<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 0-22391
COMSTOCK BANCORP
----------------
(Name of small business issuer in its charter)
NEVADA 86-0856406
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6275 NEIL ROAD
RENO, NEVADA 89511
- --------------- -----
(Address of principal executive offices) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 824-7100
<TABLE>
<CAPTION>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE
---------------------------------------
Title of Class
</TABLE>
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained herein, and no disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for the most recent fiscal year:
$21,363,574.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ System as of February 16, 1999, was
$57,243,375. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).
As of February 28, 1999, there were issued and outstanding 5,108,900
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and III of Form 10-KSB - Proxy Statement for the 1999 Annual Meeting
of Shareholders
<PAGE> 2
PART I
ITEM 1 -- BUSINESS
Certain statements in this Annual Report on Form 10-KSB include
forward- looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "safe harbor" created by those sections.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: significant increases in competition within
the banking industry; reduced margins as a result of changes in interest rates;
unexpected changes in national, regional or local economic conditions which may
result in, among other things, a deterioration in credit quality and an increase
in loan losses and/or loan loss provisions; changes in the regulatory
environment; changes in business conditions, particularly in Washoe County, NV
and in the housing industry; certain operational risks involving data processing
systems or fraud; volatility of certain rate sensitive deposits; interest rate
risks in the matching of assets and liabilities; liquidity risks; and changes in
the securities markets. See also the section included herein "Certain Additional
Business Risks" and other risk factors discussed elsewhere in this report.
Comstock Bancorp (the "Company") does not undertake -- and specifically declines
any obligation -- to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General
- -------
The Company, a Nevada bank holding company organized in 1997, operates
Comstock Bank (the "Bank") as its only operating subsidiary. The Company
conducts a general banking business, including the acceptance of demand,
savings, and time deposits and the making of commercial, real estate,
installment and other term loans. The Company's deposit accounts are insured up
to the maximum legal limits by the FDIC. The Company offers checking and savings
accounts, certificates of deposit, money market and NOW accounts and commercial
real estate, residential real estate, residential construction, commercial
loans, and installment loans. The Company operates five ATM machines, one at
each of its full-service branches, offers its customers night depository
services, bank-by-mail, and Visa cards. In 1998, the company began offering
personal computer banking for business customers.
The Company provides its range of services primarily to businesses and
individuals in the northern Nevada area. Deposits are gathered primarily from
the Reno and Carson City areas. However, the Company's lending area extends
throughout all parts of northern Nevada, including Reno, Sparks, Carson City,
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Minden/Gardnerville, Dayton, Incline Village and other communities at Lake
Tahoe. In 1998, the Company, whose assets averaged $209 million for the year,
originated $303 million of loans consisting mainly of residential, commercial,
and development loans, of which $160 million (52.8%) were sold in the secondary
market.
The Company's primary lending business is real estate construction and
development loans, and first mortgages on existing single family homes. The
majority of the Company's lending is to the real estate industry (both
individual homeowners and developers), primarily in northern Nevada. Because a
large part of the Company's lending is to the real estate industry, a decline in
the real estate market could have a material adverse effect on the financial
condition and earnings of the Company.
In addition to loans on existing dwellings, the Company also makes
construction loans. These loans remain on the Company's books until either paid
off at maturity, or until occupancy occurs and a permanent loan is placed on the
dwelling. At that point, such loans are sold in the secondary market. Most
construction loans are made for pre-sold or custom homes. While there are some
speculative loans to builders/developers, the Company closely monitors its
portfolio volumes and economic conditions in the lending areas. Construction
lending involves additional risk due to reliance upon projected rather than
historical data during the loan underwriting process, as well as the inherent
risk that repayment of the loan is often dependent upon the full and
satisfactory completion of the project. Corresponding to the greater lending
risk is a generally higher interest rate, with a shorter maturity, compared to
residential mortgage lending.
Northern Nevada is generally considered to be "high desert" in terms of
rainfall, natural vegetation, and climate. As a result of unusually dry weather
conditions during the late 1980s and early 1990s and continued population
growth, northern Nevada experienced a severe drought. Since the winter of
1994-95, however, the area has experienced above normal precipitation
culminating in what experts believe to have been at least a 50 year flood in the
first few days of 1997. Precipitation in the 98-99 water year is "above normal"
to date. Should drought conditions return, as is possible in the high desert
environment, governmental authorities may take actions intended to alleviate the
drought including, without limitation, restrictions on the issuance of building
permits. Because the majority of the Company's lending is to the real estate
industry, such governmental actions, if taken, could have a material adverse
effect on the financial condition and earnings of the Company. Because of recent
precipitation levels, management does not expect governmental authorities to
take actions, which would impact the Company's business in 1999.
Competition and Market Area
- ---------------------------
The Company's deposit service area, Carson City, Reno and Sparks
(Washoe County) contains approximately 76 deposit taking offices of other banks
and savings
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institutions. In addition, there are approximately 96 mortgage lenders in the
Company's primary lending area in Washoe County, and 25 in Carson City. The
financial institution business in the Company's primary service areas is highly
competitive with respect to both loans and deposits. In the last quarter of
1995, Norwest Bank purchased two local institutions, American Federal Savings
Bank and Primerit Savings Bank. Norwest had already been a competitor in the
local area with real estate lending offices. Since these acquisitions, Norwest
has become Washoe County's leading first mortgage lending institution. In
December, 1998, Norwest Mortgage had a 13.3% share of the residential real
estate market in Washoe County and was the leading residential real estate
lender, while the Company had 3.4% share and was tenth. In early 1996, Wells
Fargo became the successful bidder for First Interstate Bank. In 1998, Norwest
and Wells Fargo merged and now operate under the Wells Fargo name. Recent
activity indicates that Wells Fargo has increased focus on commercial and SBA
lending.
Management believes that competition has increased significantly as a
result of the bank merger activity discussed above. The resulting larger banks
have services, which the Company does not offer, including international
banking, trust services, securities and mutual fund sales, insurance and
annuities, and cash and vault services. In addition, the large banks have
significantly higher dollar capitalizations and, thus, significantly higher
lending limits than the Company's bank subsidiary. Generally, larger financial
institutions are able to operate with lower non-interest expenses as a
percentage of earning assets than the Company, enabling them to operate
profitably at lower net interest margins. Finally, the larger institutions are
often able to portfolio loans and may offer "below market" rates to attract
volume as well as offering low or no fee loan options. Through 1997 and 1998,
management noted that its lending net interest margins had shrunk. The
commercial lending department reports that, due to competition in the local
market, up front fees on loans have declined, the rates offered by the
competition have declined, and other terms have become more liberal.
In operating its business, the Company relies upon personal contacts by
its lending officers, directors, and its employees to establish and maintain
relationships with customers. The Company also uses various advertising media to
promote its lending business since, for the most part, the Company's lending
customers are different from its deposit customers.
The Company's lending customers are generally individual homeowners,
building contractors and developers, while the Company's deposit customers are
generally local businesses and individual consumers.
In the past, the principal competition for deposits and loans were
banks, savings and loan associations, and credit unions. To a lesser extent,
thrift and loan companies, mortgage brokerage companies and insurance companies
also have provided competition. In the 1980s, both federal and state legislation
increased competition by expanding the authority of savings and loan
associations to make consumer and commercial loans. Of more concern is the fact
that other institutions have been
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permitted to offer products and services that traditionally had been offered by
banks. Institutions such as credit unions, brokerage houses, mutual funds, and
insurance companies now offer checking accounts, money market funds and various
consumer loans. In 1998, Congress passed legislation expanding the domain of
credit unions while maintaining their federal tax exemption. This gives credit
unions a significant advantage over community banks. Other entities, both public
and private, seeking to raise capital through the issuance and sale of debt or
equity securities are also competitors with banks in the acquisition of
deposits. For the past several years, but especially since 1995, with the
spectacular increases in stock prices in the U.S., consumers have increasingly
put their savings into mutual funds rather than in more traditional interest
bearing bank deposits.
It is management's opinion that future competition for deposits will
come primarily from credit unions, brokerage houses, mutual funds, and insurance
companies and to a lesser extent from its traditional competitors, large banks
and savings and loan associations. In addition, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994, which permits interstate branch
banking, may disrupt the deposit market and/or significantly increase deposit
costs.
Significant technological developments continue in the realm of
electronic banking (bank from home or office). The increasing trend toward
electronic customer services has required banks to change the way both deposit
and consumer lending products are offered and serviced. An increased investment
in data processing assets and personnel will result in changes in delivery
costs. The Company had a very large capital budget in 1997 and opened two new
branches, an operations center, expanded the office space available for its
commercial and real estate departments, and purchased and installed an in-house
mainframe computer system. These changes allowed the Company to offer a personal
computer banking product to business customers in 1998 and to prepare for the
introductions of other electronic products over the next few years.
Lending Activities
COMMERCIAL LOANS. Commercial loans are made for shorter terms, and
often at higher interest rates but with less fee income, than are conventional
real estate loans, but at lower rates than many consumer loans. However, because
of the larger average size of commercial loans, the non-interest cost of
originating and servicing such loans per dollar of loan balance is often lower
than for consumer loans. Management believes that the shorter maturities of
commercial loans provide greater liquidity and protection to the Company against
increases in market interest rates. However, in many cases, the Company and/or
the borrower anticipate that the loan will be renewed at maturity if the
borrower's condition has not deteriorated and a suitable principal reduction is
made. Often, such loans have variable rates, which are tied to an appropriate
rate index.
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The Company's commercial loans are generally secured, usually by real
property. The Company also collateralizes loans with equipment, inventory or
marketable securities. Many of the Company's commercial loans are amortizing
with monthly payments. The notes on the loans usually are for a term of one to
five years. Often, the amortization schedule is for a term longer than the note,
thus giving rise to a balloon payment when the note matures.
REAL ESTATE LOANS. The Company's portfolio of real estate loans
consists primarily of loans for construction and land development. The Company
has established relationships with a number of Nevada developers and builders,
primarily developers of residential properties. Real estate development loans
are made for a much shorter term, and often at higher interest rates, than other
longer-term (i.e., "permanent") real estate loans. The cost of administering
such loans is often higher than for other real estate loans, as principal is
drawn periodically as development progresses. The Company's builders' control
unit provides inspection, voucher, check writing, and accounting services both
to the Company and to the contractor/builder/developer. In the table below,
these loans are identified as "Construction and Development" loans. The slower
growth in the loan balance in 1998 is a result of several factors including (i)
increased market competition in both northern and southern Nevada, (ii) easier
terms and credit standard by those competitors, and (iii) changes in programs as
a result of compliance issues. Because the Company's mortgage lending activities
are conducted through a community bank charter as opposed to a mortgage company,
management believes that the Company is subject to a higher standard of
regulatory enforcement on consumer compliance than its competition whose
business is not closely scrutinized by the regulatory authorities.
The Company also makes real estate loans secured by first deeds of
trust on single family residential properties. Most of the loans the Company
originates on such properties (approximately 83% in 1998 and 81% in 1997) are
sold in the secondary market, all on a non-recourse basis. Except for loans sold
to FNMA and FHLMC, the Company has traditionally sold the servicing rights with
the loans. As a general rule, the Company has a "take out source", a secondary
market purchaser (usually a large purchaser of mortgage paper such as
Countrywide Mortgage or Norwest Mortgage), for all of the residential loans that
it originates. In the table below, the category entitled "Loans Held for Sale"
consists of loans that the Company has funded which are in various stages of
document shipping and approval awaiting monies from the final secondary market
purchasers. In 1998, the Company reviewed the costs associated with maintaining
the serviced loan portfolio and based on those findings decided to discontinue
the program. The portfolio of serviced loans was sold to a third party investor
for a gain of approximately $326,000.
In the table, the "Other Mortgages" line consists of conventional real
estate (1-4 family) and multi-family home loans held for one year or longer. In
1997, the Company sold loans from this portfolio. In 1998, the Company increased
its portfolio of equity lines secured by 1-4 single family homes.
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CONSUMER LOANS. The Company has never had a large portfolio of consumer
loans. Of the Consumer Loan balance as of December 31, 1998, the Company has
less than $220,000 outstanding in its Visa credit card program.
The following table shows the composition of the Company's loan
portfolio as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
LOAN PORTFOLIO MIX
As of December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Commercial & Industrial $ 103,609 $ 101,812 $ 69,334
Real Estate:
Construction & Development 15,467 15,218 13,390
Loans Held for Sale 15,089 13,946 7,806
Other Mortgages 5,577 2,326 3,934
Consumer 2,632 3,411 2,060
--------- --------- ---------
Gross Loans(1) 142,374 136,713 96,524
Allowance for credit losses (1,598) (1,076) (857)
--------- --------- ---------
Net Loans $ 140,776 $ 135,637 $ 95,667
========= ========= =========
</TABLE>
(1) Excludes deferred fees of $552,000, $532,000 and $306,000 in 1998, 1997, and
1996, respectively.
Consistent with the Company's philosophy, there are no foreign loans or
energy related loans.
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The following table shows the amounts of certain loans outstanding as
of December 31, 1998 which, based on remaining scheduled repayments of
principal, are due in the periods indicated. Demand and other loans having no
stated maturity and no stated schedule of repayments are reported as due in one
year or less.
LOAN PORTFOLIO MATURITY
<TABLE>
<CAPTION>
Commercial Real
& Industrial Estate Consumer Total(1)
------------ ------ -------- --------
(In thousands of dollars)
<S> <C> <C> <C> <C>
In 1 year or less $ 72,664 $ 12,561 $ 1,319 $ 86,544
Over 1 year -- 5 years 20,273 7,740 994 29,007
Over 5 years 10,672 15,832(2) 319 26,823
</TABLE>
(1) Totals exclude deferred fees of $552,000.
(2) $11 million are construction loans that will roll to permanent loans
when construction is completed and will be sold in the secondary
market.
At December 31, 1998, of the approximately $55,830,000 of loans due
after one year, approximately $30,444,000 had fixed interest rates and
approximately $25,386,000 had floating or adjustable interest rates.
COMMITMENTS AND LINES OF CREDIT. In the normal course of business, the
Company makes commitments (including lines of credit and standby letters of
credit) to extend credit to be called upon at the option of the borrower. As of
December 31, 1998, the Company had $60,874,000 of such commitments outstanding.
As of December 31, 1997, the Company had $50,453,000 of such commitments
outstanding. In addition, as of December 31, 1998, the Company had issued
commitments of approximately $16 million to individuals to purchase single
family residential properties which the Company, in turn, had committed to sell
in the secondary market. The Company expects that substantially all of such
commitments will be drawn upon in the ordinary course of business. Many of the
commitments are the unfunded portions of construction loans. The evaluation of a
commitment that is not a construction loan is made on an individual basis
similar to that required for a loan. It is standard practice to require the
potential borrower to pay a fee and/or maintain a depository or borrowing
relationship regardless of whether or not the commitment is used by the
borrower.
Seasonality
- -----------
The Company experiences seasonality in its lending business, especially
in the first quarter and throughout much of the second quarter, due to the fact
that construction lending is usually at its low point and mortgage lending is
seasonally slower. The extent of the seasonal impact usually depends on the
severity of the winter. In some years, when the Reno/Sparks and Carson City
areas have little snowfall, the seasonal impact is mild. In years when snow
remains on the valley floors
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for significant periods and temperatures remain below freezing, the seasonal
impact is more significant. Because of the "Flood of 97" in Reno in early
January, there were large impacts on real estate lending in the first and second
quarters. For Washoe County, total mortgage lending in 1998 was 81% higher than
in 1997. During the first two months of 1999 the winter has been moderate with
new home construction and home sales remaining strong.
NON-PERFORMING AND NON-ACCRUAL LOANS. The Company generally determines
a loan to be "non-performing" when interest or principal is past due 90 days or
more. If it appears doubtful that the loan will be repaid, management may
consider the loan to be "non-performing" before the lapse of 90 days. If,
however, a workable program for the return of the loan to a current condition
has been established with the borrower, this period may exceed 90 days.
Classification of a loan as "non-performing" does not necessarily indicate a
future charge-off, although the Company generally charges off all past due
unsecured loans after 90 days.
It is current Company policy to cease accruing interest on loans that
are past due as to principal or interest 90 days or more, except for loans that
are well secured and in the process of collection. When a loan is placed on
"non-accrual", previously accrued and unpaid interest is generally reversed out
of income unless adequate collateral from which to collect the principal and
interest on the loan appears to be available.
The following table presents information with respect to loans which,
as of the dates indicated, were "non-performing" and were on "non-accrual"
status:
<TABLE>
<CAPTION>
NON-PERFORMING &
NON-ACCRUING LOANS
As of December 31,
------------------
1998 1997 1996
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Past Due:
--------
Still Accruing:
90 days or more... : $ 127 $ 103 $ 420
Not Accruing........ : $ 604 $ 2,573 $ 3,184
</TABLE>
For the fiscal year ended December 31, 1998, gross interest income,
which would have been recorded, had the non-accruing loans been current amounted
to $104,354. The amount that was included in interest income on such loans was
$38,792 for the fiscal year ended December 31, 1998.
As of December 31, 1998 the non-accrual loans consisted of two
commercial loans. The Company is expecting to realize charge-offs of
approximately $560,000 on these loans.
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OTHER LOANS OF CONCERN. In addition to the non-performing loans set forth in the
preceding table, as of December 31, 1998, there was also an aggregate of
$1,575,000 in net book value of loans classified by the Company of which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some concerns
regarding of the ability of the borrowers to meet all of the terms and
conditions of the notes on a timely basis and which may result in the future
inclusion of such items in the non-performing asset categories. The principal
components of loans of concern are three commercial loans totaling $860,000 and
three SBA loans totaling $620,000 (which are guaranteed up to 85% by the federal
government).
As of December 31, 1998, there were no other loans not included on the
foregoing table or discussed above where known information about the possible
credit problems of borrowers caused management to have doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
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SUMMARY OF LOAN LOSS EXPERIENCE. The following chart is an analysis of the
Company's loan loss experience for the years ended December 31, 1998, 1997, and
1996:
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE
Years ended December 31,
------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars except ratios)
<S> <C> <C> <C>
Average Loans Outstanding $140,106 $113,663 $ 88,646
======== ======== ========
Allowance, beginning of period 1,076 857 665
Charge-Offs:
Commercial & Industrial 65 31 50
Real Estate - Construction and
Development -- -- --
Real Estate -- Mortgages Held For Sale -- -- --
Real Estate -- Other Mortgages 17 32 --
Installment 20 16 11
Cash Reserve -- -- --
-------- -------- --------
Total Charge-Offs 102 79 61
Recoveries:
Commercial & Industrial 3 26 2
Real Estate - Construction and
Development -- -- --
Real Estate -- Mortgages Held For Sale -- -- --
Real Estate -- Other Mortgages -- -- --
Installment 1 2 1
Cash Reserve -- -- --
-------- -------- --------
Total Recoveries $ 4 $ 28 $ 3
======== ======== ========
Net Charge-Offs 98 51 59
Additions to Allowance 620 270 250
Allowance, end of period $ 1,598 $ 1.076 $ 857
======== ======== ========
Ratio of Net Charge-Offs
To Average Loans Outstanding 0.07% 0.04% 0.07%
======== ======== ========
Ratio of Allowance to Total
Loans at end of period 1.13% 0.79% 0.89%
======== ======== ========
</TABLE>
Management and the Loan Committee of the Board of Directors use both a
numeric rule and judgment in formulating the allowance for loan losses. In 1996
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additions to the allowance were $250,000. In 1997 and 1998 additions to the
allowance were $270,000 and $620,000, respectively. The Company has increased
the reserve to a level more consistent with current economic conditions.
The following table sets forth a breakdown of the allowance for loan
losses for the year ended December 31, 1998 and 1997:
ALLOWANCE FOR LOAN LOSSES
(In thousands of dollars except percentages)
<TABLE>
<CAPTION>
Percent of Percent of
Amount of Charge- loans in Amount of Charge- loans in
Offs for the year each category Offs for the year Each category
ended to ended to
December 31, 1998 Total Loans December 31, 1997 Total Loans
=============================================================================================
<S> <C> <C> <C> <C>
Commercial & Industrial $65 72.77% $31 74.47%
Real Estate - Construction
And Development $0 10.86% $0 11.13%
Real Estate - Mortgages
Held for Sale $0 10.60% $0 10.20%
Real Estate - Other
Mortgages $17 3.92% $32 1.70%
Installment $20 1.85% $16 2.50%
=============================================================================================
Total $102 100.00% $79 100.00%
</TABLE>
As of January 1, 1996, the Company adopted Statement of Accounting
Standards ("SFAS") No. 114, "Accounting By Creditor for Impairment of A Loan".
This change in accounting practice requires the Company to mark "impaired" loans
to the lower of book value, or (i) the discounted value of the estimated cash
flow, (ii) the value of the collateral, or (iii) an observable market price. A
loan is considered by the Company to be "impaired" if (i) it has been placed in
a non-accrual status, (ii) it is unlikely that the Company will collect all
amounts due under the loan contract, and (iii) it remains in impaired status if
it is currently performing but is not showing a consistent payment practice. At
December 31, 1998 impaired loans had a carrying value of $1,005,000 with an
allowance for losses of $484,000. At December 31, 1997 impaired loans had a
carrying value of $2,541,000 with an allowance for losses of $66,000.
Investment Activities
- ---------------------
The Company uses the investment portfolio as a secondary source of
liquidity and for income. The Company's liquidity ratio, defined as the value of
marketable assets divided by volatile liabilities, stood at 31% as of December
31, 1998 as compared to 26% as of December 31, 1997 and 28% as of December 31,
1996. As of December 31, 1998, the Company had $17.2 million in overnight funds
and $39.8 million in marketable securities and time deposits. In contrast, as of
December 31,
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1997, the Company had $9.9 million in overnight funds and $26.3 million in
marketable securities and time deposits. Also as of December 31, 1998, the
Company had borrowing capacity at the Federal Home Loan Bank of San Francisco
("FHLBSF") in excess of $67 million (30% of its assets). Such borrowing capacity
is subject to quarterly review and must be collateralized. As of December 31,
1998 the Company had borrowed $6,000,000 from FHLBSF and had pledged
approximately $33 million in loans and securities as collateral for the
borrowing line. As of December 31, 1997, the Company had the same $6,000,000
outstanding and had pledged approximately $25 million in loans and securities.
On January 1, 1994, the Company officially adopted SFAS 115, an
accounting rule which requires the Company to segregate its investment portfolio
into accounts of "Held to Maturity", "Trading", and "Available for Sale"
("AFS"). The accounting treatment of each such class is different. In
anticipation of SFAS 115, in 1992 the Company established an "Available for
Sale" portfolio consisting of items which the Bank did not intend to hold to
maturity, and a "Trading" portfolio. The "Trading" portfolio includes
investments that are intended to be held for speculative purposes and FNMA or
FHLMC mortgage-backed securities, which the Company may originate. These FNMA or
FHLMC pools would reside in the "Trading" account until sold. The AFS portfolio
is carried on the Company's books at market value. The securities in the
"Trading" portfolio are carried at market value. The Company's investment
portfolio has no "Junk Bonds" During 1995, the Financial Accounting Standards
Board ("FASB") offered a one-time opportunity to reclassify securities among the
held-to- maturity, available-for-sale, and trading categories in conjunction
with adopting a new implementation guide. Following the FASB's announcement, the
Company reclassified securities with a book value of approximately $1,691,000
from its Held-To-Maturity portfolio to its AFS portfolio. During 1998, the FASB
again offered an opportunity to reclassify securities among the
held-to-maturity, available-for-sale, and trading categories to assist in the
adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities". The Company chose this opportunity to reclassify its entire
remaining held-to-maturity portfolio to the available-for-sale portfolio. The
portfolio at the time of reclassification had a book value of approximately
$9,025,000 and a market value of approximately $9,153,000.
As of December 31, 1998, the "Trading" portfolio consisted of one pool
of Interest Only ("IO") securities with a market value of $8,000. As of December
31, 1997, the "Trading" portfolio consisted of the same pool with a market value
of $12,000. IOs represent the interest portion of a mortgage pool and give the
holder the interest payments (but not the principal payment) stream. The faster
the pools pay off, the less the value of the interest stream to the IO holders.
The IO pool has a final maturity date of 2019, but has been paying off rapidly.
As of December 31, 1998, the mortgage pool contained less than 5.7% of its
original face value. The Company is carrying the IO pool at market value.
The following table sets forth the book and market values of the
Company's investment portfolio as of December 31st of each of the designated
years:
13
<PAGE> 14
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MIX INCLUDING
DOMESTIC BANK DEPOSITS
As of December 31,
------------------------------------------------------------------------------
1998 1997 1996
----- ---- ----
(In thousands of dollars)
Amort Market Amort Market Amort Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Deposits in domestic
Banks $ 791 $ 812 $ 1,491 $ 1,518 $1,497 $1,513
U.S. Treasury and Agency
Notes and bonds 5,189 5,215 9,575 9,535 8,733 8,645
U.S. government mortgage
Backed 23,314 23,286 10,606 10,623 5,201 5,200
Corporate and other
Securities* 11,502 11,527 4,647 4,694 3,303 3,299
------- ------- ------- ------- ------- -------
Total $40,796 $40,840 $26,319 $26,370 $18,734 $18,657
======= ======= ======= ======= ======= =======
</TABLE>
* Includes investments in mutual funds and Federal Home Loan Bank Stock
14
<PAGE> 15
The following table summarizes the maturity of the Company's investment
securities and their estimated weighted average yield at December 31, 1998:
INVESTMENT PORTFOLIO MATURITY INCLUDING DOMESTIC BANK
DEPOSITS
<TABLE>
<CAPTION>
U.S. Treasury &
Deposits in Agency U.S. Govt. Corporate and
Domestic Banks Notes and Bonds Mortgage Backed Other Securities Total
-------------- --------------- --------------- ---------------- -----
(In thousands of dollars except percentages)
<S> <C> <C> <C> <C> <C>
In 1 year or less $ 50 $ 3,666 $ 755 $ 1,060 $ 5,532
Yield 8.13% 4.26% 6.50% 6.83% 5.09%
Over 1 year to 5 yrs $ 541 $ 500 $ 2,419 $ 1,819 $ 5,279
Yield 8.42% 5.93% 7.34% 4.28% 6.26%
Over 5 yrs to 10 yrs $ 200 $ 1,023 $ 2,045 $ 981 $ 4,249
Yield 6.00% 7.10% 7.41% 5.60% 6.85%
Over 10 years $ 0 $ 0 $ 18,094 $ 7,642 $ 25,737
Yield 0.00% 0.00% 7.42% 5.21% 6.76%
Total Amort Cost $ 791 $ 5,189 $ 23,314 $ 11,502 $ 40,797
Weighted Avg Yield 7.79% 4.98% 7.38% 5.25% 6.48%
</TABLE>
Note: The "Available for Sale" securities are represented in this table at their
amortized cost. In the financial statements, they are reflected at their market
value.
Except for obligations of state and local governments, the Company's
securities portfolios at December 31, 1998 contained no securities of any issuer
with an aggregate book value in excess of 10% of the Company's shareholders'
equity, excluding those issued by the United States Government, or its agencies.
Deposit Activity and Other Sources of Funds
- -------------------------------------------
General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the production
of net earnings. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources, or on a longer term basis for general business purposes or
when they are cheaper than deposit sources.
15
<PAGE> 16
Deposits. Deposits are attracted principally from within the Company's
primary market area through the offering of a broad selection of deposit
instruments, including demand deposits, money market accounts, NOW accounts,
savings accounts, and certificates of deposits. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.
The Company's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Company does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established by
the Company on a periodic basis. Determination of rates and terms are predicated
upon funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
The following table sets forth the Company's average balances of
deposits and the average rate paid on each for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
DEPOSITS
(In thousands of dollars except percentages)
Year ended December 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- -------------------------------
Average Avg Percent Average Avg Percent Average Avg Percent
Balance Rate of Total Balance Rate of Total Balance Rate of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand
Deposits (IPC) $ 26,462 __ 14.4% $ 21,577 __ 14.6% $ 18,089 __ 15.0%
Official checks, etc $ 3,341 __ 1.8% $ 3,098 __ 2.1% $ 3,028 __ 2.5%
Interest bearing demand
Deposits $ 60,001 3.2% 32.6% $ 47,022 3.3% 31.9% $ 38,678 3.4% 32.0%
Savings deposits $ 9,431 2.5% 5.1% $ 9,844 2.7% 6.7% $ 9,983 2.7% 8.2%
Time deposits $ 84,813 5.3% 46.1% $ 65,994 5.3% 44.7% $ 51,154 5.4% 42.3%
-------- ----- -------- ----- -------- -----
Total $184,048 4.5% 100.0% $147,535 4.5% 100.0% $120,932 4.4% 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Based on the Company's experience, management believes that the
Company's passbook savings, money market savings accounts and checking accounts
are relatively stable sources of deposits. However, the ability of the Company
to attract and maintain certificates of deposit and passbook accounts and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions. The addition of two branches in 1997 contributed
to the significant deposit growth in that year.
16
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ............. $171,802 $131,304 $111,169
Net deposits ................ $ 17,494 $ 34,973 $ 15,717
Interest credited ........... $ 6,950 $ 5,525 $ 4,418
Ending balance .............. $196,246 $171,802 $131,304
======== ======== ========
Net increase ................ $ 24,444 $ 40,498 $ 20,135
======== ======== ========
Percent increase ............ 14.2% 30.8% 18.1%
</TABLE>
The following table summarizes the maturity of the Company's time
deposits of $100,000 or more as of December 31, 1998:
<TABLE>
<CAPTION>
DEPOSIT MATURITIES
Time Deposits
$100,000 or more
----------------
($000s)
<S> <C>
3 months or less $ 8,043
Over 3 months through 12 months 20,400
Over 12 months 5,875
-------
Total $34,318
=======
</TABLE>
Patents
- -------
The Company holds no patents, trademarks, licenses, franchises or
concessions material to its operation.
Employees
- ---------
As of December 31, 1998, the Company employed one hundred twenty-seven
(127) persons, one hundred fifteen (115) on a full-time basis and twelve (12) on
a part-time basis, or the full-time equivalent of one hundred nineteen and one
half (119.5) employees. In contrast, as of December 31, 1997, the Company
employed the full-time
17
<PAGE> 18
equivalent of one hundred twenty-one (121) employees. The Company's employees
are not represented by any collective bargaining group. Management considers its
employee relations to be good.
Compliance with Environmental Regulations
- -----------------------------------------
Compliance with Federal, State or local provisions regulating the
discharge of materials into the environment has not had, nor is it expected in
the future to have, a material effect upon the Company's capital expenditures,
earnings or competitive position.
Compliance with Bank Secrecy Act and Consumer Compliance Regulations
- --------------------------------------------------------------------
On January 20, 1994, the Bank and the Federal Deposit Insurance
Corporation (the "FDIC") reached an agreement (a "Memorandum of Understanding")
regarding compliance deficiencies found in the Company's Bank Secrecy Act and
consumer compliance programs. In the fall of 1996, the FDIC once again examined
the Company for compliance. As a result of that examination, the Memorandum of
Understanding was lifted in the first quarter of 1997.
Subsequent Events
- -----------------
On January 13, 1999, the Company announced that it had signed a
definitive agreement to merge its holding company into that of First Security
Corporation (NASDAQ:FSCO). The value of the consideration on the day of
announcement was approximately $65,000,000, in a tax-free exchange of stock for
all of Comstock's outstanding common shares, including options and warrants.
This value will stay fixed as long as First Security's average stock price
remains between $18.70 and $24.05 during the 10 consecutive trading days
preceding the closing date. If the average First Security stock price is above
or below these levels during the actual measurement period, the total value of
the transaction may be higher or lower than $65 million to Comstock
shareholders. The Company's Comstock Bank subsidiary would be merged into First
Security Corporation's Nevada subsidiary, First Security Bank of Nevada.
The merger, which would be accounted for under purchase accounting, is
expected to close in May, 1999. The Agreement and Plan of Reorganization has
been approved by the Boards of Directors of both companies. Consummation of the
merger is subject to certain customary conditions, including, among others, the
adoption of the Agreement and Plan of Reorganization by Comstock Bancorp
shareholders and receipt of regulatory approvals.
The Directors of Comstock Bancorp have entered into Shareholder Voting
Agreements with First Security Corporation pursuant to which such Directors
agreed to vote their shares owned of Comstock Bancorp in favor of the Agreement
and Plan of Reorganization. The Shareholder Voting Agreements were executed as a
condition of
18
<PAGE> 19
and inducement to First Security Corporation entering into the Agreement and
Plan of Reorganization.
For additional information regarding the merger of Comstock Bancorp
with and into First Security Corporation, the Agreement and Plan of
Reorganization, and the Shareholder Voting Agreements, see Appendices A and B to
the Proxy Statement/Prospectus.
Year 2000 Compliance
- --------------------
GENERAL. The Year 2000 risk involves computer programs and computer software
that are not able to perform without interruption into the Year 2000. If
computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest,
payment or due dates or cause the temporary inability to process transactions,
send invoices or engage in similar normal business activities. If these issues
are not addressed by the Company, its suppliers and its borrowers, there could
be a material adverse impact on the Company's financial condition or results of
operations.
State of Readiness.
- -------------------
AWARENESS. The Board of Directors and executive management are
cognizant of the Year 2000 challenge and have made a supportive commitment of
resources to address the matter along with the adoption of a Year 2000 Policy. A
Year 2000 Project Committee has been established with a strategy to address all
internal and external system and service formulations. Vendors and servicers
have been contacted to determine their Year 2000 plans and gain their commitment
to be ready. Ongoing progress reports are being made by the Year 2000 project
Committee to the Company's Board of Directors. In addition, the Compliance
Manager for the Company performs ongoing review of the adequacy of Year 2000
Project assessments and plans, and reports the results of such monitoring to the
Audit & Compliance Committee of the Board of Directors.
ASSESSMENT. The Company has completed its assessment of its Year 2000
issues. The Company has identified critical business processes and automation
platforms, as well as examined how data transfers will be affected internally
and with outside organizations. This assessment includes both information
technology "IT" systems, as well as non-IT systems and services such as security
systems, HVAC, elevators, etc. Resource needs have been identified, including
appropriately skilled personnel, contractors, vendor support, budgets and
hardware capacity. Time frames and sequencing of Year 2000 efforts have been
established. Existing contingency plans have been evaluated, and are being
modified as needed in conjunction with the results of the Renovation validation
phases of the project. An assessment of credit risk from lending customers has
also been completed as a strategic part of the project phase.
19
<PAGE> 20
High-risk, technology dependent borrowers are being diligently worked with and
monitored to mitigate any adverse impacts to the business borrower or the
Company.
RENOVATION. According to the risk-based priorities established during
the Assessment Phase, hardware, software, databases and non-IT systems or
services will be converted, replaced or eliminated as necessary. Renovation work
for critical applications has been substantially completed. Vendor and servicer
renovation activities are being diligently monitored to ensure timely
fulfillment of Year 2000 assurances.
VALIDATION. Testing and verification of network and PC systems,
databases and utilities by simulating data conditions for the Year 2000
(including 2/29/2000 leap year), began in September 1998. Testing plans for
missions critical systems are complete, and testing is proceeding with
completion scheduled within the first quarter of 1999. A successful Y2K test
simulation of the Company's primary mainframe systems including deposit, loan
and general ledger applications was completed in April 1998. Testing is underway
on data exchanges with counterparties outside the Company and is expected to be
completed during the first quarter of 1999. Contingency plans for critical
systems will be finalized based upon Renovation and Validation phase results.
IMPLEMENTATION. Renovated systems, data bases and utilities will be put
into production as soon as possible following their validation, but no later
than mid-1999 (assuming the Company's pending merger with First Security
Corporation is not complete by that date). Implementation with servicers of
critical systems will be monitored to ensure timely completion. Contingency
plans for critical systems finalized based upon Renovation and Validation phase
results, will be simulated and tested.
COST OF COMPLIANCE. Management does not expect the costs of bringing the
Company's systems into Year 2000 compliance will have a material adverse effect
on the Company's financial conditions, results of operations or liquidity.
Management has estimated the total cost of its Year 2000 compliance effort at
$740,000 of which $479,000 is renovation cost of hardware and software and
remainder of which $261,000 is in resource costs to manage and implement the
Company's Y2K project plan. To date $644,000 has been invested with $96,000
remaining to be incurred on the project through March 31, 2000. These estimates
may not include the full cost of hardware or software for items identified in
the Testing Phase as needing renovation or replacement.
RISKS RELATED TO YEAR 2000 ISSUES. Notwithstanding the Company's efforts there
can be no assurance that potential systems interruptions or the cost necessary
to update the hardware, software and non-IT systems will not have a material
adverse impact on the Company's business, financial condition, results of
operations and business prospects. In addition, the Company has limited
information concerning the compliance status of its suppliers and customers. In
the event that any of the company's significant suppliers, (such as power,
telecommunications, etc.) do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be
20
<PAGE> 21
adversely affected. The company believes that having completed a diligent
assessment of its commercial loan portfolio, that at this time its loan risks
are limited to a few borrowers that the Company has assessed as being medium to
high risk (technology dependent companies) for a total of $2.05 million out of a
portfolio of more than $142 million. It is notable that each of these loans is
well collateralized, thereby mitigating the potential of loan losses. The medium
to high-risk borrowers are being worked with in an ongoing manner to minimize
any adverse impacts to the business borrower or the Company. The Company does
not believe that this amount is material enough for the Company to adjust its
current methodology for making provisions to the allowance for credit losses. In
addition, the Company does not believe it will have difficulty meeting cash
demands.
CONTINGENCY PLANS. The company maintains standard disaster recovery and business
resumption plans. The Company's contingency plans specific to the Year 2000 will
be formulated in conjunction with system renovation and testing results by the
second quarter of 1999. The Company is confident that is Year 2000 plan to
address the issues associated with the proper functions of the Company's
computer systems before, at and after the turn of the century will meet the
business challenges of entering the new millennium.
Regulation and Supervision
- --------------------------
General
As a state chartered bank in Nevada whose deposits are insured by the
Bank Insurance Fund (the "BIF") of the FDIC, the Company's bank subsidiary (the
"Bank") is subject to regulation under state law which is administered by the
Nevada Division of Financial Institutions (the "Nevada Division"). In addition,
the FDIC levies deposit insurance premiums and is vested with authority to
supervise the Bank and to exercise a broad range of enforcement powers. Finally,
the Bank is required to maintain reserves against deposits according to a
schedule established by the Federal Reserve Bank (the "FRB"). As a general rule,
the federal regulation is much more extensive and onerous than that of the
state.
The following references to the laws and regulations under which the
Company and the Bank are regulated are brief summaries thereof, and do not
purport to be complete and are qualified in their entirety by reference to such
laws and regulations.
21
<PAGE> 22
Federal Banking Regulations
CAPITAL REQUIREMENTS. Under FDIC regulations, insured state-chartered
banks that are not members of the Federal Reserve System ("state non-member
banks") are required to maintain minimum levels of capital. State non-member
banks must satisfy a leverage capital ratio of at least 3% if the FDIC
determines that the institution is not anticipating or experiencing significant
growth and has well diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity, good earnings and is in
general a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Ranking System (the "CAMELS" rating system) established
by the Federal Financial Institutions Examination Council. For all but the most
highly rated institutions meeting the conditions set forth above, the minimum
leverage capital ratio is 3% plus an additional "cushion" amount of at least 100
to 200 basis points.
In addition to the leverage ratio, state non-member banks must maintain
a minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least 50% must be Tier 1 capital. Tier 1 capital is the sum of
common stockholders' equity, noncumulative perpetual preferred stock (including
any related surplus) and minority investments in certain subsidiaries, less most
intangible assets.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which includes allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative perpetual preferred
stock and long-term preferred stock (original maturity of over 20 years) and
certain other capital instruments. The includable amount of Tier 2 capital
cannot exceed the amount of a bank's Tier 1 capital. Qualifying total capital is
reduced by the amount of a bank's investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross- holdings of capital securities issued by other banks and
certain other deductions.
The risk-based minimum capital requirement is measured against total
risk- weighted assets, which equals the sum of each on-balance-sheet asset and
the credit- equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. Under the FDIC's risk-weighting system,
cash and securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. Mortgage- backed securities that are issued, or
fully guaranteed as to principal and interest, by the FNMA or FHLMC and certain
municipal securities, are assigned a 20% risk weight. Single-family first
mortgages not more than 90 days past due with loan-to-value ratios under 80%,
multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios
under 80% and average annual occupancy rates over 80%, and certain qualifying
loans for the construction of one-to-four-family residences pre-sold to home
purchasers, are assigned a risk weight of 50%. Consumer loans and commercial
real estate loans, repossessed assets and assets more than 90 days past due, as
well as all other assets not specifically categorized, are assigned a risk
weight of 100%.
22
<PAGE> 23
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICI") required each federal banking agency to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate
account of interest-rate risk ("IRR"), concentration of credit risk, and the
risk of nontraditional activities, as well as to reflect the actual performance
and expected risk of loss on multi-family residential loans. Effective September
1, 1995, the FDIC, together with the other federal banking agencies, amended
their capital standards to require consideration of IRR and other financial and
operational risks (in addition to credit risk) as factors to be considered in
evaluating capital adequacy. The new standards require consideration of the
quality of a bank's process of managing its IRR, the overall condition of the
bank and the level of the bank's other risks for which capital is needed.
Institutions with significant IRR may be required to hold additional capital.
The FDIC, together with the other federal banking agencies, issued a joint
policy statement, effective June 26, 1996, providing guidance on management of
IRR, including a discussion of the critical factors affecting the agencies'
evaluation of IRR in connection with capital adequacy. The agencies also
determined not to proceed with a previously issued proposal to develop a
supervisory framework for measuring IRR and to impose an explicit capital
component for IRR.
The following table shows the Bank's leverage capital ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at December
31, 1998 along with the minimum requirements:
<TABLE>
<CAPTION>
Minimum
Bank Requirements
---- ------------
<S> <C> <C>
Tier I (core capital) 12.44% 4.0%
Total capital 13.50% 8.0%
Leverage ratio 8.49% 3.0%
</TABLE>
ENFORCEMENT. Under the FDIA, the FDIC has enforcement responsibility
over state non-member banks, such as Comstock Bank, the Company's banking
subsidiary, and has the authority to bring enforcement action against all
"institution-related parties", including controlling stockholders, officers,
directors and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on a
bank. Civil penalties cover a wide range of violations and actions and range
from up to $5,000 per day at the First Tier, $25,000 per day at the Second Tier,
and when a finding of the greatest culpability is made, up to $1 million per day
at the Third Tier. Criminal penalties for most financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
The Company is charged an annual assessment by the FDIC for insurance
of deposit accounts up to applicable statutory limits. Under the risk-based
system for deposit insurance premiums that has been in effect since 1994, the
assessment rate for
23
<PAGE> 24
an insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by the Bank's
capital level and supervisory evaluations. Institutions are assigned to one of
three capital groups, well capitalized, adequately capitalized, or
undercapitalized, based on the data reported to regulators for the date closest
to the last day of the seventh month preceding the semi-annual assessment
period. Well-capitalized institutions are institutions satisfying the following
capital ratio standards: (i) total risk-based capital ratio of 10.0% or greater;
(ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1
leverage ratio of 5.0% or greater. Adequately capitalized institutions are
institutions that do not meet the standards for well-capitalized institutions
but which satisfy the following capital ratio standards: (i) total risk-based
capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0%
or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized
institutions consist of institutions that do not qualify as either "well
capitalized" or "adequately capitalized". Within each capital group,
institutions will be assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A will consist of financially sound institutions with a few minor
weaknesses. Subgroup B consists of institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration of the
institution and increased risk of loss to the deposit insurance fund. Subgroup C
consists of institutions that pose a substantial probability of loss to the
deposit insurance fund unless effective corrective action is taken.
On September 30, 1996, the Deposit Funds Insurance Act of 1996 (the
"1996 Act") was enacted into law, and it amended the FDIA in several ways to
recapitalize the Savings Association Insurance Fund ("SAIF"), which primarily
insures the deposits of savings associations, and to reduce the disparity in the
assessment rates for the BIF and the SAIF that had develop in 1995. The 1996 Act
authorized the FDIC to impose a special assessment on all institutions with
SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. In
addition, the 1996 Act expanded the assessment base for the payments on the FICO
bonds, which were issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings & Loan Insurance Corporation, to
include the deposits of both BIF- and SAIF-insured institutions beginning
January 1, 1997. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
rate of assessments for the payments on the FICO bonds is 0.0129% for
BIF-assessable deposits and 0.0644% for SAIF-assessable deposits which began on
January 1, 1997.
The 1996 Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the federal thrift charter. Legislation that would eliminate the federal
savings association charter is under discussion. If such legislation is enacted,
federal savings associations would be required to convert to either a national
bank charter or to a state depository institution
24
<PAGE> 25
charter. Various legislative proposals also may result in the restructuring of
federal regulatory oversight, including, for example, consolidation of the
Office of Thrift Supervision into another agency, or creation of a new Federal
banking agency to replace the various such agencies which presently exist. The
Company is unable to predict whether such legislation will be enacted or, if
enacted, what the effect of such legislation will be.
FDIC regulations provide that any insured depository institution with a
ratio of Tier 1 capital to total assets of less than 2.0% will be deemed to be
operating in an unsafe or unsound condition, which would constitute grounds for
the initiation of termination of deposit insurance proceedings. The FDIC,
however, will not initiate termination of insurance proceedings if the
depository institution has entered into and is in compliance with a written
agreement with its primary regulator, and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such level as the FDIC deems appropriate.
Insured depository institutions with Tier 1 capital equal to or greater than
2.0% of total assets may also be deemed to be operating in an unsafe or unsound
condition notwithstanding such capital level.
Transactions with Affiliates and Insiders
Transactions between state non-member banks and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity that controls, is controlled by or is under common
control with the bank but does not include a subsidiary of the bank. The Company
is considered an affiliate of the Bank. Generally, Section 23A (i) limits the
extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital and surplus, and contains an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital and surplus, and
(ii) requires that all such transactions be on terms that are consistent with
safe and sound banking practices. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of guarantees and similar other
types of transactions. In addition, most extensions of credit by a bank to any
of its affiliates must be secured by collateral in amounts ranging from 100 to
130 percent of the loan amounts, depending on the type of collateral. Section
23B requires that any covered transaction, and certain other transactions,
including the bank's sale of assets and purchase of services from an affiliate
must be on terms that are substantially the same, or at least as favorable to
the institution, as those that would prevail in comparable transactions with a
non-affiliate.
Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the FRB's Regulation O thereunder on loans to
executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer or a holder of more than 10% of the
shares of a bank, as well as certain affiliated interests of such persons, may
not exceed, together with all other outstanding loans to such person and
affiliated interests, the loans-to-one-borrower limit applicable to national
banks (generally 15% of an institution's unimpaired capital and
25
<PAGE> 26
surplus) and all loans to all such persons in the aggregate may not exceed an
institution's unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than the lesser of $25,000 or
5% of capital and surplus but in any event over $500,000, to a director,
executive officer and greater than 10% stockholder of a bank, and the respective
affiliates of such person, unless such loans are approved in advance by a
majority of the board of directors of the bank, with any "interested" director
not participating in the voting. Further, the FRB, pursuant to Regulation O,
requires that loans to directors, executive officers and principal stockholders
(a) be made on terms substantially the same as those that are offered in
comparable transactions to persons not affiliated with the bank and (b) follow
credit underwriting procedures not less stringent than those prevailing for
comparable transactions with persons not affiliated with the bank. Regulation O
also prohibits a depository institution from paying, with certain exceptions, an
overdraft of any of the executive officers or directors of the institution or
any of its affiliates unless the overdraft is paid pursuant to written
pre-authorized extension or interest-bearing extension of credit or transfer of
funds from another account at the bank.
State-chartered non-member banks are further subject to the
requirements and restrictions against certain tying arrangements and on
extensions of credit involving correspondent banks. Specifically, a depository
institution is prohibited from extending credit to or offering any other
service, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain services of a
competitor of the institution subject to certain exceptions. In addition, a
depository institution with a correspondent banking relationship with another
depository institution is prohibited from extending credit to the executive
officers, directors and holders of more than 10% of the stock of the other
depository institution, unless such extension of credit is on substantially the
same terms as those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of repayment or
present other unfavorable features.
Real Estate Lending Policies
Under FDIC regulations which became effective March 19, 1993,
state-chartered non-member banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interest in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in
26
<PAGE> 27
excess of the following supervisory limits: (i) for loans secured by raw land,
the supervisory loan-to-value limit is 65% of the value of the collateral; (ii)
for land development loans (i.e., loans for the purpose of improving unimproved
property prior to the erection of structures), the supervisory limit is 75%;
(iii) for loans for the construction of commercial, multi-family or other
nonresidential property, the supervisory limit is 80%; (iv) for loans for the
construction of one-to-four-family properties, the supervisory limit is 85%; and
(v) for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property including
non-owner-occupied one-to-four-family property), the limit is 85%. Although no
supervisory loan-to-value limit has been established for owner-occupied,
one-to-four-family and home equity loans, the Interagency Guidelines state that
for any such loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable collateral.
Standards for Safety and Soundness
Under FDICIA, each federal banking agency is required to prescribe, by
regulation, safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
employee compensation, fees and benefits, asset quality and earnings
sufficiency. These standards are in the form of broad guidelines for performance
that generally leave to each institution the methods for achieving the
objectives. The Company believes that its bank subsidiary meets the FDIC's
safety and soundness standards.
Federal Home Loan Bank System
The Company's bank subsidiary is a member of the FHLB System, which
consists of twelve regional Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB of San Francisco, the Company's bank subsidiary is required
to acquire and hold shares of capital stock in the FHLB of San Francisco in an
amount at least equal to 5% of its advances (borrowings).
The FHLB of San Francisco serves as a reserve or central bank for its
member institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It offers products and services established by the FHFB and the Board of
Directors of the FHLB of San Francisco. Long-term advances may only be made for
the purpose of providing funds for residential housing or housing-related
finance. Mr. Barone, the Company's Chairman & CEO, is a Director of the FHLB of
San Francisco, was its Vice-Chairman in 1998, and was re-elected Vice-Chair for
calendar year 1999.
27
<PAGE> 28
Federal Reserve System
Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3.0% of the first $52 million of net transaction accounts,
above an exempt amount of $4.3 million, plus 10% on the remainder. This
percentage is subject to adjustment by the FRB. Because required reserves must
be maintained in the form of vault cash or in a non-interest bearing account at
a Federal Reserve bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of December 31, 1998,
the Company's bank subsidiary met its reserve requirements.
Nevada Banking Laws and Supervision
Nevada state-chartered banks, such as the Company's bank subsidiary,
are also regulated and supervised by the Nevada Division. The Nevada Division is
required to regularly examine each state-chartered bank. The approval of the
Nevada Division is required to establish or close branches, to merge with
another bank, to form a bank holding company, to issue stock, or to undertake
many other activities. As a general rule, Nevada law permits a state-chartered
bank to perform the activities of a nationally- chartered bank.
Regulation of Holding Company
The Company is subject to examination, regulation and periodic
reporting under the BHCA, as administered by the FRB. The FRB has adopted
capital adequacy guidelines for bank holding companies on a consolidated basis
substantially similar to those of the FDIC for the Bank.
The Company is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
The Company is required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
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<PAGE> 29
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from
engaging in, or acquiring 5% or more of any class of voting securities of any
company engaged in non-banking activities. One of the principal exceptions to
this prohibition is for activities found by FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
so closely related to banking as to be a proper incident thereto are: (1) making
or servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in danger of default. This law would have potential applicability if
the Company ever acquired, as a separate subsidiary, a depository institution in
addition to its bank subsidiary. There are no current plans for such an
acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stock or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal stockholders of the Company, its
bank subsidiary, any other subsidiary of the Company and related interests of
such persons. Moreover, subsidiaries of bank holding companies are prohibited
from engaging in certain tie-in arrangements (with the holding company or any of
its subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
29
<PAGE> 30
Federal Securities Laws
The Company filed a registration statement with the SEC under the
Securities Act of 1933 (the "Securities Act") for the registration of the shares
of the Company's Common Stock which were exchanged pursuant to the
reorganization of the Bank into the Company. Upon completion of the
Reorganization, the outstanding shares of the Company's Common Stock were
registered with the SEC under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company is now subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Company's
Common Stock, which were exchanged in the Reorganization, does not cover the
resale of such shares. Shares of the Company's Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company are subject to the resale restrictions
of Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate
(generally executive officers and directors) of the Company who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) would be able to sell
in the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company, or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
ITEM 2 - PROPERTIES
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995.
The building is approximately 26,000 square feet and houses the Bank's main
branch office, the Company's executive and administrative offices and the real
estate and commercial lending functions. The Company exercised its option to
purchase a one acre adjacent parcel for $174,240 in March, 1995 to facilitate
future expansion of the corporate headquarters facility, but has since
determined that such expansion would be too costly. The Company sold the one
acre parcel adjacent to the headquarters facility in 1998 realizing a gain of
approximately $164,000.
The Company owns the two story building and property located at 901 N.
Stewart St., Carson City, Nevada 89701. The building consists of approximately
7,360 square feet on a parcel of approximately .80 acres on the corner of N.
Stewart St. and E. Washington St.. A branch office, and real estate and
commercial lending representatives occupy this facility.
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<PAGE> 31
In August, 1993, the Company opened a 3,600 square foot lending office
in Las Vegas and exercised an option on an additional 1,800 square feet adjacent
to the existing space in March, 1994. In April, 1997, due to fierce competition,
which resulted in low lending volumes, high personnel turnover, and the
inability to find suitable management, the Company closed the Las Vegas office.
The lease expired in July of 1998.
In January, 1996, the Company signed a lease for a branch site located
in south Reno in a shopping center anchored by a Raleys Supermarket. The branch
opened in February, 1997. The location, approximately seven miles from the
nearest existing Comstock Bank branch, is in a rapidly growing area at the end
of a new freeway extension.
In January, 1997, the Company signed a lease for a branch site located
in north Sparks, in an area known as Spanish Springs, in a shopping center
anchored by a Scolari's Supermarket. The branch opened in July, 1997. This
location will service another rapidly growing area where the Company had no
previous branch coverage.
In January, 1997, the Company signed a five year lease for 7,130
square feet of warehouse space to house its back office operation and in-house
mainframe computer system. The Company occupied the space, after renovation, in
March, 1997. This facility is located within one mile of the Company's
headquarters.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area. Since the purchase, the
developer has begun the construction of a shopping center on the 2.3 acres
surrounding the Company's parcel. The parcel may be used for a future branch
site.
In July, 1998, the Company made an offer for a pad site in Northwest
Reno, a rapidly growing area, in a shopping center anchored by Albertsons
Supermarket. The offer was accepted and closed escrow on February 5, 1999. The
parcel will be used for a future branch site.
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<PAGE> 32
The following table sets forth summary information with respect to
property presently leased by the Bank:
<TABLE>
<CAPTION>
Current
Approximate Monthly
Address Square Feet Expiration Rental
- ------- ----------- ---------- ------
<S> <C> <C> <C>
4780 Caughlin Parkway(1) 4,140 4-30-2012 $4,250
Reno, Nevada
18100 Wedge Parkway(2) 3,000 2-15-2007 $4,800
Washoe County, Nevada
1200 Disc Drive(3) 3,200 8-01-2017 $7,600
Sparks, Nevada
5450 Riggins Court #3(4) 7,130 1-31-2002 $3,922
Reno, NV 89511
</TABLE>
(1) Consists of a parcel of land in a regional shopping center in Reno
on which the Company has constructed a branch facility (the "Caughlin
branch"). The Company has three 5-year renewal options. The land lease
terms are as follows:
Years 1-5 $3,625 per month (through April, 1997)
Years 6-10 $4,250 per month
Years 11-15 $5,000 per month
Years 16-20 $5,833 per month
(2) Consists of a branch facility in a regional shopping center in
south Reno that was completed in February 1997 (the "Galena branch").
The Company has four 5- year renewal options. The lease terms include
$4,800 per month for the first two years with increases based on the
CPI index for Urban Wage Earners and Clerical Workers, West Coast Area.
(3) Consists of a branch facility in a regional shopping center north
of Sparks that was completed in July of 1997, (the "Sparks branch").
The Company has one 10-year renewal option. The lease terms include
$7,600 per month for the first two years with increases based on 75% of
the CPI index for Urban Wage Earners and Clerical Workers, West Coast
Area.
(4) This facility houses the Finance, Branch Central Support and
Management Information Systems Departments. The space was previously a
warehouse unit
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<PAGE> 33
in a small office/warehouse center. The current lease is
fixed at $.55 per square foot for a five year period. The Company has
one 5- year option at $.75 per square foot for the first year and
annual increases, based on the Consumer Price Index for All Western
States, not to exceed $.80 per square foot.
ITEM 3 - LEGAL PROCEEDINGS
COMSTOCK BANK V. RAYMOND B. GRABER, II, (NEVADA SUPREME COURT; CASES
NO. 32194 AND NO. 33148): As reported in the Company's previous periodic
securities reports on Forms 10-Q and 10-K, this collection action on a loan
guarantee involves two Nevada Supreme Court appeals. Both appeals deal with the
same underlying factual background and has been consolidated for argument and
decision by the Nevada Supreme Court. Comstock Bank has retained the firm of
Beckley, Singleton, Jemison, Cobeaga & List, and specifically, Rex A. Jemison
and Daniel F. Polsenberg thereof, to handle the Supreme Court appeals in this
matter. A pre-trial settlement conference yielded no compromises.
The Company is involved, from time to time, in other routine litigation
arising from its operations and in other litigation as a plaintiff. Management
believes that the outcome of such litigation, individually and in the aggregate,
will not have a material adverse impact on the Company's consolidated financial
statements.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
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<PAGE> 34
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED MATTERS
Market Information
- ------------------
The Company's Common Stock is traded on the NASDAQ Small Cap Market
under the symbol "LODE". Comstock Bancorp is a bank holding company whose
subsidiary is Comstock Bank. The reorganization resulting in Comstock Bancorp
becoming the holding company of Comstock Bank was completed on June 16, 1997.
Prior to completion of the holding company reorganization, Comstock Bank's
Common Stock also traded on the NASDAQ Small Cap Market under the symbol "LODE".
Initial quotations began on March 4, 1993. As of December 31, 1998, there were
approximately 437 holders of record of the Company's Common Stock. Shown below
are the high and low sales prices for the periods indicated.
<TABLE>
<CAPTION>
1996 High Low
- ------------------ ----- ---
<S> <C> <C>
First Quarter.................. $5.00 $3.50
Second Quarter............... $5.13 $4.13
Third Quarter................. $4.88 $4.00
Fourth Quarter................ $5.38 $4.31
1997 High Low
- ----------------- ----- ---
First Quarter.................. $6.50 $5.13
Second Quarter............... $7.50 $5.67
Third Quarter................. $7.50 $6.25
Fourth Quarter................ $9.63 $7.13
1998 High Low
- ----------------- ----- ---
First Quarter.................. $11.00 $7.50
Second Quarter............... $11.00 $9.50
Third Quarter................. $10.44 $7.50
Fourth Quarter................ $10.25 $7.25
1999 High Low
- ----------------- ----- ---
First Quarter.................. $13.00 $9.00 (as of March 5, 1999)
</TABLE>
On March 5, 1999, the last reported sale price of the Common Stock was
$11.25 per share. The current market makers for the Common Stock are: Herzog,
Heine, Geduld, Inc.; Torrey Pines Securities, Inc., Knight Securities, L.P., and
Moors & Cabot, Inc.
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<PAGE> 35
Holders of Record
- -----------------
Nevada Agency and Trust Co., the Bank's stock transfer agent, reported
that, as of December 31, 1998, that there were 437 registered shareholders. In
addition, management believes there are at least 890 additional beneficial
owners holding stock in "street name" through brokerage firms and other nominee
owners.
Dividends
- ---------
Nevada Revised Statutes ("NRS") 661.215, 225 and 235 govern the payment
of cash dividends. Under these provisions, cash dividends may only be paid from
positive undivided profits. No dividends were declared in 1997 or 1998 because
the Board determined that the Company needed to retain the majority of its
capital for future expansion and capital investment. In January, 1998, the
Company announced a stock repurchase program for up to 5% of the Company's
outstanding stock at the discretion of management. During 1998, the Company
re-purchased 8,000 shares of stock. The repurchased stock was retired in
February of 1999. The Board of Directors determined that a stock repurchase plan
would be preferable to cash dividends due to the taxation of such dividends.
Future determination as to cash dividends will depend upon the earnings, capital
requirements and financial condition of the Company at that time, applicable
legal restrictions and such other factors as the Board of Directors may deem
appropriate.
