Deposit loans.................. .3
Consumer loans................. 1.0
Commercial loans............... 5.2
101.3
Less:
Unearned income.............. .6
100.7
Less:
Allowance for loan losses.... .7
Net loans.................... 100.0 %
LOANS BY TYPE OF LOAN:
Loans on existing property:
Fixed rate................... 21.1 %
Adjustable rate.............. 67.7
Construction, land and land
development loans............ 5.9
Deposit and consumer loans..... 1.3
Commercial loans............... 5.3
101.3
Less:
Unearned income.............. .6
100.7
Less:
Allowance for loan losses.... .7
Net loans...................... 100.0 %
</TABLE>
A-47
<PAGE>
ORIGINATIONS, PURCHASES, REPAYMENTS AND SALES OF LOANS.
The following table shows the loan origination, purchase, repayment and
sale activity (including mortgage-backed securities), for Columbia First for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Loans originated:
Conventional
Construction........................................... $ 53,568 $ 33,383 $ 41,768 $ 35,520 $ 65,172
Loans on existing property............................. 456,636 233,318 198,998 56,478 100,312
Refinanced............................................. 142,812 256,253 139,679 82,112 33,338
Total conventional................................... 653,016 522,954 380,445 174,110 198,822
FHA/VA.................................................... 33,031 64,067 51,976 29,530 39,509
Consumer Loans............................................ 4,496 2,625 1,878 10,003 7,281
Commercial Loans.......................................... 35,908 12,448 37,589 8,992 53,880
Total loans originated...................................... 726,451 602,094 471,888 222,635 299,492
Purchased -- Loans.......................................... 508,630 109,721 164,880 29,163 39,916
-- Mortgage-backed securities.................... 61,452 246,909 430,589 201,814 --
Acquired in Maximum
acquisition -- Loans...................................... -- -- -- -- 91,136
-- Mortgage-backed securities................. -- -- -- -- 2,209
Real estate acquired through foreclosure and loan
chargeoffs, net........................................... (3,373) (6,280) (18,005) (36,450) (20,612)
Repayments -- Loans......................................... (375,408) (330,295) (311,178) (201,465) (207,255)
-- Mortgage-backed securities.................. (146,891) (165,201) (156,288) (69,355) (66,454)
Sales -- Loans.............................................. (176,043) (287,270) (218,613) (177,928) (118,324)
-- Mortgage-backed securities......................... (179,886) (75,622) (81,704) (111,955) (35,025)
Net loan and mortgage-backed securities activity............ $ 414,932 $ 94,056 $ 281,569 $(143,541) $ (14,917)
</TABLE>
Loans and mortgage-backed securities repayments include appropriate
accretion and amortization of premiums and discounts, respectively, in the
tables above.
For a detailed discussion of Columbia First's loan origination and purchase
activity, see Management's Discussion and Analysis in Columbia First's 1994
Annual Report to Stockholders.
REAL ESTATE LENDING. The primary lending activity of Columbia First is the
extension of credit for the purpose of enabling borrowers to purchase or to
refinance residential real property, secured by first liens on such property.
The largest portion of Columbia First's loans are made to homeowners on the
security of single-family residences. In addition, Columbia First's real estate
loan portfolio includes loans secured by multi-family properties, commercial and
industrial properties (which include construction loans) and loans made for the
acquisition and development of unimproved property. Columbia First's real estate
loans are predominantly "conventional" loans, which means that they are not
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). At September 30, 1994, 80.2% of Columbia First's
total loan portfolio consisted of first lien loans secured by one-to-four-family
residences, 3.2% consisted of loans secured by multi-family residential
properties, and 11.5% consisted of non-residential properties.
Regulations of the OTS and FDIC limit the principal amount of real estate
loans made by federally chartered savings institutions to specified percentages
of the value of the property securing the loan (referred to as the
"loan-to-value ratio"). Generally, the regulations provide that at the time of
origination, a real estate loan may not exceed a ratio of the appraised value of
the security property. The maximum allowable ratio as required by the
regulations is dependent upon the type of collateral property on the real estate
loan. Columbia First's Board of Directors has established a policy regarding
maximum loan-to-value ratios for specific types of real estate loans which is in
compliance with the regulations, and which is generally more restrictive than
either the OTS or FDIC regulations.
A-48
<PAGE>
Columbia First 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 Columbia First's fixed-rate mortgage loans include a
"due on sale" clause, which provides the 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 real property subject to the mortgage and the
loan is not repaid. It is the policy of Columbia First, with limited exceptions,
to enforce due-on-sale provisions. This provides Columbia First with the
opportunity to adjust the rate of interest on existing fixed-rate loans by
negotiating a new rate at the time of sale.
Subject to market rates, the availability of acceptable mortgage loans from
secondary market sources, and applicable regulations, Columbia First engages in
the purchase of loans and the purchase and sale of loan participations. Such
purchases are conducted in the secondary mortgage market and all loans purchased
must meet the same underwriting standards as loans originated by Columbia First.
At September 30, 1994, approximately $43.3 million or 2% of Columbia
First's net loans receivable were serviced by others.
Columbia First is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), and the Residential Funding Corporation. Columbia First has
participated in various programs of FHLMC and, at September 30, 1994, serviced
$117.9 million of mortgages for FHLMC.
CONSUMER LENDING. Columbia First originates a variety of consumer loans,
including home equity lines of credit, unsecured lines of credit, loans to
depositors on the security of their deposits, home improvement loans and
automobile loans. As of September 30, 1994, deposit and consumer loans amounted
to $14.6 million, or .7%, of Columbia First's loan portfolio.
CONSTRUCTION, COMMERCIAL AND NON-RESIDENTIAL REAL ESTATE LENDING. In order
to provide loan portfolio diversification, Columbia First provides construction
loans on commercial properties and multi-family dwellings. In addition, Columbia
First provides acquisition and construction financing for unimproved and
improved properties to be used for residential and commercial purposes. These
loans have interest rates which adjust to changing market rates and are
primarily limited to Columbia First's local market area. The terms of
construction loans range from twelve to thirty-six months and often include a
reserve to pay interest on loan advances used to cover construction costs.
Columbia First subjects construction loans to underwriting criteria which
include reviews of previous projects and past performance of the borrower, the
amount of the borrower's equity in the project, independent review and valuation
of the cost estimates, pre-construction sale and leasing data, and cash flow
projections expected from the project. Also, Columbia First generally will
require personal guarantees by the principals of the borrower. As of September
30, 1994, the construction loan portfolio, including loans secured by
undeveloped land, totaled $52 million, or 2.4% of the loan portfolio.
Commercial loans primarily secured by non-residential real estate are
originated, or participating interests in such loans are purchased, by Columbia
First. Originations of such loans are presently limited to the local market
area. These loans generally provide for adjustment of interest rates to a market
index and do not exceed maturities of thirty years. Columbia First also provides
other commercial loans which are secured by collateral other than real estate.
These loans typically provide for a floating interest rate based on a "prime"
lending rate and have short repayment terms. As of September 30, 1994, the
commercial loan portfolio originated under the commercial lending authority
totaled $111.2 million, or 5.2%, of the loan portfolio.
In addition, non-residential permanent mortgages, which include loans
originated under federal real estate lending regulations, totaled $246.4 million
or 11.5% of the loan portfolio. Non-residential loans include loans for shopping
centers, office buildings, retail stores, hotels, and other non-residential
purposes.
All construction, commercial, multi-family, land acquisition and
development or other real estate loans exceeding $5 million, individually or in
the aggregate, to one borrower are subject to the specific review and approval
of the Board of Directors. Loans in excess of $3 million, individually or in the
aggregate, to one borrower are subject to the specific review and approval of
the Chairman of the Board or the Chief Executive Officer. Properties securing
such loans are appraised by an independent appraiser, and Columbia First will
lend up to 80% of appraised value of the property securing such loans. If a
security property does not meet debt coverage requirements, additional
collateral or guarantees are required to ensure adequate cash flows to meet debt
service. Ongoing reviews of the loan portfolio are performed to limit the
concentration of risk in any category of loans.
A-49
<PAGE>
MORTGAGE BANKING ACTIVITIES. At September 30, 1994 Columbia First operated
three mortgage loan origination offices which are located in Maryland and
Virginia. Loan applications are also taken at all of the full-service branch
offices. Since fiscal 1991, a wholesale loan origination program has been
utilized wherein adjustable-rate residential loans are purchased by Columbia
First, or are originated by loan brokers and the loan settlement is in the name
of Columbia First. Strict underwriting standards are maintained within this
program to ensure that the loans originated are suitable investments for
Columbia First. Loan production under this wholesale program is currently
limited to loans secured by single-family residential property located in the
Washington metropolitan area and within a seven state area adjacent to this
primary market area.
The amount of loans serviced by Columbia First for others amounted to
$135.7 million, $183 million and $250 million at September 30, 1994, 1993 and
1992, respectively. This decline is primarily due to loan repayments, as these
loans are predominantly seasoned fixed-rate loans which experienced relatively
high prepayments because of the low interest rate environment during much of
fiscal 1994 and 1993. Currently, there is little new volume in loans serviced
for others as adjustable-rate loans originated or purchased by Columbia First
are held for portfolio, and newly-originated fixed-rate loans are generally sold
on a servicing-released basis. Management is currently exploring the
opportunities to sell newly-originated loan production, both of fixed-rate and
adjustable-rate product, on a servicing-retained basis.
LOAN FEE INCOME. In addition to interest earned on loans, Columbia First
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments, changes of property ownership and for
miscellaneous services related to its loans. Income from these activities varies
from period to period consistent with the volume and type of loans made and
purchased.
Columbia First charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination fees generally amount to one
or two percent of the amount borrowed in the case of a mortgage loan. Loan
origination fees are not obtained in connection with consumer loans. Loan
origination and commitment fees net of certain direct loan origination costs are
deferred and accreted to income over the contractual life of the related loans
or upon their prepayment or disposition.
DELINQUENCIES, FORECLOSURES AND LOAN PORTFOLIO RISK ELEMENTS
If a borrower fails to make required payments on a loan within 30 days of
the date due, the loan is classified by Columbia First as delinquent. If the
delinquency is not cured within 90 days, Columbia First usually initiates
foreclosure proceedings under applicable state law. If the loan remains
delinquent, the mortgaged property is generally acquired by Columbia First in a
foreclosure sale or by accepting a deed from the borrower in lieu of
foreclosure. The property may then be sold and financed by a loan conforming to
normal loan requirements. Alternatively, the property may be sold and financed
with a "loan-to-facilitate", which is a loan involving terms more favorable to
the borrower than those normally permitted by applicable federal regulations. It
is currently Columbia First's policy to not offer loans to facilitate to a
borrower in financing the sale of foreclosed property.
In general, loans are placed on non-accrual status after being delinquent
90 days. Exceptions are made to this policy depending upon the specific
characteristics of the loan (i.e., government insured loans and qualifying
single family residences). Accordingly, a single family loan may remain on an
accrual basis even if it is 90 or more days past due. When a loan is placed on a
non-accrual status, interest accrued but not received is reversed against
interest income. A non-accrual loan may be restored to an accrual basis when
principal and interest payments are current and full payment of principal and
interest is expected.
Columbia First's asset classification methodology, in accordance with the
Competitive Equality in Banking Act ("CEBA"), provides for the classification as
Satisfactory, Special Mention, Substandard, Doubtful or Loss, of all loans, real
estate owned ("REO"), real estate investments, lease obligations, and investment
and debt securities held by Columbia First and its subsidiaries. The amount of
general reserves to be applied to assets classified as Substandard and Doubtful
has been set forth in Columbia First's policies and procedures and is predicated
on Columbia First's and industry historical trends and portfolio risk analysis.
Specific reserves are provided as needed for classified assets and those in
which management believes that there is a permanent impairment in the borrowers'
ability to repay the loan, including severely delinquent loans, based on a
current property valuation. The loan is charged off when it is no longer deemed
collectible.
A-50
<PAGE>
The following table sets forth the allocation of Columbia First's Allowance
for Loan Losses at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial......................... $ 5,707 36% $ 5,001 28% $ 2,852 15% $ 3,734 33% $ 5,918 58%
Real Estate -- Construction........ 378 2 822 5 5,204 28 2,858 26 1,161 11
Real Estate -- Permanent........... 7,033 44 7,477 42 8,231 43 4,096 37 944 9
Consumer........................... 145 1 56 -- 119 1 159 1 17 --
Unallocated........................ 2,686 17 4,533 25 2,540 13 327 3 2,260 22
$15,949 100% $17,889 100% $18,946 100% $11,174 100% $10,300 100%
</TABLE>
CEBA also requires institutions to adopt an Internal Asset Review
Committee. Within Columbia First, the Classification of Assets Committee
provides an asset quality monitoring system independent of the lending and asset
classification functions of Columbia First. The asset classification analysis is
performed monthly and the reserve balances are adjusted accordingly. Quarterly
reports of asset quality are required to be made to the Board of Directors as
part of the regular operational review of Columbia First.
A variety of factors, including its loan underwriting policies and the
changes in real estate values, have affected Columbia First's loss and
delinquency experience on its real estate loan portfolio. Fiscal 1992 and 1991
loss experience was significantly higher than historically, due in large part to
the deterioration of the local and regional real estate market. Management took
aggressive steps to reduce the level of nonperforming and underperforming loans
during fiscal 1994 and 1993, and balances at September 30, 1994 were
significantly improved as compared to prior year balances. Nonetheless, the
value of real estate fluctuates and could decline in future periods. As a result
of economic conditions and other factors beyond Columbia First's control,
Columbia First's future loss and delinquency experience cannot be predicted.
The one-to-four family residential loan portfolio, which comprised 80.2% of
the loan portfolio, continues to perform well and Columbia First is experiencing
comparatively low delinquency ratios. Columbia First's September 30, 1994
delinquency ratio for the one-to-four family portfolio was .55%, compared to the
most recently available June 30, 1994 Mortgage Bankers Association of America
regional and national ratios of 4.32% and 4.21%, respectively.
Real estate acquired by Columbia First as a result of foreclosure or by
deed in lieu of foreclosure is recorded at the lower of cost, or fair value less
estimated costs of disposal, at the date of such acquisition, and charge-offs,
if necessary, are recorded at that time. Generally all costs except capital
expenditures incurred from the date of acquisition are charged to expense.
Columbia First elected to implement, as of September 30, 1992, the American
Institute of Certified Public Accountants' Statement of Position 92-3 for the
valuation of foreclosed property. This pronouncement generally results in a
lowered discount value, and therefore a greater charge-off, of foreclosed
property held for sale. Implementing this pronouncement resulted in a charge-off
of $2.1 million at September 30, 1992.
For further information regarding the loan portfolio, see notes 5 and 6 in
the Notes to Consolidated Financial Statements in Columbia First's 1994 Annual
Report to Stockholders and the sections in Management's Discussion and Analysis
in Columbia First's 1994 Annual Report to Stockholders entitled "Provision for
Loan Losses, Net Charge-Offs and Allowance for Loan Losses" and
"Nonperforming/Underperforming Assets".
INVESTMENT ACTIVITIES
Income from investments in securities provides the third largest source of
income after interest on loans and mortgage-backed securities. Columbia First is
required by federal regulations to maintain specified minimum balances in liquid
assets, which may be invested in specified securities, and is also permitted to
make certain other securities investments. The balance of investment securities
maintained by Columbia First in excess of regulatory requirements reflects
management's desire to maintain liquidity at a level to assure adequate funds,
taking into account anticipated cash flows and available sources of credit, to
meet deposit withdrawals and loan commitments or to make other investments.
As a member of the FHLB System, Columbia First must maintain minimum levels
of liquidity, which may vary from time to time. As of September 30, 1994, the
minimum level of liquidity so required was 5.0% of net withdrawable savings
deposits plus short-term borrowings. Columbia First's average monthly liquidity
for each of the years in the five-year period
A-51
<PAGE>
ended September 30, 1994, measured as a percent of net withdrawable savings
deposits plus short-term borrowings, was 6.45%, 5.76%, 5.69%, 5.39% and 5.14%
for the years 1990 through 1994, respectively.
Such liquid funds are managed in an effort to produce the highest yield
consistent with maintaining safety of principal and adherence to applicable
regulations. Management believes that other sources of liquidity, such as asset
repayments, deposit gathering and borrowing activities, are more important in
managing the funding needs of the Bank. Because of the minimal interest rate
spread available on quality liquid investments, such investments are typically
kept at minimal levels. For a summary of investments, see Note 3 in the Notes to
Consolidated Financial Statements in Columbia First's 1994 Annual Report to
Stockholders.
SOURCES OF FUNDS
GENERAL
Historically, deposits have been the principal source of Columbia First's
funds for use in lending and for other general business purposes. In addition to
deposits, other sources of funds have been loan repayments and prepayments,
advances from the FHLB and other borrowings, including reverse repurchase
agreements.
Loan principal and interest payments are a relatively stable source of
funds, while savings inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market conditions and may
fluctuate widely. Borrowings may be used on a short-term basis to match
short-term lending such as commercial and construction loans, to compensate for
reductions in normal sources of funds such as savings inflows and to make
liquidity investments. On a long-term basis, borrowings may support expanded
lending activities.
DEPOSITS
Columbia First 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 are generally evaluated weekly and are competitively priced based on
investment opportunities and the cost of alternative sources of funds. Columbia
First relies upon its branch network, primary market area advertising, and a
"money center" department to generate its deposit flows. Columbia First's
objective is to obtain stable deposits from local sources, although some
deposits are gathered from non-local sources. The total deposit base at
September 30, 1994 was invested by residents of Maryland (41%), the District of
Columbia (24%), Virginia (24%) and other areas (11%).
Columbia First has not sought deposits in institutional brokerage programs
and does not pay any fees to deposit brokers. As mandated by the Federal Deposit
Insurance Corporation Improvement Act of 1991, the FDIC enacted strict
definitional guidelines and regulatory approval over what is considered a
brokered deposit. A local market test, as well as a national market test, is
required to be performed in order to ensure that deposit rates paid do not
exceed the maximum allowable rates, such that the deposit will not be considered
as brokered. Columbia First performs this test each time rates are evaluated,
and management will take whatever action necessary to ensure that rates paid on
deposits will not exceed the allowable rates as calculated.
Columbia First accepts deposits from third parties, who act as
intermediaries and who are defined by the FDIC to be deposit brokers. These
deposits are currently being accepted by Columbia First, subject to an approved
waiver from the FDIC. At September 30, 1994, deposits totaling $29.6 million had
been accepted from third parties. Columbia First does not pay any fees to
deposit brokers.
In response to the changing conditions in the industry, Columbia First has
developed short-term certificate accounts, jumbo certificates and mini-jumbo
certificates to offer to its customer base. These products reduce the risk of
savings outflows historically faced by savings institutions in periods of high
interest rates, or during periods when alternative investments may appear more
attractive to Columbia First's customer base. Generally, jumbo certificates are
in amounts of $100,000 or more; mini-jumbo certificates are in amounts from
$50,000 to $99,999. It is the Bank's policy to treat any certificate of deposit
in excess of $90,000 as a jumbo certificate for purposes of establishing the
applicable interest rate. These certificates are obtained from a diverse
customer base which includes state and local governments, private individuals,
corporations and non-profit organizations. Generally, these deposits are more
costly than traditional deposit sources, such as savings accounts and retail
customer-based certificate accounts. For this reason, management continues to
emphasize retail deposit account relationships. During recent fiscal periods,
jumbo and mini-jumbo certificate accounts have deliberately been allowed to
mature and lower cost, more stable, retail deposit accounts have been sought. At
September 30, 1994, individual certificate deposits in excess of $100,000
totaled $130.6 million or 8.9% of total deposits.
A-52
<PAGE>
Columbia First offers a variety of deposit accounts, including savings
accounts, checking accounts, money market deposit accounts ("MMDAs") and a
variety of fixed-term certificate accounts with different rates and maturities.
Columbia First also actively solicits Individual Retirement Accounts (IRAs) and
Simplified Employee Pension Plans (SEPPs).
Savings accounts, checking accounts and MMDAs are subject to various fees
depending upon the type of account, transaction activity and minimum balance
maintained. Except for the "No Penalty Twelve Month" product, all fixed-term
certificates are subject to a forfeiture of interest in the event of a
withdrawal of principal prior to the maturity date. These interest penalties
amount to the loss of interest for periods of one to six months depending upon
the term of the certificates.
The principal characteristics of the types of deposit accounts at Columbia
First at September 30, 1994, are summarized as follows:
<TABLE>
<CAPTION>
REQUIRED REQUIRED
MINIMUM MINIMUM
TYPE OF ACCOUNT INTEREST RATE BALANCE (1) TERM
<S> <C> <C> <C>
Demand Deposits......................................................... -- % $ None None
Regular Savings......................................................... 3.00 50 None
Regular NOW Account..................................................... 2.60 50 None
Super NOW Account....................................................... 2.80 2,500 None
Premiere NOW Account.................................................... 2.80 1,000 None
Commercial NOW Account.................................................. 2.60 100 None
Retirement Savings...................................................... 2.95 10 None
Retirement Savings...................................................... 3.05 20,000 None
MMDA.................................................................... 2.95 2,500 None
MMDA.................................................................... 3.05 20,000 None
Premiere MMDA........................................................... 3.05 10,000 None
Premiere MMDA........................................................... 3.30 20,000 None
Commercial MMDA......................................................... 2.38 50 None
Commercial MMDA......................................................... 2.83 10,000 None
Commercial MMDA......................................................... 3.08 20,000 None
Time deposits:
Tax Deferred............................................................ 4.75 500 12 Months
Fixed-rate Certificates................................................. 4.00 500 3 Months
Fixed-rate Certificates................................................. 4.25 500 6 Months
Fixed-rate Certificates................................................. 4.75 500 12 Months
Fixed-rate Certificates................................................. 5.15 500 24 Months
Fixed-rate Certificates................................................. 5.50 500 36 Months
Fixed-rate Certificates................................................. 5.75 500 48 Months
Fixed-rate Certificates................................................. 6.40 500 60 Months
No Penalty.............................................................. 4.65 500 12 Months
VariRate Plus........................................................... 5.72 500 24 Months
Triple Bump-Up.......................................................... 5.00 500 24 Months
Mini-Jumbo Certificates................................................. Varies with term 50,000 7 days-60 Months
Jumbo Certificates (2).................................................. Varies with term 90,000 7 days-60 Months
</TABLE>
(1) A $50 minimum balance is required to earn interest on all deposits other
than retirement and time deposits.
(2) In the market generally, jumbo certificates are in amounts of $100,000 or
more; however, it is the Bank's policy to treat any certificate of deposit
in excess of $90,000 as a jumbo for purposes of establishing the applicable
interest rates.
At September 30, 1994, 59% of Columbia First's total deposits were in time
deposits. Demand deposits, including savings, NOW and money market deposit
accounts, represented 41% of the deposit base. The weighted average nominal
interest rate for all accounts at September 30, 1994, was 4.12%.
A-53
<PAGE>
The following table sets forth at September 30, 1994 data regarding deposit
account balances (excluding accrued interest payable) by account type, scheduled
maturity and weighted average interest rate.
<TABLE>
<CAPTION>
JUMBO
AND WEIGHTED
VARIABLE AND MINI- PERCENT OF AVERAGE
FIXED-RATE JUMBO TOTAL INTEREST
TYPE OF ACCOUNT TOTAL CERTIFICATES CERTIFICATES DEPOSITS RATE
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand deposits:
Savings Accounts.......................................... $ 115,299 $ -- $ -- 8% 3.00%
Checking Accounts......................................... 131,264 -- -- 9 2.15
MMDAs..................................................... 347,946 -- -- 24 3.20
Total demand deposits..................................... 594,509 -- -- 41 2.93
Time deposits:
Certificates maturing in:
Year ending September 30, 1995............................ 461,305 392,263 69,042 31 4.44
Year ending September 30, 1996............................ 235,946 221,755 14,191 16 5.38
Year ending September 30, 1997............................ 66,671 59,706 6,965 5 5.70
Thereafter................................................ 105,666 89,934 15,732 7 5.67
Total time deposits..................................... 869,588 $763,658 $105,930 59 4.94
Total deposits.......................................... $1,464,097 100% 4.12%
</TABLE>
The following tables set forth the amount of scheduled maturities of time
deposits by interest rate ranges at September 30, 1994 and 1993, respectively.
