<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997
REGISTRATION NO. 333-36123
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ZIONS BANCORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
UTAH 6712 87-0227400
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of classification code number) identification
incorporation or organization) number)
</TABLE>
--------------------------
ONE SOUTH MAIN, SUITE 1380
SALT LAKE CITY, UTAH 84111
(801) 524-4787
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------------
DALE M. GIBBONS
ZIONS BANCORPORATION
ONE SOUTH MAIN, SUITE 1380
SALT LAKE CITY, UTAH 84111
(801) 524-4787
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------------------
WITH COPIES TO:
STANLEY F. FARRAR STUART G. STEIN
SULLIVAN & CROMWELL HOGAN & HARTSON LLP
444 SOUTH FLOWER STREET 555 THIRTEENTH STREET, N.W.
LOS ANGELES, CALIFORNIA 90071 WASHINGTON, D.C. 20004
(213) 955-8000 (202) 637-8575
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value(3).......... 4,925,024 shares $26.47 $57,308,502.92 $17,367(4)
</TABLE>
(1) Represents the estimated maximum number of shares of Common Stock, no par
value, which are issuable upon consummation of the merger of GB
Bancorporation ("GB") with and into Zions Bancorporation ("Zions").
(2) Pursuant to Rule 457(f)(2), the registration fee is based on the book value
of the Common Stock, no par value, of GB as of August 31, 1997 ($26.47), and
computed based on the estimated maximum number of shares of GB Common Stock
(2,165,036) that may be converted into the shares of Zions Common Stock to
be registered.
(3) Includes associated preferred share purchase rights. Prior to the occurrence
of certain events, such rights will not be evidenced or traded separately
from the Common Stock.
(4) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[GB BANCORPORATION LETTERHEAD]
OCTOBER 8, 1997
To the shareholders of GB Bancorporation:
You are cordially invited to attend a Special Meeting of shareholders of GB
Bancorporation ("GB") to be held on Monday, November 10, 1997 at 4:00 p.m.,
local time at which each shareholder of GB will be asked (1) to consider and
vote on a proposal to approve the principal terms of a proposed merger of GB
with and into Zions Bancorporation ("Zions"), pursuant to an Agreement and Plan
of Merger, dated as of July 3, 1997, as amended, by and between Zions and GB and
(2) to approve the accelerated vesting of certain stock options held by certain
directors and officers of GB to acquire GB common stock (the "Management Stock
Options"). Upon the merger becoming effective, each issued and outstanding share
of common stock, no par value, of GB will be converted into the right to receive
2.2748 (the "Conversion Number") shares of common stock, no par value, of Zions.
THE BOARD OF DIRECTORS OF GB HAS CONCLUDED THAT THE MERGER IS FAIR TO AND IN
THE BEST INTERESTS OF GB AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
THE GB SHAREHOLDERS VOTE FOR THE APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER.
Goldman, Sachs & Co., GB's financial advisor, has delivered to the GB Board its
opinion, dated July 7, 1997, that the Conversion Number is fair to the GB
shareholders. In addition, the Board of Directors recommends that the GB
shareholders vote to approve the accelerated vesting of the Management Stock
Options.
Consummation of the merger is subject to certain conditions, including the
approval of the merger by the GB shareholders and various regulatory authorities
and the receipt of an opinion of counsel in respect of certain federal income
tax consequences of the merger. Subject to satisfaction or waiver of the
conditions to the Merger, the merger currently is expected to close in the
fourth quarter of 1997.
The enclosed Notice of Special Meeting of Shareholders and Proxy
Statement-Prospectus describe the merger and provide specific information
concerning the Special Meeting. Please read these materials carefully and
consider the information contained in them.
It is important that your shares be represented and voted at the Special
Meeting regardless of the number of shares you own and whether or not you plan
to attend the Special Meeting. The affirmative vote of the holders of a majority
of the votes that may be cast by all holders of GB common stock entitled to vote
at the Special Meeting is required for approval of the principal terms of the
merger, while the affirmative vote of holders of more than 75% of the votes that
may be cast (excluding common stock owned or attributable to certain members of
management and the Board of Directors) is required for the approval of the
accelerated vesting of the Management Stock Options. Your failure to vote for
approval of the principal terms of the merger has the same effect as a vote
against the merger. Likewise, your failure to vote for approval of the
accelerated vesting of Management Stock Options has the same effect as a vote
against that proposal.
<PAGE>
We urge each of you to sign, date and mail the enclosed proxy promptly in
the enclosed postage-paid envelope, whether or not you currently plan to attend
the Special Meeting. Returning your proxy card now will not prevent you from
voting in person at the Special Meeting, but will assure that your vote is
counted if you are unable to attend. If you decide to attend the Special Meeting
and wish to vote in person, you may withdraw your proxy at that time. Please do
not send in certificates for your shares of GB common stock at this time.
Instructions for exchange of stock certificates will be sent to GB shareholders
upon consummation of the merger.
Sincerely,
Robert G. Sarver
CHAIRMAN AND CEO
Allan W. Severson
PRESIDENT
<PAGE>
GB BANCORPORATION
4320 LA JOLLA VILLAGE DRIVE, SUITE 355
SAN DIEGO, CALIFORNIA 92122
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 10, 1997
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of GB
Bancorporation, a California corporation ("GB"), has been called by the Board of
Directors of GB and will be held at the offices of GB, 4320 La Jolla Village
Drive, Suite 355, San Diego, California 92122 on Monday, November 10, 1997 at
4:00 p.m., local time.
The purposes of the Special Meeting are:
(1) to consider and vote on a proposal to approve the principal terms of a
proposed merger (the "Merger") of GB with and into Zions Bancorporation,
a Utah corporation ("Zions"), pursuant to an Agreement and Plan of
Merger, dated as of July 3, 1997 (as it may be amended, supplemented or
otherwise modified from time to time, the "Merger Agreement"), by and
between Zions and GB, with Zions being the surviving corporation;
(2) to approve the accelerated vesting of certain stock options to acquire
GB common stock held by certain directors and officers of GB (the
"Management Stock Options"); and
(3) to transact such other business as may properly come before the Special
Meeting or any postponement or adjournment thereof.
Holders of record of shares of GB common stock at the close of business on
October 1, 1997, the record date for the Special Meeting, are entitled to notice
of and to vote at the Special Meeting or at any postponements or adjournments
thereof. The affirmative vote of the holders of a majority of the outstanding
shares of GB is required to approve the principal terms of the Merger, while the
affirmative vote of holders of more than 75% of the outstanding shares
(excluding common stock owned or attributable to certain members of management
and the Board of Directors) is required for the approval of the accelerated
vesting of the Management Stock Options.
The terms of the Merger and the Zions common stock to be issued in
connection therewith are described in detail in the accompanying Proxy
Statement-Prospectus. The Board of Directors of GB has concluded that the Merger
is fair to and in the best interests of GB and its shareholders and unanimously
recommends that the GB shareholders vote for the approval of the principal terms
of the Merger. In addition, the Board of Directors of GB recommends that the GB
shareholders vote to approve the accelerated vesting of the Management Stock
Options.
To ensure that your vote will be counted, please complete, date and sign the
enclosed proxy card and return it promptly in the enclosed postage-paid
envelope, whether or not you currently plan to attend the Special Meeting. You
may revoke your proxy in the manner described in the accompanying Proxy
Statement-Prospectus at any time before it is voted at the Special Meeting.
Shareholders of GB are entitled to exercise dissenters' rights and to
receive cash in an amount equal to the fair market value of their shares of
common stock of GB as of July 6, 1997, in lieu of receiving the Zions common
stock in the Merger by complying with certain procedures specified by California
law. See "The Merger--Dissenters' Rights" in the accompanying Proxy
Statement-Prospectus. The complete text of
<PAGE>
Chapter 13 of the California General Corporation Law relating to dissenters'
rights is set forth as Appendix C to the Proxy Statement-Prospectus.
By Order of the Board of Directors,
Peggy Standefer
ASSISTANT SECRETARY
San Diego, California
October 8, 1997
------------------------
YOUR VOTE IS IMPORTANT. THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING, YOU SHOULD DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE. IF YOU ATTEND THE SPECIAL MEETING, YOU WILL BE ENTITLED TO
VOTE IN PERSON EVEN IF YOU PREVIOUSLY SUBMITTED A PROXY.
YOU SHOULD NOT SEND IN CERTIFICATES FOR YOUR SHARES OF GB COMMON STOCK AT
THIS TIME.
------------------------
<PAGE>
PROXY STATEMENT
GB BANCORPORATION
SPECIAL MEETING TO BE HELD ON
NOVEMBER 10, 1997
------------------------
PROSPECTUS
ZIONS BANCORPORATION
COMMON STOCK
(NO PAR VALUE PER SHARE)
------------------------
This Proxy Statement-Prospectus is being furnished to the shareholders of GB
Bancorporation (the "GB Shareholders"), a California corporation ("GB"), in
connection with the solicitation of proxies by the Board of Directors of GB (the
"GB Board") from holders of outstanding shares of GB's common stock, no par
value ("GB Common Stock"), for use at a special meeting of shareholders of GB to
be held at the offices of GB, 4320 La Jolla Village Drive, Suite 355, San Diego,
California 92122, on November 10, 1997, at 4:00 p.m., local time, and at any
adjournments and postponements thereof (the "Special Meeting").