35
<PAGE> 36
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
COMSTOCK BANCORP
(in thousands) Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Interest Income $ 20,496 $ 15,517 $ 14,868 $ 12,814 $ 9,134
Interest Expense 7,320 5,623 4,434 3,811 2,296
Net Interest Income 13,176 9,894 10,434 9,003 6,838
Provision for Possible Loan Losses 620 270 250 270 105
Noninterest Income 868 541 414 278 407
Noninterest Expenses 9,219 7,653 7,603 6,637 5,724
Income Before Taxes 4,205 2,512 2,995 2,374 1,416
Applicable Income Taxes (254) 676 903 769 422
Net Income 4,459 1,836 2,092 1,605 994
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 0.99 $ 0.42 $ 0.49 $ 0.43 $ 0.29
Earnings Per Share-Diluted 0.91 0.39 0.46 0.38 0.26
Cash Dividends Declared -- -- -- -- 0.47
Book Value per Common Share 4.29 3.53 3.07 2.58 2.07
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $ 141,822 $ 136,181 $ 96,524 $ 86,743 $ 69,999
Reserve for Possible Loan Losses 1,598 1,076 857 665 428
Total Assets 225,147 194,698 144,980 122,805 103,073
Deposits 196,246 179,101 131,303 111,169 93,006
Long-Term Debt
Shareholders' Equity 21,589 15,598 13,009 10,884 7,531
PROFITABILITY RATIOS:
Return on Average Assets 2.13% 1.12% 1.56% 1.41% 1.14%
Return on Average Stockholders'
Equity 25.50 12.90 17.70 18.60 14.70
Net Interest Margin, FTE (2) 4.81 4.87 4.98 4.94 4.36
Net Interest Spread, FTE (2) 4.63 4.47 4.44 4.13 3.70
Operating Expense Ratio (3) 69.00 74.50 71.50 73.00 65.80
Productivity Ratio (4) 4.41 4.66 5.69 5.83 6.54
CAPITAL RATIOS:
Shareholders' Equity to Assets 9.59% 8.01% 8.97% 8.86% 7.31%
Tangible Common Equity Ratio 9.59% 8.01% 8.97% 8.86% 7.31%
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of Period to:
Total Loans 1.13% 0.79% 0.89% 0.77% 0.62%
Nonaccruing and Renegotiated Loans 264.57 41.61 26.92 325.98 251.76
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.01 0.02 0.04 0.00 0.01
Total Assets 0.00 0.01 0.02 0.00 0.01
Total Equity 0.03 0.17 0.28 0.01 0.10
Total Equity + Loan Loss Reserve 0.03 0.16 0.26 0.01 0.10
Net Loans Charged Off to Avg Loans 0.00 0.00 0.00 0.00 0.00
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.27x 2.08x 1.98x 1.93x 1.65x
Including Interest on Deposits 1.48x 1.34x 1.40x 1.36x 1.25x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect a 10% stock
dividend in February 1995 and for a Conversion to Comstock Bancorp stock,
two for one in June 1997.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or tax-favored
loans, leases and securities with interest earned subject to full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to combined
fixed charges, earnings represent net Income plus income taxes and fixed
charges. Fixed charges, including interest on deposits, include interest
expense.
36
<PAGE> 37
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion reviews and analyzes the consolidated
operating results and financial condition of the Company. This discussion should
be read in conjunction with the consolidated financial statements and the other
financial data presented elsewhere herein.
Overview
- --------
The Company's total assets and deposits continued to grow in 1998.
Management believes that asset and deposit totals have increased for the last
five years as a result of an aggressive diversified lending posture on the part
of the Company's wholly owned bank subsidiary, the expansion of the branch
network, and economic growth in northern Nevada. In addition, management
believes that assets and deposits grew because of consolidation of local
institutions with large out of state banks.
Net income for the year ended December 31,1998 was $4,459,000 ($.99 per
share; $.91 per share fully diluted). Excluding tax benefits associated with the
exercise of stock options, operating profits approximated $3,300,000 ($.74 per
share: $.68 per share fully diluted) compared to $1,836,000 ($.42 per share;
$.39 fully diluted) in 1997, $2,092,000 ($.49 per share; $.46 fully diluted) in
1996; $1,605,000 ($.43 per share; $.38 fully diluted) in 1995; and $994,000
($.29 per share; $.27 fully diluted) in 1994.
Capitalization
- --------------
As of December 31, 1995, the Company's wholly owned bank subsidiary's
(the "Bank") Leverage Ratio was 8.57%. As of December 31, 1996, the Leverage
Ratio rose to 9.16%. For the year ending December 31, 1997, the Bank's Leverage
Ratio decreased to 8.52% due an increase in the loan portfolio. As of December
31, 1998 the Company's capital structure was as follows (excluding outstanding
options and warrants to purchase Common Stock):
Shares outstanding..................................... 5,035,500
Stockholder equity . . . . . .........................$21,589,933
Book value/share (stockholder equity).......................$4.29
Leverage Ratio .......................................... 8.49%
If all of the currently outstanding options and warrants were
exercised, the pro forma capital structure would be, as of December 31, 1998:
Shares Outstanding .....................................5,185,900
37
<PAGE> 38
Aggregate Per
Amount Share
------ -----
Stockholder equity $22,403,751 $4.45
Capital Expenditures
- --------------------
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995
at a cost of approximately $3.7 million for the land and structure and $1.7
million for the furniture, fixtures and equipment. The building is approximately
26,000 square feet and houses the Bank's main branch office, the Company's
executive and administrative offices and the real estate and commercial lending
functions. The Company exercised its option to purchase a one acre adjacent
parcel for $174,240 in March, 1995 to facilitate future expansion of the
corporate headquarters facility, but has since determined that such expansion
would be too costly and the property was sold in 1998 for $340,000. In November,
1996, the Company signed a lease on approximately 7,130 square feet of
office/warehouse space approximately one mile from the administrative
headquarters to house a computer facility and other back office administrative
functions. The Company made the decision to bring the main frame data processing
operations in-house upon receipt of notification of cancellation by its data
processing service provider. Facility renovations of and department relocations
to the new leased property were completed in March, 1997 at a cost of $214,000
(plus $51,000 for furniture, fixtures and equipment). This facility also houses
a full data processing center, which became operational in October, 1997 at a
cost of $542,000. In addition, removal of the back-office functions from the
head office facility allowed for the expansion of the commercial and residential
lending origination functions within the headquarters facility. Those facility
renovations and department relocations within the administrative office to
expand the commercial and residential lending departments were completed in May,
1997, at a cost of $56,000 (plus $77,000 for furniture, fixtures and equipment).
In January, 1996, the Company signed a lease for a branch site located
in south Reno. The branch opened in February, 1997 at a cost of $139,000 for
leasehold improvements and $263,000 for furniture, fixtures and equipment.
In January, 1997, the Company signed a lease for a branch site
located in north Sparks. The branch opened in July, 1997 at a cost of $28,000
for the leasehold improvements and $260,000 for the furniture, fixtures, and
equipment.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area at a cost (including grading)
of $466,000.
In February, 1999, the Company closed escrow on a pad in northwest
Reno. The pad is located in a shopping center bordered by both established and
developing residential and retail areas. The site cost approximated $538,000.
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<PAGE> 39
The cash to finance the above described capital expenditures came from
existing liquid assets.
Operations and Liquidity
- ------------------------
Total post-tax profits for 1998 were $4,459,000, an increase of 142.8%
from the $1,836,000 earned in 1997. The following table shows the overall
reasons for the change in the Bank's profitability.
<TABLE>
<CAPTION>
1998 1997 %Change
------------ ------------ -------
<S> <C> <C> <C>
Total loan income $ 14,077,117 $ 10,996,028 28.0
Total fee income 3,914,049 2,646,867 47.9
Overnight and investment
income 2,504,967 1,874,244 33.7
Service charges and
non-interest income 702,573 539,621 14.8
------------ ------------ --------
21,198,706 16,056,760 32.0
Total interest expense 7,319,554 5,623,352 30.2
Salaries and benefits
(excluding management
bonus) 4,683,318 3,879,940 20.7
Occupancy expenses 857,443 753,876 13.7
Furniture, fixtures and
equipment 720,188 584,839 18.8
Other operating expenses 2,136,412 2,062,543 3.6
------------ ------------ --------
15,716,915 12,904,550 21.8
Loan loss provision 620,000 270,000 129.6
------------ ------------ --------
Income from bank
operations 4,861,791 2,228,210 118.4
Management bonus accrual 822,346 371,461 121.4
Taxes (254,413) 675,615 (137.7)
Other income 164,867 926 17,704.2
------------ ------------ --------
Net income $ 4,458,725 $ 1,836,060 142.8
</TABLE>
The table shows that net income increased by 142.8% ($2,623,000) over 1997. The
largest contributing factor, in management's opinion, to the increase in income
was the exercise of employee and director options and the sale of tax favorable
municipal bonds, that resulted in a tax benefit of approximately $1,385,000
Interest income on loans grew 28%, and, again in 1998, was augmented by the
receipt of "additional" interest from a development loan in the Company's
portfolio for which
39
<PAGE> 40
the Company collects monthly interest payments plus an additional $2,100 for
each lot the developer sells. In 1998, 440 lots were sold increasing interest
income by $815,900. In 1997, 139 lots were sold and closed giving the Company
"additional" interest income of $292,000. In 1996, 128 lots were sold and closed
which added $268,800 in "additional" interest to Company revenue. Of the total
811 lots, 102 remained to be sold as of December 31, 1998. The Company expects
lot sales to continue in 1999, but such sales are subject to current market
conditions including, but not limited to, the general health of the economy,
interest rates, and competition.
The $2,622,665 increase in pre-tax income reported was attributable to
the following:
<TABLE>
<CAPTION>
<S> <C>
+$3,081,089 increase in interest income
+ 1,267,182 increase in fee income
+ 630,723 increase in investment income
+ 162,952 increase in non-interest income
- 1,696,202 increase in interest paid on deposits and funds borrowed
- 803,378 increase in salary and benefit costs
- 238,916 increase in occupancy and furniture & equipment expense
- 73,869 increase in other operating expenses
- 636,944 change in bonus, loan loss provision and other
-----------
+$1,692,637 change in pre-tax income
+ 930,028 decrease in taxes
-----------
+$2,622,665 increase in post-tax income
</TABLE>
The increase in interest income (in addition to the interest from the
development loan discussed above) was due to a larger portfolio of held to
maturity loans. As of December 31, 1998, the Company's held $141 million in its
loan portfolios compared to $135 million, a year earlier. On an average basis,
the Company held $142 million in its loan portfolios in 1998 compared to $114
million in 1997, a 24.6% increase, similar to the 28.0% increase in loan income
recorded. The 33.7% increase in investment income came primarily from the
increase in investment holdings, which rose from $27.1 million at the end of
1997 to $39.8 million at the end of 1998. Investments in overnight funds
increased from $9.9 million to $17.2 million. The 30.2% increase in interest
paid on deposits and other borrowed funds resulted mainly from a 31.3% increase
in deposits, on average, between 1998 and 1997. The loan loss provision was
increased by $350,000 or 129.6% over 1997 to meet the risks traditionally
associated with the increase in commercial loan portfolios and to meet a level
more consistent with current economic conditions and expectations.
In 1993, the Company originated $206 million in residential real estate
mortgage loans and sold $176 million of this product in the secondary market.
Due to rapidly rising rates in 1994, the market for mortgage refinancing all but
disappeared. This phenomenon, accompanied by a re-emergence of competition from
the larger financial institutions, caused residential real estate loan
originations to fall by 19.6% to $165 million, and secondary market sales to
fall to $147 million. In 1995, the Company
40
<PAGE> 41
originated $160 million in real estate loans and sold $153 million in the
secondary market, a decrease of 3.0% in loans originated and an increase of 4.1%
in loans sold. In 1996, the Company originated $170 million in residential real
estate loans and sold $139 million in the secondary market, representing an
increase of 6.3% and a decrease of 10.1%, from 1995, respectively. In 1997, the
Company originated $140 million of residential real estate mortgage loans and
sold $114 million in the secondary market representing a decrease of 17.6% in
originations and 18.0% in secondary market sales. There were two major reasons
for the lower real estate mortgage loan volume in 1997. First, the floods in
Reno in early January, 1997 severely depressed mortgage loan demand in the first
quarter in Northern Nevada. Second, the Company closed its Las Vegas mortgage
loan origination office in April, 1997. Northern Nevada mortgage originations
were $138 million in 1997 compared to $141 million in 1996, a 2% decrease. In
1998, the Company originated $193 million of residential real estate mortgage
loans and sold $160 million in the secondary market, representing an increase of
37.9 in originations and 40.4% in secondary market sales.
In 1998, existing home sales rose 9.1% in Washoe County, a major
segment of the Company's market area. During that same time period, permits for
new housing units, including multi-family, rose 36%. Local housing experts cited
low interest rates, low inflation, and rising personal income as factors leading
to the improved sales. The growth in the Company's real estate origination
business was similar to the growth in the general market.
The Company's liquidity ratio, defined as the value of marketable
assets divided by volatile liabilities, stood at 31% as of December 31, 1998 as
compared to 26% as of December 31, 1997. As of December 31, 1998, the Company
had $17.2 million in overnight funds, $39.8 million in time deposits and
marketable securities which were available for sale, and borrowing capacity at
the Federal Home Loan Bank of San Francisco in excess of $67 million (30% of its
assets). Such borrowing capacity is subject to quarterly review and must be
collateralized. As of December 31, 1998, the Company had borrowed $6,000,000 and
had pledged approximately $33 million in loans and securities to the Federal
Home Loan Bank of San Francisco as collateral for the borrowing line.
In order to generate its relatively high lending volumes, the Company
has higher personnel and overhead expenses than most in its peer group because
residential real estate lending requires extensive back office operations
including loan underwriters, loan processors, a loan servicing and shipping
staff, secondary market sales personnel, and compliance personnel. Construction
lending requires a builders' control staff and inspectors. Finally, acquisition
and development lending typically requires close monitoring by lending staff,
thus requiring additional staff for other types of lending. At the beginning of
1993, the Company had approximately 50 full time equivalent ("FTE") employees.
By the end of 1993, with the expansion of lending to Las Vegas and the gear up
for the planned growth in commercial lending, the Company employed 97 FTE
employees. At the end of 1994 and 1995 FTE employees numbered 108. And, at the
end of 1996 the Company employed 118 FTE employees. The increase
41
<PAGE> 42
included the addition of a Compliance Officer, expansion of the commercial
lending functions and partial staffing for the additional branch office that
opened in February, 1997. At the end of 1997, FTE were 121. In 1997, two
branches were opened and the Company expanded its commercial lending operation
and its Management Information Department. It also closed its Las Vegas mortgage
loan origination facility. By the end of 1998, the Company had an FTE of 119.5.
According to data publicly available on first mortgage filings, the
Company believes that it is in the top ten of first mortgage lenders in Washoe
County, and the in the top two of first mortgage lenders in Carson City. The
income generated from the Company's high volume of lending activity usually
places the Company's and the Bank's net interest margin in the top 10% of peer
group analysis. Because of the personnel and expense generated in the mortgage
operation which are not found in peer group comparative numbers, management does
not rely on peer group analysis of its specific overhead expense ratios or its
net interest margins when analyzing performance. Rather, management relies on
other productivity measures such as analysis of loan representative lending
volumes and on overall profitability measures including return on assets and
return on stockholders' equity.
Impact of Changing Interest Rates - Interest Rate Risk
- ------------------------------------------------------
The impact of changing interest rates (and inflation) on banks differs
from the impact on other companies. As financial intermediaries, banks have
assets and liabilities that may move in concert with interest rates. This is
especially true for banks with a high percentage of rate sensitive interest
earning assets and interest bearing liabilities. A bank can reduce the impact of
changing interest rates on its interest margin if it can manage its interest
rate sensitivity gap (the "gap") (also known as "Interest Rate Risk"). The gap
for any period is the volume difference between the assets and the liabilities
which reprice to market conditions in that period. Management's goal is to
adjust the gap so that the impact of falling or rising interest rates has a
neutral impact on the Company's interest margin. To do this, it is necessary for
management to anticipate the general movement of interest rates. Thus, there is
no guarantee that the Company will always be able to maintain its current
interest margins.
The table below shows changes in income and expenses due to changes in
interest rates and business volumes. Since the interest yields on loans was
substantially unchanged at 9.45% in 1998 versus 1997, the lion's share of total
income change of $2.774 million was due to volume increases ($2.757 million).
For the Company's overnight investments in Fed Funds and bank qualified
overnight mutual funds, the yield fell 20 basis points as the Federal Reserve
lowered short-term interest rates in the second half of 1998. Of the $172,772
positive change in income, $196,321 was due to higher investment levels and
- -$16,359 was due to lower yields (with -$7,190 due to the combination of rate
and volume).
Investment securities had significantly higher volume levels and
slightly lower yields, again due to falling national interest rates. Of the
$429,356 rise in income in
42
<PAGE> 43
investments, $454,597 was due to volume and -$18,746 was due to lower yields
(with -$6,496 due to the combination of rate and volume). Total interest income
grew by $3,363 million with yields 9 basis points lower in 1998 than in 1997. Of
the $3.363 million, $3.511 million was due to increased volume and -$127,407 was
due to lower yields (with $35,412 due to the combination of rate and volume).
Deposit volumes also rose in 1998 with interest costs on transaction
accounts rising by $385,042. The yield cost of transactions accounts fell by
seven basis points due to lower national interest rates. Thus, of the $385,042
of increased costs, $425,517 was volume related while the Company saved $31,720
directly from lower yield costs (and $8,755 from the combination of rate and
volume). The cost of time and savings deposits rose by $1.040 million due to
increases in both yield costs and volumes. Volume was responsible for $966,836
of the costs and yields for %59,088 (a rise of eight basis points). The yield
costs rose here due to the timing of the national rate declines and competition
in the local time certificate market. Borrowed funds (from FHLB) rose $270,897
in 1998 versus 1997. Of this amount, $268,053 was due to higher average volume
of borrowings and $762 due to higher yield costs (with $2,082 due to the
rate/volume combination).
As a result of the components, the Company's net interest income rose
$1.667 million. Of that amount, $1.895 million was due to increases in the
volume of business. However, a shrinking interest margin (14 basis points) cost
the Company $189,371.
43
<PAGE> 44
<TABLE>
<CAPTION>
COMSTOCK BANCORP
INTEREST RATE SENSITIVITY ANALYSIS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
YEAR-TO-DATE ENDED: Dec. 31, 1998 Rate Dec. 30, 1997 Rate Change Variance Variance Variance
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS:
Loan Income $13,539,860 9.45% $10,765,926 9.45% $2,773,934 $2,756,662 $4,671 $1,195
Loan Fees and
Servicing Income 4,498,394 2,916,512 1,581,882 -- -- --
--------- ---------
Total Loan,
and Fee Income 18,038,254 12.59% 13,682,437 12.01% 4,355,817 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
Fed Funds and Mutual
Fund Income 619,481 5.27% 446,710 5.47% 172,772 $196,321 ($16,359) ($7,190)
Income from
Investment Securities 1,741,207 5.66% 1,311,851 5.74% 429,356 $454,597 ($18,746) ($6,496)
Interest-Bearing
Deposit Income 81,202 6.61% 94,043 6.51% (12,841) ($14,065) $1,440 ($215)
------ ------- -------- ------ -----
Total Investment 2,441,890 5.58% 1,852,604 5.71% 589,286 $644,447 ($40,925) ($14,236)
Trading Account
and Other 63,077 7.63% 21,640 4.87% 41,437 $18,585 $12,293 $10,558
- ---------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income $15,981,750 8.51% $12,618,530 8.60% $3,363,220 $3,511,341 ($127,407) ($35,412)
Total Interest,
Fee, and Trading
Account Income $20,543,221 10.94% $15,556,683 10.59% $4,986,539 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Interest on Deposits:
Transaction Accounts $ 1,926,671 3.21% $1,541,629 3.28% $385,042 $425,517 ($31,720) ($8,755)
Time and Savings
Deposits 5,023,941 5.33% 3,983,677 5.25% 1,040,264 966,836 59,088 14,341
--------- --------- ------- ------ ------
Total Deposit
Interest Expense 6,950,612 4.51% 5,525,306 4.50% 1,425,306 1,411,446 11,039 2,820
- ---------------------------------------------------------------------------------------------------------------------------------
BORROWED
Other Borrowed 368,942 6.15 $98,046 6.10% $270,897 $268,053 $762 $2,082
------- -------- -------- ---- ------
Total Interest $ 7,319,554 4.57% $5,623,352 4.52% $1,696,202 $1,616,426 $61,964 $17,812
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $ 8,662,196 3.94% $6,995,177 4.08% $1,667,019 1,894,915 ($189,371) ($53,224)
(Excludes fee
NET INTEREST
DIFFERENTIAL $13,223,667 6.37% $9,933,330 6.08% $3,290,337 -- -- --
(Includes fee income)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO INTEREST RATE SENSITIVITY ANALYSIS TABLE:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets.
[2] "Yield/Rate" is the interest income or interest expense, annualized, divided
by the average respective outstanding balance for the period.
[3] "Total Change" represents the change in the interest income or interest
expense between the respective periods.
[4] "Volume Variance" equals the change in average volumes (balances) between
the periods times the previous period interest rate.
[5] "Rate Variance" equals the change in yields or rates between the periods
times the previous period average balance.
[6] "Rate/Volume Variance" reflects the change in interest income or interest
expense attributable to simultaneous changes in both rates and volumes between
the respective time periods.
44
<PAGE> 45
Interest Margin
- ---------------
The table below shows the sources of the Company's earnings.
Loan yields, including the fees, increased slightly between 1997 and
1998, largely due to the "additional" interest earned on the development loan
discussed previously. Loan yields declined in 1997 and 1998 from 1996 levels due
to a change in accounting for fees and due to increased competition from other
lenders. Since 1994, the Company has consistently expanded its commercial
lending while leaving the resources devoted to its real estate lending constant.
The growth in these portfolios has offset any declining yields resulting from
the prime rate reductions. In 1995, originations were $229 million. In 1996,
that figure rose to $308 million and then fell to $269 million in 1997. In 1998,
the originations rose again to $303 million.
All other portfolio yields were comparable or slightly higher between
1997 and 1998, mirroring the general movement of national interest rates. Yields
on investments rose slightly as the Company increased the duration of the
"Available for Sale" portfolio from 1.25 years to 2.61 years.
The cost of funds moved up from 4.52% in 1997 to 4.57% in 1998 partly
reflecting the Companys desire to offer competitive rates to established
customers and to remain competitive in the volatile CD market.
Overall, the 1998 net interest margin, both including and excluding
fees, remained consistent with 1997 levels.
Net Interest Margin 1998 1997 1996
---- ---- ----
Include fees: 6.6% 6.6% 8.5%
Exclude fee: 4.7% 4.8% 4.9%
45
<PAGE> 46
COMSTOCK BANCORP
CONSOLIDATED AVERAGE BALANCES
INTEREST INCOME/EXPENSE AND YIELDS/RATES
As of December 31, 1998, December 31, 1997 an December 31, 1996
(DOLLARS IN THOUSANDS - YIELDS ARE TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------
AVERAGE Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
BALANCE Expense Rate Balance Expense Rate Balance Expense Rate
--------------------- --------------------- ------------------- ----------------------
Assets (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned income* $142,730 $17,991 12.61% $113,663 $13,677 12.03% $88,645 $13,176 14.86%
Investment securities:
Taxable 21,676 1,345 6.21% 18,536 1,112 6.00% 13,287 752 5.66%
Tax-exempt 9,880 662 6.70% 4,777 321 6.72% 2,810 180 6.40%
----- ----- ----- ---
Total investment securities 31,556 2,007 6.36% 23,314 1,433 6.15% 16,097 932 5.79%
Trading account securities 10 2 23.88% 19 0 0.00% 33 0 0.00%
Federal funds sold and securities purchased 11,760 619 5.27% 8,170 447 5.47% 13,181 $708 5.37%
under agreements to resell
Interest bearing deposits with other banks 1,228 81 6.61% 1,444 94 6.51% 1,698 109 6.42%
----- -- ----- -- ---
Total earning assets $187,284 $20,701 11.05% $146,609 $15,650 10.67% $119,654 $14,925 12.47%
Allowance for loan losses (1,312) (948) (794)
Unrealized gain (loss) on securities available 30 (37) (92)
for sale
Cash and due from banks 8,542 6,536 5,606
Other assets 14,353 11,915 9,263
------ ------ -----
Total assets $208,896 $164,074 $133,637
======== ======== ========
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Deposits:
MMDA & Now $60,001 $1,927 3.21% $47,022 $1,542 3.28% $38,678 $1,298 3.36%
Savings 9,432 239 2.54% 9,844 262 2.66% 9,983 268 2.68%
Certificates of deposit less than $100,000 and 55,014 3,106 5.65% 42,778 2,410 5.63% 34,325 1,907 5.56%
other time deposit
Certificates of deposit of $100,000 or more 29,798 1,679 5.63% 23,215 1,312 5.65% 16,829 945 5.62%
------ ----- ------ ----- ------ ---
Total interest bearing deposits $154,246 $6,951 4.51% $122,860 $5,525 4.50% $99,816 $4,418 4.43%
Federal funds purchased 0 0 - 75 5 7.10% 0 0 -
Securities sold under agreements to repurchase 0 0 - 0 0 - 0 0 -
Other short-term borrowings 0 0 - 0 0 - 0 0 -
FHLB and other borrowings 6,000 369 6.15% 1,532 93 6.05% 251 16 6.37%
----- --- -- --
Total interest bearing liabilities $160,246 $7,320 4.57% $124,467 $5,623 4.52% $100,067 $4,434 4.43%
-------- --------
Non-interest bearing demand deposits 29,802 24,675 21,117
Accrued expenses and other liabilities 1,379 705 652
Shareholders' equity 17,469 14,227 11,801
------ ------ ------
Total liabilities and shareholders' equity $208,896 $164,074 $133,637
======== ======== ========
Net interest income/net interest spread 13,381 6.49% 10,027 6.16% 10,491 8.04%
===== ==== ====
Net yield on earning assets 7.14% 6.84% 8.77%
===== ==== ====
Taxable equivalent adjustment:
Loans 0 0 0
Investment securities available for sale 205 99 56
--- -- --
Total taxable equivalent adjustment 205 99 56
--- -- --
Net interest income $13,176 $9,928 $10,435
======= ====== =======
</TABLE>
*Loans on non-accrual status have been included in the computation of average
balances.
46
<PAGE> 47
Other Assets
------------
In 1997 the Company had one property classified as other real
estate owned at a book value of $8,250. The Company had a 15% interest in
the property received through judgment (the other 85% belonged to the loan
guarantor). As of December 31, 1998, $2,184,478 classified as OREO
(previously reported as non-accrual loans) is comprised of two residential
development properties. In July, the Company completed the foreclosure on a
project in Reno, which contained 13 partially completed homes. Of the 13,
two were sold in 1998, two are in escrow, two have offers pending, and the
other 7 are on schedule to be completed in March of 1999. In September, the
Company foreclosed on a project containing 2 condominiums and 11 finished
lots in Boulder, NV, in the Las Vegas area. The Company is marketing this
property on a multiple listing service and is in negotiations on an offer
for the 11 lots. The Company does not expect significant losses of
principal on either of its OREO properties. Management believes that the
acquisition of title to these projects and their placement into OREO is a
positive step in the resolution of these problem assets.
The Bank has historically serviced a portfolio of loans for the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Corporation ("FNMA") as well as for others. As of December 31,
1997, the portfolio amounted to $49.0 million. For performing this
servicing function, the Company earned a fee of approximately .47% of the
aggregate principal balance of the loans in the portfolio. The level of the
servicing portfolio has remained steady at about $50 million for the past 3
years due to the fact that, in falling interest rate environments,
management believes that the Company is better off with the fees earned in
selling the servicing than with the fees earned from directly servicing
mortgages that have an incentive to prepay. As a result of the desire to
sell all servicing and an analysis of the cost to maintain the existing
servicing, the Company made the decision to sell the servicing portfolio in
1998 for a gain of $326,000.
47
<PAGE> 48
Income & Expense
- ----------------
The table below shows the major income and expense categories. Several
of the categories are discussed and detailed in tables that follow.
<TABLE>
<CAPTION>
INCOME & EXPENSE
Years ended December 31
---------------------------
1998 1997 1996
---- ---- ----
(In thousands of dollars)
Interest income:
<S> <C> <C> <C>
Interest income $14,077 $10,996 $8,871
Fee income 3,914 2,647 4,305
----- ----- -----
Interest and fees on loans 17,991 13,643 13,176
Investments and deposits 1,885 1,427 984
Interest on fed funds sold 620 447 708
--- --- ---
Total interest income $20,496 $15,517 $14,868
======= ======= =======
Provision for credit losses 620 270 250
Interest expense:
Interest on deposits 6,951 5,525 4,418
Interest on other borrowings 369 98 16
--- -- --
Total interest expense $7,320 $5,623 $4,434
====== ====== ======
Non-interest income 868 541 414
Non-interest expense 9,219 7,653 7,603
Income before income taxes,
minority interest, and 4,205 2,512 2,995
extraordinary items
Provision for taxes (254) 676 903
---- --- ---
Post-tax income $4,459 $1,836 $2,092
====== ====== ======
</TABLE>
48
<PAGE> 49
The table below shows non-interest income for the years 1996, 1997, and
1998. Account service charges have increased with the growth in the deposit
base.
The line item "Gain on Sale, Investments and Trading Acct" reflected
the impact of marking the trading account to market and the sale of held for
sale securities.
The large increase in "other income" is largely due to a gain of
$164,000 realized on the sale of a parcel of land (previously discussed). In
accordance with FASB 125, the Company placed a loan service asset on its books
(with no liability offset) in the net amount of $34,000 in 1997. This amount was
adjusted as new loans were funded, as loans were paid off, and was reversed at
the time the servicing portfolio was sold in 1998. The following table
summarizes the Bank's non-interest income for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Account service charges $350 $288 $265
Gain on sale, investments
And trading account 86 (9) (13)
Other income 432 262 162
---- ---- ----
$868 $541 $414
==== ==== ====
</TABLE>
Non-Interest Expenses
- ---------------------
Almost all of the non-interest expenses appear high when compared to
the Company's and Bank's peer groups. In order to support its mortgage banking
business the Company has a loan center in the headquarters building in Reno
which handles real estate loan origination, houses loan representatives and
secondary market personnel, loan processing, loan servicing, and a builders'
control unit. The Carson City office also houses real estate loan
representatives and a real estate loan processing unit. The facilities,
equipment and personnel support for the mortgage lending operation make the
non-interest expenses much higher than those of most others in the "peer groups"
which generally do not have extensive mortgage lending units. The fee income
generated from the mortgage lending operations more than offsets the added
expenses.
The following table summarizes non-interest expenses for 1998, 1997 and
1996:
Years ended December 31,
1998 1997 1996
---- ---- ----
(In thousands of dollars)
48
<PAGE> 50
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Account service charges $350 $288 $265
Gain on sale, investments
And trading account 86 (9) (13)
Other income 432 262 162
---- ---- ----
$868 $541 $414
==== ==== ====
</TABLE>
Non-Interest Expenses
- ---------------------
Almost all of the non-interest expenses appear high when compared to
the Company's and Bank's peer groups. In order to support its mortgage banking
business the Company has a loan center in the headquarters building in Reno
which handles real estate loan origination, houses loan representatives and
secondary market personnel, loan processing, loan servicing, and a builders'
control unit. The Carson City office also houses real estate loan
representatives and a real estate loan processing unit. The facilities,
equipment and personnel support for the mortgage lending operation make the
non-interest expenses much higher than those of most others in the "peer groups"
which generally do not have extensive mortgage lending units. The fee income
generated from the mortgage lending operations more than offsets the added
expenses.
The following table summarizes non-interest expenses for 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Salaries and benefits $5,506 $4,251 $4,781
Occupancy expense 857 754 528
Furniture and equipment expense 720 585 464
Other operating expense 2,136 2,063 1,830
------ ------ ------
$9,219 $7,653 $7,603
====== ====== ======
</TABLE>
Salary and benefit expenses reflect full staffing in the new branch and
computer operations facilities and an increase in the management incentive plan
based on the increase in net income. The comparable salary expense for 1997 was
10.3% higher than that of 1996. Increases in occupancy, furniture, fixtures and
equipment expenses, and in other operating expenses occurred as a result of a
full year of operations in the two new branches and the operations center (see
CAPITAL EXPENDITURES above).
49
<PAGE> 51
Taxes
- -----
In 1996, the Company's effective tax rate was 30.2%, less than the
statutory 34% due to tax benefits derived from tax losses on the sale of certain
municipal bonds that were significantly larger than the financial statement
losses. In 1997, as a result of similar municipal bond sales and tax losses as
in 1996, a larger portfolio of tax exempt securities, and the exercise of stock
options by employees for which the Company received a tax deduction as if it had
paid the employees compensation, the tax rate dropped to 26.9%. For the year
ended December 31, 1998, the activity in municipal bond sales together with a
significant increase in stock option exercises resulted in an effective tax rate
of -6.05% (the Company is recovering taxes paid in past years.
Forward Look Statements
- -----------------------
Certain statements herein regarding the Company's financial position,
business strategy and the plans and objectives of Company management for future
operations are forward-looking statements rather than statements of historical
or current fact. When used herein, words such as "anticipate", "believe",
"estimate", "expect", "intend", and similar expressions, as they relate to the
Company or its management, identify forward- looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are inherently uncertain, and there can be
no assurance that the underlying assumptions will prove valid. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to changes
in prevailing interest rates, competitive factors and pricing pressures, changes
in legal and regulatory requirements, technological change, product development
risks and general economic conditions. Such statements reflect the current views
of the Company with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
50
<PAGE> 52
ITEM 7 -- FINANCIAL STATEMENTS
The Financial Statements and Supplementary Data contained in Appendix D
of the Company's proxy statement, a copy of which is attached hereto as
Exhibit 99, is incorporated herein by reference.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning directors, executive officers, promoters and
control persons and compliance with Section 16(a) of the exchange Act is
incorporated by reference from the Company's proxy statement, a copy of which
is attached hereto as Exhibit 99.
The Company considers the following individual to be "significant
employees" of the Company's bank subsidiary under Item 401(b) of Regulation S-B:
Pamela Robinson was promoted to Vice-President of Real Estate Loan
Originations in January, 1997. She has been employed at Comstock Bank since
September, 1988 as the Manager of the Real Estate Loan Origination unit in Reno.
Christiana Duncan was hired in May, 1997 as the Vice-President of Real
Estate Lending Operations. Prior to that, Ms Duncan was the Executive Vice-
President of Golden Empire Mortgage in Bakersfield, CA.
Max Doane was hired in January, 1997 as the Secondary Market Manager
and was promoted to Vice-President in January, 1998. Prior to his employment at
Comstock, Mr. Doane held a similar position at Crossland Mortgage Co. in Salt
Lake City, UT.
Lisa Milke was promoted to Vice-President, Controller in January, 1995.
She began work for Comstock Bank as its Controller in June, 1993. Prior to that,
she was a consultant to First Interstate Bank (now Wells Fargo).
51
<PAGE> 53
Carol Rhodes was promoted to Vice-President, Human Resources and
Marketing in January, 1997. She began work at Comstock Bank in March, 1993 in
the Personnel/Marketing Department.
ITEM 10 - EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by
reference from the Company's proxy statement, a copy of which is attached
hereto as Exhibit 99.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference from the Company's proxy statement,
a copy of which is attached hereto as Exhibit 99.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated by reference from the Company's proxy statement, a copy of
which is attached hereto as Exhibit 99.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as part of this
Registration Statement are as follows:
(a) List of Exhibits.
Exhibit
- Description
-----------
No.
- ---
*2.1 Plan of Reorganization dated as of February 26, 1997 by and
among Comstock Bank and Comstock Bancorp (included as Appendix
A to the Proxy Statement-- Prospectus filed as part of
Comstock Bancorp's Form S-4 Registration Statement on March
25, 1997)
*3.1 Articles of Incorporation of Comstock Bancorp (included as
Appendix C to the Proxy Statement--Prospectus filed as part of
Comstock Bancorp's Form S-4 Registration Statement on March
25, 1997).
*3.2 Bylaws of Comstock Bancorp (included as Appendix D to the
Proxy Statement--Prospectus filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997).
*3.3 Composite Articles of Incorporation of Comstock Bank filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*3.4 Composite Bylaws of Comstock Bank filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997.
51
<PAGE> 54
Exhibit
No. Description
------- -----------
*3.3 Comstock Bancorp's Form S-4 Registration Statement on March
25, 1997.
*3.4 Composite Bylaws of Comstock Bank filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997/
*4.1 Form of Stock Certificate of Comstock Bancorp filed as part of
Comstock Bancorp's Amendment No. 1 to Form S-4 Registration
Statement on April 14, 1997.
*10.1 Employment Agreement dated as of December 14, 1992 between the
Bank and Robert Barone filed as part of Comstock Bancorp's
Form S-4 Registration Statement on March 25, 1997.
*10.2 Form of Assignment of and First Amendment to Employment
Agreement among Bancorp, the Bank and Robert Barone filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*10.3 Employment Agreement dated as of December 14, 1992 between the
Bank and Larry Platz filed as part of Comstock Bancorp's Form
S-4 Registration Statement on March 25, 1997.
*10.4 Form of Assignment of and First Amendment to Employment
Agreement among Bancorp, the Bank and Larry Platz filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*10.5 1992 Incentive Plan of Comstock Bank, as amended filed as part
of Comstock Bancorp's Form S-4 Registration Statement on March
25, 1997.
*10.6 1992 Non-Employee Directors Stock Option Plan, as amended
filed as part of Comstock Bancorp's Form S-4 Registration
Statement on March 25, 1997.
*10.7 Form of Comstock Bank Payroll Deduction Stock Purchase Plan
filed as part of Comstock Bancorp's Form S-4 Registration
Statement on March 25, 1997.
*10.8 Form of Assignment of and First Amendment to Warrant Agreement
filed as part of Comstock Bancorp's Form S-4 Registration
Statement on March 25, 1997.
*10.9 Comstock Bank Director Deferred Fee Agreement (entered into by
Directors Edward Allison, Stephen Benna, John Coombs, Michael
Dyer and Larry Platz).
*10.10 Comstock Bank/Bancorp Key Employee Deferred Fee Agreement
(entered into by Messrs. Robert Barone and Larry Platz).
52
<PAGE> 55
Exhibit
- Description
-----------
No.
- ---
**11 Computation of Earnings Per Share
**21 Subsidiaries of Registrant.
**27 Financial Data Schedule (filed only in EDGAR format)
**99 Proxy Statement/Prospectus
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-k
No reports on Form 8-K were filed during the three-month period ended
December 31, 1998.
53
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Comstock Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMSTOCK BANCORP
Date: March 9, 1999 /s/ Robert Barone
Robert Barone
Chairman, Chief Executive Officer, Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 10, 1999 /s/ Edward Allison
---------------- ------------------------
Edward Allison, Director
Date: March 8, 1999 /s/ Stephen Benna
--------------- -----------------------
Stephen Benna, Director
Date: March 10, 1999 /s/ John Coombs
----------------- ---------------------
John Coombs, Director
Date: March 5, 1999 /s/ Michael Dyer
------------------ ----------------------
Michael Dyer, Director
Date: March 8, 1999 /s/ Mervyn Matorian
---------------- -------------------------
Mervyn Matorian, Director
Date: March 10, 1999 /s/ Samuel McMullen
----------------- -------------------------
Samuel McMullen, Director
Date: March 6, 1999 /s/ Ronald Zideck
---------------- -----------------------
Ronald Zideck, Director
Date: March 9, 1999 /s/ Larry Platz
---------------- -----------------------
Larry Platz, President,
Secretary, and Director
Date: March 9, 1999 /s/ Robert Barone
--------------- ------------------------------
Robert Barone, Chairman,
Chief Executive Officer and
Treasurer (principal financial
and accounting officer
54
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<PAGE> 2
COMSTOCK BANCORP
COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income: $4,458,725 $1,836,060 $2,092,108
Net Income per Common Share
(assuming no dilution):
Weighted Avg. Shares Outstd.: 4,512,781 4,335,668 4,233,693
Basic Earnings per Share: $0.99 $0.42 $0.49
Net Income per Common and
Common Equivalent Shares:
Adjusted Weighted Avg. Number 4,912,396 4,788,732 4,557,341
of Shares Outstd. After Giving
Effect to the Conversion of Options
and Warrants:
Fully Diluted Earnings per Share: $0.91 $0.39 $0.46
</TABLE>
1
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
0
<PAGE> 2
SUBSIDIARIES OF THE REGISTRANT
STATE OF
PERCENTAGE INCORPORATION
PARENT SUBSIDIARY OWNERSHIP OR ORGANIZATION
------ ---------- --------- ---------------
Comstock Bancorp Comstock Bank 100% Nevada
1
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,843
<INT-BEARING-DEPOSITS> 791
<FED-FUNDS-SOLD> 17,214
<TRADING-ASSETS> 8
<INVESTMENTS-HELD-FOR-SALE> 39,071
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 141,822
<ALLOWANCE> 1,598
<TOTAL-ASSETS> 225,147
<DEPOSITS> 196,247
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,312
<LONG-TERM> 6,000
0
0
<COMMON> 50
<OTHER-SE> 21,540
<TOTAL-LIABILITIES-AND-EQUITY> 225,149
<INTEREST-LOAN> 17,991
<INTEREST-INVEST> 1,886
<INTEREST-OTHER> 619
<INTEREST-TOTAL> 20,496
<INTEREST-DEPOSIT> 6,951
<INTEREST-EXPENSE> 7,320
<INTEREST-INCOME-NET> 13,176
<LOAN-LOSSES> 620
<SECURITIES-GAINS> 86
<EXPENSE-OTHER> 9,219
<INCOME-PRETAX> 4,205
<INCOME-PRE-EXTRAORDINARY> 4,205
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,459
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.91
<YIELD-ACTUAL> 8.54
<LOANS-NON> 604
<LOANS-PAST> 127
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,076
<CHARGE-OFFS> 102
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,598
<ALLOWANCE-DOMESTIC> 1,598
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
Exhibit 99
FIRST SECURITY CORPORATION COMSTOCK BANCORP
PROSPECTUS PROXY STATEMENT
TO THE STOCKHOLDERS OF COMSTOCK BANCORP:
Comstock Bancorp and First Security Corporation have agreed to merge
Bancorp with and into First Security, subject to approval by Bancorp's
stockholders. The merger cannot be completed unless the Bancorp stockholders
approve the merger. Only if you hold your shares at the close of business on
March 19, 1999 will you be entitled to vote on the merger and to receive this
Prospectus/Proxy Statement. Bancorp and First Security are sending you this
Prospectus/Proxy Statement to provide you with important information about these
proposed transactions. Bancorp is calling a meeting of its stockholders on April
28, 1999 to allow you to vote your Bancorp shares on the proposal to approve the
merger, as well as on other business described in this Prospectus/Proxy
Statement.
THERE ARE RISKS INHERENT IN THE OWNERSHIP OF FIRST SECURITY SHARES. SEE
"RISK FACTORS" ON PAGE __.
Upon completion of the merger, in exchange for your Bancorp shares and
options to purchase Bancorp shares, you will receive shares of First Security
common stock. The First Security shares will be listed on the NASDAQ National
Market System under the symbol "FSCO." The exact number of shares that you will
receive will be calculated according to a formula described in this
Prospectus/Proxy Statement. This formula takes into account a number of factors
including the market price of First Security common stock during certain periods
before the merger closes.
The exchange of Bancorp shares will be tax-free to you for federal
income tax purposes. If you choose to perfect your dissenter's rights under
Nevada law, you will receive the fair value of your Bancorp shares in cash, and
this would be a taxable transaction for you.
The Bancorp Board of Directors has determined that the merger and the
transactions associated with it are in your best interests and recommends that
you vote to approve the merger and the transactions associated with it by
completing the enclosed proxy voting form.
YOUR VOTE IS VERY IMPORTANT. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT
CAREFULLY
You can get more information about Comstock Bancorp or First Security
Corporation, and about the merger, by writing or calling as follows:
First Security Corporation Comstock Bancorp/Comstock Bank
79 South Main Street, Second Floor P.O. Box 7610
Salt Lake City, Utah 84111 Reno, Nevada 89510-7610
Attention Brad D. Hardy Attention: Robert N. Barrone
(801) 246-5976. (775) 827-7477
Please see "WHERE YOU CAN FIND MORE INFORMATION" on page __ for
additional information about First Security and about Bancorp which is filed
with the Securities and Exchange Commission.. Information about First Security
and Bancorp may change from that contained in this Prospectus/Proxy Statement.
First Security and Bancorp will send you additional information about themselves
before the Annual Stockholders Meeting if the new information would be material
to your decision on the merger.
FIRST SECURITY SHARES ARE NOT INSURED BANK DEPOSITS.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities agency
has approved the First Security shares or determined that this prospectus/
proxy statement is accurate or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
This Prospectus/Proxy Statement is dated March , 1999, and mailed to
Bancorp stockholders on March __, 1999.
<PAGE> 2
YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/PROXY STATEMENT TO UNDERSTAND AND VOTE ON THE
MERGER AND THE TRANSACTIONS ASSOCIATED WITH IT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT. BUT YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE SHOWN ON THE COVER PAGE, AND NEITHER THE MAILING OF THIS
PROSPECTUS/PROXY STATEMENT TO BANCORP STOCKHOLDERS NOR THE ISSUANCE OF FIRST
SECURITY COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE......................................................4
QUESTIONS AND ANSWERS ABOUT THE MERGER...............................................................4
SUMMARY..............................................................................................7
RISK FACTORS........................................................................................11
SELECTED HISTORICAL FINANCIAL DATA FOR FIRST SECURITY AND BANCORP...................................13
BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......17
COMPARATIVE PER SHARE DATA..........................................................................17
COMPARATIVE MARKET PRICE AND DIVIDENDS INFORMATION..................................................18
THE MERGER..........................................................................................21
General.....................................................................................21
The Effective Time..........................................................................21
Management of Bancorp Following with Merger.................................................21
Background of and Reasons for the Merger; Recommendation of Bancorp's Board of Directors....21
Opinion of Bancorp's Financial Advisor......................................................24
Recommendation Of Bancorp's Board Of Directors..............................................28
Interests Of Directors And Officers In The Merger That Differ From Your Interests...........28
Conversion of Shares; Exchange Ratio........................................................29
Bancorp Options.............................................................................30
Dissenting..................................................................................30
Exchange of Shares and Certificates.........................................................30
Fractional Shares...........................................................................31
Representations and Warranties..............................................................31
Certain Covenants...........................................................................31
Conditions to the Closing...................................................................31
Termination.................................................................................31
Survival of Representations and Warranties and Covenants....................................32
Amendment, Modification and Waiver..........................................................32
Accounting Treatment of the Merger..........................................................32
The Effect of the Merger on Bancorp Employee Benefit Plans..................................32
Regulatory Approvals........................................................................32
FEDERAL INCOME TAX ASPECTS..........................................................................33
The Merger..................................................................................33
Treatment of First Security and Bancorp.....................................................34
Exchange of Bancorp shares for First Security Common Stock..................................34
Taxation of Option Holders..................................................................34
Cash in Lieu of Fractional Shares...........................................................35
Dissenting Bancorp Stockholders.............................................................35
RIGHTS OF DISSENTING Bancorp STOCKHOLDERS...........................................................35
RESALE OF FIRST SECURITY SHARES RECEIVED IN THE MERGER..............................................37
INFORMATION ABOUT FIRST SECURITY....................................................................38
General.....................................................................................38
Competition.................................................................................38
Description of First Security's Capital Stock...............................................39
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
INFORMATION ABOUT BANCORP...........................................................................41
General.....................................................................................41
SUPERVISION AND REGULATION..........................................................................42
Regulation Of Bank Holding Companies........................................................42
Federal Deposit Insurance...................................................................43
Interstate Banking And Branching............................................................44
Capital.....................................................................................45
Limits On Dividends And Other Payments......................................................46
Transactions With Affiliates................................................................47
Community Reinvestment Act..................................................................47
Federal Home Loan Banks.....................................................................48
Nevada Bank Regulation......................................................................48
Monetary Policy.............................................................................48
Bank Regulatory Developments................................................................48
COMPARATIVE RIGHTS OF STOCKHOLDERS..................................................................49
Certain Differences Between Nevada and Delaware Corporate Laws..............................49
Authorized Capital Stock....................................................................49
Directors...................................................................................49
Repurchase and Redemption of Shares.........................................................51
Payment of Dividends to Stockholders........................................................51
Assessments.................................................................................52
Preemptive Rights...........................................................................52
Amendments to Articles or Certificate of Incorporation......................................52
Amendments to Bylaws........................................................................52
Stockholder Approval of Mergers and Other Business Combinations.............................52
Rights of Dissenting Stockholders...........................................................53
Annual Meetings of Stockholders.............................................................53
Special Meetings of Stockholders............................................................53
Stockholder Consent to Action Without a Meeting.............................................54
Stockholder Inspection of Records...........................................................54
THE 1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS.....................................................54
Date, Time And Place........................................................................54
Purpose.....................................................................................54
Record Date; Shares Outstanding And Entitled To Vote........................................55
Vote Required...............................................................................55
Voting And Revocation Of Proxies............................................................55
Quorum; Broker Non-Votes....................................................................55
Voting Securities And Principal Holders Thereof.............................................56
Election Of Directors (Proposal 2)..........................................................59
Information With Respect To Nominees........................................................59
Board Committees............................................................................60
Remuneration Of Directors...................................................................61
Executive Compensation......................................................................62
Certain Relationships And Related Party Transactions........................................65
Ratification Of Independent Auditor (Proposal 3)............................................66
Expenses; Solicitation Of Proxies...........................................................66
Other Matters...............................................................................66
Section 16(A) Beneficial Ownership Reporting Compliance.....................................66
Stockholder Proposals For The 2000 Annual Meeting...........................................67
LEGAL MATTERS.......................................................................................67
EXPERTS.............................................................................................67
WHERE YOU CAN FIND MORE INFORMATION.................................................................68
Incorporation of Documents by Reference.....................................................68
</TABLE>
APPENDIX A - AGREEMENT AND PLAN OF REORGANIZATION, AS AMENDED
APPENDIX B - FAIRNESS OPINION OF HOVDE FINANCIAL, INC.
APPENDIX C - PROVISIONS OF NEVADA LAW CONCERNING DISSENTING BANCORP STOCKHOLDERS
APPENDIX D - BANCORP SUMMARY ANNUAL REPORT TO SHAREHOLDERS
3
<PAGE> 4
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
First Security and Bancorp have each made forward-looking statements in
this Prospectus/Proxy Statement and in documents that are incorporated by
reference into this document. Forward-looking statements are subject to risks
and uncertainties. These forward-looking statements include information about
future results of Bancorp's operations or the performance of First Security
after the merger is completed. When we use any of the words "believes,"
"expects," "anticipates," "estimates" or similar expressions, we are making
forward-looking statements. Many possible events or factors could affect the
future financial results and performance of Bancorp and First Security,
including statements about First Security after the merger, and could cause
those results or performance to differ materially from those expressed in our
forward-looking statements. These possible events or factors include the
following:
- actual cost savings resulting from the merger are less than
expected because First Security is unable to realize those cost
savings as soon as expected or First Security incurs additional
or unexpected costs;
- revenues after the merger are lower than expected;
- competition among financial services companies increases;
- First Security is unable to integrate Bancorp's businesses as
timely as expected;
- changes in the interest rate environment reduce interest
margins;
- general economic conditions change or are worse than we
expected;
- legislative or regulatory changes adversely affect our
businesses;
- personal or commercial customers' bankruptcies increase;
- technology-related changes, including "Year 2000" data systems
compliance, are more difficult to make or more expensive than we
expected; and
- changes occur in the securities markets.
All forward-looking statements attributable to First Security are
expressly qualified in their entirety by the factors which may cause actual
results to differ materially from expectations described in this document and in
First Security's reports filed with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for the year ended December 31, 1997
(as restated for the acquisition of California State Bank in a Current Report of
Form 8-K filed on October 1, 1998) and its quarterly reports on Form 10-Q for
the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998. All
forward-looking statements attributable to Bancorp are expressly qualified in
their entirety by the factors that may cause actual results to differ materially
from expectations described in this document.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS FIRST SECURITY PROPOSING TO ACQUIRE BANCORP? HOW WILL I BENEFIT?
A: First Security desires to expand its presence in the Nevada banking
market, particularly in Northern Nevada. Bancorp's sole business,
Comstock Bank, is a successful small bank in the Reno market area, and
it provides First Security with opportunities for growth in that
important Nevada market. Under the terms of the merger agreement, you
will become a stockholder in First Security, an institution whose
common stock is traded on the NASDAQ stock market. The Bancorp Board of
Directors believes that the consideration you will receive in the
merger may deliver value to you that exceeds the value that could be
expected if Bancorp had continued as an independent entity. To review
the reasons for the merger in greater detail, and related
uncertainties, see pages __ through __.
4
<PAGE> 5
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: In exchange for your Bancorp shares of common stock, you will receive
shares of First Security common stock. The exact number of shares you
receive will be calculated according to a formula described in greater
detail in this Prospectus/Proxy Statement. We refer to this formula as
the "Exchange Ratio."
Q. HOW IS THE EXCHANGE RATIO CALCULATED?
A. The Exchange Ratio is calculated according to a relatively complex
formula that takes into account several factors, including:
- the number of Bancorp shares that are outstanding at Closing;
- the number of Bancorp Options;
- the average market price of First Security common stock.
As long as the market price of First Security common stock is between
$18.70 and $24.05 per share, the Exchange Ratio results in a constant
value of the merger consideration.
Q. WHAT HAPPENS IF THE AVERAGE MARKET PRICE OF FIRST SECURITY COMMON STOCK
IS LESS THAN $18.70 OR GREATER THAN $24.05?
A. If the average market price falls for First Security Stock below
$18.70, the Exchange Ratio results in the value of the merger
consideration being less. If the average market price rises above
$24.05, the Exchange Ratio results in the value of the merger
consideration being greater.
Q. HOW MANY SHARES OF FIRST SECURITY COMMON STOCK WILL I RECEIVE IN
EXCHANGE FOR MY BANCORP SHARES?
A. At the time of the merger, for each Bancorp Share that you own, you
will receive between 0.521 and 0.670 shares of First Security common
stock. You will receive approximately 0.521 shares of first Security
Common Stock if the market price of First Security common Stock is
equal to or greater than $24.05. You will receive approximately 0.670
shares if the market price is equal to or less than $18.70.
Q. WHAT WILL HAPPEN TO MY BANCORP OPTIONS?
A. First Security will not assume any Bancorp Options. Instead, all
Bancorp Options that have been granted prior to the Closing will
accelerate and be converted into shares of First Security common stock
using the Exchange Ratio applied to the Bancorp shares obtained through
a cashless exercise of the Options. Any Bancorp Options that are not
exercised prior to closing of the merger will be cancelled.
Q. DO I NEED TO PAY THE EXERCISE PRICE OF MY OPTIONS IN CASH?
A. No. The options will be exercised pursuant to the cashless exercise
procedure described elsewhere in this Prospectus/Proxy Statement (see
"THE MERGER -- Bancorp Options")
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "RISK FACTORS" on pages __ through __.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The exchange of your shares for First Security shares of common stock
will be tax-free to you for federal income tax purposes. However, you
may have to pay taxes on cash received for fractional shares. In
addition, if you choose to vote against the merger and also perfect
your dissenter's rights under Nevada law, you will receive the fair
value of your Bancorp shares in cash, which would be a taxable
transaction to you. To review the tax consequences to Bancorp
stockholders in greater detail, see page __.
THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR OWN
SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISORS FOR A FULL UNDERSTANDING
OF THESE TAX CONSEQUENCES.
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<PAGE> 6
Q: WHEN IS THE MERGER EXPECTED TO CLOSE?
A: We are working towards completing the merger as quickly as possible. In
addition to the approval of Bancorp stockholders, we must also obtain
regulatory approvals and satisfy other conditions described in the
merger agreement. We hope to complete the merger before June 30, 1999.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this document, please fill out and sign your Proxy Voting Form. Then
mail your signed Proxy Voting Form in the enclosed return envelope as
soon as possible so that your shares may be counted in determining a
quorum at the Annual Meeting and in voting on the matters to come
before the meeting.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve the merger agreement and the
transactions associated with it. In the merger, Bancorp would merge
with and into First Security, and Comstock Bank would merge with and
into First Security Bank of Nevada. You are also being invited to vote
on the election of a board of directors for Comstock to function if the
merger is not approved. You are also approving the selection of
independent certified accountants to audit Bancorp's financial
statements for the coming year, if the merger does not close.
BANCORP'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE FOR THE MERGER AGREEMENT AND THE TRANSACTIONS
ASSOCIATED WITH IT.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: You can revoke your proxy any time prior to the time the vote is taken
on the merger. You may do this by sending a letter to the Secretary of
Bancorp revoking your Proxy prior to the Annual Stockholders Meeting,
by attending the Annual Stockholders Meeting and announcing your
revocation of your proxy, or by submitting a later dated Proxy voting
another way prior to the Annual Stockholders Meeting. Once the vote is
taken, your vote becomes irrevocable. Bancorp expects that sufficient
shares will be voted in favor of the merger and related transactions to
legally approve them because holders of a significant amount of the
outstanding voting power of Bancorp stock have agreed to vote to
approve the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, First Security or First Chicago
Trust Company (the "Exchange Agent" for the merger) will send written
instructions to Bancorp stockholders for exchanging their stock
certificates.
Q: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you would like additional copies of this Prospectus/Proxy Statement,
or if you have more questions about the merger, you should contact:
COMSTOCK BANCORP/COMSTOCK BANK
P.O. BOX 7610
RENO, NEVADA 89510-7610
ATTENTION: ROBERT N. BARRONE
(775) 827-7477
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<PAGE> 7
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE PROPOSED MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AS
WELL AS THE ADDITIONAL DOCUMENTS WE REFER YOU TO. SEE "'WHERE YOU CAN FIND MORE
INFORMATION" (PAGE __).
FIRST SECURITY CORPORATION
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
801-246-6000
First Security is a Delaware incorporated multi-bank holding company
headquartered in Salt Lake City, Utah. At December 31, 1998, First Security and
its subsidiaries had total consolidated assets, deposits, and stockholders'
equity of $20.4 billion, $12.0 billion and $1.6 billion, respectively.
First Security Bank, N.A., and First Security Bank of New Mexico, N.A.
are First Security's primary assets. Both national banks are top level
competitors in their main locations (Utah, Idaho and Albuquerque, New Mexico),
and provide a full range of banking services. First Security also owns First
Security Bank of Southern New Mexico, N.A. and First Security Bank of
California, N.A., both of which are smaller national banks serving smaller
markets, but with access to the full range of First Security system products and
services. First Security Bank of Nevada is a growing state chartered bank
headquartered in Las Vegas. In addition to its acquisition of Bancorp, First
Security has recently announced the planned acquisition of Nevada Banking
Company in Stateline, Nevada to augment the Nevada bank's market areas.
First Security also owns and operates several non bank subsidiaries,
including a leasing company, a mortgage company, a securities broker-dealer, an
investment adviser, an insurance agency, a credit life insurance company and a
management and services subsidiary. Recently, First Security announced the
planned acquisition of San Francisco-based Van Kasper & Company, a securities
broker-dealer and investment advisor. The securities subsidiaries are subject to
regulation and supervision by the Commission and applicable state securities
authorities. The insurance agency and credit life insurance company are
regulated by applicable state insurance regulators.
A substantial portion of First Security's cash flow is typically
derived from dividends and interest from its subsidiaries, and from the sale of
investment securities to finance its growth and operations. (See "INFORMATION
ABOUT FIRST SECURITY.").
FIRST SECURITY BANK OF NEVADA
530 LAS VEGAS BLVD. SOUTH
LAS VEGAS, NEVADA 89101
702-385-
First Security Bank of Nevada is a wholly owned subsidiary of First Security
engaged in general retail and commercial banking and trust activities. First
Security Bank of Nevada is a state chartered bank supervised by the State of
Nevada and the FDIC.
COMSTOCK BANCORP
6275 NEIL ROAD
RENO, NEVADA 89511
(775) 824-7100
Bancorp is a Nevada corporation formed for the sole purpose of being a
bank holding company for Comstock Bank. Bancorp has over 1000 stockholders,
counting both stockholders of record and stockholders owning through brokerage
accounts. Bancorp shares are traded over the counter through the NASDAQ Small
Cap Market, and Bancorp files regular quarterly and annual reports with the
Securities and Exchange Commission. Bancorp had total assets of $225 million,
deposits of $196 million and stockholders' equity of $22 million at
7
<PAGE> 8
December 31, 1998. Bancorp's operating subsidiary, Comstock Bank, operates 5
branches located in Reno, Sparks and Carson City, Nevada.
BANCORP'S ANNUAL MEETING OF STOCKHOLDERS AND SOLICITATION OF PROXIES
Bancorp has called its Annual Meeting of Stockholders for April 28,
1999, and is inviting you to attend. Bancorp is also asking you for your written
proxy instruction for voting at the Meeting. As a Bancorp stockholder as of
March 19, 1999, which is the record date for the Annual Meeting, you are
entitled to receive notice of the Meeting and to vote for or against the merger.
PURPOSES.
The purpose of the Meeting and Bancorp's solicitation of proxies is to
approve the merger and the related transactions. You are also being asked to
vote on the election of a board of directors to govern Comstock in the event the
merger does not close. You are also being asked to approve the selection of
Kafoury, Armstrong & Company as Comstock's independent auditors of the 1999
financial statements, again assuming the merger does not close.
VOTES REQUIRED; RECORD DATE.
In accordance with Bancorp's Articles of Incorporation and Nevada law,
the merger may be approved and adopted at a meeting of Bancorp stockholders. At
least 50.1% of the total outstanding common stock must vote in favor of the
merger for it to be approved legally by the Bancorp stockholders. Your signed
Proxy (1) assures that your shares will be voted and (2) helps to assure that a
quorum will be present at the Stockholders Meeting.
A Bancorp Proxy may be revoked, by written notice to the Secretary of
Bancorp, at any time prior to the time the vote is taken at the Annual
Stockholders Meeting. You may also submit a later dated Proxy voting in a
different manner from an earlier Proxy.
The "Record Date" for determining stockholders entitled to vote on the
merger has been set at March 19, 1999 by the Bancorp Board of Directors. At that
date there were 5,113,900 shares of Bancorp common stock outstanding and
entitled to vote. Of this number, at least 2,556,951 shares must be present in
person or by Proxy to constitute a quorum at the Annual Stockholders Meeting,
and at least this same number of shares must be voted in favor of the merger for
it to be legally approved by the Bancorp stockholders.
As of March 19, 1999, directors and executive officers of Bancorp and
their affiliates were beneficial owners of an aggregate of 794,156 shares of
Bancorp common stock exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 15.5% of the
5,113,900 shares of Bancorp common stock that were issued and outstanding as of
such date.
(See "THE 1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS" (page .)
DISSENTERS' RIGHTS
Bancorp stockholders who do not vote in favor of the merger are
entitled to dissenters' rights under Nevada law if they follow the required
steps. Dissenter's rights generally entitle the dissenting stockholders to the
fair market value of their Bancorp shares in cash in a taxable transaction.