TIME DEPOSIT MATURITY SCHEDULE AS OF SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
MATURING DURING THE
TWELVE MONTHS ENDING
SEPTEMBER 30,
INTEREST RATE 1995 1996 1997 THEREAFTER TOTAL
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
2.51 -- 3.50%................................................... $ 66,663 $ 480 $ -- $ 21 $ 67,164
3.51 -- 5.50.................................................... 355,613 107,468 24,455 50,614 538,150
5.51 -- 7.50.................................................... 18,891 120,711 41,830 54,584 236,016
7.51 -- 9.50.................................................... 19,887 7,287 386 118 27,678
9.51 -- 11.50.................................................... 248 -- -- -- 248
11.51 -- 13.50.................................................... 3 -- -- 329 332
Total maturities................................................ $461,305 $235,946 $66,671 $ 105,666 $869,588
</TABLE>
TIME DEPOSIT MATURITY SCHEDULE AS OF SEPTEMBER 30, 1993
<TABLE>
<CAPTION>
MATURING DURING THE
TWELVE MONTHS ENDING
SEPTEMBER 30,
INTEREST RATE 1995 1996 THEREAFTER TOTAL
1994
(IN THOUSANDS)
2.51 -- 3.50%................................................... $175,292 $ 795 $ -- $ -- $176,087
<S> <C> <C> <C> <C> <C>
3.51 -- 5.50.................................................... 146,528 153,417 15,278 39,785 355,008
5.51 -- 7.50.................................................... 31,853 15,704 27,979 62,832 138,368
7.51 -- 9.50.................................................... 33,859 20,015 7,182 677 61,733
9.51 -- 11.50.................................................... 1,428 223 -- -- 1,651
11.51 -- 13.50.................................................... 43 3 -- -- 46
Total maturities................................................ $389,003 $190,157 $50,439 $103,294 $732,893
</TABLE>
A-54
<PAGE>
BORROWINGS
The FHLB System functions in a reserve credit capacity for qualifying
financial institutions. As a member, Columbia First is required to own capital
stock in the FHLB of Atlanta, and is authorized to apply for advances from the
FHLB on the security of certain of its home mortgages and other assets. Such
borrowings may be made pursuant to several different credit programs offered
from time to time by the FHLB. Each credit program has its own interest rate and
range of maturities, and the FHLB prescribes the acceptable uses to which the
advances pursuant to each program may be put as well as limitations on the size
of the advances. Depending upon the credit program used, FHLB advances bear
interest at fixed rates or at rates that vary with market conditions. A
prepayment penalty is generally imposed for early repayment of advances. The
FHLB offers a full range of maturities at generally competitive rates. See Note
10 in the Notes to Consolidated Financial Statements in Columbia First's 1994
Annual Report to Stockholders and the section entitled "Liquidity Management and
Funding" in Management's Discussion and Analysis in the 1994 Annual Report to
Stockholders for a summary of FHLB advances.
Securities sold under agreements to repurchase ("reverse repurchase
agreements") involve 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 or substantially the same securities on the maturity date. Columbia
First deals only with financially strong securities dealers and commercial banks
when entering into these transactions. Generally, the securities used in these
transactions have been FHLMC, Government National Mortgage Association ("GNMA"),
or FNMA mortgage-backed securities. Reverse repurchase transactions are treated
as borrowings with the repurchase obligations reflected as a liability on the
Consolidated Balance Sheets, and the related interest expense included in
interest on borrowings.
In an effort to attract new sources of funds, Columbia First offers a Repo
Sweep Account to its customer base. These accounts are treated as borrowings of
Columbia First and are represented as liabilities on the Consolidated Balance
Sheets. The agreement states that the amount of the borrowings may not fall
below $100,000 at any time, and that these borrowings are to be collateralized
with mortgage-backed securities. In addition, the market values of these
securities may not fall below 105% of the total amount of the borrowings. The
securities pledged pursuant to these agreements are held in safekeeping at the
FHLB of Atlanta and with various securities dealers, and are segregated as such
on the books and records of Columbia First. See Note 9 in the Notes to
Consolidated Financial Statements in Columbia First's 1994 Annual Report to
Stockholders for a summary of reverse repurchase agreements.
The following sets forth certain information with respect to the securities
sold under agreements to repurchase of Columbia First at the dates or for the
periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance........................................................... $271,091 $ 49,595 $112,337 $ 2,573 $ 47,169
Weighted average rate............................................. 5.02% 3.20% 3.33% 5.47% 8.39%
Maximum indebtedness at any month end............................. $292,709 $120,420 $115,639 $55,391 $130,030
Daily average indebtedness outstanding............................ $132,682 $ 75,475 $ 69,540 $25,685 $105,408
Weighted average rate paid (1).................................... 4.16% 3.29% 4.08% 7.37% 8.60%
</TABLE>
(1) Computed by dividing total interest expense during the year by the average
daily indebtedness during the same period.
As of September 30, 1994, $14.6 million of these borrowings were Repo Sweep
Account Agreements with customers of Columbia First. These borrowings can be
terminated by either party three days after receipt of written notice.
On March 20, 1986, Columbia First formed a finance subsidiary, CFF
Financial Corporation, to participate in a collateralized mortgage obligation
offering through Capital Access, an investment program which was established by
the U.S. League of Savings Institutions and Salomon Brothers. Notes payable by
CFF Financial Corporation to Capital Access of $24.2 million at September 30,
1994, net of unamortized discounts of $1 million, with an effective interest
rate of 9.16% were collateralized by $29.1 million of FHLMC participation
certificates. The maturity of the notes corresponds to the principal repayment
of the collateral. For additional information related to the CFF obligation, see
Note 11 in the Notes to Consolidated Financial Statements in Columbia First's
1994 Annual Report to Stockholders.
On July 27, 1986, Columbia First issued $27.8 million of 7.5% convertible
subordinated debentures due in 2011 (the "Debentures"). The Debentures were
convertible into common stock of Columbia First at a conversion price of $21.50
per share, at any time prior to maturity, unless previously redeemed. The
Debentures were unsecured general obligations, and were subordinated in right of
payment to all existing and future senior indebtedness of Columbia First. In
December, 1986,
A-55
<PAGE>
the FSLIC approved inclusion of the proceeds of the sale of the Debentures as
regulatory capital. During fiscal 1990, management embarked upon a program to
repurchase the Debentures when favorable market conditions existed, and a total
of $19.0 million had been repurchased through May 14, 1993. In addition, $268
thousand of Debentures were converted to common stock in accordance with
applicable provisions of the Debentures prior to May 14, 1993.
On May 14, 1993, Columbia First announced the June 15, 1993 redemption of
the remaining convertible subordinated debentures. The debentures were
redeemable at par plus a three percent premium, along with accrued but unpaid
interest through June 14, 1993. At that point, the debentures no longer accrue
interest at the previously stated rate of 7.50% per annum, which had been
payable semi-annually. The debentures were also convertible to common stock at a
ratio of $21.50 per share at the option of the debenture holder, through the
close of business on June 15, 1993. The fiscal 1993 results include an
extraordinary loss of $6 thousand, net of tax effect, related to the unamortized
issuance costs and the cash premium paid upon the redemption of $149 thousand of
the debentures. A total of more than $8.3 million of the debentures were
converted into 388,218 shares of common stock as a result of the call for
redemption. The conversion of the debentures resulted in an extraordinary loss
of $9 thousand, net of the tax effect, related to the write-off of $297 thousand
in unamortized costs. The write-off of these costs were substantially offset by
the recapture of accrued interest from January 1, 1993 through June 15, 1993 on
the debentures. See Note 11 in the Notes to Consolidated Financial Statements in
Columbia First's 1994 Annual Report to Stockholders and the section entitled
"Liquidity Management and Funding" in Management's Discussion and Analysis in
the 1994 Annual Report to Stockholders for additional information.
On November 20, 1986, Columbia First issued to European investors $150
million of Collateralized Floating Rate Notes due in November, 1996. The Notes
were general obligations and required semi-annual interest payments of 1/16th of
1% per annum plus the arithmetic mean of London Interbank offered quotations
(LIBOR) for six-month Eurodollar deposits. The Notes were collateralized
primarily by mortgage-backed securities. During fiscal 1990, management embarked
upon a program to retire the notes when favorable market conditions existed, and
the notes were fully retired in early fiscal 1992. See Note 11 in the Notes to
Consolidated Financial Statements in Columbia First's 1994 Annual Report to
Stockholders and the section entitled "Liquidity Management and Funding" in
Management's Discussion and Analysis in the 1994 Annual Report to Stockholders
for additional information.
A-56
<PAGE>
CERTAIN FINANCIAL AND OTHER INFORMATION FOR THE THREE AND NINE MONTHS ENDED JUNE
30, 1995
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1995 SEPTEMBER 30, 1994
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks.................................................................... $ 24,410 $ 24,328
Interest-bearing deposits with other banks................................................. 30,104 10,754
Loans held for sale........................................................................ 3,695 3,164
Investment securities...................................................................... 136,995 144,588
Mortgage-backed securities held to maturity................................................ 287,301 471,452
Mortgage-backed securities available for sale.............................................. 104,492 --
Loans receivable, net of unearned income................................................... 2,209,926 2,155,381
Allowance for loan losses................................................................ (16,673) (15,949)
Net loans................................................................................ 2,193,253 2,139,432
Accrued interest receivable................................................................ 19,053 16,486
Real estate owned.......................................................................... 8,751 12,758
Office properties and equipment, net....................................................... 10,729 11,397
Excess cost over net tangible assets acquired.............................................. 6,508 7,275
Prepaid expenses and other assets.......................................................... 5,252 6,814
Total assets............................................................................. $ 2,830,543 $2,848,448
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing...................................................................... $ 37,597 $ 28,905
Interest-bearing......................................................................... 1,564,098 1,435,192
Total deposits........................................................................... 1,601,695 1,464,097
Securities sold under agreements to repurchase............................................. 226,795 271,091
Advances from Federal Home Loan Bank of Atlanta............................................ 798,687 917,480
Other borrowings........................................................................... 21,513 25,282
Advance payments by borrowers for taxes and insurance...................................... 17,978 8,924
Accrued interest payable................................................................... 7,479 7,806
Accrued expenses and other liabilities..................................................... 14,434 21,545
Total liabilities........................................................................ 2,688,581 2,716,225
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized 12,500,000 shares, issued and
outstanding 3,769,907 shares and 3,701,407 shares at June 30, 1995 and September 30,
1994..................................................................................... 38 37
Additional paid-in capital................................................................. 60,204 58,626
Retained earnings, substantially restricted................................................ 81,645 73,560
Unrealized gain on securities available for sale........................................... 75 --
Total stockholders' equity............................................................... 141,962 132,223
Total liabilities and stockholders' equity............................................... $ 2,830,543 $2,848,448
</TABLE>
A-57
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
INTEREST INCOME
Loans including fees........................................................ $42,316 $29,708 $121,886 $ 82,311
Mortgage-backed securities held to maturity................................. 4,551 8,510 13,118 26,116
Mortgage-backed securities available for sale............................... 2,140 -- 6,749 --
Investment securities....................................................... 2,114 1,764 6,333 5,018
Interest-bearing deposits with other banks.................................. 251 129 593 295
Total interest income.................................................... 51,372 40,111 148,679 113,740
INTEREST EXPENSE
Deposit accounts............................................................ 19,586 13,705 53,661 40,698
Borrowings.................................................................. 17,907 13,376 55,361 34,331
Total interest expense................................................... 37,493 27,081 109,022 75,029
NET INTEREST INCOME...................................................... 13,879 13,030 39,657 38,711
PROVISION FOR LOAN LOSSES..................................................... 200 200 400 2,010
NET INTEREST INCOME AFTER PROVISIONS FOR LOAN LOSSES..................... 13,679 12,830 39,257 36,701
NONINTEREST INCOME
Service charges on deposit accounts......................................... 775 615 2,269 1,686
Fees and charges on loan accounts........................................... 317 267 904 855
Gain on sale of assets, net................................................. 707 1,096 1,649 3,769
Miscellaneous............................................................... 553 700 1,521 1,742
Total noninterest income................................................. 2,352 2,678 6,343 8,052
NONINTEREST EXPENSE
Personnel................................................................... 4,179 4,744 13,482 14,322
Occupancy and equipment..................................................... 2,166 2,375 6,825 6,674
Deposit insurance premium................................................... 958 887 2,739 2,767
Amortization of excess cost over net tangible assets acquired............... 232 338 767 5,513
Real estate owned -- net costs of operations................................ 480 553 1,425 1,498
-- provision for losses.................................. 882 104 882 267
Data processing............................................................. 739 464 1,757 1,338
Marketing................................................................... 347 572 996 1,411
Other....................................................................... 1,174 1,105 3,467 3,444
Total noninterest expense................................................ 11,157 11,142 32,340 37,234
Income before income taxes and extraordinary item........................ 4,874 4,366 13,260 7,519
INCOME TAX EXPENSE............................................................ 1,956 1,500 5,175 4,358
NET INCOME BEFORE EXTRAORDINARY ITEM.......................................... 2,918 2,866 8,085 3,161
Extraordinary item: effect of change in method of accounting for
income taxes............................................................. -- -- -- 5,483
NET INCOME.................................................................... $ 2,918 $ 2,866 $ 8,085 $ 8,644
EARNINGS PER SHARE
PRIMARY AND FULLY-DILUTED:
Net income before extraordinary item........................................ $ .74 $ .76 $ 2.11 $ .84
Extraordinary item: effect of change in method of accounting for
income taxes............................................................. -- -- -- 1.46
Net income.................................................................. $ .74 $ .76 $ 2.11 $ 2.30
</TABLE>
A-58
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
JUNE 30,
1995 1994
<S> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income........................................................................................ $ 8,085 $ 8,644
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses....................................................................... 400 2,010
Depreciation and amortization................................................................... 1,805 1,675
Accretion of loan fees.......................................................................... (3,194) (3,483)
Net amortization of premium on mortgage-backed securities held to maturity...................... 422 3,074
Net amortization of premium on mortgage-backed securities available for sale.................... 691 --
Amortization of excess cost over net tangible assets acquired................................... 767 5,513
FHLB of Atlanta stock dividend.................................................................. -- (1,016)
Decrease (increase) in loans held for sale...................................................... (531) 31,543
Increase in accrued interest receivable......................................................... (2,567) (175)
Decrease in prepaid expenses and other assets................................................... 1,562 342
Decrease in accrued expenses and other liabilities.............................................. (7,111) (13,863)
Increase (decrease) in accrued interest payable................................................. (327) 932
Gain on sale of assets, net..................................................................... (1,649) (3,769)
Provision for losses on real estate owned....................................................... 882 267
Unrealized gain on securities available for sale................................................ 75 --
Net cash provided (used) by operating activities............................................. (690) 31,694
INVESTING ACTIVITIES
Proceeds from sale of branch deposit liabilities................................................ 633 --
Purchase of insurance accounts.................................................................. -- (306)
Purchase of FHLB stock.......................................................................... (348) (6,357)
Redemption of FHLB stock........................................................................ 5,805 2,821
Increase in interest-bearing deposits with other banks.......................................... (19,350) (8,683)
Proceeds from the repayment and maturity of investment securities............................... 9,111 34,595
Purchases of investment securities.............................................................. (6,975) (40,537)
Principal collected on loans.................................................................... 225,910 244,953
Principal collected on mortgage-backed securities held to maturity.............................. 22,894 122,344
Principal collected on mortgage-backed securities available for sale............................ 12,598 --
Purchases of mortgage-backed securities......................................................... -- (61,452)
Proceeds from sale of mortgage-backed securities................................................ -- 180,468
Proceeds from sale of mortgage-backed securities available for sale............................. 43,071 --
Proceeds from sale of loans..................................................................... 47,223 170,766
Loans originated or acquired.................................................................... (324,856) (922,382)
Capitalized costs of real estate owned.......................................................... (3,618) (1,926)
Proceeds from sale of real estate owned......................................................... 8,474 9,550
Purchase of office properties and equipment..................................................... (1,173) (1,759)
Proceeds from sales of office properties and equipment.......................................... -- 89
Net cash provided (used) by investing activities............................................. 19,399 (277,816)
FINANCING ACTIVITIES
Increase in advance payments by borrowers for taxes and insurance............................... 9,054 10,553
Net increase in deposits........................................................................ 137,598 61,580
Net increase (decrease) in securities sold under agreements to repurchase....................... (44,296) 125,194
Proceeds from advances from FHLB of Atlanta..................................................... 2,341,400 972,153
Repayment of advances from FHLB of Atlanta...................................................... (2,460,193) (908,602)
Repayment of other borrowings................................................................... (3,769) (10,195)
Exercise of stock options....................................................................... 1,579 251
Net cash provided (used) by financing activities............................................. (18,627) 250,934
Increase in cash................................................................................ 82 4,812
Cash at beginning of period..................................................................... 24,328 13,641
Cash at end of period........................................................................ $ 24,410 $ 18,453
</TABLE>
A-59
<PAGE>
Supplemental disclosure of information
1. Columbia First Bank, a Federal Savings Bank, made income tax payments of $3
million and $1.9 million during the nine months ended June 30, 1995 and 1994,
respectively.
2. Interest paid on deposits and borrowings totaled $109.3 million and $74.1
million during the nine months ended June 30, 1995 and 1994, respectively.
3. Additions to real estate acquired in settlement of loans through foreclosure
were $2.2 million and $8.2 million during the nine months ended June 30, 1995
and 1994, respectively.
4. On October 1, 1994, $162.7 million of mortgage-backed securities held to
maturity were transferred to mortgage-backed securities available for sale.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Columbia First Bank, a Federal Savings Bank, and its subsidiaries reported
net income before extraordinary items of $2,918,000 or $0.74 per share, for the
three months ended June 30, 1995, approximately the same as the prior year
quarterly net income of $2,866,000, or $0.76 per share. For the nine months
ended June 30, 1995, the Bank reported net income of $8,085,000, or $2.11 per
share compared to the prior year period net income of $8,644,000, or $2.30 per
share. An extraordinary item related to the Bank's implementation of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", in the amount of
$5.5 million, or $1.46 per share, was recognized in the prior year period. The
prior year results also reflected a re-evaluation of the underlying assumptions
within the amortization of goodwill, which resulted in the write-off of
approximately $4.3 million in goodwill. The after-tax effect of this write-off
in the prior year period was approximately $3.8 million. All per share amounts
are presented on a fully-diluted basis.
FINANCIAL CONDITION
Total assets as of June 30, 1995 declined $17.9 million, or .6%, compared
to September 30, 1994 balances. This decline was primarily attributable to an
overall decline of $79.7 million in investments in mortgage-backed securities.
Effective October 1, 1994, Columbia First prospectively adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). The adoption of SFAS 115 resulted in
the reclassification of approximately $162.7 million in mortgage-backed
securities from the "held to maturity" portfolio to the "available for sale"
portfolio. Management sold approximately $43.1 million of the available for sale
securities during the quarter ended June 30, 1995, with a net gain of $17
thousand. Repayments, premium amortization and changes in the unrealized
gain/loss on the securities accounted for the further net reduction of these
investments during the nine month period to the June 30, 1995 balance. Thus, the
available for sale mortgage-backed securities declined from $162.7 million to
$104.5 million during the period, a decline of $58.2 million, or 35.8%.
The held to maturity mortgage-backed securities, subsequent to the
reclassification of the approximately $162.7 million noted above, declined by
approximately $21.5 million, or 7%, during the period ended June 30, 1995. This
decline was entirely due to principal repayments and premium amortization. The
Consolidated Balance Sheets as of June 30, 1995 reflect the current balances of
mortgage-backed securities held to maturity and available for sale, as well as,
the unrealized gain related to the securities available for sale which is
reflected in stockholders' equity. Additional information regarding the adoption
of SFAS 115 is in the section MORTGAGE-BACKED SECURITIES.
Significant declines during the nine month period ended June 30, 1995 were
also noted in investment securities and real estate owned. Investment securities
were reduced by $7.6 million, or 5.3%, as a result of management's intent to
increase Columbia First's short-term liquidity. Real estate owned declined $4
million, or 31.4%, as a result of the disposal of certain parcels and the
payment in full of other in-substance foreclosed properties during the period.
Partially offsetting these declines were increases in net loans, which
registered increases of $53.8 million, or 2.5%, during the nine month period.
Loan balances increased in large part as a result of adjustable-rate loan
volume, which resulted in a $33.5 million increase in the loan portfolio during
the period ended June 30, 1995. Fixed-rate loan balances declined $17 million,
or 10.2%, during this period as refinance activity on seasoned, higher rate
loans was stimulated by the lower interest rate environment in recent months.
Construction, land and land development loans increased $34.3 million, or 65.9%,
during the period. Additional discussion on loan balances is in the section
LOANS RECEIVABLE. An increase of $19.4 million, or 180%,
A-60
<PAGE>
during the period in interest-bearing deposits with other banks was due to
management's intent to increase the short-term liquidity position, as noted
above. Other asset balances remained relatively unchanged during the nine months
ended June 30, 1995.
As more fully described in the LIQUIDITY MANAGEMENT AND FUNDING section,
management has stimulated the deposit funding during the current fiscal period,
such that deposits have increased by $137.6 million, or 9.4%, during the nine
months ended June 30, 1995. The generally higher interest rate environment
during most of fiscal 1995 has created increased consumer demand for certificate
of deposit account products, and Columbia First continues to succeed in the
efforts to increase the noninterest-bearing deposit account base through sales
efforts and new small business deposit account offerings. The increase in
deposit balances has enabled Columbia First to reduce borrowings by $166.9
million, or 13.7%, during this fiscal period.
Advance payments by borrowers for taxes and insurance increased by $9.1
million, or 101.5%, as a result of the additional loan volume being serviced and
because of the timing of the remittances of these funds to the various tax
authorities and insurance underwriters. The accrued expenses and other
liabilities balance, which typically declines during interim periods compared to
the fiscal year-end balance, was reduced by $7.1 million, or 33%, during the
nine months ended June 30, 1995.
During the fiscal year-to-date, Columbia First reported a net interest
margin of 1.86%, compared to the 2.09% and 2.08% margins recognized during the
nine months ended June 30, 1994 and fiscal year ended September 30, 1994,
respectively. The net interest margin for the quarter ended June 30, 1995 was
1.96%. The increase in short-term interest rates during the first four months of
fiscal 1995 and most of fiscal 1994 has had a significant impact upon the net
interest margin. Funding costs have increased more rapidly than the earnings
from adjustable-rate assets, which reprice upwards on a more delayed basis. More
recently, funding costs have declined and Columbia First is experiencing an
improving net interest margin.
For the three months ended June 30, 1995, net interest income was $.8
million, or 6.5%, higher than in the comparable prior year period, as increased
volume provided an additional $1.9 million in net interest income which was
partially offset with a $1.1 million decline in net interest income as a result
of changes in interest rates. For the nine months ended June 30, 1995, net
interest income improved $.9 million, or 2.4%, compared to the prior year
period's results. This improvement was entirely due to the $12 million increase
experienced as a result of additional volume, which was only partially offset by
the $11.1 million decline in net interest income resulting from higher interest
rates. Management expects the net interest margin to continue to stabilize and
improve during the final period of fiscal 1995, as funding costs are expected to
remain stable and as residential mortgage assets reprice upwards.
Management continues to closely monitor interest rate sensitivity to ensure
that appropriate action can be undertaken as interest rates change. Columbia
First's one-year interest rate sensitivity has been maintained in a relatively
"matched" position, such that assets which reprice within one year exceed
liabilities which reprice within one year by only $17.6 million. This represents
a one-year interest sensitivity "gap" of .62% at June 30, 1995.
MORTGAGE-BACKED SECURITIES
The following tables set forth mortgage-backed securities by issuer and by
interest rate characteristics. The first table shows Columbia First's held to
maturity securities portfolio by issuer and by interest rate characteristics.
The second table indicates components of the available for sale portfolio by
issuer. All of the securities identified as available for sale are
adjustable-rate securities.