At the Special Meeting, GB Shareholders will be asked to consider and vote
to approve the principal terms of a merger of GB with and into Zions
Bancorporation (the "Merger"), a Utah corporation ("Zions"), with Zions being
the corporation surviving the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"), pursuant to an Agreement and Plan of Merger, dated as
of July 3, 1997 and amended on September 5, 1997 (as it may be amended,
supplemented or otherwise modified from time to time, the "Merger Agreement"),
by and between Zions and GB, which is attached as Appendix A to this Proxy
Statement-Prospectus and is incorporated herein by reference. GB Shareholders
also will be asked to approve the acceleration of certain stock options to
acquire GB Common Stock ("Management Stock Options") held by certain directors
and officers of GB ("Stock Option Proposal").
Under the Merger Agreement, each share of GB Common Stock issued and
outstanding at the Effective Time (as defined herein) (other than (a) shares
which have not been voted in favor of the principal terms of the Merger and with
respect to which Dissenters' Rights (as defined herein) shall have been
perfected in accordance with the California General Corporation Law (the "CGCL")
and (b) shares held directly or indirectly by Zions) will be converted
automatically at the Effective Time into the right to receive 2.2748 shares (the
"Conversion Number") of common stock of Zions ("Zions Common Stock"). Based upon
(a) the 2,014,036 shares of GB Common Stock outstanding on October 2, 1997 and
(b) assuming the issuance, prior to the Effective Time, of the 151,000 shares of
GB Common Stock upon exercise of stock options to acquire GB Common Stock
outstanding on October 2, 1997 and no Dissenters' Rights are perfected by GB
Shareholders and no cash is paid in lieu of fractional shares, 4,925,024 shares
of Zions Common Stock would be issued in the Merger.
This Proxy Statement-Prospectus constitutes a prospectus of Zions in respect
of up to 4,925,024 shares of Zions Common Stock to be issued upon consummation
of the Merger pursuant to the Merger Agreement.
The outstanding shares of Zions Common Stock are traded on The Nasdaq
National Market System ("NASDAQ"). The last reported closing price of Zions
Common Stock on NASDAQ on October 2, 1997 was $38.00 per share.
This Proxy Statement-Prospectus and the accompanying proxy cards are first
being mailed to GB Shareholders on or about October 8, 1997.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
THE SHARES OF ZIONS COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
------------------------
THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS OCTOBER 8, 1997.
<PAGE>
AVAILABLE INFORMATION
Zions is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and 1801 California Street, Suite 4800, Denver, Colorado 80202, at
prescribed rates. Copies of such materials can also be obtained at prescribed
rates by mail addressed to the Commission, Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. Zions Common Stock is quoted on NASDAQ,
and such reports, proxy statements and other information can also be inspected
at the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C.
20006. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
This Proxy Statement-Prospectus constitutes a part of a registration
statement on Form S-4 (together with all amendments and exhibits, the
"Registration Statement") filed by Zions with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Zions Common Stock to be issued in connection with the Merger. As
permitted by the rules and regulations of the Commission, this Proxy
Statement-Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. The statements contained in this Proxy
Statement-Prospectus as to the contents of any contract or other document filed
as an exhibit to the Registration Statement are of necessity brief descriptions
and are qualified in their entirety by reference to the copy of such contract or
document filed as an exhibit to the Registration Statement. The Registration
Statement and the exhibits thereto can be inspected at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C., and copies of such material can be obtained at prescribed rates by mail
addressed to the Commission, Public Reference Section, Washington, D.C. 20549.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Zions are hereby
incorporated herein by reference and made a part hereof:
(a) Zions' Annual Report on Form 10-K for the year ended December 31,
1996, filed on March 26, 1997.
(b) Zions' Quarterly Reports on Forms 10-Q for the quarters ended March
31, 1997 and June 30, 1997, filed on May 13, 1997 and August 12, 1997,
respectively.
(c) Zions' Current Reports on Forms 8-K filed on March 11, 1997, July 9,
1997 and October 3, 1997.
(d) Zions' Form 8-A registration statement dated October 10, 1996.
All documents and reports filed by Zions pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
Special Meeting shall be deemed to be incorporated herein by reference and to be
a part hereof from the date of such filing and any statement contained herein or
in a document incorporated or deemed to be incorporated herein by reference
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein or in any other subsequently filed document
which also is, or is deemed to be, incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part hereof, except as so modified or superseded.
Such incorporation by
2
<PAGE>
reference shall not be deemed specifically to incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
------------------------
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS
RELATING TO ZIONS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES
OF SUCH DOCUMENTS ARE AVAILABLE UPON REQUEST AND WITHOUT CHARGE TO ANY PERSON TO
WHOM THIS PROXY STATEMENT-PROSPECTUS HAS BEEN DELIVERED. REQUESTS FOR SUCH
DOCUMENTS SHOULD BE DIRECTED TO ZIONS BANCORPORATION, ONE SOUTH MAIN, SUITE
1380, SALT LAKE CITY, UTAH 84111, ATTENTION: DALE M. GIBBONS, SENIOR VICE
PRESIDENT (801-524-4787). IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS
PRIOR TO THE SPECIAL MEETING, ANY REQUEST SHOULD BE MADE NOT LATER THAN NOVEMBER
3, 1997.
All information contained in this Proxy Statement-Prospectus with respect to
Zions and its subsidiaries has been supplied by Zions, and all information with
respect to GB and its subsidiaries has been supplied by GB.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A
PROXY, BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER, OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER DELIVERY OF
THIS PROXY STATEMENT-PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES BEING
OFFERED PURSUANT TO THIS PROXY STATEMENT-PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN OR THEREIN SINCE THE DATE OF THIS PROXY
STATEMENT-PROSPECTUS.
------------------------
FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this Proxy
Statement-Prospectus, including without limitation statements containing the
words "believes," "anticipates," "intends," "expects" and words of similar
import, constitute forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of Zions to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic conditions in Zions' market areas; variances in
interest rates; changes in or amendments to regulatory authorities, capital
requirements or other regulations applicable to Zions' banking subsidiaries;
increased competition for loans and deposits; and other factors referred to
elsewhere in this Proxy Statement-Prospectus and the documents incorporated by
reference herein. GIVEN THESE UNCERTAINTIES, SHAREHOLDERS OF GB ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. Zions disclaims
any obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements included or incorporated
by reference herein to reflect future events or developments.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 2
INDEX OF CERTAIN DEFINED TERMS............................................................................. 6
SUMMARY.................................................................................................... 8
The Companies............................................................................................ 8
The Special Meeting...................................................................................... 9
The Merger............................................................................................... 10
The Merger Agreement..................................................................................... 12
Comparison of Shareholder Rights; "Anti-Takeover" Provisions............................................. 13
Markets and Market Prices................................................................................ 13
Selected Financial Information........................................................................... 15
Comparative Per Share Data............................................................................... 14
Vote on Stock Option Proposal............................................................................ 15
THE COMPANIES.............................................................................................. 16
Zions.................................................................................................... 16
Stock Prices and Dividends on Zions Common Stock......................................................... 16
GB....................................................................................................... 17
Financial Presentation................................................................................... 18
Selected Financial Data for GB........................................................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GB FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996............................................................. 20
Overview................................................................................................. 20
Results of Operations.................................................................................... 20
Financial Condition...................................................................................... 22
Selected Financial Data for Grossmont Bank............................................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GROSSMONT BANK FOR
THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994......................................................... 26
Overview................................................................................................. 26
Results of Operations.................................................................................... 26
Financial Condition...................................................................................... 28
THE SPECIAL MEETING........................................................................................ 34
Date, Time and Place..................................................................................... 34
Matters to be Considered at the Special Meeting.......................................................... 34
Record Date; Stock Entitled to Vote...................................................................... 34
Votes Required; Quorum................................................................................... 34
Voting of Proxies........................................................................................ 34
Revocability of Proxies.................................................................................. 35
Solicitation of Proxies.................................................................................. 35
Security Ownership of Certain Beneficial Owners and Management........................................... 35
THE MERGER................................................................................................. 36
Background of the Merger................................................................................. 36
Effect of Merger......................................................................................... 37
Reasons for the Merger; Recommendations of the Board of Directors........................................ 37
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Opinion of Financial Advisor............................................................................. 38
Certain Federal Income Tax Consequences.................................................................. 42
Regulatory Approvals..................................................................................... 43
Resale of Zions Common Stock............................................................................. 44
Interests of Certain Persons in the Merger............................................................... 45
Dissenters' Rights....................................................................................... 47
Accounting Treatment..................................................................................... 49
THE MERGER AGREEMENT....................................................................................... 50
The Merger............................................................................................... 50
Conversion of GB Common Stock............................................................................ 50
Effective Time........................................................................................... 50
Exchange of Stock Certificates........................................................................... 50
Conduct of the Business of GB Prior to the Merger........................................................ 51
Representations and Warranties........................................................................... 51
Certain Covenants........................................................................................ 51
Conditions............................................................................................... 54
Waiver and Amendment..................................................................................... 56
Termination.............................................................................................. 56
THE SHAREHOLDER AGREEMENTS................................................................................. 58
COMPARISON OF ZIONS COMMON STOCK AND GB COMMON STOCK....................................................... 59
Description of Zions Capital Stock....................................................................... 59
General.................................................................................................. 59
Voting Rights............................................................................................ 59
Shareholder Rights Plan.................................................................................. 60
Board of Directors....................................................................................... 60
Shareholder Meetings..................................................................................... 62
Amendment of Articles and Bylaws......................................................................... 62
Dissenters' Rights....................................................................................... 62
Preferred Stock.......................................................................................... 62
Dividend Rights.......................................................................................... 63
Liquidation Rights....................................................................................... 63
Inspection Rights........................................................................................ 64
ACCELERATION OF STOCK OPTIONS.............................................................................. 65
General.................................................................................................. 65
Vote on Acceleration of Certain Stock Options............................................................ 65
Purpose of Vote.......................................................................................... 66
Vote Required for Approval; Recommendation of the Board of Directors..................................... 67
VALIDITY OF ZIONS COMMON STOCK............................................................................. 67
EXPERTS.................................................................................................... 67
LIST OF APPENDICES
Appendix A--Agreement and Plan of Merger, dated as of July 3, 1997, between Zions and GB, as amended.