THE MERGER (PAGE ___)
First Security and Bancorp have agreed to merge Bancorp with and into
First Security, and to combine Comstock Bank with and into First Security Bank
of Nevada. The merger agreement is attached as Appendix A at the back of this
Prospectus/Proxy Statement. We encourage you to read the merger agreement. It is
the legal document that governs the proposed Merger.
8
<PAGE> 9
WHAT BANCORP STOCKHOLDERS WILL RECEIVE IN THE MERGER
As a result of the merger, Bancorp stockholders will receive shares of
First Security common stock. The exact number of shares you receive will be
calculated according to a formula described in greater detail in this
Prospectus/Proxy Statement. Bancorp stockholders will not receive fractional
shares. Instead, they will receive a check in payment for any fractional shares
based on the average market value of First Security common stock during a
specified period prior to the merger.
Do not send in your Bancorp stock certificates now. When the merger is
completed you will receive written instructions for exchanging your Bancorp
stock certificates.
OWNERSHIP OF FIRST SECURITY FOLLOWING THE MERGER
The shares of First Security common stock issued to Bancorp
stockholders in the merger will constitute less than 1.9% of the outstanding
stock of First Security after the merger, and the current stockholders of First
Security will hold the remaining 98.1% of the outstanding stock of First
Security after the merger.
CONDITIONS (PAGE __)
The merger will not be completed unless certain conditions are met,
including the approval of the merger agreement and the transactions associated
with it by Bancorp stockholders. Certain of the conditions may be waived by the
company entitled to assert the condition.
TERMINATION (PAGE __)
First Security and Bancorp may together agree to terminate the merger
agreement without completing the merger whether or not the Bancorp stockholders
have approved the merger agreement.
The merger agreement may also be terminated by the Board of Directors
of either company in certain other circumstances including:
(1) if the merger is not completed on or before October 12, 1999,
except that neither First Security or Bancorp may terminate
the merger agreement if its breach of the merger agreement is
the reason the merger has not been completed by that date;
(2) if the approval of the stockholders of Bancorp is not
obtained;
(3) if the other party has failed to perform certain of its
obligations under the merger agreement.
AMENDMENT (PAGE __)
After the Bancorp stockholders have approved the merger agreement, the
Boards of Directors of First Security and Bancorp may only amend the merger
agreements in certain ways. The Boards may not change the Exchange Ratio, terms
that would change the tax consequences, or methods of accounting for the merger.
VOTING AGREEMENTS (PAGE __)
In connection with the merger, all of the directors of Bancorp holding
in aggregate approximately 15.5% of the Bancorp shares of common stock as of
March 19, 1999 have agreed to vote their shares in favor of the merger and the
transactions associated with it. These voting agreements terminate upon the
completion of the merger or upon termination of the merger agreement in
specified circumstances.
NO SOLICITATION OF TRANSACTIONS (PAGE __)
Bancorp has agreed in the merger agreement that neither it nor any of
its agents or employees, directly or indirectly, will initiate, solicit or
encourage any inquiries or the making of any proposal or offer for, furnish any
9
<PAGE> 10
confidential information relating to, or engage in any negotiations or
discussions concerning, any acquisition or purchase of Bancorp.
REGULATORY APPROVALS (PAGE __)
First Security is required to make filings with or to obtain approvals
from certain regulatory authorities in connection with the merger. These
consents and approvals include the approval of the Federal Reserve Board, the
State of Nevada, and the FDIC. A notice was filed with the Federal Reserve Board
on __________________. All other necessary applications and notices have been
filed or are in the process of being filed. First Security cannot predict
whether it will obtain all required regulatory approvals, the timing of such
approvals, whether any approvals will include conditions that would be
detrimental to First Security or whether there will be litigation challenging
the approvals.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE __)
The exchange of Bancorp common stock for First Security common stock
(other than cash paid for fractional shares) generally will be tax free,
however, the exercise of any Bancorp options you hold may be a taxable event,
for federal income tax purposes. To review the tax consequences in greater
detail, see page __.
Tax matters are very complicated and the tax consequences of the merger
to you will depend on your own circumstances. You are urged to consult your tax
advisors as to the specific tax consequences of the merger to you.
OPINION OF FINANCIAL ADVISOR (PAGE __)
Hovde Financial, Inc. has delivered its written opinion to the Bancorp
Board of Directors that the merger consideration is fair from a financial point
of view to the Bancorp stockholders. The Hovde Financial, Inc. opinion is
attached to this document as Appendix B. You should read the opinion completely
to understand the assumptions made, matters considered and limitations of the
review undertaken by Hovde Financial, Inc.
If the merger is completed, Bancorp will pay to Hovde Financial, Inc. a
total fee that depends in part on the value of the transaction, as measured by
the price per share of First Security common stock. This is in addition to the
$10,000 paid by Bancorp to Hovde Financial, Inc. in September 1998, when Bancorp
engaged Hovde Financial, Inc., but including an additional $35,000 paid by
Bancorp in connection with Bancorp's execution of the merger agreement and Hovde
Financial, Inc.'s delivery of its fairness opinion. Assuming a price per share
of First Security common stock of between $18.70 and $24.05, the total fee
payable to Hovde Financial, Inc. by Bancorp on completion of the acquisition is
estimated to be $858,750.
We encourage you to read the Hovde Financial opinion. For more
information about Hovde Financial, Inc., see pages __ through __.
COMPARATIVE RIGHTS OF STOCKHOLDERS (PAGE __)
Bancorp is a Nevada corporation, and you as a Bancorp stockholder have
certain rights under Nevada law. After the merger you will be a First Security
stockholder and will have rights under Delaware law. If the merger is completed,
the rights of former Bancorp stockholders who become First Security stockholders
will be determined by First Security's certificate of incorporation and by-laws
which differ in certain respects from Bancorp's articles of incorporation and
by-laws.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS (PAGE __)
Some of Bancorp's directors and officers have interests in the merger
that differ from, or are in addition to, their interests as Bancorp
stockholders, such as change of control agreements with Bancorp and contemplated
employment agreements with First Security. The members of Bancorp's Board of
Directors knew about these additional interests and considered them when the
Board of Directors approved the merger agreement and the merger contemplated
thereby.
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<PAGE> 11
RISK FACTORS
The success of the merger is subject to certain risks. A description of
these risks is found at "RISK FACTORS" starting on page of this Prospectus/Proxy
Statement.
BANCORP'S REASONS FOR THE MERGER (PAGE )
Giving consideration to a number of factors affecting smaller banking
institutions, including shrinking profit margins, the need for product line
diversification, lower ROA (return on assets) and ROE (return on equity) than
stockholders expect, escalating concern in the financial institutions industry
about the Year 2000 computer problem, a Congress that continued to increase the
regulatory burden on commercial and community banks while exempting non-banks
from many of the onerous laws and regulations applicable to depository
institutions, and the need for a more significant commitment of resources to
technology, Bancorp's management and Board of Directors concluded that their
desire for Bancorp to remain independent might not be in the best interests of
stockholders. The Board and management concluded that if a sale were in the best
interests of stockholders, the interests of customers, employees and community
could also be best served if Bancorp selected desirable acquisition candidates
and initiated discussions with them in an orderly manner, rather than passively
waiting for acquisition overtures to be made to Bancorp and hoping the
acquiror's goals were consistent with the Board's and management's.
In connection with its decision to approve the merger and recommend the
transaction to Bancorp's stockholders, and with the assistance of its financial
advisor, Hovde Financial, the Board of Directors reviewed the adequacy and
fairness of the consideration to be received by Bancorp stockholders in the
merger. The Board concluded that the consideration offered by First Security was
fair, and that long-term returns to Bancorp's stockholders would be enhanced by
the merger.
To review the reasons for the merger in greater detail, as well as
related uncertainties, see pages __ through __.
RECOMMENDATION TO BANCORP STOCKHOLDERS
The Bancorp Board of Directors believes that the merger is in your best
interests and unanimously recommends that you vote FOR the proposal to approve
the merger.
STOCKHOLDER VOTES REQUIRED TO APPROVE THE MERGER
The affirmative vote of the holders of a majority of the outstanding
shares of Bancorp common stock are required to approve the merger and the
transactions associated with it. As of March 19, 1999, directors and executive
officers of Bancorp held approximately 15.5% of the outstanding shares of
Bancorp common stock. Your failure to return a signed Proxy Card will have the
effect of a vote against the merger and the transactions associated with it,
although such action will not be enough to perfect dissenter's rights under
applicable Nevada law.
Under applicable law, the First Security stockholders are not entitled
to vote on the merger. First Security, as the sole stockholder of First Security
Bank of Nevada, has agreed to vote all of the shares of First Security Bank of
Nevada in favor of the merger.
RISK FACTORS
Certain risks are inherent in the merger and the business of First
Security. The material risks are highlighted below for the benefit of Bancorp
stockholders:
RISKS TO BANCORP STOCKHOLDERS RESULTING FROM THE EXCHANGE RATIO
The Exchange Ratio operates such that if the market price of First
Security common stock falls below $18.70 per share, the value of the shares that
you receive at the time of the merger may be less than the value of those shares
at the time you execute the Proxy voting form.
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<PAGE> 12
VOLATILITY OF STOCK PRICES.
The market for First Security common stock is potentially volatile. The
trading price of First Security common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements following acquisitions by First Security or its competitors,
changes in interest rates or prices of First Security's or its competitors'
financial products and services, changes in product mix, changes in revenue and
revenue growth rates for First Security as a whole or for geographic areas or
business units, and other events or factors. Statements or changes in opinions,
ratings or earnings estimates made by brokerage firms or industry analysts
relating to the markets in which First Security does business or relating to
First Security specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of First Security common stock.
Statements by financial or industry analysts regarding the impact on First
Security's net income per share resulting from the merger and the extent to
which such analysts expect potential business synergies to affect reported
results in future periods can be expected to contribute to volatility in the
market price of First Security common stock.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations which have particularly affected the market price
for the securities of many financial services companies and which often have
been unrelated to the operating performance of these companies. For example the
Dow Jones Industrial Average ("DJIA") fell from a high of 9,337.97, its close on
July 17, 1998, to 7,632.53, its close on October 1, 1998, a decline of 18.26%.
Furthermore, the DJIA experienced its second largest one-day decline, a loss of
512.61 on August 31, 1998, and its largest one-day increase, a gain of 380.53 on
September 8, 1998. Other market indicators have experienced similar volatility.
Since July 17, 1998, the closing price of a share of First Security common stock
has exhibited similar volatility, ranging from a high of $23.94 per share on
July 14, 1998 to a low of $15.50 per share on August 31, 1998. Market analysts
have attributed the volatility to a number of factors, including economic
conditions in Russia, Asia and Latin America. First Security has negligible
exposure to financial losses from turmoil in such foreign economies. However,
First Security cautions Bancorp stockholders that such factors, as well as
others that First Security cannot predict, may cause an adverse impact on the
trading markets for equity securities, including shares of First Security common
stock.
ATTRACTION AND RETENTION OF EMPLOYEES.
The continued growth and success of First Security depends
significantly on the continued service of highly skilled employees and managers.
In particular, First Security's success to date has depended to a significant
extent upon a number of key management employees, the loss of any of whom could
have a material adverse effect on First Security's business and results of
operations. Competition for these employees in today's marketplace, especially
in the financial services industries, is intense. First Security's ability to
attract and retain employees is dependent on a number of factors including its
continued ability to grant stock incentive awards. There can be no assurance
that First Security will be successful in continuing to recruit new personnel
and to retain existing personnel. The loss of one or more key employees or First
Security's inability to maintain existing employees, or to recruit new employees
could have a material adverse impact on First Security. In addition, First
Security may experience increased compensation costs to attract and retain
skilled personnel.
IMPACT OF DATE CHANGES IN 1999 AND 2000.
Some of the computer programs used by First Security in its internal
operations rely on time-sensitive software that was written using two digits
rather than four to identify the applicable year. These programs may recognize a
date using "00" as the year 1900 rather than the year 2000. These systems could
also recognize some combinations of "9" as calling for the end of the operation.
The use of 2000 as a leap year may also cause date change-related malfunctions
by computers. These date changes could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. First Security expects to successfully
implement its year 1999 and 2000 compliance program and does not believe that
the cost of such procedures will have a material effect on its results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in the completion of these procedures or that the cost
of such procedures will not exceed original estimates, either of which could
have a material adverse effect on future results of operations.
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<PAGE> 13
In addition to correcting the business and operating systems used by
First Security in the ordinary course of business as described above, First
Security is engaged in an assessment of its key product and service suppliers
and loan customers to determine their level of Year 2000 compliance. This
includes providers of key utility services such as electric power and telephone
services. There can be no assurance that First Security will not experience
serious disruptions in 2000 as a result of supplier problems and failures
notwithstanding the fact that First Security's own systems are Y2k compliant.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS.
Certain provisions of First Security's Charter and Bylaws could delay
or frustrate the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving First Security, even if such
events could be beneficial to its stockholders. For example, each share of First
Security common stock, including the shares to be issued to Bancorp stockholders
in the merger, has a right attached that entitles the stockholder to acquire a
series of preferred stock under certain circumstances associated with a
potential change in control of First Security, a feature commonly referred to as
a "poison pill". Also the First Security Bylaws restrict the ability of a
stockholder to nominate directors or to present matters before a stockholders
meeting. The First Security certificate of incorporation contains a
supermajority voting provision commonly known as a "fair price" provision that
will make certain staged take-overs difficult. (See "INFORMATION ABOUT FIRST
SECURITY-Description of First Security's Capital Stock.")
SELECTED HISTORICAL FINANCIAL DATA FOR FIRST SECURITY AND BANCORP
The following tables present selected financial data of First Security and
Bancorp for the periods indicated. The historical financial data as of and for
the five fiscal years shown were derived from audited financial statements. The
data presented below should be read in conjunction with the financial
statements, related notes and other financial information of Bancorp included
elsewhere in this Prospectus/Proxy Statement, and of First Security which are
incorporated by reference.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE FINANCIAL TABLES WHICH FOLLOW]
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FIRST SECURITY CORPORATION
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (1) 3/2/99
FIRST SECURITY CORPORATION
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 1,420,660 $ 1,213,378 $ 1,039,391 $ 1,974,015 $ 801,659
Interest Expense 716,961 587,439 485,328 469,812 322,035
Net Interest Income 703,699 625,939 554,063 504,203 479,624
Provision for Possible Loan Losses 71,923 63,386 41,300 22,682 1,545
Noninterest Income 474,390 357,157 306,444 270,638 202,043
Noninterest Expenses 723,088 588,904 531,219 555,192 455,322
Income Before Taxes 383,078 330,806 287,988 196,967 224,800
Applicable Income Taxes 135,398 115,532 103,516 72,336 81,098
Net Income 247,680 215,274 184,472 124,631 143,702
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 1.32 $ 1.18 $ 1.03 $ 0.71 $ 0.83
Earnings Per Share-Diluted 1.28 1.14 1.00 0.69 0.81
Cash Dividends Declared 0.52 0.44 0.38 0.33 0.31
Book Value per Common Share 8.54 7.59 6.72 6.13 5.36
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $14,013,417 $11,230,796 $69,697,351 $18,616,763 $8,442,282
Reserve for Possible Loan Losses 173,350 157,525 142,693 135,011 138,107
Total Assets 21,689,088 18,151,783 15,456,641 13,529,699 12,602,149
Deposits 12,658,574 11,417,634 10,103,009 8,202,844 8,442,035
Long-Term Debt 2,609,558 1,304,463 944,055 720,521 685,426
Shareholders' Equity 1,595,495 1,400,846 1,217,840 1,082,995 937,368
PROFITABILITY RATIOS:
Return on Average Assets 1.28% 1.35% 1.35% 0.98% 1.25%
Return on Average Stockholders'
Equity 16.21 16.60 16.23 12.02 15.69
Net Interest Margin, FTE (2) 4.15 4.47 4.59 4.48 4.69
Net Interest Spread, FTE (2) 3.53 3.75 3.85 3.73 4.08
Operating Expense Ratio (3) 60.84 59.27 61.18 70.89 66.03
Productivity Ratio (4) 3.75 3.68 3.87 4.37 3.95
CAPITAL RATIOS:
Shareholders' Equity to Assets 7.36% 7.72% 7.88% 8.00% 7.44%
Tangible Common Equity Ratio 5.57 6.24 6.74 6.95 6.16
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of
Period to:
Total Loans 1.24% 1.40% 1.47% 1.57% 1.64%
Nonaccruing and Renegotiated Loans 378.39 427.17 399.14 547.49 529.08
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.35 0.40 0.48 0.43 0.42
Total Assets 0.23 0.25 0.30 0.27 0.28
Total Equity 3.10 3.20 3.81 3.40 3.81
Total Equity + Loan Loss Reserve 2.79 2.88 3.41 3.03 3.32
Net Loans Charged Off to Average Loans 0.49 0.51 0.41 0.30 0.11
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.22x 2.41x 2.82x 2.23x 3.04x
Including Interest on Deposits 1.53x 1.56x 1.59x 1.42x 1.70x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect two
separate 3-for-2 common stock splits in the form of 50% stock dividends
paid in May 1997 and February 1998 and also for the May 1998
pooling-of-interests acquisition of California State Bank.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or
tax-favored loans, leases and securities with interest earned subject to
full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to combined
fixed charges and preferred stock dividends, earnings represent net
income plus income taxes and fixed charges. Fixed charges, including
interest on deposits, include interest expense, capitalized interest, an
amount equal to the pretax earnings required to meet applicable preferred
stock dividend requirements and the interest factor included in rents.
14
<PAGE> 15
FIRST SECURITY CORPORATION
(in thousands)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
DEBT:
Deposits (1) $ 12,658,574
Federal funds purchased and securities sold under
agreements to repurchase 3,747,084
Other short-term borrowings 518,505
Long-term debt (2) 2,609,558
Notes offered hereby -
------------
Total Debt 19,533,721
------------
STOCKHOLDERS' EQUITY:
Series "A", $3.15 Cumulative Convertible Preferred Stock,
(9,208 shares issued) 484
Common Stock (par value $1.25, authorized 600,000,000
shares, 191,008,099 shares issued) (3) 238,760
Paid-in surplus 181,906
Retained earnings 1,233,264
Accumulated other comprehensive income (4) 30,377
Common treasury stock, at cost (4,295,975 shares) (89,296)
------------
Total stockholders' equity 1,595,495
------------
Total capitalization $ 21,129,216
============
</TABLE>
Notes:
(1) Including demand deposits of $2.8 billion and interest-bearing deposits of
$9.9 billion (including $1.5 billion of certificates of deposit over $100,000).
(2) Being, with respect to FSCO, (in thousands), $23,750 of Medium Term Notes
due 1998-2003, $98,962 of 7.875% Senior Notes due 1999, $150,000 of 6.875%
Senior Notes due 2006, $75,000 of 7.5% Subordinated Notes due 2002, $325,000 of
5.875% Senior Notes due 2003 and $125,000 of 7.0% Subordinated Notes due 2005.
With respect to FSCO's subsidiaries, $150,000 of 8.41% Subordinated Capital
Income Securities due 2026; and $2,143,203 of Bank Notes and Federal Home Loan
Bank borrowings (FHLB borrowings mature in 1998-2000) and $309 of Nonbank debt.
FSCO's subsidiaries obligations are direct obligations of such subsidiaries, and
as such constitute claims against such subsidiaries ranking prior to FSCO's
equity therein.
(3) Shares issued and outstanding excluded 9,458,411 shares reserved for
issuance upon exercise of outstanding employee stock options, 377,585 shares
reserved for issuance upon exercise of conversion rights of preferred stock,
804,953 shares reserved for issuance under the dividend reinvestment and stock
purchase plan, 2,025,528 shares reserved for issuance under FSCO's Comprehensive
Management Incentive Plan, and 1,449,000 shares reserved for issuance under
FSCO's Nonemployee Director Stock Option Plan.
(4) Accumulated other comprehensive income consists entirely of net
unrealized gains on securities available for sale, net of tax.
15
<PAGE> 16
COMSTOCK BANCORP
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (1) 3/2/99
COMSTOCK BANCORP
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 20,496 $ 15,517 $ 14,868 $ 12,814 $ 9,134
Interest Expense 7,320 5,623 4,434 3,811 2,296
Net Interest Income 13,176 9,894 10,434 9,003 6,838
Provision for Possible Loan Losses 620 270 250 270 105
Noninterest Income 868 541 414 278 407
Noninterest Expenses 9,219 7,653 7,603 6,637 5,724
Income Before Taxes 4,205 2,512 2,995 2,374 1,416
Applicable Income Taxes (254) 676 903 769 422
Net Income 4,459 1,836 2,092 1,605 994
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 0.99 $ 0.42 $ 0.49 $ 0.43 $ 0.29
Earnings Per Share-Diluted 0.91 0.39 0.46 0.38 0.26
Cash Dividends Declared -- -- -- -- 0.47
Book Value per Common Share 4.29 3.53 3.07 2.58 2.07
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $ 141,822 $ 136,181 $ 96,524 $ 86,743 $ 69,999
Reserve for Possible Loan Losses 1,598 1,076 857 665 428
Total Assets 225,147 194,698 144,980 122,805 103,073
Deposits 196,246 179,101 131,303 111,169 93,006
Long-Term Debt
Shareholders' Equity 21,589 15,598 13,009 10,884 7,531
PROFITABILITY RATIOS:
Return on Average Assets 2.13% 1.12% 1.56% 1.41% 1.14%
Return on Average Stockholders'
Equity 25.50 12.90 17.70 18.60 14.70
Net Interest Margin, FTE (2) 4.81 4.87 4.98 4.94 4.36
Net Interest Spread, FTE (2) 4.63 4.47 4.44 4.13 3.70
Operating Expense Ratio (3) 69.00 74.50 71.50 73.00 65.80
Productivity Ratio (4) 4.41 4.66 5.69 5.83 6.54
CAPITAL RATIOS:
Shareholders' Equity to Assets 9.59% 8.01% 8.97% 8.86% 7.31%
Tangible Common Equity Ratio 9.59% 8.01% 8.97% 8.86% 7.31%
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of Period to:
Total Loans 1.13% 0.79% 0.89% 0.77% 0.62%
Nonaccruing and Renegotiated Loans 264.57 41.61 26.92 325.98 251.76
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.01 0.02 0.04 0.00 0.01
Total Assets 0.00 0.01 0.02 0.00 0.01
Total Equity 0.03 0.17 0.28 0.01 0.10
Total Equity + Loan Loss Reserve 0.03 0.16 0.26 0.01 0.10
Net Loans Charged Off to Average Loans 0.00 0.00 0.00 0.00 0.00
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.27x 2.08x 1.98x 1.93x 1.65x
Including Interest on Deposits 1.48x 1.34x 1.40x 1.36x 1.25x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect a 10%
stock dividend in February 1995 and for a conversion to Comstock
Bancorp stock, two for one in June 1997.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or
tax-favored loans, leases and securities with interest earned subject
to full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to
combined fixed charges,earnings represent net income plus income taxes
and fixed charges. Fixed charges, including interest on deposits,
include interest expense.
16
<PAGE> 17
BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Bancorp has attached to this Prospectus/Proxy Statement as Appendix D its
Summary Annual Report to Shareholders which contains Management's Discussion and
Analysis of Financial Condition and Results of Operations. Please refer to
Appendix D.
YEAR 2000 ISSUES
Bancorp utilizes software and related information technologies that
will be affected by the date changes in the years 1999 and 2000 (generically
referred to as the "Year 2000 Issue"). The Year 2000 Issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year, while other systems read some combinations of "9's" as an
order to end operations. When these date changes take place, certain
date-sensitive systems may not recognize the new dates as valid. This inability
to recognize or properly treat date change information may result in a systems
failure or cause systems to process critical financial and operational
information incorrectly. The Year 2000 issue affects non-information
technologies as well, including embedded chips in a number of machines and
processes that are date sensitive, and these machines and systems control
building operations and communications equipment, among other applications.
Finally, Bancorp relies on third party customers and suppliers for the ongoing
maintenance and operations of Bancorp. These third parties have their own Year
2000 problems, and the failure of these third party suppliers could have a
material adverse impact on Bancorp's business.
Bancorp is addressing the Year 2000 Issue through contingency planning for its
own systems, replacement or remediation of noncompliant systems, and
communication with key customers and suppliers to assure Year 2000 awareness and
remediation.
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
First Security and Bancorp and combined per share data on an unaudited pro forma
basis after giving effect to the merger on a purchase basis assuming that the
market price for First Security common stock is $18.70 per share so that
approximately 0.67 shares of First Security common stock are issued in exchange
for each Bancorp Share. This data should be read in conjunction with the
selected historical financial data set forth herein and the historical financial
statements of Bancorp and the notes thereto that are incorporated herein by
reference. The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the combined financial position or results
of operations of future periods or the results that actually would have been
realized had the entities been a single entity during the periods presented.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
1998
FIRST SECURITY HISTORICAL PER COMMON SHARE: BASIC DILUTED
------ -------
<S> <C> <C>
Net income (loss) per common share-basic and diluted ......
Book value ................................................
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
1998
BANCORP HISTORICAL PER COMMON SHARE: BASIC DILUTED
------ -------
<S> <C> <C>
Net income (loss) per common share-basic and diluted ...... $ 0.99 $ 0.91
Book value ................................................ $ 4.29 $ 4.16
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
1998
PRO FORMA COMBINED NET INCOME PER SHARE(1) BASIC DILUTED
------ -------
<S> <C> <C>
Per First Security common share-basic and diluted .........
Equivalent per Bancorp share-basic and diluted ............
PRO FORMA COMBINED BOOK VALUE PER SHARE(1)(2)
Per First Security share ..................................
Equivalent per Bancorp share ..............................
</TABLE>
(1) The unaudited equivalent Bancorp pro forma share amounts are calculated
by multiplying the First Security combined pro forma per share amounts
by the Exchange Ratio.
(2) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end
of each period. Pro forma book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of
common stock outstanding at the end of each period.
COMPARATIVE MARKET PRICE AND DIVIDENDS INFORMATION
First Security common stock is quoted through the NASDAQ National
Market under the symbol "FSCO". The following table sets forth the high and low
sales price of First Security common stock. The cash dividends declared per
share for the calendar periods are also indicated. The information presented
below for First Security was obtained from the National Association of
Securities Dealers, Inc. ALL FIRST SECURITY NUMBERS OF SHARES AND PER SHARE
INFORMATION ARE ADJUSTED FOR A NUMBER OF FIRST SECURITY STOCK SPLITS TAKING
PLACE IN THE PERIOD 1993-1998, THE MOST RECENT HAVING BEEN PAID ON FEBRUARY 24,
1998. THIS INFORMATION HAS ALSO BEEN ADJUSTED FOR THE POOLING OF INTERESTS
MERGER INVOLVING FIRST SECURITY'S ACQUISITION OF CALIFORNIA STATE BANK ON MAY
30, 1998.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE TABLE ON NEXT PAGE]
18
<PAGE> 19
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED PER
FIRST SECURITY
PRICE OF FIRST SECURITY COMMON STOCK COMMON SHARE
------------------------------------ --------------
HIGH LOW
---- ---
<S> <C> <C> <C>
1999
1/1/99-
1998
Fourth Quarter $23.94 $15.50 $0.13
Third Quarter 24.79 21.00 0.13
Second Quarter 26.17 21.83 0.13
First Quarter
1997
Fourth Quarter $27.92 $19.08 $0.11
Third Quarter 21.33 17.58 0.11
Second Quarter 19.00 14.45 0.11
First Quarter 16.56 14.22 1.10
1996
Fourth Quarter $15.17 $12.50 $0.10
Third Quarter 12.50 10.57 0.09
Second Quarter 12.28 10.17 0.09
First Quarter 12.33 10.30 0.09
1995
Fourth Quarter $11.26 $9.04 $0.08
Third Quarter 9.85 8.15 0.08
Second Quarter 8.48 6.81 0.08
First Quarter 7.60 6.52 0.08
1994
Fourth Quarter $8.44 $6.37 $0.08
Third Quarter 9.48 8.22 0.08
Second Quarter 9.19 8.08 0.08
First Quarter 8.59 7.63 0.08
</TABLE>
The closing price of First Security common stock as reported on the
NASDAQ National Market on January 12, 1999, the last trading day prior to the
public announcement of the merger agreement was $22.50 per share. On January 12,
1999, the last trading day before we announced the merger, Bancorp common stock
closed at $10.375 per share.
On March __, 1999, the last practicable date prior to mailing this
Prospectus/Proxy Statement, the closing price for First Security common stock
was $________ per share, and the closing price for Bancorp common stock was
$______ per share.
First Security has paid cash dividends on its common and preferred
stock without reduction in amount for over 60 consecutive years. Since 1983,
these dividends have been paid quarterly. Future dividends on First Security
common stock will be determined by First Security's Board of Directors in light
of circumstances existing at the time, including the earnings and financial
condition of First Security, and there is no assurance that dividends will
continue to be paid at current levels. No material restrictions have been
imposed on First Security's ability to pay dividends from its earned surplus by
bank regulations or applicable
19
<PAGE> 20
law. Payment of dividends on the First Security common stock is also subject to
the prior rights of First Security's outstanding Preferred Stock.
Bancorp stockholders are advised to obtain current market quotations
for First Security common stock. No assurances can be given concerning the
market price of the First Security common stock before or after the date on
which the merger is consummated. The market price of First Security common stock
will fluctuate between the date of this Prospectus/Proxy Statement and the
Closing Date and thereafter. Because the Exchange Ratio is subject to the
adjustment mechanisms described earlier in this Prospectus/Proxy Statement, and
because the market price of First Security common stock is subject to
fluctuation, the value of the shares of First Security common stock that Bancorp
stockholders will receive under the merger agreement may increase or decrease
prior to and following the Closing.
Bancorp common stock is quoted through the NASDAQ Small Cap Market
under the symbol "LODE". The following table sets forth the high and low sales
price of Bancorp common stock. The cash dividends declared per share for the
calendar periods are also indicated. The information presented below for Bancorp
was obtained from the National Association of Securities Dealers, Inc. and
reflects interdealer prices, without retail markup, markdown or commissions, and
may not represent actual transactions.
As of March 19, 1999, Bancorp had over 1000 stockholders, including
stockholders of record and stockholders owning their shares through brokerage
accounts. The following table shows the high and low closing sales prices per
share of Bancorp for the periods indicated. The stock price information has been
adjusted to reflect the two-for-one stock share exchange effected as part of
Bancorp's holding company reorganization, which was consummated on June 16,
1997.
<TABLE>
<CAPTION>
PRICE OF BANCORP COMMON STOCK
------------------------------------
HIGH LOW
---- ---
<S> <C> <C>
1999
First Quarter $13.00 $9.00
(through March 19, 0
1999)
1998
Fourth Quarter $10.25 $7.25
Third Quarter 10.44 7.50
Second Quarter 11.00 9.50
First Quarter 11.00 7.50
1997
Fourth Quarter $9.63 $7.13
Third Quarter 7.50 6.25
Second Quarter 7.50 5.67
First Quarter 6.50 5.13
</TABLE>
Bancorp did not declare or pay cash dividends in 1997 or 1998 and has
no plans to declare or pay cash dividends for the foreseeable future. The
Bancorp Board of Directors has determined that Bancorp should retain the
majority of its capital for future expansion and capital investment. In January
1998, Bancorp announced a stock repurchase program for up to 5% of its
outstanding stock, at the discretion of management. The Board of Directors
determined that a stock repurchase plan was preferable to paying cash dividends,
due to the taxation of dividends. Bancorp derives its earnings from and is
dependent upon the earnings of and cash dividends paid by Comstock Bank. Because
dividends from Comstock Bank are Bancorp's principal source of income, dividends
to stockholders of Bancorp would depend upon receipt by Bancorp of dividends
from Comstock Bank. The ability of Comstock Bank to
20
<PAGE> 21
pay dividends is restricted by bank regulation, however no restrictions have
been placed on Bancorp's ability to pay dividends out of its earned surplus by
bank regulators. See "SUPERVISION AND REGULATION - LIMITS ON DIVIDENDS AND OTHER
PAYMENTS."
THE MERGER
The following is a summary of certain provisions of the merger
agreement, a copy of which is attached hereto as Appendix A and incorporated
herein by reference. Such summary is qualified in its entirety by reference to
the full text of the merger agreement.
GENERAL
Subject to the terms and conditions of the merger agreement, Bancorp
will merge with and into First Security, and Bancorp's subsidiary, Comstock
Bank, will merge with and into First Security Bank of Nevada.
THE EFFECTIVE TIME
Promptly after all conditions to the merger agreement have been
satisfied or waived, the appropriate corporate filings pertaining to the merger
or such other documents as may be appropriate or necessary to effect the merger,
will be executed and filed in accordance with applicable Nevada Law and
applicable Delaware Law. At that time the merger will become effective.
MANAGEMENT OF BANCORP FOLLOWING THE MERGER
Bancorp and Comstock Bank will cease to exist following the merger.
Offices of Comstock Bank that will continue to operate after the merger will
become branches of First Security Bank of Nevada. All First Security Bank of
Nevada offices are managed according to First Security policies and procedures,
and offer products and services authorized by First Security.
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF BANCORP'S BOARD OF
DIRECTORS
1996 was a watershed year for Bancorp. Management and the Board of
Directors determined then that changes had to be made if Comstock Bank was to
continue providing superior returns for stockholders, to continue providing
exceptional service to customers, and to remain an independent financial
institution beyond the turn of the century. Comstock Bank competes for customers
with larger institutions, some of which are among the largest banks in the
nation. These other institutions have the financial, staff and other resources
and organizational breadth that allows them to offer customers the broadest and
most current range of banking products and services and trust services, and a
diverse array of related products and services, including securities, insurance
and related products, investment advisory services and a variety of
non-traditional banking services. Accordingly, the Board of Directors and
management determined that Comstock Bank's technological capabilities had to be
enhanced to keep pace with technological changes sweeping the financial
institutions industry. In addition, Comstock Bank's business lines had to be
expanded to match customers' expectations concerning the kinds of services they
could expect from their financial institution.
A holding company for Comstock Bank was formed in 1997 to allow
Comstock Bank to pursue other financial lines of business, and plans were made
to bring Comstock Bank's technological platform in-house, which was accomplished
in October 1997. In the 1996 Annual Report's letter to stockholders, management
said:
"In 1996, the Bank, having determined that it wanted to remain
independent, began an ambitious expansion and capital investment
program to allow the Bank to effectively compete in the rapidly
changing financial services marketplace by completely overhauling and
significantly upgrading its technological capabilities. These capital
investments and structural changes do not come without cost. The
capital expenditures, themselves, have an implementation and start-up
period in which they are not contributing to earnings. Management
expects that during this period, the ROA and ROE could be lower than
the Bank's recent financial performances. In the end, management
believes that these projects will allow the Bank to remain independent
as we approach the new millennium and give it the tools it needs to
produce the growth and high level of returns that the stockholders have
come to expect."
21
<PAGE> 22
Notwithstanding the efforts to remain independent, Comstock Bank faced
increasing competitive pressures from other community banks, the most intense
competition from the larger banks now dominating Nevada's financial landscape,
and from large out-of-state banks and non-banks with local loan production
offices.
As a consequence, in 1998 management opened discussions with a local
community bank regarding a merger of equals, had discussions with a local
independent insurance agency, and held preliminary discussions with an
out-of-state bank that was comparable in size to, but slightly smaller than,
Bancorp. The purpose of the discussion with the local community bank was to
consider the efficiencies and economies of scale of a larger operation. Those
discussions ended when that institution was sold to an out-of-state bank. The
discussions with the independent insurance agency were held to determine whether
Bancorp could expand its product line into the insurance business. These
discussions ended when management determined that the profitability of the
products and services that the agency wished to extend to Comstock Bank's
customers was minimal.
The discussions with the out-of-state institution in the late spring
and summer were of particular interest to management because that company was
very aggressive in its pursuit of technology and had had some successes in
lucrative government-lending programs. The discussions did not proceed beyond
initial discussions because the out-of-state bank was not interested in a
merger-of-equals.
Management had also made some inquiries of other banks in the state to
determine whether they were interested in pursuing a merger-of-equals. In each
case, however, the other institutions were seeking a business combination with a
larger institution than Comstock Bank and one whose stock was more actively
traded and more liquid than that of Bancorp.
While there were successes in the company's internal technological
efforts, management was faced with the reality that the company was still a long
way from competing with the larger institutions in the electronic banking
sector, and the reality that achieving this goal would require a significant
additional commitment of capital. A number of factors affecting smaller banking
institutions led management and the Board to conclude that their desire to
remain independent might not be in the best interests of stockholders, including
- shrinking profit margins,
- the need for product line diversification,
- prospective lower ROA and ROE than stockholders expect,
- escalating concern in the financial institutions industry about
the Year 2000 computer problem,
- a Congress that continued to increase the regulatory burden on
commercial and community banks while exempting non-banks from
many of the onerous laws and regulations applicable to depository
institutions, and
- the need for a more significant commitment of resources to
technology.
The Board and management concluded that if a sale were in the best
interests of stockholders, the interests of customers, employees and community
could also be best served if Bancorp selected desirable acquisition candidates
and initiated discussions with them in an orderly manner, rather than passively
waiting for acquisition overtures to be made to Bancorp and hoping the
acquiror's goals were consistent with the Board's and management's. Management
and the Board developed a set of parameters regarding the ideal characteristics
of potential buyers of Bancorp. Chief among these parameters were:
- a community bank orientation with local decision making in the
lending function;
- a complete array of competitive products and services for the
rapidly changing financial services market;
- a reputation for high levels of customer service and treatment of
employees; and
22
<PAGE> 23
- a business focus on serving western markets, rather than an
institution for which the Reno-area market would be a remote
outpost.
In July 1998, Bancorp received inquiries regarding its interest in a
possible acquisition transaction from two large bank holding companies, one of
which was First Security. Management had already had discussions with Hovde
Financial regarding the value of Bancorp to a potential acquiror. In addition,
Compass Bancshares, Inc. of Birmingham, Alabama had just signed a definitive
agreement to purchase the largest independent bank headquartered in Arizona, and
Hovde's financial advisory services had resulted in a very attractive deal from
the Arizona bank's point of view. With management's recommendation, the Board
therefore authorized contact with Hovde. At the August, 1998 Board meeting, a
Hovde representative discussed pricing and market conditions specific to Nevada.
The Board discussed its duties regarding stockholder interests and concluded
that the Board should determine what the value of the company was. The Board
authorized management to pursue an agreement with Hovde to help determine
Bancorp's value to a potential acquiror.
By the September, 1998 Board meeting, management had concluded an
agreement with Hovde, consistent with the Board's direction. Management had
responded to Hovde's requests for information, and management and Hovde together
had selected those institutions Hovde would contact that were generally in
conformity with the parameters the Board had established. By the October, 1998
Board meeting, Hovde had elicited expressions of interest from several banks.
The Board compared First Security's offer to those submitted by other interested
institutions and determined that First Security was the institution most closely
fitting Bancorp's parameters. At the time, the securities markets were in the
midst of a severe sell-off, and valuations for financial institutions had been
severely affected. The Board authorized management to explore First Security's
continuing level of interest.
Bancorp's management met with First Security's executive management on
November 4, 1998. At the initial meeting, it appeared that First Security's
philosophy regarding community banking and customer service was similar to
Bancorp's. In addition, First Security's lines of business were similar to those
in which Comstock Bank had expertise. First Security's proposal also provided
for an all stock, tax-free reorganization. Moreover, through negotiation,
management obtained a significant price increase from First Security's initial
response to Hovde's invitation for acquisition offers. Following discussions by
Hovde concerning the performance, lines of business and organizational structure
of First Security, at a special meeting of the Board on November 16, 1998,
Bancorp's Board authorized management to negotiate and execute a letter of
intent with First Security. The letter of intent was signed on November 18,
1998. First Security performed its due diligence during the week of November 30,
1998. On January 12, 1999, Bancorp's Board of Directors held a meeting at which
legal counsel reviewed the terms and conditions of the definitive agreement that
had been negotiated throughout December and early January. Legal counsel also
reviewed the fiduciary obligations of directors in mergers of financial
institutions. In addition, a representative of Hovde orally advised the Bancorp
Board of Directors that the terms of the definitive agreement were fair to the
Bancorp stockholders from a financial point of view. Following discussion and
review, the Board of Directors of Comstock Bancorp unanimously approved the
definitive agreement. The definitive Merger Agreement was entered into as of
January 12, 1999.
In connection with its decision to approve the merger and recommend the
transaction to Bancorp's stockholders, and with the assistance of Hovde
Financial, the Board of Directors reviewed the adequacy and fairness of the
consideration to be received by the Bancorp stockholders in the merger. The
consideration to be received for Bancorp as a whole was valued at approximately
$65 million as of the date of the definitive agreement. That represents a
premium of more than $43 million over Bancorp's book value as of December 31,
1998.
The Board considered that Bancorp's stock trades infrequently and that
the liquidity for larger blocks of stock is virtually nonexistent. The Board
further considered the future prospects for Bancorp and its business. Given
internal budget estimates of lower earnings in 1999 than in 1998, shrinking
profit margins, increased cost pressures, a hostile regulatory climate, and the
need to devote significant resources to technology, which would continue to
adversely affect both ROA and ROE, the Board concluded that the consideration
offered by First Security was fair, and that long-term returns to Bancorp's
stockholders would be enhanced by the merger.
In addition, the Board considered the potential social and economic
impact of the merger on Comstock Bank's employees, depositors, loan customers
and vendors, as well as the potential social and economic impact of the merger
on the community in which Comstock Bank operates. Of particular importance to
the Board was the fact that First Security Bank of Nevada had no existing
presence in northern Nevada and that First Security Bank of Nevada would have to
expand aggressively. This would increase the likelihood that First Security Bank
of Nevada would retain many existing employees. Further, it appeared likely that
First Security Bank of Nevada would build upon the
23
<PAGE> 24
community banking philosophy that Comstock Bank had come to stand for and would
continue local loan decision making and high levels of customer service.
OPINION OF BANCORP'S FINANCIAL ADVISOR
Bancorp retained Hovde to act as its financial advisor in connection
with the merger. Hovde Financial rendered a written opinion to Bancorp as of
January 12, 1999 to the effect that, based upon and subject to the factors and
assumptions set forth in such opinion, and as of that date, the merger
consideration to be paid by First Security was fair from a financial point of
view to the stockholders of Bancorp.
The full text of the Hovde opinion sets forth assumptions made, matters
considered and qualifications and limitations on the review undertaken, among
other things. The full text of the Hovde opinion is attached hereto as Appendix
B and is incorporated herein by reference. Bancorp stockholders are urged to
read the Hovde opinion in its entirety. Directed to the Bancorp Board, the Hovde
opinion addresses only the fairness to the holders of Bancorp common stock, from
a financial point of view, of the consideration to be paid by First Security for
the Bancorp common stock pursuant to the Agreement and Plan of Reorganization.
The Hovde opinion was rendered to the Bancorp Board of Directors for its
consideration in determining whether to approve the merger agreement. The Hovde
opinion does not constitute a recommendation to any Bancorp stockholder as to
how such stockholder should vote. The following summary of the Hovde opinion is
qualified in its entirety by reference to the full text of the Hovde opinion.
No limitations were imposed by Bancorp on the scope of Hovde's
investigation or the procedures to be followed by Hovde in rendering its
opinion. Hovde was not requested to and did not make any recommendation to the
Bancorp Board of Directors as to the form or amount of consideration to be
offered by First Security to Bancorp in the merger, which was determined through
arm's-length negotiations between the parties. In arriving at its opinion, Hovde
did not ascribe a specific range of value to First Security or Bancorp. Rather,
Hovde made its determination as to the fairness, from a financial point of view,
of the consideration to be offered by First Security to Bancorp in the merger
based upon the financial and comparative analyses described below. Hovde was not
requested to opine as to, and its opinion does not address, Bancorp's underlying
business decision to proceed with or effect the merger.
During the course of the engagement, Hovde reviewed and analyzed
material bearing on the financial and operating conditions of First Security and
Bancorp and material prepared in connection with the proposed transaction,
including the following:
(1) the merger agreement;
(2) certain publicly available information concerning First
Security, Bancorp, and their subsidiaries, including as
applicable, consolidated financial statements for each of the
three years ended December 31, 1997;
(3) documents filed with the Securities and Exchange Commission,
the Federal Reserve Board, the Office of the Comptroller of
the Currency and certain other state or regulatory agencies
filed by each of the foregoing entities (including
subsidiaries) for the aforementioned three year period and for
the quarterly periods ended March 31, June 30 and September
30, 1998, respectively;
(4) as applicable, recent internal reports for both companies and
financial projections for Bancorp;
(5) the nature and terms of recent sale and merger transactions
involving banks and bank holding companies that Hovde
considered relevant; and
(6) financial and other information provided by the management of
Bancorp and First Security.
In arriving at its opinion, Hovde assumed and relied upon the accuracy
and completeness of the financial and other information used by it without
assuming any responsibility for independent verification of such information,
and further relied upon the assurances of the managements of First Security and
Bancorp that they were not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to any financial
projections reviewed by Hovde, Hovde assumed that such projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of either First Security or Bancorp. First
Security has indicated to Hovde Financial that the merger will be accounted for
using the purchase method of
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<PAGE> 25
accounting, and Hovde has assumed that the merger would generally be treated as
a tax-free exchange of shares to Bancorp stockholders. In arriving at its
opinion, Hovde did not conduct a physical inspection of the properties and
facilities of First Security or Bancorp and did not make or obtain any
evaluations or appraisals of the assets or liabilities of First Security or
Bancorp. In addition, Hovde noted that it is not expert in the evaluation of
loan portfolios or allowances for loan and real estate owned losses and, on
advice of Bancorp, Hovde assumed that the allowances for loan and real estate
owned losses (as currently stated or as adjusted in connection with the merger)
provided to it by Bancorp, which were used by Hovde in its analysis and in
arriving at its opinion, were in the aggregate adequate to cover all such
losses. Hovde's opinion necessarily was based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of Hovde's
opinion.
The following is a summary of the analyses Hovde Financial performed in
arriving at its January 12, 1999 opinion as to the fairness of the merger
consideration from a financial point of view to Bancorp. In connection with the
preparation and delivery of its opinion to the Board of Directors of Bancorp,
Hovde performed a variety of financial and comparative analyses, as described
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances.
Therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, Hovde did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Hovde believes that its analyses must be considered as a whole and
that considering any portion of such analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Hovde made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Bancorp. Any
estimates contained in these analyses were not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth herein. In addition, analyses relating
to the value of businesses did not purport to be appraisals or to reflect the
prices at which businesses may actually be sold.
PURCHASE PRICE ANALYSIS. Hovde calculated the price-to-book,
price-to-tangible book, price to earnings multiple, and deposit premium paid,
(defined as the transaction value, minus the tangible book value, divided by
total deposits), in the merger using September 30, 1998 financial data and based
upon an aggregate transaction value of $65 million. This analysis yielded
- a price-to-book value multiple of 352.2%,
- a price-to-tangible book value multiple of 352.2%,
- a price-to-last twelve months' earnings multiple of 19.9x,
- a price-to-estimated 1998 earnings multiple of 20.7x, and
- a deposit premium of 27.9%.
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COMPARABLE COMPANY ANALYSIS. Using publicly available information,
Hovde compared the financial performance of Bancorp with all other independent
commercial banks headquartered in Nevada (the "Comparable Bank Group"). These
banks included the following:
Bank West of Nevada Mesquite State Bank
Community Bank of Nevada Nevada Bank & Trust Company
First National Bank Nevada Banking Company
Great Basin Bank of Nevada Pioneer Citizens Bank of Nevada
Heritage Bank of Nevada Silver State Bank
Las Vegas Business Bank
Indications of such financial performance and stock market valuation included
profitability (return on average assets and return on average equity); the ratio
of tangible equity to tangible assets; and the ratio of nonperforming assets to
total assets:
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 COMSTOCK BANCORP COMPARABLE BANK GROUP MEDIAN
<S> <C> <C>
Return on average assets.................. 1.67% 1.24%
Return on average equity.................. 20.51% 12.64%
Tangible equity to tangible assets........ 8.02% 9.43%
Nonperforming assets to total assets...... 1.33% 0.07%
</TABLE>
In addition, Hovde compared the financial performance of First Security
with the following publicly traded bank holding companies located in Southern
and Rocky Mountain states with total assets between $5 billion and $25 billion
(the "Comparable Bank Group"). These included
AmSouth Bancorporation First American Corporation
Colonial BancGroup, Inc. First Tennessee National Corporation
Commerce Bancshares, Inc. First Virginia Banks, Inc.
Community First Bankshares, Inc. Hibernia Corporation
Compass Bancshares, Inc. Zions Bancorporation
Indications of such financial performance and stock market valuation included
profitability (return on average assets and return on average equity); the ratio
of tangible equity to tangible assets; and the ratio of nonperforming assets to
total assets:
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, 1998 FIRST SECURITY COMPARABLE BANK GROUP MEDIAN
<S> <C> <C>
Return on average assets.................. 1.28% 1.36%
Return on average equity.................. 16.20% 14.78%
Tangible equity to tangible assets........ 7.12% 6.39%
Nonperforming assets to total assets...... 0.22% 0.30%
</TABLE>
Because of the inherent differences in the businesses, operations,
financial conditions and prospects of Bancorp, First Security and the companies
included in the Comparable Bank Group, Hovde believed that a purely quantitative
comparable company analysis would not be particularly meaningful in the context
of the merger. Hovde believed that the appropriate use of a comparable company
analysis in this instance would involve qualitative judgments concerning the
differences between Bancorp and the companies included in the Comparable Bank
Group which would affect the trading values of the comparable companies and
Bancorp.
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<PAGE> 27
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information,
Hovde reviewed certain terms and financial characteristics, including historical
price-to-earnings ratio, the price-to-book ratio, the price-to-tangible book
ratio, and the deposit premium paid at the time of transaction announcement, of
commercial banking institution merger or acquisition transactions in Arizona,
Colorado, Nevada, New Mexico and Utah that were announced from February 1, 1998
to December 30, 1998 (the "Comparable Bank Transactions Group"):
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED FIRST SECURITY/ COMPARABLE BANK TRANSACTIONS
SEPTEMBER 30, 1998 COMSTOCK BANCORP * GROUP AVERAGE
<S> <C> <C>
Price-to-latest twelve months' earnings... 19.9x 16.8x
Price-to-book value....................... 352.2% 337.9%
Price-to-tangible book value.............. 352.2% 349.3%
Deposit premiums paid..................... 27.9% 23.2%**
</TABLE>
* Based on the $22.50 closing price of First Security common stock on
January 12, 1999.
** (range of 12.1% to 35.7%)
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations and financial conditions and prospects of Bancorp,
First Security and the companies included in the Comparable Bank Transactions
Group, Hovde believed that a purely quantitative comparable transaction analysis
would not be particularly meaningful in the context of the evaluation of the
fairness of the merger consideration. Hovde believed that the appropriate use of
a comparable transaction analysis in this instance would involve qualitative
judgments concerning the differences between the characteristics of these
transactions and the merger which would affect the acquisition values of the
acquired companies and Bancorp.
DISCOUNTED TERMINAL VALUE ANALYSIS. Hovde estimated the present value
per share of the Bancorp common stock by assuming a range of discount rates from
10% to 15% and a 15% annual growth rate in earnings through 2003, starting with
aggregate earnings of $2.8 million in 1998. In addition, Hovde used a range of
P/E multiples (price-to-earnings) from 18 to 22 in calculating the net present
value per share. This analysis and its underlying assumptions yielded a range of
value for Bancorp's shares of approximately $8.45 to $12.33. This compares to a
per share transaction value of $12.53. In arriving at the value of Bancorp's
book value at December 31, 2003, Hovde assumed 100% earnings retention from
September 30, 1998 through December 31, 2003. These rates and values were chosen
to reflect different assumptions regarding the required rates of return of
holders or prospective buyers of Bancorp common stock.
PRO FORMA MERGER ANALYSIS. Hovde analyzed the impact of the merger on
Bancorp's estimated earnings per share based on the most recent estimates for
1999 earnings of Bancorp published by IBES. In calculating the earnings
accretion, Hovde assumed Bancorp's internally estimated 1999 earnings of $2.8
million, resulting in earnings per fully diluted share of $0.54. Hovde also
assumed a range of share prices from $18.70 on the low end to $24.05 on the high
end. Based upon information provided by the management of Bancorp and upon
analysts' estimates for First Security, Hovde then concluded that the merger
consideration would result in accretion on an earnings basis between 48.25% and
80.99% to Bancorp's earnings per share in 1999.
Hovde is a nationally recognized investment banking firm. As part of
its investment banking business, Hovde is continuously engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations for corporate and other
purposes. The Bancorp Board of Directors retained Hovde based upon Hovde's
experience and expertise and its familiarity with Bancorp and First Security.
Hovde is acting as financial advisor to Bancorp in connection with the merger.
Pursuant to a letter agreement with Hovde executed by Bancorp on September 15,
1998, Bancorp has agreed to pay Hovde a fee equal to 1.375% of the aggregate
consideration payable in connection with the merger, $35,000 of which has been
paid to Hovde. The letter agreement with Hovde also provides that Bancorp will
reimburse Hovde for its reasonable out-of-pocket expenses incurred in connection
with the merger (up to a maximum of $20,000) and indemnify Hovde and certain
related persons and entities against certain liabilities, including liabilities
under securities laws, incurred in connection with its services thereunder.
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<PAGE> 28
RECOMMENDATION OF BANCORP'S BOARD OF DIRECTORS
The Bancorp Board of Directors has unanimously adopted and approved the
Agreement and Plan of Reorganization and the transactions contemplated thereby.
The Bancorp Board of Directors has unanimously determined that the merger is
fair to and in the best interests of Bancorp, its stockholders and holders of
options. THE BANCORP BOARD OF DIRECTORS THEREFORE RECOMMENDS A VOTE FOR ADOPTION
AND APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION AND THE MERGER
CONTEMPLATED THEREBY.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS
Some of Bancorp's directors and officers have interests in the
acquisition that differ from, or are in addition to, their interests as
stockholders of Bancorp. The members of Bancorp's Board of Directors knew about
these additional interests and considered them when the Board of Directors
approved the Agreement and Plan of Reorganization and the merger contemplated
thereby.
CHANGE-IN-CONTROL SEVERANCE AND OTHER BENEFITS. Mr. Robert N. Barone,
Bancorp's Chairman, Chief Executive Officer and Treasurer, and Mr. Larry Platz,
Bancorp's President and Secretary, anticipate receiving substantial
change-in-control severance and other benefits as a result of the merger. See,
"1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS - EXECUTIVE COMPENSATION."
EMPLOYMENT AGREEMENTS. After the merger, Messrs. Barone and Platz
anticipate serving as Executive Vice Presidents of First Security Bank of Nevada
pursuant to Employment Agreements having initial terms of six months. These
Employment Agreements provide for monthly base compensation of $17,500 for each
of them. Messrs. Barone and Platz will also be entitled to participate in all
fringe benefit, medical and life insurance, bonus, compensation, retirement,
stock option, pension and other plans sponsored for all employees of First
Security, with credit given for vesting and eligibility purposes for service
with Comstock Bank (but without prior service credit for purposes of accrual of
benefits under First Security Corporation's retirement plan). The Employment
Agreements also provide that Messrs. Barone and Platz will not be obligated to
repay premiums paid by Comstock Bank on their split-dollar life insurance
policies until October 2009. See "1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS -
EXECUTIVE COMPENSATION."
The Employment Agreements with First Security Bank of Nevada also
contain noncompete provisions. At the end of the Employment Agreements'
six-month terms, each of Messrs. Barone and Platz will be prohibited for a
period of 18 months thereafter from competing with First Security Bank of Nevada
in any commercial or mortgage banking business. Under the Employment Agreements,
a business is considered to be in competition with First Security Bank of Nevada
if it is engaged in the commercial or mortgage banking business in Washoe
County, Nevada. Each of Messrs. Barone and Platz will receive $4,000 monthly for
the 18-month term of the noncompetition provisions of the Employment Agreements.
CONTINUED SERVICE AS A DIRECTOR. The merger agreement provides in
Section 6.17 that Mr. Barone will be elected to serve as a director of First
Security Bank of Nevada for a term of one year from the effective date of the
merger.
Although Comstock Bank is a member of the Federal Home Loan Bank of San
Francisco ("FHLBSF"), First Security Bank of Nevada is not. Mr. Barone currently
serves as a director and Vice Chairman of the FHLBSF, and in that capacity
receives annual compensation of approximately $25,600. The merger agreement
provides in Section 6.18 that First Security Bank of Nevada will establish and
maintain membership in the FHLBSF for one year from the effective date of the
merger. Mr. Barone is expected to continue to serve as a director of the FHLBSF
for that period and to receive compensation therefor.
INDEMNIFICATION. The merger agreement provides in Section 6.13 that
indemnification currently available to directors, officers and employees of
Bancorp and Comstock Bank under the Articles of Incorporation, Bylaws or other
instruments of Bancorp or Comstock Bank will be continued by First Security for
a period of three years after completion of the merger. The Board of Directors
of each of Bancorp and Comstock Bank has adopted resolutions indemnifying
directors individually in the maximum amount of $5 million in the aggregate.
Additionally, the merger agreement provides that First Security will use
commercially reasonable efforts to cause the persons serving as directors and
officers of Bancorp and Comstock Bank to be covered for a period of three years
after completion of the merger by Comstock Bank's directors' and officers'
liability insurance for acts and omissions occurring prior to completion of the
merger.
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<PAGE> 29
SUBSTANTIAL PERSONAL INVESTMENTS. Directors and executive officers of
Bancorp own or have the right to acquire more than 16% of Bancorp's common
stock. A substantial portion of their net worth consists of investment in
Bancorp common stock. Bancorp's Chairman, Chief Executive Officer and Treasurer,
Mr. Robert N. Barone, and the other directors expect to achieve greater
diversification of their personal investment portfolios following the merger.
Many of these individuals have dedicated more than ten years to building
Comstock Bank and Bancorp into the company that it is today. Mr. Robert N.
Barone, Bancorp and Comstock Bank's Chairman and Chief Executive Officer, and
Mr. Larry A. Platz, Bancorp and Comstock Bank's President, have been with
Comstock Bank since 1984, when total assets were less than $10 million.
On December 28, 1998, each of Messrs. Barone and Platz exercised all of
the stock options they held on that date. Mr. Barone acquired 271,700 shares for
an aggregate option exercise price of approximately $646,985. Mr. Platz acquired
233,200 shares for an aggregate option exercise price of approximately $563,235.
Funds for payment by Mr. Barone of the exercise price and associated taxes were
obtained from personal funds and from borrowings from one or more individuals or
firms, including Mr. Umberto Fedeli and Resource Management, Inc., owners of
more than 5% of Bancorp's common stock, or from one or more securities firms.
Funds for payment of the exercise price by Mr. Platz were obtained by him from
personal funds and borrowings from Mr. Barone. Mr. Barone's borrowings from Mr.
Fedeli have been partially retired by subsequent borrowings, including margin
debt held by one or more securities firms. Hovde Acquisition, L.L.C., an entity
controlled by the principals of Hovde Financial, Inc., which is acting as
financial advisor to Bancorp, has provided financing to Mr. Barone in the
approximate amount of $500,000. Hovde Acquisition, L.L.C. has a lien on 271,700
shares of Bancorp stock held by The Barone Family 1988 Trust in a securities
account. Mr. Platz's borrowings from Mr. Barone are unsecured.
CONVERSION OF SHARES; EXCHANGE RATIO
In accordance with the merger agreement, each issued and outstanding
share of the Bancorp common stock will be converted into the right to receive
the merger consideration (as defined below). Each Bancorp stockholder will cease
to have any rights as a Bancorp stockholder, except the right to receive the
merger consideration upon the terms and subject to the conditions set forth in
the merger agreement.
CERTAIN DEFINITIONS. The merger agreement provides for the conversion
of the Bancorp shares into shares of First Security common stock under an
Exchange Ratio that is somewhat complex. To understand the details of the
Exchange Ratio, the following definitions are provided:
"Average First Security Share Price" mean the average of the
closing last sales prices per share of First Security common stock on the NASDAQ
National Market for the ten (10 consecutive trading days prior to the Closing
Date (such period referred to herein as the "Closing Calculation Period").
"Bancorp Share Price" means the quotient of (A) the sum of $65
million divided by (B) the sum of, (1) the total number of issued and
outstanding Bancorp shares and (2) the total number of Bancorp shares subject to
all vested Bancorp Options.
"Exchange Ratio" means (in each case, rounded to the nearest
one one-hundred thousandth of a share and in each case, as adjusted to reflect
any split, combination, dividend or other distribution made prior to the
effective time of the merger),
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<PAGE> 30
(i) if the Average First Security Share Price is greater
than or equal to $24.05, the number determined by
dividing the Bancorp Share Price by $24.05;
(ii) if the Average First Security Share Price is less
than or equal to $18.70, the number determined by
dividing Bancorp Share Price by $18.70; and
(iii) if the Average First Security Share Price is greater
than $18.70 and less than $24.05, the number
determined by dividing the Bancorp Share Price by
Average First Security Share Price;
BANCORP OPTIONS
Each outstanding option to purchase Bancorp shares (a "Bancorp Option")
issued under each stock option plan, program, agreement or arrangement of
Bancorp (each a "Bancorp Stock Plan") that has previously vested or will have
vested upon consummation of the merger (a "Vested Bancorp Option") will be
exercised pursuant to a cashless exercise procedure whereby each holder of a
Vested Bancorp Option will be entitled to receive on a net basis that number of
Bancorp shares equal to X in the following formula:
X = A(B - C)
--------
B
where A equals the number of Bancorp shares subject to such Vested Bancorp
Option, B equals Bancorp Share Price and C equals the strike price of such
Vested Bancorp Option; provided, that X will be rounded, in the case of any
Vested Bancorp Option other than an "incentive stock option" (within the meaning
of section 422 of the Internal Revenue Code), up and, in the case of any
incentive stock option, down to the nearest whole share, as necessary. The
aggregate number of shares so issuable with respect to all Vested Bancorp
Options will be referred to herein as the "Bancorp Option Shares." Each Bancorp
Option Share will be converted into shares of First Security common stock
pursuant to the merger agreement for the account of the holder of such Vested
Bancorp Option.