A-61
<PAGE>
MORTGAGE-BACKED SECURITIES -- HELD TO MATURITY
<TABLE>
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1994
AMOUNT % AMOUNT % CHANGE
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BY ISSUER:
FNMA mortgage-backed securities...................................... $ 28,895 10.1% $ 87,321 18.5% $ (58,426)
GNMA mortgage-backed securities...................................... 121,300 42.2 128,282 27.2 (6,982)
FHLMC participation certificates..................................... 81,740 28.5 194,467 41.2 (112,727)
CMOs................................................................. 52,085 18.1 52,569 11.2 (484)
284,020 98.9 462,639 98.1 (178,619)
Premium, net......................................................... 3,281 1.1 8,813 1.9 (5,532)
$ 287,301 100.0% $ 471,452 100.0% $(184,151)
BY INTEREST RATE CHARACTERISTICS:
Fixed-rate........................................................... $ 29,351 10.2% $ 33,588 7.1% $ (4,237)
Adjustable-rate...................................................... 254,669 88.7 429,051 91.0 (174,382)
284,020 98.9 462,639 98.1 (178,619)
Premium, net......................................................... 3,281 1.1 8,813 1.9 (5,532)
$ 287,301 100.0% $ 471,452 100.0% $(184,151)
</TABLE>
MORTGAGE-BACKED SECURITIES -- AVAILABLE FOR SALE
<TABLE>
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1994
AMOUNT % AMOUNT % CHANGE
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BY ISSUER:
FHLMC participation certificates..................................... $ 71,954 68.9% $ -- -- % $ 71,954
FNMA mortgage-backed securities...................................... 29,335 28.1 -- -- 29,335
101,289 97.0 -- -- 101,289
Premium, net......................................................... 3,081 2.9 -- -- 3,081
104,370 99.9 -- -- 104,370
Unrealized gain on securities........................................ 122 0.1 -- -- 122
$ 104,492 100.0% $ -- -- % $ 104,492
</TABLE>
Adjustable-rate mortgage-backed securities are purchased from time to time
in order to augment the interest income provided from loans. Columbia First has
not purchased any of these securities during the most recent eighteen-month
period because of the strong demand for adjustable-rate residential mortgage
loans within the Washington, D.C. metropolitan area. Management currently
expects single-family residential loan volume to be sufficient to provide the
desired asset size, and purchases of mortgage-backed securities are not
currently expected during the remainder of fiscal 1995.
Columbia First prospectively adopted SFAS 115 as of October 1, 1994. SFAS
115 specifies the accounting and reporting for all investments in debt and
equity securities that have readily determinable fair value. Fair value is based
on published market prices or dealer quotes. The adoption of SFAS 115 resulted
in the transfer of approximately $162.7 million of mortgage-backed securities
from the held to maturity portfolio to the available for sale portfolio. No
securities were classified as "trading" under the definition of SFAS 115. In
accordance with SFAS 115, securities which are available for sale are marked-
to-market based upon their fair values, with the resulting unrealized gain or
loss reflected, net of tax effect, in the equity accounts of Columbia First.
The adoption of SFAS 115 at October 1, 1994 resulted in an unrealized
mark-to-market loss of approximately $1.5 million, and equity was reduced by $.9
million, the tax-effected amount of this unrealized loss. Management
specifically chose for transfer to the available for sale portfolio those
securities whose fair values were expected to be less affected by changes in
interest rates. At June 30, 1995, the current outstanding balance of $104.5
million in "available for sale"securities included a mark-to-market unrealized
gain of $122 thousand. Columbia First's equity accounts reflect the tax-effected
$75 thousand unrealized gain on these securities at June 30, 1995.
A-62
<PAGE>
Columbia First sold $43.1 million of available for sale mortgage-backed
securities during the quarter ended June 30, 1995. A net pre-tax gain of $17
thousand was realized from the sale. Management expects that additional sales
from the available for sale portfolio will be executed during the remainder of
fiscal 1995, in order to provide additional liquidity.
LOANS RECEIVABLE
The following tables set forth the composition of Columbia First's loan
portfolio by type of loan and by type of collateral:
<TABLE>
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1994
AMOUNT % AMOUNT % CHANGE
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
LOANS BY TYPE OF LOAN:
Loans on existing property:
Fixed-rate...................................................... $ 149,656 6.8% $ 166,660 7.8% $(17,004)
Adjustable-rate................................................. 1,846,014 84.2 1,812,556 84.7 33,458
Construction, land and land development loans...................... 86,287 3.9 52,019 2.4 34,268
Deposit and consumer loans......................................... 15,218 .7 14,594 .7 624
Commercial loans................................................... 114,425 5.2 111,165 5.2 3,260
2,211,600 100.8 2,156,994 100.8 54,606
Less: Unearned income.............................................. 1,674 .1 1,613 .1 61
2,209,926 100.7 2,155,381 100.7 54,545
Less: Allowance for loan losses.................................... 16,673 .7 15,949 .7 724
Total loans..................................................... $ 2,193,253 100.0% $ 2,139,432 100.0% $ 53,821
<CAPTION>
JUNE 30, 1995 SEPTEMBER 30, 1994
AMOUNT % AMOUNT % CHANGE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOANS BY TYPE OF COLLATERAL:
Mortgage loans:
One-to-four family.............................................. $ 1,727,042 78.8% $ 1,716,276 80.2% $ 10,766
Multi-family.................................................... 73,305 3.3 68,533 3.2 4,772
Non-residential................................................. 281,610 12.8 246,426 11.5 35,184
Total mortgage loans............................................ 2,081,957 94.9 2,031,235 94.9 50,722
Deposit loans...................................................... 2,431 .1 2,592 .1 (161)
Consumer loans..................................................... 12,787 .6 12,002 .6 785
Commercial loans................................................... 114,425 5.2 111,165 5.2 3,260
2,211,600 100.8 2,156,994 100.8 54,606
Less: Unearned income.............................................. 1,674 .1 1,613 .1 61
2,209,926 100.7 2,155,381 100.7 54,545
Less: Allowance for loan losses.................................... 16,673 .7 15,949 .7 724
Total loans..................................................... $ 2,193,253 100.0% $ 2,139,432 100.0% $ 53,821
</TABLE>
The $53.8 million increase in net loan balances at June 30, 1995 was
primarily attributable to increases in mortgage loans during fiscal 1995. During
the nine months ended June 30, 1995, there was a $10.8 million increase in
single-family mortgage loans, a $4.8 million increase in mortgage loans on
multi-family residential properties and a $35.2 million increase in
non-residential mortgage loans. In addition, consumer loans and commercial loans
increased $.8 million and $3.3 million, respectively, during the nine months
ended June 30, 1995.
As previously announced, management effected a restructuring of the first
trust residential mortgage lending function, and closed two mortgage lending
offices during the quarter ended March 31, 1995. Columbia First intends to
maintain a significant residential mortgage lending presence in the Washington,
D.C. metropolitan area; however, current market forces have indicated that the
overhead expenses associated with the two offices which were closed can be more
efficiently utilized
A-63
<PAGE>
in the origination of mortgage loans through the retail bank branch system. The
restructuring of the mortgage lending function has begun to significantly reduce
Columbia First's noninterest expenses, and further economies are expected in
future periods.
ASSET QUALITY
Columbia First maintains an allowance for possible loan losses which is
available to absorb estimated future losses on the current portfolio. Various
factors are considered when management determines the amount of the provision
and the adequacy of the allowance for loan losses. A portion of the allowance is
allocated to cover specifically identified potential losses and a portion is
allocated for changes in general economic conditions, changes in real estate
market trends and resulting loan losses, and changes in the levels of past due
loans and nonperforming assets. The following table highlights the activity in
the allowance for loan losses:
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1994 CHANGE
<S> <C> <C> <C>
(IN THOUSANDS)
Balance, September 30, 1994 and 1993.................................. $15,949 $17,889 $(1,940)
Provision............................................................. 400 2,010 (1,610)
Charge-offs........................................................... (385) (4,640) 4,255
Recoveries............................................................ 709 819 (110)
Net recoveries (charge-offs).......................................... 324 (3,821) 4,145
Balance, June 30, 1995 and 1994....................................... $16,673 $16,078 $ (595)
</TABLE>
Charge-offs were minimal during the period ended June 30, 1995, and
recoveries on loans previously charged off exceeded charge-offs for the period.
Prior year charge-offs of $4.6 million related primarily to three credit
relationships. Charge-offs of $1.6 million related to a credit relationship with
a residential builder involving two projects, one of which was transferred to
in-substance foreclosure during the period and the other of which was sold
during the period. In addition, management disposed of an $8.6 million mortgage
loan in which the borrower had declared bankruptcy during the period. The
discount price received from the sale of the mortgage resulted in a charge-off
of $1.6 million. A commercial credit resulted in the charge-off of $.7 million.
Substantially all of the charge-offs recognized on these credits had already
been allocated by management in prior periods.
The following table summarizes asset balances which are not performing in
accordance with original contractual terms:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1995 1994 CHANGE
<S> <C> <C> <C>
(IN THOUSANDS)
Nonaccrual loans...................................................................... $ 7,521 $ 2,492 $ 5,029
Nonaccrual loans upon which interest is being received................................ 11,411 885 10,526
Restructured loans.................................................................... 7,500 7,701 (201)
Total nonperforming/underperforming loans........................................... 26,432 11,078 15,354
Real estate owned..................................................................... 8,751 12,758 (4,007)
Total nonperforming/underperforming assets.......................................... $ 35,183 $23,836 $11,347
Loans past due 90 days................................................................ $ 5,944 $ 3,639 $ 2,305
Nonperforming loans/loans, net of unearned income..................................... 1.20% .51%
Nonperforming loans/total assets...................................................... .93% .39%
Nonperforming assets/loans, net of unearned income.................................... 1.59% 1.11%
Nonperforming assets/total assets..................................................... 1.24% .84%
Loan loss allowance/nonperforming loans............................................... 63.08% 143.97%
Loan loss allowance/loans, net of unearned income..................................... .75% .74%
</TABLE>
Nonperforming/underperforming loans consist of loans on which interest is
no longer accrued and fully secured loans which have been restructured in an
attempt to enable the borrower to continue to maintain control of the underlying
collateral. Restructured loans have been written down to fair value.
Nonperforming/underperforming loans increased $15.4 million during the period
ended June 30, 1995. Columbia First is receiving interest payments on $18.9
million, or 72%, of the total nonperforming/underperforming loan category. These
payments are being recorded as income on a cash basis as payments are received
because management has determined that the loan principal is fully collectible.
A-64
<PAGE>
At June 30, 1995, there was $7.5 million in nonaccrual loans upon which no
interest was being received. This represents an increase of $5 million from the
balance at September 30, 1994, and was entirely due to one $7.1 million credit
relationship secured by real estate, which is in the process of rezoning, and
certain limited partnership interests. Management believes that the collateral
value is adequate to support the loan balance. Partially offsetting this
relationship being classified as nonaccrual was the improvement or repayment of
$2.1 million in other credits previously classified as nonaccrual. A previously
disclosed nonaccrual loan on a hotel property in Washington, D.C. has been
satisfactorily renegotiated, and management does not currently expect any loss
on this credit relationship. At June 30, 1995, there was a $10.5 million
increase in nonaccrual loans upon which interest is being received, which was
primarily due to an $8.9 million credit relationship which management believes
is adequately secured by a Washington, D.C. hotel property. The credit is in the
process of being restructured, and no loss is anticipated.
Real estate owned consists of real estate acquired by foreclosure,
in-substance foreclosure and real estate on which deeds in lieu of foreclosure
have been accepted. Real estate owned is recorded on the date acquired at the
lower of cost or fair value. Real estate owned has declined $4 million during
the nine months ended June 30, 1995 due to aggressive efforts to dispose of
certain properties, as well as, repayments received from the sale of collateral
on loans which had been classified as in-substance foreclosures. Management
expects continued improvement in this area during the remainder of the fiscal
year, as these assets continue to be liquidated through sales activity.
Loans which are delinquent in excess of 90 days are fully secured loans
which have not been restructured, and for which management believes ultimate
collectibility is not in doubt because of the underlying collateral values.
These loans continue to accrue interest according to the terms of the loan
agreement, and are comprised primarily of loans secured by single-family
residences. These balances have increased by $2.3 million during the current
fiscal year-to-date period.
LIQUIDITY MANAGEMENT AND FUNDING
Liquidity measures a company's ability to maintain sufficient cash flows to
fund operations and meet existing and future obligations, including loan
commitments, maturing liabilities and depositors' withdrawals. The asset portion
of the balance sheet provides liquidity through short-term investments, as well
as maturities and repayments of loans and investment securities. Other sources
of asset liquidity include sales of loans and asset securitizations. Liability
liquidity is provided through the Bank's ability to attract and maintain
sufficient deposits and to access available funding markets. Federal regulations
require that the Bank maintain an average 5.00% liquidity ratio in relation to
certain borrowings and the deposit base. The Bank exceeded the requirement
throughout the periods ended June 30, 1995 and 1994.
Total deposits increased $137.6 million, or 9.4%, during the nine months
ended June 30, 1995. Management has deployed these funds to reduce borrowings,
which have declined $166.9 million, or 13.7%, during this same period. Asset
shrinkage and equity capital generated during the period have also allowed
management to reduce borrowed funds during the period. Management expects
continued asset shrinkage during the remainder of the fiscal year; however,
borrowings are expected to increase, primarily in order to fund the previously
announced sale of approximately $120 million in deposit liabilities in two
branch offices located in Hagerstown, Maryland. This transaction is expected to
be consummated just prior to September 30, 1995.
Transaction and savings accounts declined $95.3 million, or 16%, during the
nine-month period along with a net increase of $248.7 million, or 32.5%, in
certificate of deposit accounts. The transaction and savings account balances
declined despite a net growth of 3,805 accounts, an increase of 5.9% in the
number of transaction and savings accounts. Management has found that customers
with large balance money market accounts have transferred funds to certificate
of deposit accounts, in order to lock in higher rates as interest rates have
risen. Industry reports indicate that this is a phenomenon which has been
observed throughout the financial services industry. The interest rate
environment during the most recent few months has indicated that this trend may
be slowing, and management does not expect continued growth in the certificate
of deposit account base during the remainder of the fiscal year. Certificates of
deposit in excess of $100,000 increased by 25.7%, to $164.1 million at June 30,
1995, compared to $130.6 million at September 30, 1994.
Columbia First considers borrowings from the Federal Home Loan Bank of
Atlanta to be a stable and cost effective source of liquidity. During the
nine-month period ended June 30, 1995, FHLB advances declined by $118.8 million,
or 12.9%, to $798.7 million. During the same period, reverse repurchase
agreements declined $44.3 million, or 16.3%. Other borrowings declined $3.8
million during the same period. Although borrowings will continue to be a
significant funding source, management realizes the importance of funding asset
investment activity with retail deposits, and a primary goal in fiscal 1995 has
been to reduce the reliance upon borrowed funds.
A-65
<PAGE>
As of June 30, 1995, approximately $887.7 million, or 84.8%, of the total
borrowing base reprices or matures within the upcoming six months. The majority
of these rate sensitive liabilities reprice each month, or on a quarterly or
semi-annual basis. Columbia First's asset base is primarily comprised of
one-year adjustable-rate assets, and funding these assets with borrowings of
relatively short-term duration maximizes net interest income. Nonetheless,
management continues to selectively lengthen the maturities of other funding
sources, such as certificates of deposit, in order to provide protection against
possible future interest rate increases.
CAPITAL
As of June 30, 1995, total stockholders' equity was $142 million, an
increase of $9.7 million from September 30, 1994. Capital was augmented by
current fiscal year earnings of $8.1 million. The relatively immaterial
tax-effected unrealized gain of $75 thousand related to the mark-to-market
effect of the implementation of SFAS 115 is also included in capital at June 30,
1995. Additional discussion regarding the implementation of SFAS 115 is in the
section MORTGAGE-BACKED SECURITIES. Additional capital of $1.1 million and $.5
million, respectively, was realized during the fiscal period as a result of the
exercise of employee stock options, and the tax deductibility on employees'
exercise and sale of stock options in prior periods.
As shown in the table below, June 30, 1995 capital ratios are in excess of
all regulatory requirements. Columbia First's capital ratios currently place the
institution in the regulatory category known as "adequately capitalized". The
most recent examination results by the Office of Thrift Supervision ("OTS") are
reflected in the current regulatory minimum capital ratios as outlined below.
<TABLE>
<CAPTION>
COLUMBIA FIRST
CURRENT REGULATORY CAPITAL IN
REQUIREMENTS COMPUTED COMPUTED EXCESS OF
TYPE OF CAPITAL PERCENT AMOUNT PERCENT AMOUNT REQUIREMENT
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible.............................................. 1.50% $ 42,352 4.78% $134,977 $92,625
Core.................................................. 3.00 84,705 4.78 134,977 50,272
Tier 1 risk-based..................................... 4.00 64,779 8.33 134,977 70,198
Total risk-based...................................... 8.00 129,558 9.27 150,143 20,585
</TABLE>
The capital calculations included in the above table utilized stockholders'
equity excluding the effect of the unrealized gain on mortgage-backed securities
available for sale, as required by regulatory definition. The OTS has
promulgated an interest-rate risk component to the risk-based capital
calculation, the effects of which will be required in the future. The original
implementation date of this mandate was March 31, 1995; however, the OTS most
recently has announced that the promulgation will not be effective earlier than
June 30, 1995. Management expects to remain in compliance with all capital
requirements upon the inclusion of this interest rate risk component in the
calculation of the risk-based capital ratios.
RESULTS OF OPERATIONS
Net interest income was $13.9 million and $39.7 million for the quarter and
nine months ended June 30, 1995, respectively. These results represent increases
of $.8 million and $.9 million, respectively, for the three-and nine-month
periods compared to the prior year's results. Net interest income is a function
of interest income earned on the asset base compared to the interest costs on
the various funding sources. The interest rate margin is net interest income
divided by average earning assets, and represents the net yield on average
earning assets. The net interest margin of 1.96% for the quarter ended June 30,
1995 compares to the 2.01% margin reported for the quarter ended June 30, 1994.
The margin for the nine months ended June 30, 1995 was 1.86%, or 23 basis points
lower than the 2.09% margin recognized in the prior-year period. The decline in
the net interest margin during the current periods was due to an increase in the
cost of funds which has exceeded the increase in interest income on earning
assets.
For the quarter ended June 30, 1995, higher volume accounted for an
increase of $1.9 million in net interest income compared to the prior year. This
increase was, however, partially offset by the effect of rising interest rates,
which accounted for a decline of $1.1 million in the level of net interest
income. During the nine months ended June 30, 1995, increased volume accounted
for an increase of $12 million in net interest income which was partially offset
by the $11.1 million decline in net interest income due to increases in interest
rates during the current period.
A-66
<PAGE>
The following table highlights the changes in interest rates on earning
assets and interest bearing liabilities:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
AT MONTHS MONTHS
JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
1995 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
(ANNUALIZED RATES)
Earning assets:
Loans and mortgage-backed securities.......................................... 7.70% 7.37 % 6.27 % 7.08 % 6.24 %
Investments................................................................... 5.74 5.92 5.19 5.83 5.02
Total earning assets.......................................................... 7.58 7.29 6.21 7.00 6.17
Interest-bearing liabilities:
Deposits...................................................................... 4.99 5.11 4.00 4.80 4.03
Borrowings.................................................................... 6.35 6.46 4.95 6.26 4.62
Total interest-bearing liabilities............................................ 5.53 5.67 4.42 5.44 4.28
Interest rate spread.......................................................... 2.05% 1.62 % 1.79 % 1.56 % 1.89 %
Interest rate margin.......................................................... 1.96 % 2.01 % 1.86 % 2.09 %
</TABLE>
As noted in the above table, the 7.58% interest rate on total earning
assets at period-end June 30, 1995 shows the effects of Columbia First's
adjustable-rate assets repricing upwards, as compared to the 7.29% and 7.00%
rates earned for the three months and nine months ended June 30, 1995,
respectively. The 5.53% rate on interest-bearing liabilities at June 30, 1995
indicates that, although funding costs have risen during fiscal 1995, the
stabilization of interest rates has begun to positively impact the repricing of
Columbia First's funding base.
During fiscal 1995, management expects that approximately $1.6 billion in
adjustable-rate single-family mortgage loans and mortgage-backed securities will
reprice to more current interest rates and, in almost all cases, the amount of
the adjustment will be the entire 100 and 200 basis point (or, 1% and 2%) annual
"cap" or limitation. These increases in the interest rates earned will take
place even if market rates are relatively unchanged. In fact, most of these
assets will reprice an additional 100 or 200 basis points in fiscal 1996 even if
market rates are relatively unchanged. Significantly increased earnings could be
realized by Columbia First if the costs of interest-bearing liabilities can be
maintained at current market levels. Management believes that a continued stable
interest rate environment, such as that which has been experienced in recent
months, would allow Columbia First to maintain funding costs at current levels
while assets continue to reprice upwards. This would result in an improved net
interest margin in future periods.
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined as a result of the evaluation
of current economic conditions, the local and regional real estate markets and
other factors. During the three months ended June 30, 1995, Columbia First
provided $200 thousand for possible losses on loans, equal to the amount
provided in the comparable period last year. For the nine months ended June 30,
1995, provisions of $400 thousand were recognized, compared to $2 million for
the same period of the prior year. During fiscal 1995, Columbia First has
experienced net recoveries of $.3 million. This net recovery has enabled
management to reduce the level of loan loss provisions necessary in fiscal 1995.
Management expects that increased provisions for possible loan losses may be
required during the remainder of fiscal 1995; however, these provisions are
expected to reflect the conservative nature of the loan portfolio. Additional
discussion regarding asset quality is included in the ASSET QUALITY section.
NONINTEREST INCOME
Noninterest income declined $326 thousand, or 12.2%, for the three months
ended June 30, 1995 compared to the same period last year. Gain on sale of
assets declined $389 thousand, or 35.5%, during the period. Prior year results
primarily reflect the gains recognized on the sale of newly originated
fixed-rate mortgage loans. Fiscal 1995 gains on the sale of fixed-rate loans is
significantly less than in prior years as a result of the interest rate
environment which has made adjustable-rate loans more attractive to borrowers.
Most of the fiscal 1995 period gain on the sale of assets was related to the
disposal of real estate owned. Miscellaneous income declined $147 thousand, or
21%, as a result of a $153 thousand item included in this category in the prior
year which was related to a recovery on a real estate owned property which had
been previously disposed.
A-67
<PAGE>
Partially offsetting these items was an increase of $160 thousand, or 26%,
in service charges on deposit accounts. This increase is the result of an
increased number of core deposit transaction accounts. These accounts provide
more opportunity for fee based income, and management is pursuing an aggressive
marketing strategy to stimulate continued growth in this area through the retail
branch network. Other noninterest income categories did not experience
significant changes during the current period.
Noninterest income declined $1.7 million, or 21.2%, for the nine months
ended June 30, 1995 compared to the same period last year. Gain on sale of
assets declined $2.1 million, or 56.2%, as a result of the reduced volume of
fixed-rate mortgage loan originations, as explained above. Current period
results include a $683 thousand gain on the sale of deposits from the branch
office in Columbia, Maryland, which was closed during the period. Partially
offsetting this decline was an increase of $583 thousand, or 34.6%, in service
charges on deposit accounts. Miscellaneous income declined $221 thousand, or
12.7%, primarily for the item noted in the above discussion regarding the fiscal
1994 period. Other noninterest income categories did not change significantly
during the current fiscal period.
NONINTEREST EXPENSE
Noninterest expense was relatively unchanged for the three months ended
June 30, 1995 compared to the same period last year. Personnel expense declined
$565 thousand, or 11.9%, in the current fiscal period. This decline reflects the
impact of the mortgage lending function reorganization undertaken earlier in
fiscal 1995. Occupancy expenses declined $209 thousand, or 8.8%, during the
fiscal 1995 period primarily as a result of the closing of the two loan
origination offices done in conjunction with the above noted reorganization.
Amortization of excess cost over net tangible assets acquired declined $106
thousand, or 31.4%, as a result of certain components of the goodwill asset
which have been fully amortized. Costs associated with real estate owned
declined $73 thousand, or 13.2%, during the period as a result of continued
progress in the disposal of this property, thereby reducing the need for these
operating expenses. Marketing expenses declined $225 thousand, or 39.3%, for the
three months ended June 30, 1995 as compared to the prior year period as a
result of a redefined marketing strategy embarked upon in fiscal 1995.