Appendix B--Fairness Opinion of Goldman, Sachs & Co.
Appendix C--Chapter 13 of the CGCL.
</TABLE>
5
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED
TERM AT PAGE
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Acquiring Person..................................................................................... 60
Acquisition Proposal................................................................................. 53
Affiliates........................................................................................... 54
Approval Notice...................................................................................... 48
Articles............................................................................................. 59
Bancomer............................................................................................. 17
BHCA................................................................................................. 8
California Selected Bank Mergers..................................................................... 40
Centennial........................................................................................... 8
Certificate.......................................................................................... 50
CGCL................................................................................................. 1
Code................................................................................................. 9
Commission........................................................................................... 2
Committee............................................................................................ 65
Conversion Number.................................................................................... 1
CRA.................................................................................................. 44
Director Shareholders................................................................................ 58
Dissenters' Rights................................................................................... 11
Effective Time....................................................................................... 12
Employment Agreements................................................................................ 46
Exchange Act......................................................................................... 2
Exchange Agent....................................................................................... 50
FDIC................................................................................................. 23
FDICIA............................................................................................... 33
Federal Reserve Board................................................................................ 11
Flip-in Date......................................................................................... 60
GB................................................................................................... 1
GB Board............................................................................................. 1
GB Common Stock...................................................................................... 1
GB Estimates......................................................................................... 40
GB Shareholders...................................................................................... 1
Goldman Sachs Opinion................................................................................ 38
Grossmont Bank....................................................................................... 8
Indemnified Parties.................................................................................. 53
Letter of Transmittal................................................................................ 50
Management Stock Options............................................................................. 1
Maximum Amount....................................................................................... 53
Merger............................................................................................... 1
Merger Agreement..................................................................................... 1
Merger Consideration................................................................................. 50
NASDAQ............................................................................................... 1
NBA.................................................................................................. 8
Non-Competition Agreement............................................................................ 46
Notional Price....................................................................................... 40
Period of Employment................................................................................. 46
Pitkin............................................................................................... 8
Record Date.......................................................................................... 9
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DEFINED
TERM AT PAGE
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Registration Statement............................................................................... 2
Right................................................................................................ 60
Securities Act....................................................................................... 2
Shareholder Agreements............................................................................... 9
Shareholder Rights Plan.............................................................................. 60
SOLC................................................................................................. 9
Special Meeting...................................................................................... 1
State Commissioner................................................................................... 11
Stock Option Plan.................................................................................... 15
Stock Option Proposal................................................................................ 1
Surviving Corporation................................................................................ 1
Tri-State............................................................................................ 8
Valley............................................................................................... 8
Vectra............................................................................................... 8
ZFNB................................................................................................. 8
Zions................................................................................................ 1
Zions Certificate.................................................................................... 50
Zions Common Stock................................................................................... 1
Zions Independent Directors Committee................................................................ 10
Zions Selected Large Cap Banks....................................................................... 41
Zions Selected Small Cap Banks....................................................................... 41
</TABLE>
7
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ALL
RESPECTS BY THE MORE DETAILED INFORMATION INCLUDED IN THIS PROXY
STATEMENT-PROSPECTUS, THE APPENDICES HERETO AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. GB SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS PROXY
STATEMENT-PROSPECTUS, INCLUDING THE APPENDICES HERETO AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE, IN ITS ENTIRETY. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES TO "ZIONS" HEREIN SHALL BE TO ZIONS AND ITS SUBSIDIARIES
AND REFERENCES TO "GB" HEREIN SHALL BE TO GB AND ITS SUBSIDIARIES.
THE COMPANIES
ZIONS
Zions is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and organized under the laws of Utah,
engaged primarily in the commercial banking business through its banking
subsidiaries. Zions' principal executive offices are located at One South Main,
Suite 1380, Salt Lake City, Utah 84111 (telephone: 801-524-4787). Zions is the
second largest bank holding company headquartered in Utah. Zions First National
Bank ("ZFNB"), Salt Lake City, Utah, founded in 1873, is a wholly owned
subsidiary of Zions (except for directors' qualifying shares) and as of June 30,
1997 had 106 offices located throughout the State of Utah, plus one foreign
office, for a total of 107 banking offices, including its head office. ZFNB is
the second largest commercial banking organization headquartered in the State of
Utah.
Zions also owns Nevada State Bank, Las Vegas, Nevada; National Bank of
Arizona ("NBA"), Phoenix, Arizona; Pitkin County Bank and Trust Co. ("Pitkin"),
Aspen, Colorado; Valley National Bank of Cortez ("Valley"), Cortez, Colorado;
and Centennial Savings Bank, F.S.B. ("Centennial"), Durango, Colorado. As of
June 30, 1997, Nevada State Bank operated 27 offices in Nevada and was the fifth
largest commercial bank in Nevada; NBA operated 17 offices in Arizona and was
the fifth largest commercial bank in Arizona. Through Pitkin, Valley and
Centennial, Zions operates its commercial banking and thrift business through 12
branches in western Colorado and one branch in northwestern New Mexico.
On July 11, 1997, Zions also acquired Zions Bank (formerly Tri-State Bank)
in Montpelier, Idaho. Subsequent to the acquisition by Zions of Zions Bank,
Zions Bank acquired 10 branches located in Idaho from Wells Fargo Bank, and
opened two DE NOVO branches in Idaho. On July 18, 1997, ZFNB, Nevada State Bank
and NBA acquired 1, 5 and 11 branches from Wells Fargo, respectively. On
September 19, 1997, ZFNB acquired 4 additional branches located in Utah from
Wells Fargo. On August 15, 1997, Zions Bank merged into ZFNB. As a result, ZFNB
now operates 14 branches in Idaho. In addition, Zions has entered into
agreements to acquire Sun State Bank, Las Vegas, Nevada, with 5 branches in
Nevada, and The First National Bank in Alamosa in Alamosa, Colorado, with 3
branches in Colorado. On September 23, 1997, Zions entered into an agreement
with Vectra Banking Corporation, a Colorado corporation ("Vectra"), pursuant to
which Vectra will merge with and into Zions; Vectra's wholly-owned banking
subsidiary, Vectra Bank, operates 15 branches in Denver, Colorado. Finally, also
on September 23, 1997, Zions entered into an agreement with Tri-State Finance
Corporation, a Colorado corporation ("Tri-State"), pursuant to which Tri-State
will merge with and into a subsidiary of Zions; Tri-State operates 2 branches in
Denver, Colorado. The agreements relating to the acquisition of Vectra and
Tri-State provide for the issuance of Zions Common Stock in exchange for the
outstanding shares of capital stock of such corporations. Specifically, the
agreement with Vectra provides that each outstanding share of Vectra common
stock will be converted into the right to receive 0.685 shares of Zions Common
Stock and each outstanding share of Vectra preferred stock will be converted
into the right to receive 7.755 shares of Zions Common Stock, in each case
subject to adjustment under certain circumstances. The Tri-State agreement
provides for the issuance of 710,000 shares of Zions Common Stock for all
outstanding stock of Tri-State.
At June 30, 1997, Zions had total consolidated assets of approximately $8.0
billion, deposits of $5.2 billion, and shareholders' equity of $0.6 billion. See
"The Companies--Zions."