DISSENTING SHARES
Dissenting Shares will not be converted into or represent a right to
receive the merger consideration. A dissenting Bancorp stockholder will be
entitled to only such rights as are granted by applicable Nevada Law. (See
"RIGHTS OF DISSENTING Bancorp STOCKHOLDERS.")
EXCHANGE OF SHARES AND CERTIFICATES
First Security will deposit with the Exchange Agent for the benefit of
the Bancorp stockholders, for exchange through the Exchange Agent, (i) cash in
an amount sufficient to pay cash in lieu of fractional shares, and (ii)
certificates representing the shares of First Security common stock
As soon as reasonably practicable, the Exchange Agent will mail to each
holder of record of a certificate or certificates which represented outstanding
Bancorp shares (the "Certificates") whose shares were converted into the right
to receive shares of First Security common stock pursuant to the merger
agreement, (i) a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent and will be in such form and
have such other provisions as First Security may reasonably specify), and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of First Security common stock, and cash in
lieu of fractional shares of First Security common stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by First Security, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate will be entitled
to receive in exchange therefor (i) a certificate representing that whole number
of First Security Shares which such holder has the right to receive pursuant to
the provisions of this Article III and (ii) cash in lieu of any fractional
number of First Security Shares. In addition, upon the occurrence of a
Distribution Event, the holder of such Certificate will also be entitled to
receive in exchange therefore (i) a certificate representing that whole number
of Holdback Shares which such holder has the right to receive, (ii) cash in lieu
of any fractional number of Holdback Shares and (iii) cash equal to the
dividends payable with respect to such Holdback Shares. Until surrendered each
Certificate will be deemed to represent only the right to receive upon such
surrender the merger consideration and
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<PAGE> 31
cash in lieu of any fractional shares of First Security common stock. No
interest will be paid or accrue on any cash payable in lieu of any fractional
shares of First Security common stock.
BANCORP STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL LETTERS. BANCORP STOCKHOLDERS SHOULD NOT RETURN SHARE
CERTIFICATES WITH THEIR BANCORP PROXY VOTING FORMS.
FRACTIONAL SHARES
No certificates representing fractional shares of First Security
common stock will be issued upon the surrender for exchange of Certificates.
Each Bancorp stockholder who would otherwise have been entitled to
receive a fraction of a share of First Security common stock in connection with
the merger will receive, in lieu thereof, cash (without interest) in an amount
equal to (A) such fraction multiplied by (B) the Average First Security Share
Price.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties of Bancorp and Comstock Bank and similar customary representations
and warranties of First Security and First Security Bank of Nevada. (See
Appendix A)
CERTAIN COVENANTS
Pursuant to the merger agreement, Bancorp has made various customary
covenants, including that, during the period from January 12, 1999 until the
effective time of the merger, it will: (a) conduct its operations and business
in the usual and ordinary course of business; (b) permit First Security to make
such additional investigation of the business and properties of Bancorp as First
Security deems reasonably necessary or advisable; (c) supplement or amend, if
necessary, the Bancorp disclosure schedule to the merger agreement; (d) refrain
from soliciting or attempting to procure offers related to the acquisition of
Bancorp by a party other than First Security or First Security Bank of Nevada;
and (e) to use its best efforts to retain certain employees.
First Security and First Security Bank of Nevada will: (a) refrain from
effecting any purchase or acquisition of First Security common stock during the
closing Calculation Period; (b) provide directors and officers of Bancorp
indemnification against losses suffered as a result of such persons service as a
director or officer of Bancorp; (c) file with the NASDAQ National Market a
notification for listing covering shares issuable in the merger.
CONDITIONS TO THE CLOSING
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY
The respective obligation of each party to effect the Closing is
subject to the satisfaction or waiver at or prior to the Closing of certain
conditions including: (a) the absence of any governmental prohibition or
restriction on the Closing; (b) the absence of any suit, action, investigation,
inquiry or other proceeding seeking to prevent consummation of the merger, if
such suit may reasonably succeed; (c) the effectiveness of all required consents
and approvals from any governmental entities; (d) the receipt by Bancorp and
First Security of opinions of their respective counsel, substantially to the
effect that the merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code; and (e) the execution of
non-competition agreements by Messrs. Barone and Platz.
CONDITIONS TO THE OBLIGATIONS OF FIRST SECURITY
The obligation of First Security and First Security Bank of Nevada to
effect the Closing is further subject to the satisfaction (or waiver by First
Security) at or prior to the Closing Date of the certain conditions including:
the absence of any developments or events having a material adverse effect on
the business of Bancorp and Bancorp maintaining a net worth of at least
$16,658,575, subject to certain adjustments.
TERMINATION
The merger agreement may be terminated at any time prior to the Closing:
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<PAGE> 32
(a) by the mutual proxy voting form of the First Security and
Bancorp;
(b) by either party under certain conditions if the Closing
has not taken place on or before October 12, 1999;
(c) by First Security or Bancorp upon notice given to the
other if any court or governmental entity of competent jurisdiction
will have issued a final permanent nonappealable order, enjoining or
otherwise prohibiting the merger;
(d) by either party upon certain breaches by the other party
of any representation, warranty, covenant or agreement set forth in the
merger agreement. In the event of the termination of the merger
agreement, all of the obligations and liabilities of the parties under
the merger agreement shall terminate.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS
Subject to certain exceptions set forth in the merger agreement, all of
the representations and warranties and covenants of Bancorp and First Security
contained in the merger agreement shall survive the Closing and shall continue
in full force and effect for a period of two years thereafter, after which such
representations and warranties and covenants shall terminate and have no further
force or effect.
AMENDMENT, MODIFICATION AND WAIVER
The merger agreement may not be amended, modified or waived except by
an instrument or instruments in writing signed and delivered on behalf of each
of the parties to the merger agreement. Moreover, once approved by Bancorp's
stockholder, the Exchange Ratio may not be amended without further Bancorp
stockholder consent.
ACCOUNTING TREATMENT OF THE MERGER
First Security expects that the merger will be accounted for as a
"purchase" under generally accepted accounting principles. Purchase accounting
calls for First Security to recognize any premium it is paying for Bancorp as
"goodwill" which will affect some financial ratios of importance to regulators
and the investment community. Purchase accounting also allows First Security to
step up its basis in the assets of Bancorp for income tax purposes.
THE EFFECT OF THE MERGER ON BANCORP EMPLOYEE BENEFIT PLANS
All retirement and health insurance plans maintained by Bancorp or
Comstock Bank for the benefit of employees will remain in effect without
substantive change until the merger takes place, except as may be required by
applicable law in connection with the intended termination of these plans as
part of the merger. Bancorp and First Security will determine whether it is in
the best interests of the parties and the employees of Bancorp to terminate
Bancorp's 401(k) Plan or to merge such plan into a First Security benefit plan;
provided, however, that no accounts will be permitted to roll-over to First
Security's 401(k) plan without the express written consent of the trustee and
sponsor of First Security's 401(k) plan to such roll-over, which approval will
not be given in any event without receipt of such documentation from Bancorp as
may be requested by First Security, including, without limitation, an Internal
Revenue Service ruling obtained by Bancorp approving the roll-over and ensuring
the qualification of the First Security 401(k) plan if it accepts such
roll-overs.
The current Bancorp health insurance plan likely will terminate when
the merger takes place. Subject to applicable law, all Bancorp employees
retained after the merger will be eligible to participate in the First Security
health insurance plan now in effect, in accordance with its terms.
REGULATORY APPROVALS
Consummation of the merger is conditioned on the receipt of all
requisite regulatory approvals, including prior approval of the Federal Reserve
Board of the merger and of the specific ability of First Security to own and
operate Bancorp under current federal banking regulatory parameters.
The Federal Reserve Board must approve the merger. It is still
reviewing the merger agreement transactions and their effects as of the date of
this Prospectus/Proxy Statement. First Security does not know of any reason why
the Federal Reserve Board will not approve the transactions contemplated in the
merger agreement in a timely fashion, although there
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can be no assurance that such approvals will be obtained, and, if obtained,
there can be no assurance as to the date of any such approvals or the absence of
any litigation challenging such approvals.
The FDIC and the State of Nevada also must approve the merger, with a
particular emphasis on the combination of Comstock Bank with and into First
Security Bank of Nevada. These agencies are still reviewing the merger agreement
transactions and their effects as of the date of this Prospectus/Proxy
Statement. First Security does not know of any reason why the FDIC or the State
of Nevada will not approve the transactions contemplated in the merger agreement
in a timely fashion, although there can be no assurance that such approvals will
be obtained, and, if obtained, there can be no assurance as to the date of any
such approvals or the absence of any litigation challenging such approvals.
The U.S. Department of Justice will receive a copy of the application
filed with the Federal Reserve Board and will have 30 days within which to
challenge the merger agreement on antitrust grounds.
First Security, as an acquiring bank holding company, is required to
file a notice with the Federal Reserve Board that describes the proposed Merger
and the proposed activities of Bancorp as a subsidiary of First Security,
including the affect of First Security's ownership of Bancorp on competition
among entities that engage in such activities, the identity of the parties
involved in the transaction, a description of the public benefits that may be
expected from the proposal, a description of the terms of the transaction, the
sources of funds for the transaction and other financial and managerial
information. The information included in the notice and other requests for
information will allow the Federal Reserve Board, when considering approval of
the merger, to take into consideration the financial and managerial resources
and prospects of the existing and combined institutions and the benefits that
may be expected from the merger. The Federal Reserve Board will, among other
things, evaluate the adequacy of the capital and management levels of the
acquiring bank holding company both before and following the proposed
transaction.
First Security has filed its notice with the Federal Reserve Board.
The Federal Reserve Board may deny a request for approval of an
acquisition by a bank holding company if it determines that the transaction
would result in a monopoly or be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize a given business activity in any part
of the United States, or if its effect in any section of the country would be
substantially to lessen competition or to tend to create a monopoly, or if it
would in any other manner result in a restraint of trade, unless the Federal
Reserve Board finds that the anticompetitive effects of a transaction are
clearly outweighed by the probable effects of the transaction in providing
benefits to the public.
Applicable federal law provides for the publication of notice and
public comment on notice applications filed with the Federal Reserve Board. The
merger may not be consummated until after Federal Reserve Board approval is
obtained.
THERE IS NO ASSURANCE THAT THESE REGULATORY APPROVALS WILL BE RECEIVED TIMELY OR
AT ALL.
AN APPROVAL BY THE FEDERAL RESERVE BOARD OR THE FDIC REFLECTS ONLY THE
VIEW THAT THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT DO NOT
CONTRAVENE APPLICABLE COMPETITIVE STANDARDS IMPOSED BY LAW, AND THAT SUCH
TRANSACTIONS ARE CONSISTENT WITH REGULATORY POLICIES RELATING TO SAFETY AND
SOUNDNESS. AN APPROVAL BY THE FEDERAL RESERVE BOARD OR THE FDIC IS NOT AN
OPINION BY THE FEDERAL RESERVE BOARD OR THE FDIC THAT THE MERGER TRANSACTIONS
ARE FAVORABLE TO THE BANCORP STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW OR THAT
THE FEDERAL RESERVE BOARD OR THE FDIC HAS CONSIDERED THE ADEQUACY OF THE TERMS
OF THE TRANSACTIONS; AND AN APPROVAL BY THE FEDERAL RESERVE BOARD OR THE FDIC IS
NOT AN ENDORSEMENT OR RECOMMENDATION OF THE MERGER AGREEMENT.
FEDERAL INCOME TAX ASPECTS
THE MERGER
The following is a summary of certain Federal income tax consequences
of the merger to the Bancorp stockholders that exchange such stock for First
Security common stock pursuant to the merger. This summary addresses only such
stockholders who hold First Security common stock received in exchange therefor
as a capital asset. This does not address all Federal income tax considerations
that may be relevant to particular stockholders in light of their individual
circumstances or to stockholders that are subject to special rules, such as
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, foReigle stockholders, Bancorp stockholders who hold their
Bancorp shares as part of a straddle, hedging or conversion transaction, and
stockholders who acquired
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their Bancorp shares pursuant to the exercise of employee stock options or
otherwise as compensation. The following summary is based upon the provisions of
the Internal Revenue Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), applicable Treasury Regulations thereunder, judicial decisions
and current administrative rulings, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis. Tax consequences under
state, local, foReigle, and other laws are not addressed herein. Each
stockholder is advised to consult his or her tax advisor as to the particular
facts and circumstances which may be unique to such stockholder and also as to
any estate, gift, state, local or foReigle tax considerations arising out of the
merger.
No rulings have been or will be requested from the Internal Revenue
Service with respect to any matters discussed herein. There can be no assurances
that future legislation, regulations, administrative rulings or court decisions
would not alter the tax consequences set forth below. The obligation of each of
First Security and Bancorp to consummate the merger is conditioned on its
receipt of an opinion from Ray, Quinney & Nebeker, based on such facts,
representations, and assumptions as counsel may reasonably deem relevant
(including certain representations regarding the ownership of Bancorp stock), to
the effect that the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. The following summary assumes that the merger will be consummated as
described in the Agreement and Plan of Merger and this Proxy
Statement/Prospectus/Consent Solicitation.
TREATMENT OF FIRST SECURITY AND BANCORP
No gain or loss will be recognized by First Security or Bancorp as a
result of the merger.
EXCHANGE OF BANCORP SHARES FOR FIRST SECURITY COMMON STOCK
Subject to the discussion of the Taxation of the Option Holders below,
(i) a holder of Bancorp shares whose Bancorp shares are exchanged in the merger
into First Security common stock will not recognize gain or loss, except to the
extent of cash, if any, received in lieu of fractional shares (see "--Cash in
Lieu of Fractional Shares" below), (ii) the aggregate tax basis of the First
Security common stock received by such holder will be equal to the aggregate tax
basis of the Bancorp shares exchanged therefor (excluding any portion of the
holder's basis allocated to fractional shares), and (iii) the holding period of
First Security common stock received will include the holding period of the
Bancorp shares exchanged therefor.
TAXATION OF OPTION HOLDERS
As described in "The merger--Conversion of Shares-Exchange Ratio" and
"The merger--Bancorp Options," (i) each Vested Bancorp Option and Warrant will
be exercised pursuant to a cashless exercise procedure, and (ii) the net number
of Bancorp shares issuable upon such exercise will be converted into First
Security common stock pursuant to the Exchange Ratio. In connection with such
exercise, each holder of Vested Bancorp Options may recognize ordinary income in
an amount equal to the excess of (i) the fair market value of the Bancorp shares
over (ii) the strike price of such Vested Bancorp Options. Such income will be
subject to income tax withholding requirements at the statutory rates. In
addition, to the extent certain stockholder approval requirements have not been
satisfied, such income may be subject to the excise tax provisions of Section
280G of the Internal Revenue Code, applicable to "excess parachute payments".
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CASH IN LIEU OF FRACTIONAL SHARES
A holder of Bancorp shares who receives cash in lieu of fractional
shares of First Security common stock will be treated as having received such
fractional shares pursuant to the merger, and then as having exchanged such
fractional shares for cash in a redemption by First Security. The amount of such
gain or loss will be equal to the difference between the ratable portion of the
tax basis of the Bancorp shares exchanged in the merger that is allocated to
such fractional shares and cash received in lieu thereof. Any such capital gain
or loss will constitute long term capital gain or loss if such Bancorp shares
has been held by the holder for more than one year at the time of the
consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to tax at a rate not to
exceed 20%.
DISSENTING BANCORP STOCKHOLDERS
A Bancorp stockholder who receives solely cash in exchange for Bancorp
common stock in the merger pursuant to the exercise of dissenter's rights under
applicable Nevada Law will recognize capital gain or loss at the time of the
consummation of the merger equal to the difference between the tax basis of the
Bancorp shares surrendered and the amount of the cash received therefor. Such
capital gain or loss will constitute long-term capital gain or loss if such
Bancorp shares has been held for more than one year at the time of the
consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to a tax at a rate not to
exceed 20%.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT
APPLY TO ALL BANCORP STOCKHOLDERS. BANCORP STOCKHOLDERS ARE URGED TO CONSULT
THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER.
RIGHTS OF DISSENTING BANCORP STOCKHOLDERS
Holders of Bancorp common stock are entitled to exercise dissenters'
rights under Chapter 92A, Sections 92A.300 through 92A.500 of the Nevada Revised
Statutes. Option holders are not entitled in their capacities as option holders
to exercise dissenters' rights. A stockholder of Bancorp will be entitled to
relief as a dissenting stockholder if and only if he or she complies strictly
with all of the procedural and other requirements of Sections 92A.300 through
92A.500 of the Nevada Revised Statutes. A copy of Sections 92A.300 through
92A.500 is attached hereto as Appendix C. The following summary does not purport
to be a complete statement of the method of compliance with Sections 92A.300
through 92A.500. The following summary is qualified in its entirety by reference
to the copy of Sections 92A.300 through 92A.500 attached hereto as Appendix C.
NEVADA REVISED STATUTES SECTION 92A.380. Stockholders of a Nevada
corporation have the right to dissent from certain corporate actions in certain
circumstances. According to Nevada Revised Statutes Section 92A.380.1(a)(1),
these circumstances include consummation of a merger requiring approval of the
corporation's stockholders. Stockholders who are entitled to dissent are also
entitled to demand payment in the amount of the fair value of their shares.
NEVADA REVISED STATUTES SECTION 92A.410 AND SECTION 92A.420. According
to Nevada Revised Statutes Section 92A.420.1, stockholders of Bancorp who wish
to assert dissenters' rights:
- must deliver to Bancorp BEFORE the vote is taken at the Annual
Meeting written notice of their intent to demand payment for
their Bancorp common stock if the merger is completed, and
- must not vote their shares in favor of the Agreement and Plan of
Reorganization.
Stockholders failing to satisfy these requirements will not be entitled to
dissenters' rights under Chapter 92A of the Nevada Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.430. A written dissenter's notice
(a "DISSENTER'S NOTICE") will thereafter be sent by the "SUBJECT CORPORATION" to
all stockholders of Bancorp who satisfied these two requirements (written notice
of intent to demand payment and not voting in favor of the merger). Nevada
Revised Statutes Section 92A.430.1. The written dissenters' notice is required
to be sent within 10 days after we complete the merger. According to Section
92A.335 of the Dissenters' Rights Statute, Bancorp is deemed to be the "SUBJECT
CORPORATION" before the merger
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occurs, but First Security Corporation will be the "SUBJECT CORPORATION" after
the merger occurs. The Dissenter's Notice to be sent by First Security
Corporation must include:
- a statement of where the demand for payment is to be sent and
where and when certificates for Bancorp common stock are to be
deposited;
- a statement informing the holders of Bancorp common stock not
represented by certificates to what extent the transfer of such
shares will be restricted after the demand for payment is
received;
- a form for demanding payment. This form will require stockholders
asserting dissenters' rights to certify whether they acquired
beneficial ownership of the shares before the date when the terms
of the merger were announced to the news media or the
stockholders (the "ANNOUNCEMENT DATE," which was January 13,
1999);
- a date by which the Subject Corporation must receive the demand
for payment, which may not be fewer than 30 or more than 60 days
after the date the Dissenter's Notice was delivered; and
- a copy of Section 92A.300 through Section 92A.500 of the Nevada
Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.440. Bancorp stockholders
exercising dissenters' rights must thereafter
- demand payment;
- certify whether they acquired beneficial ownership of Bancorp
common stock before the January 13, 1999 Announcement Date; and
- deposit their certificates in accordance with the terms of the
Dissenter's Notice.
Nevada Revised Statutes Section 92A.440.3 provides that stockholders of
Bancorp who fail to demand payment or deposit their certificates where required
by the dates set forth in the Dissenters' Notice will not be entitled to payment
for the shares as provided under Chapter 92A of the Nevada Revised Statutes. A
stockholder who desires to exercise dissenters' rights but who fails to follow
the foregoing procedures will not be entitled to demand payment of and receive
the fair value of his shares of Bancorp pursuant to the Dissenters' Rights
Statute included herewith as Appendix C. Instead, that stockholder would receive
the same merger consideration per share stockholders of Bancorp who do not
exercise dissenters' rights will receive.
NEVADA REVISED STATUTES SECTION 92A.460. First Security will be
required under Nevada Revised Statutes Section 92A.460.1 to pay each dissenter
who complied with Section 92A.440 (demand for payment; certification that he
acquired the shares before the January 13, 1999 Announcement Date; and deposit
of share certificates) the amount First Security estimates to be the fair value
of the dissenter's shares of Bancorp common stock, plus accrued interest. The
payment must be made by First Security within 30 days after First Security
receives the dissenter's demand for payment. The payment must be accompanied by
- a copy of First Security's financial statements for the year
ended December 31, 1998 as well as First Security's most current
interim financial statements;
- a statement of First Security's estimate of the fair value of the
dissenter's shares of Bancorp common stock;
- an explanation of how interest was calculated;
- a statement of the dissenter's rights to demand payment under
Section 92A.480 of the Nevada Revised Statutes of the dissenter's
estimate of the value of the Bancorp common stock (discussed
below); and
- a copy of Section 92A.300 through Section 92A.500 of the Nevada
Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.470. However, First Security may
withhold payment from dissenters who became the beneficial owners of shares of
Bancorp common stock on or after the January 13, 1999 Announcement
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Date. Nevada Revised Statutes Section 92A.470.1. If payment is withheld in this
fashion by First Security, it must estimate the fair value of the dissenter's
shares of Bancorp common stock (plus accrued interest) and offer to pay this
amount to each dissenter in full satisfaction of his demand. First Security
would have to send this offer to all dissenters with a statement of First
Security's estimate of the fair value of the shares of Bancorp common stock, an
explanation of how interest was calculated and a statement of the dissenters'
rights to demand payment under Section 92A.480 of the Nevada Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.480. Nevada Revised Statutes
Section 92A.480 provides that a dissenter who believes that the amount paid
under Section 92A.460 or offered under Section 92A.470 is less than the full
value of his shares of Bancorp common stock or that the interest due is
incorrectly calculated, may, within 30 days after First Security made or offered
payment for the shares, either (i) notify First Security in writing of his own
estimate of the fair value of the shares of Bancorp common stock and the amount
of interest due and demand payment of this estimate (less any payments made
under Section 92A.460 of the Nevada Revised Statutes), or (ii) reject the offer
for payment made by First Security under Section 92A.470 and demand payment of
the fair value of his shares and interest due.
NEVADA REVISED STATUTES SECTION 92A.490. If a demand for payment
remains unsettled, First Security must commence a court proceeding within 60
days after receiving a demand, petitioning the court to determine the fair value
of the shares of Bancorp common stock and accrued interest. All dissenters whose
demands remain unsettled would be made a party to such proceeding, which would
be conducted in the district court of Washoe County, Nevada. If First Security
fails to do so, it would be required under Section 92A.490 to pay the amount
demanded to each dissenter whose demand remains unsettled.
Dissenters would be entitled to a judgment
- for the amount determined by the district court to represent the
fair value of their shares, plus accrued interest, less any
amount paid pursuant to Section 92A.460 of the Nevada Revised
Statutes; or
- for the amount determined by the district court to represent the
fair value of shares acquired on or after the January 13, 1999
Announcement Date, plus accrued interest, if and to the extent
First Security withheld payment for those shares under Section
92A.470.
NEVADA REVISED STATUTES SECTION 92A.500. The district court would
assess the costs of the proceedings against First Security, unless the court
finds that all or some of the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment. The court may also assess against First
Security or the dissenters the fees and expenses of counsel and experts for the
respective parties, in the amount the court finds equitable.
THE REQUIRED DISSENTERS RIGHTS PROCEDURE MUST BE FOLLOWED EXACTLY ORANY
DISSENTERS' RIGHTS MAY BE LOST.
RESALE OF FIRST SECURITY SHARES RECEIVED IN THE MERGER
The shares of First Security common stock to be issued to Bancorp
stockholders in connection with the merger will be registered with the
Securities and Exchange Commission under the provisions of the Securities Act of
1933 ("the Securities Act").
Resales of the First Security common stock received in connection
with the merger agreement will need to be in compliance with applicable state
securities laws and regulations, and this compliance will be the responsibility
of the selling or transferring Stockholder. For most Bancorp stockholders, the
First Security shares received in the merger will be freely transferable.
First Security shares received by persons who are deemed to be
"affiliates" of Bancorp for purposes of Rule 145 under the Securities Act, may
be resold by them only in transactions permitted by such Rule, or as otherwise
permitted under the Securities Act. Rule 145 applies certain of the requirements
and provisions of Rule 144 (applicable to unregistered shares) to registered
shares received by an affiliate of a party to a merger transaction. Rule 144, in
turn, applies certain restrictions on method and amount of securities sales. As
a condition to the Closing on the merger agreement, each person who is so
identified is required to deliver to First Security at or prior to Closing a
written agreement satisfactory to counsel for First Security that such person
and his or her "associates" (as defined for purposes of Rule 145) will not offer
to sell or otherwise dispose of any shares of First Security common stock issued
to such person or his or her associates pursuant to the merger agreement in
violation of the Securities Act or the regulations thereunder.
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INFORMATION ABOUT FIRST SECURITY
GENERAL
First Security is a Delaware incorporated multi-bank holding
company headquartered in Salt Lake City, Utah. At December 31, 1998, First
Security and its subsidiaries had total consolidated assets, deposits, and
stockholders' equity of $20.4 billion, $12.0 billion and $1.6 billion,
respectively. Its main executive offices are located at 79 South Main Street,
Salt Lake City, Utah 84111, telephone 801-246-6000.
The principal assets of First Security are all of the capital stock of
First Security Bank, N.A. and First Security Bank of New Mexico, N.A., both of
which provide a broad range of banking, fiduciary, and other financial services.
Based on assets of approximately $15.0 billion at June 30, 1998, First Security
Bank N.A. was ranked the 52nd largest commercial bank in the United States, and
is the largest bank in the State of Utah and the second largest bank in the
State of Idaho. First Security Bank of New Mexico N.A. also has offices in
Oregon and Wyoming. At September 30, 1998 First Security Bank N.A. had 243
branches. Based on deposits of $1.1 billion at December 31, 1997, First Security
Bank of New Mexico N.A.was ranked the 3rd largest bank in the State of New
Mexico, and the second largest in the Albuquerque market. It currently has 32
branches.
First Security also owns 100% of the outstanding capital stock of First
Security Bank of Nevada, a Nevada state bank, 100% of the shares of First
Security Bank of Southern New Mexico N.A., a national bank headquartered in Las
Cruces, New Mexico, and 100% of the outstanding shares of First Security Bank of
California, N.A., a national bank headquartered in Irvine, California. (All of
First Security's banking subsidiaries will be referred to hereafter as "the
First Security Banks".) Along with these banking organizations, First Security
also directly or indirectly owns the stock of various nonbank companies engaged
in businesses related to banking and finance, including management services,
securities brokerage, equipment leasing, insurance and investment management,
mutual funds, and a small business investment company.
In addition to its equity investment in subsidiaries, First Security
directly or indirectly raises funds principally to finance the operations of its
nonbank subsidiaries. A substantial portion of First Security's annual income is
typically derived from dividends directly from its bank and nonbank
subsidiaries, and from interest on loans to First Security's nonbank
subsidiaries.
COMPETITION
As noted above, FSBNA is the largest bank in Utah, the second largest
bank in Idaho, the 6th largest bank in Oregon, and the 5th largest bank in
Wyoming. As also noted, FSBNM is the third largest bank in New Mexico (second
largest in Albuquerque). In California, Nevada, and Southern New Mexico, First
Security's banks are smaller, more localized competitors, with competition
coming from a variety of larger banks and credit unions.
First Security's banks compete with other banking organizations in the
states in which they operate on the basis of price, service and convenience.
Other types of financial institutions, such as savings banks, savings and loan
associations, and credit unions offer a wide range of deposit and loan services
(including commercial loans) and, in some instances, fiduciary services. The
First Security Banks also compete with brokerage firms and mutual funds, which
provide the substantial equivalent of checking accounts, credit cards and
similar devices that strongly resemble deposit products. Major retailers compete
for loans by offering credit cards and retail installment contracts. It is
anticipated that competition from nonbank organizations will continue to grow.
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DESCRIPTION OF FIRST SECURITY'S CAPITAL STOCK
The following statements are brief summaries of the material provisions
relating to First Security's Preferred Stock and First Security common stock and
are qualified in their entirety by the provisions of First Security's
Certificate of Incorporation, which has been filed with the Commission. See
"COMPARATIVE RIGHTS OF STOCKHOLDERS."
PREFERRED STOCK.
The Certificate of Incorporation authorizes the issuance of 400,000
shares of preferred stock with no par value ("Preferred Stock"). On December 31,
1998, there were 9,361 shares of $3.15 Cumulative Convertible Preferred Stock,
Series "A" (the "Series A Preferred Stock") outstanding. Holders of Series A
Preferred Stock have the right to receive semi-annual dividends at the annual
rate of $3.15 per share. Such right is cumulative and such dividends are payable
before dividends may be paid on the First Security common stock. The Series A
Preferred Stock is convertible into the First Security common stock at a ratio
of 41.00625 shares of First Security common stock for each share of Series A
Preferred Stock. This conversion right is subject to adjustment in certain
events to protect against dilution of the conversion rights attached to the
Series A Preferred Stock. In the event of a liquidation, dissolution or winding
up of First Security, the holders of Series A Preferred Stock are entitled to
receive cash value of $52.50 per share plus unpaid accumulated preferred
dividends before any distribution is made to holders of the First Security
common stock. First Security may, at the option of the Board of Directors,
redeem the whole or any part of the outstanding Series A Preferred Stock at the
redemption price of $52.50 per share plus unpaid accumulated preferred
dividends.
Holders of First Security's Series A Preferred Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders. Voting
for the election of directors is not cumulative. If at any time four or more
semi-annual dividends on the Series A Preferred Stock are in default, in whole
or in part, the holders of the Series A Preferred Stock as a class will be
entitled to elect four directors and the holders of the First Security common
stock will be entitled to elect the remaining directors. Holders of any
additional Preferred Stock hereafter issued may have such full or limited voting
rights as are provided by the Board of Directors.
The Board of Directors of First Security is authorized by the
Certificate of Incorporation to provide, without further stockholder action, for
the issuance of one or more series of preferred stock. The Board of Directors
has the power to fix various terms with respect to each series, including voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations, restrictions and redemption,
conversion or exchangeability provisions. Holders of preferred stock have no
pre-emptive rights. The Series A Preferred Stock is not publicly traded.
COMMON STOCK.
First Security is authorized to issue 600,000,000 shares of First
Security common stock with a par value of $1.25 per share. As of December 31,
1998, there were outstanding 188,440,990 (net of Treasury Stock) shares of First
Security common stock. At such date, there were 2,025,528 shares reserved for
issuance under First Security's Comprehensive Management Incentive Plan as stock
bonuses and other awards; 912,728 shares reserved for issuance under First
Security's Dividend Reinvestment Plan; 383,860 shares reserved for issuance upon
the conversion of First Security's Series A Preferred Stock, 10,130,190 shares
reserved for issuance upon exercise of outstanding stock options, and 1,499,000
shares reserved for issuance under First Security's Non-Employee Director Option
Plan. Payment of dividends on the First Security common stock is also subject to
the prior rights of First Security's outstanding Series A Preferred Stock.
The holders of First Security common stock are entitled to voting
rights for the election of directors and for other purposes, subject to the
voting rights of the holders of Preferred Stock conferred by law and to the
specific voting rights granted to each series of Preferred Stock and to voting
rights which may in the future be granted to subsequently created series of
Preferred Stock.
Holders of First Security common stock are entitled to receive
dividends when and if declared by the Board of Directors of First Security out
of any funds legally available therefor, and are entitled upon liquidation,
after claims of creditors and preferences of First Security's Series A Preferred
Stock and any other series of Preferred Stock hereafter authorized, to receive
pro rata the net assets of First Security. First Security common stock has no
pre-emptive or conversion rights.
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STOCKHOLDER RIGHTS PLAN
As of August 28, 1989, the Company adopted a Stockholder Rights
Agreement ("the Plan") and the Board of Directors of the Company on that date
(a) declared a dividend of one "Right" for each share of Common Stock held of
record as of the close of business on September 8, 1989, and (b) authorized the
issuance of one Right to attach to each share of Common Stock issued after
September 8, 1989, and prior to the occurrence of certain events described in
the Plan. The Rights are attached to all Common Stock certificates that were
outstanding on September 8, 1989, or have been issued since that date (including
the shares of First Security common stock to be issued to Bancorp stockholders),
and no separate Rights Certificates have been or will be distributed until the
occurrence of certain events described in the Rights Agreement. Until such
separation, no Right may be exercised or traded separately from the Common Stock
certificate to which it is attached. Following separation, the Rights may,
depending upon the occurrence of certain events described in the Rights
Agreement, entitle the holders thereof to either purchase or receive additional
shares of Common Stock. Technical amendments were made to the Plan twice between
1989 and October 28, 1998. The Rights will expire at the close of business on
August 28, 1999, unless earlier redeemed by the Company in accordance with the
terms of the Plan.
On October 26, 1998, the Company amended the price at which a
registered holder would be entitled to purchase from the Company one
one-thousandth of a share of the Company's Junior Series B Preferred Stock,
without par value. The Exercise Price had formerly been set at $100 per right
(before adjustment for the Company's 1991, 1992, 1996, 1997 and 1998 3-for-2
stock splits, or $13.17 after split adjustments), and has been amended to so as
to be set at $85 per right (after adjustment for such stock splits).
The Board also adopted a new plan with legal and technical innovations
over the Plan (the "Successor Rights Plan") in its action on October 26, 1998.
The Successor Rights Plan will take effect upon the expiration of the existing
rights on August 28, 1999. There is no material difference between the Plan, as
now amended, and the Successor Rights Plan that will be effective upon the
expiration of the Plan. In connection with the Successor Rights Plan, the Board
declared a dividend of one right (a "Successor Right") for each outstanding
share of common stock payable on August 28, 1999 to the stockholders of record
as of that date.
First Security's rights plans are designed to protect First Security's
stockholders' interests in the event of an unsolicited attempt to acquire First
Security, including a gradual accumulation of shares in the open market. First
Security believes that these plans provide protection against a partial or
two-tier tender offer that does not treat all stockholders equally and against
other coercive takeover tactics which could impair First Security's Board of
Directors' ability to represent First Security's stockholders fully. Management
believes that the Rights should also deter any attempt by a controlling
stockholder to take advantage of First Security through self-dealing
transactions. First Security's rights plans are not intended to prevent a
takeover of First Security. Issuing the Rights has no dilutive effect, does not
affect reported earnings per share, and does not change the way in which First
Security's shares are traded. However, the exercise of Rights by some but not
all of First Security's stockholders would have a dilutive effect on
nonexercising stockholders. Moreover, some may argue that the Plan has the
potential for "entrenching" current management by allowing current voting
stockholders to increase their voting shares, thus making a tender offer more
difficult and costly.
Shares of First Security common stock do not have cumulative voting
rights.
First Security common stock is not subject to redemption by either
First Security or a stockholder, but there is no restriction on the repurchase
by First Security of shares of First Security common stock except for certain
regulatory limits.
First Security's Certificate of Incorporation provides that, in
general, an affirmative vote of not less than 80% of the outstanding shares of
First Security common stock is required to approve or authorize certain major
corporate transactions involving First Security and holders of more than 10% of
the First Security common stock (including certain mergers, substantial
dispositions of assets, liquidation or dissolution, or recapitalization). The
80% vote is not required in some such circumstances, including certain
transactions which have been approved in advance by a majority of the Board of
Directors, or where holders of First Security common stock receive a price per
share that satisfies the fairness criteria set forth in the Certificate of
Incorporation.
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INFORMATION ABOUT BANCORP
GENERAL
Incorporated in Nevada, Bancorp is a bank holding company registered
under the Bank Holding Company Act. Bancorp's sole operating subsidiary is
Comstock Bank, a commercial bank chartered by the State of Nevada. Bancorp has
no significant operations independent of Comstock Bank. Comstock Bank conducts a
general banking business, including the acceptance of demand, savings, and time
deposits and the making of commercial, real estate, installment and other term
loans. Comstock Bank's deposit accounts are insured up to the maximum legal
limits by the FDIC. Comstock Bank offers checking and savings accounts,
certificates of deposit, money market and NOW accounts, and commercial real
estate, residential real estate, residential construction, commercial and
installment loans. Comstock Bank operates five ATM machines, one at each of its
full-service branches, and offers its customers night depository services,
bank-by-mail, and Visa cards.
Comstock Bank provides its lending and deposit services primarily to
businesses and individuals in the northern Nevada area. Deposits are gathered
primarily from the Reno and Carson City areas. However, Comstock Bank's lending
area extends throughout all parts of northern Nevada, including Reno, Sparks,
Carson City, Minden/Gardnerville, Dayton, Incline Village and other communities
at Lake Tahoe.
Comstock Bank's primary lending business is real estate construction
and development loans, as well as first mortgages on existing single family
homes. The majority of Comstock Bank's lending is to the real estate industry
(both individual homeowners and developers), primarily in northern Nevada.
Beginning in 1995, Comstock Bank began to focus on commercial lending, including
commercial real estate development, and on more traditional commercial lending
to the area's small businesses. In 1998, Comstock Bank's commercial loan
originations totaled $110 million. Construction and development loans are higher
in risk than first mortgage loans to purchasers of single family homes, because
underwriting decisions on construction and development loans require reliance
upon projected data and because loan repayment is dependent on the full and
satisfactory completion of a construction or development project. Corresponding
to the greater lending risk are generally higher interest rates, additional fee
income and shorter note lives when compared to lending such as first mortgage
lending.
First mortgage lending on single family homes has been a mainstay for
Comstock Bank since the mid-1980s. Typically, Comstock Bank does not retain
these mortgages in its portfolio, because the long-term nature of mortgages
would not match the shorter-term nature of the deposit liabilities that provide
Comstock Bank with funds for lending. Because of that maturity mismatch,
Comstock Bank is, like other financial institutions, subject to the risk of
changes in interest rates. Comstock Bank attempts to manage interest rate risk
by a number of means, including sale of mortgages and mortgage servicing rights
in the secondary market. In addition to promoting interest rate risk management,
sales of loans in the secondary market represent an opportunity for Comstock
Bank to realize a profit on sale and obtain funds for additional lending.
Bancorp is a legal entity separate and distinct from its subsidiaries.
Accordingly, the right of Bancorp, and thus the right of Bancorp's creditors, to
participate in any distribution of the assets or earnings of any subsidiary,
other than in its capacity as a creditor of such subsidiary, is subject to the
prior payment of claims of creditors of such subsidiary. The principal sources
of Bancorp's revenues are dividends and fees from its subsidiaries. See
"REGULATION AND SUPERVISION -- LIMITS ON DIVIDENDS AND OTHER PAYMENTS" for a
discussion of the restrictions on Comstock Bank's ability to pay dividends to
Bancorp.
At December 31, 1998, Bancorp's total assets were $225.15 million, its
total deposits were $196.25 million, and its total stockholders' equity was
$21.59 million. In 1998, Comstock Bank originated $303.15 million of loans, of
which $162.81 million (53.7%) were 1-to-4 family mortgage loans sold in the
secondary market, which exceeded Comstock Bank's total average assets in 1998 of
$209.44 million.
Bancorp's executive offices are located at 6275 Neil Road, Reno, Nevada
89511, and its telephone number is (775) 824-7100. Bancorp common stock is
traded on the Nasdaq SmallCap Market under the symbol "LODE". As of March 19,
1999, there were approximately 5,113,900 shares outstanding.
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<PAGE> 42
SUPERVISION AND REGULATION
The following discussion of federal and state laws governing banks and
bank holding companies is a summary only and does not purport to be complete.
The following discussion is qualified in its entirety by reference to the
particular statutory and regulatory provisions discussed. Changes in applicable
law or in the policies of various regulatory authorities could have a material
effect on the business and prospects of First Security Corporation, First
Security Bank of Nevada, Bancorp and Comstock Bank.
Each of First Security Corporation and Bancorp is a bank holding
company within the meaning of the Bank Holding Company Act of 1956. As such,
they are subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System, acting primarily through the Federal
Reserve Bank of San Francisco. First Security Corporation and Bancorp are
required to file annual reports with the Federal Reserve Board and to provide
the Federal Reserve Board such additional information as the Federal Reserve
Board may require. Comstock Bank is a Nevada-chartered commercial bank, and each
of First Security Corporation's subsidiary banks is a state-chartered or
nationally chartered bank. As FDIC member institutions, the deposits of First
Security Corporation's subsidiary banks and Comstock Bank are insured to a
maximum of $100,000 per depositor through the Bank Insurance Fund administered
by the FDIC. As a Nevada-chartered, non-member bank, Comstock Bank is primarily
regulated by the FDIC and the Nevada Division of Financial Institutions. First
Security Corporation's subsidiary banks are regulated by the FDIC or the
Comptroller of the Currency and, in the case of state-chartered institutions, by
the state banking regulator under the law of the state of their organization.
First Security Corporation and its subsidiary banks, Bancorp and
Comstock Bank are subject to federal and state banking laws. These federal and
state laws are intended to protect depositors, not stockholders. Federal and
state laws applicable to financial institution holding companies and their
financial institution subsidiaries regulate the range of permissible business
activities, investments, reserves against deposits, capital levels, lending
activities and practices, the nature and amount of collateral for loans,
establishment of branches, mergers, dividends and a variety of other important
matters.
First Security Corporation's subsidiary banks and Comstock Bank are
subject to detailed, complex and sometimes overlapping federal and state
statutes and regulations in their routine banking operations. These statutes and
regulations include but are not limited to state usury and consumer credit laws,
the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in
Savings Act and the Community Reinvestment Act.
First Security Corporation's subsidiary banks and Comstock Bank are
subject to Federal Reserve Board regulations that require depository
institutions to maintain reserves against their transaction accounts
(principally NOW and regular checking accounts). Because required reserves are
commonly maintained in the form of vault cash or in a noninterest-bearing
account (or pass-through account) at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce an institution's earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
expanded significantly the authority of federal agencies to regulate the
activities of federally chartered and state-chartered financial institutions and
their holding companies. The Federal Reserve Board and the FDIC have extensive
authority to prevent and to remedy unsafe and unsound practices and violations
of applicable laws and regulations by institutions and their holding companies.
The agencies may assess civil money penalties, issue cease and desist or removal
orders, seek injunctions, and publicly disclose such actions. In addition, the
Superintendent of the Nevada Division of Financial Institutions possesses
enforcement powers in order to address violations of Nevada banking law by
Nevada-chartered banks.
REGULATION OF BANK HOLDING COMPANIES
Bank holding companies and their activities are subject to extensive
regulation by the Federal Reserve Board. The Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before (i) directly or indirectly acquiring ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, the acquiring company would own or control more than 5% of the
shares of the other bank or bank holding company (unless the acquiring company
already owns or controls a majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve Board will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and
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<PAGE> 43
needs of the community to be served. The Federal Reserve Board also considers
capital adequacy and other financial and managerial factors in its review of
acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits a
bank holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions
involve certain non-bank activities that, by statute or by Federal Reserve Board
regulation or order, have been determined to be activities so closely related to
the business of banking or of managing or controlling banks as to be a proper
incident thereto. In making this determination, the Federal Reserve Board
considers whether the performance of such activities by a bank holding company
can be expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency in resources, that will outweigh
the risks of possible adverse effects such as decreased or unfair competition,
conflicts of interest or unsound banking practices.
Some of the activities determined by Federal Reserve Board regulation
to be incidental to the business of banking are: making or servicing loans or
certain types of leases; engaging in certain insurance and discount brokerage
activities; performing certain data processing services; providing securities
brokerage services; acting in certain circumstances as a fiduciary or investment
or financial advisor; and making investments in certain corporations or projects
designed primarily to promote community welfare. The Federal Reserve Board has
approved applications by bank holding companies to engage, through nonbank
subsidiaries, in certain securities-related activities (underwriting of
municipal revenue bonds, commercial paper, consumer-receivable-related
securities and one-to-four family mortgage-backed securities), provided that the
affiliates would not be "principally engaged" in such activities for purposes of
Section 20 of the Glass-Steagall Act. In limited situations, holding companies
have been permitted to underwrite and deal in corporate debt and equity
securities through such subsidiaries.
It is Federal Reserve Board policy that bank holding companies serve as
a source of strength for their subsidiary banking institutions. The Federal
Reserve Board considers the adequacy of a bank holding company's capital on
essentially the same risk-adjusted basis as capital adequacy is determined by
the FDIC at the bank subsidiary level. In the case of a bank holding company
with less than $150 million in total consolidated assets, the Federal Reserve
Board's regulations provide that the capital adequacy requirements will
generally be applied on a bank-only basis (rather than on a consolidated basis).
In general, bank holding companies are required to maintain a minimum ratio of
total capital to risk-weighted assets of 8% and Tier 1 capital (consisting
principally of stockholders' equity) of at least 4%. Bank holding companies are
also subject to a leverage ratio requirement. The minimum required leverage
ratio for the highest rated companies is 3%. The minimum required leverage ratio
for all other bank holding companies is 4% or higher. See " CAPITAL."
Subsidiary banks of a bank holding company are subject to restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities and on the use
of their securities as collateral for loans to any borrower. These regulations
and restrictions could limit a bank holding company's ability to obtain funds
from a subsidiary bank for the bank holding company's cash needs, including
funds for payment of dividends, interest and operating expenses. Furthermore,
under the Bank Holding Company Act and regulations of the Federal Reserve Board,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, neither First Security
Bank of Nevada nor Comstock Bank generally may require a customer to obtain
other services from the bank or its holding company as a condition to an
extension of credit to the customer, and may not require that customer to
promise not to obtain other services from a competitor.
FEDERAL DEPOSIT INSURANCE
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in FDIC member institutions are insured to a maximum of
$100,000 per depositor. Banks are required to pay semiannual deposit insurance
premium assessments to the FDIC. In general terms, each institution is assessed
insurance premiums according to how much risk to the insurance fund the
institution represents. Well-capitalized institutions with few supervisory
concerns are assessed lower premiums than other institutions. Currently,
insurance fund assessments range from zero for well-capitalized institutions to
0.27% of deposits for institutions that are not well capitalized (with a
statutory minimum of $2,000 paid by all institutions). Comstock Bank's current
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assessment rate is .003% annually, including payments by Comstock Bank for
interest on the FICO Bonds discussed below.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
enacted on September 30, 1996 provides that, beginning with semi-annual periods
after December 31, 1996, Bank Insurance Fund deposits will also be assessed to
pay interest on the bonds issued in the late 1980s by the Financing Corporation
("FICO BONDS"). The FICO Bonds were issued for the purpose of recapitalizing the
now defunct Federal Savings and Loan Insurance Corporation, which had been the
principal insurer of savings association deposits. For purposes of the
assessments to pay interest on the FICO Bonds, Bank Insurance Fund deposits will
be assessed at a rate of 20% of the assessment rate applicable to Savings
Association Insurance Fund deposits until December 31, 1999. After the earlier
of December 31, 1999 or the date on which the last savings association ceases to
exist, full pro rata sharing of FICO assessments will begin. The assessments to
pay interest on the FICO Bonds are not expected by First Security Corporation or
Bancorp to have a material effect on First Security Corporation or Bancorp or
their subsidiary banks.
INTERSTATE BANKING AND BRANCHING
The Reigle-Neal Interstate Banking and Branching Efficiency Act was
enacted in 1994 to ease restrictions on interstate banking. The Reigle-Neal Act
allows the Federal Reserve Board to approve an application by an adequately
capitalized and adequately managed bank holding company to acquire a bank
located in a state other than the acquiring company's home state without regard
to whether the transaction is prohibited by the laws of any state. The Federal
Reserve Board may not approve the acquisition of a bank that has not been in
existence for the minimum time period (up to five years) specified by the
statutory law of the acquired, or "target," bank's state. The Reigle-Neal Act
also prohibits the Federal Reserve Board from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state that may
be held or controlled by a bank or bank holding company if the limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit contained
in the Riegle-Neal Act. Nevada Revised Statutes Sections 666.305 et seq. allow
interstate bank merger transactions involving Nevada-chartered banks, subject to
approval by the State of Nevada.
Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity. Branching
may also be accomplished by establishing de novo branches or acquiring branches
in another state. A branch of an out-of-state bank operating in another state,
or "host state," is subject to the law of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and
establishment of branches.
The Riegle-Neal Act authorizes the FDIC to approve interstate branching
de novo by state-chartered banks solely in states that specifically allow for
such branching. The FDIC recently adopted regulations under the Riegle-Neal Act
to prohibit an out-of-state bank from using the new interstate branching
authority primarily for the purpose of deposit production. These regulations
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities served by the out-of-state bank.
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<PAGE> 45
CAPITAL
The Federal Reserve Board and the FDIC employ similar risk-based
capital guidelines in their examination and regulation of bank holding companies
and financial institutions. If capital falls below the minimum levels
established by the guidelines, the bank holding company, bank or savings bank
may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities. Failure to satisfy applicable capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal regulatory authorities, including the termination of deposit
insurance by the FDIC and a prohibition on the acceptance of "brokered
deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury,
which have a 0% risk-weight. Off-balance sheet items are also taken into account
in the calculation of risk-based capital, with each class of off-balance sheet
item being converted to a balance sheet equivalent according to established
"conversion factors." From these computations, the total of risk-weighted assets
is derived. Risk-based capital ratios therefore state capital as a percentage of
total risk-weighted assets and off-balance sheet items. The ratios established
by guideline are minimums only.
Current risk-based capital guidelines require all bank holding
companies and banks to maintain a minimum risk-based total capital ratio equal
to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily
marketable mortgage servicing rights are generally deducted from capital. Tier 1
capital includes common stockholders' equity, qualifying perpetual preferred
stock (within limits and subject to certain conditions, particularly if the
preferred stock is cumulative preferred stock), and minority interests in equity
accounts of consolidated subsidiaries, less intangibles. Tier 2 capital
includes: (i) the allowance for loan losses up to 1.25% of risk-weighted assets;
(ii) any qualifying perpetual preferred stock exceeding the amount that may be
included in Tier 1 capital; (iii) hybrid capital instruments; (iv) perpetual
debt; (v) mandatory convertible securities and (vi) subordinated debt and
intermediate term preferred stock of up to 50% of Tier 1 capital. Total capital
is the sum of Tier 1 and Tier 2 capital, less reciprocal holdings of other
banking organizations, capital instruments and investments in unconsolidated
subsidiaries.
The FDIC has added a market risk component to the capital requirements
of nonmember banks and savings banks. The market risk component could require
additional capital for general or specific market risk of trading portfolios of
debt and equity securities and other investments or assets. The FDIC's
evaluation of an institution's capital adequacy takes account of a variety of
other factors as well, including interest rate risks to which the institution is
subject, the level and quality of an institution's earnings, loan and investment
portfolio characteristics and risks, risks arising from the conduct of
nontraditional activities and a variety of other factors. Accordingly, the
FDIC's final supervisory judgment concerning an institution's capital adequacy
could differ significantly from the conclusions that might be drawn from the
absolute level of an institution's risk-based capital ratios. Therefore,
institutions generally are expected to maintain risk-based capital ratios that
exceed the minimum ratios discussed above. This is particularly true for
institutions contemplating significant expansion plans and institutions that are
subject to high or inordinate levels of risk. Moreover, although the FDIC does
not impose explicit capital requirements on holding companies of institutions
regulated by the FDIC, the FDIC can take account of the degree of leverage and
risks at the holding company level. If the FDIC determines that the holding
company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may
require the subsidiary institution(s) to maintain additional capital or the FDIC
may impose limitations on the subsidiary institution's ability to support its
weaker affiliates or holding company.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles. At
December 31, 1998, First Security Corporation, First Security Bank of Nevada,
Bancorp and Comstock Bank were in compliance with all regulatory capital
requirements.
In order to resolve the problems of undercapitalized institutions and
to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
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<PAGE> 46
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. For example, an institution that is not
"well capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized institution must
guarantee, in part, certain aspects of the institution's capital plan. Financial
institution regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit Insurance Corporation Improvement Act of
1991 also authorizes the regulatory agencies to reclassify an institution from
one category into a lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. Undercapitalized
institutions are required to take certain specified actions in order to increase
their capital or otherwise decrease the risks to the federal deposit insurance
funds.
The following table illustrates the capital and prompt corrective
action guidelines applicable to First Security Corporation and its banking
subsidiaries and to Bancorp and Comstock Bank, as well as their total risk-based
capital ratios, Tier 1 capital ratios and leverage ratios as of December 31,
1998.
<TABLE>
<CAPTION>
AT MINIMUM NECESSARY TO MINIMUM NECESSARY TO BE
DECEMBER 31, 1998 BE ADEQUATELY CAPITALIZED
WELL CAPITALIZED
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIRST SECURITY CORPORATION AND
SUBSIDIARIES:
Total Risk-Based Capital Ratio % 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio % 6.00% 4.00%
Leverage Ratio.............. % 5.00% 3.00%
</TABLE>
BANCORP AND COMSTOCK BANK:
<TABLE>
<CAPTION>
COMSTOCK BANCORP
BANK
<S> <C> <C> <C> <C>
Total Risk-Based Capital Ratio 13.50% 14.78% 10.00% 8.00%
Tier 1 Risk-Based Capital 12.44% 13.76% 6.00% 4.00%
RatioLeverage Ratio......... 8.49% 9.72% 5.00% 3.00%
</TABLE>
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is dependent on the amount of
dividends that may be declared by its subsidiary banks. A state-chartered bank's
ability to pay dividends may be affected both by state banking laws and federal
banking agencies' capital adequacy guidelines. Moreover, regulatory authorities
are authorized to prohibit banks and bank holding companies from paying
dividends if payment of dividends would constitute an unsafe and unsound banking
practice. Bancorp is not subject directly to the Nevada banking statutes that
regulate the payment of dividends. However, because the ultimate source of
dividends to stockholders of Bancorp is dividends received from Comstock Bank,
dividends payable to stockholders of Bancorp depend on the earnings of Comstock
Bank, Comstock Bank's financial condition, Comstock Bank's need for funds and
applicable government policies and regulations.
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In general, the directors of a Nevada-chartered bank may declare out of
net profits a dividend or distribution in an amount the directors judge
expedient, provided that (i) at least 10% of net profit from the prior fiscal
year is transferred to surplus and (ii) the bank's surplus equals or exceeds the
bank's initial stockholders' equity. A Nevada-chartered bank is prohibited from
paying a dividend in excess of its undivided profits unless the bank's
stockholders' equity is at least equal to 6% of the bank's total deposit
liabilities. Under the general corporation law provisions of the Nevada Revised
Statutes (to which both Bancorp and Comstock Bank are subject), in no event may
a corporation pay dividends if, after giving effect to payment of the dividend,
the corporation would be unable to pay its debts as they become due or the
corporation's assets would be less than the sum of its total liabilities plus
the amount that would be needed to satisfy the preferential rights (if any) upon
dissolution of stockholders whose preferential rights are superior to those
receiving the dividend distribution.
Under the Federal Deposit Insurance Act and prompt corrective action
regulations of the FDIC, Comstock Bank would be prohibited from making any
capital distributions if, after the distribution, Comstock Bank would have (i) a
total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
Comstock Bank currently satisfies all of its regulatory capital requirements.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that a bank holding company should not pay cash dividends on
common stock unless (i) the organization's net income for the past year is
sufficient to fully fund the dividends and (ii) the prospective rate of earnings
retention appears consistent with the organization's capital needs, asset
quality and overall financial condition. For small bank holding companies (those
with less than $150 million in assets), the FRB's position is that such
companies should not pay dividends so long as they have a debt-to-equity ratio
of 1:1 or greater.
TRANSACTIONS WITH AFFILIATES
Although Comstock Bank is not a member bank of the Federal Reserve
System, under the Federal Deposit Insurance Act it is required to comply with
Sections 23A and 23B of the Federal Reserve Act (pertaining to transactions with
affiliates) in the same manner and to the same extent as member banks. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. Generally, Sections 23A and 23B of the
Federal Reserve Act (i) limit the extent to which a bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus, and (ii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes making loans, purchasing
assets, issuing a guarantee and other similar types of transactions.
First Security Corporation's subsidiary banks' and Comstock Bank's
authority to extend credit to executive officers, directors and greater than 10%
stockholders, as well as entities such persons control, is subject to Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal
Reserve Board. Among other things, these laws require insider loans to be made
on terms substantially similar to those offered to unaffiliated individuals,
place limits on the amount of loans a bank may make to such persons based, in
part, on the bank's capital position, and require certain approval procedures to
be followed. Under Section 22(h), loans to an executive officer, director, or
greater than 10% stockholder (a "principal stockholder") of a bank, and certain
affiliated entities of either, together with all other outstanding loans to such
persons and affiliated entities, may not exceed the bank's loans-to-one-borrower
limit, which in general terms is 15% of tangible capital but can be higher in
certain circumstances. Section 22(h) also prohibits loans in excess of the
greater of 5% of capital or $25,000 to directors, executive officers and
principal stockholders, and their respective affiliates, unless the loans are
approved in advance by a majority of the board of directors, with any
"interested" director not participating in the voting. A violation of these
restrictions could result in the assessment of substantial civil monetary
penalties, the imposition of a cease-and-desist order or other regulatory
sanctions.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977 and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community.
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The CRA requires that bank regulatory agencies conduct regular CRA examinations
and provide written evaluations of institutions' CRA performance. The CRA also
requires that an institution's CRA performance rating be made public. CRA
performance evaluations are based on a four-tiered rating system: Outstanding,
Satisfactory, Needs to Improve and Substantial Noncompliance.
At the most recent CRA examination of Comstock Bank, dated November 4,
1996, Comstock Bank received a CRA performance rating of "Satisfactory."
Although CRA examinations occur on a regular basis, CRA performance evaluations
are used principally in the evaluation of regulatory applications submitted by
an institution. CRA performance evaluations are considered in evaluating
applications for such things as mergers, acquisitions and applications to open
branches. Over the twenty years that the CRA has existed, and particularly in
the last decade, institutions have faced increasingly difficult regulatory
obstacles and public interest group objections in connection with their
regulatory applications, including institutions that have received the highest
possible CRA ratings.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks serve as credit sources for their members.
As a member of the FHLB of San Francisco, Comstock Bank is required to maintain
an investment in the capital stock of the FHLB of San Francisco in an amount
calculated by reference to the member institution's assets and the amount of
loans, or "advances," from the FHLB. Comstock Bank is in compliance, with an
investment in FHLB of San Francisco stock of $843,200 at December 31, 1998.
Comstock Bank obtains funds on a secured basis from the FHLB of San Francisco
pursuant to an "Advances and Security Agreement."
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
NEVADA BANK REGULATION
Nevada law prescribes the permissible investments and activities of
Nevada banks, including the types of loans and investments such institutions may
make. The ability of Nevada-chartered banks to engage in state-authorized
activities is also subject to oversight and approval by the FDIC. The State of
Nevada also has approval authority over establishment of branches and mergers
involving or acquisitions of control of Nevada banks, and Nevada may also
initiate supervisory or enforcement actions against a Nevada bank. If any of the
grounds set forth in Nevada law exists for doing so, the State of Nevada may
place a Nevada bank in conservatorship or receivership.
MONETARY POLICY
The earnings of financial institutions are affected by the policies of
regulatory authorities, including monetary policy of the Federal Reserve Board.
An important function of the Federal Reserve System is regulation of aggregate
national credit and money supply. The Federal Reserve Board accomplishes these
goals with measures such as open market dealings in securities, establishment of
the discount rate on bank borrowings and changes in reserve requirements against
bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of financial institutions' loans, investments
and deposits, and they also affect interest rates charged on loans or paid on
deposits. Monetary policy is influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government. Federal Reserve
Board monetary policy has had a significant effect on the operating results of
financial institutions in the past, and it can be expected to influence
operating results in the future.
BANK REGULATORY DEVELOPMENTS
The laws and regulations affecting banks and bank holding companies
have changed significantly over recent years. Additional changes can be expected
in the future. Like administrations before it, the current administration has
considered consolidation of bank regulatory responsibilities now administered by
four separate banking agencies. Over the same time period, Congress has proposed
additional restrictions on the powers of bank holding companies, thrift holding
companies and their affiliates, as well as expanded powers for bank holding
companies, thrift holding companies and their affiliates, including securities-
and insurance-related powers.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the merger, the Bancorp stockholders will become
stockholders of First Security whose rights will (i) cease to be defined and
governed by Nevada law and will be defined and governed by applicable Delaware
Law and (ii) cease to be defined and governed by the articles of incorporation
and bylaws of Bancorp and will be defined and governed by the First Security
Certificate and the First Security Bylaws. Certain provisions of the First
Security Certificate and the First Security Bylaws alter the rights of
stockholders from those that Bancorp stockholders presently have and also alter
certain powers of management. These provisions are summarized below. This
summary is qualified in its entirety by reference to the First Security
Certificate, the First Security Bylaws, the Restated Articles of Incorporation
of Bancorp (the "Bancorp Articles"), the Bylaws of Bancorp (the "Bancorp
Bylaws") and applicable law. In addition, First Security could implement certain
other changes by amending the First Security Certificate or the First Security
Bylaws.
CERTAIN DIFFERENCES BETWEEN NEVADA AND DELAWARE CORPORATE LAWS
Applicable Delaware law governs the rights of First Security
stockholders and will govern the rights of Bancorp stockholders who become
stockholders of First Security. The Nevada corporate laws and applicable
Delaware Law differ in many respects. Certain of the significant differences
that could materially affect the rights of Bancorp stockholders are discussed
below.
AUTHORIZED CAPITAL STOCK
BANCORP. Under Bancorp's Articles of Incorporation, the aggregate
number of shares which it is authorized to issue is 15,000,000 shares of Common
Stock, $.01 par value. All shares of Bancorp common stock are identical in
rights and have one vote. The holders of Bancorp common stock are entitled to
such dividends as may be declared from time to time by the Bancorp Board of
Directors from funds available therefor, subject to certain restrictions, and
upon liquidation are entitled to receive pro rata all assets of Bancorp
available for distribution to such holders after provision for liabilities.