Deposit insurance premiums were $71 thousand, or 8%, higher as a result of
the increased deposit base upon which the insurance is assessed. Significant
provisions for losses on real estate owned were required in the fiscal 1995
period, primarily related to the re-evaluation of two properties, and this
category increased $778 thousand, almost eightfold, during the period. Data
processing expenses increased $275 thousand, or 59.3%, as a result of the
increase in the number of transaction accounts, which result in higher data
processing costs than certificate of deposit accounts, and also because of
certain conversion related items. Other noninterest expenses increased $69
thousand, or 6.2%, as a result of legal and consulting fees incurred in
connection with the pending acquisition of Columbia First by First Union
Corporation.
On a fiscal year-to-date basis, noninterest expenses declined $4.9 million,
or 13.1%, primarily as a result of the reduction in amortization of excess cost
over net tangible assets. Expenses related to the amortization of goodwill were
reduced by $4.7 million during the nine months ended June 30, 1995. The prior
period results reflect a thorough review of the components of goodwill which was
accomplished by management in the early part of fiscal 1994. The resulting
charge-off of approximately $4.3 million, and the acceleration of approximately
$.4 million, in goodwill amortization is reflected in the prior period results.
During the nine months ended June 30, 1995, personnel expenses were $840
thousand, or 5.9%, lower than the prior year due primarily to the restructuring
of the mortgage loan operation noted above.
Occupancy expenses increased $151 thousand, or 2.2%, as a result of the
additional full-service branch office locations opened during fiscal 1994 which
are now fully operational. These additional expenses were not fully offset on a
fiscal year-to-date basis by the recently reduced expenses from the closing of
the two loan origination offices noted above. Real estate owned costs of
operation were flat with the prior year period; however, provisions for losses
on real estate owned increased $615 thousand as a result of the factors noted
above. The increase in data processing expense of $419 thousand, or 31.3%, and
the decline in marketing expense of $415 thousand, or 29.46%, during the nine
months ended June 30, 1995 are related to the same factors noted above. Other
noninterest expense categories did not experience a significant fluctuation in
the nine-month period ended June 30, 1995 compared to the prior year results.
INCOME TAX EXPENSE
Income tax expense is a function of earnings and is adjusted for
nondeductible expenses such as goodwill amortization. Because of these factors,
Columbia First's effective tax rate can fluctuate from period to period. Income
tax expense of $2 million and $1.5 million was recognized for the quarters ended
June 30, 1995 and 1994, respectively. This represents effective tax rates of
40.1% and 34.4%, respectively, for the fiscal 1995 and fiscal 1994 periods.
Income tax expense of $5.2
A-68
<PAGE>
million and $4.4 million was recognized for the nine months ended June 30, 1995
and 1994, respectively. This represents effective tax rates of 39% and 58%,
respectively, for the fiscal 1995 and 1994 periods. The relatively high tax rate
for the nine month period ended June 30, 1994 was the result of accelerated
goodwill amortization which was primarily non-deductible for income tax
purposes.
See the EXTRAORDINARY ITEM section for additional information regarding
Columbia First's adoption of Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes". Columbia First's federal income tax returns have
been examined by the Internal Revenue Service through the year ended September
30, 1991.
EXTRAORDINARY ITEM
The fiscal 1994 implementation of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), resulted in a
reduction of the net deferred tax liability by approximately $5.5 million, or
$1.46 per share, during the quarter ended December 31, 1993. This amount is
reported separately as the cumulative effect of the change in the method of
accounting for income taxes. SFAS 109 requires a change from the deferred method
under APB Opinion 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of SFAS 109, deferred income taxes
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
OTHER EVENTS
Columbia First has previously announced, on April 6, 1995, that it has
signed a definitive agreement to merge with First Union Corporation in an
exchange of First Union stock valued at $60 per share. The merger transaction is
subject to shareholder and regulatory approval, and is expected to be completed
during the second half of 1995.
A-69
<PAGE>
COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRIMARY AND FULLY-DILUTED
Earnings:
Net income before extraordinary item............................... $ 2,918 $ 2,866 $ 8,085 $ 3,161
Extraordinary item: effect of change in method of accounting for
income taxes.................................................... -- -- -- 5,483
Net income......................................................... $ 2,918 $ 2,866 $ 8,085 $ 8,644
Shares:
Weighted average number of common shares outstanding and common
share equivalents............................................... 3,865,034 3,771,474 3,827,565 3,766,908
Earnings per common and equivalent share:
Net income before extraordinary item............................... $ .74 $ .76 $ 2.11 $ .84
Extraordinary item: effect of change in method of accounting for
income taxes.................................................... -- -- -- 1.46
Net income......................................................... $ .74 $ .76 $ 2.11 $ 2.30
</TABLE>
Note -- The common share equivalents used to determine primary and fully-diluted
earnings per share consider all options outstanding as of June 30, 1995 and
1994, respectively, whose exercise would not be anti-dilutive. The number of
common share equivalents is calculated using the treasury stock method. Primary
common share equivalents totaled 101,912 and 76,012 for the quarter ended June
30, 1995 and 1994, respectively, and 46,615 and 69,500 for the nine months ended
June 30, 1995 and 1994, respectively. Fully-diluted common share equivalents
totaled 105,258 for the three and nine months ended June 30, 1995, and 80,626
for three and nine months ended June 30, 1994. There were 14,500 and 600 options
exercised in the quarters ended June 30, 1995 and 1994, respectively. Options
for 68,500 and 23,500 shares were exercised during the nine months ended June
30, 1995 and 1994, respectively.
A-70
<PAGE>
ANNEX B
AGREEMENT AND PLAN OF ACQUISITION
AGREEMENT AND PLAN OF ACQUISITION, dated as of the 5th day of April, 1995
(this "Plan"), by and among COLUMBIA FIRST BANK, a Federal Savings Bank (the
"Bank"), FIRST UNION CORPORATION, a North Carolina corporation ("First Union"),
and FIRST UNION CORPORATION OF VIRGINIA, a Virginia corporation ("FUNC-VA").
RECITALS:
(A) THE BANK. The Bank is a stock federal savings bank duly organized and
existing in good standing under the laws of the United States, with its
principal executive offices located in Arlington, Virginia. As of the date
hereof, the Bank has 12,500,000 authorized shares of common stock, each of $0.01
par value ("Bank Common Stock"), and 7,500,000 authorized shares of preferred
stock, each of $0.01 par value ("Bank Preferred Stock")(no other class of
capital stock being authorized), of which 3,755,407 shares of Bank Common Stock
are issued and outstanding and no shares of Bank Preferred Stock are issued and
outstanding.
(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. 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 defined in EXHIBIT
B hereto) 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 173,251,577 shares of First Union Common Stock were issued
and outstanding as of February 28, 1995, and no shares of First Union Class A
Preferred Stock and no shares of First Union Preferred Stock are issued and
outstanding as of the date hereof.
(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) VOTING AGREEMENT. As a condition and inducement to First Union's
willingness to enter into this Plan, CF Financial Associates L.P., the owner of
approximately 37.6% of the issued and outstanding shares of Bank Common Stock as
of the date hereof, and CF Holdings, Inc., its sole general partner (together
with CF Financial Associates L.P., the "Principal Stockholders"), have entered
into an agreement with First Union in the form attached hereto as EXHIBIT A (the
"Voting Agreement"), pursuant to which the Principal Stockholders have agreed to
vote all such shares in favor of approval of the transactions contemplated by
this Plan at the Meeting (as hereinafter defined).
(E) RIGHTS, ETC. Except as Previously Disclosed (as hereinafter defined) in
SCHEDULE 4.01(C), there are no shares of capital stock of the Bank authorized
and reserved for issuance, the Bank has no Rights (as hereinafter defined)
issued or outstanding and the Bank has no commitment to authorize, issue or sell
any such shares or any Rights, except pursuant to this Plan. 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 (and shall include stock
appreciation rights). There are no preemptive rights in respect of Bank Common
Stock.
(F) APPROVALS. The Board of Directors of each of the Bank, First Union and
FUNC-VA has duly approved, at meetings duly called and held of each of such
Boards of Directors, this Plan and has duly authorized the execution and
delivery hereof in counterparts.
(G) 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 the Bank 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:
B-1
<PAGE>
I. THE ACQUISITION.
1.01. THE ACQUISITION. Subject to and upon the terms and conditions of this
Plan, at the Effective Time (as hereinafter defined), the Bank shall sell,
transfer, convey, assign and deliver to FUNC-VA all of the assets of the Bank,
including cash balances on the Effective Date (the "Bank Assets") and FUNC-VA
shall purchase, acquire and accept the Bank Assets from the Bank, and FUNC-VA
shall assume all liabilities (the "Bank Liabilities") of the Bank. Collectively,
the purchase and assumption contemplated in the previous sentence is referred to
as the "Acquisition".
1.02. RIGHT TO DIRECT BANK ASSETS AND BANK LIABILITIES. As contemplated in
paragraph (G) of the Recitals, FUNC-VA may direct that the Bank Assets be
transferred to and that the Bank Liabilities be assumed by a corporation or
corporations 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 Bank Assets and assume the Bank Liabilities as follows: (A) it assigns to
First Union National Bank of Maryland ("FUNB-MD"), the right to acquire the Bank
Assets and assume the Bank Liabilities associated with the Bank's Maryland
branches; (B) it assigns to First Union National Bank of Washington, D.C.
("FUNB-DC") the right to acquire the Bank Assets and assume the Bank Liabilities
associated with the Bank's Washington, D.C. branches; and (C) it assigns to
First Union National Bank of Virginia ("FUNB-VA") the right to acquire the
remaining Bank Assets and assume the remaining Bank Liabilities. To effectuate
the foregoing, FUNC-VA hereby directs (i) FUNB-VA to merge with the Bank (with
FUNB-VA being the resulting bank), (ii) FUNB-VA, as successor by merger to the
Bank, to transfer to FUNB-MD the Bank Assets and Bank Liabilities associated
with the Maryland branches of the Bank, and (iii) FUNB-VA, as successor by
merger to the Bank, to transfer to FUNB-DC the Bank Assets and Bank Liabilities
associated with the Washington, D.C. branches of the Bank. The transactions
contemplated by clauses (i), (ii) and (iii) of the preceding sentence shall be
consummated simultaneously with one another at the Effective Time. The transfers
contemplated by clauses (ii) and (iii) shall each be accomplished pursuant to a
purchase and assumption agreement, in form and substance reasonably acceptable
to the Bank, entered into (as promptly as reasonably practicable after the date
hereof) between First Union, FUNC-VA and FUNB-VA, on the one hand, and FUNB-MD
or FUNB-DC, on the other hand (each, a "P&A Agreement"). The merger contemplated
by clause (i) shall be accomplished pursuant to a plan of merger in
substantially the form of EXHIBIT B (the "Plan of Merger"), to be entered into
on the date hereof. At and after the date of entry into the P&A Agreements and
the Plan of Merger, all references herein to this "Plan" shall include a
reference to such P&A Agreements and Plan of Merger. To the extent the
transactions contemplated in this Plan require action by FUNB-VA, FUNB-MD and
FUNB-DC, First Union and FUNC-VA agree to cause such action to be taken.
1.03. EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the conditions to the
obligations of the parties to effect the Acquisition as set forth in ARTICLE VI,
the effective date of the Acquisition (the "Effective Date") shall be such date
as First Union shall notify the Bank in writing not less than five days prior
thereto, which date shall be the first day of the month immediately following
the earliest date (the "Satisfaction Date") of satisfaction or waiver in writing
of such conditions; provided that if a record date for a dividend on First Union
Common Stock would otherwise fall after the Satisfaction Date but before such
Effective Time, the parties shall use their reasonable best efforts (without any
requirement that any party waive any condition set forth in ARTICLE VI) to cause
the Effective Date to occur on or before such record date. The time on the
Effective Date at which the Acquisition shall become effective is referred to as
the "Effective Time."
II. CONSIDERATION.
2.01. ACQUISITION CONSIDERATION. Subject to the terms and conditions of
this Plan, at the Effective Time, as consideration for the Bank Assets, in
addition to the assumption of the Bank Liabilities by its subsidiaries in
accordance with ARTICLE I, First Union shall issue, in the manner specified in
the Plan of Merger, to the holders of record immediately prior to the Effective
Time of shares of Bank Common Stock, the Consideration specified in such Plan of
Merger.
2.02. RESERVATION OF RIGHT TO REVISE TRANSACTION. First Union may at any
time change the method of effecting the acquisition of the Bank (including
without limitation the provisions of this ARTICLE II) if and to the extent it
deems such change to be desirable; PROVIDED, HOWEVER, that no such change shall
(i) alter the type of consideration to be issued to any holders of Bank Common
Stock as provided for in this Plan, (ii) reduce the value of such consideration,
(iii) adversely affect the intended tax-free treatment to the Bank's
stockholders as a result of receiving such consideration or prevent the parties
from obtaining the opinion of Sullivan & Cromwell referred to in SECTION 6.11,
or (iv) materially delay completion of the Acquisition.
B-2
<PAGE>
III. ACTIONS PENDING CONSUMMATION.
The Bank shall conduct its and each of the Bank Subsidiaries' (as
hereinafter defined) business in the ordinary and usual course consistent with
past practice and shall use its best efforts to maintain and preserve its and
each of the Bank Subsidiaries' business organization, employees and advantageous
business relationships and retain the services of its and each of the Bank
Subsidiaries' officers and key employees, and, without the prior written consent
of First Union and FUNC-VA, the Bank will not, and the Bank will cause each of
the Bank Subsidiaries not to:
3.01. CAPITAL STOCK. Except as Previously Disclosed in SCHEDULE 4.01(C),
issue, sell or otherwise permit to become outstanding any additional shares of
Bank Common Stock, Bank Preferred Stock or any other capital stock of the Bank,
any stock appreciation rights, or any Rights with respect thereto, or permit any
additional shares of Bank Common Stock to become subject to 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 Bank Subsidiaries to the Bank), or declare or make
any distribution on or in respect of, or directly or indirectly combine, split,
redeem, reclassify, purchase or otherwise acquire, any shares of the capital
stock of the Bank or the Bank Subsidiaries or, other than as expressly permitted
in or contemplated by this Plan, authorize the creation or issuance of, or
issue, any additional shares of such 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 or assume, guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual, corporation
or other Business Entity (as hereinafter defined).
3.04. OPERATING PROCEDURES; CAPITAL EXPENDITURES; ETC. Except as may be
directed by any regulatory agency, (A) change its or any of the Bank
Subsidiaries' lending, investment, liability management or other material
banking or other policies in any material respect, except such changes as are in
accordance and in an effort to comply with SECTION 5.11, (B) incur or commit to
incur any capital expenditures beyond those Previously Disclosed in SCHEDULE
3.04, other than in the ordinary course of business and not exceeding $100,000
individually or $250,000 in the aggregate, or (C) implement or adopt any change
in accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
3.05. LIENS. Impose, or permit or suffer the imposition, on any shares of
capital stock of any of the Bank Subsidiaries, or on any of its or the Bank
Subsidiaries' other assets, any Liens (as hereinafter defined), other than Liens
on such other assets that, individually or in the aggregate, are not material to
the business, properties or operations of the Bank and the Bank Subsidiaries,
taken as a whole.
3.06. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously
Disclosed in SCHEDULE 3.06, enter into or amend any employment, severance or
similar agreement or arrangement with any of its directors, officers, employees
or consultants, or grant any salary or wage increase, amend the terms of any
Bank Stock Option (as defined in EXHIBIT B hereto) or increase any employee
benefit (including incentive or bonus payments), except normal individual
increases in regular compensation to employees in the ordinary course of
business consistent with past practice.
3.07. BENEFIT PLANS. Except as Previously Disclosed in SCHEDULE 3.07, 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. Except as Previously Disclosed in SCHEDULE
3.08, (A) dispose of any portion of its assets, deposits, business or
properties, which is material to the Bank and the Bank Subsidiaries taken as a
whole, or discontinue or terminate any existing line of business, or (B) merge
or consolidate with, or acquire all or any portion of the business or property
of, any other entity which is material to the Bank and the Bank Subsidiaries
taken as a whole (except foreclosures or acquisitions by the Bank in a fiduciary
capacity, in each case in the ordinary course of business consistent with past
practice) or (C) make any material investment either by purchase of stock or
securities, contributions to capital, property transfers, or purchase of any
property or assets of any other individual or Business Entity other than
wholly-owned Bank Subsidiaries and other than the purchase or sale of loans or
marketable securities in the ordinary course of business consistent with past
practices.
3.09. AMENDMENTS. Amend its Articles of Incorporation, Charter or Bylaws.
B-3
<PAGE>
3.10. CLAIMS. Settle any claim, action or proceeding involving liability
for any material money damages or any restrictions upon the operations of the
Bank or any Bank Subsidiaries, or forgive or compromise any material amount of
debt of any person or Business Entity other than wholly-owned Bank Subsidiaries
(provided that First Union agrees not to withhold unreasonably its consent with
respect to any such forgiveness or compromise).
3.11. CONTRACTS. Except as Previously Disclosed on SCHEDULE 3.11, enter
into, terminate or make any change in any material contract, agreement or lease
relating to goods, services, real property or occupancy, except in the ordinary
course of business consistent with past practice with respect to such contracts,
agreements and leases that are terminable by it without penalty on not more than
60 days prior written notice.
3.12. OTHER ACTIONS. Except to the extent consistent with the conduct of
its business in the usual and ordinary course, or as otherwise contemplated by
this Plan, take any action that would (A) materially impede or delay the receipt
of any approval referred to in SECTION 6.02 without the imposition of a
condition or restriction of the type referred to in the proviso to such SECTION
or (B) adversely affect the ability of any party to perform its obligations
under this Plan.
3.13. AGREEMENTS. Authorize, commit or enter into any agreement to take any
of the actions referred to in SECTIONS 3.01 through 3.12.
IV. REPRESENTATIONS AND WARRANTIES.
4.01. BANK REPRESENTATIONS AND WARRANTIES. The Bank hereby represents and
warrants to First Union and FUNC-VA, 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 each jurisdiction 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, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect (as
hereinafter defined) on the Bank. Each of the Bank and Bank Subsidiaries 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, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on the Bank.
(C) SHARES. The outstanding shares of it are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive rights.
Except as Previously Disclosed in SCHEDULE 4.01(C), there are no shares of
capital stock or other equity securities of the Bank outstanding and no
outstanding Rights with respect thereto.
(D) BANK SUBSIDIARIES.
(1) The Bank has Previously Disclosed in SCHEDULE 4.01(D) a list of
all of the subsidiaries of the Bank (each a "Bank Subsidiary" and,
collectively, the "Bank Subsidiaries"). No equity securities of any of the
Bank Subsidiaries are or may become required to be issued (other than to
the Bank or a wholly-owned Bank Subsidiary) by reason of any Rights with
respect thereto. There are no contracts, commitments, understandings or
arrangements by which any of the Bank Subsidiaries is or may be bound to
sell or otherwise issue any shares of its capital stock, and there are no
contracts, commitments, understandings or arrangements relating to the
rights of the Bank to vote or to dispose of such shares. All of the shares
of capital stock of each Bank Subsidiary held by the Bank or a Bank
Subsidiary are fully paid and nonassessable and subject to no pre-emptive
rights and are owned by the Bank or a Bank Subsidiary free and clear of any
Liens. Each Bank 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 each jurisdiction 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 on the Bank. Except as Previously Disclosed in
SCHEDULE 4.01(D), the Bank does not own beneficially, directly or
indirectly, any shares of any equity securities or similar interests of any
corporation, bank, partnership, joint venture, business trust, association
or other organization (a "Business Entity") other than stock in the Federal
Home Loan Bank of Atlanta (the "FHL Bank") and readily marketable
securities purchased in open-market transactions in the ordinary and usual
course of its business consistent with past practices. The term "Bank
Subsidiary" means any Business Entity, more than twenty-five percent of any
class of equity voting interests which are owned directly or indirectly by
the Bank.
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(2) The deposits of the Bank are insured by the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is a member in good standing with the FHL Bank.
(3) Columbia First Insurance Services, Inc. acts as agent for the sale
of property, casualty, liability and life insurance policies and products
to customers and non-customers of the Bank.
(E) CORPORATE POWER. It and each of the Bank Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own or lease all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval of
the holders of at least 66 2/3 percent of the then outstanding shares of Bank
Common Stock, this Plan 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 as to enforcement to the conservatorship and
receivership provisions of the Federal Deposit Insurance Act, bankruptcy,
insolvency, fraudulent conveyance and other similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(G) NO DEFAULTS. Subject to the approval by the holders of at least 66 2/3
percent of the then outstanding shares of Bank Common Stock, the required
regulatory approvals referred to in SECTION 6.02, and the required filings under
federal and state securities laws, and except as Previously Disclosed on
SCHEDULE 4.01(G), the execution, delivery and performance of this Plan and the
consummation of the transactions contemplated hereby by it, does not and will
not (i) constitute a breach or violation of, or a default under, or the
acceleration or creation of a Lien (with or without the giving of notice,
passage of time or both) pursuant to, any law, rule or regulation or any
judgment, decree, order, governmental or non-governmental permit or license, or
agreement, indenture or instrument of it or of any of the Bank Subsidiaries or
to which it or any of the Bank Subsidiaries or its or their properties is
subject or bound, which breach, violation, default or Lien is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the Bank,
(ii) constitute a breach or violation of, or a default under, its Articles of
Incorporation, Charter or Bylaws, or (iii) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental or
non-governmental permit or license or the consent or approval of any other party
to any such agreement, indenture or instrument, other than any such consent or
approval, which if not obtained, would not be reasonably likely, individually or
in the aggregate, to have a Material Adverse Effect on the Bank.
(H) FINANCIAL REPORTS. (i) Its Annual Report on Form 10-K for the fiscal
year ended September 30, 1994, and all other documents filed or to be filed
subsequent to September 30, 1994 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 "Bank Shareholder
Financial Reports"), and (ii) its Thrift Financial Report for the fiscal year
ended September 30, 1994, and all other Thrift Financial Reports filed or to be
filed subsequent to September 30, 1994, in the form filed with the OTS (in each
case, the "Bank OTS Financial Reports" and together with the Bank Shareholder
Financial Reports, the "Bank Financial Reports") did not, as of their respective
dates (or in the case of Bank Financial Reports filed after the date of this
Plan, 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 Bank Financial Reports (including the related notes and
schedules thereto) fairly presents (or in the case of Bank Financial Reports
filed after the date of this Plan, 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 Bank Financial Reports (including any related notes
and schedules thereto) fairly presents (or in the case of Bank Financial Reports
filed after the date of this Plan, 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, except in each case
as may be noted therein, subject to normal and recurring year-end audit
adjustments and the absence of footnotes in the case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. None of the Bank or the Bank
Subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on the Bank, except as reflected in the Bank Financial Reports
prior to the date of this Plan.
(J) NO EVENTS. No events have occurred or circumstances arisen since
September 30, 1994, which, individually or in the aggregate, have had or are
reasonably likely to have a Material Adverse Effect on the Bank.
(K) PROPERTIES. Except as Previously Disclosed in SCHEDULE 4.01(K) or
except as specifically reserved against or otherwise disclosed in the Bank
Financial Reports (including the related notes and schedules thereto) and except
for those properties and assets that have been sold or otherwise disposed of in
the ordinary course of business since September 30, 1994, the
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Bank and the Bank Subsidiaries have good and marketable title, free and clear of
all liens, encumbrances, charges, security interests, restrictions (including
restrictions on voting rights or rights of disposition), defaults, or equities
of any character or claims or third party rights of whatever nature
(collectively, "Liens"), to all of the properties and assets, tangible and
intangible, reflected in the Bank Financial Reports as being owned by Bank or
the Bank Subsidiaries as of the dates thereof, other than those Liens that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on the Bank. All buildings and all fixtures, equipment, and other
property and assets which are material to its business on a consolidated basis
and are held under leases or subleases by any of the Bank or the Bank
Subsidiaries are held under valid leases or subleases enforceable in accordance
with their respective terms, other than any such exceptions to enforceability
that, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on the Bank.