8
<PAGE>
GB
GB is a bank holding company registered under the BHCA and organized under
the laws of California, and its principal business is to serve as a bank holding
company for Grossmont Bank, a California state bank ("Grossmont Bank")
established in 1972. GB is the largest independent bank holding company
headquartered in San Diego, California. Substantially all of GB's revenue and
income is derived from the operation of Grossmont Bank, which currently has 14
branches in the San Diego County area. Grossmont Bank provides a full range of
banking services to small and middle market businesses and retail consumers
primarily in the San Diego metropolitan area. At June 30, 1997, GB had
consolidated assets of approximately $716 million, deposits of $639 million and
shareholders' equity of $53 million. GB's principal executive offices are
located at 4320 La Jolla Village Drive, Suite 355, San Diego, California 92122
(telephone: 619-623-3190).
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held at the offices of GB, 4320 La
Jolla Village Drive, Suite 355, San Diego, California 92122 on Monday, November
10, 1997 at 4:00 p.m., local time.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The purposes of the Special Meeting are (a) to consider and vote upon the
approval of the principal terms of the Merger, (b) to approve the Stock Option
Proposal (as defined herein) and (c) to transact such other business as may
properly come before the Special Meeting or any adjournments or postponements
thereof. See "The Special Meeting--Matters to be Considered at the Special
Meeting."
RECORD DATE; STOCK ENTITLED TO VOTE
Only holders of record of GB Common Stock at the close of business on
October 1, 1997 (the "Record Date") will be entitled to receive notice of, and
to vote at, the Special Meeting and any postponements or adjournments thereof.
As of the Record Date, there were 2,014,036 shares of GB Common Stock
outstanding. See "The Special Meeting--Record Date; Stock Entitled to Vote."
VOTES REQUIRED; QUORUM
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of GB Common Stock entitled to vote at the Special
Meeting is required to approve the principal terms of the Merger. Approval of
the Stock Option Proposal will require the affirmative vote of holders of more
than 75% of the outstanding shares of GB Common Stock entitled to vote
(excluding common stock owned or attributable to the holders of the Management
Stock Options under the Internal Revenue Code of 1986, as amended (the "Code")).
Each holder of shares of GB Common Stock outstanding on the Record Date will be
entitled to one vote for each share held of record upon each matter properly
submitted at the Special Meeting and any postponement or adjournment thereof. A
majority of all shares of GB Common Stock entitled to vote, represented in
person or by proxy, constitutes a quorum. Abstentions and broker non-votes are
each included in the determination of the number of shares present; however,
they are not counted as votes in favor of the principal terms of the Merger or
of the Stock Option Proposal, as the case may be. See "The Special
Meeting--Votes Required; Quorum."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, the directors and officers of GB beneficially held,
in the aggregate, the ability to direct the voting with respect to 939,250
shares of GB Common Stock, comprising approximately 46.6% of the voting power of
the GB Common Stock outstanding on the Record Date. In addition, pursuant to
shareholder agreements (the "Shareholder Agreements") entered into in connection
with the Merger
9
<PAGE>
Agreement, the directors of GB, in their capacity as shareholders, together
holding or controlling an aggregate of 939,250 shares of GB Common Stock (or
approximately 46.6% of the shares of GB Common Stock outstanding on the Record
Date), have agreed to vote their shares in favor of the principal terms of the
Merger. Such shares include 198,000 shares of GB Common Stock owned by Simmons
One, L.C. ("SOLC"). SOLC is owned by members of the Simmons family, including
Harris H. Simmons, L.E. Simmons and David Simmons. Roy W. Simmons is the
Chairman of Zions, Harris H. Simmons is the President and Chief Executive
Officer and a director of Zions and L.E. Simmons is a director of Zions. David
Simmons, the son of Roy W. Simmons and the brother of Harris H. Simmons and L.E.
Simmons, is a director of GB and the President of SOLC. In addition, as of the
Record Date, Zions owned 98,000 shares of GB Common Stock (or approximately 4.9%
of the shares of GB Common Stock outstanding on the Record Date).
If all such persons and institutions vote their shares in favor of the
principal terms of the Merger, the principal terms of the Merger will be
approved by the requisite vote of the GB Common Stock. See "The Special
Meeting--Security Ownership of Certain Beneficial Owners and Management."
THE MERGER
EFFECT OF MERGER
At the Effective Time, GB will merge with and into Zions, and Zions will be
the surviving corporation in the Merger and will continue its corporate
existence under Utah law. The separate corporate existence of GB will then
cease.
Upon the Merger becoming effective, each share of GB Common Stock issued and
outstanding at the Effective Time (other than (a) shares which have not been
voted in favor of the principal terms of the Merger and with respect to which
Dissenters' Rights shall have been perfected in accordance with the CGCL and (b)
shares held directly or indirectly by Zions) will be converted automatically
into the right to receive 2.2748 shares of Zions Common Stock. See "The Merger
Agreement--Effective Time" and "The Merger Agreement--The Merger."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
GB. The GB Board has unanimously approved the Merger Agreement and the
transactions contemplated thereby. THE MEMBERS OF THE GB BOARD UNANIMOUSLY
BELIEVE THAT THE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT ARE FAIR TO, AND ARE IN THE BEST INTERESTS OF, THE GB SHAREHOLDERS AND
UNANIMOUSLY RECOMMEND A VOTE "FOR" THE MATTERS TO BE VOTED UPON BY SUCH
SHAREHOLDERS IN CONNECTION WITH THE MERGER. THE CONCLUSION OF THE GB BOARD WITH
RESPECT TO THE MERGER IS BASED UPON A NUMBER OF FACTORS. See "The
Merger--Background of the Merger," "--Reasons for the Merger; Recommendations of
the Board of Directors" and "--Opinion of Financial Advisor."
ZIONS. An independent committee (the "Zions Independent Directors
Committee") of seven members of the Board of Directors of Zions has unanimously
approved the Merger Agreement and determined that the Merger and the issuance of
the Zions Common Stock pursuant thereto are fair to, and in the best interests
of, Zions and its shareholders. The approval of the Merger Agreement by the
shareholders of Zions is not required.
OPINION OF FINANCIAL ADVISOR
Goldman, Sachs & Co., GB's financial advisor, has rendered its written
opinion, dated July 7, 1997, to the GB Board to the effect that, as of such
date, the Conversion Number was fair to the GB Shareholders. Goldman, Sachs &
Co. has also delivered a written opinion to the GB Board that, as of the date of
this Proxy Statement-Prospectus, the Conversion Number is fair to the GB
Shareholders. For additional information, see "The Merger--Opinion of Financial
Advisor." The opinion of Goldman, Sachs & Co.,
10
<PAGE>
dated the date of this Proxy Statement-Prospectus, is attached as Appendix B to
this Proxy Statement-Prospectus. GB Shareholders are urged to read such opinion
in its entirety for descriptions of the procedures followed, matters considered
and limitations on the reviews undertaken in connection therewith.
CERTAIN FEDERAL TAX CONSEQUENCES
Zions and GB have received from Sullivan & Cromwell, special counsel to
Zions, an opinion of counsel regarding the material tax consequences of the
Merger. Consummation of the Merger is conditional, among other things, on
confirmation, immediately prior to the Effective Time, of the opinion of
Sullivan & Cromwell to the effect that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (ii) Zions and
GB will each be a party to that reorganization; (iii) except with respect to
cash received in lieu of fractional share interests, holders of GB Common Stock
will not recognize gain or loss for federal income tax purposes as a result of
the receipt of Zions Common Stock in the Merger; (iv) the basis of the Zions
Common Stock received by GB Shareholders in the Merger will equal the basis of
the GB Common Stock for which it is exchanged; and (v) the holding period of the
Zions Common Stock received by the GB Shareholders in the Merger will include
the holding period of the GB Common Stock for which it is exchanged, assuming
that such GB Common Stock is a capital asset in the hands of the holder thereof
at the Effective Time. See "The Merger--Certain Federal Income Tax
Consequences."
Because of the complexity of the tax laws and the individual nature of the
tax consequences of the Merger to each GB Shareholder, each GB Shareholder
should consult a tax advisor concerning certain other federal and all state,
local and foreign tax consequences of the Merger that may be applicable.
REGULATORY APPROVALS
The Merger is subject to prior approval by the Board of Governors of The
Federal Reserve System (the "Federal Reserve Board") under Section 3 of the BHCA
and the Commissioner of Financial Institutions of the State of California (the
"State Commissioner") pursuant to Section 700 ET SEQ. of the California
Financial Code. On August 15, 1997, Zions submitted both a notice to the Federal
Reserve Board seeking approval of the Merger and related matters and an
application to the State Commissioner. The Federal Reserve Board approved the
Merger and related matters on September 30, 1997. The State Commissioner
approved the application on September 30, 1997. See "The Merger--Regulatory
Approvals" and "The Merger Agreement--Conditions."