FIRST SECURITY. Under First Security's Certificate of Incorporation,
First Security is authorized to issue 600,000,000 shares of common stock and
400,000 shares of preferred stock. All shares of First Security common stock are
identical in rights and have one vote. All shares of preferred stock also have
one vote.
The First Security common stock to be issued in the merger will be
newly issued from authorized and unissued First Security common stock. The First
Security common stock, when delivered pursuant to the merger agreement, will be
duly authorized and validly issued, fully paid and non-assessable, which status
will be supported by an opinion of First Security's counsel.
First Security's Certificate of Incorporation provides that its Board
of Directors can issue preferred stock in one or more series and with such terms
and at such times and for such consideration as the First Security Board of
Directors may determine. The authority of the First Security Board of Directors
includes the determination or fixing of the following with respect to shares of
any series thereof: (a) the number of shares and designation or title thereof;
(b) rights as to dividends; (c) whether and upon what terms the shares are to be
redeemable; (d) rights and preferences of the holders upon the liquidation,
dissolution or winding up of First Security; (e) whether the shares are to be
subject to a retirement or sinking fund; (f) whether and upon what terms the
shares are convertible; (g) the voting rights, if any; (h) whether the issuance
of any additional shares of a series shall be subject to restrictions as to
issuance or as to the powers, preferences or rights of any other series; and (i)
any other preferences, privileges, powers or relative rights specified by the
Board of Directors.
On August 28, 1989, First Security's Board of Directors adopted a
Stockholder Rights Plan whereby each First Security stockholder is issued rights
to acquire a new class of junior preferred stock, which rights could also be
expanded by the First Security Board of Directors to allow the purchase of
additional shares of First Security under certain circumstances involving the
acquisition of certain amounts of First Security stock by a third party. (See
"INFORMATION ABOUT FIRST SECURITY--Description of First Security's Capital
Stock--Common Stock.").
DIRECTORS
NUMBER. Bancorp's Bylaws provide that the number of its directors shall
be not less than 5 nor more than 20, with the exact number to be set from time
to time by the Board of Directors. Currently, Bancorp has 9 Directors. First
Security's Bylaws provide that the number of its directors shall be not less
than six nor more than thirty, with the exact
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number to be established from time to time by resolution of the Board of
Directors. Currently, First Security has 20 directors.
ELECTION. Both applicable Nevada Law and applicable Delaware Law
provide that members of the board of directors are elected by a plurality vote
of the stockholders, with each share being entitled to one vote, unless the
articles or certificate of incorporation provide otherwise.
REMOVAL. Applicable Nevada law provides that one or more directors of a
corporation may be removed with or without cause, by the vote of stockholders
representing not less than two-thirds of the voting power of the issued and
outstanding stock entitled to vote, subject to certain conditions. These
conditions include certain voting requirements applicable to corporations having
cumulative voting rights and to the removal of a member of a board who is
elected by a single class. The Bancorp Board of Directors is not classified.
Bancorp stockholders may not cumulate votes for Directors.
Under applicable Delaware Law any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares entitled to vote at an election of directors. Applicable Delaware law
also provides additional requirements for the removal of a member of a board
which is classified as to term or elected by a single class or elected by
classes possessing cumulative voting rights. However, these additional
requirements do not apply to First Security, as the Board of Directors of First
Security is not classified and none of First Security's shares of capital stock
possesses any cumulative voting rights.
INDEMNIFICATION. Both the Nevada and applicable Delaware Laws provide
that a director, employee, officer or agent of a corporation may be indemnified
against liability (other than in an action by or in the right of the
corporation) and other costs incurred by such person in connection with such
proceeding, provided such person acted in good faith and in a manner such person
reasonably believed to be in, and not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reason to
believe the conduct was unlawful. For actions or suits brought by or in the name
of the corporation, both the Nevada and applicable Delaware Laws provide that a
director, employee, officer or agent of a corporation may be indemnified against
expenses incurred by such person in connection with such proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in, or at least not opposed to, the best interests of the corporation, except
that if such person is adjudged to be liable to the corporation, such person can
be indemnified if and only to the extent that a court determines that despite
the adjudication of liability, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses as
the court shall deem proper. On the other hand, if he/she prevails,
indemnification is mandatory. See the following subsection captioned "Directors'
and Officer's Liability" for a discussion of the differences in the standards of
liability for Bancorp Directors compared to First Security Directors.
Both applicable Delaware Law and applicable Nevada Law provide that the
determination of whether an officer or director is entitled to indemnification
(that is, whether or not the person has met the statutory standard of conduct
required for indemnification) is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who are not parties to the
action, suit or proceeding in question, or (2) if such a quorum is not
obtainable or if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
First Security's Articles of Incorporation, as amended, provide for
indemnification of such persons to the full extent allowed by applicable law.
Bancorp has similar broad indemnification provisions.
DIRECTOR'S AND OFFICER'S LIABILITY. The Nevada and Delaware Statutes
both allow a corporation to include, in its articles or certificate of
incorporation, a provision that limits or eliminates the personal liability of
an officer (Nevada only) or a director to the corporation and its stockholders
for monetary damages for such person's breach of fiduciary duty, provided that
such provision may not so limit a director's liability (i) for a breach of his
or her duty of loyalty to the corporation (Delaware only); (ii) for acts or
omissions not in good faith or involving fraud (Nevada only), intentional
misconduct or a knowing violation of law; (iii) for unlawful payments of
dividends, certain stock repurchases or redemptions; or (iv) for any transaction
from which the director derived an improper personal benefit (Delaware only).
These provisions have the effect of protecting a corporation's
directors against personal liability from breaches of their duty of care. First
Security, with the approval of its stockholders, amended its Certificate of
Incorporation to include such provisions in 1989. Bancorp's Articles of
Incorporation contain a similar provision.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE 1933 ACT
MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF FIRST
SECURITY, FIRST SECURITY HAS BEEN ADVISED THAT IN THE OPINION OF THE SECURITIES
AND
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EXCHANGE COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE 1933 ACT AND IS, THEREFORE, UNENFORCEABLE. IN THE EVENT THAT A CLAIM FOR
INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN THE PAYMENT BY FIRST
SECURITY OF EXPENSES INCURRED OR PAID BY A DIRECTOR, OFFICER OR CONTROLLING
PERSON OF THE REGISTRANT IN A SUCCESSFUL DEFENSE OF ANY ACTION, SUIT OR
PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER OR CONTROLLING PERSON IN
CONNECTION WITH THE SECURITIES BEING REGISTERED, FIRST SECURITY 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 OF WHETHER SUCH
INDEMNIFICATION BY IT IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE 1933 ACT AND
WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH ISSUE.
TRANSACTIONS INVOLVING INTERESTED DIRECTORS. Applicable Delaware law
states that a transaction involving an interested director of a Delaware
corporation is not void or voidable if (a) the director's interest in the
transaction is disclosed to the board and a majority of the disinterested
directors approve it, (b) the interest is disclosed to the stockholders and the
transaction is approved by a majority of the stockholders, or (c) the
transaction is fair to the corporation. Applicable Nevada law contains a similar
provision, except that the board of directors may approve the transaction only
if the vote is sufficient without counting the vote of the interested directors.
REPURCHASE AND REDEMPTION OF SHARES
Applicable Delaware law permits a corporation to redeem or repurchase
any of its shares for cash, other property or a promissory note except when the
capital of the corporation is impaired, or when such repurchase or redemption
would impair any capital of the corporation. Applicable Nevada law is silent on
this point.
PAYMENT OF DIVIDENDS TO STOCKHOLDERS
Holders of Bancorp common stock are entitled to share ratably in such
cash dividends as may be declared from time to time by Bancorp's Board of
Directors out of funds legally available therefor, subject to certain
restrictions. Under applicable Nevada Law, Bancorp may only declare dividends on
its capital stock if the corporation would not be rendered insolvent.
Applicable Delaware law allows a corporation, subject to any
restrictions in its certificate of incorporation, to declare and pay dividends
upon its shares of capital stock either out of its surplus (as determined under
the statute) or, in the event there is no such surplus, out of its net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. Further restrictions on dividends apply in the event a corporation
has issued shares possessing a preference upon the distribution of assets. The
ability of a Delaware corporation to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis. First Security's
restated Certificate of Incorporation grants to the Board of Directors the power
to declare dividends on its Common Stock, subject to any dividend or sinking
fund requirements pertaining to its Preferred Stock. First Security is also
subject to restrictions on its dividend paying ability under banking laws.
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ASSESSMENTS
All outstanding shares of Bancorp and First Security are fully paid and
nonassessable.
PREEMPTIVE RIGHTS
Bancorp stockholders do not have a preemptive right to acquire unissued
shares, treasury shares or securities convertible into such shares unless
provided otherwise in the Articles of Incorporation. Delaware law does not
provide for preemptive rights unless expressly provided in the Certificate of
Incorporation. First Security's Certificate does not provide for preemptive
rights.
AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
Applicable Delaware law permits the board of directors of a Delaware
corporation to adopt a resolution of its own volition setting forth a proposed
amendment to the corporation's certificate of incorporation and directing that
such proposed amendments be submitted to a vote at a meeting of stockholders.
Upon the written request of the holders of not less than 10% of the shares
entitled to vote upon a proposed amendment, the board of directors is required
to adopt a resolution setting forth the requested amendment and directing that
the amendment be submitted to a vote at a meeting of stockholders.
Applicable Nevada law similarly permits the board of directors of a
Nevada corporation to adopt a resolution proposing changes to the corporation's
articles of incorporation and directing that such proposed amendments be
submitted to a vote at a stockholders meeting.
The voting requirements for stockholder approval of proposed amendments
under applicable Nevada Law and applicable Delaware Law both generally require a
majority vote of the shares entitled to vote on such amendments.
AMENDMENTS TO BYLAWS
Applicable Nevada law provides that, unless the power to amend a
corporation's bylaws is reserved to its stockholders by its articles of
incorporation, the bylaws may be amended by the Board of Directors. Bancorp has
made no such reservation.
Applicable Delaware law provides that stockholders may amend the bylaws
of a corporation, provided that the corporation may, in its articles of
incorporation, also confer such power upon the board of directors. First
Security's Certificate of Incorporation expressly authorizes its Board of
Directors to amend its Bylaws.
STOCKHOLDER APPROVAL OF MERGERS AND OTHER BUSINESS COMBINATIONS
Applicable Nevada law requires that any proposed exchange, merger or
consolidation of a corporation must be approved by the holders of a majority of
the outstanding shares entitled to vote.
Applicable Delaware law provides that a merger, consolidation, sale,
lease or exchange of all or substantially all of its assets may be effected upon
a vote of the holders of a majority of a corporation's outstanding shares.
Delaware law does not require a stockholder vote of the surviving corporation in
a merger if (a) the merger does not amend the existing certificate of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged or becomes a treasury share of the surviving
corporation, and (c) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to such issuance.
In February 1988, applicable Delaware Law was amended to prohibit
certain business combinations (generally mergers, consolidations and sales of
10% or more of a corporation's assets) between Delaware corporations and
"Interested Stockholders." As defined under applicable Delaware Law, Interested
Stockholders are persons who alone, or together with their affiliates,
beneficially own 15% or more of the outstanding stock of a corporation.
Applicable Delaware law bars business combinations between an Interested
Stockholder and the corporation for a period of three years after any such
person or group has become an Interested Stockholder. Applicable Delaware law
contains exceptions to the prohibition which allows such combinations if, as a
result of the transaction which causes a person to become an Interested
Stockholder, such person owns 85% or more of the outstanding voting stock (with
certain exceptions). Another provision exempts from the coverage of applicable
Delaware Law any transaction approved by the corporation's board of directors
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and two-thirds of the outstanding voting stock not held by the Interested
Stockholder. First Security's Certificate of Incorporation provides for
super-majority voting requirements in certain cases of non-consensual merger
votes.
Applicable Nevada law similarly prohibits such business combinations
between Nevada corporations and interested stockholders for a period of 3 years
after the interested stockholder's date of acquiring shares unless the
combination or the purchase of the shares, made by the interested stockholder is
approved by the board of directors. Applicable Nevada law also prohibits such
business combinations after the expiration of 3 years after the interested
stockholder's date of acquiring shares unless the combination meets the
requirements specified in Section 78.439 for director and stockholder approvals
or Sections 78.441 to 78.444 inclusive with respect to the consideration to be
received in the combination by all stockholders other than the interested
stockholder. Applicable Nevada law defines interested stockholders to include
persons who, alone or together with affiliates, beneficially own 10% of the
outstanding stock of the corporation. A Nevada corporation may opt-out of the
application of these provisions under certain circumstances. Bancorp's Articles
of Incorporation provide that the Nevada statute governing combinations with
interested stockholders shall apply to Bancorp.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt-out of the application of these provisions under
certain circumstances. Bancorp has not opted out of the application of this
statute. Applicable Delaware law contains no such provision.
Nevada law does not require a stockholder vote of the surviving
corporation in a merger if (a) the merger does not amend the existing articles
of incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to such issuance.
RIGHTS OF DISSENTING STOCKHOLDERS
Sections 92A.300 to 92A.500 of applicable Nevada Law provide statutory
appraisal rights to certain stockholders who may dissent from certain corporate
reorganizations such as mergers or sales of all or substantially all of the
institution's assets. Under applicable Nevada Law, stockholders are not entitled
to dissenters' rights in the event of a merger if, at March 19, 1999 fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting at which the plan of merger is to be acted on, the shares are listed on
a national securities exchange, included in the NASDAQ National Market System,
or are held by at least 2,000 stockholders of record, unless an exception
applies.
Applicable Delaware law provides appraisal rights only in the case of a
statutory merger, consolidation or sale of substantially all the assets of a
corporation, except that such rights are not available in cases in which the
corporation is to be the surviving corporation and no vote of its stockholders
is required for such transaction or, unless otherwise provided in the
certificate of incorporation, in cases in which the consideration for such
transaction is shares of stock listed on a national securities exchange or held
of record by more than 2,000 stockholders, unless such stockholders are required
by the terms of the merger, consolidation or sale to accept anything other than
shares of stock of the surviving corporation, shares of stock of another
corporation which are all listed or held by such number of record holders, cash
in lieu of fractional shares of such stock, or any combination thereof. The
Certificate of Incorporation of First Security does not provide for greater
appraisal rights than those set forth in applicable Delaware Law.
First Security Stockholders are not entitled to dissent from or vote on
the merger.
ANNUAL MEETINGS OF STOCKHOLDERS
Applicable Delaware law authorizes the Delaware Chancery Court to order
a Delaware corporation to hold an election of directors upon an application by
any stockholder or director if an annual meeting of the stockholders has not
been held for 13 months. Applicable Nevada law authorizes a Nevada Court to
similarly order the election of directors of a Nevada corporation upon
application by a stockholder who holds not less than 15% of the voting power if
an annual meeting of stockholders has not been held for 18 months.
SPECIAL MEETINGS OF STOCKHOLDERS
Applicable Nevada law provides that special meetings of a corporation's
stockholders may be called by the board of directors, the holders of at least
one-tenth of all the votes entitled to be cast on the subject matter of the
meeting, or by
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such other persons as are designated in the corporation's articles of
incorporation or bylaws. Bancorp's Bylaws authorize the Chairman and the
President to call a special meeting.
Under applicable Delaware Law, special meetings of stockholders of a
corporation may be called by the board of directors or by such persons as are
authorized by the corporation's certificate of incorporation or bylaws. First
Security's Bylaws provide that such meetings may also be called by the
President, and shall be called by the President or the Secretary at the written
request of stockholders owning not less than a majority of all shares issued and
outstanding and entitled to vote on any proposal to be submitted to the meeting.
Applicable Nevada law is similar to applicable Delaware Law concerning meetings
of stockholders in general, although applicable Nevada Law is silent as to any
distinction between regular and special meetings of stockholders.
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
Under applicable Nevada Law, any action which may be taken at any
meeting of stockholders may be taken without a meeting and a vote if a written
consent stating the action is signed by a majority of the stockholders entitled
to vote with respect to the subject matter thereof, unless the corporation's
articles of incorporation provide otherwise.
Bancorp's articles of incorporation do not restrict this right.
Applicable Delaware law provides that, unless otherwise provided in the
certificate of incorporation, any action which may be taken at any meeting of
stockholders may be taken without a meeting, prior notice or a vote, if written
consents setting forth the action taken are signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to take such action if the action were taken at a meeting. First Security's
Certificate of Incorporation does not prohibit such actions by written consent.
STOCKHOLDER INSPECTION OF RECORDS
Applicable Delaware law grants every stockholder the right to inspect a
Delaware corporation's stockholder register and other books and records.
Applicable Nevada law states that any stockholder who holds at least 15% of the
outstanding stock may inspect the corporation's articles of incorporation,
bylaws and stock ledger.
THE 1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS
DATE, TIME AND PLACE
This Prospectus/Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of Bancorp for use at the
1999 Annual Meeting of Bancorp stockholders. The Annual Meeting will be held on
Wednesday, April 28, 1999, at 4:00 p.m. Pacific Time in the Conference Center on
the second floor of Comstock Bank's Administrative Headquarters, 6275 Neil Road,
Reno, Nevada.
PURPOSE
At the Annual Meeting, holders of Bancorp common stock, par value $.01
per share, will be asked to vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of January 12, 1999 by and between
First Security Corporation, its subsidiary First Security Bank of Nevada,
Bancorp and its subsidiary Comstock Bank. The Agreement and Plan of
Reorganization provides that Bancorp will merge with and into First Security
Corporation, a Delaware corporation, and that First Security Corporation will be
the surviving corporation.
Stockholders will also be asked to consider and vote upon election of
directors to serve until the 2000 Annual Meeting of Stockholders or until the
merger of Bancorp with and into First Security Corporation is completed. Lastly,
stockholders of Bancorp will be asked to consider and vote upon ratification of
the Board of Directors' appointment of Kafoury, Armstrong & Company to serve as
independent auditors of Bancorp for the year ending December 31, 1999, or until
the merger is completed.
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RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
March 19, 1999 for the determination of Bancorp stockholders entitled
to notice of and to vote at the Annual Meeting has been fixed by the Board of
Directors as the close of business on March 19, 1999. As of the March 19, 1999
record date, there were approximately 5,113,900 shares of Bancorp common stock
issued and outstanding. The Bancorp common stock was held on that date by
approximately 437 stockholders of record. Holders of Bancorp common stock on the
March 19, 1999 record date are entitled to one vote per share on each matter to
be acted upon at the Annual Meeting. Bancorp stockholders are not entitled to
vote cumulatively in the election or removal of directors or otherwise. Holders
of Bancorp common stock on the March 19, 1999 record date are entitled to
exercise dissenters' rights on the proposal to approve and adopt the merger
agreement. See "RIGHTS OF DISSENTING STOCKHOLDERS."
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of
Bancorp common stock is required to adopt the merger agreement. Accordingly, the
affirmative vote of approximately 2,556,451 shares of Bancorp common stock is
required to adopt the merger agreement. Failure to vote is equivalent to voting
against the merger agreement. Of the 5,113,900 shares of Bancorp common stock
issued and outstanding on the March 19, 1999 record date, directors and
executive officers are entitled to vote 794,156 shares, representing
approximately 15.5% of the Bancorp common stock. See, " - VOTING SECURITIES AND
PRINCIPAL HOLDERS THEREOF."
Directors of Bancorp are elected by plurality vote, meaning the
nominees receiving the greatest number of votes are elected. Therefore,
abstentions will have no effect on the election of directors.
VOTING AND REVOCATION OF PROXIES
Bancorp stockholders are requested to complete, date and sign the
accompanying proxy and return it promptly in the accompanying postage-prepaid
envelope.
Shares represented by valid proxies will be voted at the Annual Meeting
in accordance with the instructions noted thereon. If no instructions are given,
proxies will be voted FOR adoption of the merger agreement, FOR election of
nominees identified herein to serve as directors and FOR ratification of the
Board of Directors' appointment of Kafoury, Armstrong & Company to serve as
independent auditors. Proxies solicited hereby may be used at the Annual Meeting
only and will not be used for any other meeting.
Unless revoked, the shares represented by proxies will be voted at the
Annual Meeting. Stockholders who execute proxies retain the right to revoke them
at any time before completion of the meeting, but revocation will not affect a
vote previously taken. The presence of a stockholder at the meeting will not
automatically revoke such stockholder's proxy. A stockholder may revoke a proxy
at any time prior to its exercise by
- delivering to the Secretary of Bancorp a written notice of
revocation prior to the meeting;
- delivering to the Secretary prior to the meeting a duly executed
proxy bearing a later date; or
- attending the meeting and filing a written notice of revocation
with the Secretary.
Any written notice revoking a proxy should be delivered to Mr. Larry A. Platz,
President and Secretary of Bancorp, P.O. Box 7610, Reno, Nevada 89510-7610 (by
mail, or to Mr. Platz at Bancorp, 6275 Neil Road, Reno, Nevada 89511 if by
overnight courier).
QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the meeting is a
majority of the shares of Bancorp common stock issued and outstanding on the
March 19, 1999 Record Date and entitled to vote, whether represented in person
or by proxy. If a quorum is not obtained, or if fewer shares of Bancorp common
stock than the number required are voted in favor of the merger agreement, the
Annual Meeting may be postponed or adjourned to permit additional time for
soliciting and obtaining additional proxies or votes. At any subsequent
reconvening of the meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the Annual Meeting,
except for any proxies that have been effectively revoked or withdrawn.
55
<PAGE> 56
Abstentions and broker non-votes will be counted as present for
purposes of determining whether there is a quorum at the Annual Meeting, but
will not be voted. Because adoption of the merger agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
Bancorp common stock, abstentions and broker non-votes will have the same effect
as votes against adoption of the merger agreement. Directors of Bancorp are
elected by plurality vote.
Therefore, abstentions will have no effect on the election of directors.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On the date the merger agreement was executed, each of the directors of
Bancorp entered into a Stockholder Voting Agreement with First Security
Corporation as an inducement for First Security Corporation to enter into the
merger agreement. The Stockholder Voting Agreement provides that each of the
directors executing the Stockholder Voting Agreement:
- is required to vote his Bancorp common stock in favor of the
merger;
- may not sell, agree to sell or grant a proxy to vote any Bancorp
common stock owned by him or thereafter acquired by him, except
for a proxy in favor of First Security Corporation or in favor of
the merger; and
- may not solicit or encourage a competing acquisition proposal or
furnish information to or cooperate with a competing bidder for
Bancorp.
However, the Stockholder Voting Agreement provides that the directors executing
the Stockholder Voting Agreement are not required to take any action that would,
in the reasonable opinion of their legal counsel, violate any duties imposed by
law. The obligations represented by the Stockholder Voting Agreement terminate
on the earlier to occur of termination of the merger agreement or consummation
of the merger contemplated thereby.
Together, the directors who executed the Stockholder Voting Agreement
own or exercise voting power over approximately 794,156 shares of Bancorp common
stock outstanding on the March 19, 1999 record date, or 15.5% of the voting
power.
The following tables indicate the beneficial ownership of common stock
as of February 28, 1999 (i) by directors and executive officers of Bancorp, (ii)
by each person who is known by Bancorp to own beneficially more than 5% of the
outstanding shares of Bancorp common stock (showing the owner's address as
well), and (iii) by all directors and executive officers of Bancorp as a group.
Information concerning the number of shares of common stock beneficially owned
by the persons identified in the table under the caption "Certain Stockholders"
is derived from Schedules 13D filed by such persons with the Securities and
Exchange Commission for the purpose of reporting their beneficial ownership of
common stock. For purposes of the following tables, a person is considered to
"beneficially own" any shares with respect to which he exercises sole or shared
voting or investment power or of which he has the right to acquire such
beneficial ownership within 60 days.
[THIS SPACE LEFT BLANK INTENTIONALLY]
56
<PAGE> 57
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
COMMON STOCK CLASS
------------ ----------
CERTAIN STOCKHOLDERS
<S> <C> <C>
Lee Deitrich 400,000 7.83%
7090 Morley Road
Painesville, Ohio 44077
Umberto Fedeli 420,000 8.22%
5005 Rockside Road, 5th Floor
Independence, Ohio 44131
Lawrence G. Loxterman 370,460 7.25%
270 Barrington Ridge Road
Painesville, Ohio 44077
William H. Loxterman 348,460 6.82%
10100 Hoose Road
Mentor, Ohio 44060
Resource Management, Inc. 385,000(1) 7.54%
Dba Gelfand/Maxus Asset Management
1301 East Ninth Street, Suite 3600
Cleveland, Ohio 44114
</TABLE>
<TABLE>
<CAPTION>
SHARES
ACQUIRABLE
WITHIN 60
DAYS UPON
DIRECTORS, NOMINEES AND SHARES OF EXERCISE OF PERCENT
EXECUTIVE OFFICERS COMMON STOCK OPTIONS OF CLASS
- ------------------ ------------ ----------- ---------
<S> <C> <C> <C>
Edward E. Allison ........... 4,730 12,400 (2)
Robert N. Barone ............ 400,068(3) 0 7.83%
6275 Neil Road
Reno, Nevada 89511
Stephen C. Benna ............ 400 4,600 (2)
John A. Coombs .............. 24,598 0 (2)
Michael W. Dyer ............. 65,374 0 1.28%
Mervyn J. Matorian .......... 20,642 0 (2)
(2)
Samuel P. McMullen .......... 590 11,000
Larry A. Platz .............. 277,254 0 5.43%
6275 Neil Road
Reno, Nevada 89511
Ronald R. Zideck ............ 500 0 (2)
Directors (inc. nominees) and
Executive Officers as a group
(9 persons) 794,156 28,000 16.01%
</TABLE>
57
<PAGE> 58
NOTES TO PREVIOUS TABLE:
(1) Mr. Richard A. Barone is the controlling stockholder and President of
Resource Management, Inc. doing business under the name "Gelfand/Maxus Asset
Management." Resource Management, Inc. is a privately owned money management
firm headquartered in Cleveland, Ohio. Mr. Richard A. Barone may be deemed to
own beneficially the shares owned by Resource Management, Inc. Richard A. Barone
is the brother of Robert N. Barone. Mr. Robert N. Barone owns a 15% minority
interest in Resource Management, Inc.
(2) Less than one percent (1%).
(3) All of Mr. Barone's shares are held by The Barone Family 1988 Trust, of
which Mr. Barone and his spouse are trustees. Mr. Barone also owns a 15%
minority interest in Resource Management, Inc., which owns 385,000 shares of
Bancorp common stock (approximately 7.54%). See Note (1). On December 28, 1998,
Mr. Barone exercised all of the stock options he held on that date. Mr. Barone
acquired 271,700 shares for an aggregate option exercise price of approximately
$646,985. Funds for payment by Mr. Barone of the exercise price and associated
taxes were obtained by him from personal funds and from borrowings from one or
more individuals or firms, including Mr. Umberto Fedeli and Resource Management,
Inc., owners of more than 5% of Bancorp's common stock, or from one or more
securities firms. Mr. Barone's borrowings from Mr. Fedeli have been partially
retired by subsequent borrowings, including margin debt held by one or more
securities firms. Hovde Acquisition, L.L.C., an entity controlled by the
principals of Hovde Financial, Inc., which is acting as financial advisor to
Bancorp, has provided financing to Mr. Barone in the approximate amount of
$500,000. Hovde Acquisition, L.L.C. has a lien on 271,700 shares of Bancorp
stock held by The Barone Family 1988 Trust in a securities account.
Unless otherwise indicated, voting power and investment power are
exercised solely by the person named in the table or shared with members of his
household. For the purpose of determining beneficial ownership with respect to
the named persons, common stock includes all issued and outstanding common
stock, as well as common stock acquirable through the exercise or conversion of
any option, warrant or security within 60 days. Under the 1992 Incentive Plan
and 1992 Non-Employee Directors' Stock Option Plan, options to acquire
approximately 72,000 shares of common stock are outstanding and are currently
exercisable.
Under Section 3.3 of the merger agreement, Bancorp and First Security
have agreed that all outstanding vested options shall be exercised immediately
before completion of the merger. The exercise will take the form of a "cashless
exercise," meaning option holders will not have to pay the option exercise price
in cash. Instead, option holders will be deemed to have received a number of
shares of Bancorp common stock with an aggregate value equal to (i) the
difference between the per share value of Bancorp common stock and the option
exercise price per share, (ii) multiplied by the number of shares acquirable
upon exercise of the option. Option holders will not have to take any action to
accomplish the cashless exercise.
The 1992 Non-Employee Directors' Stock Option Plan was adopted in 1992
and assumed by Bancorp in connection with the 1997 holding company
reorganization of Comstock Bank. At the meeting of the Board of Directors
immediately following each annual meeting of stockholders, each non-employee
director has received automatically a grant on the following terms:
(1) from the shares reserved for issuance under the 1992
Non-Employee Directors' Stock Option Plan, each non-employee
director is granted the right to purchase up to 5,500 shares
at the fair market value on that date, which right may be
exercised by the director by delivering a written notice of
exercise at the Board of Directors' meeting at which the right
is granted;
(2) without further action by the Board of Directors or the
Options Committee, each non-employee director is granted on
such date a ten-year option to purchase 2,200 shares at fair
market value on the date of grant; and
(3) for each share a director purchases under paragraph (1) above,
he is granted on the same date an additional ten-year option
to purchase an equal number of shares at the same price.
To be eligible for this grant, a director (i) must have been a director for at
least three full months during the preceding fiscal year, (ii) must not have
been an employee or officer of Bancorp or any of its affiliates during the 12
months preceding such date and (iii) must not have been eligible during the
preceding twelve months to receive any award of stock, options or stock
appreciation rights under any other benefit plan of Bancorp or affiliates. No
director may be granted rights to purchase shares and options to purchase shares
in the aggregate of more than 110,000 shares under the 1992 Non-Employee
Directors' Stock Option Plan. The aggregate number of shares of common stock
reserved for issuance under the 1992 Non-Employee Directors' Stock Option Plan
is 270,000 shares. The 1992 Non-Employee Directors' Stock Option Plan has a term
of ten years, but termination of the 1992 Non-Employee Directors' Stock Option
Plan would not affect any outstanding options granted under the 1992
Non-Employee Directors' Stock Option
58
<PAGE> 59
Plan. Options granted under the 1992 Non-Employee Directors' Stock Option Plan
may be exercised at any time from the date of grant and for a period of ten
years thereafter.
In connection with the merger, Bancorp has agreed that it will not
issue any additional options under the 1992 Non-Employee Directors' Stock Option
Plan. No options or other benefits will be granted to directors under the 1992
Non-Employee Directors' Stock Option Plan following the Annual Meeting or
thereafter.
ELECTION OF DIRECTORS (PROPOSAL 2)
Under Bancorp's Bylaws, the Board of Directors may consist of no fewer
than five and no more than 20 directors, the precise number being fixed within
that range by resolution adopted by the Board of Directors or by stockholders at
an annual meeting. The Board of Directors has fixed the number of directors at
nine. Under the Bylaws, a majority of the directors may fill vacancies and newly
created directorships resulting from any increase in the authorized number of
directors. All directors of Bancorp are elected annually and hold office until
the following annual meeting or until their successors are elected and
qualified. The Board of Directors of Bancorp and the Board of Directors of
Comstock Bank are comprised of the same individuals, serving identical terms as
directors of Bancorp and Comstock Bank. If elected by stockholders at the Annual
Meeting, the individuals identified herein as nominees will serve as directors
until the merger is consummated. If the merger is not consummated, the nominees
will serve as directors until the 2000 Annual Meeting of Stockholders or until
their successors are elected and qualified. The proxies solicited hereby cannot
be voted for a greater number of persons than the number of nominees identified
herein.
INFORMATION WITH RESPECT TO NOMINEES
For each nominee as director, the table below sets forth his name, age
and period of service as a director. The holding company reorganization approved
by stockholders at Comstock Bank's 1997 Annual Meeting became effective in June
1997. As a result of the holding company reorganization, stockholders of
Comstock Bank became stockholders of Bancorp, and Comstock Bank became a wholly
owned subsidiary of Bancorp. In connection with the holding company
reorganization, the individuals serving as directors of Comstock Bank served
also as the initial Board of Directors of Bancorp, and they have continued to
serve as members of the Board of Directors of each of Bancorp and Comstock Bank
since that time. Except for Mr. Zideck, the individuals identified in the table
above have served as directors of Bancorp since its inception. Accordingly, the
table below indicates the period of service of these individuals as directors of
Comstock Bank.
<TABLE>
<CAPTION>
NOMINEES AGE DIRECTOR SINCE TITLE BUSINESS EXPERIENCE DURING PAST 5 YEARS
-------- --- -------------- ----- ---------------------------------------
<S> <C> <C> <C> <C>
Edward E. Allison 59 November 1993 Director Self-employed government relations and
investment consultant
Robert N. Barone 54 March 1984 Chairman, Chief Chairman, Chief Executive Officer and
Executive Officer, Treasurer of Bancorp and Comstock
Treasurer and Bank; also a director of the Federal
Director Home Loan Bank of San Francisco since
1996, serving as Vice Chairman since
February 1998
Stephen C. Benna 46 June 1996 Director President, Chief Executive Officer and
General Manager of CB Concrete
Company, and General Manager of
Capitol City Concrete Company,
concrete manufacturing
John A. Coombs 53 April 1982 Director Orthodontist; private practice
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
NOMINEES AGE DIRECTOR SINCE TITLE BUSINESS EXPERIENCE DURING PAST 5 YEARS
-------- --- -------------- ----- ---------------------------------------
<S> <C> <C> <C> <C>
Michael W. Dyer 51 December 1984 Director and Partner in law firm of Dyer, Lawrence,
General Counsel Cooney & Penrose,
Carson City
Mervyn J. Matorian 54 March 1983 Director State Farm insurance agent
Samuel P. McMullen 49 September 1993 Director President of The McMullen Strategic
Group, a governmental and public
relations and political strategy
consulting and communications firm;
Partner in law firm of Avansino,
Melarkey, Knobel, McMullen & Mulligan,
Reno
Larry A. Platz 60 March 1984 President, President and Secretary of Bancorp and
Secretary and Comstock Bank
Director
Ronald R. Zideck 61 December 1997 Director Retired Managing Partner of Reno
office of Grant Thornton, LLP,
international accounting and
consulting firm; also a Director of
Harveys Casino Resorts
</TABLE>
Except as may be noted herein, there are no family relationships among
any of the directors or executive officers. None of such persons was selected or
serves as director pursuant to any arrangement or understanding with any other
person. Directors are elected at each annual meeting of the stockholders of
Bancorp. Each officer serves at the discretion of the Board of Directors. Except
as may be disclosed herein, none of the directors and executive officers of
Bancorp serves as a director of any company that has a class of securities
registered under, or which is subject to the periodic reporting requirements of,
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940. None of the directors or executive officers
of Bancorp has been involved in any legal proceedings concerning bankruptcy,
either individually or in respect of any businesses with which they have been
involved, nor have any of such persons been convicted of any crime, excluding
traffic violations and similar minor offenses.
BOARD COMMITTEES
The Board of Directors, which is responsible for the overall affairs of
Bancorp, conducts its business through meetings of the Board. The Board of
Directors held 12 regular meetings and one special meeting in 1998. Bancorp has
no Board committees other than the Options Committee. The Board of Directors of
Comstock Bank held twelve (12) regular and no special meetings in 1998.
Committees of the Board of Directors of Comstock Bank include, among others, a
CRA/Audit/Compliance Committee and a Personnel/Compensation Committee. The
entire Board of Directors of Bancorp acts as a nominating committee for
selecting nominees for election as directors.
CRA/AUDIT/COMPLIANCE COMMITTEE (Comstock Bank): This committee met
twice in 1998. The CRA/Audit/Compliance Committee consists solely of directors
who are not also executive officers of Bancorp or Comstock Bank. It currently
consists of four members: Messrs. Allison, Benna, Dyer and Zideck. The Community
Reinvestment Act ("CRA") function of the Committee is to consider Comstock
Bank's CRA efforts, performance and areas of improvement. The
CRA/Audit/Compliance Committee receives reports from Comstock Bank's CRA Officer
about Comstock Bank's CRA efforts and Comstock Bank's opportunities to offer
products and services that are responsive to the needs of Comstock Bank's
community. The audit function of the CRA/Audit/Compliance Committee is to review
the findings of the outside auditor and any internal control findings. The
compliance function of the CRA/Audit/Compliance Committee is to review the
findings of any regulatory examination involving compliance.
60
<PAGE> 61
PERSONNEL/COMPENSATION COMMITTEE (Comstock Bank): This committee met
once in 1998. Its function is to review the compensation of Comstock Bank's
senior executives and all vice presidents. It has five members: Messrs. Allison,
Barone, Benna, Matorian and Platz.
OPTIONS COMMITTEE (Bancorp): The Options Committee is the only
committee of the Board of Directors of Bancorp. It met twice in 1998. The Option
Committee's function is to administer the stock option plans, including but not
limited to review of officer and employee performance for the purpose of making
awards of stock, options or other benefits under the 1992 Incentive Plan
(adopted by Comstock Bank in 1992 and assumed by Bancorp in connection with the
1997 holding company reorganization of Comstock Bank). The Option Committee
consists of five members: Messrs. Allison, Benna, Coombs, McMullen and Zideck.
In 1998, no director attended fewer than 75% of the aggregate number of
meetings of Comstock Bank's Board of Directors and committee(s) on which he
served. Likewise, in 1998 no director attended fewer than 75% of the aggregate
number of meetings of Bancorp's Board of Directors and committee on which he
served.
REMUNERATION OF DIRECTORS
Directors do not receive separate cash compensation for their service
as Bancorp directors in addition to compensation they receive for their service
as Comstock Bank directors. In 1998, directors received the sum of $700 for each
regular meeting of the Board of Directors of Comstock Bank attended. In
addition, each committee meeting attended entitled the non-employee director to
compensation of $100, except the Loan Committee, which set compensation of $250
for attending non-employee directors.
Consistent with the terms of the 1992 Non-Employee Directors' Stock
Option Plan discussed in " - VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF,"
following the 1998 Annual Meeting of Stockholders each of the six non-employee
directors received automatically options to acquire 2,200 shares of common
stock, exercisable for a ten-year period at the fair market value of the common
stock on such date ($12.00 per share). In addition, Messrs. Allison, Benna,
Coombs and Dyer exercised the right under the 1992 Non-Employee Directors' Stock
Option Plan to acquire shares of common stock at the fair market value on such
date, receiving for each share so acquired a companion option to acquire a share
of common stock, exercisable for the same period, at the same price and on the
same terms as the automatic grant of options to acquire 2,200 shares. The number
of shares acquired by these non-employee directors (and the number of shares
acquirable upon exercise of accompanying options received as a result thereof)
following the 1998 Annual Meeting of Stockholders was as follows: Mr. Allison,
200 shares; Dr. Coombs, 500 shares; Mr. Dyer, 500 shares; and Mr. Matorian, 500
shares.
In connection with the merger, Bancorp has agreed that it will not
issue any additional options under the 1992 Non-Employee Directors' Stock Option
Plan. No options or other benefits will be granted to directors under the 1992
Non-Employee Directors' Stock Option Plan following the Annual Meeting or
thereafter.
Comstock Bank has implemented a deferred fee arrangement for directors.
Upon execution of a Deferred Fee Agreement, each director is eligible to defer
part or all of the fees to which he is entitled for service as director. As of
the date hereof, all directors other than Directors Barone, Matorian, McMullen
and Zideck have entered into Deferred Fee Agreements. Under the Deferred Fee
Agreements, deferred director fees are retained by Comstock Bank, which makes a
matching contribution of up to 25% of the first $12,000 in compensation deferred
by a director. Each director earns interest on deferred fees and matching
contributions at a rate established annually by the Board of Directors, which
rate may not exceed the prime lending rate of Comstock Bank plus 2%. Upon
retirement, disability or death, deferred director fees, matching contributions
and interest thereon will be paid in cash to the director or his or her
beneficiary(ies) in equal monthly installments over a 13-year period (or in a
lump sum if the director has previously elected a lump sum distribution). If a
director's service is terminated in connection with a change in control,
however, the benefits payable under the Deferred Fee Agreements would be payable
in a lump sum within 90 days. Because of the proposed merger with First Security
Corporation, each director who is a party to a Deferred Fee Agreement will
receive a lump sum payment of his deferred benefits within 90 days after
completion of the merger.
Director Platz has entered into a Deferred Fee Agreement relating to
his compensation as a director, and a separate Key Employee Deferred
Compensation Agreement relating to his compensation as an executive officer.
See, " - EXECUTIVE COMPENSATION."
61
<PAGE> 62
EXECUTIVE COMPENSATION
Since formation of Bancorp and completion of the holding company
reorganization of Comstock Bank in June 1997, Bancorp's executive officers have
received remuneration from Bancorp. Bancorp's two executive officers no longer
receive compensation from Comstock Bank, although Bancorp does have an agreement
with Comstock Bank whereby Comstock Bank reimburses Bancorp for a portion of the
executives' time spent on Comstock Bank matters. The following table shows the
annual compensation for services in all capacities to Comstock Bank (and Bancorp
during the latter half of 1997) for the fiscal years ended December 31, 1998,
1997 and 1996 for the Chief Executive Officer and the President of Comstock Bank
and Bancorp. No other executive officer received compensation in excess of
$100,000 during 1998.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------ -------
($) (#)
($) RESTRICTED SECURITIES ($) ($)
NAME AND ($) ($) OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
------------------ ------- --------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert N. Barone, 1998 198,000 290,164 (2) 0 0 0 25,137(3)
Chairman of the 1997 186,000 125,526 (2) 0 0 0 36,913(3)
Board of Directors, 1996 174,000 96,308 (2) 0 0 0 17,487(3)
Chief Executive
Officer and Treasurer
Larry A. Platz, 1998 198,000 260,164 (2) 0 0 0 24,992(4)
President and 1997 186,000 95,526 (2) 0 0 0 47,297(4)
Secretary 1996 174,000 116,308 (2) 0 0 0 17,885(4)
</TABLE>
(1) Includes amounts deferred at the election of the named executive
officers pursuant to the 401(k) Plan of Comstock Bank and pursuant to the Key
Employee Deferred Compensation Agreements. See, "Key Employee Deferred
Compensation Agreements" hereinafter.
(2) Perquisites and other personal benefits did not exceed the lesser of
$50,000 or 10% of total salary and bonus.
(3) Includes (i) the dollar amount of contributions by Comstock Bank to
vested and unvested 401(k) Plan account(s) of Mr. Barone, (ii) the dollar amount
of matching contributions to the Key Employee Deferred Compensation Agreement
account of Mr. Barone, together with interest thereon calculated at the rate
provided for in the Key Employee Deferred Compensation Agreement, (iii) the
dollar value of the benefit realized or realizable by Mr. Barone by reason of
Comstock Bank's payment of the premiums on split-dollar life insurance and a
supplemental retirement insurance annuity, (iv) board fees and (v) premiums paid
on Mr. Barone's custom disability plan ($2,738 in each of 1998, 1997 and 1996).
See, " - Employment Agreements." The dollar value of the split-dollar premium
benefit is calculated on an actuarial basis for the period between payment of
the premium by Comstock Bank and the anticipated date of repayment to Comstock
Bank of premiums previously paid for the split-dollar life insurance. Matching
contributions to the 401(k) Plan account(s) of Mr. Barone were $5,000 in 1998,
$4,750 in 1997 and $4,500 in 1996. Matching contributions to the Key Employee
Deferred Compensation Agreement account of Mr. Barone totaled $4,050 in 1998,
with interest of $333, and $2,000 in 1997, with interest of $53. The Key
Employee Deferred Compensation Agreements were approved by Comstock Bank in
December 1996, but no matching contributions were made prior to 1997.
(4) Includes (i) the dollar amount of contributions by Comstock Bank to
vested and unvested 401(k) Plan account(s) of Mr. Platz, (ii) the dollar amount
of matching contributions to the Key Employee Deferred Compensation Agreement
account of Mr. Platz, together with interest thereon calculated at the rate
provided for in the Key Employee Deferred Compensation Agreement, (iii) the
dollar value of the benefit realized or realizable by Mr. Platz by reason of
Comstock Bank's payment of the premiums on split-dollar life insurance and a
supplemental retirement insurance annuity, (iv) board fees (including deferred
board fees, board fee matching contributions and interest thereon) and (v)
premiums paid on Mr. Platz's custom disability plan ($3,238 in each of 1998 and
1997 and $3,136 in 1996). See, " - Employment Agreements." The dollar value of
the split-dollar premium benefit is calculated on an actuarial basis for the
period between payment of the premium by Comstock Bank and the anticipated date
of repayment to Comstock Bank of premiums previously paid for the split-dollar
life insurance. Matching contributions to the 401(k) Plan account(s) of Mr.
Platz were $5,000 in 1998, $4,750 in 1997 and $4,500 in 1996. Matching
contributions to the Key Employee Deferred Compensation Agreement account and
the (Director) Deferred Fee Agreement account (see, "Remuneration of Directors")
of Mr. Platz aggregated $3,000 in 1998, with interest of $296, and $2,000 in
1997, with interest of $54. The Key Employee Deferred Compensation Agreements
and (Director) Deferred Fee Agreements were approved by Comstock Bank in
December 1996, but no matching contributions were made prior to 1997.
In 1998, neither Mr. Barone nor Mr. Platz received any grants of stock
options or other awards under the Company's 1992 Incentive Plan or otherwise. In
1998 both Mr. Barone and Mr. Platz exercised all previously granted stock
options. The following table shows the number of shares of Common Stock
acquirable upon exercise of options by the individuals named in the Summary
Compensation Table above. The table also indicates the extent to which such
options were exercisable at December 31, 1998, as well as the approximate value
of such options based on the fair market value of the Common Stock at December
31, 1998.
62
<PAGE> 63
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR END (#) YEAR END ($)
--------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Barone 271,700 $1,934,021 0 0 $ 0 $ 0
Larry A. Platz 271,700 $1,942,966 0 0 $ 0 $ 0
</TABLE>
EMPLOYMENT AGREEMENTS. Comstock Bank entered into substantially similar
employment agreements dated as of December 14, 1992 with each of Messrs. Robert
Barone and Larry Platz (the "Employment Agreements"). In connection with the
holding company reorganization of Comstock Bank, Bancorp succeeded to those
contracts on June 16, 1997. The initial term of the Employment Agreements is for
a period of five years, unless terminated for cause (as defined therein). The
term of each Employment Agreement is automatically extended for one additional
year on each anniversary date of the Employment Agreement, unless the Board of
Directors gives 30 days' prior written notice that the term will not be
extended.
The Employment Agreements provide that each of Messrs. Barone and Platz
is entitled to an annual base salary of $132,000, plus an annual bonus of 6% of
after-tax profits, unless economic conditions or the financial condition of
Comstock Bank dictate that the bonus be suspended. The annual base salary is
subject to renegotiation every six months, but changes, if any, may result only
in an increase in the annual base salary, not a decrease. The Employment
Agreements also provide that Mr. Barone and Mr. Platz are entitled to
participate in all benefit plans and programs available to executives and
salaried employees.
Each Employment Agreement provides that, following a change of control,
Bancorp may terminate the Employment Agreement. If the Employment Agreement is
terminated following a change in control, Bancorp would nevertheless continue to
be obligated for a period of four years from the date of termination to pay Mr.
Barone or Mr. Platz, as the case may be, his then current annual base salary.
The merger will constitute a change-in-control for purposes of Messrs.
Barone's and Platz's Employment Agreements. In connection with the proposed
merger, Messrs. Barone and Platz have entered into Agreements for
Change-in-Control Severance Benefits with Bancorp and Comstock Bank. The
Agreements for Change-in-Control Severance Benefits provide to Messrs. Barone
and Platz severance benefits in amounts consistent with the benefits that would
have been payable under the severance provisions of their Employment Agreements,
which are superseded by the Agreements for Change-in-Control Severance Benefits
to that extent. Under the Agreements for Change-in-Control Severance Benefits,
Messrs. Barone and Platz will each be entitled to a severance payment of
$760,000 as a result of the merger. Messrs. Barone and Platz will also receive
cash compensation in connection with the merger for accrued but unused vacation.
The payment for accrued but unused vacation will be approximately $70,000 for
Mr. Barone and approximately $28,000 for Mr. Platz.
SALARY CONTINUATION AGREEMENTS. Each of Messrs. Barone and Platz
entered into a Salary Continuation Agreement with Comstock Bank effective April
30, 1997, which agreements were assumed by Bancorp following the holding company
reorganization in June 1997. The Salary Continuation Agreements are intended to
supplement the income of Messrs. Barone and Platz following their retirement,
death, disability or termination following a change in control.
Bancorp is obligated to continue to pay Mr. Barone or his designated
beneficiary(ies) for a period of 15 years following Mr. Barone's retirement,
death or disability or following a change in control of Bancorp. The salary
continuation benefit for Mr. Barone would be
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<PAGE> 64
NORMAL RETIREMENT (AGE 65): $66,900 annually upon Mr. Barone's
retirement on or after reaching age 65 or upon his death;
- EARLY RETIREMENT: an annual amount ranging from a low of $7,753
annually, had Mr. Barone retired in the plan year ending April
30, 1999, or $14,947 annually for early retirement in the third
plan year (ending April 30, 2000), to a high of $66,900 for early
retirement at age 64, at the end of the final plan year 2010.
This early retirement benefit would be payable to Mr. Barone
after he reaches normal retirement age of 65. Alternatively, the
Salary Continuation Agreement provides that the Board of
Directors may elect to pay (1) an immediate annual benefit
ranging from $3,161, had Mr. Barone retired in the plan year
ending April 30, 1999, to $66,900 had he retired in the final
plan year or (2) a lump sum payment for the years credited at the
time of his retirement, ranging from a lump sum of $28,414 for
retirement in the plan year ending April 30, 1999, or $59,034 for
early retirement in the plan year beginning May 1, 1999, to
$601,394 for retirement in the final plan year;
- DISABILITY: an amount equal to the immediate annual benefit for
early retirement if Mr. Barone is terminated due to disability;
or
- CHANGE IN CONTROL: an amount equal to the early retirement lump
sum benefit if a change in control of Bancorp occurs.
Bancorp is obligated to continue to pay Mr. Platz or his designated
beneficiary(ies) for a period of 15 years following Mr. Platz's retirement,
death or disability or following a change in control of Bancorp. The salary
continuation benefit for Mr. Platz would be
- NORMAL RETIREMENT (AGE 65): $44,700 annually upon Mr. Platz's
retirement on or after reaching age 65 or upon his death;
- EARLY RETIREMENT: an annual amount ranging from a low of $7,903
annually, had Mr. Platz retired in the plan year ended April 30,
1999, $15,236 annually for early retirement in the third plan
year (ending April 30, 2000), to a high of $44,700 for early
retirement at age 64, at the end of the seventh plan year. This
early retirement benefit would be payable to Mr. Platz after he
reaches normal retirement age of 65. Alternatively, the Salary
Continuation Agreement provides that the Board of Directors may
elect to pay (1) an immediate annual benefit ranging from $5,046,
had Mr. Platz retired in the plan year ending April 30, 1999, to
$44,700 had he retired after the seventh plan year or (2) a lump
sum payment for the years credited at the time of his retirement,
ranging from a lump sum of $45,361 for retirement in the plan
year ending April 30, 1999, or $94,244 for early retirement in
the plan year beginning May 1, 1999, to $401,829 for retirement
after the seventh plan year;
- DISABILITY: an amount equal to the immediate annual benefit for
early retirement if Mr. Platz is terminated due to disability; or
- CHANGE IN CONTROL: an amount equal to the lump sum payment for
early retirement if a change in control of Bancorp occurs.
Neither Bancorp nor Comstock Bank would be obligated under the Salary
Continuation Agreement to pay any benefit to Messrs. Barone or Platz or his
beneficiary(ies) if he is terminated for cause.
The merger agreement provides in Section 11.1 that the change in
control of Bancorp shall be deemed to have occurred in the plan year beginning
May 1, 1999, entitling Messrs. Barone and Platz to the lump sum
change-in-control benefits calculated under the Salary Continuation Agreements
for the plan year ending April 30, 1999. As a consequence of the proposed
merger, Mr. Barone expects to receive approximately $59,634 as a lump-sum
payment under his Salary Continuation Agreement, and Mr. Platz expects to
receive approximately $94,244 as a lump-sum payment under his Salary
Continuation Agreement.
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SPLIT-DOLLAR LIFE INSURANCE. The Employment Agreements also provide for
a split-dollar life insurance arrangement. Comstock Bank pays the premiums for
two $2,300,000 split-dollar life insurance policies insuring the lives of Larry
Platz and Robert Barone (individually, a "Policy" and, together, the
"Policies"). One Policy is owned by Mr. Platz and the other is owned by Mr.
Barone. Annual premiums of approximately $163,000 for each Policy were paid by
Comstock Bank for a period of five years from October 1992, with nominal annual
premium payments for a period of two years thereafter. The total amount of
premiums paid by Comstock Bank for each Policy are $845,565 for Mr. Barone and
$841,730 for Mr. Platz. Comstock Bank will be entitled to repayment of premium
payments made on each Policy (less any borrowings and less accrued interest
thereon) no later than (i) the death of Mr. Barone or the death of Mr. Platz, or
(ii) the seventeenth anniversary date of the Policies. Moreover, Comstock Bank
will be entitled to early repayment (i) if the split-dollar insurance agreement
is terminated by written notice from Mr. Barone or Mr. Platz, as the case may
be, or by mutual consent of the parties or (ii) if Mr. Barone or Mr. Platz, as
the case may be, terminates employment under certain specified circumstances.
The amount of any early repayment would not exceed the cash surrender value of
the relevant Policy at such time. The Policies have been assigned to Comstock
Bank as collateral security for repayment of the premiums paid by Comstock Bank.
The Employment Agreements entered into by Messrs. Barone and Platz with
First Security Bank of Nevada provide that Messrs. Barone and Platz will not be
obligated to repay premiums paid by Comstock Bank on their split-dollar life
insurance policies until October 2009. See "TERMS OF THE MERGER - INTERESTS OF
DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR INTERESTS."
KEY EMPLOYEE DEFERRED COMPENSATION AGREEMENTS. Similar to the Deferred
Fee Agreement described in "Remuneration of Directors" above, on April 30, 1997
Comstock Bank entered into Key Employee Deferred Compensation Agreements with
Messrs. Barone and Platz. Pursuant to the Key Employee Deferred Compensation
Agreements, Messrs. Barone and Platz have elected to defer part of their annual
base salary. Comstock Bank makes a matching contribution of up to 25% of the
first $12,000 of compensation deferred by Mr. Barone, and up to 15% of the first
$12,000 of compensation deferred by Mr. Platz. Matching contributions made are
subject to potential reduction or elimination in certain events, as described
hereinafter. The amount of salary deferred may be modified annually with
approval of the Board of Directors. Each of Messrs. Barone and Platz earns
interest on deferred compensation and matching contributions at a rate
established annually by the Board of Directors, which rate may not exceed the
prime lending rate of Comstock Bank plus 2%. The Key Employee Deferred
Compensation Agreements with Messrs. Barone and Platz and the obligations of
Comstock Bank thereunder were assumed by Bancorp in connection with the holding
company reorganization of Comstock Bank.
Upon their retirement, disability or death or upon a change in control
of Bancorp, deferred compensation, matching contributions and interest thereon
will be paid in cash to Messrs. Barone and Platz or their designated
beneficiary(ies) in equal monthly installments over a 13-year period (or in a
lump sum to the extent that a lump sum distribution has previously been
elected). Upon termination of employment in connection with a change in control,
however, the benefits payable under the Key Employee Deferred Compensation
Agreements would be payable in a lump sum within 90 days. As a result of the
proposed merger between Bancorp and First Security Corporation, Mr. Barone
expects as of January 31, 1999 to receive approximately $34,062 as a lump-sum
payment under his Key Employee Deferred Compensation Agreement. Mr. Platz
expects as of January 31, 1999 to receive approximately $9,751 as a lump-sum
payment under his Key Employee Deferred Compensation Agreement, and $18,407
under his (Director) Deferred Fee Agreement.
Mr. Platz has entered into a similar deferred director fee arrangement
with respect to fees to which he is entitled in his capacity as director. See,
"- REMUNERATION OF DIRECTORS."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Some of the directors and officers of Bancorp, as well as their
affiliates, are and have been customers of Comstock Bank and as such have had
banking transactions with Comstock Bank in 1998. Loan transactions with these
persons were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, prevailing at the time for
comparable transactions with others, and did not present more than a normal risk
of collectability or other unfavorable features.
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In 1998 Comstock Bank paid to the law firm of Dyer, Lawrence, Cooney &
Penrose, a firm in which Mr. Dyer, a director of Comstock Bank and Bancorp, is a
partner, the sum of $85,760 for legal services rendered. In 1998 Comstock Bank
paid State Farm Insurance the sum of $340 for insurance. Mr. Matorian, a
director, is the State Farm agent through whom the insurance was placed.
Beginning in 1997, Resource Management, Inc., which owns 385,000 shares
(7.62%) of Bancorp's common stock, has provided investor relations services to
Bancorp for a monthly fee of $3,500. Mr. Richard A. Barone, the brother of
Bancorp's Chairman and Chief Executive Officer, is the controlling stockholder
and President of Resource Management, Inc. Chairman and Chief Executive Officer
Robert N. Barone owns a 15% minority interest in Resource Management, Inc.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ELECTION
OF EACH OF THE NOMINEES NAMED HEREIN.
RATIFICATION OF INDEPENDENT AUDITOR (PROPOSAL 3)
Bancorp's independent auditor for the fiscal year ended December 31,
1998 was Kafoury, Armstrong & Company. The Board of Directors has selected
Kafoury, Armstrong & Company to be its independent auditor for the fiscal year
ending December 31, 1999. This appointment is being presented to the
stockholders for ratification.
One or more members of the firm of Kafoury, Armstrong & Company are
expected to be present at the Annual Meeting. The representative(s) of the
independent auditor will have the opportunity to make a statement if desired,
and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF THE APPOINTMENT OF KAFOURY, ARMSTRONG & COMPANY AS
INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
EXPENSES; SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by Bancorp. In
addition to solicitation by mail, directors, officers and employees of Bancorp
and Comstock Bank may solicit proxies for the Annual Meeting personally or by
telephone without additional remuneration therefor. Brokerage houses, nominees,
fiduciaries and other custodians are requested to forward soliciting materials
to beneficial owners. Bancorp will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy material to the beneficial owners of Bancorp common stock.
Stockholders may authorize another person or persons to act for them as
proxy by transmitting or authorizing the transmission of a telegram, cablegram
or other means of electronic transmission to the Secretary of Bancorp, provided
that any such telegram, cablegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Annual Meeting other than those matters described above in this Prospectus/Proxy
Statement. However, if any other matters should properly come before the
meeting, it is intended that proxies in the accompanying form will be voted in
respect thereof in accordance with the judgment of the person or persons voting
the proxies, including matters relating to the conduct of the meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Due to administrative oversight, Director Coombs was late in filing a Form 4
reporting his purchase of Bancorp stock.
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STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
If the merger agreement is not approved or the acquisition contemplated
thereby is not consummated before the 2000 Annual Meeting, Bancorp plans to hold
its 2000 Annual Meeting of Stockholders on May 31, 2000. In order for a
stockholder proposal to be included in next year's proxy statement, it must be
received by the Secretary at Bancorp's office at 6275 Neil Road, Reno, Nevada
89511 (mailing address P.O. Box 7610, Reno, NV 80510-7610) by November 29, 1999.
If a stockholder intends to present a proposal at the 2000 Annual
Meeting of Stockholders without seeking to include the proposal in Bancorp's
proxy materials for that meeting (assuming the merger is not completed by that
time and, therefore, that Bancorp holds an annual meeting in the year 2000),
Bancorp's management proxies will be entitled to use the discretionary voting
authority that will be contained in the proxies for the 2000 Annual Meeting of
Stockholders to vote on the stockholder's proposal at the 2000 Annual Meeting of
Stockholders, unless prior notice of the proposal is given to Bancorp. Prior
notice must be given to Bancorp at least 45 days before the anticipated April
20, 2000 proxy mailing date for the 2000 Annual Meeting of Stockholders.
Accordingly, a stockholder who desires to present a proposal at the 2000 Annual
Meeting of Stockholders without seeking to include the proposal in Bancorp's
proxy materials for that meeting should provide notice of the proposal to
Bancorp no later than March 6, 2000. If the stockholder fails to do so,
Bancorp's management proxies for the 2000 Annual Meeting of Stockholders will be
entitled to use their discretionary voting authority on that proposal, without
any discussion of the matter in Bancorp's proxy materials.
LEGAL MATTERS
Ray, Quinney & Nebeker, P.C, Salt Lake City, Utah, will pass upon
certain other matters with respect to the merger for First Security and First
Security Bank of Nevada, including the legality of the First Security common
stock to be issued in the merger. As of March 19, 1999, attorneys at Ray,
Quinney & Nebeker, as a group, were beneficial owners of no more than 4% of the
total outstanding First Security common stock and held no Bancorp shares. A
stockholder of Ray, Quinney & Nebeker is the daughter of the Chairman and Chief
Executive Officer of First Security. Another stockholder acts as Assistant
Secretary of First Security.
The law firm of Grady & Associates, Cleveland, Ohio, will pass upon
certain matters in connection with the merger for Bancorp.
EXPERTS
The consolidated financial statements of First Security incorporated in
this Prospectus/Proxy Statement by reference from the First Security Current
Report on Form 8-K dated October 1, 1998, have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report (which report
expressed an unqualified opinion and included explanatory language describing
the restatement of the financial statements to give effect to the California
State Bank acquisition, which was accounted for as a pooling of interests),
which is incorporated herein by reference, and have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Bancorp as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 incorporated in this Prospectus/Proxy Statement by reference
from Bancorp's Annual Report on Form 10-KSB have been audited by Kafoury,
Armstrong & Company, independent auditors, as set forth in their report thereon.