(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 or which alleges claims under any fair lending
law or other law relating to discrimination, including, without limitation, the
Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Fair Housing Act, the Community Reinvestment Act and the Home
Mortgage Disclosure Act, which, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect on the Bank 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 the
Bank Subsidiaries or any of its or their material properties or their officers,
directors or controlling persons is a party to or is subject to or in receipt of
any order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment or supervisory letter or similar submission to or from,
any federal or state governmental agency or authority charged with the
supervision or regulation of depository institutions or engaged in the insurance
of deposits (together with any and all agencies or departments of federal, state
or local government (including, without limitation, the OTS, the FHL Bank, the
FDIC, the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") and any other federal or state bank, thrift or other financial
institution, insurance or securities regulatory authorities (including the
Securities and Exchange Commission (the "SEC"), the "Regulatory Authorities"))
and neither it nor any of the Bank Subsidiaries has been advised by any of the
Regulatory Authorities that any such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment or
supervisory letter or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in SCHEDULE
4.01(M), each of the Bank and the Bank Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to carry on
its business as presently conducted and that are material to the business
of the Bank and the Bank 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 of its knowledge, 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 the Bank or the
Bank Subsidiaries 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 on
the Bank, (ii) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the
aggregate, would be reasonably likely to have a Material Adverse Effect on
the Bank, or (iii) requiring any of the Bank or the Bank Subsidiaries (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 material 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 "adequately capitalized" as defined in 12 CFR
(section mark)565.4 and is not in "troubled condition" as defined in 12 CFR
(section mark)574.9;
(5) does not accept, rollover or renew brokered deposits;
(6) is, to the best of its knowledge, in compliance in all material
respects with all fair lending laws or other laws relating to
discrimination, including, without limitation, the Truth in Lending Act,
the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage
Disclosure Act and similar federal and state laws and regulations; and
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(7) as of the date hereof, pays the FDIC assessment premium rate
Previously Disclosed in SCHEDULE 4.01(M).
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in SCHEDULE 4.01(N),
none of the Bank or the Bank 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
(i) would be required to be filed as an exhibit to a Form 10-K filed by the Bank
that has not been filed as an exhibit to the Bank's Form 10-K filed for the
fiscal year ended September 30, 1994 or (ii) requires the payment by the Bank or
a Bank Subsidiary of at least $50,000 annually. True and correct copies of such
contracts or agreements or amendments thereto have been supplied to First Union.
None of the Bank or the Bank Subsidiaries is in default under any 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 any of its respective assets,
business or operations receives benefits, which default, individually or in the
aggregate, would be reasonably likely to have a Material Adverse Effect on the
Bank, 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. Except as Previously
Disclosed in SCHEDULE 4.01(N), neither the Bank nor any Bank Subsidiary is
subject to or bound by any contract containing covenants which limit the ability
of the Bank or any Bank 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, the Bank or any Bank Subsidiary may carry on its business
(other than as may be required by law or any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1992, each of the Bank and the Bank
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 (i)
the FDIC, (ii) the OTS, the FHL Bank and the Federal Home Loan Bank System, and
(iii) any other applicable Regulatory Authorities (except, in the case of state
securities authorities, filings which are not material). 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
Regulatory 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 fees Previously Disclosed in SCHEDULE 4.01(P) to be paid
to Friedman, Billings, Ramsey & Co., Inc. and Wertheim Schroder & Co. Inc.
(Q) EMPLOYEE BENEFIT PLANS.
(1) SCHEDULE 4.01(Q) 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 the Bank Subsidiaries for the benefit of employees,
former employees, directors, former directors or their beneficiaries (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 the Bank Subsidiaries (the "ERISA Plans"), to the extent subject to
ERISA, are in substantial compliance with ERISA. Except as Previously
Disclosed in SCHEDULE 4.01(Q) each ERISA 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 Internal
Revenue Code of 1986, as amended (the "Code"), has received a favorable
determination letter from the Internal Revenue Service, and it is not aware
of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter or the inability to
receive such a favorable determination letter. There is no material pending
or, to its knowledge, threatened litigation relating to the ERISA Plans.
Neither it nor any of the Bank Subsidiaries has engaged in a transaction
with respect to any ERISA Plan that would subject it or any of the Bank
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.
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(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by it or any of the Bank 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 it nor any of the
Bank Subsidiaries presently contributes to a Multiemployer Plan, nor have
they contributed to such a plan within the past five calendar years. 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 past 12-month period.
(4) All contributions required to be made under the terms of any ERISA
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 it nor any of the Bank
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 (i.e., a
defined benefit plan), as of the last day of the most recent plan year, 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) Neither it nor any of the Bank Subsidiaries has any obligations
for retiree health and life benefits under any plan, except as Previously
Disclosed in SCHEDULE 4.01(Q). There are no restrictions on the rights of
it or any of the Bank Subsidiaries to amend or terminate any such plan
without incurring any liability thereunder.
(7) Except as Previously Disclosed in SCHEDULE 4.01(Q), neither the
execution and delivery of this Plan 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 it or any of
the Bank Subsidiaries under any Compensation and Benefit Plan or otherwise
from it or any of the Bank 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 or restriction described in the proviso to that SECTION 6.02.
(S) LABOR RELATIONS. Neither it nor any of the Bank 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 Bank Subsidiaries the subject of a proceeding asserting that it or
any such Bank Subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act), which if adversely determined, is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on the Bank, or seeking to compel it or such Bank Subsidiary to bargain
with any labor organization as to wages and conditions of employment, nor is
there any strike or other similar labor dispute involving it or any of the Bank
Subsidiaries, pending or, to the best of its knowledge, threatened, nor is it
aware of any activity involving its or any of the Bank 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 or other assets of the Bank and the Bank
Subsidiaries that have been classified by it as of February 28, 1995 (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been classified as of February 28, 1995 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 the Bank or a Bank Subsidiary prior to February
28, 1995.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses shown on the consolidated balance sheets of the Bank included in the
September 30, 1994 Bank Financial Reports, was, and the allowance for possible
loan losses to be shown on subsequent Bank Financial Reports, will be, adequate,
as determined in the manner contemplated by generally accepted accounting
principles, to provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding (including accrued interest
receivable) as of the date thereof.
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(V) INSURANCE. Each of the Bank and the Bank 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 that are known to it, except for such matters which, individually or
in the aggregate, are not reasonably likely to have a Material Adverse Effect on
the Bank. Set forth on SCHEDULE 4.01(V) is a list of all insurance policies
maintained by or for the benefit of the Bank or the Bank Subsidiaries or their
directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in SCHEDULE 4.01(W), there
is no person who, as of the date of this Plan, may be deemed to be an
"affiliate" of the Bank (each, an "Affiliate") 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) STATE TAKEOVER LAWS. It is not subject to any applicable takeover laws
of the Commonwealth of Virginia, the State of Maryland or the District of
Columbia and it has taken all necessary action to exempt this Plan and the
transactions contemplated hereby from, and this Plan and the transactions
contemplated hereby are exempt from, the applicable takeover provisions of the
Bank's Charter and Bylaws.
(Y) NO FURTHER ACTION. It has taken all action so that the entering into of
this Plan, and the consummation of the transactions contemplated hereby or any
other action or combination of actions, or any other transactions, contemplated
hereby do not and will not (i) require a vote of stockholders (other than a vote
of the holders of at least 66 2/3 percent of the outstanding shares of Bank
Common Stock), or (ii) result in the grant of any rights to any person under the
Articles of Incorporation, Charter or Bylaws of the Bank or any Bank Subsidiary
or under any agreement to which the Bank or any of the Bank Subsidiaries is a
party, or (iii) except as contemplated by this Plan, restrict or impair in any
way the ability of First Union or FUNC-VA to exercise the rights granted
hereunder.
(Z) ENVIRONMENTAL MATTERS.
(1) To its knowledge, it and each of the Bank 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), except for instances of noncompliance which are not
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on the Bank.
(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 Bank Subsidiaries or 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 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 Bank 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 on the Bank or have been
Previously Disclosed in SCHEDULE 4.01(Z).
(3) There is no proceeding pending or, to its knowledge, threatened
before any court, governmental agency or board or other forum in which any
Loan/Fiduciary Property (or it or any of the Bank 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
on the Bank or have been Previously Disclosed in SCHEDULE 4.01(Z).
(4) To its knowledge, there is no reasonable basis for any proceeding
of a type described in subsections (2) or (3) above, except as has been
Previously Disclosed in SCHEDULE 4.01(Z).
(5) To its knowledge, during the period of (i) its or any of the Bank
Subsidiaries' ownership or operation of any of their respective current
properties, (ii) its or any of the Bank Subsidiaries' participation in the
management of any Participation Facility, or (iii) its or any of the Bank
Subsidiaries' holding of a security or other interest in a Loan/Fiduciary
Property, there have been no releases of Hazardous Material in, on, under
or affecting any such property, Participation Facility or Loan/Fiduciary
Property, except for such releases that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the
Bank or have been Previously Disclosed in SCHEDULE 4.01(Z).
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(6) To its knowledge, prior to the period of (i) its or any of the
Bank Subsidiaries' ownership or operation of any of their respective
current properties, (ii) its or any of the Bank Subsidiaries' participation
in the management of any Participation Facility, or (iii) its or any of the
Bank Subsidiaries' holding of a security or other interest in a
Loan/Fiduciary Property, there were no releases of Hazardous Material in,
on, under or affecting any such property, Participation Facility or
Loan/Fiduciary Property, except for such releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on the Bank or have been Previously Disclosed in SCHEDULE 4.01(Z).
(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 Bank Subsidiaries or in which it or any of the Bank
Subsidiaries holds a security or other interest, and, where required by the
context, includes any such property where it or any of the Bank
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 Bank Subsidiaries participates in the management
and, where required by the context, includes the owner or operator of such
property, but only with respect to such property; "Environmental Law" means
(i) any federal, state and local law, statute, ordinance, rule, regulation,
code, license, permit, approval, order, judgment, decree, injunction, 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 and the
federal Toxic Substances Control Act, and the Federal Insecticide,
Fungicide and Rodenticide Act, the Federal Occupational Safety and Health
Act of 1970, 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 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) TAXES. Except as Previously Disclosed in SCHEDULE 4.01(AA), (i) all
reports and returns with respect to Taxes (as defined below) and tax related
information reporting requirements that are required to be filed by or with
respect to it or the Bank Subsidiaries, including without limitation
consolidated federal income tax returns of it and the Bank Subsidiaries
(collectively, the "Bank Tax Returns"), have been duly filed, or requests for
extensions have been timely filed and have not expired, except to the extent all
such failures to file, taken together, are not reasonably likely to have a
Material Adverse Effect on the Bank, and such Bank Tax Returns were true,
complete and accurate in all material respects, (ii) all taxes (which shall mean
federal, state, local or foreign income, gross receipts, windfall profits,
severance, property, production, sales, use, license, excise, franchise,
employment, premium, recording, documentary, transfer, back-up withholding or
similar taxes, together with any interest, additions, or penalties with respect
thereto, together with any interest in respect of such additions or penalties,
collectively "Taxes") shown to be due on the Bank Tax Returns or otherwise
imposed on the income, properties or operations of it or the Bank Subsidiaries
have been paid in full, (iii) the Bank 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
Bank 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 Bank Tax Returns which are reasonably likely,
individually or in the aggregate, to result in a determination that would have a
Material Adverse Effect on the Bank, except as reserved against in the Bank
Financial Reports filed prior to the date of this Plan, and (vi) no waivers of
statutes of limitations (excluding such statutes that relate to years under
examination by the Internal Revenue Service) have been given by or requested
with respect to any Taxes of it or the Bank Subsidiaries.
(BB) ACCURACY OF INFORMATION. The statements with respect to the Bank and
the Bank Subsidiaries contained in this Plan, the Schedules and any other
written documents executed and delivered by or on behalf of it pursuant to the
terms of this
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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, in light of the circumstances under which they were made, not
misleading.
(CC) NO DISSENTERS' RIGHTS. The holders of Bank Common Stock have no
dissenters', appraisal or similar rights in connection with the execution of
this Plan or the consummation of any of the transactions contemplated hereby.
(DD) DERIVATIVES CONTRACTS; STRUCTURED NOTES; ETC. None of the Bank or the
Bank 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 or any other contract not included on the balance sheet which
is a derivative contract (including various combinations thereof) (each a
"Derivatives Contract") or owns securities that (1) are referred to as
"structured notes," "high risk mortgage derivatives," "capped floating rate
notes" or "capped floating rate mortgage derivatives," or (2) are likely to have
changes in value as a result of interest rate changes that significantly exceed
normal changes in value attributable to interest rate changes, except for those
Derivatives Contracts and other instruments legally purchased or entered into in
the ordinary course of business and Previously Disclosed in SCHEDULE 4.01(DD),
including a list, as applicable, of any Bank or Bank Subsidiary assets pledged
as security for each such instrument.
(EE) ACCOUNTING CONTROLS. Each of the Bank and the Bank Subsidiaries has
devised and maintained systems of internal accounting controls sufficient to
provide reasonable assurances, in the judgment of the Board of Directors of the
Bank, that (i) all material transactions are executed in accordance with
management's general or specific authorization; (ii) all material transactions
are recorded as necessary to permit the preparation of financial statements in
conformity with generally accepted accounting principles consistently applied
with respect to thrifts or any other criteria applicable to such statements;
(iii) access to the material properties and assets of the Bank and the Bank
Subsidiaries is permitted only in accordance with management's general or
specific authorization; (iv) the recorded accountability for items is compared
with the actual levels at reasonable intervals and appropriate action is taken
with respect to any differences; and (v) there are no violations of the Bank
Secrecy Act.
(FF) COMMITMENTS AND CONTRACTS. Neither the Bank nor any Bank Subsidiary is
a party or subject to any of the following (whether written or oral, express or
implied):
(1) except as Previously Disclosed in SCHEDULE 4.01(FF), any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or
fringe benefits) with any present or former officer, director or employee
(other than those which are terminable at will by the Bank or such Bank
Subsidiary without any obligation on the part of the Bank or such Bank
Subsidiary to make any payment in connection with such termination);
(2) except as Previously Disclosed in SCHEDULE 4.01(FF), any real
property lease with annual rental payments aggregating $50,000 or more; or
(3) except as Previously Disclosed in SCHEDULE 4.01(FF), any material
contract with any Affiliate.
4.02. FIRST UNION AND FUNC-VA REPRESENTATIONS AND WARRANTIES. Each of First
Union and FUNC-VA hereby represents and warrants to the Bank, 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, this Plan 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 as to enforcement to
bankruptcy, insolvency and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(C) NO DEFAULTS. Subject to receipt of 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
consummation of the transactions contemplated hereby by it, do not and will not
(i) constitute a breach or violation of, or a default under or the acceleration
or creation of a Lien (with or without the giving of notice, passage of time or
both) pursuant to, any law, rule or regulation or any judgment, decree, order,
governmental or non-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, default
or Lien is reasonably likely to have a Material Adverse Effect on it, (ii)
constitute a breach or violation of, or a default under, its Articles of
Incorporation, Charter or Bylaws, or (iii) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental or
non-governmental permit or license, or the consent
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or approval of any other party to any such agreement, indenture or instrument
other than such consent or approval, which if not obtained, would not be
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it.
(D) FINANCIAL REPORTS. In the case of First Union, its Annual Report on
Form 10-K for the fiscal year ended December 31, 1994, and all other documents
filed or to be filed subsequent to December 31, 1994 under Sections 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 as of their respective
dates (or in the case of First Union Financial Reports filed after the date of
this Plan, 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 (or in the case of First Union Financial
Reports filed after the date of this Plan, 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 (or in the case of First
Union Financial Reports filed after the date of this Plan, 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, except
as may be noted therein, subject to normal and recurring year-end audit
adjustments and the absence of footnotes in the case of unaudited statements.
(E) NO EVENTS. No events have occurred, or circumstances have arisen, since
December 31, 1994, which, individually or in the aggregate, have had or are
reasonably likely to have a Material Adverse Effect on it.
(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 should not be obtained without the imposition of any
condition or requirement of the type referred to in the proviso to that 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 Bank Common Stock upon
consummation of the Acquisition in accordance with ARTICLE II of the Plan of
Merger 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) ORGANIZATION, STANDING AND AUTHORITY. It is duly qualified to do
business and is in good standing in each jurisdiction where the failure to be
duly qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it. Each of First Union and its subsidiaries 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, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(J) CORPORATE POWER. It has the corporate power and authority to carry on
its business as it is now being conducted and to own or lease all its material
properties and assets.
(K) ACCURACY OF INFORMATION. The statements with respect to it contained in
this Plan, the Schedules and any other written documents executed and delivered
by or on behalf of it 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, in light of
the circumstances under which they were made, not misleading.
(L) LITIGATION; REGULATORY ACTION. Neither it nor any of its subsidiaries
is a party to any 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 on it and, to the best of
its knowledge, no such litigation, proceeding or controversy has been
threatened; and neither it nor any of its subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is the subject of any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authorities, which is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it and
neither it nor any of its subsidiaries has been advised by any Regulatory
Authorities that any such 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.
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(M) COMPLIANCE WITH LAWS. To its knowledge, it and its subsidiaries have
conducted their business in compliance with all federal, state, and local laws,
ordinances and regulations, including applicable banking laws, federal and state
securities laws, and laws and regulations concerning truth-in-lending, usury,
fair credit reporting, fair lending, the Community Reinvestment Act, consumer
protection, occupational safety, fair employment practices and fair labor
standards, except where the failure to so comply is not reasonably likely to
have a Material Adverse Effect on it. Neither it nor any of its subsidiaries has
received any written notification or communication from any Regulatory
Authority, (i) asserting that either it or any of its subsidiaries are not
currently in compliance with any of the statutes, regulations or ordinances that
such Regulatory Authority enforces, which noncompliance is reasonably likely to
have a Material Adverse Effect on it, (ii) threatening to revoke any license,
franchise, permit or governmental authorization the revocation of which would
have a Material Adverse Effect on it, or (iii) requiring it or any of its
subsidiaries (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 material resolution or
policy).
(N) 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 on it, except as reflected in the First Union Financial Reports
prior to the date of this Plan.
V. COVENANTS.
The Bank hereby covenants to each of First Union and FUNC-VA and each of
First Union and FUNC-VA hereby covenants to the Bank, that:
5.01. EFFORTS TO CONSUMMATE. Subject to the terms and conditions of this
Plan, it shall use all reasonable 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 (including prompt filing of all
necessary applications or notices with Regulatory Authorities), so as to permit
consummation of the Acquisition as soon as practicable after the date of this
Plan and to otherwise enable consummation of the transactions contemplated
hereby 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). Except as otherwise contemplated in this Plan, in the
case of the Bank, each party hereto agrees to use its best efforts to forebear
from taking any action or engaging in any transaction that is reasonably likely
to result in an unreasonable delay of consummation of the Acquisition.
5.02. PROXY STATEMENT. The Bank and First Union shall prepare a proxy
statement/prospectus (the "Proxy Statement") to be mailed to the holders of Bank
Common Stock in connection with the transactions contemplated hereby and to be
filed by the Bank 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. The Bank agrees to call a special meeting (the
"Meeting") of the holders of Bank Common Stock for purposes of voting upon the
approval of this Plan. Subject to the next succeeding sentence, the Board of
Directors of the Bank will recommend such approval, and the Bank will take all
reasonable lawful action to solicit such approval by its shareholders. The Board
of Directors of the Bank may determine not to make such a recommendation, or
withdraw, modify or change any such recommendation if and only if such Board of
Directors, after having consulted with and considered the written advice of
outside counsel and the advice of its financial advisors, has determined that
the making of such recommendation, or the failure so to withdraw, modify or
change its recommendation, is substantially more likely than not to constitute a
breach of the fiduciary duties of such directors under applicable law.
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 or on behalf of the Bank relating to the
Bank or the Bank Subsidiaries and by or on behalf of 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 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 or on behalf of such other party
specifically for use in the Registration Statement.
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5.04. REGISTRATION STATEMENT EFFECTIVENESS. First Union will advise the
Bank, 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. Neither the Bank nor First Union will, without the
prior approval of the other (which approval shall not be unreasonably withheld
or delayed), issue any press release or written statement for general
circulation relating to the transactions contemplated hereby, except as
otherwise required by law.
5.06. ACCESS; INFORMATION.
(A) (1) Upon reasonable notice, the Bank 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 Time, to all of its and the Bank Subsidiaries'
properties, books, contracts, data processing system files, commitments and
records and, during such period, the Bank shall furnish promptly to First
Union (a) a copy of each material report, schedule and other document filed
by the Bank or any Bank Subsidiary with any Regulatory Authority, and (b)
all other information concerning the business, properties and personnel of
the Bank or any Bank Subsidiary as First Union may reasonably request,
provided that no investigation pursuant to this SECTION 5.06 shall affect
or be deemed to modify or waive any representation or warranty made by the
Bank or the conditions to the obligations of the Bank to consummate the
transactions contemplated by this Plan; and (2) upon reasonable notice,
First Union shall afford the Bank's counsel and investment advisors,
access, during normal business hours for (x) the period beginning ten days
prior to the mailing of the Proxy Statement and ending on the date of such
mailing and (y) the period ten days prior to the Effective Date and ending
on the Effective Date, to certain First Union information for the purposes
of conducting due diligence on First Union, provided that no investigation
pursuant to this SECTION 5.06 shall affect or be deemed to modify or waive
any representation or warranty made by First Union or the conditions to the
obligations of First Union to consummate the transactions contemplated by
this Plan.
(B) First Union and the Bank (including their respective
representatives) will not use any information obtained pursuant to this
SECTION 5.06(A) 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 the Bank,
deliver to the Bank all documents so obtained by First Union or destroy
such documents and, in the case of destruction, will certify such fact to
the Bank.
5.07. ACQUISITION PROPOSALS. In the case of the Bank, without the prior
written consent of First Union, it shall not, and it shall cause the Bank
Subsidiaries not to, solicit or encourage inquiries or proposals with respect
to, or 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 or deposits of, or a substantial equity
interest in, the Bank or any of the Bank Subsidiaries or any merger or other
business combination with the Bank or any of the Bank Subsidiaries other than as
contemplated by this Plan; PROVIDED, HOWEVER, that if the Bank is not otherwise
in violation of this Section, the Board of Directors of the Bank may furnish or
cause to be furnished information and may participate in such discussions and
negotiations if such Board of Directors, after having consulted with and
considered the written advice of outside counsel, has determined that the
failure to provide such information or participate in such negotiations and
discussions is substantially more likely than not to cause the members of such
Board of Directors to breach their fiduciary duties under applicable law. The
Bank shall instruct its and the Bank Subsidiaries' officers, directors, agents,
advisors and affiliates to refrain from taking any action that would violate or
conflict with 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, the Bank or any of the Bank
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 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.
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5.10. AFFILIATE AGREEMENTS. In the case of the Bank, it will use its best
efforts to obtain from each person who may be deemed to be an Affiliate 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 C
restricting the disposition of such Affiliate's shares of Bank Common Stock and
the shares of First Union Common Stock to be received by such person in exchange
for such person's shares of Bank Common Stock. A list of such persons, as of the
date hereof, is Previously Disclosed in SCHEDULE 5.10.
5.11. CERTAIN POLICIES OF THE BANK. In the case of the Bank, it shall,
consistent with generally accepted accounting principles and regulatory
accounting principles, use its best efforts to record any accounting adjustments
required to conform its and the Bank Subsidiaries' loan, litigation and other
reserve and real estate valuation policies and practices (including loan
classifications and levels of reserves) so as to reflect consistently on a
mutually satisfactory basis the policies and practices of First Union; PROVIDED,
HOWEVER, the Bank shall not be obligated to record any such accounting
adjustments pursuant to this SECTION 5.11 (i) unless and until the Bank shall be
reasonably satisfied that the conditions to the obligation of the parties to
consummate the Acquisition will be satisfied or waived on or before the
Effective Time, and (ii) in no event until the day prior to the Effective Date.