DISSENTERS' RIGHTS
In connection with the Merger, GB Shareholders may be entitled to
dissenters' rights under Chapter 13 of the CGCL ("Dissenters' Rights") the text
of which is attached hereto as Appendix C. GB Shareholders who do not vote in
favor of the Merger and who fully comply with the applicable provisions of
Chapter 13 of the CGCL have the right to require the purchase of the shares of
GB Common Stock held by them for cash at the fair market value of those shares
on the day before the terms of the Merger were first announced, excluding
appreciation or depreciation because of the Merger. FAILURE TO COMPLY STRICTLY
WITH THE PROVISIONS OF CHAPTER 13 OF THE CGCL MAY RESULT IN A WAIVER OR
FORFEITURE OF SUCH DISSENTERS' RIGHTS. SEE "THE MERGER--DISSENTERS' RIGHTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the GB Board, GB Shareholders should be
aware that certain members of the Boards of Directors and managements of GB and
Zions have interests in the transactions contemplated by the Merger Agreement
that are in addition to the interests of shareholders generally and which may
create potential conflicts of interest. These interests include, among other
things, the following:
11
<PAGE>
(i) in September 1995, GB was purchased from a trust for which a Mexican bank
was the beneficial owner by an investor group which included Zions and certain
members of the current managements of GB and Zions. This investor group included
Robert G. Sarver, Allan W. Severson and Christopher L. Skillern, who are,
respectively, the Chairman and Chief Executive Officer, the President, and the
Secretary of GB. The investor group also included (through SOLC) Roy W. Simmons,
Harris W. Simmons, L. E. Simmons and David Simmons who are, respectively, the
Chairman of the Board of Directors, the President and Chief Executive Officer
and a director, a director of Zions, and a director of GB; (ii) certain members
of the Board of Directors and the management of GB are members of the Board of
Directors of Zions or are affiliated with members of the Board of Directors and
the management of Zions; (iii) certain members of the Board of Directors and the
management of GB are direct or indirect beneficial owners of Zions Common Stock;
(iv) certain members of the Board of Directors and the management of Zions are
direct or indirect beneficial owners of GB Common Stock; (v) in connection with
the Merger, options to acquire an aggregate of 151,000 shares of GB Common Stock
which are held by directors and officers of GB and Grossmont Bank will be
accelerated and become exercisable at an average exercise price of $20.70 per
share; (vi) in connection with the Merger, Grossmont Bank will enter into
employment agreements and non-competition agreements with certain officers of GB
and Grossmont Bank; and (vii) Zions will indemnify the directors and officers of
GB and Grossmont Bank from certain liabilities and provide them with directors'
and officers' liability insurance. See "The Merger--Interests of Certain Persons
in the Merger" and "The Merger Agreement--Certain Covenants."
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, it is intended that the
Merger will be accounted for as a pooling-of-interests in accordance with
generally accepted accounting principles. See "The Merger-- Accounting
Treatment." In the event that the requisite shareholder approval is not obtained
for the Stock Option Proposal and the Merger Agreement is not terminated, the
Merger will be accounted for as a purchase transaction rather than a pooling,
and the vote of GB Shareholders to approve the principal terms of the Merger
will be resolicited.
THE MERGER AGREEMENT
EFFECTIVE TIME
The Merger will become effective (the "Effective Time") on the date and at
the time that articles of merger and related documents are filed with the Utah
Division of Corporations and Commercial Code or such later date as may be
specified in such articles. Subject to satisfaction or waiver of the conditions
specified in the Merger Agreement, the parties expect the Merger to become
effective in the fourth quarter of 1997, although there can be no assurance as
to whether or when the Merger will occur. See "The Merger Agreement--Effective
Time" and "--Conditions."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions, including
receipt of the shareholder approval solicited hereby, receipt of the necessary
regulatory approvals, receipt of opinion of counsel in respect of certain
federal income tax consequences of the Merger and other matters and satisfaction
of other closing conditions. See "The Merger Agreement--Conditions."
WAIVER AND AMENDMENT
Prior to the Effective Time, any provision of the Merger Agreement may be
waived by the party benefitted by the provision or by both parties, or amended
or modified at any time (including the structure of the transaction) by an
agreement in writing between the parties and approved by the respective Boards
of Directors. See "The Merger Agreement--Waiver and Amendment."
12
<PAGE>
TERMINATION
The Merger Agreement may be terminated, and the Merger abandoned, prior to
the Effective Time, either before or after its approval by the GB Shareholders,
upon the occurrence of various events and under certain circumstances, including
by the mutual consent of Zions and GB; by either party in the event of the
failure of the GB Shareholders to approve the Merger Agreement at the Special
Meeting or upon the material breach of the other party of any representation,
warranty, covenant or agreement not cured or curable within a specified grace
period; by either party upon the failure to obtain any approval, consent or
waiver of a governmental authority required to permit consummation of the
transactions contemplated by the Merger Agreement; by Zions or GB in the event
that the Merger is not consummated by March 31, 1998; by Zions in the event that
GB takes or allows to be taken certain actions in connection with a merger of GB
with a third party; and by GB prior to approval of GB Shareholders at the
Special Meeting if GB receives a proposal from a third party on such terms that
the GB Board determines that to proceed with the Merger would violate their
fiduciary duty to the GB Shareholders and to accept such third party proposal.
Under certain circumstances, a termination fee may be payable by GB to Zions
upon termination of the Merger Agreement. See "The Merger
Agreement--Termination."
COMPARISON OF SHAREHOLDER RIGHTS; "ANTI-TAKEOVER" PROVISIONS
The rights of GB Shareholders currently are determined by reference to the
CGCL, GB's Articles of Incorporation and GB's Bylaws. At the Effective Time, GB
Shareholders will become shareholders of the Surviving Corporation. Their rights
as shareholders will then be determined by reference to the Utah Revised
Business Corporation Act, Zions' Articles of Incorporation and Zions' Bylaws.
The Articles of Incorporation and Bylaws of Zions contain provisions which may
be considered to be anti-takeover in nature, including staggered terms of office
for directors, absence of cumulative voting and special shareholder vote
requirements for certain types of extraordinary corporate transactions.
Additionally, Zions has adopted a shareholders' rights plan which will have the
effect of encouraging entities interested in acquiring Zions to negotiate any
such transactions with Zions' management and of deterring or discouraging
unfriendly takeovers by making any such takeover substantially more expensive to
the entity sponsoring the unfriendly takeover. See "Comparison of Zions Common
Stock and GB Common Stock."
MARKETS AND MARKET PRICES
Zions Common Stock is currently traded on NASDAQ under the symbol "ZION."
There is no public market for the GB Common Stock. The following table sets
forth (i) the closing price per share of Zions Common Stock on the dates
indicated and (ii) the equivalent per share price for GB Common Stock (based
upon the Conversion Number):
<TABLE>
<CAPTION>
ZIONS EQUIVALENT PRICE
COMMON PER GB
STOCK COMMON SHARE(1)
--------- -----------------
<S> <C> <C>
July 7, 1997(2)................................................. $ 36.325 $ 82.63
October 2, 1997................................................. $ 38.00 $ 86.4386
</TABLE>
- ------------------------
(1) The equivalent price per share of GB Common Stock at the specified date
represents the closing price of a share of Zions Common Stock on such date
multiplied by the Conversion Number.
(2) The last full trading day before the public announcement of the signing of
the Merger Agreement.