Such consolidated financial statements are included herein in reliance upon such
report given upon the authority of such firm as experts in auditing and
accounting.
Representatives of Kafoury, Armstrong & Company are expected to be
present at the Bancorp Annual Meeting of Stockholders. Such representatives will
have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
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WHERE YOU CAN FIND MORE INFORMATION
First Security Corporation has filed with the Securities and Exchange
Commission a Registration Statement on Form S-4 under the Securities Act of
1933. The Form S-4 Registration Statement registers the distribution of First
Security Corporation securities to be issued to Bancorp stockholders in the
merger. The Form S-4 Registration Statement , including attached exhibits and
schedules, contains additional relevant information about First Security
Corporation common stock. The rules and regulations of the Securities and
Exchange Commission allow us to omit certain information included in the Form
S-4 Registration Statement from this Prospectus/Proxy Statement.
In addition, First Security Corporation and Bancorp file reports, proxy
statements and other information with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. You may read and copy that
information at the following locations of the Securities and Exchange
Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy and proxy statements and other
information regarding issuers that, like First Security Corporation and Bancorp,
file electronically with the Securities and Exchange Commission. The address of
that site is http://www.sec.gov.
The Securities and Exchange Commission allows First Security
Corporation and Bancorp to "incorporate by reference" information into this
Prospectus/Proxy Statement. This means that we can disclose important
information to you by referring you to another document filed separately with
the Securities and Exchange Commission. The information incorporated by
reference is considered to be a part of this Prospectus/Proxy Statement, except
for any information that is superseded by information that is included directly
in this document.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus/Proxy Statement incorporates by reference the documents
listed below that First Security Corporation and Bancorp have previously filed
with the Securities and Exchange Commission. These documents contain important
information about our companies and their financial affairs.
FIRST SECURITY CORPORATION (Securities and Exchange Commission File No.
1-6906):
(a) Annual Report on Form 10-K for the year ended December 31, 1998;
(b) Proxy Statement dated March __, 1999;
(c) Current Reports on Form 8-K dated November 2, 1998 and January
22, 1999; and
(d) Description of First Security Corporation Common Stock, included
in First Security Corporation's Registration Statement on Form
S-3, filed with the Commission on September 13, 1991 (Commission
File Number 33-42784).
BANCORP (Securities and Exchange Commission File No. 000-22391):
(a) Annual Report on Form 10-KSB for the year ended December 31,
1998;
(b) Current Report on Form 8-K dated January 15, 1999; and
(c) Description of Bancorp common stock, included in Bancorp's
Registration Statement on Form S-4, filed with the Commission on
March 25, 1997 (Commission File Number 333-23923), under the
captions "Description of the Reorganization" and "Description of
Bancorp Capital Stock."
All documents filed by First Security Corporation and Bancorp under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after
the date of this Prospectus/Proxy Statement and prior to the date of the Bancorp
Annual Meeting shall be deemed to be incorporated by reference in this
Prospectus/Proxy Statement and to
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be a part hereof from the date of filing such documents. These documents include
periodic reports, such as Annual Reports on Forms 10-K or 10-KSB, Quarterly
Reports on Forms 10-Q or 10-QSB and Current Reports on Form 8-K, as well as
proxy statements.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus/Proxy Statement to the extent that a
statement contained herein or in any other subsequently filed document which is
also incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement, as so modified or superseded,
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus/Proxy Statement. The information relating to First Security
Corporation and Bancorp contained in this Prospectus/Proxy Statement should be
read together with the information in the documents incorporated by reference.
Copies of any First Security Corporation documents, other than exhibits
to such documents, that are incorporated by reference but not presented herein
or delivered herewith are available without charge to any person to whom this
Prospectus/Proxy Statement is delivered upon written or oral request to First
Security Corporation, Attention: Brad D. Hardy, Executive Vice President and
Chief Financial Officer, Suite 200, 79 South Main Street, Salt Lake City, Utah
84111, telephone number (801) 246-6000. In order to ensure timely delivery of
such documents prior to the Annual Meeting of Bancorp, any request should be
received on or before _____________, 1999. Copies of such documents will also be
available upon request thereafter until the effective time of the merger.
Copies of any Bancorp documents, other than exhibits to such documents,
that are incorporated by reference but not presented herein or delivered
herewith are available without charge to any person to whom this
Prospectus/Proxy Statement is delivered upon written or oral request to Bancorp,
Attention: Mr. Larry A. Platz, President and Secretary, P.O. Box 7610, Reno,
Nevada 89510-7610 (by mail, or to Mr. Platz at Bancorp, 6275 Neil Road, Reno,
Nevada 89511 if by overnight courier), telephone number (775) 824-7100. To
ensure timely delivery of such documents prior to the Annual Meeting of Bancorp,
any request should be received on or before April 20, 1999. Copies of such
documents will also be available upon request thereafter until the effective
time of the merger.
A copy of Bancorp's Summary Annual Report to Shareholders is attached
as Appendix D to this Prospectus/Proxy Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST SECURITY CORPORATION OR BANCORP. THIS PROSPECTUS/PROXY
STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT OR THE
SOLICITATION OF A PROXY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS/PROXY STATEMENT, NOR ANY DISTRIBUTION OF THE SECURITIES
OFFERED PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF FIRST SECURITY CORPORATION OR
BANCORP OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS
PROSPECTUS/PROXY STATEMENT.
ALL INFORMATION CONTAINED OR INCORPORATED IN THIS PROSPECTUS/PROXY
STATEMENT WITH RESPECT TO FIRST SECURITY CORPORATION WAS SUPPLIED BY FIRST
SECURITY CORPORATION. ALL INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT WITH RESPECT TO BANCORP WAS SUPPLIED BY BANCORP. ALTHOUGH NEITHER
FIRST SECURITY CORPORATION NOR BANCORP KNOWS OF ANY INFORMATION INDICATING THAT
ANY STATEMENTS OR INFORMATION HEREIN RELATING TO THE OTHER PARTY ARE INACCURATE
OR INCOMPLETE, NEITHER FIRST SECURITY CORPORATION NOR BANCORP CAN WARRANT THE
ACCURACY OR COMPLETENESS OF SUCH STATEMENTS OR INFORMATION AS THEY RELATE TO THE
OTHER PARTY.
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APPENDIX A
MERGER AGREEMENT
<PAGE> 71
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE 12TH DAY OF JANUARY,
1999 (THIS "AGREEMENT"), IS MADE AND ENTERED INTO BY AND AMONG FIRST SECURITY
CORPORATION, A DELAWARE CORPORATION ("FSC"), FIRST SECURITY BANK OF NEVADA, A
BANK ORGANIZED UNDER THE LAWS OF NEVADA ("FSB"), COMSTOCK BANCORP, A NEVADA
CORPORATION ("BANCORP"), AND COMSTOCK BANK, A BANK ORGANIZED UNDER THE LAWS OF
NEVADA ("BANK").
R E C I T A L S:
A. FSC is a corporation duly organized and existing under the laws of
the State of Delaware, with its principal place of business located in Salt Lake
City, Utah. FSC is authorized by its Articles of Incorporation, as amended, to
issue (i) 400,000 shares of preferred stock, each of no par value ("FSC
Preferred Stock"), 18,052 of which are designated as Class A Preferred Stock, of
which 9,361 were issued and outstanding on November 30, 1998, and (ii)
600,000,000 shares of common stock, each of $1.25 par value ("FSC Common
Stock"), of which as of November 30, 1998, there were 188,440,989 (net of
Treasury) shares issued and outstanding ("Basic Shares").
B. FSB is a bank duly organized under the laws of the State of Nevada,
with its principal place of business located in Las Vegas, Nevada. FSB is
authorized by its Articles of Incorporation to issue 5,000,000 shares of common
stock, each of $1.00 par value ("FSB Common Stock"), of which as of the date of
this Agreement there were 4,329,161 shares issued and outstanding. FSC owns
beneficially and of record all of the issued and outstanding shares of FSB
Common Stock.
C. Bancorp is a corporation duly organized and existing under the laws
of the State of Nevada, with its principal place of business located in Reno,
Nevada. Bancorp is authorized by its Articles of Incorporation to issue
15,000,000 shares of common stock, $.01 par value ("Bancorp Common Stock"), of
which, as of November 30, 1998, there were (i) 4,481,368 shares issued and
outstanding, (ii) options outstanding for 651,732 shares as of such date (the
"Options") and (iii) warrants outstanding for 52,800 shares (the "Warrants").
D. Bank is a bank incorporated under the laws of the State of Nevada,
having its principal place of business located in Reno, Nevada. Bank is
authorized by its Articles of Incorporation to issue 6,000,000 shares of common
stock, each of $.50 par value ("Bank Common Stock"), of which as of the date of
this Agreement there were 2,210,834 shares issued and outstanding. Bancorp owns
beneficially and of record all of the issued and outstanding shares of Bank
Common Stock.
E. The parties hereto desire that Bancorp be merged with and into FSC
(the "Merger") pursuant to this Agreement and that certain Certificate of Merger
in the form attached hereto as Exhibit A (the "Certificate of Merger") and that
immediately after the Merger, Bank be merged with and into FSB (the "Bank
Merger") pursuant to this Agreement and those certain Articles of Merger
attached hereto as Exhibit B (the "Bank Articles of Merger").
A G R E E M E N T:
NOW, THEREFORE, in consideration of foregoing and the respective
representations, warranties, covenants, agreements and conditions set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, covenant and agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
(a) Pursuant to the laws of the States of Delaware and Nevada,
and subject to the terms and conditions of this Agreement, at the effective time
of the Certificate of Merger (the "Effective Time"), FSC and Bancorp (sometimes
referred to herein as the "Merging Entities") shall consummate the Merger
pursuant to which (a) Bancorp shall be merged with and into FSC, and the
separate corporate existence of Bancorp shall thereupon cease; (b) FSC shall be
the successor or surviving corporation in the Merger and shall continue to be
governed by the laws of the State of Delaware (the "Surviving Corporation"); and
(c) the separate corporate existence of FSC with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger,
except as set forth in
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this Article I. FSC, as the Surviving Corporation, shall thereupon and
thereafter possess all the rights, privileges, powers and franchises, of a
public as well as a private nature, and shall be subject to all restrictions,
disabilities and duties of the Merging Entities; and all property, real,
personal and mixed and all debts due to the Merging Entities on whatever
account, including subscriptions for shares and all other things in action or
belonging to the Merging Entities shall be taken and deemed to be vested in FSC
without further act or deed. FSC shall thenceforth be responsible for all the
debts, liabilities and duties of each of the Merging Entities and may be
prosecuted to judgment as if the Merger had not taken place, or FSC may be
substituted in place of the Merging Entities and neither the rights of creditors
nor any liens upon any property of either shall be impaired by the Merger.
(b) As of the Effective Time, the certificate of incorporation of
FSC as in effect immediately prior to the Merger shall be the certificate of
incorporation of the Surviving Corporation until thereafter amended as provided
by law and such certificate of incorporation. As of the Effective Time, the
bylaws of FSC as in effect immediately prior to the Effective Time shall be the
bylaws of the Surviving Corporation until thereafter amended as provided by law
and such bylaws of the Surviving Corporation.
1.2 Directors and Officers of the Surviving Corporation. The directors
and officers of the Surviving Corporation at the Effective Time shall be the
directors and officers of FSC as of immediately prior to the Effective Time, and
shall serve in their respective positions until their successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the certificate of incorporation and
the bylaws of the Surviving Corporation.
1.3 Subsequent Actions. If, at any time after the Merger, FSC shall
consider or be advised that any deeds, bills of sale, assignments, assurances,
or any other actions or things are necessary or desirable to vest, perfect, or
confirm of record or otherwise in FSC its right, title, or interest in, to, or
under any of the rights, properties, or assets of Bancorp acquired or to be
acquired by FSC as a result of or in connection with the Merger, or otherwise to
carry out this Agreement, the officers and directors of FSC shall be authorized
to execute and deliver, in the name and on behalf of Bancorp or otherwise, all
such deeds, bills of sale, assignments, and assurances, and to make and do, in
the name and on behalf of Bancorp or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect, or confirm any right,
title, and interest in, to, and under such rights, properties, or assets in FSC
or otherwise to carry out this Agreement.
ARTICLE II
THE BANK MERGER
2.1 The Bank Merger.
(a) Immediately after but essentially concurrently with the
Merger, and pursuant to the laws of the State of Nevada, and subject to the
terms and conditions of this Agreement, at the time that the Bank Articles of
Merger become effective, FSB and Bank (sometimes collectively referred to herein
as the "Merging Banks") shall consummate the Bank Merger pursuant to which (a)
the Bank shall be merged with and into FSB, immediately after but essentially
concurrently with the Merger, and the separate corporate existence of Bank shall
thereupon cease; (b) FSB shall be the successor or surviving bank in the Merger
and shall continue to be governed by the laws of the State of Nevada (sometimes
referred to herein as the "Surviving Bank"); and (c) the separate corporate
existence of FSB with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Bank Merger, except as set forth in
this Article II. FSB, as the Surviving Bank, shall thereupon and thereafter
possess all the rights, privileges, powers and franchises, of a public as well
as a private nature, and shall be subject to all restrictions, disabilities and
duties of the Merging Banks, and all property, real, personal and mixed and all
debts due to the Merging Banks on whatever account, including subscriptions for
shares and all other things in action or belonging to the Merging Banks shall be
taken and deemed to be vested in FSB without further act or deed. FSB shall
thenceforth be responsible for all the debts, liabilities and duties of each of
the Merging Banks and may be prosecuted to judgment as if the Bank Merger had
not taken place, or FSB may be substituted in place of the Merging Banks and
neither the rights of creditors nor any liens upon any property of either shall
be impaired by the Bank Merger.
(b) As of the effective time of the Bank Merger, the articles of
incorporation of FSB as in effect immediately prior to the Bank Merger shall be
the articles of incorporation of the Surviving Bank without amendment until
thereafter amended as provided by law and such articles of incorporation. As of
the effective time of the Bank Merger, the bylaws of FSB as in effect
immediately prior to the Bank Merger shall be the bylaws of the Surviving Bank
without amendment until thereafter amended as provided by law and such bylaws.
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2.2 Directors and Officers of the Surviving Bank. The directors of the
Surviving Bank shall be as set forth on Schedule 2.2 attached hereto and such
individuals shall serve for a twelve month period from and after the Closing
Date or until their successors are duly elected and qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and the bylaws of the Surviving Bank. The officers of the
Surviving Bank at the effective time of the Bank Merger shall be the officers of
FSB as of immediately prior to the Bank Merger and shall serve in their
respective positions until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the articles of incorporation and the bylaws of the Surviving
Bank.
2.3 Subsequent Actions. If, at any time after the Bank Merger, FSB
shall consider or be advised that any deeds, bills of sale, assignments,
assurances, or any other actions or things are necessary or desirable to vest,
perfect, or confirm of record or otherwise in FSB its right, title, or interest
in, to, or under any of the rights, properties, or assets of Bank acquired or to
be acquired by FSB as a result of or in connection with the Bank Merger, or
otherwise to carry out this Agreement, the officers and directors of FSB shall
be authorized to execute and deliver, in the name and on behalf of Bank or
otherwise, all such deeds, bills of sale, assignments, and assurances, and to
make and do, in the name and on behalf of Bank or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect, or confirm
any right, title, and interest in, to, and under such rights, properties, or
assets in FSB or otherwise to carry out this Agreement.
2.4 Conversion of Shares. The manner and basis of converting the shares
of the Merging Banks shall be as set forth in Article III, below.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Conversion of Common Stock of Merging Entities.
(a) Conversion of Bancorp Common Stock. In accordance with this
Agreement, as of the Effective Time, by virtue of the Merger and without any
further action on the part of the holders of any shares of Bancorp Common Stock,
each issued and outstanding share of Bancorp Common Stock (of which there shall
be no more than 5,185,900 shares fully diluted and assuming all Options and
Warrants shall have been exercised or terminated) other than shares as to which
dissenters' rights are perfected ("Dissenting Shares"), and all rights in
respect thereof, shall be converted, ipso facto, into the right to receive the
Merger Consideration.
AS OF THE EFFECTIVE TIME, ALL SUCH SHARES OF BANCORP COMMON STOCK,
INCLUDING ALL OPTION AND WARRANT SHARES, SHALL NO LONGER BE OUTSTANDING AND
SHALL AUTOMATICALLY BE CANCELED AND RETIRED AND SHALL CEASE TO EXIST. EACH
HOLDER OF A CERTIFICATE REPRESENTING ANY SHARES OF BANCORP COMMON STOCK SHALL
CEASE TO HAVE ANY RIGHTS WITH RESPECT THERETO, EXCEPT THE RIGHT TO RECEIVE, UPON
THE SURRENDER OF ANY SUCH CERTIFICATES, THE MERGER CONSIDERATION UPON THE TERMS
AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN.
(b) Certain Definitions
"Average FSC Share Price" shall mean the average of the last
sales prices per share of FSC Common Stock on the Nasdaq
National Market for the ten (10) consecutive trading days
preceding the Closing Date (such period referred to herein as
the "Closing Calculation Period"); subject to the following:
(i) if the Average FSC Share Price is
greater than or equal to $24.05, the Average FSC
Share Price shall be $24.05; and
(ii) if the Average FSC Share Price is less
than or equal to $18.70, the Average FSC Share Price
shall be $18.70.
"Bancorp Share Price" shall mean, subject to adjustment
pursuant to Section 8.2(g) below, $65,000,000 divided by (i)
the total number of issued and outstanding shares of Bancorp
Common Stock, plus (ii) the total number of shares of Bancorp
Common Stock subject to all Vested Options, plus (iii) the
total number of shares of Bancorp Common Stock subject to all
Warrants.
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"Exchange Ratio" shall mean (in each case, rounded to four
digits to the right of the decimal point) that number of
shares of FSC Common Stock (rounded to the nearest one
thousandth) determined as follows:
Bancorp Share Price
Average FSC Share Price
"Merger Consideration" for each share of Bancorp Common Stock
being converted into shares of FSC Common Stock shall mean
that number of duly authorized, validly issued, fully paid and
nonassessable shares of FSC Common Stock equal to the Exchange
Ratio; provided, however, if, prior to the Effective Time, FSC
should split, reclassify or combine the FSC Common Stock, or
pay a stock dividend or other stock distribution in FSC Common
Stock, as of a record date prior to the Effective Time,
appropriate adjustment or adjustments (rounded to four digits
to the right of the decimal point) will be made to the
Exchange Ratio and the total number of shares of FSC Common
Stock to be issued in the transaction so as to maintain the
proportional interest in FSC Common Stock which the
shareholders of Bancorp would otherwise have received.
(c) FSC Stock. All shares of FSC Common Stock which are
outstanding immediately prior to the Merger shall continue to be outstanding
after the Merger.
3.2 The Merging Banks.
(a) FSB Common Stock. All shares of FSB Common Stock which are
outstanding immediately prior to the Bank Merger shall continue to be
outstanding immediately after the Bank Merger
(b) Bank Common Stock. As of the Effective Time, each issued and
outstanding share of Bank Common Stock and all rights in respect thereof shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and no FSB Common Stock or FSC Common Stock shall be
delivered in exchange therefore.
3.3 Options Immediately prior to the Effective Time, each then
outstanding Option issued under each stock option plan, program, agreement or
arrangement of Bancorp (each a "Bancorp Stock Plan") that has previously vested
prior to the Merger (a "Vested Option") shall be exercised pursuant to a
cashless exercise procedure whereby each holder of a Vested Option shall be
entitled to receive on a net basis that number of shares of Bancorp Common Stock
equal to X in the following formula:
X = A(B - C)
-------
B
Where A equals the number of shares of Bancorp Common Stock subject to such
Vested Option, B equals the Bancorp Share Price and C equals the strike price of
such Vested Option. The aggregate number of shares so issuable with respect to
all Vested Options shall be referred to herein as the "Bancorp Option Shares."
At the Effective Time, each Bancorp Option Share shall be converted into shares
of FSC Common Stock pursuant to Sections 3.1 and 3.5 for the account of the
holder of such Vested Option.
3.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, Dissenting Shares shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 3.1 hereof, but the holder
thereof shall be entitled to only such rights as are granted by the NGCL.
(b) Notwithstanding the provisions of Section 3.4. (a) above, if
any holder of shares of Bancorp Common Stock who demands appraisal of such
holder's shares of Bancorp Common Stock under the NGCL effectively withdraws or
loses (through failure to perfect or otherwise) his or her right to appraisal,
then as of the Effective Time or the occurrence of such event, whichever later
occurs, such holder's shares of Bancorp Common Stock shall automatically be
converted into and represent only the right to receive the Merger Consideration
as provided in Section 3.1. hereof, without interest, upon surrender of the
certificate or certificates representing such shares of Bancorp Common Stock
pursuant to Section 3.5 hereof.
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(c) Bancorp shall give FSC (i) prompt notice of any written
demands for appraisal or payment of the fair value of any shares of Bancorp
Common Stock, withdrawals of such demands, and any other instruments served on
the Bancorp pursuant to the NGCL. Except with the prior written consent to FSC,
Bancorp shall not voluntarily make any payment with respect to any demands for
appraisal, settle or offer to settle any such demands.
3.5 Exchange of Shares and Certificates.
(a) Exchange Agent. As of the Effective Time, FSC shall deposit
with First Chicago Trust Company of New York or such other bank or trust company
as may be designated by FSC (the "Exchange Agent"), for the benefit of the
holders of shares of Bancorp Common Stock, for exchange in accordance with this
Article III, through the Exchange Agent, (i) cash in an amount sufficient to pay
cash in lieu of fractional shares, and (ii) certificates representing the shares
of FSC Common Stock issuable pursuant to Section 3.1. hereof in exchange for
outstanding shares of Bancorp Common Stock (the "Exchange Fund").
(b) Exchange Procedures; Transfer of Shares. As soon as
reasonably practicable after the Effective Time, the Exchange Agent shall mail
to each holder of record of a certificate or certificates which immediately
prior to the Effective Time represented outstanding shares of Bancorp Common
Stock (the "Certificates") whose shares were converted into the right to receive
shares of FSC Common Stock pursuant to Section 3.1. hereof (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as FSC may reasonably specify and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of FSC Common Stock, and cash in lieu of fractional shares
of FSC Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by FSC,
together with documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that whole number of shares which such holder has the
right to receive pursuant to the provisions of this Article III and (ii) cash in
lieu of any fractional number of shares as contemplated by this Section 3.5, and
the Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Bancorp Common Stock which is not registered in the
transfer records of Bancorp, a certificate representing the proper number of
shares of FSC Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or the taxes required by
reason of the issuance of shares of FSC Common Stock to a person other than the
registered holder of such Certificate or establish to the satisfaction of FSC
that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 3.5, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration and cash in lieu of any fractional shares of
FSC Common Stock as contemplated by this Section 3.5. No interest shall be paid
or accrue on any cash payable in lieu of any fractional shares of FSC Common
Stock.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions with respect to FSC Common Stock with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of FSC Common Stock represented thereby,
and no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to Section 3.5(e) hereof, until the surrender of such
Certificate in accordance with this Article III. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
applied to the holder of the certificate representing whole shares of FSC Common
Stock issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any cash payable in lieu of a fractional share of FSC
Common Stock to which such holder is entitled pursuant to Section 3.5(e) and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of FSC Common
Stock, and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such whole shares of FSC Common Stock.
(d) No Further Ownership Rights in Bancorp Common Stock; No
Transfer Following the Closing Date. All shares of FSC Common Stock issued upon
the surrender for exchange of Certificates in accordance with the terms of this
Article III (including any cash paid pursuant to Section 3.5(e) hereof) shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to the shares of Bancorp Common Stock theretofore represented by such
Certificates, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Bancorp
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange
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Agent for any reason, they shall be canceled and exchanged as provided in this
Article III, except as otherwise provided by law.
(e) Fractional Shares.
(i) No certificates representing fractional shares of
FSC Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests shall not entitle the
owner thereof to vote or to any other rights of a stockholder of FSC.
(ii) Notwithstanding any other provision of this
Agreement, each holder of shares of Bancorp Common Stock converted
pursuant to the Merger who would otherwise have been entitled to
receive a fraction of a share of FSC Common Stock (after taking into
account all Certificates delivered by such holder) shall receive, in
lieu thereof, cash (without interest) in an amount equal to (A) such
fraction multiplied by (B) the Average FSC Share Price.
(f) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of the Certificates for six
months after the Effective Time shall be delivered to FSC, upon demand, and any
holders of the Certificates who have not theretofore complied with this Article
III shall thereafter look only to FSC for payment of their Bancorp Common Stock,
any cash in lieu of fractional shares of FSC Common Stock and any dividends or
distributions with respect to FSC Common Stock.
(g) No Liability. None of FSC, FSB, Bancorp, Bank or the Exchange
Agent shall be liable to any person in respect of any shares of FSC Common Stock
(or dividends or distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificates shall not have been
surrendered prior to seven years after the Effective Time, or immediately prior
to such earlier date on which any shares of FSC Common Stock, any cash in lieu
of fractional shares of FSC Common Stock, or any dividends or distributions with
respect to FSC Common Stock in respect of such Certificate would otherwise
escheat to or become the property of any Governmental Entity, any such shares,
cash, dividends or distributions in respect of such Certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation free and clear of all claims or interest of any person previously
entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by FSC, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
FSC.
ARTICLE IV
COVENANTS OF BANCORP AND BANK
4.1 Conduct of Business Pending the Closing. Except as otherwise
contemplated hereby, between the date hereof and the Effective Time, or the time
when this Agreement terminates as provided herein, each of Bancorp and Bank
shall conduct its respective operations and business in the usual and ordinary
course of business and consistent with past practice and use their commercially
reasonable efforts to retain for the benefit of FSC and FSB the continuing
services of the present officers and employees of Bank and Bancorp, to preserve
the goodwill of customers and others having business relations with Bank and
Bancorp, to preserve the deposit levels of Bank, to preserve the benefits of all
contractual relationships with others and to keep in force at least at their
present limits all policies of insurance currently in effect. Without limiting
the generality of the foregoing, and except as otherwise specifically permitted
by this Agreement, during the period from the date hereof to the Effective Time,
neither Bank nor Bancorp shall, without the prior written authorization of the
Chairman, President or Chief Financial Officer of FSC:
(a) Change in Capital Stock; Issuance of Shares. Make any change
in their authorized capital stock, or issue, agree to issue or permit Bank or
Bancorp to become obligated to issue any shares of their capital stock, or
securities convertible into their capital stock, except that Bancorp may issue
shares of Bancorp Common Stock upon the exercise of outstanding Options or
Warrants described in Schedule 5.3;
(b) Options, Warrants, and Rights. Grant or issue any options,
warrants or other rights, including stock appreciation rights, of any kind
relating to the purchase of shares of their capital stock, or securities
convertible into their capital stock (except for the Options and Warrants
outstanding as of the date hereof described in Schedule
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5.3, Bancorp and Bank hereby represent and warrant that no options, warrants,
stock appreciation rights or other rights to purchase shares of their capital
stock are outstanding on the date hereof);
(c) Dividends. Declare or pay any dividends or other
distributions on any shares of their capital stock; provided, however, that Bank
may declare dividends to Bancorp in accordance with normal practices and to
cover expenses associated with the transactions hereunder in an amount not to
exceed $3,530,278 (see lines 11 and 20 on Schedule 8.2(g) attached hereto);
(d) Purchase of Shares. Purchase or otherwise acquire, or agree
to acquire, any shares of their stock, other than in a fiduciary capacity;
(e) Benefit Plans. Except as required by law, or, with the
consent of FSC, to terminate the employee benefit plans identified in Section
5.16 incident to the integration of Bank's employees into the employee benefit
plans offered by FSC or FSB, enter into or amend any pension, retirement, stock
option, stock appreciation, profit sharing, deferred compensation, consultant,
bonus, group insurance or similar benefit plan (other than the cafeteria plan
identified in Schedule 5.16) in respect of any of their directors, officers or
other employees;
(f) Conduct of Business. Except as contemplated by this
Agreement, take or omit to take any action which (i) causes Bancorp or Bank not
to conduct their respective businesses in a manner consistent with normal
business practices, including with respect to the securities or asset portfolios
of Bank, (ii) has a Material Adverse Effect on the financial condition (present
or prospective), businesses, properties, assets or operations of Bancorp and
Bank (the parties hereto recognize that the operation of Bancorp and Bank until
the Effective Time is the responsibility of Bancorp and Bank and their
respective Boards of Directors and officers; nevertheless, Bancorp and Bank
shall keep FSC advised of all important changes in the financial condition
(present or prospective), business, properties, assets or operations of Bancorp
and Bank);
(g) Acquisitions and Mergers. Acquire or merge with any other
company or acquire any branch or other significant part of the assets of any
other company;
(h) Liens; Indebtedness; Increase in Compensation, etc. Except in
the ordinary course of business, (i) mortgage, pledge or subject to a lien or
any other encumbrance any of their respective assets, dispose of any of their
respective assets, incur or cancel any indebtedness or claims, purchase or lease
any assets having a purchase price or lease cost, in the aggregate, of more than
$20,000.00, other than the pending property purchase and the parking lot
renovation at 6275 Neil Road, Reno, Nevada identified in Schedule 5.14 or (ii)
except for the two Agreements for Change-in-Control Severance Benefits set forth
in Schedule 5.16 hereto, increase any compensation or benefits payable to their
respective officers or employees, except to pay routine merit increases in
accordance with past practices and costs associated with the transactions
contemplated under this Agreement (the parties hereto recognize that Bank has in
the ordinary course of business routinely pledged up to $45,000,000 of mortgage
loan assets and U.S. government and agency securities as collateral for
borrowings from the Federal Home Loan Bank of San Francisco and that Bank may
continue to pledge residential mortgage loans and U.S. government and agency
securities to the Federal Home Loan Bank of San Francisco to secure borrowings
in an aggregate amount up to $35,000,000 through the Closing Date).
Notwithstanding the restrictions contained in this section, Bancorp or Bank may
grant individual annual increases to officers and employees for 1999 in
accordance with past practices up to a maximum aggregate total of 6% of the
total annual compensation of all officers and employees, which amount shall not
in any event exceed $378,902, and continue during 1999 incentive compensation
arrangements in accordance with past practices.
(i) Amendments to Charter, etc. Amend their respective Articles
of Incorporation or make any material amendments to their respective Bylaws
which would interfere in any manner with the transactions contemplated by this
Agreement.
4.2 Investigation; Access. Each of Bancorp and Bank shall diligently
endeavor to (i) take or cause to be taken all action required under this
Agreement on its part to be taken as promptly as practicable so as to permit the
consummation of the transactions contemplated by this Agreement at the earliest
possible date and cooperate fully with FSC and FSB to that end, including,
without limitation, providing to FSC and FSB, and their respective employees,
accountants and counsel, access to Bancorp's and Bank's books, records, reports,
tax returns and facilities and to its employees, accountants, and counsel;
provided, however, that such investigation to be conducted by FSC and FSB shall
be performed in such a manner which will not unreasonably interfere with the
normal operations, or
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customer or employee relations, of Bancorp and Bank and shall be in accordance
with procedures established by the parties having due regard for the foregoing,
and (ii) furnish all necessary information for inclusion in any applications
relating to the consents, approvals and permissions of regulatory authorities
referred to in Article VIII.
Bancorp and Bank have delivered to FSC, as Schedule 4.2, (i) a list
setting forth all of the classified, criticized and non-performing assets of
Bank ("Classified Assets") as identified by Bank or by the most recent
examination by Bank's federal or state bank examiner, along with an explanation
of management's response for dealing with such assets, (ii) a list of all loans
which are more than thirty (30) days past due ("Past Due Loans"), and (iii) Bank
management's analysis of expected losses to be incurred with respect to the
loans (assets) identified in items (i) and (ii).
From execution of the Agreement until Closing, Bancorp and Bank shall
deliver to FSC (i) monthly reports which summarize the loan and lease and the
deposit activity of Bank for the previous month, and (ii) a report detailing any
changes to the Classified Assets or Past Due Loans.
FSC covenants and agrees that FSC and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning Bancorp and Bank received from any of them (except to
the extent that such documents or information are a matter of public record or
require disclosure in the Proxy Statement/Prospectus, the Registration Statement
on Form S-4 to be filed by FSC pursuant to Section 6.10, or any of the public
information of any applications required to be filed with any governmental or
regulatory agency to obtain the approvals and consents required to effect the
transactions contemplated hereby), and if the transactions contemplated herein
are not consummated, such confidence shall be maintained and all such documents
shall be returned to Bancorp.
4.3 Regulatory Approvals. Bancorp and Bank shall (i) use their best
efforts in good faith to assist FSC in obtaining all necessary regulatory
approvals and taking or causing to be taken all other action required under this
Agreement on its or their part to be taken as promptly as practicable so as to
permit the consummation of the transactions contemplated by this Agreement at
the earliest possible date, and cooperate fully with FSC and FSB to that end,
and (ii) furnish all necessary information for inclusion in any applications
relating to the consents, approvals, and permissions of regulatory authorities
referred to in Article VIII. Bancorp and Bank shall have the right to review all
applications to such regulatory authorities before the filing thereof and to
comment upon the form of such applications and the information contained
therein. Bancorp and Bank know of no reasons why the transactions contemplated
by this Agreement should not be approved by the regulatory authorities.
4.4 Termination of Employee Benefit Plans. On or before the Effective
Time, Bancorp and FSC shall determine whether it is in the best interests of the
parties hereto and the employees of Bancorp and Bank to terminate the employee
benefit plans (as described in Section 5.16) or to merge such plans into an
appropriate FSC benefit plan. FSC will cooperate in such determination to either
freeze the Plans or transfer such benefits under the Plans (in a plan-to-plan
transfer) into an existing benefit plan maintained by FSC as to which such
benefits may be transferred without necessity of material amendment to, or
adverse effect on qualification of, such FSC plan and provided further that FSC
incurs no expense or other adverse result in allowing such rollover of benefits.
4.5 Information for Proxy Statement. Upon request by FSC, Bancorp and
Bank shall timely prepare and deliver to FSC, in such form required by rules and
regulations of the United States Securities and Exchange Commission (the "SEC"),
all information, descriptions, accounting reports and schedules (including
audited financial statements in the form required by Regulation S-X of the SEC,
as may be required) and other materials required for preparation and filing of
the Registration Statement contemplated by Section 6.10 of this Agreement.
4.6 Environmental Reports. Within twenty (20) days of execution of this
Agreement, Bancorp and Bank shall cause to be prepared, by firms reasonably
acceptable to FSC, Phase I Environmental Reports with respect to real property
owned by Bancorp and Bank, including Bank's branch facilities. In the event a
Phase I report indicates that Bancorp or Bank may be a potentially liable party
for remedial action under any environmental laws (as such term is defined in
Section 5.7 below), then Bancorp and Bank shall cause Phase II Environmental
Reports to be prepared detailing any possible exposure under such laws. The cost
of said Phases I and II Environmental Reports and the cost of any remedial
action determined to be necessary by such reports shall be borne by Bancorp and
Bank. Bank shall make available to FSC any Phase I Environmental Reports which
it has obtained on real property-secured loans.
4.7 Notification of Actions. Bancorp and Bank covenant and agree to
immediately notify FSC and FSB in the event of any action which materially
affects any of the covenants set forth in this Article IV.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANCORP AND BANK
As an inducement to FSC and FSB to enter into this Agreement, and in
addition to any representations and warranties made elsewhere in this Agreement,
Bancorp and Bank jointly and severally represent and warrant to and agree with
FSC and FSB as of the date of this Agreement and as of the Closing Date as
follows:
5.1 Organization, Conduct of Business, etc. Each of Bancorp and Bank
(i) is duly organized and validly existing and in good standing under the laws
of the State of Nevada, (ii) has all requisite power and authority (corporate
and other) to own its properties and conduct its business as now being
conducted, (iii) is duly qualified to do business and is in good standing in
each jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where failure to so qualify would not have a Material Adverse
Effect, as defined in Section 11.17, below, on Bancorp or Bank or their
respective businesses, operations, properties, assets or condition (financial or
otherwise), and (iv) is not transacting business, or operating any properties
owned or leased by it in violation of any provision of federal or state law or
any rule or regulation promulgated thereunder, which violation would have a
Material Adverse Effect on Bancorp or Bank or their respective businesses,
operations, properties, assets or condition (financial or otherwise). Other than
Bancorp's ownership of Bank and except as set forth in Schedule 5.1, neither
Bancorp nor Bank owns any equity interest in any other business organization and
neither Bancorp nor Bank is a party to any joint venture or similar enterprise.
5.2 Capitalization. The authorized capital stock of Bank consists
solely of 6,000,000 shares of Bank Common Stock. As of the date hereof, there
are 2,210,834 shares of Bank Common Stock issued and outstanding. Bancorp owns,
beneficially and of record, all of the issued and outstanding shares of Bank
Stock. The authorized capital stock of Bancorp consists solely of 15,000,000
shares of Bancorp Common Stock. As of the date hereof, there are 5,035,500
shares of Bancorp Common Stock issued and outstanding, net of 8,000 shares of
treasury stock. The outstanding shares of Bancorp Common Stock and the holders
of record thereof are identified on Schedule 5.2 hereto. All of the outstanding
shares of capital stock of each of Bank and Bancorp have been duly authorized
and are validly issued, fully paid and nonassessable.
5.3 Options, SARs, Warrants, etc. Schedule 5.3 identifies (i) the
holders of each of the Options, the number of Options held by each holder of
Options and the Option exercise price with respect thereto and (ii) the holders
of each of the Warrants, the number of Warrants held by each holder of Warrants
and the Warrant exercise price with respect thereto. Except for the Options and
the Warrants, there are no outstanding stock appreciation rights or options,
warrants, calls, units or commitments of any kind relating to the issuance,
sale, purchase or redemption of, or securities convertible into, capital stock
of Bank or Bancorp. Except for the stock option plans disclosed on Schedule
5.16, neither Bancorp nor Bank maintain a plan relating to the issuance, sale,
purchase or redemption of capital stock of Bancorp or Bank.
5.4 Authorization; Validity of Agreement. Each of Bancorp and Bank has
the corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Board of Directors of
Bancorp and Bank, has been duly executed and delivered on behalf of Bancorp and
Bank, and, subject to approval by the shareholders of Bancorp, constitutes a
valid and binding agreement of Bancorp and Bank, enforceable against each in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, liquidation, receivership, conservatorship, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles.
5.5 Bancorp and Bank Reports. Since January 1, 1995, each of Bancorp
and Bank has filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), Federal Deposit Insurance Corporation (the "FDIC") and the
Nevada Financial Institutions Division (the "Division"). All such reports and
statements filed by Bancorp or Bank with the Federal Reserve Board, the FDIC,
the Division and other applicable state securities or banking authorities are
collectively referred to herein as the "Bank Reports." As of their respective
dates, the Bank Reports complied in all material respects with all the statutes,
rules and regulations enforced or promulgated by the regulatory authority with
which they were filed and did not and as of the date hereof do not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading. Except as set
forth on Schedule 5.5, since January 1, 1995, no regulatory agency, including
the Federal
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Reserve Board, the FDIC and the Division, has criticized, in any significant
manner, the management or operation of Bancorp or Bank, cited Bancorp or Bank
for a violation of law, or imposed any mandatory action by Bancorp or Bank to
bring such party in compliance with applicable rules and regulations.
5.6 Bancorp and Bank Financial Statements; No Undisclosed Liabilities.
Bancorp's audited Balance Sheets as of December 31, 1996 and December 31, 1997,
and its audited Statements of Income and Statements of Cash Flow for the years
ended December 31, 1996 and December 31, 1997, and Bancorp's unaudited interim
Balance Sheet for the period ended September 30, 1998, heretofore delivered to
FSC (hereinafter the "Financial Statements"), were prepared in accordance with
generally accepted accounting principles consistently applied (except for such
interim statement which requires year-end adjustments) and present fairly
Bancorp's and Bank's financial condition, results of operations and changes in
cash flow as of such dates.
Bancorp and Bank will provide to FSC on a monthly basis prior to the
Effective Time all interim financial statements relating to Bancorp and Bank
customarily prepared by Bancorp or Bank.
Except as and to the extent stated in the Financial Statements
delivered or to be delivered pursuant to this Section 5.6 and in Schedule 5.6,
and except for those liabilities incurred in the normal course of Bancorp's or
Bank's business or as contemplated by this Agreement, neither Bancorp nor Bank
has any material liabilities or obligations, secured or unsecured (whether
accrued, absolute, contingent or otherwise), and whether due or to become due,
including but not limited to liabilities on account of taxes, other governmental
charges or lawsuits subsequently brought. Except as set forth on Schedule 5.6,
there are no suits, actions or proceedings pending or, to the knowledge of
Bancorp or Bank or any of their directors or officers, threatened, or any
contingent liability which would give rise to any right of indemnification on
the part of any director or officer of Bancorp or Bank or his or her heirs,
executors or administrators, as against Bancorp or Bank or any successor to the
business of Bancorp or Bank.
5.7 Environmental Matters. For purposes of this Section 5.7, the term
"environmental laws" shall include all state and federal laws designed to
protect human health or the environment, as amended from time to time, and all
regulations promulgated thereunder, including, without limitation, the Clean Air
Act, 42 U.S.C.A. Sections 7401, et seq., the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C.A. Sections 9601, et seq.,
the Federal Water Pollution Control Act, 33 U.S.C.A. Sections 1251, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C.A. Sections 6901, et seq., and
the Toxic Substances Control Act, 15 U.S.C.A. Sections 2601, et seq. "Hazardous
substance" shall include all petroleum products as well as any toxic or
hazardous material, hazardous waste or other hazardous or regulated substance
defined in or regulated by any environmental law, provided that hazardous
substance shall not include commercially available consumer products reasonably
appropriate for use in or for routine maintenance or upkeep of an office of a
financial institution as long as such products are used in accordance with label
instructions.
Except as set forth in Schedule 5.7, to the best knowledge of Bancorp
and Bank after due inquiry, neither Bancorp or Bank, nor any property of Bancorp
or Bank, is subject to any pending or potential claim, liability or obligation
to any person arising under any environmental law. With respect to the real
property owned or leased by Bancorp and Bank (including other real estate), to
the best knowledge of Bancorp and Bank after due inquiry:
(a) No such property is presently contaminated by, and no such
property has ever been used or is presently being used by any person to
generate, manufacture, refine, transport, treat, store, handle or dispose of,
any hazardous substance in any regulated form or quantity.
(b) No such property has ever contained or presently contains, or
has been used or is being used by any person for storage of, asbestos,
ureaformaldehyde foam insulation, PCB's, dioxins, mercury, lead or uranium (or
other heavy metal) products or tailings, or any other hazardous substance in any
regulated form or quantity, whether contained in construction or fill materials
or used or stored thereon or therein.
(c) Neither Bancorp, Bank nor any other tenant or occupant of any
such property has received a summons, citation, directive, letter, notice of
violation, request for information or other communication, written or oral, from
any local, state or federal agency concerning any possible intentional or
unintentional action or omission on the part of any person which has resulted in
the possible release of any hazardous substance affecting such property or
concerning any other possible violation of any environmental law affecting the
property.
(d) To the extent any permit, approval or registration is or has
been required to be obtained or maintained under any environmental law with
respect to any such property, any improvement of or on any such
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property or any activity occurring on any such property, each such permit,
approval or registration has been obtained and is in good standing. In addition,
all such permits, approvals and registrations have been disclosed to FSC in
writing.
(e) No such property contains or has ever contained any storage
tank used or intended for use to store any hazardous substance.
5.8 Loan Loss Reserves. The reserves for possible loan losses and net
loan charge-offs of Bank as established from time to time by Bank are adequate
under generally accepted accounting principles. Such reserves comply in all
material respects with all loan loss requirements or guidelines applied to Bank
by any governmental authorities having jurisdiction with respect thereto.
5.9 Title to Properties. Except as reflected in the Financial
Statements delivered or to be delivered pursuant to Section 5.6, and except as
set forth on Schedule 5.9, Bancorp and Bank own, free and clear of any liens,
claims, charges, options, or other encumbrances, all of the property, real,
personal or mixed, reflected in the Financial Statements and all property
acquired since such date. Except as set forth in Schedule 5.9, neither Bancorp
nor Bank has received any notice of violation of any applicable zoning
regulation, ordinance or other law, order, regulation or requirement relating to
its operations or its properties. To Bank's knowledge, there are no such
violations of material nature and all buildings and structures used by Bancorp
and Bank substantially conform with all applicable ordinances, codes and
regulations. Except as set forth in Schedule 5.9 hereto, in Bancorp's and Bank's
opinion, all such properties which are material to the business or operations of
Bancorp and Bank are in a good state of maintenance and repair and are adequate
for its current uses and purposes. During each of the past three calendar years,
Bancorp and Bank and their properties have been insured for customary risks with
customary limits, deductibles, and exclusions, including but not limited to
Bankers Blanket Bond, and such insurance protection continues in effect as of
the date hereof. Bancorp and Bank have delivered to FSC true and correct copies
of all deeds, title insurance policies and surveys each has with respect to the
real property owned by them and copies of all leases with respect to real
property leased by them.
5.10 Absence of Defaults. The execution of this Agreement and the Bank
Articles of Merger does not and performance of the transactions contemplated by
them will not (assuming Bancorp shareholder approval and applicable regulatory
approval) (a) violate the provisions of the Articles of Incorporation or Bylaws
of either Bancorp or Bank, or (b), except as set forth in Schedule 5.10, violate
the provisions of or place either Bancorp or Bank in default under any
agreement, indenture, mortgage, lien, lease, contract, instrument, order,
judgment, decree, ordinance, statute, or regulation to which either Bancorp or
Bank is subject, to which any property of either Bancorp or Bank is subject, or
to which either Bancorp or Bank is a party, which violations or defaults would
in the aggregate have a Material Adverse Effect on the business, operations,
properties, assets, or condition (financial or otherwise) of either Bancorp or
Bank.
5.11 Absence of Material Adverse Changes. Except as set forth on
Schedule 5.11, since December 31, 1997, there has been no change, and no
development involving a reasonably foreseeable prospective change, in or
affecting the financial condition (present or prospective), businesses,
properties, assets or operations (present or prospective) of Bancorp and Bank
that either individually or in the aggregate has had or is likely to have a
Material Adverse Effect on Bancorp or Bank. Since December 31, 1997, Bancorp and
Bank have conducted their respective businesses only in the ordinary course and
consistent with past banking standards.
5.12 Actions, Proceedings and Investigations. Set forth in Schedule
5.12 hereto is a complete and accurate listing of all litigation, administrative
or other proceeding to which Bancorp or Bank is a party, except for such
proceedings in which Bank is seeking to collect on a loan or lease transaction
and no counterclaim or similar claim has been filed against Bank. There are no
actions, proceedings or investigations pending, or, to the knowledge of the
executive officers of Bank and Bancorp, threatened or contemplated against or
relating to Bancorp or Bank or any of their respective properties or assets (and
said officers are not aware of any facts that would give rise to any such
claim), which would have a Material Adverse Effect on the financial condition
(present or prospective), businesses, properties, assets or operations (present
or prospective) of Bancorp or Bank, or the ability of Bancorp or Bank to
consummate the Merger and Bank Merger contemplated hereby.
5.13 Absence of Brokerage Commissions, etc. Except for Bancorp's
agreement with Hovde Financial, Inc., the details of which have been disclosed
to FSC in Schedule 5.13, all negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by Bancorp and Bank
directly with FSC and FSB without the
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participation or intervention of any other person, firm or corporation employed
or engaged by or on behalf of Bancorp and Bank in such a manner as to give rise
to any valid claim against Bancorp or Bank, or FSC or FSB, for a brokerage
commission, finder's fee or like payment.
5.14 Material Contracts Except for those documents listed on Schedule
5.14 hereto, copies of which documents have been provided by Bancorp and Bank to
FSC, each of Bancorp and Bank is not a party to or bound by any commitment,
agreement or other instrument which (i) is material to the business, operations,
properties, assets or financial condition of Bancorp or Bank; (ii) limits the
freedom of Bancorp or Bank to compete in any line of business or with any
person; or (iii) requires Bank to transfer funds (other than in the ordinary
course of business) to, make an investment in or guarantee the debt of any
entity. Except as set forth in Schedule 5.14, neither Bancorp or Bank is a party
to any contract or agreement, including but not limited to any lease, service
contract or employment agreement which (i) provides for a remaining term in
excess of two (2) years from and after the date hereof, and (ii) provides for a
total payment thereunder in excess of $20,000.00. Neither Bancorp or Bank is in
default, and there has not occurred any event that with the lapse of time or
giving of notice or both would constitute such a default, in any respect which
has or may have a Material Adverse Effect on the business, operations,
properties, assets or financial condition of Bancorp or Bank under any of the
agreements or other instruments referred to in this Section 5.14.
5.15 Compliance With Laws; Documentation.
(a) Except as set forth on Schedule 5.15, to the best knowledge
of Bancorp and Bank, after due inquiry: the conduct by Bancorp and Bank of their
respective businesses does not violate or infringe any domestic or foreign laws,
statutes, ordinances, rules or regulations, the enforcement of which,
individually or in the aggregate, would have a Material Adverse Effect on the
business, operations, properties, assets or condition (financial or otherwise)
of Bancorp or Bank; and Bancorp and Bank each has complied in all material
respects with every local, state or federal law or ordinance, and every
regulation or order issued thereunder, now in effect and applicable to Bancorp
and Bank governing or pertaining to fair housing, anti-redlining, equal credit
opportunity, truth-in-lending, real estate settlement procedures, fair credit
reporting and every other prohibition against unlawful discrimination in
residential lending, or governing consumer credit, including, but not limited
to, the Consumer Credit Protection Act, Truth-in-Lending Law, and in particular
Regulation Z promulgated by the Federal Reserve Board, and the Real Estate
Settlement Procedures Act of 1974.
(b) All loans, leases, contracts and accounts receivable (billed
and unbilled), security agreements, guarantees and recourse agreements of Bank
as held in its portfolio, or as sold into the secondary market, represent and
are valid and binding obligations of their respective parties and debtors,
enforceable in accordance with their respective terms, each is based on a valid,
binding and enforceable contract(s) or commitment(s), each of which has been
executed and delivered in full compliance, in form and substance, with any and
all federal, state or local laws applicable to Bank, or to the other party or
parties to the contract(s) or commitment(s), including without limitation the
Truth-in-Lending Act, Regulations Z and U of the Federal Reserve Board, laws and
regulations providing for non-discriminatory practices in the granting of loans
or credit, applicable usury laws, laws imposing lending limits, and each has
been administered in full compliance with all applicable federal, state or local
laws or regulations. Except as set forth on Schedule 5.15, all Uniform
Commercial Code filings, or filings of trust deeds, or of lien or other security
interest documentation that are required by any applicable federal, state or
local government laws and regulations to perfect the security interests referred
to in any and all of such documents or other security agreements have been made,
and all security interests under such deeds, documents or security agreements
have been perfected, and all contracts have been entered into or assumed in full
compliance with all applicable material legal or regulatory requirements.
(c) To the best knowledge of Bancorp and Bank, all loan files of
Bank are complete and accurate in all material respects and have been maintained
in accordance with good banking practice.
(d) All notices of default, foreclosure proceedings or
repossession proceedings against any real or personal property collateral have
been issued, initiated and conducted by Bank in full formal and substantive
compliance with all applicable federal, state or local laws and regulations, and
no loss or impairment of any security interest, or exposure to meritorious
lawsuits or other proceedings against Bancorp and Bank, has been or will be
suffered or incurred by Bancorp and Bank.
(e) To the best knowledge of Bancorp and Bank, Bank is not in
violation of any applicable servicer or other requirement of the FHA, VA, FNMA,
GNMA, FHLMC or any private mortgage insurer which insures any
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loans owned by Bank or as to which Bank has sold to other investors, the effect
of which violation, individually or in the aggregate, would have a Material
Adverse Effect on the business, operations, properties, assets or condition
(financial or other) of Bank, and with respect to such mortgage loans Bank has
not done or failed to do, or caused to be done or omitted to be done, any act
the effect of which act or omission impairs or invalidates (i) any FHA insurance
or commitments of the FHA to insure, (ii) any VA guarantee or commitment of the
VA to guarantee, (iii) any private mortgage insurance or commitment of any
private mortgage insurer to insure, (iv) any title insurance policy, (v) any
hazard insurance policy, or (vi) any flood insurance policy required by the
National Flood Insurance Act of 1968, as amended, to the material detriment of
Bank.
(f) Bank is not knowingly engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying any margin stock.
5.16 Employee Benefits.
(a) Schedule 5.16 contains a true and complete list of each
employee benefit, compensation or welfare benefit plan, program or agreement
maintained or contributed to or required to be contributed to by Bancorp or Bank
(the "Plans"). Neither Bancorp nor Bank has any formal plan or commitment,
whether legally binding or not, to create any additional Plan or modify or
change any existing Plan that would affect any employee or terminated employee
of Bancorp or Bank.
(b) Except as set forth in Schedule 5.16, there are no employment
agreements entered into by Bancorp or Bank and no other deferred compensation or
salary continuation agreements or commitments maintained or agreed to by Bancorp
or Bank.
(c) With respect to each of the Plans, Bancorp and Bank have
heretofore delivered to FSC true and complete copies of each of the following
documents: (i) each Plan and related trust, if any (including all amendments
thereto); (ii) annual report and actuarial report, if required to be filed under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), for
the last two (2) years and the latest financial statement, if any, for each such
Plan; (iii) the most recent summary plan description, together with each summary
of material modifications, required under ERISA; (iv) the most recent
determination letter received from the Internal Revenue Service ("IRS") with
respect to each Plan that is intended to be qualified under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"); and (v) information
which identifies (x) all asserted or unasserted claims arising under any Plan,
(y) all claims presently outstanding against any Plan, (z) a description of any
future compliance action required with respect to any Plan under ERISA, or
federal or state law.
(d) All required contributions have been, or will be, made with
respect to each Plan on or prior to the date of this Agreement and have been
properly recorded on the Financial Statements. Except as disclosed on Schedule
5.16, each trust associated with the Plans, if any, is fully funded as of the
date of this Agreement. Schedule 5.16 sets forth the amount of monthly payments
due and owing for each month that the 401(k) Plan, Bank Payroll Stock Deduction
Purchase Plan, Deferred Compensation Plan and two Salary Continuation Agreements
for Robert N. Barone ("Mr. Barone") and Larry A.Platz ("Mr. Platz") are
continued and the amount of liability for claims if Bancorp or Bank were to
terminate the Plans and the costs involved in any such termination. Except as
disclosed in Schedule 5.16, there are no other material liabilities that would
be incurred in connection with the termination of the Plans.
(e) Except as disclosed on Schedule 5.16, each of the Plans has
been operated and administered since inception in all material respects in
accordance with applicable laws, including, but not limited to, ERISA and the
Code and each of the Plans that is intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified. The Plans are legally valid and
binding and in full force and effect.
(f) All amendments required under the Code have been made by
Bancorp or Bank and approved by the IRS with respect to each Plan on or prior to
the date of this Agreement.
(g) Except as set forth in Schedule 5.16, no Plan provides
benefits, including, without limitation, death or medical benefits (whether or
not insured), with respect to current or former employees beyond their
retirement or other termination of service (other than (A) coverage mandated by
applicable law, (B) death benefits or retirement benefits under any "employee
pension plan," as that term is defined in Section 3(2) of ERISA, (C) deferred
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compensation benefits accrued as liabilities on the books of Bancorp or Bank, or
(D) benefits the full cost of which is borne by the current or former employee
(or his or her beneficiary)).
(h) There are no pending or, to Bancorp's or Bank's knowledge,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Plans or any trusts related thereto.
(i) Except as set forth in Schedule 5.16, the consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) (A) entitle any current or former
employee of Bancorp or Bank to severance pay, employment compensation or any
other payment, benefit or award, or (B) accelerate or modify the time of payment
or vesting, or increase the amount of any benefit, award or compensation due any
such employee.
(j) Neither Bancorp nor Bank has ever had liabilities to the
Pension Benefit Guaranty Corporation ("PBGC"). No material liability to the PBGC
has been or will be incurred by Bank or other trade or business under "common
control" with Bancorp or Bank (as determined under Section 414(c) of the Code)
(each a "Common Control Entity") on account of any termination of a Plan subject
to Title IV of ERISA. On and after September 2, 1974, no filing has been made by
Bancorp or Bank (or any Common Control Entity) with the PBGC (and no proceeding
has been commenced by the PBGC) to terminate any Plan subject to Title IV of
ERISA maintained, or wholly or partially funded, by Bank (or any Common Control
Entity). Neither Bancorp, Bank nor any Common Control Entity, has (i) ceased
operations at a facility so as to become subject to the provisions of Section
4062(e) of ERISA, (ii) withdrawn as a substantial employer so as to become
subject to the provisions of Section 4063 of ERISA, (iii) ceased making
contributions on or before the Closing Date to any Plan subject to Section
4064(a) of ERISA to which Bancorp or Bank (or any Common Control Entity) made
contributions during the five years prior to the Closing Date, or (iv) made a
complete or partial withdrawal from a multi-employer plan (as defined in Section
3(37) of ERISA) so as to incur withdrawal liability as defined in Section 4201
of ERISA (without regard to subsequent reduction or waiver of such liability
under Section 4207 or 4208 of ERISA).
5.17 Repurchase Agreements. Bank has, as of the date hereof, and as of
the Closing Date will have, valid and perfected first position security
interests in all government securities subject to repurchase agreements, and, to
the knowledge of Bancorp and Bank, as of the date hereof, the value of the
collateral securing each such repurchase agreement equals or exceeds the amount
of the debt secured by such collateral under such agreement.
5.18 Taxes and Tax Returns. Bancorp and Bank each has delivered (or
will deliver within five (5) days of execution of this Agreement) true and
correct copies of all tax returns filed for the years ending 1995, 1996, and
1997. Bancorp and Bank have filed all federal, state and local tax returns and
forms (including but not limited to forms 1099), which are required by law to be
filed or delivered as of the date hereof and have paid all taxes which have
become due. Except as set forth in Schedule 5.18, to the best knowledge of
Bancorp and Bank, after due inquiry, Bank has timely filed all currency
transaction reports required by the Bank Secrecy Act, as amended, has timely
filed all information returns required by Sections 6041, 6041A, 6042, 6045,
6049, 6050H, and 6050J of the Code; and has exercised due diligence in obtaining
certified taxpayer identification numbers as required pursuant to Treasury
Regulation 35a.9999. Where payment of such taxes is not required to be made as
of the date hereof, Bancorp and Bank have set up an adequate reserve or accrual
for the payment of all taxes required to be paid in respect of the periods
covered by such returns.
5.19 Consents and Approvals Except for (i) the filing of applications
and notices, as applicable, with the State of Nevada, the FDIC and/or the
Federal Reserve Board and approval of such applications, (ii) the filing of the
Bank Articles of Merger with the Nevada Secretary of State and the filing of the
Certificate of Merger with the respective Secretaries of State of Delaware and
Nevada, (iii) the filing with the SEC of a proxy statement in definitive form
relating to the meeting of Bancorp's stockholders to be held in connection with
this Agreement and the transactions contemplated hereby (the "Proxy Statement"),
and (iv) the consents and approvals set forth in Schedule 5.19, no consents or
approvals of, or filings or registration with, any governmental entity or with
any third party are necessary in connection with (A) the execution and delivery
by Bancorp and Bank of this Agreement or (B) the consummation by Bancorp and
Bank of the transactions contemplated by this Agreement.
5.20 Insurance. Schedule 5.20 contains a true, complete and correct
description of all material policies of fire, liability, production, completion
bond, errors and omissions, workmen's compensation and other forms of insurance
owned or held by Bancorp and Bank, copies of which have previously been
delivered to FSC. All such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the Closing Date
have
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been paid, and no notice of cancellation or termination has been received with
respect to any such policy. During the last three years neither Bancorp nor Bank
has been refused any insurance with respect to its assets or operations, nor has
its coverage been limited, by any insurance carrier to which it has applied for
any such insurance or with which it has carried insurance.
5.21 Section 280G No payment received by any person as a result of the
transactions contemplated hereby shall constitute an "excess parachute payment"
within the meaning of section 280G of the Code.
5.22 Disclosure. No representation or warranty by Bancorp or Bank
contained in this Agreement, nor any statement or certificate furnished or to be
furnished by Bancorp or Bank to FSC or FSB or their representatives in
connection herewith or pursuant hereto, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to make the statements herein or therein contained not misleading or
necessary in order to provide a prospective purchaser of the business of Bancorp
and Bank with adequate information as to Bancorp and Bank and their condition
(financial or otherwise), properties, assets, liabilities, business and
prospects, and Bancorp and Bank have disclosed to FSC and FSB in writing all
material adverse facts known to them relating to same.
ARTICLE VI
COVENANTS, REPRESENTATIONS AND WARRANTIES OF FSC AND FSB
As an inducement to Bancorp and Bank to enter into this Agreement, and
in addition to any representations and warranties made elsewhere in this
Agreement, FSC and FSB jointly and severally covenant, represent and warrant to
and agree with Bancorp and Bank as of the date of this Agreement and as of the
Closing Date as follows:
6.1 Organization, Conduct of Business, etc. FSC and FSB (i) are each
duly organized and validly existing and in good standing under the laws of
Delaware (in the case of FSC), or the State of Nevada (in the case of FSB), (ii)
have all requisite power and authority (corporate and other) to own their
respective properties and conduct their respective businesses as now being
conducted, (iii) are each duly qualified to do business and are in good standing
in each jurisdiction in which the character of the properties owned or leased by
them therein or in which the transaction of their respective businesses makes
such qualification necessary, except when failure to so qualify would not have a
Material Adverse Effect on FSC and its consolidated subsidiaries, and (iv) are
not transacting business, or operating any properties owned or leased by any of
them, in violation of any provision of federal or state law or any rule or
regulation promulgated thereunder, which violation would have a Material Adverse
Effect on FSC and its consolidated subsidiaries.