5.12. ANTI-TAKEOVER LAW. In the case of the Bank, it shall not take any
action that would cause the transactions contemplated by this Plan to be subject
to any applicable "anti-takeover" statute and it shall take all necessary steps
to exempt (or ensure the continued exemption of) the transactions contemplated
by this Plan from any applicable "anti-takeover" law, as now or hereafter in
effect.
5.13. NO RIGHTS TRIGGERED. In the case of the Bank and except as otherwise
contemplated by this Plan, it shall take all necessary steps to ensure that the
entering into of this Plan and the consummation of the transactions contemplated
hereby (including without limitation the Acquisition) and any other action or
combination of actions, or any other transactions contemplated hereby do not and
will not (i) result in the grant of any rights to any person (including
directors, officers and employees of the Bank) under the Charter or By-laws of
the Bank or except as Previously Disclosed in SCHEDULE 4.01(Q) under any
agreement to which the Bank or any of the Bank Subsidiaries is a party, or (ii)
restrict or impair in any way the ability of First Union or FUNC-VA to exercise
the rights granted hereunder.
5.14. SHARES LISTED. In the case of First Union, it shall use its
reasonable 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 Bank Common Stock pursuant to this Plan.
5.15. REGULATORY APPLICATIONS. In the case of each of First Union and its
subsidiaries, (i) it shall promptly prepare and submit applications to the
appropriate Regulatory Authorities for approval of the Acquisition, and (ii) as
promptly as reasonably practicable make all other appropriate filings (including
responding to comments and similar actions) to secure all other approvals,
consents and rulings which are necessary for the consummation of the Acquisition
by First Union. First Union will provide copies of such applications and
responses to the Bank and its counsel prior to submitting such applications and
responses to the applicable Regulatory Authorities. In the case of the Bank, it
agrees, upon request, to furnish First Union with information concerning itself,
the Bank Subsidiaries, its and their directors, officers and stockholders and
such other matters as may be necessary or advisable in connection with any
filing, notice or application made by or on behalf of First Union or any of its
subsidiaries in connection with the Acquisition and the other transactions
contemplated in this Plan.
5.16. REGULATORY DIVESTITURES. In the case of the Bank and upon the written
request of FUNC-VA, effective at or within fifteen days prior to the Effective
Time (to the extent required by any Regulatory Authority) and provided that
First Union and FUNC-VA shall have waived or satisfied all conditions to closing
and waived their rights to terminate this Plan, the Bank and the Bank
Subsidiaries shall cease, to the extent legally practicable, engaging in such
activities as First Union shall advise the Bank in writing are not permitted to
be engaged in by First Union under applicable law following the Effective Date
and, to the extent required by any Regulatory Authority as a conditional
approval of the transactions contemplated by this Plan, the Bank shall divest
any Bank Subsidiary engaged in activities or holding assets that are
impermissible for a bank holding company or a national banking association, on
terms and conditions agreed to by First Union.
5.17. INDEMNIFICATION.
(A) For six years after the Effective Date, First Union and FUNC-VA
shall indemnify, defend and hold harmless the present and past directors,
officers and employees of the Bank and the Bank Subsidiaries (each, an
"Indemnified Party") against all liabilities arising out of actions or
omissions occurring at or prior to the Effective Date to the same extent
such persons are indemnified under OTS regulations as in effect on the date
hereof and the Bank's Charter and By-laws as in effect on the date hereof,
including provisions relating to advances of expenses incurred in the
defense of any litigation. Wherever First Union or FUNC-VA has discretion
in the exercise of indemnification under such OTS
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<PAGE>
regulations and the Bank's Charter and By-laws, it will, subject to the
circumstances relating thereto, advice of counsel and the terms and
conditions with respect to such discretion, exercise such discretion in
favor of the Indemnified Party.
(B) First Union shall use its reasonable best efforts to maintain the
Bank's existing directors' and officers' liability insurance policy (or a
policy, including First Union's existing policy, providing comparable
coverage amount on terms no less favorable) covering persons who are
currently covered by such insurance for a period of three years after the
Effective Date; provided, that First Union shall not be obligated to make a
premium payment in respect of such policy (or replacement policy) which
exceeds, for the portion related to the Bank's directors and officers, 150%
of the annual premium payment on the Bank's current policy in effect as of
the date of this Plan; provided, further, that if such coverage can only be
obtained upon the payment of a premium in excess of 150% of the annual
premium payment of the Bank's current policy, First Union shall obtain such
coverage as can reasonably be obtained by paying a premium of 150% of the
annual premium payment of the Bank's current policy in effect as of the
date of this Plan.
(C) Any Indemnified Party wishing to claim indemnification under
subsection (A) of this SECTION 5.17, 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 and FUNC-VA under subsection (A) of this SECTION
5.17 (unless such failure materially increases First Union's or FUNC-VA's
liability under such subsection (A)). In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after
the Effective Date), (i) First Union or FUNC-VA shall have the right to
assume the defense thereof, if it so elects, and First Union or FUNC-VA
shall pay all reasonable fees and expenses of counsel for the Indemnified
Parties promptly as statements therefor are received; PROVIDED, HOWEVER,
that First Union or FUNC-VA shall be obligated pursuant to this subsection
(C) to pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction for any single action, suit or proceeding or any group of
actions, suits or proceedings arising out of or related to a common body of
facts, PROVIDED, FURTHER, that First Union or FUNC-VA will, pursuant to
this subsection (C), pay for an additional firm of counsel for an
Indemnified Party who has a conflict of interest with other Indemnified
Parties, (ii) the Indemnified Parties will cooperate in the defense of any
such matter, and (iii) First Union or FUNC-VA shall not be liable for any
settlement effected without its prior written consent.
(D) If First Union or FUNC-VA or any of its successors or assigns
shall consolidate with or merge into any other entity and shall not be the
continuing or surviving entity of such consolidation or merger or shall
transfer all or substantially all of its assets to any entity, then and in
each case, proper provision shall be made so that the successors and
assigns of First Union or FUNC-VA shall assume the obligations set forth in
this SECTION 5.17.
(E) First Union shall pay, or cause FUNC-VA to pay, all reasonable
expenses, including reasonable attorneys' fees, that may be incurred by any
Indemnified Party in enforcing the indemnity and other obligations provided
for in this SECTION 5.17. The rights of each Indemnified Party hereunder
shall be in addition to any other rights such Indemnified Party may have
under the Charter or By-laws of the Bank, under the applicable OTS rules
and regulations or otherwise.
5.18. CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective
Date, each of the Bank and First Union shall, and shall cause its
representatives to, confer on a regular and frequent basis with
representatives of the other.
(B) The Bank shall promptly notify First Union of (1) any material
change in the business or operations of the Bank or any Bank Subsidiary,
(2) any material complaints, investigations or hearings (or communications
indicating that the same may be contemplated) of any Regulatory Authority
relating to the Bank or any Bank Subsidiary, (3) the institution or the
threat of material litigation involving or relating to the Bank or any Bank
Subsidiary, or (4) any event or condition that might be reasonably expected
to cause any of the Bank's representations or warranties set forth herein
not to be true and correct as of the Effective Date (except to the extent
contemplated by SECTION 6.08) or prevent the Bank from fulfilling its
obligations hereunder; and in each case shall keep First Union informed
with respect thereto.
(C) Each of First Union and FUNC-VA shall (1) promptly notify the Bank
of any event or condition that might reasonably be expected to cause any of
its representations or warranties set forth herein not to be true and
correct as of the Effective Date (except to the extent contemplated by
SECTION 6.07), and (2) notify the Bank immediately of any denial of any
application filed by it or its subsidiaries with any Regulatory Authority
with respect to this Plan, and in each case shall keep the Bank informed
with respect thereto.
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5.19. TAX OPINION. The Bank, First Union and FUNC-VA agree not to knowingly
or intentionally, and agree to cause their subsidiaries and affiliates to not
knowingly or intentionally, take any action that would prevent the tax opinion
contemplated in SECTION 6.11 from being delivered.
VI. CONDITIONS TO CONSUMMATION.
Consummation of the Acquisition is conditioned upon:
6.01. SHAREHOLDER VOTE. Approval of this Plan by the requisite vote of the
stockholders of the Bank.
6.02. REGULATORY APPROVALS. Procurement by First Union or its subsidiaries
of regulatory consents and approvals by the appropriate Regulatory Authorities,
and the expiration of any statutory waiting periods, relating to the
transactions contemplated hereby, including those described in SECTIONS 1.01 AND
1.02; PROVIDED, HOWEVER, that no such approval or consent shall have imposed any
condition or requirement which, in the reasonable judgment of First Union, would
so materially and adversely impact the economic or business benefits to First
Union from the transactions contemplated by this Plan so as to render
inadvisable the consummation of the Acquisition.
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.
6.04. KPMG PEAT MARWICK LLP LETTERS. The Bank shall cause KPMG Peat Marwick
LLP to deliver to First Union letters, dated the date of or shortly prior to (A)
the mailing of the Proxy Statement, and (B) the Effective Date, in form and
substance reasonably satisfactory to First Union, with respect to the Bank's
consolidated financial position and results of operations, which letters shall
be based upon "agreed upon procedures" undertaken by such firm in accordance
with the Statement on Auditing Standards No. 72.
6.05. LEGAL OPINION. The Bank shall have received an opinion, dated the
Effective Date, of Marion A. Cowell, Jr., counsel for First Union, in form
reasonably satisfactory to the Bank, which shall cover the matters customarily
covered by opinions delivered in similar transactions involving First Union.
6.06. LEGAL OPINION. First Union and FUNC-VA shall have received an
opinion, dated the Effective Date, of Silver, Freedman & Taff, L.L.P., and/or
other counsel for the Bank acceptable to First Union, in form reasonably
satisfactory to First Union, which shall cover the matters customarily covered
by opinions delivered in similar transactions involving First Union.
6.07. FIRST UNION OFFICERS' CERTIFICATE. (A) Each of the representations
and warranties contained herein of First Union and FUNC-VA shall be true and
correct (in the case of each representation and warranty that contains a
materiality qualification) or true and correct in all material respects (in the
case of each representation and warranty that contains no materiality
qualification) 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 so true and correct as of such date and (B)
each and all of the agreements and covenants of First Union and FUNC-VA 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 the Bank shall have received a certificate signed by an executive officer of
First Union and FUNC-VA, dated the Effective Date, to such effect.
6.08. BANK OFFICERS' CERTIFICATE. (A) Each of the representations and
warranties contained herein of the Bank shall be true and correct (in the case
of each representation and warranty that contains a materiality qualification)
or true and correct in all material respects (in the case of each representation
and warranty that contains no materiality qualification) 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 so true and correct as of such date, and (B) each and all of the agreements
and covenants of the Bank 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 FUNC-VA shall have
received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of the Bank, 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 Acquisition.
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6.11. TAX OPINION. First Union, FUNC-VA and the Bank shall have received an
opinion from Sullivan & Cromwell, counsel for First Union, to the effect that
(i) the Acquisition constitutes a reorganization under Section 368 of the Code,
and (ii) no gain or loss will be recognized by stockholders of the Bank who
receive shares of First Union Common Stock solely in exchange for their shares
of Bank Common Stock, except that gain or loss may be recognized as to cash
received in lieu of fractional share interests. In rendering their opinion,
Sullivan & Cromwell may require and rely upon representations and agreements
contained in certificates and other documents executed by officers of First
Union, FUNC-VA, the Bank 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.
Notwithstanding anything to the contrary contained in this ARTICLE VI, a
failure to satisfy any of the conditions set forth in the proviso following
SECTION 6.02 or in SECTIONS 6.04, 6.06 OR 6.08 shall only constitute conditions
if asserted by First Union, and a failure to satisfy any of the conditions set
forth in SECTIONS 6.05 OR 6.07 shall only constitute conditions if asserted by
the Bank.
VII. TERMINATION.
7.01. TERMINATION. This Plan may be terminated prior to the Effective Time,
either before or after receipt of required stockholder approvals:
(A) MUTUAL CONSENT. By the mutual consent of First Union (acting for
itself and on behalf of FUNC-VA) and the Bank, if the Board of Directors of
each so determines by vote of a majority of the members of its entire
Board.
(B) BREACH. By First Union (acting for itself and on behalf of
FUNC-VA) or the Bank, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event of (1) 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 (2)
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.
(C) DELAY. By First Union (acting for itself and on behalf of FUNC-VA)
or the Bank, if its Board of Directors so determines by vote of a majority
of the members of its entire Board, in the event that the Acquisition is
not consummated by January 1, 1996, provided that the terminating party is
not then in material breach of any representation, warranty or covenant
contained in this Plan.
(D) NO STOCKHOLDER APPROVAL. By the Bank or First Union (acting for
itself and on behalf of FUNC-VA), 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 the Meeting, including any adjournment or adjournments thereof.
(E) BY THE BANK. By the Bank if (1) any Business Entity, other person
or group, as defined in the Exchange Act (other than First Union or any
affiliate of First Union) (a "Person"), shall have commenced (as such term
is used in Rule 14d-2(b) under the Exchange Act), a bona fide tender offer
for all outstanding shares of Bank Common Stock or any Person shall have
made a bona fide written offer involving a merger or consolidation of the
Bank or the acquisition of all or substantially all of its stock or assets
(a "Competing Offer"), (2) the Bank's Board of Directors shall determine,
after consultation with the Bank's financial advisors, that such Competing
Offer provides a material economic improvement to the holders of Bank
Common Stock when compared to the Acquisition, (3) the Bank's Board of
Directors determines, after having reviewed the definitive agreement then
to be entered into in connection with such Competing Offer and after having
consulted with and considered the written advice of outside counsel and the
advice of its financial advisors, that if they fail to recommend or accept
such Competing Offer then such failure would result in a breach of the
directors' fiduciary duties under applicable law, and (4) the Bank's Board
of Directors has authorized the execution and delivery of a definitive
agreement relating to such Competing Offer; provided, however, that the
Bank may not terminate this Plan pursuant to this SECTION 7.01(E) until the
expiration of five business days after written notice of any such Competing
Offer referenced in this SECTION 7.01(E) has been delivered to First Union
and FUNC-VA, together with a summary of the terms of any such Competing
Offer.
(F) BY FIRST UNION. By First Union (acting for itself and on behalf of
FUNC-VA), if the Board of Directors of the Bank shall have (1) authorized
or approved the entry into a definitive agreement relating to a Competing
Offer or
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(2) failed to recommend the approval of this Plan and the Acquisition to
the holders of Bank Common Stock, or withdraws, modifies or changes its
recommendation in a manner adverse to First Union and FUNC-VA.
7.02. TERMINATION FEE.
(A) The Bank hereby agrees to pay FUNC-VA, and FUNC-VA shall be
entitled to payment of, a termination fee (the "Bank Fee") of $11.5 million
(First Union and its subsidiaries other than FUNC-VA not being entitled to
payment of any additional fees under this SECTION 7.02) following the
occurrence of a Fee Trigger Event (as defined below), provided that FUNC-VA
shall have sent written notice of such entitlement within 90 days after
FUNC-VA actually becomes aware of such occurrence. Such payment shall be
made in immediately available funds within five business days after
delivery of a notice from FUNC-VA requesting such payment. The right to
receive the Bank Fee shall terminate if any of the following (a "Fee
Termination Event") occurs prior to a Fee Trigger Event: (i) the Effective
Date, (ii) termination of this Plan in accordance with the provisions
hereof if such termination occurs prior to the occurrence of a Preliminary
Event (as defined below), except a termination by First Union pursuant to
SECTION 7.01(B), (iii) termination of this Plan following the occurrence of
a Preliminary Event and the passage of 18 months after such termination, or
(iv) termination of this Plan by First Union pursuant to SECTION 7.01(B)
and the passage of 12 months after such termination.
(B) The term "Preliminary Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) the Bank without having received FUNC-VA's prior written
consent, shall have entered into an agreement to engage in any
Acquisition Transaction (as defined below) with any person (the term
"person" for purposes of this Agreement having the meaning assigned
thereto in Section 3(a)(9) and 13(d)(3) of the Exchange Act) other than
First Union or any of its subsidiaries or affiliates, or the Board of
Directors of the Bank shall have recommended that the shareholders of
the Bank approve or accept any Acquisition Transaction with any person
other than First Union or any of its subsidiaries or affiliates. For
purposes of this Plan, "Acquisition Transaction" shall mean (a) a merger
or consolidation, or any similar transaction, involving the Bank, (b) a
purchase, lease or other acquisition of all or substantially all of the
assets or deposits of the Bank, (c) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise)
of securities representing 20% or more of the voting power of the Bank;
provided that the term "Acquisition Transaction" does not include (x)
any internal merger or consolidation involving only the Bank or a
holding company formation or (y) any acquisition of additional shares of
Bank Common Stock by the Principal Stockholders (which, for purposes of
this SECTION 7.02 shall include each of Melvin Lenkin, Edward J. Lenkin,
Manuel V. Fernandez, David H. Hillman, Thomas J. Schaefer, Judy Lerner,
Mark Lerner or trusts established by the aforesaid individuals for their
spouses and/or descendants with respect to shares of Bank Common Stock
beneficially owned, or subject to an option held, by any of them as of
the date hereof as a result of such person's being a director, officer
or employee of the Bank or such person's or such trust's being a
director, officer, partner or shareholder of CF Financial Associates,
L.P. or CF Holdings, Inc. or being included in a "group" (as defined in
Section 13(d)(3) of the Exchange Act) including only other Principal
Stockholders so long as none of them is in breach of any material
representation, warranty or agreement contained in the Voting Agreement,
(to the extent such shares are subject to the voting obligation set
forth in Section 1 thereof);
(ii) (a) any person (other than First Union or any of its
subsidiaries or affiliates or the Principal Stockholders (so long as
none of them is in breach of any material representation, warranty or
agreement in the Voting Agreement)) shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 20% or more of
the outstanding shares of Bank Common Stock (the term "beneficial
ownership" for purposes of this Agreement having the meaning assigned
thereto in Section 13(d) of the Exchange Act, or (b) any group (as such
term "group" is defined in Section 13(d)(3) of the Exchange Act), other
than a group of which First Union or any of its subsidiaries or
affiliates, or a group including only Principal Stockholders (so long as
none of them is in breach of any material representation, warranty or
agreement in the Voting Agreement), is a member, shall have been formed
that beneficially owns 20% or more of the Bank Common Stock then
outstanding;
(iii) any person other than First Union or any of its subsidiaries
or affiliates shall have made a bona fide proposal to the Bank or its
shareholders, by public announcement or written communication that is or
becomes the subject of public disclosure, to engage in an Acquisition
Transaction (including, without limitation, any situation in which any
person other than First Union or any of its subsidiaries or affiliates
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
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<PAGE>
Act, with respect to, a tender offer or exchange offer to purchase any
shares of Bank Common Stock such that, upon consummation of such offer,
such person would own or control 20% or more of the then outstanding
shares of Bank Common Stock (such an offering referred to herein as a
"Tender Offer" or an "Exchange Offer", respectively));
(iv) after a proposal is made by a third party to the Bank or its
shareholders to engage in an Acquisition Transaction, or such third
party states its intention to the Bank to make such a proposal if this
Plan terminates, the Bank shall have knowingly or willfully breached any
representation or breached any covenant or obligation contained in this
Plan and such breach would entitle First Union to terminate this Plan
under SECTION 7.01(B) (without regard to the cure period provided for
therein unless such cure is promptly effected without jeopardizing
consummation of the Acquisition);
(v) the holders of shares of Bank Common Stock shall not have
approved this Plan at the Meeting or the Meeting shall not have been
held or shall have been canceled prior to termination of this Plan, in
each case after any person (other than First Union or any of its
subsidiaries or affiliates) shall have (a) made in writing, or publicly
disclosed an intention to make, a bona fide proposal to engage in an
Acquisition Transaction or (b) commenced a Tender Offer or filed a
registration statement under the Securities Act, with respect to an
Exchange Offer; or
(vi) the Board of Directors of the Bank shall have failed to
recommend the approval of this Plan and the Acquisition to the holders
of Bank Common Stock, or withdraws, modifies or changes its
recommendation in a manner adverse to First Union and FUNC-VA.
(C) The term "Fee Trigger Event" shall mean either of the following
events or transactions occurring after the date hereof:
(i) the acquisition by any person, other than First Union or any of
its subsidiaries or affiliates or the Principal Stockholders (so long as
neither of them is in breach of any material representation, warranty or
agreement in the Voting Agreement), alone or together with such person's
affiliates and associates, or any group (as defined in Section 13(d)(3)
of the Exchange Act), other than a group of which First Union or any of
its subsidiaries or affiliates is a member, or a group including only
Principal Stockholders (so long as none of them is in breach of any
material representation, warranty or agreement in the Voting Agreement),
of beneficial ownership of 35% or more of the outstanding shares of Bank
Common Stock;
(ii) the occurrence of a Preliminary Event described in clause
(B)(i) above, except that the percentage referred to in clause (c)
thereof shall be 35%; or
(iii) the termination of this Plan pursuant to SECTIONS 7.01(E) OR
7.01(F)(1).
(D) The Bank shall notify First Union promptly in writing of its
knowledge of the occurrence of any Preliminary Event or Fee Trigger Event;
PROVIDED, HOWEVER, that the giving of such notice by the Bank shall not be
a condition to the right of First Union to the Bank Fee.
VIII. OTHER MATTERS.
8.01. SURVIVAL. If the Effective Time occurs, all representations,
warranties, agreements and covenants contained in this Plan shall not survive
the Effective Time, PROVIDED, HOWEVER, the agreements contained in SECTION 5.17
shall survive the Effective Time. If this Plan is terminated prior to the
Effective Time, the agreements and representations of the parties in SECTIONS
4.01(P) AND 4.02(F), SECTIONS 5.03, 5.06(B), 5.12 AND 5.13, and SECTIONS 7.02,
8.01, 8.03, 8.04, 8.05, 8.06, 8.07, 8.09 AND 8.11 shall survive such
termination.
8.02. WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Plan may be (A) waived in writing by the party benefitted by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated hereby), 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.
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, except as federal law
may be applicable.
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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 the Bank and First
Union.
8.06. CONFIDENTIALITY. Except as otherwise provided in SECTION 5.06(B),
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.
8.07. 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 First Union
or FUNC-VA to: First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
Attn: Chief Executive Officer
Copy to: Marion A. Cowell, Jr., Esq.
First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
If to the Bank, to: Columbia First Bank
1560 Wilson Boulevard
Arlington, VA 22209-2409
Attn: Chief Executive Officer
Copy to: Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor-East
Washington, DC 20005
Attn: Barry P. Taff, Esq.
</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:
(A) the term "Material Adverse Effect", when applied to a party, shall mean
an event, occurrence or circumstance (including without limitation, any breach
of a representation or warranty contained herein by such party) which (1) has a
material adverse effect on the financial condition, results of operations or
business of such party and its subsidiaries, taken as a whole, or (2) would
materially impair such party's, or any affiliated party's (which includes, as to
the Bank, the Bank Subsidiaries, and as to First Union, FUNC-VA and its
subsidiaries) ability to timely perform its obligations under this Plan or the
consummation of any of the transactions contemplated hereby; PROVIDED, that a
Material Adverse Effect shall not include (i) effects resulting from general
economic conditions (including changes in interest rates), (ii) changes in
financial condition as a result of changes in accounting practices or changes to
statutes, regulations or regulatory policies that have not resulted in
materially more severe adverse changes than that experienced by similarly
situated financial institutions and (iii) the fees and expenses of all counsel,
accountants and financial advisors relating to the transactions contemplated by
this Plan and the costs and expenses incurred in connection with the Meeting;
(B) the term "individually or in the aggregate" as used in ARTICLE IV of
this Plan includes all events, occurrences and circumstances described in any
paragraph of ARTICLE IV, and is not linked to any specific paragraph;
(C) the term "Previously Disclosed" by a party shall mean information set
forth in a Schedule that is delivered by such party to the other party
contemporaneously with the execution of this Plan and specifically designated as
information "Previously Disclosed" pursuant to this Plan; and
(D) the term "subsidiary", with respect to a party, means any Business
Entity that is controlled by such party and is required to be consolidated with
such party under generally accepted accounting principles.
8.09. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements
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<PAGE>
heretofore made. Nothing in this Plan, expressed or implied, shall confer upon
any person, other than First Union, FUNC-VA, and the Bank or their respective
successors, any rights, remedies, obligations or liabilities under or by reason
of this Plan.