There have been no recent purchases or sales of GB Common Stock among
private parties. However, on February 28, 1997, GB sold 13,893 shares of GB
Common Stock to employees at a per share price of $30.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth certain historical financial information for
Zions and GB. This information is based on the respective historical financial
statements of Zions and GB incorporated by reference or included herein, as the
case may be, and should be read in conjunction with such statements and
information and the related notes. Because GB was acquired by an investor group
from a trust for the benefit of a Mexican bank on September 30, 1995,
information with respect to periods prior to this acquisition has been omitted.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
ZIONS
Earnings
Net interest income......... $ 143,650 $ 123,439 $ 260,473 $ 227,094 $ 198,606 $ 174,657 $ 157,282
Provision for loan losses... 1,810 1,360 3,540 2,800 2,181 2,993 10,929
Net income.................. $ 54,739 $ 48,735 $ 101,350 $ 81,328 $ 63,827 $ 58,205 $ 45,209
Per Share
Net income.................. .92 .83 1.71 1.38 1.09 1.02 .86
Cash Dividends.............. .23 .21 .43 .35 .29 .25 .19
Statement of Condition at
Period End
Assets...................... $8,049,952 $6,087,914 $6,484,964 $5,620,646 $4,934,095 $4,801,054 $4,107,924
Deposits.................... 5,159,917 4,340,316 4,552,017 4,097,114 3,705,976 3,432,289 3,075,110
Long-term debt.............. 251,171 55,992 251,620 56,229 58,182 59,587 99,223
Shareholders' equity........ 589,194 473,522 507,452 428,506 365,770 312,592 260,070
</TABLE>
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED ENDED DEC
JUNE 30, 31,
-------------------- ---------
1997 1996 1996
--------- --------- ---------
(IN THOUSANDS,
<S> <C> <C> <C> <C> <C> <C> <C>
EXCEPT PER SHARE AMOUNTS)
GB
Earnings
Net interest income......... $ 18,672 $ 13,188 $ 29,125
Provision for loan losses... 1,230 300 1,100
Net income.................. $ 4,735 $ 2,581 $ 6,073
Per Share
Net income.................. 2.24 1.24 2.91
Cash Dividends.............. -- -- --
Statement of Condition at
Period End
Assets...................... $ 716,253 $ 527,494 $ 631,488
Deposits.................... 639,313 465,995 567,647
Long-term debt.............. 7,500 -- --
Shareholders' equity........ 52,623 43,570 47,158
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth for the periods indicated certain historical,
pro forma and pro forma equivalent per share financial information. The
unaudited pro forma combined financial information reflects the application of
the pooling-of-interests method of accounting. The following table should be
read in conjunction with the financial information as incorporated by reference
or included herein. The pro forma data in the table, presented as of and for the
six months ended June 30, 1997 and as of and for
14
<PAGE>
the year ended December 31, 1996, are presented for comparative and illustrative
purposes only and are not necessarily indicative of the combined financial
position or results of operations in the future or what the combined financial
position or results of operations would have been had the Merger been
consummated during the periods or as of the dates for which the information in
the table is presented. The following data are based on the respective
historical financial statements of Zions and GB incorporated by reference or
included herein, as the case may be, and should be read in conjunction with such
financial statements and such information and the related notes to each.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
----------------- -------------
<S> <C> <C>
Net Income Per Common Share
Zions......................................................................... $ .92 $ 1.71
GB............................................................................ 2.24 2.91
Pro Forma Combined............................................................ .93 1.68
Equivalent Pro Forma.......................................................... 2.12 3.82
Book Value Per Common Share
Zions......................................................................... $ 9.82 $ 8.61
GB............................................................................ 26.13 23.58
Pro Forma Combined............................................................ 9.93 8.74
Equivalent Pro Forma.......................................................... 22.59 19.88
Cash Dividends Declared Per Common Share
Zions(1)...................................................................... $ .23 $ .43
GB............................................................................ -- --
Pro Forma Combined............................................................ .23 .43
Equivalent Pro Forma.......................................................... .52 .98
</TABLE>
- ------------------------
(1) While Zions is not obligated to pay cash dividends, the Board of Directors
of Zions presently intends to continue its policy of paying quarterly cash
dividends. Future dividends will depend, in part, upon the earnings and
financial condition of Zions.
VOTE ON STOCK OPTION PROPOSAL
The GB Shareholders are being asked to approve separately the acceleration
of the vesting of Management Stock Options held by Robert G. Sarver, Allan W.
Severson and Christopher L. Skillern, to the extent such acceleration would
otherwise constitute a "parachute payment" to such individuals. Under the GB
1995 Stock Option Plan (the "Stock Option Plan"), all unvested options to
acquire shares of GB Common Stock will accelerate and become fully exercisable
within 30 days before the Effective Time of the Merger. With respect to Messrs.
Sarver, Severson and Skillern, outstanding options were exercisable as to 5,714,
12,857 and 8,571 shares of GB Common Stock, respectively, as of July 31, 1997,
and options for an additional 14,286, 32,143, and 21,429 shares of GB Common
Stock, respectively, will accelerate and become exercisable under the Stock
Option Plan during such 30-day period. If the separate approval by the GB
Shareholders of the Stock Option Proposal is not obtained, Messrs. Sarver,
Severson and Skillern will forfeit all rights to the presently unvested options
and the unvested options will terminate at the Effective Time. See "Acceleration
of Stock Options--General" and "--Purpose of Vote."
Approval of the Stock Option Proposal will not reduce the number of shares
of Zions Common Stock that GB Shareholders will receive upon consummation of the
Merger. Likewise, the failure to approve the Stock Option Proposal will not
increase the number of shares of Zions Common Stock issuable to the GB
Shareholders upon consummation of the Merger, nor will it increase the number of
shares of Zions Common Stock issued to any other holder of options.
15
<PAGE>
THE COMPANIES
ZIONS
Zions is a bank holding company registered under the BHCA, and organized
under the laws of Utah, engaged primarily in the commercial banking business
through its banking subsidiaries. Zions' principal executive offices are located
at One South Main, Suite 1380, Salt Lake City, Utah 84111 (telephone:
801-524-4787). Zions is the second largest bank holding company headquartered in
Utah. ZFNB, Salt Lake City, Utah, founded in 1873, is a wholly owned subsidiary
of Zions (except for directors' qualifying shares) and as of June 30, 1997 had
106 offices located throughout the State of Utah, plus one foreign office, for a
total of 107 banking offices, including its head office. ZFNB is the second
largest commercial banking organization headquartered in the State of Utah.
Zions also owns Nevada State Bank, Las Vegas, Nevada; NBA, Phoenix, Arizona;
Pitkin, Aspen, Colorado; Valley, Cortez, Colorado; and Centennial, Durango,
Colorado. As of June 30, 1997, Nevada State Bank operated 27 offices in Nevada
and was the fifth largest commercial bank in Nevada, and NBA operated 17 offices
in Arizona and was the fifth largest commercial bank in Arizona. Through Pitkin,
Valley and Centennial, Zions operates its commercial banking and thrift business
through 12 branches in western Colorado and one branch in northwestern New
Mexico.
On July 11, 1997, Zions also acquired Zions Bank (formerly Tri-State Bank)
in Montpelier, Idaho. Subsequent to the acquisition by Zions of Zions Bank,
Zions Bank acquired 10 branches located in Idaho from Wells Fargo Bank, and
opened two DE NOVO branches in Idaho. On July 18, 1997, ZFNB, Nevada State Bank
and NBA acquired 1, 5 and 11 branches from Wells Fargo Bank, respectively. On
September 19, 1997, ZFNB acquired 4 additional branches located in Utah from
Wells Fargo Bank. On August 15, 1997, Zions Bank merged into ZFNB. As a result,
ZFNB currently operates 14 branches in Idaho. Finally, Zions has entered into
agreements to acquire Sun State Bank, Las Vegas, Nevada, with 5 branches in
Nevada, and The First National Bank in Alamosa, Alamosa, Colorado, with 3
branches in Colorado. On September 23, 1997, Zions entered into an agreement
with Vectra Banking Corporation, a Colorado corporation ("Vectra"), pursuant to
which Vectra will merge with and into Zions; Vectra's wholly-owned banking
subsidiary, Vectra Bank, operates 15 branches in Denver, Colorado. Finally, also
on September 23, 1997, Zions entered into an agreement with Tri-State Finance
Corporation, a Colorado corporation ("Tri-State"), pursuant to which Tri-State
will merge with and into a subsidiary of Zions; Tri-State operates 2 branches in
Denver, Colorado. The agreements relating to the acquisition of Vectra and
Tri-State provide for the issuance of Zions Common Stock in exchange for the
outstanding shares of capital stock of such corporations. Specifically, the
agreement with Vectra provides that each outstanding share of Vectra common
stock will be converted into the right to receive 0.685 shares of Zions Common
Stock and each outstanding share of Vectra preferred stock will be converted
into the right to receive 7.755 shares of Zions Common Stock, in each case
subject to adjustment under certain circumstances. The Tri-State agreement
provides for the issuance of 710,000 shares of Zions Common Stock for all
outstanding stock of Tri-State.
At June 30, 1997, Zions had total consolidated assets of approximately $8.0
billion, deposits of $5.2 billion, and shareholders' equity of $0.6 billion.
STOCK PRICES AND DIVIDENDS ON ZIONS COMMON STOCK
Zions Common Stock is traded in the over-the-counter market under the symbol
"ZION" and is listed on NASDAQ. The following table has been adjusted to reflect
Zions' May 9, 1997 stock split and sets forth the high and low bid quotations
for Zions Common Stock for the periods indicated, in each case as reported by
NASDAQ, and the cash dividends per share declared on Zions Common Stock for such
16
<PAGE>
periods. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
QUARTERLY BID
PRICE RANGE CASH
-------------------- DIVIDENDS
HIGH LOW DECLARED
--------- --------- -----------
<S> <C> <C> <C>
1995
First Quarter.................................................. $ 10.13 $ 8.88 $ .075
Second Quarter................................................. 12.50 9.53 .0875
Third Quarter.................................................. 15.38 12.38 .0875
Fourth Quarter................................................. 20.28 15.22 .1025
-----------
$ .3525
-----------
-----------
1996
First Quarter.................................................. $ 19.81 $ 16.69 $ .1025
Second Quarter................................................. 19.75 17.00 .1025
Third Quarter.................................................. 22.44 18.00 .11
Fourth Quarter................................................. 26.00 21.69 .11
-----------
$ .425
-----------
-----------
1997
First Quarter.................................................. $ 33.25 $ 25.69 $ .11
Second Quarter................................................. 37.63 28.38 .12
-----------
Third Quarter (through October 2, 1997)........................ 40.00 34.69 $ --
-----------
-----------
</TABLE>
On July 7, 1997, the last NASDAQ trading day prior to the public
announcement of the Merger, the closing sale price for the Zions Common Stock
was $36.325. On October 2, 1997, the closing sale price for Zions Common Stock
was $38.00. On June 30, 1997, there were 60,025,863 shares of Zions Common Stock
outstanding, held by approximately 4,616 shareholders of record.