6.2 Authorization and Validity of Agreement. FSC and FSB each have the
corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Executive Committee of the
Board of Directors of FSC and the Board of Directors of FSB, has been duly
executed and delivered on their behalf, and constitutes a valid and binding
agreement of each of FSC and FSB, enforceable in accordance with its terms,
subject to approval of the sole shareholder of FSB and ratification by the Board
of Directors of FSC.
6.3 FSC Reports. Since January 1, 1995, FSC and its consolidated
subsidiaries have filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that were required to
be filed with (i) the SEC, including but not limited to Form 10-K, Form 10-Q,
Form 8-K and proxy statements, (ii) the Federal Reserve Board, (iii) the Office
of the Comptroller of the Currency (the "OCC"), (iv) the FDIC, and (v) other
applicable state securities or banking authorities. All such reports and
statements filed with the SEC, the Federal Reserve Board, the OCC, the FDIC, and
other applicable state securities or banking authorities are collectively
referred to herein as the "FSC Reports." As of their respective dates, to the
best knowledge of the officers of FSC, the FSC Reports complied in all material
respects with all 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 a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading.
6.4 FSC Financial Statements; Tax Returns. FSC's Consolidated Balance
Sheets as of December 31, 1996 and December 31, 1997, and its Consolidated
Statements of Income and Consolidated Statements of Cash Flow for the years then
ended, heretofore delivered to Bancorp and Bank, were prepared in accordance
with generally accepted accounting principles consistently applied and present
fairly its consolidated financial condition, results of operations and changes
in financial position as of such dates and for such periods. FSC will provide a
copy of its Consolidated
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Balance Sheet and its Consolidated Statement of Income and Consolidated
Statement of Cash Flow as of December 31, 1998 when available. FSC has filed all
federal, state and local tax returns and forms (including but not limited to
Forms 1099), which are required by law to be filed or delivered as of the date
hereof and have paid all taxes which have become due. Where payment of such
taxes is not required to be made as of the date hereof, FSC has set up an
adequate reserve or accrual for the payment of all taxes required to be paid in
respect of the periods covered by such returns.
Except as and to the extent stated in the FSC Financial Statements
provided by FSC to Bancorp and Bank and except for those liabilities incurred in
the normal course of FSC's or any of its subsidiaries' respective businesses,
FSC and its consolidated subsidiaries do not have any material liabilities or
obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise).
6.5 Absence of Material Adverse Changes. Since December 31, 1997, there
has been no change, and no development involving a reasonably foreseeable
prospective change, in or affecting the financial condition (present or
prospective), businesses, properties or operations of FSC and its consolidated
subsidiaries that either individually or in the aggregate has had or is likely
to have a Material Adverse Effect on FSC and its consolidated subsidiaries.
6.6 Absence of Defaults Under Agreements. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will conflict with or result in a breach of or constitute a default under
any provision of FSC's or FSB's respective Articles of Incorporation, Bylaws, or
any agreement to which FSC or FSB is a party or by which either of them is bound
or to which any of their respective properties is subject, or result in the
creation of any liens or encumbrances upon their respective assets, and no
consents or waivers thereunder are required to be obtained in connection with
the transactions contemplated hereby, except for the approval of required
regulatory authorities and of the shareholders of FSB and Bank.
6.7 Actions, Proceedings, and Investigations. Except as set forth in
FSC's filings with the SEC, there are no actions, proceedings or investigations
pending, or to the knowledge of the executive officers of FSC, threatened or
contemplated, against or relating to FSC or any of its consolidated
subsidiaries, or any of their respective properties, which would have a Material
Adverse Effect on the financial condition (present or prospective), businesses,
properties or operations of FSC and its consolidated subsidiaries, or the
ability of FSC or FSB to consummate the Merger contemplated hereby.
6.8 Regulatory Approvals. FSC and FSB shall (i) use their best efforts
in good faith to obtain all necessary regulatory approvals and to take or cause
to be taken all other action required under this Agreement on their part to be
taken as promptly as practicable so as to permit the consummation of the
transactions contemplated by this Agreement at the earliest possible date, and
cooperate fully with Bancorp and Bank to that end, and (ii) furnish all
necessary information for inclusion in any applications relating to the
consents, approvals, and permissions of regulatory authorities referred to in
Article VIII. FSC knows of no reasons why the transactions contemplated by this
Agreement should not be approved by the regulatory authorities. FSC shall give
Bancorp prompt notice of receipt of the regulatory approvals referred to in
Section 8.1(a) and shall provide Bancorp with copies of any written comments by
any regulatory authorities regarding or relating to the non-confidential
portions of the regulatory applications filed in connection with the
transactions contemplated hereby.
6.9 FSC Common Stock. All of the outstanding FSC Common Stock is duly
authorized and validly issued, fully paid and nonassessable. The FSC Common
Stock to be issued and delivered pursuant to the Merger, when issued as
contemplated hereby, shall be duly authorized, validly issued, fully paid and
nonassessable.
6.10 Registration of Shares. FSC will use its best efforts to cause a
Registration Statement on Form S-4 or other appropriate form (the "Registration
Statement") to be filed and declared effective under the Securities Act of 1933,
as amended (the "1933 Act"), with respect to the FSC Common Stock which is to be
issued in connection with the transactions contemplated by this Agreement, which
Registration Statement, at the time it becomes effective, and at the Effective
Time, shall in all material respects conform to the requirements of the 1933 Act
and the General Rules and Regulations of the SEC under said Act (the "1933
Rules"), and the FSC Common Stock to be issued by FSC in connection with the
Merger shall be duly qualified or exempted, as the case may be, under applicable
state Blue Sky securities laws in those states in which Bancorp has informed FSC
that its shareholders reside. FSC will furnish to Bancorp, its counsel,
investment banker and accountants drafts of Registration Statement filings
sufficiently in advance of filing so as to afford a reasonable opportunity for
review and comment.
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6.11 Notification of Actions. FSC and FSB covenant and agree to
immediately notify Bancorp and Bank in the event of the breach of any of the
covenants set forth in this Article VI.
6.12 NASDAQ/NMS Listing FSC shall take all actions necessary to assure
that the shares of FSC Common Stock to be issued in the Merger will be approved
for listing on the National Association of Security Dealers Automatic Quotation,
National Market System ("NASDAQ/NMS") prior to the Closing Date.
6.13 Indemnification. FSC agrees that all rights to indemnification or
exculpation now existing in favor of the directors and officers of Bancorp and
Bank as provided in their respective charters, bylaws, indemnification
agreements or otherwise in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall, to the greatest extent permitted by
Delaware law and the organizational documents of FSC as in effect, survive the
Merger and shall continue in full force and effect for a period of three (3)
years. If FSC or any of its successors or assigns (i) shall consolidate with or
merge into any other corporation or entity and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii) shall
transfer all or substantially all of its properties and assets to any
individual, corporation or other entity, then, and in each such case, FSC shall
use its commercially reasonable efforts to cause such successor and assigns of
FSC to assume the obligations set forth in this Section 6.13
FSC shall use its commercially reasonable efforts to cause the persons
serving as officers and directors of Bancorp and Bank immediately prior to the
Effective Time to be covered for a period of three (3) years after the Effective
Time by the current policies of directors' and officers' liability insurance
maintained by Bank with respect to acts or omissions occurring prior to the
Effective Time which were committed by such officers and directors in their
capacity as such (provided that FSC may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no less
advantageous to such officers and directors); provided, however, that FSC shall
not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 150% of the premiums paid as of the date hereof by
Bank for such insurance.
6.14 Ongoing Credit Review. With respect to its ongoing credit review
of Bank between the date hereof and the Effective Time, FSC covenants and agrees
that it shall apply the same credit review procedures and credit standards it
used in the initial credit review and that in its ongoing credit review it will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a Material
Adverse Effect.
6.15 Limitations on FSC's Conduct Prior to the Effective Time. Between
the date hereof and the Effective Time or the time when this Agreement
terminates as provided herein, FSC shall not, without prior written consent of
Bancorp, take any action which would or is reasonably likely to (i) adversely
affect the ability of FSC to obtain any necessary approvals of any governmental
entity required for the transactions contemplated hereby; (ii) adversely affect
FSC's ability to perform its covenants and agreements under this Agreement; or
(iii) result in any of the conditions to the performance of FSC's obligations
hereunder not being satisfied.
6.16 Access to Information. Upon reasonable request by Bancorp, Brad D.
Hardy, Executive Vice President & Chief Financial Officer, or Jay S. Bachman,
Senior Vice President, Corporate Development, shall be available in Salt Lake
City, Utah, to Bancorp and its representatives, counsel, accountants and agents
to discuss FSC's operations, and FSC shall provide to Bancorp and its
representatives, at their request, copies of all filings made with the SEC
between the date hereof and the Closing. Bancorp covenants and agrees that it
and its representatives, counsel, accountants and agents will hold in strict
confidence all documents and information concerning FSC or any of its
subsidiaries so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the Form S-4
or any of the public information of any application required to be filed with
any governmental or regulatory agency to obtain the approvals and consents
required to effect the transactions contemplated hereby), and if the
transactions contemplated herein are not consummated, such confidence shall be
maintained and all such documents shall be returned to FSC.
6.17 FSB Board Position. FSC hereby agrees to elect Robert N. Barone to
serve as a member of the Board of Directors of FSB for a term of one (1) year
from and after the Effective Time. FSC further agrees to take no action to
remove Mr. Barone as a director during such period unless such removal is for
cause or results from Mr. Barone's inability to serve by reason of his physical
or mental illness or incapacity.
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6.18 Federal Home Loan Bank Membership. FSC hereby agrees to maintain
Bank's membership, or obtain on behalf of FSB a membership, in the San Francisco
Federal Home Loan Bank for one (1) year from and after the Effective Time;
provided, however, that such membership may be terminated at any time during
such period in the event that the Management Committee of First Security Bank,
N.A. determines that there exist compelling business reasons to do so (such that
FSB's continued membership and investment in the FHLB exposes FSB to
unacceptable financial risk).
ARTICLE VII
PROXY STATEMENT; SHAREHOLDER MEETINGS
7.1 Proxy Statement. FSC (with the assistance of Bancorp and Bank)
shall prepare the Registration Statement, as provided in Paragraph 6.10 above,
which Registration Statement will include a Proxy Statement to be used with
respect to providing the shareholders of Bancorp with notice of the shareholder
meeting for Bancorp. Bancorp and Bank represent and warrant that the information
they provide for use in the Proxy Statement will comply in all material respects
with the requirements of the Securities Exchange Act of 1934 (the "1934 Act")
and the applicable rules and regulations promulgated by the SEC under such Act
(the "1934 Rules"), and will not contain an 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, except that Bancorp and
Bank make no representation with respect to information furnished by FSC or FSB
expressly for inclusion in the Proxy Statement. FSC and FSB represent and
warrant that the Proxy Statement will comply in all material respects with the
requirements of the 1934 Act and the applicable 1934 Rules, and will not contain
an 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, except that FSC and FSB make no representation with respect to
information furnished in writing by Bancorp and Bank expressly for inclusion in
the Proxy Statement.
7.2 Bancorp Meeting. This Agreement shall be submitted for approval,
ratification and confirmation by the shareholders of Bancorp at a meeting
thereof to be called in accordance with the applicable provisions of law and
held as promptly as practicable after the execution of this Agreement and in no
event later than the expiration of forty-five (45) days, or in the event of an
SEC comment period, the expiration of such SEC comment period, if applicable,
without the filing of any post-effective amendment to the Registration Statement
to be filed by FSC pursuant to Paragraph 6.10, following the effectiveness of
said Registration Statement. Bancorp will mail the Proxy Statement prepared by
FSC as part of the Registration Statement to its shareholders for purposes of
the meeting of its shareholders. Consistent with the exercise of their fiduciary
duties to shareholders, the Board of Directors of Bancorp shall recommend to the
shareholders that the shareholders approve the Agreement and the transactions
contemplated therein.
7.3 Bank and FSB Action By Unanimous Written Consent. This Agreement
shall be submitted to the sole shareholder of each of Bank and FSB for approval,
ratification and confirmation pursuant to an Action by Unanimous Written Consent
in accordance with the applicable provisions of law as promptly as practicable
after the execution of this Agreement, and in no event later than the expiration
of forty-five (45) days without the filing of any post-effective amendment to
the Registration Statement to be filed by FSC pursuant to Paragraph 6.10,
following the effectiveness of said Registration Statement. FSC owns
beneficially and of record all of the issued and outstanding shares of FSB
Common Stock and will vote all of such shares in favor of this Agreement.
Bancorp owns all of the issued and outstanding shares of Bank Common Stock and
will vote all of such shares in favor of this Agreement.
ARTICLE VIII
CONDITIONS OF CLOSING
8.1 Conditions of Closing For All Parties.
The consummation of the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Regulatory Approval. All consents, approvals and permissions
and the satisfaction of all of the requirements prescribed by law, including but
not limited to the consents, approvals and permissions of all applicable
regulatory authorities which are necessary to the carrying out of the Bank
Merger and Merger as described in this Agreement, shall have been procured;
provided, however, the approvals referred to in this subparagraph (a) shall not
have imposed any significant conditions which FSC and FSB on the one hand, or
Bancorp and Bank, on the other, reasonably deem to be materially disadvantageous
or burdensome. An approval shall be deemed to be materially
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disadvantageous or burdensome if the approval includes a condition which, in the
reasonable opinion of the Board of Directors of FSC, would have a Material
Adverse Effect on the anticipated economic and business benefits to FSC of the
transactions contemplated by this Agreement.
(b) Registration Statement, etc. The FSC Common Stock to be
issued by FSC hereunder shall be the subject of the Registration Statement and
to qualification or exemption under state securities laws as appropriate. The
Registration Statement shall have been declared effective and shall not be
subject to a stop order or any threatened stop order. Such FSC Common Stock
shall have been included for listing in the NASDAQ/NMS subject to official
notice of issuance.
(c) No Injunction, etc. There shall not have been instituted any
litigation, regulatory proceeding or other matter which challenges the legality
or effectiveness of the transactions contemplated hereby or seeks an order,
decree or injunction enjoining or prohibiting the consummation of the Merger.
(d) Tax Opinions. FSC and Bancorp shall have received from Ray,
Quinney & Nebeker, counsel to FSC, an opinion reasonably satisfactory to FSC and
Bancorp in the form of Schedule 8.1(d), respectively, to the general effect that
the Merger shall not result in the recognition of gain or loss for federal
income tax purposes by Bancorp or FSC, nor shall the issuance of the FSC Common
Stock result in the recognition of gain or loss by the holders of Bancorp Common
Stock who receive such stock in connection with the Merger. The opinion shall be
dated prior to the date the Prospectus is first mailed to the shareholders of
Bancorp and such opinion shall not have been withdrawn or modified in any
material respect.
(e) Section 280G. There shall have been no payments received by
any person as a result of the transactions contemplated hereby that would
constitute an "excess parachute payment" within the meaning of Section 280G of
the Code.
8.2 Conditions of Closing For FSC and FSB. The obligation of FSC and
FSB, respectively, to consummate the transactions contemplated by this Agreement
is conditioned upon the following:
(a) Shareholder Approval. A majority of the shareholders of
Bancorp shall have approved this Agreement and the Merger contemplated hereby
(unless a higher percentage of the outstanding shares of Bancorp must approve
the transaction under the Articles of Incorporation or Bylaws of Bancorp).
Bancorp, as the sole shareholder of Bank, shall approve the Agreement and the
Bank Merger.
(b) Bancorp and Bank Resolutions; Corporate Documents. Each of
Bancorp and Bank shall have delivered to FSC and FSB (i) a copy of its Articles
of Incorporation as certified by the Nevada Secretary of State; (ii) a copy of
its bylaws certified by its corporate secretary, (iii) a certificate of good
standing dated as of the Closing Date, issued by the appropriate governmental
agency, (iv) certified copies of resolutions duly adopted by its Board of
Directors approving this Agreement and, in the case of the Board of Directors of
Bancorp, directing the submission thereof to a vote of the shareholders of
Bancorp, and (v) certified copies of resolutions duly adopted by the
shareholders of Bancorp (owning the outstanding shares as required by
subparagraph (a) above) approving this Agreement and the Merger, all as
contemplated hereby.
(c) Bancorp and Bank Representations and Warranties. Unless
waived in writing by FSB and FSC, the representations and warranties of Bancorp
and Bank contained in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as though made on and as of such date. Except
as otherwise contemplated by this Agreement, Bancorp and Bank shall each have
performed in all material respects all of its obligations and agreements
hereunder theretofore to be performed by it. FSC and FSB shall have received at
the Closing a certificate to the foregoing effect dated as of the Closing Date
and executed on behalf of Bancorp and Bank by one of their duly authorized
executive officers.
(d) Comfort Letters. FSC shall have received letters from
Kafoury, Armstrong & Co., dated (i) the effective date of the Registration
Statement and (ii) shortly prior to the Effective Time, in form and substance
satisfactory to FSC, with respect to Bancorp's and Bank's financial condition,
which letters shall be based upon customary specified procedures undertaken by
such firm. The "comfort letters" contemplated hereby shall include, but not be
limited to, those matters identified in Schedule 8.2(d) attached hereto.
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(e) Opinion of Bancorp and Bank Counsel. Unless waived in writing
by FSC and FSB, FSC and FSB shall have received at the Closing from Grady &
Associates, special counsel to Bancorp and Bank, and other counsel to Bancorp
and Bank acceptable to FSC, written opinions, dated the Closing Date,
substantially in the form of Schedule 8.2(e) hereto.
(f) Affiliate's Letter. Unless waived in writing by FSC, FSC
shall have received a letter from each person who, in the opinion of Bancorp and
its counsel (who shall be entitled to rely on written certificates of such
persons), is an "affiliate" (as that term is defined in Rule 405 promulgated by
the SEC under the 1933 Act) of Bancorp in the form attached hereto as Schedule
8.2(f). Such "affiliate's" letter shall include covenants with respect to
compliance with the rules and regulations of the SEC for any public reoffering
or sale of the FSC Common Stock to be issued under the terms of this Agreement
to such affiliate.
(g) Condition of Bank. FSB shall have determined, based on an
audit and review by its officers, accountants and legal counsel, conducted prior
to the execution of this Agreement and updated as of the Closing Date, as
provided below, that (i) the assets, books, records and operations of Bank are
in reasonably satisfactory condition and will not adversely impact FSB after
consummation of the Merger; (ii) based on the review of the assets, books,
records and operations of Bank by FSC, there are no liabilities (existing,
threatened or contingent) which FSC, in its discretion, determines to be
unacceptable, as determined by reference to Articles IV and V of this Agreement;
(iii) the methodology for determining and the allowance for loan and lease
losses of Bank as determined by the grading of Bank loans and leases by FSC, is
adequate in all material respects; (iv) the net earnings after taxes for the
years ended 1995, 1996, 1997 and 1998 are as reported in the Financial
Statements delivered to FSC pursuant to Section 5.6; and (v) as of the Closing
Date, the net worth of Bancorp and Bank, calculated in accordance with generally
accepted accounting principles and as more specifically set forth in Schedule
8.2(g) attached hereto, will exceed $16,658,575, exclusive of unrealized
securities gains or losses pursuant to FASB 115 (see line 23 on Schedule
8.2(g)). The net worth test shall be calculated after accrual or payment of the
expenses incurred by Bancorp and Bank with respect to the Bank Merger and
Merger, including but not limited to investment banker's, auditor's and
attorney's fees and expenses incurred with respect to employee severance
payments and/or termination or freezing of any employee Plan, as defined in
Section 5.16 (provided that all of such expenses collectively shall not exceed
an aggregate total of $2,782,183 after tax (see lines 11 and 22 on Schedule
8.2(g) attached hereto)), but before pay-in of the exercise strike price,
including any tax effects of such exercise, for the Options and Warrants, all of
which shall inure to the benefit of FSC in addition to the equity target stated
herein, as more specifically set forth in Schedule 8.2(g). Such net worth target
assumes a Closing Date of March 31, 1999 and shall be increased by $190,000 per
month (on a pro-rated basis) if the Closing Date were to occur after March 31,
1999. In the event that Bancorp and Bank incur costs as a result of Phase II
remediation related to the Carson City, Nevada, property of Five Hundred
Thousand Dollars ($500,000) or less, the parties agree that the purchase price
shall be decreased on a dollar-for-dollar (after-tax) basis. Should the
remediation costs exceed $500,000, the parties shall have the right to
renegotiate the terms of this transaction.
In the event FSB determines, and Bank agrees, that certain loans or
assets should be written down or charged off or that additions to the provision
for loan losses should be made, as contemplated by subparagraphs (ii) and (iii)
of this Section 8.2(g), Bank agrees to take such actions as are appropriate
under the circumstances and the net worth requirement set forth in this
paragraph as a condition to Closing shall be determined after the taking of such
actions.
Any charge-offs, other asset write-downs or additions to the allowance
for loan loss or other financial adjustments at or prior to the Closing made at
the request, in writing, of FSC or FSB, for the convenience of FSC or FSB, and
not required by said subparagraphs (ii) and (iii) of this 8.2(g), which
charge-offs or additions Bank agrees to make, shall not reduce net worth for
purposes of satisfaction of the net worth condition set forth in this Section
8.2(g).
With respect to the credit review to be conducted by FSC and FSB
hereunder, FSC and FSB covenant and agree that the update credit review of Bank
by FSC and FSB shall be conducted approximately fifteen (15) business days prior
to the Closing Date. In conducting the update credit review, FSC and FSB agree
that they shall apply the same credit review procedures and credit standards
they used in the initial credit review and that in their update review they will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a material
adverse event. A demonstrable adverse change or a material adverse event shall
be defined by reference to the term Material Adverse Effect.
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(h) Employment Agreements. Each of Mr. Barone and Mr. Platz shall
have executed and delivered an Employment Agreement in the form set forth as
Schedules 8.2(h-1) and 8.2(h-2), respectively, attached hereto and incorporated
herein.
(i) Condition of Properties. FSC shall have determined, based on
the Phase I and Phase II Environmental Reports, as provided in Section 4.6
above, that there are no liabilities (existing, threatened or outright)
associated with the real properties owned by Bancorp or Bank which are
unacceptable. Such determination shall be made by FSC within forty-five (45)
days of receipt of such Phase I and Phase II Environmental Reports delivered to
FSC under Section 4.6, above.
(j) Options and Warrants. All Options and Warrants shall have
been exercised or cancelled (and no additional Options or Warrants shall have
been issued as of the Closing Date) and each of the Bancorp Stock Option Plans
and agreements related thereto and the warrants covered by the Warrant Agreement
provided under cover of Schedule 5.3 shall have been redeemed.
(k) Cafeteria Plan Issues. Bank shall have (i) caused a Cafeteria
Plan document under Section 125 of the Code to be in place; (ii) caused Forms
5500-C/Rs for the years 1993 through 1997 to be filed with the Department of
Labor and the Internal Revenue Service under the Delinquent Filer Voluntary
Compliance Program ("DVCP"), and (iii) paid all penalties associated with such
DVCP filings. Payment of the penalties in connection with such filings shall
have no impact on the net worth test set forth in Section 8.2(g).
8.3 Conditions of Closing For Bancorp and Bank. The obligation of
Bancorp and Bank to consummate the transactions contemplated by this Agreement
is conditioned upon the following:
(a) FSC and FSB Representations and Warranties. Unless waived in
writing by Bancorp and Bank, the representations and warranties of FSC and FSB
contained in this Agreement shall be correct on and as of the Closing Date with
the same effect as though made on and as of such date, except for changes which
are not, in the aggregate, material and adverse to the financial condition,
businesses, properties or operations of FSC and its consolidated subsidiaries,
and, except as otherwise contemplated by this Agreement, FSC and FSB shall have
performed in all material respects all of their obligations and agreements
hereunder theretofore to be performed by them. Bancorp and Bank shall have
received at the Closing a certificate to the foregoing effect dated the Closing
Date and executed on behalf of FSC and FSB by one of their duly authorized
executive officers.
(b) Opinion of FSC Counsel. Unless waived in writing by Bancorp
and Bank, Bancorp and Bank shall have received at the Closing from Ray, Quinney
& Nebeker, a written opinion, dated the Closing Date, substantially in the form
of Schedule 8.3(b) hereto.
(c) FSC Resolutions; Corporate Documents. FSC shall have
delivered to Bancorp a certified copy of resolutions duly adopted by the Board
of Directors of FSC approving this Agreement, the Merger and the Bank Merger,
all as contemplated hereby. FSC shall deliver to Bancorp (i) a copy certified by
the Delaware Secretary of State's Office of FSC's Certificate of Incorporation;
(ii) a copy of FSC's Bylaws certified by the Corporate Secretary, and (iii) a
certificate of good standing dated as of a recent date, issued by the Delaware
Secretary of State's office.
(d) Shareholder Approval. Under the Delaware General Corporation
Law, FSC shareholder approval is not required for the Merger. FSC, as the sole
shareholder of FSB, shall approve the Agreement and the Bank Merger. A majority
of the shareholders of Bancorp shall have approved this Agreement and the
Merger.
(e) Fairness Opinion. Bancorp shall have previously received a
letter from Hovde Financial, Inc. dated as of a date within five (5) days of the
mailing of the Bancorp Proxy Statement to the shareholders of Bancorp, to the
effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of Bancorp.
ARTICLE IX
CLOSING OF MERGER
9.1 Closing. Unless the Agreement is earlier terminated in
accordance with Article X, below, the closing of the transactions contemplated
herein (the "Closing") shall take place at 10:00 a.m. on a date to be agreed
upon by the parties, and if such date is not agreed upon by the parties, the
Closing shall occur on the fifth business day after
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satisfaction or waiver of all of the conditions precedent set forth in Article
VIII and the expiration of the required waiting period following approval of
FSC's application to the Federal Reserve Bank of San Francisco and the Nevada
Financial Institutions Division, if any, relating to the Merger and the Bank
Merger but in no event later than thirty (30) days after the expiration of such
period (the "Closing Date"), at the offices of Ray, Quinney & Nebeker, 79 South
Main Street, Salt Lake City, Utah 84111.
9.2 Filing of Certificate of Merger and Articles of Merger.
(a) Bancorp and FSC shall execute a Certificate of Merger and
Articles of Merger in substantially the forms attached hereto as Exhibits A-1
and A-2 and shall cause such Certificate of Merger and Articles of Merger to be
filed with the Delaware Secretary of State's Office and the Nevada Secretary of
State's Office, respectively, on the Closing Date or as soon thereafter as
practicable. The Effective Time of the Merger shall be on such date as the
Delaware Secretary of State and the Nevada Secretary of State, under their
respective rules and regulations, deem the Merger effective.
(b) Bank and FSB shall execute articles of merger in
substantially the form attached hereto as Exhibit B and shall cause such
articles of merger to be approved by the Nevada Financial Institutions Division
and filed with the Nevada Secretary of State's office, on the Closing Date or as
soon thereafter as practicable. The Bank Merger shall take effect on such date
as the Nevada Secretary of State, under rules and regulations governing such
office, deems the Bank Merger effective, but in any event shall be effective
after the Effective Time of the Merger.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by mutual consent of the Executive Committee and Board of
Directors of FSC and FSB, respectively, and the Boards of Directors of Bancorp
and Bank; or
(b) by the Boards of Directors of FSC and FSB, respectively, or
the Boards of Directors of Bancorp and Bank at any time after the expiration of
nine (9) months from the date hereof, if the Bank Merger and Merger shall not
theretofore have been consummated by the failure to satisfy the conditions to
Closing not within the control of the electing party; or
(b) by Bancorp and Bank, upon written notice to FSC and FSB at
any time if any representation or warranty of FSC and FSB contained in this
Agreement was materially incorrect when made or becomes materially incorrect on
or prior to the Closing Date, or if FSC or FSB fail to comply with any of their
respective covenants contained in this Agreement, and the same is not cured
within thirty (30) days after notice of such inaccuracy or noncompliance; or
(c) by FSC and FSB upon written notice to Bancorp and Bank at any
time if any representation or warranty of Bancorp and Bank contained in this
Agreement was materially incorrect when made or becomes materially incorrect on
or prior to the Closing Date, or if Bancorp and Bank fail to comply with any of
their covenants contained in this Agreement, and the same is not cured within
thirty (30) days after notice of such inaccuracy or noncompliance; or
(d) by FSC and FSB, upon written notice to Bancorp and Bank at
any time if a majority of Bancorp's shareholders (or such higher level mandated
by the Articles of Incorporation or Bylaws of Bancorp) does not approve the
Merger contemplated hereby, or if such Merger is disapproved by any governmental
authority whose approval is necessary; or
(e) by either Bancorp or FSC, if Bancorp shall have failed to act
or refrain from doing any act as required under this Agreement pursuant to
Section 11.9.
10.2 Effect of Termination. In the event of termination and abandonment
hereof pursuant to the provisions of Section 10.1, this Agreement shall become
void and have no force or effect, except that Sections 10.2, 11.2, 11.9 and
11.11 shall survive the termination. Such termination shall not relieve any
party of any liability for damages arising out of its willful breach of any
provision of this Agreement for any default prior to such termination.
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ARTICLE XI
ADDITIONAL COVENANTS
11.1 Employee Matters. FSC shall use its best efforts to effect a
conversion of Bancorp/Bank employees who become FSB employees to FSC benefit
plans within twelve (12) months of the Effective Date (the "Conversion Period").
During the Conversion Period, FSC shall continue only the following Plans
described in Section 5.16, for the benefit of the employees of Bancorp/Bank who
become FSB employees pending termination or merger of the Plans into FSC benefit
plans:
(a) The Bank 401(k) plan; and
(b) The Bank Welfare Benefit Plans listed as or in items 4(a),
(b), (c), (d), (e), (f), (g), (h), and (j) of Schedule 5.16 hereto.
Upon conversion to FSC benefit plans, Bancorp/Bank employees who are
still employed at such time shall cease participation in the Plans described in
Section 5.16 and shall be entitled to participate in such FSC benefit plans in
accordance with the terms thereof and in accordance with FSC policy. For
purposes of determining each such Bancorp/Bank employee's eligibility and
vesting under such FSC benefit plans, FSC shall recognize such Bancorp/Bank
employee's service with Bank beginning on the date such Bank employee commenced
employment with Bank; provided, however, that with respect to the FSC 401(k)
plan, prior service credit shall be given only for such period as Bank's 401(k)
plan has been in existence; and, provided further that prior service credit
shall not be given for purposes of accrual of benefits under the FSC retirement
plan.
FSC also covenants and agrees that any pre-existing condition,
limitation or exclusion in its health plans shall not apply to Bancorp or Bank
employees or their covered dependents who are covered under similar Bancorp or
Bank health plans on the Closing Date and who elect coverage under FSC's health
plans at the time such Bancorp or Bank employees are first given the option to
enroll in FSC's health plans.
FSC will use its best efforts to either freeze the Plans or transfer
such benefits under the Plans (in a plan-to-plan transfer) into an existing
benefit plan maintained by FSC as to which such benefits may be transferred
without cost to FSC, or necessity of material amendment to, or adverse effect on
qualifications of, such FSC plan; provided, however, that no accounts shall be
permitted to roll-over to FSC's 401(k) plan without the express written consent
of the trustee and sponsor of FSC's 401(k) plan, in its sole discretion, to such
roll-over, which approval shall not be given in any event without receipt of
such documentation from Bancorp and Bank as may be requested by FSC prior to
Closing, including, without limitation, an Internal Revenue Service ruling
obtained by Bancorp approving the roll-over and ensuring the qualification of
the FSC 401(k) plan if the FSC 401(k) plan accepts such roll-overs.
Each of Mr. Barone and Mr. Platz have entered into a Salary
Continuation Agreement dated April 30, 1997 with Bancorp (the "SERP Agreement")
which provides for certain payments to each of Mr. Barone and Mr. Platz,
respectively, upon a change in control of Bank as set forth therein. FSC agrees
that, notwithstanding the date of the Effective Time, each of Mr. Barone and Mr.
Platz shall be entitled to the April 30, 1999 benefit under the SERP Agreement.
No provision of this Agreement shall be construed to prohibit FSC
from having the right to terminate the employment of any employee, with or
without cause, or to amend or terminate after the Closing Date any employee
benefit plan established, maintained or contributed to by FSC or its
subsidiaries.
11.2 Costs. Each of the parties to this Agreement shall pay its own
charges and costs incurred or to be incurred in connection with the execution
and performance of this Agreement. In the event of a willful breach of a
material agreement or covenant contained herein by either Bancorp and Bank, on
the one hand, or FSC and FSB, on the other, which breach either directly or
indirectly results or would result in a failure to consummate the Bank Merger
and Merger, and which breach cannot be cured or is not cured within thirty (30)
days after written notice of such breach is given to the party committing such
breach, the party causing such breach shall be liable to the other party for
damages for an amount not to exceed $2,500,000; provided, further, that in the
event of a termination of this Agreement under Section 10.1(f), above, Bancorp
shall pay to FSC a termination fee of $2,000,000. Either party may elect to
forego the recovery of damages and pursue its right to the specific performance
or enforcement of the terms and provisions of this Agreement.
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11.3 Instruments of Transfer, etc. Each of the parties hereto shall
cooperate with the other parties in every way in carrying out the transactions
contemplated herein, in delivering instruments to perfect the conveyances,
assignments and transfers contemplated herein, and in delivering all documents
and instruments reasonably deemed necessary or useful by counsel for any party
hereto.
11.4 Notices. All notices, requests, consents and demands shall be
given to or made upon the parties at their respective addresses set forth below,
or at such other address as a party may designate in writing delivered to the
other parties. Unless otherwise agreed in this Agreement, all notices, requests,
consents and demands shall be given or made by personal delivery, by confirmed
air courier, by facsimile transmission ("fax"), with a copy to follow by first
class mail, or by certified first class mail, return receipt requested, postage
prepaid, to the party or parties addressed as aforesaid. If sent by confirmed
air courier, such notice shall be deemed to be given upon the earlier to occur
of the date upon which it is actually received by the addressee or the business
day upon which delivery is made at such address as confirmed by the air courier
(or if the date of such confirmed delivery is not a business day, the next
succeeding business day). If mailed, such notice shall be deemed to be given
upon the earlier to occur of the date upon which it is actually received by the
addressee or the second business day following the date upon which it is
deposited in a first-class postage-prepaid envelope in the United States mail
addressed as aforesaid. If given by fax, such notice shall be deemed to be given
upon the date it is actually received by the addressee, as confirmed by the fax
activity report generated upon transmission of such fax.
(a) If to FSC and FSB, to:
First Security Bank of Nevada
530 Las Vegas Blvd. S
Las Vegas, Nevada 89101
Attn: David J. Smith, President
and Chief Executive Officer
Fax Number: (702) 385-8705
With a copy to:
First Security Corporation
79 South Main Street
Salt Lake City, Nevada 84111
Attn: Brad D. Hardy, Esq.
Executive Vice-President & General Counsel
Fax Number: (801) 359-6928
With a copy to:
Sylvia I. Iannucci, Esq.
Ray, Quinney & Nebeker
400 Deseret Building
79 South Main Street
Salt Lake City, Utah 84111
Fax Number: (801) 532-7543
(b) If to Bancorp and Bank, to:
Comstock Bank
6275 Neil Road
Reno, Nevada 89511
Attn: Robert N. Barone, Chief Executive Officer
Fax Number: (775) 828-0377
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<PAGE> 95
With a copy to:
Comstock Bancorp
6275 Neil Road
Reno, Nevada 89511
Attn: Robert N. Barone, Chief Executive Officer
Fax Number: (775) 828-0377
With a copy to:
Francis X. Grady, Esq.
Grady & Associates
20800 Center Ridge Road, Suite 116
Rocky River, Ohio 44116-4306
Fax Number: (440) 356-7254
Each party hereto shall notify promptly the other in writing of the occurrence
of any event which will or may result in the failure to satisfy the conditions
specified in Article VIII hereof. Between the date of this Agreement and the
Closing Date, each party hereto will advise the other of the satisfaction of
such conditions as they occur.
11.5 Amendments. Prior to the Effective Time, any provision of this
Agreement, except for Section 3.1 which establishes the Exchange Ratio, may be
amended or modified at any time, either before or after its approval, if any, by
the shareholders of any party to this Agreement, by an agreement in writing
between the parties hereto approved by their respective Boards of Directors (or
Executive Committee in the case of FSC) and executed in the same manner as this
Agreement.
11.6 Entire Agreement. This Agreement and all exhibits and schedules
hereto and other documents incorporated or referred to herein, contain the
entire agreement of the parties and there are no representations, inducements or
other provisions other than those expressed in writing. No modification, waiver
or discharge of any provision of or breach of this Agreement shall (i) be
effective unless it is executed in writing by the party effecting such
modification, waiver or discharge, or (ii) affect the right of either party
hereto thereafter to enforce any other provision or to exercise any right or
remedy in the event of a breach by a party hereto, whether or not similar.
11.7 Assignment. This Agreement may not be assigned by any party hereto
except with the prior written consent of the other parties.
11.8 Counterparts. Any number of counterparts of this Agreement may be
signed and delivered and each shall be considered an original and together they
shall constitute one agreement.
11.9 Exclusive Merger Agreement. Bancorp, Bank, and the Board of
Directors of Bancorp covenant and agree that, between the date hereof and the
date of the meeting of the shareholders of Bancorp described in Article VII
hereof, they will not, either directly or indirectly, solicit or attempt to
procure offers relating to the merger or acquisition of Bancorp or Bank with or
by any entity not a party to this Agreement, or negotiate or enter into any
agreements relating to the merger or acquisition of Bancorp or Bank with or by
any such third party, and such persons further agree to use his or her best
efforts to obtain the approval of the Merger by the shareholders of Bancorp.
Notwithstanding the foregoing, neither Bancorp, Bank nor any of their respective
officers or directors shall be required by this Section 11.9 to take or refrain
from taking any action if to do so would, in the written opinion of Bancorp's
legal counsel, violate the duties imposed by law on the Bancorp directors or
officers to the Bancorp shareholders.
11.10 Public Statements. No party to this Agreement shall issue any
press release or other public statement concerning the transactions contemplated
by this Agreement without first providing the other parties hereto with a
written copy of the text of such release or statement and obtaining the consent
of the other parties respecting such release or statement, which consent will
not be unreasonably withheld. The consent provided for in this Section 11.10
shall not be required if the delay necessary to obtain such consent would
preclude the timely issuance of a press release or public statement as required
by law. The provisions of this Section 11.10 shall not be construed as
prohibiting the filing of copies of this Agreement or descriptions of this
Agreement with (i) regulatory agencies as to
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<PAGE> 96
which regulatory approvals are contemplated by this Agreement or (ii) the SEC
consistent with Bancorp's obligations as a company whose shares are registered
pursuant to the Securities Exchange Act of 1934.
11.11 Confidentiality. Each party shall use all information that it
obtains from the others pursuant to this Agreement solely for the effectuation
of the transactions contemplated by this Agreement or for other purposes
consistent with the intent of this Agreement and shall not use any of such
information for any other purpose, including, without limitation, the
competitive detriment of the other parties. Each party shall maintain as
strictly confidential all information it learns from the others and shall, upon
expiration or termination of this Agreement, return promptly to the other
parties all documentation (and copies thereof) provided by them or made
available by third parties. Each party may disclose such information to its
respective affiliates, counsel, accountants, tax advisors and consultants. This
provision shall not prohibit the use or disclosure of confidential information
pursuant to court order or which has otherwise become publicly available.
11.12 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreements or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 3.1(a), 3.4, 3.5, 6.10,
6.13, 6.17, 6.18, 11.1, 11.10 and 11.11, the Employment Agreements in the form
of Schedules 8.2(h-1) and 8.2(h-2), and the agreements of the Affiliates
contained in the letters referred to in Section 8.2(f).
11.13 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Closing, the parties may mutually
agree to revise the structure of the Bank Merger and the Merger and related
transactions provided that each of the transactions comprising such revised
structure shall (i) not change the amount or form of consideration to be
received by the holders of Bancorp Common Stock, (ii) be capable of consummation
in as timely a manner as the structure contemplated herein and (iii) not
otherwise be prejudicial to the interest of the stockholders of Bancorp. This
Agreement and any related documents shall be appropriately amended in order to
reflect any such revised structure.
11.14 Third Parties. Except with respect to Article III, Sections 6.13,
6.17, 6.18 and 11.1 which are intended to benefit the shareholders, employees,
officers and directors of Bancorp, each party hereto intends that this Agreement
shall not benefit or create any right or cause of action to any person other
than parties hereto. As used in this Agreement, the term "parties" shall refer
only to FSC, FSB, Bancorp or Bank as the context may require.
11.15 Severability. Except to the extent that application of this
Section 11.15 would have a Material Adverse Effect on either party, any term or
provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provisions shall be interpreted to be only so broad as is
enforceable.
11.16 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
11.17 Definition of "Material Adverse Effect". As used in this
Agreement, "Material Adverse Effect" shall mean with respect to a person, a
Material Adverse Effect upon (A) the business, financial condition, operations,
or prospects of such person, or (B) the ability of such person to timely perform
its obligations under the Agreement and to timely consummate the Merger;
provided, however, that in determining whether a Material Adverse Effect has
occurred there shall be excluded any effect on the referenced party the cause of
which is (i) any change in banking or similar laws, rules or regulations of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) any change in generally accepted accounting principles or
regulatory accounting principles applicable to banks or their holding companies
generally, (iii) any action or omission of FSC or Bancorp or any subsidiary of
either of them taken with the prior written consent of FSC or Bancorp, as
applicable, or permitted by this Agreement, and (iv) any changes in general
economic conditions affecting banks or their holding companies generally.
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<PAGE> 97
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first set forth above.
FIRST SECURITY CORPORATION
By /s/ Morgan J. Evans
--------------------------------
Morgan J. Evans, President and
Chief Operating Officer
FIRST SECURITY BANK OF NEVADA
By /s/ David J. Smith
--------------------------------
David J. Smith, President and
Chief Executive Officer
COMSTOCK BANCORP
By /s/ Robert N. Barone
--------------------------------
Robert N. Barone, Chairman and
Chief Executive Officer
COMSTOCK BANK
By /s/ Robert N. Barone
--------------------------------
Robert N. Barone, Chairman and
Chief Executive Officer
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<PAGE> 98
APPENDIX B
OPINION OF HOVDE FINANCIAL, INC.
<PAGE> 99
January 12, 1999
Board of Directors
Comstock Bancorp
6275 Neil Road
Reno, NV 89511
Members of the Board:
We have reviewed the Agreement and Plan of Reorganization (the
"Agreement") and related exhibits and schedules dated as of the date hereof by
and among First Security Corporation ("FSC"), First Security Bank of Nevada
("FSB"), Comstock Bancorp ("Bancorp") and Comstock Bank ("Bank"), pursuant to
which, among other things, Bancorp will be merged with and into FSC (the
"Merger"). As is set forth in the Agreement, all of the issued and outstanding
shares of Bancorp Common Stock, including all Option and Warrant shares shall be
converted into the right to receive $65 million in FSC Common Stock, subject to
adjustment as provided for in the Agreement (the "Merger Consideration").
Capitalized terms used herein shall have the same meaning as in the Agreement,
unless specifically stated otherwise.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation of
securities in connection with negotiated underwritings, subscription and
community offerings, private placements, merger and acquisition transactions and
recapitalizations. Pursuant to a Consulting Agreement dated September 11, 1998,
between Bancorp and Hovde, Hovde was engaged to assist Bancorp in exploring
various strategic options, including a potential affiliation of Bancorp with a
larger financial institution. Therefore, we are familiar with Bancorp having
acted as its financial advisor in connection with the proposed transaction, and
having participated in the negotiations leading to the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Bancorp and FSC, and
material prepared in connection with the proposed transaction, including the
following: the Agreement; certain publicly available information concerning
Bancorp and FSC, including consolidated financial statements for each of the
three years ended December 31, 1997, respectively, as well as subsequent
quarterly statements for the periods ended September 30, 1998 for Bancorp and
FSC, respectively; the nature and terms of recent sale and merger transactions
involving banks and bank holding companies that we consider relevant; historical
and current market data for the common stock of Bancorp and FSC; and financial
and other publicly available information provided to us by the managements of
Bancorp and FSC.
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<PAGE> 100
Board of Directors
Comstock Bancorp
January 12, 1999
Page Two
In addition, we have conducted meetings with members of the senior
management of Bancorp and FSC for the purpose of reviewing the future prospects
of both companies. We also took into account our assessment of general economic,
market and financial conditions and our experience in other similar
transactions, as well as our overall knowledge of the banking industry and our
general experience in securities valuations.
We have acted as financial advisor to Bancorp with respect to the
proposed Merger and have received a fee from Bancorp for our services. We will
also receive an additional fee if the proposed Merger is consummated. Please be
advised that we have no other financial advisory or other relationships with
Bancorp. In the ordinary course of their businesses, affiliates of Hovde may
actively trade the debt and equity securities of FSC for their own account or
for the accounts of customers and, accordingly, they may at any time hold long
or short positions in such securities.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the publicly available materials
provided to us by Bancorp and FSC, and in the discussions with management of
Bancorp and FSC.
Based on the foregoing and our experience as investment bankers, we are
of the opinion that, as of the date hereof, the Merger Consideration to be
received by the shareholders of Bancorp in connection with the Merger as
described in the Agreement is fair to such shareholders from a financial point
of view.
Sincerely,
HOVDE FINANCIAL, INC.
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<PAGE> 101
APPENDIX C
EXTRACTS FROM NEVADA LAWS CONCERNING DISSENTERS' RIGHTS OF BANCORP
STOCKHOLDERS
<PAGE> 102
QUALIFICATIONS OF AND PROCEDURES
FOR DISSENTING STOCKHOLDERS
NEVADA REVISED STATUTES SECTION 92A
92A.300 DEFINITIONS. As used in Nevada Revised Statutes ("NRS") 92A.300
to 92A.500, inclusive, unless the context otherwise requires, the words and
terms defined in NRS 92A.305 to 92A.335, inclusive, have the meanings ascribed
to them in those sections.
92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or by
a nominee as the stockholder of record.
92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the action
of a domestic corporation.
92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation.
92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances.
92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY
COMPANY. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
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2. Unless otherwise provided in its articles of incorporation or
bylaws, no member of a domestic nonprofit corporation, including, but not
limited to, a cooperative corporation, which supplies services described in
chapter 704 of NRS to its members only, and no person who is a member of a
domestic nonprofit corporation as a condition of or by reason of the ownership
of an interest in real property, may resign and dissent pursuant to subsection
1.
92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS
AND TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a
stockholder is entitled to dissent from, and obtain payment of the fair value of
his shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic
corporation is a party:
(1) If approval by the stockholders is required for the
merger by NRS 92A.120 to 92A.160, inclusive, or the
articles of incorporation and he is entitled to vote
on the merger; or
(2) If the domestic corporation is a subsidiary and is
merged with its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject
owner's interests will be acquired, if he is entitled to vote
on the plan.
(c) Any corporate action taken pursuant to a vote of the
stockholders to the event that the articles of incorporation,
bylaws or a resolution of the board of directors provides that
voting or nonvoting stockholders are entitled to dissent and
obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under
NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to him or the domestic corporation.
92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN
CLASSES OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF
MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan
of merger or exchange to accept for the shares anything
except:
(1) Cash, owner's interests or owner's interests and cash
in lieu of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective
date of the plan of merger or exchange, were
either listed on a national securities
exchange, included in the national market
system by the National Association of
Securities Dealers, Inc., or held of record
by at least 2,000 holders of owner's
interests of record; or
(2) A combination of cash and owner's interests of the
kind described in sub-subparagraphs (I) and (II) of
subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require action of
the stockholders of the surviving domestic corporation under NRS 92A.130.
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<PAGE> 104
92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY
TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL
STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer
than all of the shares registered in his name only if he dissents with respect
to all shares beneficially owned by any one person and notifies the subject
corporation in writing of the name and address of each person on whose behalf he
asserts dissenter's rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his other
shares were registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of
the stockholder of record to the dissent not later than the
time the beneficial stockholder asserts dissenter's rights;
and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct
the vote.
92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, the notice of the meeting must
state that stockholders are or may be entitled to assert dissenters' rights
under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those
sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders, the
domestic corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.
92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is
taken, written notice of his intent to demand payment for his
shares if the proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1
is not entitled to payment for his shares under this chapter.
92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and
when certificates, if any, for shares must be deposited:
(b) Inform the holders of shares not represented by certificates
to what extent the transfer of the shares will be restricted
after the demand for payment is received;
(c) Supply a form for demanding payment that includes the date of
the first announcement to the news media or to the
stockholders of the terms of the proposed action and requires
that the person
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<PAGE> 105
asserting dissenter's rights certify whether or not he
acquired beneficial ownership of the shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more
than 60 days after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF
RIGHTS OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's
notice for this certification; and
(c) Deposit his certificates, if any, in accordance with the terms
of the notice.
2. The stockholder who demands payment and deposits his certificates,
if any, before the proposed corporate action is taken retains all other rights
of a stockholder until those rights are canceled or modified by the taking of
the proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter.
92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER
DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its
registered office in this state, of the county where the
dissenter resides or has its registered office. The court
shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a
fiscal year ending not more than 16 months before the date of
payment, a statement of income for that year, a statement of
changes in the stockholders' equity for that year and the
latest available interim financial statements, if any:
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under
NRS 92A.480; and
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<PAGE> 106
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF
DISSENTER'S NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate of the
fair value of the shares, an explanation of how the interest was calculated, and
a statement of the dissenters' right to demand payment pursuant to NRS 92A.480.
92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for his
shares.
92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to
a judgment:
(a) For the amount, if any, by which the court finds the fair
value of his shares, plus interest, exceeds the amount paid by
the subject corporation; or
(b) For the fair value, plus accrued interest, of his
after-acquired shares for which the subject corporation
elected to withhold payment pursuant to NRS 92A.470.
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<PAGE> 107
92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS
AND FEES.
1. The court in a proceeding to determine fair value shall determine
all of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters
if the court finds the subject corporation did not
substantially comply with the requirements of NRS 92A.300 to
92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor
of any other party, if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily,
vexatiously or not in good faith with respect to the rights
provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the subject corporation,
the court may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
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APPENDIX D
BANCORP SUMMARY ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 109
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of, and for, the years ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Earnings:
Total Interest Income ............. $ 20,496 $ 15,517 $ 14,868 $ 12,814 $ 9,134
Total Interest Expense ............ 7,319 5,623 4,434 3,811 2,296
-------- -------- -------- -------- --------
Net Interest Income ............... 13,177 9,894 10,434 9,003 6,938
Provision for loan losses ......... 620 270 250 270 105
-------- -------- -------- -------- --------
Net Income after provision
for loan losses ................... 12,557 9,624 10,184 8,733 6,733
Other Operating Income ............ 867 541 414 278 407
Non-Interest Expense .............. (9,220) (7,653) (7,603) (6,637) (5,724)
BigHorn Joint-Venture (net) ....... 0 0 0 0 0
Provision for taxes/Tax Benefit.... 254 (676) (903) (769) (422)
-------- -------- -------- -------- --------
Net Income ........................ $ 4,458 $ 1,836 $ 2,092 $ 1,605 $ 994
======== ======== ======== ======== ========
Shares:
Outstanding (000's)(1)(2) ......... 5,036 4,423 4,236 4,232 3,638
Earnings per Share(1)(2) .......... $ .99 $ .42 $ .49 $ .43 $ .29
Cash Dividends Declared(1)(2) ..... $ .00 $ .00 $ .00 $ .00 $ .472
Book Value per Share
Outstanding: ...................... $ 4.29 $ 3.53 $ 3.07 $ 2.58 $ 2.07
</TABLE>
(1) Adjusted for 10% stock dividend declared in February 1995.
(2) Adjusted for conversion to Comstock Bancorp stock, two for one in June
1997.
D-1
<PAGE> 110
<TABLE>
<CAPTION>
As of, and for, the years ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands of dollars, except share data and ratios)
<S> <C> <C> <C> <C> <C>
Selected Assets & Liabilities:
Total Assets .................... $ 225,149 $ 194,698 $ 144,980 $ 122,805 $ 103,073
Total Deposits .................. $ 196,247 $ 179,101 $ 131,303 $ 111,169 $ 93,006
Gross Loans ..................... $ 141,822 $ 136,182 $ 96,524 $ 86,743 $ 69,999
Stockholders' Equity ............ $ 21,590 $ 15,598 $ 13,009 $ 10,884 $ 7,531
Selected Financial Ratios (%):
Reserves for Loan Losses
To End of Period Loans ......... 1.13% .79% .89% .77% .62%
Net Charge-Offs to End of
Period Loans (Recoveries) ...... .07% .04% .06% .04% .11%
Non-Accruing Loans to Total
End of Period Loans ............ .5% 1.9% 3.3% .2% .2%
Net Income to Average
Stockholders' Equity .......... 25.5% 12.9% 17.7% 18.6% 14.7%
Net Income to Average
Total Assets .................. 2.13% 1.12% 1.56% 1.41% 1.14%
Dividend Payout Ratio ........... 0.0% 0.0% 0.0% 0.0% 41.4%
</TABLE>
Note: Average stockholder equity is calculated using end of month data,
as the Company only computes its income on a monthly basis. However,
average assets are calculated using daily figures.
D-2
<PAGE> 111
The following discussion reviews and analyzes the consolidated operating
results and financial condition of the Company. This discussion should be read
in conjunction with the consolidated financial statements and the other
financial data presented elsewhere herein.
Overview
The Company's total assets and deposits continued to grow in 1998.
Management believes that asset and deposit totals have increased for the last
five years as a result of an aggressive diversified lending posture on the part
of the Company's wholly owned bank subsidiary, the expansion of the branch
network, and economic growth in northern Nevada. In addition, management
believes that assets and deposits grew because of consolidation of local
institutions with large out of state banks.
Net income for the year ended December 31,1998 was $4,459,000 ($.99 per
share; $.91 per share fully diluted). Excluding tax benefits associated with the
exercise of stock options, operating profits approximated $3,300,000 ($.74 per
share: $.68 per share fully diluted) compared to $1,836,000 ($.42 per share;
$.39 fully diluted) in 1997, $2,092,000 ($.49 per share; $.46 fully diluted) in
1996; $1,605,000 ($.43 per share; $.38 fully diluted) in 1995; and $994,000
($.29 per share; $.27 fully diluted) in 1994.
Capitalization
As of December 31, 1995, the Company's wholly owned bank subsidiary's
(the "Bank") Leverage Ratio was 8.57%. As of December 31, 1996, the Leverage
Ratio rose to 9.16%. For the year ending December 31, 1997, the Bank's Leverage
Ratio decreased to 8.52% due an increase in the loan portfolio. As of December
31, 1998 the Company's capital structure was as follows (excluding outstanding
options and warrants to purchase Common Stock):
<TABLE>
<S> <C>
Shares outstanding ......................... 5,035,500
Stockholder equity ......................... $ 21,589,933
Book value/share (stockholder equity) ...... $ 4.29
Leverage Ratio ............................. 8.49%
</TABLE>
If all of the currently outstanding options and warrants were exercised,
the pro forma capital structure would be, as of December 31, 1998:
<TABLE>
<S> <C>
Shares Outstanding ....................... 5,185,900
</TABLE>
<TABLE>
<CAPTION>
Aggregate Per
Amount Share
----------- -----
<S> <C> <C>
Stockholder equity $22,403,751 $4.45
</TABLE>
D-3
<PAGE> 112
Capital Expenditures
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995
at a cost of approximately $3.7 million for the land and structure and $1.7
million for the furniture, fixtures and equipment. The building is approximately
26,000 square feet and houses the Bank's main branch office, the Company's
executive and administrative offices and the real estate and commercial lending
functions. The Company exercised its option to purchase a one acre adjacent
parcel for $174,240 in March, 1995 to facilitate future expansion of the
corporate headquarters facility, but has since determined that such expansion
would be too costly and the property was sold in 1998 for $340,000. In November,
1996, the Company signed a lease on approximately 7,130 square feet of
office/warehouse space approximately one mile from the administrative
headquarters to house a computer facility and other back office administrative
functions. The Company made the decision to bring the main frame data processing
operations in-house upon receipt of notification of cancellation by its data
processing service provider. Facility renovations of and department relocations
to the new leased property were completed in March, 1997 at a cost of $214,000
(plus $51,000 for furniture, fixtures and equipment). This facility also houses
a full data processing center, which became operational in October, 1997 at a
cost of $542,000. In addition, removal of the back-office functions from the
head office facility allowed for the expansion of the commercial and residential
lending origination functions within the headquarters facility. Those facility
renovations and department relocations within the administrative office to
expand the commercial and residential lending departments were completed in May,
1997, at a cost of $56,000 (plus $77,000 for furniture, fixtures and equipment).
In January, 1996, the Company signed a lease for a branch site located
in south Reno. The branch opened in February, 1997 at a cost of $139,000 for
leasehold improvements and $263,000 for furniture, fixtures and equipment.
In January, 1997, the Company signed a lease for a branch site located
in north Sparks. The branch opened in July, 1997 at a cost of $28,000 for the
leasehold improvements and $260,000 for the furniture, fixtures, and equipment.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area at a cost (including grading)
of $466,000.
In February, 1999, the Company closed escrow on a pad in northwest Reno.
The pad is located in a shopping center bordered by both established and
developing residential and retail areas. The site cost approximated $538,000.
The cash to finance the above described capital expenditures came from
existing liquid assets.
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<PAGE> 113
Operations and Liquidity
Total post-tax profits for 1998 were $4,459,000, an increase of 142.8%
from the $1,836,000 earned in 1997. The following table shows the overall
reasons for the change in the Bank's profitability.
<TABLE>
<CAPTION>
1998 1997 %Change
------------ ------------ --------
<S> <C> <C> <C>
Total loan income $ 14,077,117 $ 10,996,028 28.0
Total fee income 3,914,049 2,646,867 47.9
Overnight and investment
income 2,504,967 1,874,244 33.7
Service charges and
non-interest income 702,573 539,621 14.8
------------ ------------ --------
21,198,706 16,056,760 32.0
Total interest expense 7,319,554 5,623,352 30.2
Salaries and benefits
(excluding management
bonus) 4,683,318 3,879,940 20.7
Occupancy expenses 857,443 753,876 13.7
Furniture, fixtures and
equipment 720,188 584,839 18.8
Other operating expenses 2,136,412 2,062,543 3.6
------------ ------------ --------
15,716,915 12,904,550 21.8
Loan loss provision 620,000 270,000 129.6
------------ ------------ --------
Income from bank
operations 4,861,791 2,228,210 118.4
Management bonus accrual 822,346 371,461 121.4
Taxes (254,413) 675,615 (137.7)
Other income 164,867 926 17,704.2
------------ ------------ --------
Net income $ 4,458,725 $ 1,836,060 142.8
</TABLE>
The table shows that net income increased by 142.8% ($2,623,000) over 1997. The
largest contributing factor, in management's opinion, to the increase in income
was the exercise of employee and director options and the sale of tax favorable
municipal bonds, that resulted in a tax benefit of approximately $1,385,000
Interest income on loans grew 28%, and, again in 1998, was augmented by the
receipt of "additional" interest from a development loan in the Company's
portfolio for which the Company collects monthly interest payments plus an
additional $2,100 for each lot the developer sells. In 1998, 440 lots were sold
increasing interest income by
D-5
<PAGE> 114
$815,900. In 1997, 139 lots were sold and closed giving the Company "additional"
interest income of $292,000. In 1996, 128 lots were sold and closed which added
$268,800 in "additional" interest to Company revenue. Of the total 811 lots, 102
remained to be sold as of December 31, 1998. The Company expects lot sales to
continue in 1999, but such sales are subject to current market conditions
including, but not limited to, the general health of the economy, interest
rates, and competition.
The $2,622,665 increase in pre-tax income reported was attributable to
the following:
<TABLE>
<S> <C>
+$3,081,089 increase in interest income
+ 1,267,182 increase in fee income
+ 630,723 increase in investment income
+ 162,952 increase in non-interest income
- 1,696,202 increase in interest paid on deposits and funds borrowed
- 803,378 increase in salary and benefit costs
- 238,916 increase in occupancy and furniture & equipment expense
- 73,869 increase in other operating expenses
- 636,944 change in bonus, loan loss provision and other
-----------
+$1,692,637 change in pre-tax income
+ 930,028 decrease in taxes
-----------
+$2,622,665 increase in post-tax income
</TABLE>
The increase in interest income (in addition to the interest from the
development loan discussed above) was due to a larger portfolio of held to
maturity loans. As of December 31, 1998, the Company's held $141 million in its
loan portfolios compared to $135 million, a year earlier. On an average basis,
the Company held $142 million in its loan portfolios in 1998 compared to $114
million in 1997, a 24.6% increase, similar to the 28.0% increase in loan income
recorded. The 33.7% increase in investment income came primarily from the
increase in investment holdings, which rose from $27.1 million at the end of
1997 to $39.8 million at the end of 1998. Investments in overnight funds
increased from $9.9 million to $17.2 million. The 30.2% increase in interest
paid on deposits and other borrowed funds resulted mainly from a 31.3% increase
in deposits, on average, between 1998 and 1997. The loan loss provision was
increased by $350,000 or 129.6% over 1997 to meet the risks traditionally
associated with the increase in commercial loan portfolios and to meet a level
more consistent with current economic conditions and expectations.
In 1993, the Company originated $206 million in residential real estate
mortgage loans and sold $176 million of this product in the secondary market.
Due to rapidly rising rates in 1994, the market for mortgage refinancing all but
disappeared. This phenomenon, accompanied by a re-emergence of competition from
the larger financial institutions, caused residential real estate loan
originations to fall by 19.6% to $165 million, and secondary market sales to
fall to $147 million. In 1995, the Company originated $160 million in real
estate loans and sold $153 million in the secondary
D-6
<PAGE> 115
market, a decrease of 3.0% in loans originated and an increase of 4.1% in loans
sold. In 1996, the Company originated $170 million in residential real estate
loans and sold $139 million in the secondary market, representing an increase of
6.3% and a decrease of 10.1%, from 1995, respectively. In 1997, the Company
originated $140 million of residential real estate mortgage loans and sold $114
million in the secondary market representing a decrease of 17.6% in originations
and 18.0% in secondary market sales. There were two major reasons for the lower
real estate mortgage loan volume in 1997. First, the floods in Reno in early
January, 1997 severely depressed mortgage loan demand in the first quarter in
Northern Nevada. Second, the Company closed its Las Vegas mortgage loan
origination office in April, 1997. Northern Nevada mortgage originations were
$138 million in 1997 compared to $141 million in 1996, a 2% decrease. In 1998,
the Company originated $193 million of residential real estate mortgage loans
and sold $160 million in the secondary market, representing an increase of 37.9
in originations and 40.4% in secondary market sales.