8.10. BENEFIT PLANS. As soon as administratively practicable after the
Effective Time, except as Previously Disclosed in SCHEDULE 8.10, employees of
the Bank and the Bank 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, the vesting of
benefits under such plans, and the accrual of benefits under such plans, First
Union shall give effect to years of service with the Bank or the Bank
Subsidiaries, as the case may be, as if such service had been 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/ KENNETH R. STANCLIFF
Name: Kenneth R. Stancliff
Title: Senior Vice President
COLUMBIA FIRST BANK,
A FEDERAL SAVINGS BANK
By: /s/ MELVIN LENKIN
Name: Melvin Lenkin
Title: Chairman of the Board
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EXHIBIT A
AGREEMENT, dated as of April 5, 1995 (this "Agreement"), among FIRST UNION
CORPORATION, a North Carolina corporation ("First Union"), CF FINANCIAL
ASSOCIATES, L.P., a Delaware limited partnership ("Shareholder"), a shareholder
of COLUMBIA FIRST BANK, A FEDERAL SAVINGS BANK, a federally chartered stock
savings bank, (the "Bank"), and, as to Section 18 hereof, CF HOLDINGS INC., a
Delaware corporation (the "General Partner").
RECITALS:
(A) THE ACQUISITION. First Union and Bank are contemporaneously herewith
entering into that certain Agreement and Plan of Acquisition of even date
herewith (the "Acquisition Agreement") pursuant to which First Union, through
its subsidiaries, will acquire all the business, assets and liabilities of the
Bank, subject to the terms and conditions of the Acquisition Agreement (the
"Acquisition");
(B) THE SHARES. Shareholder (i) is the beneficial and registered owner of
1,411,000 shares (the "Shares") of Common Stock, par value $.01 per share ("Bank
Common Stock"), of Bank, constituting approximately 37.6% of the currently
outstanding shares of Bank Common Stock, and (ii) desires to enter into this
Agreement in order to induce First Union to enter into the Acquisition
Agreement; and
(C) CONDITION TO ACQUISITION AGREEMENT. As a condition to its willingness
to enter into the Acquisition Agreement, First Union has requested Shareholder
to vote in favor of approval and adoption of the Acquisition Agreement, the
Acquisition and the transactions contemplated thereby and Shareholder hereby
agrees so to vote, subject to the terms and conditions hereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein, intending to be legally bound hereby, the
parties hereto agree as follows:
1. AGREEMENT TO VOTE. At such time as Bank conducts a meeting of, solicits
written consents from or otherwise seeks a vote of, its shareholders for the
purpose of adopting and approving the Acquisition Agreement, the Acquisition and
the transactions contemplated thereby, Shareholder agrees duly and validly to
vote all of the Shares, as well as any and all other shares of Bank Common Stock
as to which Shareholder possesses the power to vote or direct voting
(collectively, the "Voting Shares"), in favor of adopting and approving the
Acquisition Agreement, the Acquisition and the transactions contemplated
thereby.
2. LIMITATION. Notwithstanding Section 1 hereof, Shareholder will have at
all times the right to vote the Shares, in its sole discretion, with respect to
all matters unrelated to the Acquisition submitted to a vote of the shareholders
of the Bank.
3. TERMINATION OF VOTING AGREEMENT. This Agreement shall terminate upon (i)
termination of the Acquisition Agreement in accordance with its terms or (ii)
consummation of the Acquisition. In the event of termination of this Agreement
as provided in clause (i) of the preceding sentence, this Agreement shall
forthwith become null and void and there shall be no liability or obligation on
the part of First Union, Shareholder or their respective officers or directors,
except that nothing in this Section 3 shall relieve any party hereto from any
liability for breach of this Agreement prior to such termination.
4. EXCEPTIONS TO OBLIGATIONS. Except for the agreement of Shareholder to
vote the Shares in accordance with Section 1 hereof, nothing in this Agreement
shall: (a) require Shareholder to acquire additional shares of Bank Common
Stock; (b) require a director of Bank who is an officer, director, partner,
shareholder, nominee or representative of Shareholder or the General Partner, in
his or her capacity as a director of Bank, to take or refrain from taking any
action consistent with the provisions of Section 5.02 or Section 5.07 of the
Acquisition Agreement or that would otherwise cause such director to violate his
or her fiduciary duties to Bank's shareholders under applicable law; or (c)
require Shareholder to take any action that would prevent or impede Bank's
ability to exercise its rights or fulfill its obligations under Section 5.07 of
the Acquisition Agreement.
5. COVENANTS OF SHAREHOLDER. Except in accordance with the provisions of
this Agreement, Shareholder agrees, until this Agreement has been terminated in
accordance with Section 3 hereof, not to:
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<PAGE>
(a) directly or indirectly, sell, transfer, pledge, assign or
otherwise dispose of, or enter into any contract, option, commitment or
other arrangement or understanding with respect to the sale, transfer,
pledge, assignment or other disposition of any of the Shares, except where
the transferee, pledgee or assignee executes a separate writing in form and
substance satisfactory to First Union agreeing to the provisions of Section
1 hereof;
(b) except as may be required to vote the Voting Shares in accordance
with Section 1 hereof or as provided in Section 5(a) hereof, grant any
consents or proxies, deposit any Shares into a voting trust or enter into a
voting agreement with respect to any Voting Shares;
(c) take any action or omit to take any action which would prohibit,
prevent or preclude Shareholder from performing its obligations under this
Agreement; or
(d) without the prior written approval of First Union, directly or
indirectly through its officers, directors, partners, agents or
representatives, solicit or encourage inquiries or proposals with respect
to, or 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 or deposits of, or a substantial
equity interest in, the Bank, or any merger or other business combination
with the Bank (any of the foregoing, a "Competing Transaction"), other than
the Acquisition.
Notwithstanding Section 5(d) and except for the agreement of Shareholder to
vote the Voting Shares in accordance with Section 1 hereof, nothing contained in
this Agreement shall prohibit the Board of Directors of Shareholder from
furnishing information to any person or entity that, after the date hereof,
makes a bona fide proposal to enter into a Competing Transaction, that after the
date hereof had not been initiated, solicited or encouraged in any manner by
Bank, Shareholder or any affiliate thereof, if: (A) the Board of Directors of
Bank shall have determined to take certain actions permitted by the proviso to
Section 5.07 of the Acquisition Agreement; (B) the Shareholder and the General
Partner shall have unanimously determined in good faith (after considering the
written advice of outside counsel, a copy of which will be provided to First
Union) that such action is required for Shareholder to comply with its fiduciary
duties to the Bank's other shareholders under applicable law; (C) the
Shareholder and the General Partner shall have reasonably concluded that the
proposal was made in good faith; (D) prior to furnishing such information to
such person or entity, Shareholder shall have received from such person or
entity an executed confidentiality agreement, with terms reasonably satisfactory
to Shareholder; and (E) Shareholder shall have so notified First Union.
6. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER. Shareholder and the
General Partner hereby represent and warrant to First Union as follows:
(a) As of the date hereof, the Shares are the only shares of Bank
Common Stock that Shareholder or the General Partner has the right, power
or authority to vote, and Shareholder does not own or have any right to
acquire any other shares of Bank Common Stock.
(b) Shareholder and the General Partner each has all requisite power
and authority to execute and deliver this Agreement and to vote the Voting
Shares in accordance with Section 1 hereof and otherwise perform its
obligations hereunder; such execution, delivery, vote and performance have
been duly authorized by all necessary action on the part of Shareholder and
the General Partner each; and this Agreement has been duly executed and
delivered by each of Shareholder and the General Partner and constitutes
the valid and binding agreement of each of Shareholder and the General
Partner, enforceable against Shareholder in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(c) The execution and delivery of this Agreement by Shareholder does
not, and the consummation of the transactions contemplated hereby,
including, without limitation, the agreement of Shareholder to vote the
Voting Shares in accordance with Section 1 hereof, will not, constitute a
breach or violation of, or a default under, Shareholder's Agreement of
Limited Partnership or the Certificate of Incorporation or Bylaws of the
General Partner, or under any material agreement, indenture or instrument
to which the General Partner, Shareholder or any subsidiary of Shareholder
is a party or by which Shareholder or any subsidiary of Shareholder or any
of their respective properties is subject or bound, which breach, violation
or default could reasonably be expected to have a material adverse effect
on the transactions contemplated by this Agreement or any adverse effect on
the General Partner's or Shareholder's ability to perform its obligations
hereunder, including without limitation, the agreement of Shareholder to
vote the Shares in accordance with Section 1 hereof.
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<PAGE>
(d) The consummation of the transactions contemplated by this
Agreement, including, without limitation, the agreement of Shareholder to
vote the Voting Shares in accordance with Section 1 hereof, will not
require any consent, waiver or approval under any such judgment, decree,
order, governmental permit or license, or material agreement, indenture or
instrument referred to in Section 6(c) hereof, other than any consents,
waivers or approvals contemplated by the Acquisition Agreement and the
schedules thereto or such consents, waivers or approvals the absence of
which would not have a material adverse effect on the transactions
contemplated by this Agreement or any adverse effect on the General
Partner's or Shareholder's ability to perform its obligations hereunder or
thereunder, including, without limitation, the agreement of Shareholder to
vote the Voting Shares in accordance with Section 1 hereof.
(e) The Shares are now and, except as permitted by Section 5(a)
hereof, will at all times during the term of this Agreement be beneficially
owned and held of record by Shareholder, free and clear of all liens,
claims, security interests or any other encumbrances whatsoever, other than
restrictions upon resale which may be imposed by Federal or state
securities laws.
(f) The General Partner is the sole general partner of Shareholder and
no limited partner or other person has the right to direct the voting of
securities by Shareholder.
7. REPRESENTATIONS AND WARRANTIES OF FIRST UNION. First Union hereby
represents and warrants to Shareholder that First Union has the corporate power
and authority to execute, deliver and perform this Agreement; such execution,
delivery and performance have been duly authorized by all necessary corporate
action on the part of First Union; and this Agreement has been duly executed and
delivered by First Union and constitutes the valid and binding agreement of
First Union, enforceable against First Union in accordance with its terms,
subject as to enforcement to bankruptcy, insolvency and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
8. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement,
including, without limitation, the agreement of Shareholder to vote the Voting
Shares in accordance with Section 1 hereof, were not performed by the applicable
party hereto in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that each of the parties hereto shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement by the other and
to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which it is entitled at law or in equity.
9. FURTHER ASSURANCES. Shareholder and First Union agree to execute and
deliver all such further documents and instruments and take all such further
reasonable action as may be necessary or appropriate, including cooperation in
obtaining any and all required regulatory approvals, in order to consummate the
transactions contemplated hereby, including, without limitation, the agreement
of Shareholder to vote the Voting Shares in accordance with Section 1 hereof.
10. EXPENSES. Except as may otherwise be provided herein, no party hereto
shall be responsible for the payment of any other parties' expenses incurred in
connection with this Agreement.
11. THIRD PARTY BENEFICIARIES. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and its respective
successors and permitted assigns, and it is not the intention of the parties to
confer third party beneficiary rights upon any other person or entity.
12. AMENDMENTS. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by all of the parties hereto.
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<PAGE>
13. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and delivered personally or by telecopy
transmission or sent by registered or certified mail or by any express mail
service, postage or fees prepaid, addressed as follows:
(a) if to First Union:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Attention: Chief Executive Officer
with a copy to:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Attention: General Counsel
(b) if to Shareholder:
CF Financial Associates, L.P.
4922-A St. Elmo Avenue
Bethesda, MD 20814
Attn: CF Holdings, Inc.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina (without regard to
principles of conflict of laws), except to the extent that the Federal laws of
the United States govern the matters set forth herein.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute but one agreement.
16. EFFECT OF HEADING. The descriptive headings contained herein are for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
17. SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
18. GENERAL PARTNER. By executing this Agreement on behalf of Shareholder
and on its own behalf, the General Partner, as sole general partner of
Shareholder, confirms that it will take any and all action necessary or
appropriate to ensure compliance by Shareholder with this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first written above.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
NAME: KENNETH R. STANCLIFF
TITLE: SENIOR VICE PRESIDENT
C.F. FINANCIAL ASSOCIATES, L.P.
By: C.F. HOLDINGS INC., as
General Partner
By: /s/ MELVIN LENKIN
NAME: MELVIN LENKIN
TITLE: PRESIDENT
C.F. HOLDINGS INC., as to
Section 18
By: /s/ MELVIN LENKIN
NAME: MELVIN LENKIN
TITLE: PRESIDENT
B-27
<PAGE>
EXHIBIT B
PLAN OF MERGER
PLAN OF MERGER, dated as of the 5th day of April, 1995 (this "Plan"), by
and between COLUMBIA FIRST BANK, a federal savings bank (the "Bank") and FIRST
UNION CORPORATION, a North Carolina corporation ("First Union"), FIRST UNION
CORPORATION OF VIRGINIA, a Virginia corporation ("FUNC-VA") and FIRST UNION
NATIONAL BANK OF VIRGINIA, a national banking association ("FUNB-VA").
RECITALS:
(A) AGREEMENT AND PLAN OF ACQUISITION. The parties hereto have entered into
an Agreement and Plan of Acquisition, dated as of the date hereof (the
"Acquisition Agreement"), providing for the acquisition by FUNC-VA and certain
of its controlled subsidiaries of the assets of the Bank and the assumption by
certain controlled subsidiaries of FUNC-VA of the liabilities of the Bank (the
"Acquisition").
(B) DIRECTION. FUNC-VA has directed that the Acquisition be accomplished,
in part, by way of the merger of the Bank with and into FUNB-VA (the "Merger")
pursuant to the terms and conditions of this Plan.
(C) THE BANK. As of December 31, 1994, the Bank had capital of
$132,998,000, divided into common stock of $37,000, surplus of $59,064,000 and
undivided profits, including capital reserves, of $76,077,000, and net
unrealized gains (loss) on investment securities of ($2,180,000).
(D) FUNB-VA. As of December 31, 1994, FUNB-VA had capital of $589,374,000,
divided into common stock of $65,164,000, surplus of $415,286,000 and undivided
profits, including capital reserves, of $179,919,000, and net unrealized gain
(loss) on investment securities of ($70,995,000).
(E) DEFINED TERMS. Capitalized terms used without definition in this Plan
have been defined in the Acquisition Agreement.
In consideration of their mutual promises and obligations (including those
in the Acquisition Agreement), 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 MERGER.
1.01. THE MERGER. Subject to the terms and conditions of this Plan and
subject to First Union's right to revise the structure of the Acquisition
pursuant to SECTION 2.02 of the Acquisition Agreement, at the Effective Time:
(A) THE CONTINUING BANK. The Bank shall be merged with and into FUNB-VA,
the separate existence of the Bank shall cease and FUNB-VA (the "Continuing
Bank") shall be the surviving constituent of the Merger; and the Continuing Bank
shall continue to conduct the business of a national banking association at its
main office in Roanoke, Virginia and at the legally established branches of the
Bank located in the Commonwealth of Virginia and of FUNB-VA.
(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 each 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 and any liquidation account established by either of such banks).
(D) CHARTER; BY-LAWS; DIRECTORS; OFFICERS. The Charter and By-Laws of the
Continuing Bank shall be those of FUNB-VA, as in effect immediately prior to the
Effective Time. The directors and officers of FUNB-VA in office immediately
prior
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<PAGE>
to the Effective Time 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 THE CONTINUING BANK. The amount of the capital
stock of the Continuing Bank shall be not less than $65,164,000 and shall
consist of not less than 6,516,400 issued and outstanding shares of common
stock, each of $10.00 par value, and the issued and outstanding shares shall
remain issued and outstanding as shares of FUNB-VA, each of $10.00 par value,
and the holders thereof shall retain their rights therein.
II. CONSIDERATION.
2.01. CONSIDERATION. Subject to the terms and conditions of this Plan, at
the Effective Time:
(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 (as amended,
the "First Union Rights Agreement")), issued and outstanding immediately prior
to the Effective Time shall remain as issued and outstanding shares of First
Union Common Stock.
(B) OUTSTANDING BANK COMMON STOCK. Each share (excluding shares held by the
Bank or any of its subsidiaries or by First Union or any of its subsidiaries, in
each case other than in a fiduciary capacity or in satisfaction of debts
previously contracted ("Excluded Shares")) of Bank Common Stock issued and
outstanding immediately prior to the Effective Time shall become and be
converted into the right to receive the Consideration (as defined below) in
accordance with SECTION 2.04.
(C) OUTSTANDING FUNB-VA COMMON STOCK. The shares of FUNB-VA 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-VA
Common Stock.
(D) FOR PURPOSES OF THIS PLAN:
(1) "Average Market Price" shall mean the average of the daily closing
sales prices of First Union Common Stock as reported on the Composite
Transactions Tape of the New York Stock Exchange, Inc. ("NYSE") reporting
system for the ten consecutive full trading days in which such shares are
traded on the NYSE ending on the first trading day following the receipt of
the last required regulatory approval referred to in SECTION 6.02 of the
Acquisition Agreement and the expiration of all waiting periods required by
such regulatory approvals for the Acquisition.
(2) "Consideration" shall mean the number of shares of First Union
Common Stock equal to the quotient of $60.00 and the Average Market Price.
2.02. STOCKHOLDER RIGHTS; STOCK TRANSFERS. At the Effective Time, holders
of Bank Common Stock shall cease to be, and shall have no rights as, holders
thereof, other than to receive the Consideration provided under this ARTICLE II.
After the Effective Time, there shall be no transfers on the stock transfer
books of the Bank or the Continuing Bank of the shares of Bank Common Stock
which were issued and outstanding immediately prior to the Effective Time.
2.03. FRACTIONAL SHARES. Notwithstanding any other provision hereof or in
the Acquisition Agreement, 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 Bank
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 Composite Transactions reporting system of the NYSE (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 holder of Bank
Common Stock of record immediately prior to the Effective Date transmittal
materials for use in exchanging such holder's certificates for Bank 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 Bank Common Stock are converted at the Effective Time, 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 holder only upon delivery
to First Union National Bank of North Carolina (the "Exchange Agent") of the
certificates formerly representing all of such Bank Common Stock owned by such
holder (or indemnity satisfactory to First Union and the Exchange Agent, 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 such holder shall be
entitled to receive upon such delivery. Certificates surrendered for exchange by
any person constituting an Affiliate of the
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<PAGE>
Bank for purposes of Rule 145 of the Securities Act, 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 5.10 of
the Acquisition Agreement.
2.05. 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 Consideration
shall be proportionately adjusted.
2.06. EXCLUDED SHARES. Each of the Excluded Shares shall be cancelled and
retired as of the Effective Date and no consideration shall be issued in
exchange therefor.
2.07. OPTIONS. From and after the Effective Time, all employee and director
stock options to purchase shares of Bank Common Stock (each, a "Bank Stock
Option"), which are then outstanding and unexercised, shall be converted into
and become options to purchase shares of First Union Common Stock, and FUNC-VA
shall assume each such Bank Stock Option in accordance with the terms of the
plan and agreement by which it is evidenced; PROVIDED, HOWEVER, that from and
after the Effective Time, (i) each such Bank Stock Option assumed by FUNC-VA may
be exercised solely to purchase shares of First Union Common Stock, (ii) the
number of shares of First Union Common Stock purchaseable upon exercise of such
Bank Stock Option shall be equal to the number of shares of Bank Common Stock
that were purchaseable under such Bank Stock Option immediately prior to the
Effective Time multiplied by the number of shares comprising the Consideration
and rounding down to the nearest whole share, with cash being paid for any
fractional share interest that otherwise would be purchaseable, and (iii) the
per share exercise price under each such Bank Stock Option shall be adjusted by
dividing the per share exercise price of each such Bank Stock Option by the
number of shares comprising the Consideration, and rounding up to the nearest
cent. The Bank represents and warrants that the number of shares of Bank Common
Stock which are issuable upon exercise of Bank Stock Options as of the date
hereof is Previously Disclosed in SCHEDULE 4.01(Q) of the Acquisition Agreement.
The terms of each Bank Stock Option shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split, stock
dividend, recapitalization or other similar transaction with respect to First
Union Common Stock on or subsequent to the Effective Time. It is intended that
the foregoing assumption shall be effected in a manner which is consistent with
the requirements of Section 424 of the Code, as to any Bank Stock Option that is
an "incentive stock option" (as defined in Section 422 of the Code).
III. CONDITIONS; TERMINATION.
3.01. CONDITIONS. Consummation of the Merger is conditioned upon occurrence
of the Effective Time in accordance with the Acquisition Agreement and is
subject to the conditions set forth in Article VI thereof.
3.02. TERMINATION.
(A) This Plan shall terminate upon, and be of no further force or effect
following, any termination of the Acquisition Agreement in accordance with its
terms.
(B) This Plan may be terminated by an agreement in writing executed by all
parties hereto.
IV. OTHER MATTERS.
4.01. SURVIVAL. If the Effective Time occurs, all representations,
warranties, agreements and covenants contained in this Plan shall not survive
the Effective Time, PROVIDED, HOWEVER, the agreements contained in SECTION 2.04
shall survive the Effective Date. If this Plan is terminated prior to the
Effective Time, the agreements and representations of the parties in SECTIONS
4.01, 4.03, 4.04, 4.05, 4.06, 4.07, 4.09 AND 4.11 shall survive such
termination.
4.02. WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Plan may be (A) waived in writing by the party benefitted by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated hereby), 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.
4.03. 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.
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<PAGE>
4.04. GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of North Carolina, except as federal law
may be applicable.
4.05. 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):
If to First Union,
FUNC-VA or FUNB-VA, to: First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
Attn: Chief Executive Officer
Copy to: Marion A. Cowell, Jr., Esq.
First Union Corporation
One First Union Center
Charlotte, NC 28288-0013
If to the Bank, to: Columbia First Bank
1560 Wilson Boulevard
Arlington, VA 22209-2409
Attn: Chief Executive Officer
Copy to: Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor-East
Washington, DC 20005
Attn: Barry P. Taff, Esq.
4.06. DEFINITIONS. Any term defined anywhere in this Plan (including
pursuant to paragraph (E) of the Recitals) shall have the meaning ascribed to it
for all purposes of this Plan (unless expressly noted to the contrary). In
addition, the term "subsidiary", with respect to a party, means any Business
Entity that is controlled by such party and is required to be consolidated with
such party under generally accepted accounting principles.
4.07. NO THIRD PARTY BENEFICIARIES. Nothing in this Plan, expressed or
implied, shall confer upon any person, other than First Union, FUNC-VA, FUNB-VA,
and the Bank or their respective successors, any rights, remedies, obligations
or liabilities under or by reason of this Plan.
4.08. HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
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<PAGE>
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/ KENNETH R. STANCLIFF
NAME: KENNETH R. STANCLIFF
TITLE: SENIOR VICE PRESIDENT
FIRST UNION NATIONAL BANK OF VIRGINIA
By: /s/ KENNETH R. STANCLIFF
NAME: KENNETH R. STANCLIFF
TITLE: SENIOR VICE PRESIDENT
COLUMBIA FIRST BANK, A FEDERAL SAVINGS
BANK
By: /s/ MELVIN LENKIN
NAME: MELVIN LENKIN
TITLE: CHAIRMAN OF THE BOARD
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<PAGE>
OPINIONS OF SCHRODER WERTHEIM & CO. INC.
AND FRIEDMAN, BILLINGS, RAMSEY & CO. INC.