While Zions is not obligated to pay cash dividends, Zions' Board of
Directors presently intends to continue the policy of paying quarterly cash
dividends. Future dividends will depend, in part, upon the earnings and
financial condition of Zions.
GB
GB is the largest independent bank holding company headquartered in San
Diego, California. Substantially all of GB's revenue and income is derived from
the operation of its community bank subsidiary, Grossmont Bank, a California
state bank established in 1972 which currently has 14 branches in the San Diego
County area. Grossmont Bank provides a full range of banking services to small
and middle market businesses and retail consumers primarily in the San Diego
metropolitan area. At June 30, 1997, GB had consolidated assets, deposits and
shareholders' equity of approximately $716 million, $639 million and $53
million, respectively.
On September 30, 1995, GB was purchased by an investor group, which included
members of the current management of GB and Zions, from a trust for which
Bancomer, S.A., a Mexican bank ("Bancomer"), was the beneficial owner. Since the
investor group's acquisition of GB, Grossmont Bank has experienced significant
loan and deposit growth as bank mergers have increased the concentration in the
California banking market. In addition, Grossmont Bank has hired several senior
level San Diego bankers from competing institutions.
Grossmont Bank, GB's principal subsidiary, provides a full range of
commercial and retail banking services in the San Diego area that compete
directly with major regional banks. The primary lending focus
17
<PAGE>
of Grossmont Bank is on small and medium-sized businesses, commercial mini-perm
mortgages and construction and development loans. Other business loan products
include lines of credit, term loans, asset-based loans, letters of credit and
small business loans under Small Business Administration 7(a) and 504 loan
programs. Other business products and services include checking accounts, money
market accounts, cash management systems, on-line information services and
merchant credit card services.
Loans to consumers include auto loans (new and used), personal credit lines,
home equity lines, residential construction and mortgage loans, boat loans and
credit card loans. Other consumer products and services include deposit accounts
such as checking, interest checking, savings, money market, certificates of
deposit and IRA accounts, direct deposit/automatic payments and ATM network and
safe deposit box services.
Generally, Grossmont Bank's commercial loans are underwritten in Grossmont
Bank's primary market area on the basis of the borrower's ability to service
such debt from income. Approximately 28% of Grossmont Bank's real estate loans
are loans to commercial businesses collateralized by real estate and other
assets. Single-family residential mortgage loans are collateralized by
owner-occupied properties located in Grossmont Bank's primary market area, and
generally have been originated in amounts of no more than 80% of appraised
value.
GB's headquarters are located at 4320 La Jolla Village Drive, Suite 355, San
Diego, California 92122, and its telephone number is (619) 623-3190.
FINANCIAL PRESENTATION
Prior to the September 30, 1995 acquisition of GB from a trust beneficially
owned by Bancomer, Grossmont Bank was operated as a stand-alone entity. The
operations of Bancomer Holding Company, the predecessor to GB, were apart and
separate from those of Grossmont Bank. Audited consolidated financial statements
were not prepared for the combined entity of Bancomer and Grossmont Bank prior
to September 30, 1995. The financial presentation that follows provides
consolidated selected financial data for GB for the relevant periods since the
acquisition and the consolidated selected financial data for Grossmont Bank for
the relevant periods prior to the acquisition. The operations of GB for the year
ended December 31, 1995 are the same as for Grossmont Bank, except for (1)
additional interest expense of $219,000 as a result of debt recorded at GB; (2)
amortization expense of $23,000 relating to the additional amortization of
goodwill at the holding company level recorded in connection with the
acquisition; (3) additional interest income of $2,000 as a result of investments
recorded at GB; and (4) general and administrative holding company expenses of
$8,000. Since the operations of GB are materially the same as Grossmont Bank and
a comparison of the results of operations of GB for the year ended December 31,
1996 with the three months ended December 31, 1995 would not be meaningful, for
the purposes of Management's Discussion and Analysis of Financial Condition and
Results of Operations, the operations of Grossmont Bank for the year ended
December 31, 1996 are compared to Grossmont Bank's operations for the year ended
December 31, 1995.
SELECTED FINANCIAL DATA FOR GB
The following selected financial data for GB should be read in conjunction
with the Financial Statements of GB and the Notes thereto and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations of GB for the Six Months ended June 30, 1997 and June 30,
1996." The selected financial data at December 31, 1996 and 1995 and for the
year ended December 31, 1996 have been derived from GB's Financial Statements
which have been audited by Ernst & Young LLP, independent public accountants.
The selected financial data at and for the six months ended June 30, 1997 and
1996 and the three months ended December 31, 1995 have been derived from
financial statements of GB which have not been audited but, in the opinion of
management, contain all adjustments
18
<PAGE>
(consisting of normal recurring adjustments) necessary to present fairly the
financial position and results of operations of GB at and for those time
periods.
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS YEAR ENDED ENDED
ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
---------------------- ------------ -------------
1997 1996 1996 1995
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA (IN THOUSANDS)
Interest income.......................................... $ 26,122 $ 18,344 $ 40,465 $ 9,013
Interest expense......................................... 7,450 5,156 11,340 2,558
---------- ---------- ------------ -------------
Net interest income.................................... 18,672 13,188 29,125 6,455
Provision for loan losses................................ 1,230 300 1,100 200
---------- ---------- ------------ -------------
Net interest income after provision for loan losses.... 17,442 12,888 28,025 6,255
Other operating income................................... 3,327 2,309 4,919 1,083
Other operating expenses................................. 13,024 10,773 22,912 5,443
---------- ---------- ------------ -------------
Income before income taxes............................. 7,745 4,424 10,032 1,895
Provision for income taxes............................... 3,010 1,843 3,959 838
---------- ---------- ------------ -------------
Net income............................................... $ 4,735 $ 2,581 $ 6,073 $ 1,057
---------- ---------- ------------ -------------
---------- ---------- ------------ -------------
PERFORMANCE RATIOS(1)
Return on average assets................................. 1.39% 1.04% 1.12% 0.89%
Return on average common equity.......................... 19.03 12.16 13.75 10.36
Net interest margin...................................... 6.30 6.17 6.20 6.23
Efficiency ratio......................................... 57.94 67.77 65.68 68.02
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------------------- ---------------------------
1997 1996 1996 1995
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (PERIOD END, IN THOUSANDS)
Total assets............................................. $ 716,253 $ 527,494 $ 631,488 $ 474,869
Securities............................................... 178,963 147,929 173,954 154,155
Loans.................................................... 453,792 302,908 383,421 260,376
Allowance for loan losses................................ (8,107) (6,275) (6,844) (5,882)
Total deposits........................................... 639,313 465,995 567,647 413,956
Long term debt........................................... 7,500 -- -- --
Total shareholders' equity............................... 52,623 43,570 47,158 41,172
ASSETS QUALITY RATIOS
Nonperforming assets to loans and other real estate...... 0.41% 0.45% 0.31% 1.35%
Net charge-offs (recoveries) to average loans............ (0.02) (0.07) 0.05 0.16
Allowance for loan losses to total loans................. 1.79 2.07 1.79 2.26
Allowance for loan losses to non-performing loans........ 439.18 464.84 580.49 167.53
CAPITAL RATIOS
Leverage ratio........................................... 7.36% 6.71% 6.19% 6.75%
Tier 1 risk-based capital ratio.......................... 10.05 9.77 8.71 10.33
Total risk-based capital ratio........................... 11.30 11.02 9.96 11.59
</TABLE>
- ------------------------
(1) Performance ratios for the six months ended June 30, 1997 and 1996 and three
months ended December 31, 1995 are annualized.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GB FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
OVERVIEW
GB's net income for the six months ended June 30, 1997 and 1996 was $4.7
million and $2.6 million, respectively. The increase in net income for the first
six months of 1997 compared to the same period of 1996 was due primarily to an
increase in net interest income from GB's loan and deposit growth.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $18.7 million for the six months ended June 30,
1997, a $5.5 million or 41.6% increase over the $13.2 million for the six months
ended June 30, 1996. The increase in net interest income was due primarily to a
38.8% increase in average earning assets, including in particular, a 52.2%
increase in average loans for the six months ended June 30, 1997 compared to the
six months ended June 30, 1996. GB's yield on average earning assets increased
22 basis points for the six months ended June 30, 1997 to 8.81% from 8.59% for
the 1996 period while its cost of average interest bearing liabilities increased
19 basis points to 3.51% from 3.32% for the 1996 period. The higher net interest
spread combined with the positive effects of the volume increase in earning
assets caused GB's net interest margin to increase to 6.30% for the first six
months of 1997 from 6.17% for the same period in 1996.