In 1998, existing home sales rose 9.1% in Washoe County, a major segment
of the Company's market area. During that same time period, permits for new
housing units, including multi-family, rose 36%. Local housing experts cited low
interest rates, low inflation, and rising personal income as factors leading to
the improved sales. The growth in the Company's real estate origination business
was similar to the growth in the general market.
The Company's liquidity ratio, defined as the value of marketable assets
divided by volatile liabilities, stood at 31% as of December 31, 1998 as
compared to 26% as of December 31, 1997. As of December 31, 1998, the Company
had $17.2 million in overnight funds, $39.8 million in time deposits and
marketable securities which were available for sale, and borrowing capacity at
the Federal Home Loan Bank of San Francisco in excess of $67 million (30% of its
assets). Such borrowing capacity is subject to quarterly review and must be
collateralized. As of December 31, 1998, the Company had borrowed $6,000,000 and
had pledged approximately $33 million in loans and securities to the Federal
Home Loan Bank of San Francisco as collateral for the borrowing line.
In order to generate its relatively high lending volumes, the Company
has higher personnel and overhead expenses than most in its peer group because
residential real estate lending requires extensive back office operations
including loan underwriters, loan processors, a loan servicing and shipping
staff, secondary market sales personnel, and compliance personnel. Construction
lending requires a builders' control staff and inspectors. Finally, acquisition
and development lending typically requires close monitoring by lending staff,
thus requiring additional staff for other types of lending. At the beginning of
1993, the Company had approximately 50 full time equivalent ("FTE") employees.
By the end of 1993, with the expansion of lending to Las Vegas and the gear up
for the planned growth in commercial lending, the Company employed 97 FTE
employees. At the end of 1994 and 1995 FTE employees numbered 108. And, at the
end of 1996 the Company employed 118 FTE employees. The increase
D-7
<PAGE> 116
included the addition of a Compliance Officer, expansion of the commercial
lending functions and partial staffing for the additional branch office that
opened in February, 1997. At the end of 1997, FTE were 121. In 1997, two
branches were opened and the Company expanded its commercial lending operation
and its Management Information Department. It also closed its Las Vegas mortgage
loan origination facility. By the end of 1998, the Company had an FTE of 119.5.
According to data publicly available on first mortgage filings, the
Company believes that it is in the top ten of first mortgage lenders in Washoe
County, and the in the top two of first mortgage lenders in Carson City. The
income generated from the Company's high volume of lending activity usually
places the Company's and the Bank's net interest margin in the top 10% of peer
group analysis. Because of the personnel and expense generated in the mortgage
operation which are not found in peer group comparative numbers, management does
not rely on peer group analysis of its specific overhead expense ratios or its
net interest margins when analyzing performance. Rather, management relies on
other productivity measures such as analysis of loan representative lending
volumes and on overall profitability measures including return on assets and
return on stockholders' equity.
Impact of Changing Interest Rates - Interest Rate Risk
The impact of changing interest rates (and inflation) on banks differs
from the impact on other companies. As financial intermediaries, banks have
assets and liabilities that may move in concert with interest rates. This is
especially true for banks with a high percentage of rate sensitive interest
earning assets and interest bearing liabilities. A bank can reduce the impact of
changing interest rates on its interest margin if it can manage its interest
rate sensitivity gap (the "gap") (also known as "Interest Rate Risk"). The gap
for any period is the volume difference between the assets and the liabilities
which reprice to market conditions in that period. Management's goal is to
adjust the gap so that the impact of falling or rising interest rates has a
neutral impact on the Company's interest margin. To do this, it is necessary for
management to anticipate the general movement of interest rates. Thus, there is
no guarantee that the Company will always be able to maintain its current
interest margins.
The table below shows changes in income and expenses due to changes in
interest rates and business volumes. Since the interest yields on loans was
substantially unchanged at 9.45% in 1998 versus 1997, the lion's share of total
income change of $2.774 million was due to volume increases ($2.757 million).
For the Company's overnight investments in Fed Funds and bank qualified
overnight mutual funds, the yield fell 20 basis points as the Federal Reserve
lowered short-term interest rates in the second half of 1998. Of the $172,772
positive change in income, $196,321 was due to higher investment levels and
- -$16,359 was due to lower yields (with -$7,190 due to the combination of rate
and volume).
D-8
<PAGE> 117
Investment securities had significantly higher volume levels and
slightly lower yields, again due to falling national interest rates. Of the
$429,356 rise in income in investments, $454,597 was due to volume and -$18,746
was due to lower yields (with -$6,496 due to the combination of rate and
volume). Total interest income grew by $3,363 million with yields 9 basis points
lower in 1998 than in 1997. Of the $3.363 million, $3.511 million was due to
increased volume and -$127,407 was due to lower yields (with $35,412 due to the
combination of rate and volume).
Deposit volumes also rose in 1998 with interest costs on transaction
accounts rising by $385,042. The yield cost of transactions accounts fell by
seven basis points due to lower national interest rates. Thus, of the $385,042
of increased costs, $425,517 was volume related while the Company saved $31,720
directly from lower yield costs (and $8,755 from the combination of rate and
volume). The cost of time and savings deposits rose by $1.040 million due to
increases in both yield costs and volumes. Volume was responsible for $966,836
of the costs and yields for %59,088 (a rise of eight basis points). The yield
costs rose here due to the timing of the national rate declines and competition
in the local time certificate market. Borrowed funds (from FHLB) rose $270,897
in 1998 versus 1997. Of this amount, $268,053 was due to higher average volume
of borrowings and $762 due to higher yield costs (with $2,082 due to the
rate/volume combination).
As a result of the components, the Company's net interest income rose
$1.667 million. Of that amount, $1.895 million was due to increases in the
volume of business. However, a shrinking interest margin (14 basis points) cost
the Company $189,371.
D-9
<PAGE> 118
COMSTOCK BANCORP
INTEREST RATE SENSITIVITY ANALYSIS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
YEAR-TO-DATE ENDED: Dec. 31, 1998 Rate Dec. 30, 1997 Rate Change Variance Variance Variance
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS:
Loan Income $13,539,860 9.45% $10,765,926 9.45% $ 2,773,934 $ 2,756,662 $ 4,671 $ 1,195
----------- ---- ----------- ---- ----------- ----------- ----------- -----------
Loan Fees and
Servicing Income 4,498,394 2,916,512 1,581,882 -- -- --
----------- ----------- -----------
Total Loan,
Servicing,
and Fee Income 18,038,254 12.59% 13,682,437 12.01% 4,355,817 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS:
Fed Funds and Mutual
Fund Income 619,481 5.27% 446,710 5.47% 172,772 $ 196,321 ($ 16,359) ($ 7,190)
Income from
Investment 1,741,207 5.66% 1,311,851 5.74% 429,356 $ 454,597 ($ 18,746) ($ 6,496)
Securities
Interest-Bearing
Deposit Income 81,202 6.61% 94,043 6.51% (12,841) ($ 14,065) $ 1,440 ($ 215)
----------- ----------- ----------- ----------- ----------- -----------
Total Investment 2,441,890 5.58% 1,852,604 5.71% 589,286 $ 644,447 ($ 40,925) ($ 14,236)
Income
Trading Account
Assets
and Other 63,077 7.63% 21,640 4.87% 41,437 $ 18,585 $ 12,293 $ 10,558
Investments
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest $15,981,750 8.51% $12,618,530 8.60% $ 3,363,220 $ 3,511,341 ($ 127,407) ($ 35,412)
Income
Total Interest,
Servicing,
Fee, and Trading
Account Income $20,543,221 10.94% $15,556,683 10.59% $ 4,986,539 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D-10
<PAGE> 119
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Interest on Deposits:
Transaction $ 1,926,671 3.21% $ 1,541,629 3.28% $ 385,042 $ 425,517 ($ 31,720) ($ 8,755)
Accounts
Time and Savings
Deposits 5,023,941 5.33% 3,983,677 5.25% 1,040,264 966,836 59,088 14,341
----------- ----------- ----------- ----------- ----------- -----------
Total Deposit
Interest 6,950,612 4.51% 5,525,306 4.50% 1,425,306 1,411,446 11,039 2,820
Expense
- ----------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed 368,942 6.15% $ 98,046 6.10% $ 270,897 $ 268,053 $ 762 $ 2,082
----------- ----------- ----------- ----------- ----------- -----------
Funds
Total Interest $ 7,319,554 4.57% $ 5,623,352 4.52% $ 1,696,202 $ 1,616,426 $ 61,964 $ 17,812
Expense
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $ 8,662,196 3.94% $ 6,995,177 4.08% $ 1,667,019 $ 1,894,915 ($ 189,371) ($ 53,224)
(Excludes fee
income)
NET INTEREST
DIFFERENTIAL $13,223,667 6.37% $ 9,933,330 6.08% $ 3,290,337 -- -- --
(Includes fee
income)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO INTEREST RATE SENSITIVITY ANALYSIS TABLE:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets.
[2] "Yield/Rate" is the interest income or interest expense, annualized,
divided by the average respective outstanding balance for the period.
[3] "Total Change" represents the change in the interest income or interest
expense between the respective periods.
[4] "Volume Variance" equals the change in average volumes (balances)
between the periods times the previous period interest rate.
[5] "Rate Variance" equals the change in yields or rates between the periods
times the previous period average balance.
[6] "Rate/Volume Variance" reflects the change in interest income or
interest expense attributable to simultaneous changes in both rates and
volumes between the respective time periods.
D-11
<PAGE> 120
Interest Margin
The table below shows the sources of the Company's earnings.
Loan yields, including the fees, increased slightly between 1997 and
1998, largely due to the "additional" interest earned on the development loan
discussed previously. Loan yields declined in 1997 and 1998 from 1996 levels due
to a change in accounting for fees and due to increased competition from other
lenders. Since 1994, the Company has consistently expanded its commercial
lending while leaving the resources devoted to its real estate lending constant.
The growth in these portfolios has offset any declining yields resulting from
the prime rate reductions. In 1995, originations were $229 million. In 1996,
that figure rose to $308 million and then fell to $269 million in 1997. In 1998,
the originations rose again to $303 million.
All other portfolio yields were comparable or slightly higher between
1997 and 1998, mirroring the general movement of national interest rates. Yields
on investments rose slightly as the Company increased the duration of the
"Available for Sale" portfolio from 1.25 years to 2.61 years.
The cost of funds moved up from 4.52% in 1997 to 4.57% in 1998 partly
reflecting the Companys desire to offer competitive rates to established
customers and to remain competitive in the volatile CD market.
Overall, the 1998 net interest margin, both including and excluding
fees, remained consistent with 1997 levels.
<TABLE>
<CAPTION>
Net Interest Margin 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Include fees: 6.6% 6.6% 8.5%
Exclude fee: 4.7% 4.8% 4.9%
</TABLE>
D-12
<PAGE> 121
COMSTOCK BANCORP
CONSOLIDATED AVERAGE BALANCES
INTEREST INCOME/EXPENSE AND YIELDS/RATES
AS OF DECEMBER 31, 1998, DECEMBER 31, 1997 AN DECEMBER 31, 1996
(DOLLARS IN THOUSANDS - YIELDS ARE TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------------------------------------------------------------------------------------------------
Assets (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned income* $ 142,730 $ 17,991 12.61% $ 113,663 $ 13,677 12.03% $ 88,645 $ 13,176 14.86%
Investment securities:
Taxable 21,676 1,345 6.21% 18,536 1,112 6.00% 13,287 752 5.66%
Tax-exempt 9,880 662 6.70% 4,777 321 6.72% 2,810 180 6.40%
--------- --------- --------- --------- --------- ---------
Total investment securities 31,556 2,007 6.36% 23,314 1,433 6.15% 16,097 932 5.79%
Trading account securities 10 2 23.88% 19 0 0.00% 33 0 0.00%
Federal funds sold and
securities purchased under
agreements to resell 11,760 619 5.27% 8,170 447 5.47% 13,181 $ 708 5.37%
Interest bearing deposits with
other banks 1,228 81 6.61% 1,444 94 6.51% 1,698 109 6.42%
--------- --------- --------- --------- --------- ---------
Total earning assets $ 187,284 $ 20,701 11.05% $ 146,609 $ 15,650 10.67% $ 119,654 $ 14,925 12.47%
Allowance for loan losses (1,312) (948) (794)
Unrealized gain (loss) on
securities available for sale 30 (37) (92)
Cash and due from banks 8,542 6,536 5,606
Other assets 14,353 11,915 9,263
--------- --------- ---------
Total assets $ 208,896 $ 164,074 $ 133,637
========= ========= ========
Liabilities and Stockholders'
Equity:
Interest bearing liabilities:
Deposits:
MMDA & Now $ 60,001 $ 1,927 3.21% $ 47,022 $ 1,542 3.28% $ 38,678 $ 1,298 3.36%
Savings 9,432 239 2.54% 9,844 262 2.66% 9,983 268 2.68%
Certificates of deposit less
than $100,000 and other time
deposits 55,014 3,106 5.65% 42,778 2,410 5.63% 34,325 1,907 5.56%
Certificates of deposit of
$100,000 or more 29,798 1,679 5.63% 23,215 1,312 5.65% 16,829 945 5.62%
--------- --------- --------- --------- --------- ---------
Total interest bearing deposits $ 154,246 $ 6,951 4.51% $ 122,860 $ 5,525 4.50% $ 99,816 $ 4,418 4.43%
Federal funds purchased 0 0 -- 75 5 7.10% 0 0 --
Securities sold under
agreements to repurchase 0 0 -- 0 0 -- 0 0 --
Other short-term borrowings 0 0 -- 0 0 -- 0 0 --
FHLB and other borrowings 6,000 369 6.15% 1,532 93 6.05% 251 16 6.37%
--------- --------- --------- ---------
Total interest bearing
liabilities $ 160,246 $ 7,320 4.57% $ 124,467 $ 5,623 4.52% $ 100,067 $ 4,434 4.43%
--------- ---------
Non-interest bearing demand
deposits 29,802 24,675 21,117
Accrued expenses and other
liabilities 1,379 705 652
Shareholders' equity 17,469 14,227 11,801
--------- --------- ---------
Total liabilities and
shareholders' equity $ 208,896 $ 164,074 $ 133,637
========= ========= ========
Net interest income/net
interest spread 13,381 6.49% 10,027 6.16% 10,491 8.04%
===== ===== =====
Net yield on earning assets 7.14% 6.84% 8.77%
===== ===== =====
Taxable equivalent adjustment:
Loans 0 0 0
Investment securities
available for sale 205 99 56
--------- --------- ---------
Total taxable equivalent
adjustment 205 99 56
--------- --------- ---------
Net interest income $ 13,176 $ 9,928 $ 10,435
========= ========= =========
</TABLE>
* Loans on non-accrual status have been included in the computation of average
balances.
D-13
<PAGE> 122
Other Assets
In 1997 the Company had one property classified as other real estate
owned at a book value of $8,250. The Company had a 15% interest in the
property received through judgment (the other 85% belonged to the loan
guarantor). As of December 31, 1998, $2,184,478 classified as OREO
(previously reported as non-accrual loans) is comprised of two residential
development properties. In July, the Company completed the foreclosure on a
project in Reno, which contained 13 partially completed homes. Of the 13,
two were sold in 1998, two are in escrow, two have offers pending, and the
other 7 are on schedule to be completed in March of 1999. In September, the
Company foreclosed on a project containing 2 condominiums and 11 finished
lots in Boulder, NV, in the Las Vegas area. The Company is marketing this
property on a multiple listing service and is in negotiations on an offer
for the 11 lots. The Company does not expect significant losses of principal
on either of its OREO properties. Management believes that the acquisition
of title to these projects and their placement into OREO is a positive step
in the resolution of these problem assets.
The Bank has historically serviced a portfolio of loans for the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Corporation ("FNMA") as well as for others. As of December 31,
1997, the portfolio amounted to $49.0 million. For performing this servicing
function, the Company earned a fee of approximately .47% of the aggregate
principal balance of the loans in the portfolio. The level of the servicing
portfolio has remained steady at about $50 million for the past 3 years due
to the fact that, in falling interest rate environments, management believes
that the Company is better off with the fees earned in selling the servicing
than with the fees earned from directly servicing mortgages that have an
incentive to prepay. As a result of the desire to sell all servicing and an
analysis of the cost to maintain the existing servicing, the Company made
the decision to sell the servicing portfolio in 1998 for a gain of $326,000.
D-14
<PAGE> 123
Income & Expense
The table below shows the major income and expense categories. Several
of the categories are discussed and detailed in tables that follow.
<TABLE>
<CAPTION>
INCOME & EXPENSE
Years ended December 31
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Interest income:
Interest income $ 14,077 $ 10,996 $ 8,871
Fee income 3,914 2,647 4,305
-------- -------- --------
Interest and fees on loans 17,991 13,643 13,176
Investments and deposits 1,885 1,427 984
Interest on fed funds sold 620 447 708
-------- -------- --------
Total interest income $ 20,496 $ 15,517 $ 14,868
======== ======== ========
Provision for credit losses 620 270 250
Interest expense:
Interest on deposits 6,951 5,525 4,418
Interest on other borrowings 369 98 16
-------- -------- --------
Total interest expense $ 7,320 $ 5,623 $ 4,434
======== ======== ========
Non-interest income 868 541 414
Non-interest expense 9,219 7,653 7,603
Income before income taxes,
minority interest, and
extraordinary items 4,205 2,512 2,995
Provision for taxes (254) 676 903
-------- -------- --------
Post-tax income $ 4,459 $ 1,836 $ 2,092
======== ======== ========
</TABLE>
D-15
<PAGE> 124
Interest Income
Interest income increased by 28.0% in 1998 ($3,081,000). Loan yields
increased by .58% while the average level of the loan portfolio increased by
25.6%. In 1994, as a result of a softening in the single family mortgage lending
market, the Company made an effort to increase commercial lending. As a result,
interest income increased by 67.4% in 1995, as increased commercial portfolio
levels combined with increased rates to produce increased interest income. In
1996 portfolio levels continued to increase while rates remained constant and
interest income rose 14.8%. In 1997, loan yields fell slightly while the average
level of the loan portfolio grew 28.3% another indication of reduced margins.
Fee income fell in 1997 over 1996 levels as a result of an accounting change in
fee recognition, but rose again 1998 with increase volumes.
As a result of growth and the use of some of the Company's liquidity in
the investment portfolio, income attributable to investments and overnight
deposits with other financial institutions rose 37% in 1998 to $2.7 million from
$1.9 million in 1997.
Interest Expense
In 1995, interest rates began to decline, but the Company's deposit
costs, in dollar terms, were up due to increased deposit levels. In 1996,
interest rates remained fairly steady, while costs rose due to deposit level
increases. In 1997, deposit levels rose significantly, the Company borrowed
funds, and deposit costs were up slightly. As a result, Total interest expense
increased 30.2% from $5.6 million in 1997 to $7.3 million in 1998 largely due to
the increase in deposit balances (28.7%).
Non-Interest Income
The table below shows non-interest income for the years 1996, 1997, and
1998. Account service charges have increased with the growth in the deposit
base.
The line item "Gain on Sale, Investments and Trading Acct" reflected the
impact of marking the trading account to market and the sale of held for sale
securities.
The large increase in "other income" is largely due to a gain of
$164,000 realized on the sale of a parcel of land (previously discussed). In
accordance with FASB 125, the Company placed a loan service asset on its books
(with no liability offset) in the net amount of $34,000 in 1997. This amount was
adjusted as new loans were funded, as loans were paid off, and was reversed at
the time the servicing portfolio was sold in 1998. The following table
summarizes the Bank's non-interest income for 1997, 1996 and 1995:
D-16
<PAGE> 125
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
(In thousands of dollars)
<S> <C> <C> <C>
Account service charges $ 350 $ 288 $ 265
Gain on sale, investments
And trading account 86 (9) (13)
Other income 432 262 162
----- ----- -----
$ 868 $ 541 $ 414
===== ===== =====
</TABLE>
Non-Interest Expenses
Almost all of the non-interest expenses appear high when compared to the
Company's and Bank's peer groups. In order to support its mortgage banking
business the Company has a loan center in the headquarters building in Reno
which handles real estate loan origination, houses loan representatives and
secondary market personnel, loan processing, loan servicing, and a builders'
control unit. The Carson City office also houses real estate loan
representatives and a real estate loan processing unit. The facilities,
equipment and personnel support for the mortgage lending operation make the
non-interest expenses much higher than those of most others in the "peer groups"
which generally do not have extensive mortgage lending units. The fee income
generated from the mortgage lending operations more than offsets the added
expenses.
The following table summarizes non-interest expenses for 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
(In thousands of dollars)
<S> <C> <C> <C>
Salaries and benefits $5,506 $4,251 $4,781
Occupancy expense 857 754 528
Furniture and equipment expense 720 585 464
Other operating expense 2,136 2,063 1,830
------ ------ ------
$9,219 $7,653 $7,603
====== ====== ======
</TABLE>
Salary and benefit expenses reflect full staffing in the new branch and
computer operations facilities and an increase in the management incentive plan
based on the increase in net income. The comparable salary expense for 1997 was
10.3% higher than that of 1996. Increases in occupancy, furniture, fixtures and
equipment expenses, and in other operating expenses occurred as a result of a
full year of operations in the two new branches and the operations center (see
Capital Expenditures above).
D-17
<PAGE> 126
Taxes
In 1996, the Company's effective tax rate was 30.2%, less than the
statutory 34% due to tax benefits derived from tax losses on the sale of certain
municipal bonds that were significantly larger than the financial statement
losses. In 1997, as a result of similar municipal bond sales and tax losses as
in 1996, a larger portfolio of tax exempt securities, and the exercise of stock
options by employees for which the Company received a tax deduction as if it had
paid the employees compensation, the tax rate dropped to 26.9%. For the year
ended December 31, 1998, the activity in municipal bond sales together with a
significant increase in stock option exercises resulted in an effective tax rate
of -6.05% (the Company is recovering taxes paid in past years.
Forward Look Statements
Certain statements herein regarding the Company's financial position,
business strategy and the plans and objectives of Company management for future
operations are forward-looking statements rather than statements of historical
or current fact. When used herein, words such as "anticipate", "believe",
"estimate", "expect", "intend", and similar expressions, as they relate to the
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are inherently uncertain, and there can be
no assurance that the underlying assumptions will prove valid. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to changes
in prevailing interest rates, competitive factors and pricing pressures, changes
in legal and regulatory requirements, technological change, product development
risks and general economic conditions. Such statements reflect the current views
of the Company with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
D-18
<PAGE> 127
COMSTOCK BANCORP AND SUBSIDIARY
DECEMBER 31, 1998, 1997, AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
INDEPENDENT AUDITOR'S REPORT D-20
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition D-21
Consolidated Statements of Income D-22
Consolidated Statements of Changes in Stockholders' Equity D-23
Consolidated Statements of Cash Flows D-24 - D-25
Notes to Financial Statements D-26 - D-46
</TABLE>
D-19
<PAGE> 128
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
of Comstock Bancorp and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Comstock Bancorp and Subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Bancorp'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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comstock
Bancorp and Subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Carson City, Nevada
January 11, 1999
D-20
<PAGE> 129
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks (non-interest bearing) $ 9,843,000 $ 9,464,000
Federal funds sold 17,214,000 9,853,000
Interest-bearing deposits in domestic financial institutions 791,000 1,492,000
Trading account securities 8,000 12,000
Securities available for sale 39,071,000 14,218,000
Securities held to maturity (market value of $0 and
$10,632,000 at December 31, 1998 and 1997) -- 10,636,000
Federal Home Loan Bank stock 843,000 788,000
Loans held for sale 15,088,000 13,946,000
Loans, net of allowance for credit losses of $1,598,000
and $1,076,000 in 1998 and 1997, respectively 125,136,000 121,159,000
Premises and equipment, net 7,263,000 7,710,000
Other real estate owned 2,184,000 8,000
Accrued interest receivable 1,052,000 989,000
Other assets 6,654,000 4,423,000
------------- -------------
Total Assets $ 225,147,000 $ 194,698,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits (non-interest bearing) $ 38,420,000 $ 32,299,000
Savings, money market and NOW accounts 69,764,000 60,917,000
Time deposits, under $100,000 53,744,000 50,944,000
Time deposits, $100,000 and over 34,318,000 27,642,000
------------- -------------
Total Deposits 196,246,000 171,802,000
Accrued interest payable 281,000 321,000
Accounts payable and accrued expenses 1,031,000 876,000
Income taxes payable -- 102,000
Line of credit payable 6,000,000 6,000,000
------------- -------------
Total Liabilities 203,558,000 179,101,000
------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized, 5,035,500 and 4,423,668 shares issued
and outstanding at December 31, 1998 and 1997 respectively 50,000 44,000
Paid-in surplus 10,501,000 8,908,000
Retained earnings 11,087,000 6,628,000
Accumulated other comprehensive income 14,000 17,000
Less cost of treasury stock (8,000 shares at December 31, 1998
and 0 at December 31, 1997) (63,000) --
------------- -------------
Total Stockholders' Equity 21,589,000 15,597,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 225,147,000 $ 194,698,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-21
<PAGE> 130
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 17,991,000 $ 13,643,000 $ 13,176,000
Interest on investment and trading securities:
Taxable 1,348,000 1,112,000 751,000
Exempt from federal income tax 457,000 221,000 124,000
Interest on federal funds sold 619,000 447,000 708,000
Interest on deposits with banks 81,000 94,000 109,000
------------ ------------ ------------
Total Interest Income 20,496,000 15,517,000 14,868,000
------------ ------------ ------------
Interest expense:
Interest on deposits 6,951,000 5,525,000 4,418,000
Interest on line of credit 369,000 98,000 16,000
------------ ------------ ------------
Total Interest Expense 7,320,000 5,623,000 4,434,000
------------ ------------ ------------
Net interest income 13,176,000 9,894,000 10,434,000
Provision for credit losses (620,000) (270,000) (250,000)
------------ ------------ ------------
Net interest income after provision for credit
losses 12,556,000 9,624,000 10,184,000
------------ ------------ ------------
Other income:
Service charges on deposit accounts 350,000 288,000 265,000
Gain (loss) on sale of investment securities 88,000 1,000 (19,000)
Gain (loss) on sale of trading securities (2,000) 1,000 6,000
Other 432,000 251,000 162,000
------------ ------------ ------------
Total Non-Interest Income 868,000 541,000 414,000
------------ ------------ ------------
Other expense:
Salaries and employee benefits 5,506,000 4,251,000 4,781,000
Occupancy expenses 857,000 754,000 528,000
Furniture and equipment expense 720,000 585,000 464,000
Other operating expenses 2,136,000 2,063,000 1,830,000
------------ ------------ ------------
Total Non-Interest Expense 9,219,000 7,653,000 7,603,000
------------ ------------ ------------
Income before income taxes 4,205,000 2,512,000 2,995,000
Income tax expense (benefit) (254,000) 676,000 903,000
------------ ------------ ------------
Net income $ 4,459,000 $ 1,836,000 $ 2,092,000
============ ============ ============
Basic earnings per share $ 0.99 $ 0.42 $ 0.49
============ ============ ============
Diluted earnings per share $ 0.91 $ 0.39 $ 0.46
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-22
<PAGE> 131
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Common Stock
----------------------------- Treasury Stock Paid-In Retained
Shares Amount at Cost Surplus Earnings
------------ ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 4,232,000 $ 42,000 $ -- $ 8,164,000 $ 2,700,000
Net income -- -- -- -- 2,092,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $6,000 -- -- -- -- --
Comprehensive income
Sale of common stock 4,000 -- -- 20,000 --
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1996 4,236,000 42,000 -- 8,184,000 4,792,000
Net income -- -- -- -- 1,836,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $14,000 -- -- -- -- --
Comprehensive income
Sale of common stock 188,000 2,000 -- 724,000 --
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1997 4,424,000 44,000 -- 8,908,000 6,628,000
Net income -- -- -- -- 4,459,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of ($1,000) -- -- -- -- --
Comprehensive income
Sale of common stock 620,000 6,000 -- 1,593,000 --
Common stock repurchase (8,000) -- (63,000) -- --
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1998 5,036,000 $ 50,000 $ (63,000) $ 10,501,000 $ 11,087,000
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Stockholders' Comprehensive
Income Equity Income
------------- ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1995 $ (21,000) $ 10,885,000
Net income -- 2,092,000 $ 2,092,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $6,000 12,000 12,000 12,000
------------
Comprehensive income $ 2,104,000
============
Sale of common stock -- 20,000
------------ ------------
Balances, December 31, 1996 (9,000) 13,009,000
Net income -- 1,836,000 $ 1,836,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $14,000 26,000 26,000 26,000
------------
Comprehensive income $ 1,862,000
============
Sale of common stock -- 726,000
------------ ------------
Balances, December 31, 1997 17,000 15,597,000
Net income -- 4,459,000 $ 4,459,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of ($1,000) (3,000) (3,000) (3,000)
------------
Comprehensive income $ 4,456,000
============
Sale of common stock -- 1,599,000
Common stock repurchase -- (63,000)
------------ ------------
Balances, December 31, 1998 $ 14,000 $ 21,589,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-23
<PAGE> 132
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Page 1 of 2)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,459,000 $ 1,836,000 $ 2,092,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 620,000 270,000 250,000
Depreciation and amortization 917,000 573,000 568,000
Net (gain) loss on sale of assets (160,000) -- --
Net (gain) loss on sales of available for sale securities (88,000) (1,000) 19,000
Net (gain) loss on trading securities 4,000 (1,000) (6,000)
Increase (decrease) in deferred taxes
due to change in unrealized loss on
securities available-for-sale (1,000) 14,000 (6,000)
Proceeds from sales of trading securities -- 17,000 13,000
Net (increase) decrease in:
Accrued interest receivable (63,000) (149,000) (88,000)
Other assets (2,231,000) (1,863,000) (259,000)
Loans held for sale (1,142,000) (6,140,000) 2,777,000
Net increase (decrease) in:
Accrued interest payable (40,000) 132,000 27,000
Accounts payable and accrued expenses 155,000 398,000 (63,000)
Income taxes payable (102,000) 102,000 (48,000)
------------ ------------ ------------
Net Cash Provided (Used) By
Operating Activities 2,328,000 (4,812,000) 5,276,000
------------ ------------ ------------
Cash flows from investing activities:
Net change in interest bearing deposits in
domestic financial institutions 701,000 6,000 287,000
Proceeds from sales of available-for-sale securities 10,795,000 3,124,000 4,647,000
Proceeds from maturities of available-for-sale securities 10,751,000 4,958,000 4,029,000
Purchases of available-for-sale securities (35,723,000) (10,529,000) (8,768,000)
Purchases of held-to-maturity securities -- (6,820,000) (3,157,000)
Proceeds from maturities of held-to-maturity securities -- 1,674,000 506,000
Net change in loans held to maturity (6,779,000) (33,568,000) (12,616,000)
Purchases of premises and equipment, net (258,000) (1,861,000) (1,052,000)
Purchase of Federal Home Loan Bank stock (55,000) (410,000) (58,000)
------------ ------------ ------------
Net Cash Provided (Used) By
Investing Activities (20,568,000) (43,426,000) (16,182,000)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-24
<PAGE> 133
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Page 2 of 2)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net change in demand deposits, savings,
money market and NOW accounts $ 14,968,000 $ 15,165,000 $ 8,967,000
Net change in time deposits 9,476,000 25,333,000 11,168,000
Proceeds of line of credit payable -- 6,000,000 --
Proceeds from sale of common stock, net 1,599,000 726,000 20,000
Purchase of treasury stock (63,000) -- --
------------ ------------ ------------
Net Cash Provided (Used) By
Financing Activities 25,980,000 47,224,000 20,155,000
------------ ------------ ------------
Increase (Decrease) In Cash
and Cash Equivalents 7,740,000 (1,014,000) 9,249,000
Cash and cash equivalents:
Beginning of year 19,317,000 20,331,000 11,082,000
------------ ------------ ------------
End of Year $ 27,057,000 $ 19,317,000 $ 20,331,000
============ ============ ============
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 7,360,000 $ 5,204,000 $ 4,407,000
============ ============ ============
Income Taxes $ 1,560,000 $ 797,000 $ 1,054,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-25
<PAGE> 134
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE 1 - Summary of Significant Accounting Policies:
Principles of Consolidation
On June 16, 1997, Comstock Bancorp (the "Bancorp") acquired
Comstock Bank (the "Bank") in a business combination accounted for as a
pooling of interest. Comstock Bank became a wholly owned subsidiary of
the Bancorp through the exchange of 4,421,668 shares of the Bancorp's
common stock for 100% of the outstanding shares of the Bank. Significant
intercompany accounts and transactions have been eliminated in the
consolidation. The accompanying financial statements for 1997 are based
on the assumption that the companies were combined for the full year,
and financial statements of the prior year have been restated to give
effect to the combination.
Nature of Operations
Comstock Bank is a Nevada State chartered bank. The Bank provides
a variety of financial services to individuals and corporate customers
through its branches in Nevada. The Bank's primary deposit products are
non-interest-bearing and interest-bearing checking accounts, savings,
money market, NOW accounts, and certificates of deposit. Its primary
lending products are commercial loans related to the development of
single family homes and commercial properties, and single family
residential loans. Accordingly, its revenues are derived primarily from
these products. The accounting and reporting policies of Comstock Bank
conform with generally accepted accounting principles and with general
practice within the banking industry. The following is a summary of the
most significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
credit losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process,
D-26
<PAGE> 135
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on
loans and foreclosed real estate may change materially in the near term.
Securities
Management adopted Financial Accounting Standards Board (FASB)
115 on January 1, 1994; and, therefore, determines the appropriate
classification of securities at the time of purchase. If management has
the intent and the ability at the time of purchase to hold securities
until maturity, they are classified as held to maturity and carried at
amortized historical cost. Securities to be held for indefinite periods
of time and not intended to be held to maturity are classified as
available for sale and are carried at fair value. Securities held for
indefinite periods of time include securities that management intends to
use as part of its asset and liability management strategy and that may
be sold in response to changes in interest rates, resultant prepayment
risk and other factors.
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on
investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and
losses are credited or charged to stockholders' equity, whereas realized
gains and losses are charged to operations. Premiums and discounts are
recognized in interest income using the interest method over the period
to maturity.
Loans
Loans, including the unamortized balance of loan origination,
commitment, and other fees and costs are stated at the principal amounts
outstanding. Loans held for sale are stated at the lower of cost or
market value. Current market value is based on quoted market prices for
similar loans.
Loan Origination Fees
Loan origination fees, net of certain related costs, are being
deferred and amortized over the expected lives of the related loans
using methods that approximate the interest method.
Allowance for Credit Losses
An allowance for credit losses is provided through charges to
operations in the form of a provision for credit losses. Loans which
management believes are uncollectible, together with any accrued income,
are charged against this account with subsequent recoveries, if any,
credited to the account.
D-27
<PAGE> 136
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
The amount of the current provision for credit losses charged to
operations is determined by management's evaluation of the quality and
inherent risks in the loan portfolio, economic conditions, and other
factors which warrant current recognition.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization, which is determined using the straight
line method over estimated useful lives ranging from three to forty
years.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in
the valuation allowance are included in loss on foreclosed real estate.
Typically, such properties are disposed of within one year.
Income Taxes
Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income and
inclusion of expenses deductible for federal income tax purposes which
are not expenses for financial reporting purposes) and include deferred
taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes.
Interest Income on Loans
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans
(including unamortized fees) is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to
meet payments as they come due. Upon such discontinuance, all unpaid
accrued interest is reversed.
Dividends
In accordance with Nevada Revised Statutes, the Bancorp's
dividend policy prohibits payments of dividends in excess of its
retained earnings.
Cash Flow Information
Cash and cash equivalents for purposes of the cash flow
statements include cash and due from banks and federal funds sold.
D-28
<PAGE> 137
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Prior Years' Reclassification
The prior years' financial statements have been reclassified
where applicable to conform to the current year's presentation.
NOTE 2 - Loan Contracts Serviced for Others:
During 1998, the Bank sold its servicing portfolio to an
unrelated party. The gain, which is included in interest and fee income
on loans, was not material.
Commercial loans and mortgage contracts with unpaid balances of
approximately $0, $55,342,000, and $52,004,000, were being serviced for
others at December 31, 1998, 1997, and 1996, respectively.
NOTE 3 - Trading Account Securities:
Trading account securities consist of U.S. Treasury and hedging
securities with varying maturity dates. The investments are carried at
market value.
NOTE 4 - Securities:
During 1998, the Bank adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. On the date of adoption, all securities in the
held-to-maturity portfolio were reclassified into the available-for-sale
portfolio.
The carrying amounts of investment securities as shown in the
Statements of Financial Condition of the Bancorp and their approximate
fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury and Agency Securities $ 5,190,000 $ 31,000 $ 5,000 $ 5,216,000
State and Municipal Securities 10,537,000 116,000 91,000 10,562,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 23,322,000 37,000 66,000 23,293,000
Other Debt Securities -- -- -- --
----------- ----------- ----------- -----------
$39,049,000 $ 184,000 $ 162,000 $39,071,000
=========== =========== =========== ===========
December 31, 1997:
U.S. Treasury and Agency Securities $ 6,730,000 $ 8,000 $ 6,000 $ 6,732,000
State and Municipal Securities 1,265,000 10,000 2,000 1,273,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 6,197,000 23,000 7,000 6,213,000
Other Debt Securities -- -- -- --
----------- ----------- ----------- -----------
$14,192,000 $ 41,000 $ 15,000 $14,218,000
=========== =========== =========== ===========
</TABLE>
D-29
<PAGE> 138
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Held-to-Maturity Securities
----------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury and Agency Securities $ -- $ -- $ -- $ --
State and Municipal Securities -- -- -- --
Collateralized Mortgage Obligations
and Mortgage-backed Securities -- -- -- --
Other Debt Securities -- -- -- --
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
December 31, 1997:
U.S. Treasury and Agency Securities $ 2,844,000 $ 9,000 $ 51,000 $ 2,802,000
State and Municipal Securities 3,101,000 56,000 15,000 3,142,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 4,601,000 19,000 18,000 4,602,000
Other Debt Securities 90,000 -- 4,000 86,000
----------- ----------- ----------- -----------
$10,636,000 $ 84,000 $ 88,000 $10,632,000
=========== =========== =========== ===========
</TABLE>
The amortized cost and approximate market value of securities
held-to-maturity and available-for-sale at December 31, 1998, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------------- ---------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $ 4,525,000 $ 4,538,000
Due after one year
through five years -- -- 4,738,000 4,804,000
Due after five years
through ten years -- -- 4,005,000 4,034,000
Due after ten years -- -- 25,781,000 25,695,000
----------- ----------- ----------- -----------
$ $ $39,049,000 $39,071,000
=========== =========== =========== ===========
</TABLE>
Maturities of mortgage-backed securities are classified in
accordance with the contractual repayment schedules. Expected maturities
will differ from the contractual maturities reported above, because debt
security issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Securities held-to-maturity with a carrying value of
approximately $0 and $7,445,000 and securities available-for-sale with a
carrying value of approximately $28,504,000 and $12,928,000 were pledged
to FHLB and Federal Reserve Bank at December 31, 1998 and 1997,
respectively.
D-30
<PAGE> 139
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Gross proceeds, gross realized gains, and gross realized losses
on sales of available-for-sale securities were:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Gross proceeds:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 5,304,000 1,445,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 5,491,000 1,679,000
Other Debt Securities -- --
----------- -----------
$10,795,000 $ 3,124,000
=========== ===========
Gross realized gains:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 85,000 7,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 36,000 2,000
Other Debt Securities -- --
----------- -----------
$ 121,000 $ 9,000
=========== ===========
Gross realized losses:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 6,000 3,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 10,000 5,000
Other Debt Securities 17,000 --
----------- -----------
$ 33,000 $ 8,000
=========== ===========
</TABLE>
The net realized gains of $88,000 and $1,000 on the sale of
securities resulted in an income tax cost of approximately $30,000 and
$0 for 1998 and 1997, respectively.
NOTE 5 - Loans:
Loans held for sale were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate mortgages $15,088,000 $13,946,000
=========== ===========
</TABLE>
The Bank funded and subsequently sold approximately $193,250,000
and $144,392,000 of loans held for sale in 1998 and 1997, respectively.
The resulting gain and loss was insignificant in both years.
D-31
<PAGE> 140
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Major loan classifications were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commercial and industrial $ 103,447,000 $ 101,812,000
Real estate:
Construction and land development 15,468,000 15,218,000
Mortgages 3,561,000 2,326,000
Installment 4,810,000 3,411,000
------------- -------------
Subtotal 127,286,000 122,767,000
Deferred loan fees, net (552,000) (532,000)
Allowance for credit losses (1,598,000) (1,076,000)
------------- -------------
Net Loans $ 125,136,000 $ 121,159,000
============= =============
</TABLE>
Loans with a carrying value of approximately $6,528,000 and
$8,250,000 at December 31, 1998 and 1997, respectively, were pledged to
secure the line of credit with FHLB (see Note 7).
The Bank's business activity is with customers primarily located
within Northern Nevada. The Bank grants commercial, real estate, and
installment loans to these customers. Although the Bank has a
diversified loan portfolio, a significant portion of its customers'
ability to repay the loans is dependent upon the economic health of
commercial and residential real estate development. Generally, the loans
are secured by real estate. The loans are expected to be repaid from
cash flow or proceeds from the sale of the real estate of the borrower.
The Bank's policy is generally to require adequate collateral for all
commercial and residential real estate development credit extended. The
bank may be required to take legal action to enforce its rights to
pledged collateral.
A summary of the changes in the allowance for credit losses for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 1,076,000 $ 857,000 $ 665,000
Loans charged off (102,000) (79,000) (61,000)
Loan recoveries 4,000 28,000 3,000
----------- ----------- -----------
Net Recoveries
(Charge-Offs) (98,000) (51,000) (58,000)
Provision charged to operations 620,000 270,000 250,000
----------- ----------- -----------
Ending Balance $ 1,598,000 $ 1,076,000 $ 857,000
=========== =========== ===========
</TABLE>
D-32
<PAGE> 141
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Impairment of loans having carrying values of $1,005,000 and
$2,541,000 at December 31, 1998 and 1997, respectively, have been
recognized in conformity with FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan. The total allowance for credit
losses related to those loans was $484,000 and $66,000, respectively.
For impairment recognized in conformity with FASB Statement No. 114, the
entire change in present value of expected cash flows is reported as
provision for credit losses in the same manner in which impairment
initially was recognized or as a reduction in the amount of provision
for credit losses that otherwise would be reported.
The average recorded investment in impaired loans was $3,381,000
and $2,935,000 during 1998 and 1997, respectively. The amount of
interest income recognized during 1998 and 1997 was approximately
$41,000 and $42,000, respectively, which was approximately the same
amount that would have been recognized on a cash basis. If an impaired
loan is placed on nonaccrual status, all future collections while on
nonaccrual status are recognized as a reduction of the loan investment.
For impaired loans not on nonaccrual status, interest income is
recognized when earned.
At December 31, 1998 and 1997, the Bank's significant credit risk
was in commercial and industrial, and construction and land development
loans. Of the total allowance for credit losses at the end of each of
those years, nearly all of the allowance was for loans in those two
categories.
NOTE 6 - Premises and Equipment:
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,231,000 $ 1,371,000
Buildings 4,996,000 4,890,000
Furniture, fixtures, and equipment 4,276,000 3,929,000
------------ ------------
10,503,000 10,190,000
Less: Accumulated depreciation
and amortization (3,240,000) (2,480,000)
------------ ------------
$ 7,263,000 $ 7,710,000
============ ============
</TABLE>
Depreciation and amortization expense was approximately $917,000,
$573,000, and $568,000, for the years ended December 31, 1998, 1997, and
1996, respectively.
NOTE 7 - Credit Arrangement:
The Bank has a credit agreement with the Federal Home Loan Bank
of San Francisco (FHLB) whereby the Bank may borrow up to 30 percent of
the Bank's assets, with terms up to 240 months. The above line of credit
requires the Bank to maintain certain collateral maintenance, credit,
and other requirements as set forth by FHLB. The line is secured by
securities and mortgage loans pledged to the FHLB which amounted to
approximately $32,538,226 and $25,153,000 at December 31, 1998 and 1997,
respectively.
D-33
<PAGE> 142
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
At December 31, 1998 and 1997, $6,000,000 was owed to FHLB. This
amount accrues interest at an average rate of 6.13 percent and matures
in the year 2000.
The Bank also has an uncollateralized credit line with Union Bank
of California, whereby the Bank may borrow federal funds up to
$2,500,000. This agreement expires July 31, 1999 and requires a
compensating balance of $200,000.
There were no borrowings on this line at December 31, 1998 or 1997.
NOTE 8 - Other Operating Expenses:
The major categories of other operating expenses for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Data processing fees $ 58,000 $ 191,000 $ 235,000
Legal and consulting fees 294,000 219,000 226,000
Office supplies 199,000 211,000 359,000
Advertising 329,000 400,000 253,000
Other operating expenses 1,256,000 1,042,000 757,000
---------- ---------- ----------
$2,136,000 $2,063,000 $1,830,000
========== ========== ==========
</TABLE>
All advertising costs are expensed as incurred.
NOTE 9 - Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current federal income tax expense $ (6,000) $ 861,000 $ 990,000
Deferred federal income tax expense (248,000) (185,000) (87,000)
--------- --------- ---------
$(254,000) $ 676,000 $ 903,000
========= ========= =========
</TABLE>
A reconciliation of income tax at the statutory rate to the
Bank's effective rate is as follows:
1998 1997 1996
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
Tax-exempt life insurance income -1.1% -1.8% -0.8%
Tax loss in excess of book loss on
sale of investment securities -1.5% -2.0% -0.8%
Compensation on stock options -34.7% -1.2% 0.0%
Tax-exempt interest income -3.7% -3.0% -1.4%
Other, net 0.9% 0.9% -0.8%
------ ------ ------
-6.1% 26.9% 30.2%
====== ====== ======
D-34
<PAGE> 143
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Deferred income taxes result from temporary differences in the
basis of assets and liabilities for financial reporting and income
taxes. The source of these temporary differences and their resulting
effect on income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Depreciation $ 7,000 $ 22,000 $ 6,000
Provision for loan losses (176,000) (92,000) (85,000)
Loan fees (7,000) (77,000) (15,000)
Valuation of loans held for sale (72,000) -- --
Other, net -- (38,000) 7,000
--------- --------- ---------
$(248,000) $(185,000) $ (87,000)
========= ========= =========
</TABLE>
Significant components of the deferred tax liabilities and assets
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 96,000 $ 84,000
Valuation of available-for-sale securities 7,000 9,000
-------- --------
103,000 93,000
-------- --------
Deferred tax assets:
Valuation of available-for-sale securities -- --
Excess of financial reporting provision
for credit losses over tax basis 512,000 334,000
Deferred compensation 110,000 38,000
Deferred fee income 188,000 181,000
-------- --------
810,000 553,000
-------- --------
Net deferred tax asset $707,000 $460,000
======== ========
</TABLE>
NOTE 10 - Earnings Per Share:
Earnings per share have been restated retroactively for the year
ended December 31, 1996 to reflect the business combination and the
adoption of SFAS No. 128, "Earnings per Share" during 1997.
D-35
<PAGE> 144
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Basic earnings per share and diluted earnings per share have been
computed based on the following:
<TABLE>
<CAPTION>
1998
------------------------------------
Common
Income Shares
Numerator Denominator EPS
---------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $4,459,000 4,535,000 $ 0.99
======
Dilutive Effect of Potential Common Stock
Stock options -- 384,000
---------- ----------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $4,459,000 4,919,000 $ 0.91
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------
Common
Income Shares
Numerator Denominator EPS
---------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $1,836,000 4,356,000 $ 0.42
======
Dilutive Effect of Potential Common Stock
Stock options -- 433,000
---------- ----------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $1,836,000 4,789,000 $ 0.39
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------
Common
Income Shares
Numerator Denominator EPS
---------- ----------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,092,000 4,234,000 $ 0.49
======
Dilutive Effect of Potential Common Stock
Stock options -- 323,000
---------- ----------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $2,092,000 4,557,000 $ 0.46
========== ========== ======
</TABLE>
D-36
<PAGE> 145
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE 11 - Stock Options:
The Bancorp has stock option plans which provide for the grant of
non-qualified stock options to certain directors, officers, and key
employees. At December 31, 1998, there were 213,936 shares of common
stock available for future grant or award and all of the outstanding
options were exercisable. Options are granted at prices not less than
fair market value at the date of grant and for terms of up to ten years.
Activity in the stock option plans was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Per Share
of Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1995 641,032 2.52
Granted 46,700 5.04
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1996 687,732 2.68
Granted 47,500 6.99
Exercised 34,400 3.81
Cancelled -- --
------- -------
Outstanding at December 31, 1997 700,832 2.92
Granted 14,900 10.00
Exercised 618,132 2.56
Cancelled -- --
------- -------
Outstanding at December 31, 1998 97,600 6.25
======= =======
</TABLE>
The Bancorp has also issued warrants to shareholders in
connection with the issuance of stock. The activity of those stock
options was as follows:
<TABLE>
<S> <C> <C>
Outstanding at December 31, 1995 206,800 3.87
Granted -- --
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1996 206,800 3.87
Granted -- --
Exercised 154,000 3.86
Cancelled -- --
------- -------
Outstanding at December 31, 1997 52,800 3.86
Granted -- --
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1998 52,800 3.86
======= =======
</TABLE>
D-37
<PAGE> 146
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
The Bancorp applies APB Opinion 25 in accounting for its fixed and
performance-based stock compensation plans. Accordingly, no compensation
cost has been recognized in 1998, 1997, or 1996. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement
No. 123, net income and earnings per share would have been reduced as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Net income:
As reported $ 4,459,000 $ 1,836,000 $ 2,092,000
=========== =========== =============
Pro forma $ 4,401,000 $ 1,715,000 $ 2,007,000
=========== =========== =============
Basic earnings per share:
As reported $ .99 $ .42 $ .49
=========== =========== =============
Pro forma $ .97 $ .39 $ .47
=========== =========== =============
Diluted earnings per share:
As reported $ .91 $ .39 $ .46
=========== =========== =============
Pro forma $ .89 $ .36 $ .44
=========== =========== =============
</TABLE>
The fair value of each option grant is estimated on the date of
grant using an option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 39.75% 37.15% 30.45%
Risk free interest rate 4.68% 5.53% 6.68%
Expected lives 10 years 10 years 10 years
</TABLE>
NOTE 12 - Profit Sharing Plan:
Effective January 1, 1992, the Bank established a 401(k) Profit
Sharing Plan and Trust that covers all eligible employees. The Bank
makes discretionary matching contributions based on 50 percent of the
amount of salary deferral elected by the employee, up to 6 percent of
the employee's salary. Contributions to the plan charged to operations
were not material for the years ended December 31, 1998, 1997, and 1996.
NOTE 13 - Operating Leases:
The Bank leases premises and equipment under operating leases
expiring through 2011. The aggregate future minimum annual rental
commitment as of December 31, 1998, under operating leases having
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999 $ 397,000
2000 379,000
2001 363,000
2002 257,000
2003 231,000
Thereafter 2,078,000
----------
$3,705,000
==========
</TABLE>
D-38
<PAGE> 147
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Rent expense for the years ended December 31, 1998, 1997, and
1996 amounted to approximately $463,000, $368,000, and $202,000,
respectively. Certain operating leases provide for renewal options for
periods of 5 to 15 years at the fair rental value at the time of
renewal. In the normal course of business, operating leases are
generally renewed or replaced by other leases.
NOTE 14 - Financial Instruments with Off-Balance Sheet Risk:
In the ordinary course of business, the Bank enters into various
types of transactions which involve financial instruments with
off-balance sheet risk. These instruments include commitments to extend
credit and standby letters of credit and are not reflected in the
accompanying balance sheet. These transactions may involve, to varying
degrees, credit and interest rate risk in excess of the amount, if any,
recognized in the balance sheet.
Management does not anticipate any loss to result from these
commitments; however, in case of default, legal action may be required
to enforce its rights to collateral pledged to secure these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit.
The Bank applies the same credit standards to these contracts as it uses
in its lending process.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Financial instruments whose
contractual amount
represented risk:
Commitments to extend credit $60,874,000 $50,453,000 $56,716,000
=========== =========== ===========
Standby letters of credit $ 1,392,000 $ 3,504,000 $ 3,729,000
=========== =========== ===========
</TABLE>
Commitments to extend credit are arrangements to lend to
customers. These commitments have specified interest rates and generally
have fixed expiration dates, but may be terminated by the Bank if
certain conditions of the contract are violated. These commitments are
normally collateralized by real estate.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party.
Credit risk arises in these transactions from the possibility that a
customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual
evaluation of each customer's credit worthiness, but may include cash
and securities.
NOTE 15 - Commitments and Contingencies:
Because of the nature of its business, the Bank is often a
defendant in legal actions. Based upon advice of counsel, management
does not anticipate that the final outcome of any litigation in process,
or anticipated, will have a materially adverse effect on the Bank's
operations or financial condition.
D-39
<PAGE> 148
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE 16 - Related Party Transactions:
The Bank has entered into transactions (including loans and
deposits) with its directors, officers, and significant shareholders.
Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates
and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features.
The following is a summary of the aggregate loan activity
involving related party loans during 1997 and 1998.
<TABLE>
<S> <C>
Balance, December 31, 1996 $ 427,000
Additions 269,000
Repayments (53,000)
-----------
Balance, December 31, 1997 643,000
Additions 828,000
Repayments (275,000)
Balance, December 31, 1998 $ 1,196,000
===========
</TABLE>
NOTE 17 - Regulatory Matters:
The Bank is required to maintain certain average reserve
requirements with the Federal Reserve Bank. Reserve requirements are
based on a percentage of deposit liabilities. The average required
reserves during 1997 and 1998 ranged from $875,000 to $1,250,000.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements
to which it is subject.
D-40
<PAGE> 149
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
As of December 31, 1998, the most recent notification from
federal banking agencies categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $20,313,000 13.5% *$12,040,000 *8.0% *$15,050,000 *10.0%
Tier I Capital
(to Risk Weighted Assets) 18,715,000 12.4% *6,020,000 *4.0% *9,030,000 *6.0%
Tier I Capital
(to Average Assets) 18,715,000 8.5% *8,815,000 *4.0% *11,019,000 *5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $16,470,000 11.7% *$11,309,000 *8.0% *$14,136,000 *10.0%
Tier I Capital
(to Risk Weighted Assets) 15,397,000 10.9% *5,654,000 *4.0% *8,482,000 *6.0%
Tier I Capital
(to Average Assets) 15,397,000 8.3% *7,400,000 *4.0% *9,250,000 *5.0%
</TABLE>
- -----------------
* Greater than or equal to
NOTE 18 - Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Values of Financial
Instruments," requires disclosure of information about the fair value of
financial instruments for which it is practicable to estimate a value,
whether or not recognized in the statement of condition. Whenever
possible, quoted market prices are used to estimate fair values. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Therefore, in many cases, the estimated fair values may not be realized
in an immediate sale of the instruments.
D-41
<PAGE> 150
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate of the estimated fair value amounts is not intended to
represent the underlying value of the Bancorp.
The carrying amounts and the estimated fair values are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 27,057,000 $ 27,057,000
Interest-bearing deposits 791,000 791,000
Trading account securities 8,000 8,000
Investment securities 39,071,000 39,071,000
Federal Home Loan Bank Stock 843,000 843,000
Loans receivable 140,224,000 147,150,000
Accrued interest receivable 1,052,000 1,052,000
------------ ------------
Total Asset Financial
Instruments $209,046,000 $215,972,000
============ ============
Liabilities:
Deposits $196,246,000 $197,283,000
Accrued interest payable 281,000 281,000
Line of credit payable 6,000,000 6,285,000
------------ ------------
Total Liability Financial
Instruments $202,527,000 $203,849,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 19,317,000 $ 19,317,000
Interest-bearing deposits 1,492,000 1,492,000
Trading account securities 12,000 12,000
Investment securities 24,854,000 24,850,000
Federal Home Loan Bank Stock 788,000 788,000
Loans receivable 135,106,000 138,741,000
Accrued interest receivable 989,000 989,000
------------ ------------
Total Asset Financial
Instruments $182,558,000 $186,189,000
============ ============
</TABLE>
D-42
<PAGE> 151
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Liabilities:
Deposits $171,802,000 $171,936,000
Accrued interest payable 321,000 321,000
Line of credit payable 6,000,000 6,006,000
------------ ------------
Total Liability Financial
Instruments $178,123,000 $178,263,000
============ ============
</TABLE>
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the statement of financial
condition for cash and cash equivalents approximate those assets' fair
values.
Interest-Bearing Deposits
Fair values for interest-bearing deposits in domestic financial
institutions are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Trading Account Securities
Fair values for the Bank's trading account assets, which also are
the amounts recognized in the statement of condition, are based on
quoted market prices.
Investment Securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Federal Home Loan Bank Stock
Fair values for Federal Home Loan Bank stock is based on its par
value since it is redeemable at par.
Loans Receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values of fixed-rate mortgage loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. The fair values of other fixed-rate loans are
estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
D-43
<PAGE> 152
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Accrued Interest Receivable
The carrying amount reported in the statement of financial
condition for accrued interest receivable approximates its fair value.
Deposit Liabilities
The carrying amounts for interest-bearing and
non-interest-bearing demand, savings, money market, and NOW accounts
approximate those liabilities' fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Accrued Interest Payable
The carrying amount reported in the statement of financial
condition for accrued interest payable approximates its fair value.
Line of Credit Payable
Fair value for line of credit payable is estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar lines of credit.
NOTE 19 - Subsequent Events:
On January 13, 1999, Comstock Bancorp announced it had reached an
agreement to be acquired by First Security Corporation. The acquisition
is contingent upon stockholder and regulatory approval.
NOTE 20 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Gain
(Loss) on
Provision Available-
Net for for-Sale Basic Diluted
Interest Interest Interest Credit Investment Net Earnings Earnings
Three Months Ended Income Expense Income Losses Securities Income Per Share Per Share
------------------ ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1998 $ 4,664,000 $ 1,737,000 $ 2,927,000 $ 110,000 $ (8,000) $ 601,000 $ .14 $ .12
June 30, 1998 5,607,000 1,832,000 3,775,000 150,000 -- 1,119,000 .25 .23
September 30, 1998 5,396,000 1,934,000 3,462,000 210,000 (12,000) 886,000 .20 .18
December 31, 1998 4,829,000 1,817,000 3,012,000 150,000 108,000 1,853,000 .40 .38
----------- ----------- ----------- ----------- ----------- ----------- ------ ------
$20,496,000 $ 7,320,000 $13,176,000 $ 620,000 $ 88,000 $ 4,459,000 $ .99 $ .91
=========== =========== =========== =========== =========== =========== ====== ======
March 31, 1997 $ 3,306,000 $ 1,210,000 $ 2,096,000 $ 60,000 $ (3,000) $ 265,000 $ .06 $ .06
June 30, 1997 3,849,000 1,330,000 2,519,000 60,000 -- 431,000 .10 .09
September 30, 1997 3,986,000 1,431,000 2,555,000 60,000 -- 488,000 .11 .10
December 31, 1997 4,376,000 1,652,000 2,724,000 90,000 4,000 652,000 .15 .14
----------- ----------- ----------- ----------- ----------- ----------- ------ ------
$15,517,000 $ 5,623,000 $ 9,894,000 $ 270,000 $ 1,000 $ 1,836,000 $ .42 $ .39
=========== =========== =========== =========== =========== =========== ====== ======
</TABLE>
D-44
<PAGE> 153
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE 21 - Parent Company Statements:
The parent company was formed during 1997; therefore, no parent
company statements are presented for years prior to 1997.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Condensed Balance Sheet:
Assets:
Cash $ 1,780,000 $ 311,000
Investment in subsidiary 18,729,000 15,414,000
Other assets 1,477,000 136,000
----------- -----------
Total Assets $21,986,000 $15,861,000
=========== ===========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 396,000 $ 264,000
----------- -----------
Shareholders' equity 21,590,000 15,597,000
----------- -----------
Total Liabilities and
Shareholders' Equity $21,986,000 $15,861,000
=========== ===========
Condensed Statement of Income:
Revenues:
Cash dividends from bank subsidiary $ -- $ 300,000
Income from subsidiary 3,317,000 1,663,000
Other income 1,110,000 307,000
----------- -----------
Total Revenues 4,427,000 2,270,000
----------- -----------
Expenses:
Employee compensation and benefits 1,179,000 441,000
Other expenses 190,000 61,000
----------- -----------
Total expenses 1,369,000 502,000
----------- -----------
Income before income taxes 3,058,000 1,768,000
Income tax benefit 1,401,000 68,000
----------- -----------
Net Income $ 4,459,000 $ 1,836,000
=========== ===========
</TABLE>
D-45
<PAGE> 154
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Condensed Statement of Cash Flows:
Cash flows from operating activities:
Net Income $ 4,459,000 $ 1,836,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization 14,000 7,000
Undistributed earnings of subsidiary (3,317,000) (1,663,000)
Change in other assets (1,355,000) (143,000)
Change in liabilities 132,000 264,000
----------- -----------
Net Cash Provided by Operating
Activities (67,000) 301,000
----------- -----------
Cash flows from financing activities:
Sale of stock 1,599,000 10,000
Treasury stock purchase (63,000) --
----------- -----------
Net Increase in Cash 1,469,000 311,000
Cash, beginning of year 311,000 --
----------- -----------
Cash, end of year $ 1,780,000 $ 311,000
=========== ===========
</TABLE>
D-46