ANNEX C
(Schroder Wertheim & Co. logo appears here)
October 5, 1995
Board of Directors
Columbia First Bank, A Federal Savings Bank
1560 Wilson Boulevard
Arlington, VA 22209
Gentlemen:
We understand that Columbia First Bank, A Federal Savings Bank ("Columbia
First" or the "Company") has entered into an Agreement and Plan of Acquisition,
dated as of April 5, 1995 (the "Merger Agreement"), with First Union Corporation
("First Union"), pursuant to which Columbia First will be merged with and into a
wholly-owned subsidiary of First Union (the "Merger"). The Merger Agreement
provides, among other things, that each issued and outstanding share of common
stock of Columbia First, par value $.01 per share, other than such shares held
directly or indirectly by First Union in a nonfiduciary capacity and any such
shares held as treasury stock by the Company, shall be converted and become the
right to receive shares of First Union common stock, par value $3.33 1/3 per
share (the "Consideration"). Pursuant to the Merger Agreement, the number of
shares of First Union common stock which will be exchanged for each share of
Columbia First common stock in the Merger will equal $60 divided by the average
daily closing price per share of common stock of First Union over the ten
trading days ending on the first trading day following the receipt of the last
required regulatory approval and the expiration of all regulatory waiting
periods. We understand that, in accordance with the foregoing, each share of
Columbia First common stock will be exchanged for 1.1852 shares of First Union
common stock. The Merger will be considered at a special meeting of the
shareholders of Columbia First. The terms of the Merger are more fully set forth
in the Merger Agreement.
We also understand that as a condition and inducement to First Union's
willingness to enter into the Merger Agreement, CF Financial Associates, L.P.,
which owns approximately 38% of the outstanding common stock of Columbia First,
and CF Holdings, Inc., the sole general partner of CF Financial Associates,
L.P., have entered into a voting agreement pursuant to which they have agreed to
vote all their shares in favor of the Merger (the "Voting Agreement").
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, of the Consideration to the shareholders of
Columbia First.
In connection with our opinion set forth herein, we have, among other
things:
(i) reviewed the Annual Reports to shareholders and Annual Reports on
Form 10-K filed with the Office of Thrift Supervision ("OTS") for the
fiscal years ended September 30, 1992, 1993 and 1994 by Columbia
First;
(ii) reviewed the Annual Reports to shareholders and Annual Reports on
Form 10-K filed with the Securities and Exchange Commission (the
"Commission") for the fiscal years ended December 31, 1992, 1993 and
1994 by First Union;
(iii) reviewed the Annual Report to shareholders and Annual Report on Form
10-K filed with the Commission for the year ended December 31, 1994
by First Fidelity Bancorporation ("First Fidelity"), with whom First
Union has entered into a definitive merger agreement;
(iv) reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 31, 1994, March 31, 1995 and June 30, 1995 filed with
the OTS by Columbia First;
(v) reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1995 (as amended by Form 10-Q/A Amendment No. 1,
dated May 16, 1995) and June 30, 1995 filed with the Commission by
First Union;
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<PAGE>
(Schroder Wertheim & Co. logo appears here)
(vi) reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1995 and June 30, 1995 filed with the Commission by
First Fidelity;
(vii) reviewed the Form 8-K filed with the OTS on April 20, 1995 by
Columbia First;
(viii) reviewed the Forms 8-K filed with the Commission on June 19, 1995,
June 20, 1995, June 21, 1995, June 30, 1995 and August 30, 1995 by
First Union;
(ix) reviewed the Form 8-K filed with the Commission on June 23, 1995 by
First Fidelity;
(x) discussed the past and current operations, financial condition and
prospects of Columbia First, First Fidelity and First Union with the
managements of Columbia First and First Union, respectively;
(xi) reviewed the reported prices and trading activity for Columbia
First's common stock and First Union's common stock and compared them
with those of certain companies which we deemed to be reasonably
similar to Columbia First and First Union, respectively;
(xii) compared the results of operations and financial condition of
Columbia First and First Union with those of certain companies which
we deemed to be reasonably similar to Columbia First and First
Union, respectively;
(xiii) reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions which we deemed to be reasonably
comparable;
(xiv) participated in discussions and negotiations among representatives
of Columbia First, representatives of First Union, Columbia First's
legal advisors and the legal advisors to First Union;
(xv) reviewed execution copies of each of the Merger Agreement, Voting
Agreement; and
(xvi) performed such other analyses and reviewed and analyzed such other
information as we deemed appropriate.
In rendering our opinion, we have not assumed any responsibility for
independently verifying the accuracy and completeness of any information
supplied or otherwise made available to us by Columbia First or First Union, and
we have not undertaken an independent appraisal of the assets or liabilities of
Columbia First or First Union or been furnished with any such appraisals. We are
not experts in the evaluation of allowances for loan losses and have not
reviewed any individual credit files of Columbia First or First Union. Our
opinion is necessarily based upon economic, market and other conditions as they
exist on, and the information made available to us as of, the date hereof.
Schroder Wertheim & Co. Incorporated, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. We
have acted as financial advisor to Columbia First in connection with the
transaction described in this letter and will receive a fee for our services
which is contingent upon the consummation of the Merger. Schroder Wertheim & Co.
Incorporated is a full service securities firm and in the course of our normal
trading activities we may from time to time effect transactions and hold
positions in securities of Columbia First and First Union.
This letter is solely for the information of the Board of Directors of
Columbia First in its consideration of the Merger Agreement and may not be
relied upon by any other person or used for any other purpose, reproduced,
disseminated, quoted or referred to without our prior written consent. This
letter does not constitute a recommendation to any shareholder with respect to
whether to vote in favor of the Merger and should not be relied upon by any
shareholder as such.
Based upon and subject to the foregoing, we are of the opinion, as
investment bankers, that the Consideration is fair, from a financial point of
view, to the shareholders of Columbia First.
Very truly yours,
(Signature of Schroder Wertheim & Co.)
SCHRODER WERTHEIM & CO.
Incorporated
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<PAGE>
October 5, 1995
Board of Directors
Columbia First Bank, A Federal Savings Bank
1560 Wilson Boulevard
Arlington, VA 22209
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc., ("FBR")
provide you with its opinion as to the fairness from a financial point of view
to holders of shares of beneficial interest ("Shareholders") of Columbia First
Bank, A Federal Savings Bank ("Columbia First" or the "Company") of the proposed
Agreement and Plan of Merger between Columbia First and First Union Corporation
("First Union"), dated April 5, 1995 (the "Merger Agreement"), pursuant to which
Columbia First will be merged with a wholly-owned subsidiary of First Union (the
"Merger"). The Agreement provides, among other things, that each issued and
outstanding share of common stock of Columbia First, par value $0.01 per share,
other than such shares held directly or indirectly by First Union in a
nonfiduciary capacity and any such shares held as treasury stock by the Company,
shall be converted into the right to receive $60.00 per share of First Union
common stock, par value $3.33 1/3 per share (the "Consideration"). The number of
shares of First Union common stock which will be exchanged for each share of
Columbia First common stock in the Merger will equal $60 divided by the average
daily closing price per share of common stock of First Union over the ten
trading days ending on the first trading day following the receipt of the last
required regulatory approval and the expiration of all regulatory waiting
periods. We understand that, in accordance with the foregoing, each share of
Columbia First common stock will be exchanged for 1.1852 shares of First Union
common stock. The Merger will be considered at a special meeting of the
shareholders of Columbia First. The terms of the Merger are more fully set forth
in the Merger Agreement.
FBR understands that as a condition and inducement to First Union's
willingness to enter into the Merger Agreement, CF Financial Associates, L.P.,
which owns approximately 38% of the outstanding common stock of Columbia First,
and CF Holdings, Inc., the sole general partner of CF Financial Associates,
L.P., have entered into a voting agreement pursuant to which they have agreed to
vote all their shares in favor of the Merger (the "Voting Agreement").
In delivering this opinion, FBR has completed the following tasks:
1. reviewed the Columbia First Annual Reports to Shareholders and Columbia
First Annual Reports on Form 10-K filed with the Office of Thrift
Supervision (the "OTS") for the fiscal years ended September 30, 1992,
1993 and 1994;
2. reviewed the First Union Annual Reports to shareholders and First Union
Annual Reports on Form 10-K filed with the Securities and Exchange
Commission (the "SEC") for the fiscal years ended December 31, 1992,
1993 and 1994;
3. reviewed the First Fidelity Bancorporation ("First Fidelity") Annual
Reports to shareholders and First Fidelity Annual Reports on Form 10-K
filed with the SEC for the fiscal years ended December 31, 1992, 1993
and 1994;
4. reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 31, 1994, March 31, 1995 and June 30, 1995 filed with
the OTS by Columbia First;
5. reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1995 and June 30, 1995 filed with the SEC by First
Union;
6. reviewed the Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1995 and June 30, 1995 filed with the SEC by First
Fidelity;
7. reviewed the Form 8-K for August 20, 1995 filed with the OTS by
Columbia First;
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<PAGE>
8. reviewed the Form 8-K for June 19, 1995, June 20, 1995, June 30, 1995
and August 30, 1995 filed with the SEC by First Union;
9. reviewed the Form 8-K for June 23, 1995 filed with the SEC by First
Fidelity;
10. discussed the past and current operations, financial condition and
prospects of Columbia First and First Union with the managements of
Columbia First and First Union;
11. reviewed the reported prices and trading activity for Columbia First's
common stock and First Union's common stock and compared them with
those of certain companies which FBR deemed to be reasonably comparable
to Columbia First and First Union;
12. compared results of operations and financial condition of Columbia
First and First Union with those of certain companies which FBR deemed
to be reasonably comparable to Columbia First and First Union;
13. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions which FBR deemed to be reasonably
comparable;
14. participated in discussions and negotiations among representatives of
Columbia First, representatives of First Union, legal counsel for
Columbia First and legal counsel for First Union;
15. reviewed execution copies of each of the Merger Agreement and the
Voting Agreement; and
16. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume any responsibility for
independently verifying the accuracy and completeness of the information
concerning the Company and First Union as furnished by the Company and First
Union, respectively, or the publicly-available information regarding other
financial institutions and economic data. FBR has further relied on the
assurances of management of Columbia First and First Union that they are not
aware of any facts that would make such information provided inaccurate or
misleading. FBR has not undertaken an independent appraisal of the assets or
liabilities of Columbia First or First Union nor has FBR been furnished with any
such appraisals. FBR is not an expert in the evaluation of allowances for loan
losses and has not reviewed any individual credit files of Columbia First or
First Union. FBR's opinion is necessarily based upon economic, market and other
conditions as they exist on the information made available to FBR as of the date
hereof. FBR expresses no opinion on matters of a legal, regulatory, tax or
accounting nature related to the Merger and related transactions as set forth in
the Merger Agreement and the Voting Agreement.
FBR, as part of its institutional brokerage, research and investment
banking practice, is regularly engaged in the valuation of securities and the
evaluation of transactions in connection with initial and secondary offerings,
mutual-to-stock conversions of savings institutions, mergers and acquisitions of
commercial banks, savings institutions and savings and loan holding companies,
as well as business valuations for other corporate purposes for financial
institutions and real estate related companies. As specialists in the valuation
of securities of financial institutions, FBR has experience in, and knowledge
of, Virginia and the surrounding regional markets for thrift and bank securities
and institutions operating in Virginia and the surrounding regional areas.
FBR has acted as financial advisor to Columbia First in connection with the
transaction described herein and will receive a fee for services rendered which
is contingent upon the consummation of the Merger. In the ordinary course of
FBR's business, it may effect transactions in the securities of Columbia First
or First Union for its own account and/or for the accounts of its customers and,
accordingly, may at any time hold long or short positions in such securities.
From time to time, principals and/or employees of FBR may also have positions in
the securities.
This letter is solely for the information of the Board of Directors of
Columbia First in its consideration of the Merger Agreement. This letter may not
be relied upon by any other person or used for any other purpose, reproduced,
disseminated, quoted from or referred to without FBR's prior written consent. It
is understood that this letter is directed solely to the Board of Directors of
Columbia First and is not intended to be and does not constitute a
recommendation to any Shareholders as to how such Shareholder should vote with
respect to the proposed transaction.
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<PAGE>
Based upon and subject to the foregoing, as well as any such other matters
as we consider relevant, it is FBR's opinion that the Consideration is fair,
from a financial point of view, to the Shareholders of Columbia First.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
EMANUEL J. FRIEDMAN
CHAIRMAN
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<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 statue 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)(a) The Merger Agreement, including the Voting Agreement. (Incorporated by reference to ANNEX B to the
Prospectus/Proxy Statement included in this Registration Statement.)*
(2)(b) The FFB Merger Agreement, including the exhibits thereto. (Incorporated by reference to Exhibit (99) to FUNC's
Current Report on Form 8-K dated June 21, 1995.)
(3)(a) 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)(b) By-laws of FUNC, as amended. (Incorporated by reference to Exhibit (4)(b) to FUNC's Current Report on Form 8-K
dated September 20, 1991.)
(4)(a) Shareholder Protection Rights Agreement, as amended. (Incorporated by reference to Exhibit (4)(b) to FUNC's
Current Reports on Form 8-K dated December 18, 1990 and October 20, 1992, and to Exhibit (99) to FUNC's Current
Reports on Form 8-K dated June 20, 1995 and June 21, 1995.)
(4)(b) 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.
(10) Employment Agreement between FUNC and John R. Georgius. (Incorporated by reference to Exhibit (10) to Amendment
No. 1 to FUNC's Registration Statement No. 33-60835.)
(12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges. (Incorporated by reference to Exhibit (12) to
FUNC's 1995 Second Quarter Report on Form 10-Q.)
(12)(b) Pro Forma Computations of Consolidated Ratios of Earnings to Fixed Charges and Pro Forma Computations of
Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. (Incorporated by reference to
Exhibit (99)(b) to FUNC's Second Quarter Report on Form 10-Q.)
(23)(a) Consent of KPMG Peat Marwick LLP.**
(23)(b) Consent of KPMG Peat Marwick LLP.**
(23)(c) Consent of KPMG Peat Marwick LLP.**
(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 Friedman, Billings, Ramsey & Co., Incorporated**
(23)(g) Consent of Schroder Wertheim & Co. Inc.
(24) Power of Attorney.**
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
(27) FUNC's Financial Data Schedule. (Incorporated by reference to Exhibit (27) to FUNC's 1995 Second Quarter Report
on Form 10-Q.)
(99) Form of proxy for the Special Meeting of Stockholders of Columbia.
</TABLE>
* Omitted exhibits to be furnished upon request of the Commission.
** Previously filed.
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.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act;
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<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15 (d) of the Exchange Act that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement No. 33-62399 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 October 4,
1995.
FIRST UNION CORPORATION
By: MARION A. COWELL, JR.
MARION A. COWELL, JR.
EXECUTIVE VICE PRESIDENT,
SECRETARY AND GENERAL COUNSEL
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement No. 33-62399 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 Chairman, and Chief Executive Officer and Director
EDWARD E. CRUTCHFIELD
*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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
*JOHN R. GEORGIUS Director
JOHN R. GEORGIUS
*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.
*LEONARD G. HERRING 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
*DEWEY L. TROGDON Director
DEWEY L. TROGDON
*JOHN D. UIBLE Director
JOHN D. UIBLE
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
*B. J. WALKER Director
B. J. WALKER
*KENNETH G. YOUNGER Director
KENNETH G. YOUNGER
*By Marion A. Cowell, Jr., Attorney-in-Fact
MARION A. COWELL, JR.
MARION A. COWELL, JR.
</TABLE>
Date: October 4, 1995
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
<S> <C> <C>
(2)(a) The Merger Agreement, including the Voting Agreement. Incorporated by reference to ANNEX B to the
Prospectus/Proxy Statement included in this
Registration Statement.*
(2)(b) The FFB Merger Agreement, including the exhibits Incorporated by reference to Exhibit (99) to FUNC's
thereto. Current Report on Form 8-K dated June 21, 1995.
(3)(a) 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)(b) By-laws of FUNC, as amended. Incorporated by reference to Exhibit (4)(b) to FUNC's
Current Report on Form 8-K dated September 20, 1991.
(4)(a) Shareholder Protection Rights Agreement, as amended. Incorporated by reference to Exhibits (4)(b) to FUNC's
Current Reports on Form 8-K dated December 18, 1990
and October 20, 1992, and to Exhibit (99) to FUNC's
Current Reports on Form 8-K dated June 20, 1995 and
June 21, 1995.
(4)(b) 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. Previously filed.
(8) Tax opinion of Sullivan & Cromwell. Filed herewith.
(10) Employment Agreement between FUNC and John R. Incorporated by reference to Exhibit (10) to Amendment
Georgius. No. 1 to FUNC's Registration Statement No. 33-60835.
(12)(a) Computations of Consolidated Ratios of Earnings to Incorporated by reference to Exhibit (12) to FUNC's
Fixed Charges. 1995 Second Quarter Report on Form 10-Q.
(12)(b) Pro Forma Computations of Consolidated Ratios of Incorporated by reference to Exhibit (99)(b) to FUNC's
Earnings to Fixed Charges and Pro Forma Computations Second Quarter Report on Form 10-Q.
of Consolidated Ratios of Earnings to Fixed Charges
and Preferred Stock Dividends.
(23)(a) Consent of KPMG Peat Marwick LLP. Previously filed.
(23)(b) Consent of KPMG Peat Marwick LLP. Previously filed.
(23)(c) Consent of KPMG Peat Marwick LLP. Previously filed.
(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 Friedman, Billings, Ramsey & Co., Previously filed.
Incorporated
(23)(g) Consent of Schroder Wertheim & Co. Inc. Filed herewith.
(24) Power of Attorney. Previously filed.
(27) FUNC's Financial Data Schedule. Incorporated by reference to Exhibit (27) to FUNC's
1995 Second Quarter Report on Form 10-Q.
(99) Form of proxy for the Special Meeting of Stockholders Filed herewith.
of Columbia.
</TABLE>
* Omitted exhibits to be furnished upon request of the Commission.
<PAGE>
EXHIBIT (8)
October 5, 1995
First Union Corporation,
One First Union Center,
Charlotte, North Carolina 28288-0013.
Columbia First Bank, F.S.B.
1560 Wilson Boulevard,
Arlington, Virginia 22209-2409.
Ladies and Gentlemen:
We have acted as special counsel to First Union Corporation, a corporation
organized under the laws of North Carolina ("First Union"), in connection with
the planned acquisition of all of the assets and liabilities of Columbia First
Bank, F.S.B., a stock federal savings bank organized under the laws of the
United States ("Columbia"), by First Union Corporation of Virginia, a
corporation organized under the laws of Virginia and a wholly owned subsidiary
of First Union (except for certain Class B shares owned by another subsidiary of
First Union) ("FUNC-VA"), and the transfer of those assets and liabilities to
First Union National Bank of Virginia ("FUNB-VA"), First Union National Bank of
Maryland ("FUNB-MD") and First Union National Bank of Washington, D.C.
("FUNB-DC"), each a national banking association organized under the laws of the
United States and a wholly owned subsidiary of FUNC-VA (except for directors'
qualifying shares), accomplished by means of a merger of Columbia with and into
FUNB-VA (the "Merger") and a purchase of assets and an assumption of liabilities
by FUNB-MD and FUNB-DC (with the Merger, the "Acquisition"), pursuant to the
Agreement and Plan of Acquisition, dated as of the 5th day of April, 1995, by
and between and First Union, Columbia, and FUNC-VA (the "Agreement").
Capitalized terms used but not defined herein shall have the meanings specified
in the Proxy Statement-Prospectus pertaining to the Acquisition.
We have assumed with your consent that:
(a) the Acquisition will be effected in accordance with the Agreement, and
(b) the representations contained in the letters of representation from
Columbia and First Union to us dated October 5, 1995 and October 5, 1995,
respectively, will be true on the Effective Date.
On the basis of the foregoing, and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, it is our opinion,
under presently applicable federal income tax law, that the Merger will
constitute a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and that:
(i) no gain or loss will be recognized for federal income tax purposes
by Columbia stockholders upon the exchange in the Merger of shares of
Columbia Common Stock solely for FUNC Common Shares (except with respect to
cash received in lieu of a fractional share interest in FUNC Common Stock);
(ii) the basis of FUNC Common Shares received in the Merger by
Columbia stockholders (including the basis of any fractional share interest
in FUNC Common Stock) will be the same as the basis of the shares of
Columbia Common Stock surrendered in exchange therefor;
(iii) the holding period of FUNC Common Shares received in the Merger
by a Columbia stockholder (including the holding period of any fractional
share interest in FUNC Common Stock) will include the holding period during
which the shares of Columbia Common Stock surrendered in exchange therefor
were held by the Columbia stockholder, provided such shares of Columbia
Common Stock were held as capital assets; and
(iv) cash received by a holder of Columbia Common Stock in lieu of a
fractional share interest in FUNC Common Stock 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 Columbia Common Stock allocable to the
fractional share interest.
<PAGE>
First Union Corporation
Columbia First Bank, F.S.B.
Page 2
The tax consequences described above may not be applicable to Columbia
stockholders that acquired their Columbia Common Stock pursuant to the exercise
of an employee stock option or right or otherwise as compensation, that hold
Columbia Common Stock as part of a "straddle" or "conversion transaction" or
that are insurance companies, securities dealers, financial institutions or
foreign persons.
We hereby consent to the reference to us under the heading "The
Merger -- Certain Federal Income Tax Consequences" in the Proxy
Statement-Prospectus pertaining to the Acquisition and to the filing of this
opinion as an exhibit to the related Registration Statement on Form S-4 filed
with the Securities and Exchange Commission. In giving this consent, we do not
hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
Sullivan & Cromwell
2
<PAGE>
EXHIBIT (23)(G)
CONSENT OF SCHRODER WERTHEIM & CO. INCORPORATED
Board of Directors
Columbia First Bank, A Federal Savings Bank
We hereby consent to the inclusion of our opinion dated as of October 5,
1995 and addressed to the Board of Directors of Columbia First Bank, A Federal
Savings Bank as Annex C to the Proxy Statement/Prospectus filed as part of the
Registration Statement on Form S-4 of First Union Corporation and to the
references contained in said Proxy Statement/Prospectus to such opinions and to
our firm as Financial Advisor to Columbia First, A Federal Savings Bank. In
giving such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission.
Schroder Wertheim & Co. Incorporated
October 4, 1995
<PAGE>
EXHIBIT 99
FORM OF PROXY FOR THE SPECIAL
MEETING OF
STOCKHOLDERS OF COLUMBIA
R E V O C A B L E
COLUMBIA FIRST BANK,
P R O X Y
A FEDERAL SAVINGS BANK
SPECIAL MEETING OF STOCKHOLDERS
NOVEMBER 3, 1995
The undersigned hereby appoints the official proxy committee of the Board
of Directors of Columbia First Bank, a Federal Savings Bank ("Columbia") with
full powers of substitution to act as attorneys and proxies for the undersigned,
to vote all shares of common stock of Columbia which the undersigned is entitled
to vote at the Special Meeting of Stockholders ("Special Meeting"), to be held
at Columbia's headquarters located at 1560 Wilson Boulevard, Arlington, Virginia
22209-2409, on Friday, November 3, 1995, at 10:00 a.m., local time, and at any
and all adjournments or postponements thereof, as follows:
To consider and vote upon a proposal to approve (i) the Agreement and Plan
of Acquisition, dated as of April 5, 1995, among Columbia, First Union
Corporation ("FUNC") and First Union Corporation of Virginia ("FUNC-VA") and
(ii) the Plan of Merger, dated as of April 5, 1995, among Columbia, FUNC,
FUNC-VA and First Union National Bank of Virginia ("FUNB-VA"), pursuant to
which (a) Columbia would merge with and into FUNB-VA, and (b) each
outstanding share of Columbia common stock (excluding certain shares held by
Columbia or FUNC) would be converted into the right to receive 1.1852 shares
of FUNC common stock, all on and subject to the terms and conditions
contained therein.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ABOVE PROPOSAL. THIS PROXY
WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL
BE VOTED "FOR" THE ABOVE PROPOSAL. IF ANY OTHER BUSINESS IS PRESENTED AT THE
SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THE OFFICIAL PROXY COMMITTEE IN ITS
DISCRETION. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER
BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned acknowledges receipt prior to the execution of this proxy of
the combined Notice of Special Meeting of Stockholders and Prospectus/Proxy
Statement for the Special Meeting.
Dated: , 1995
PRINT NAME OF STOCKHOLDER
SIGNATURE OF STOCKHOLDER
PRINT NAME OF STOCKHOLDER
SIGNATURE OF STOCKHOLDER
Please sign exactly as name
appears on this card. When signing
as attorney, executor,
administrator, trustee or
guardian, please give your full
title. If shares are held jointly,
each holder should sign.
PLEASE PROMPTLY COMPLETE, DATE AND SIGN THIS PROXY AND MAIL IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