20
<PAGE>
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. All average
balances are daily average balances. Nonaccruing loans have been included in the
tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------------------------- -------------------------------------
ANNUALIZED ANNUALIZED
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCES PAID RATE BALANCES PAID RATE
----------- --------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS
ASSETS
Interest Earning Assets
Loans................................ $ 414,763 $ 20,359 9.82% $ 272,526 $ 13,603 9.98%
Securities........................... 168,141 5,488 6.53 145,464 4,504 6.19
Fed funds sold....................... 10,104 275 5.44 9,236 237 5.13
----------- --------- ----------- ---------
Total interest earning assets...... 593,008 26,122 8.81 427,226 18,344 8.59
Less allowance for loan loss........... 7,435 6,078
----------- -----------
Total earning assets net of
allowance............................ 585,573 421,148
Non-earning Assets..................... 96,641 74,331
----------- -----------
TOTAL ASSETS....................... $ 682,214 $ 495,479
----------- -----------
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities
Interest bearing demand deposits..... $ 63,910 318 1.00 $ 49,288 242 0.98
MMC & Savings Accounts............... 184,994 2,598 2.81 151,749 1,999 2.64
TCD's................................ 163,403 4,050 4.96 98,697 2,487 5.04
Repo/Fed Funds purchased............. 4,619 113 4.88 1,670 41 4.91
Norwest Note/Capital Securities...... 7,678 371 9.74 9,226 387 8.39
----------- --------- ----------- ---------
Total interest bearing
liabilities...................... 424,604 7,450 3.51 310,630 5,156 3.32
Non-interest bearing liabilities
Non-interest bearing demand
deposits........................... 191,226 126,909
Other liabilities.................... 16,189 15,313
Shareholders' Equity................... 50,195 42,627
----------- -----------
TOTAL LIABILITIES & EQUITY......... $ 682,214 $ 495,479
----------- --------- ----------- ---------
----------- -----------
Net Interest Income.................... $ 18,672 $ 13,188
--------- ---------
--------- ---------
Net Interest Spread.................... 5.30 5.27
Net Interest Margin.................... 6.30 6.17
</TABLE>
21
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on the growth of the loan portfolio,
the amount of net loan losses incurred and management's estimation of potential
future losses based on an ongoing evaluation of the portfolio risk and economic
conditions. The provisions for loan losses equaled $1.2 million and $300,000 for
the six months ended June 30, 1997 and 1996, respectively. The increase in the
provision for loan losses in the first six months of 1997 compared to the same
1996 period principally reflects the rapid growth in GB's loan portfolio.
OTHER OPERATING INCOME
Other operating income was $3.3 million and $2.3 million for the first six
months of 1997 and 1996, respectively. The $1.0 million increase was due
primarily to an increase in service charges on deposit accounts and an increase
in merchant credit card fees.
OTHER OPERATING EXPENSES
Other operating expenses totaled $13.0 million and $10.8 million for the
first six months of 1997 and 1996, respectively. The increase was due primarily
to a $1.4 million (26.3%) increase in salaries and benefits. The increase in
salaries and benefits was primarily a result of GB's efforts to recruit
experienced local bankers who left local competitors acquired by larger banks.
The efficiency ratio was 57.9% and 67.8% for the first six months of 1997 and
1996, respectively. The decrease was due primarily to large increases in earning
assets and GB's efforts to control non-growth and non-profit related overhead
expenses.
INCOME TAXES
Income tax expense includes the regular federal income taxes at the
statutory rate plus income tax components of the California franchise tax. The
federal income tax expense is a function of GB's taxable income, tax exempt
income, non-deductible interest expense and other non-deductible expenses,
including goodwill amortization. Income tax expense was $3.0 million for the
first six months of 1997, resulting in an effective tax rate of 38.9% and $1.8
million for the same period of 1996, resulting in an effective tax rate of
41.7%.
FINANCIAL CONDITION
LOAN PORTFOLIO
Loan growth during 1996 and the first six months of 1997 was the result of
GB's focus on lending to small business and middle market companies and private
banking for individuals. The consolidation of the banking industry in GB's
service area created a unique opportunity for GB to market its products and
services.
Total loans at June 30, 1997 were $453.8 million, an increase of $70.4
million from December 31, 1996. At June 30, 1997, total loans represented 71% of
deposits and 63% of total assets.
NON-PERFORMING ASSETS
Non-performing assets at June 30, 1997 and June 30, 1996 were $1.8 million
and $1.4 million, respectively. The ratio of non-performing assets to loans and
other real estate owned equaled 0.41% and 0.45% at June 30, 1997 and 1996,
respectively.
22
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on evaluation of the
loan portfolio, management presents a quarterly review of the allowance for loan
losses to the GB Board, indicating any changes in the allowance since the last
review and any recommended actions as to adjustments in the allowance. In making
its evaluation, management considers the effect of changes in the local real
estate market on collateral values, the results of recent regulatory
examinations, the effects on the loan portfolio of current economic indicators
and their probable impact on borrowers, the amount of charge-offs for the
period, the amount of non-performing loans and related collateral security and
the evaluation of its loan portfolio by the loan review function. Charge-offs
occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as prior charge-off experience of classified assets'
collateral value, portfolio composition, trends in economic conditions and the
financial strength of borrowers. Management establishes specific allowances for
loans which management believes require reserves greater than those allocated
according to their classification or delinquent status. An unallocated allowance
is also established based on other internal and external factors. GB then
charges to operations a provision for loan losses determined on an annualized
basis to maintain the allowance for loan losses at an adequate level determined
according to the foregoing methodology. The allowance for loan losses was $8.1
million and $6.3 million at June 30, 1997 and 1996, respectively. Management
believes that the allowance for loan losses at June 30, 1997 is adequate to
cover losses inherent in the portfolio as of such date.
DEPOSITS
Total deposits were $639.3 million at June 30, 1997. This represented an
increase of $71.7 million from December 31, 1996. GB's ratio of non-interest
bearing demand deposits to total deposits as of June 30, 1997, and December 31,
1996 was 33.6% and 33.0%, respectively. An aggressive marketing campaign and key
personnel additions in 1996 enabled GB to attract new customers. Non-interest
bearing accounts increased 43.4% to $187.5 million in 1996 due to various new
deposit account incentives available to the customers combined with a focused
marketing effort.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current and
future operations. GB is subject to capital adequacy requirements imposed by the
Federal Reserve Board, and Grossmont Bank is subject to capital adequacy
requirements imposed by the Federal Deposit Insurance Corporation ("FDIC") and
the State Commissioner. The Federal Reserve Board, FDIC and the State
Commissioner have adopted risk-based capital standards for assessing capital
adequacy. These standards define capital and establish minimum capital
requirements in relation to assets and off-balance sheet exposure. The risk-
based capital standards are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among bank holding companies and
banks by assigning risk weights to broad categories of assets and off-balance
sheet items based upon their relative credit risks.
The risk-based capital standards require all banks and bank holding
companies to maintain a minimum "Tier 1 capital" ratio of at least 4.0% of
risk-weighted assets and "total risk-based" capital (Tier 1 and Tier 2) ratio of
at least 8.0% of risk-weighted assets. "Tier 1 capital" consists primarily of
common shareholders' equity and qualifying perpetual preferred stock, together
with related surpluses and retained earnings, and minority interests in equity
accounts of consolidated subsidiaries, less deductions for goodwill and various
other intangibles. "Tier 2 capital" may include a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, preferred
stock not qualifying as Tier 1
23
<PAGE>
capital and a limited amount of the general valuation allowance for loan and
lease losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital."
Under the risk-based capital standards, bank holding companies and banks are
required to maintain a minimum leverage ratio of Tier 1 capital to average total
consolidated assets ("leverage ratio"). Institutions with well diversified risk,
including no undue interest rate exposure; excellent asset quality; high
liquidity; good earnings; and that are generally considered to be strong banking
organizations, rated composite 1 under applicable federal guidelines, and not
experiencing or anticipating significant growth are required to maintain a
minimum leverage ratio of 3.0%. Other banking organizations are required to
maintain a leverage ratio of at least 4.0% to 5.0% depending on the
organization's condition. The regulatory capital requirements further provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above the minimum
levels and comparable to peer group averages, without significant reliance on
intangible assets.
The following table provides a comparison of GB's leverage and risk-based
capital ratios as of June 30, 1997 to the regulatory standards:
<TABLE>
<CAPTION>
MINIMUM
GB RATIO REQUIRED
--------- ---------
<S> <C> <C>
Leverage ratio.......................................................... 7.36% 3.00%
Tier 1 risk-based capital ratio......................................... 10.05% 4.00%
Total risk-based capital ratio.......................................... 11.30% 8.00%
</TABLE>
The following is a table of GB's regulatory capital, the required amount of
regulatory capital and the amount of excess regulatory capital at June 30, 1997.
<TABLE>
<CAPTION>
REQUIRED EXCESS
REGULATORY REGULATORY
JUNE 30, 1997 CAPITAL CAPITAL
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Leverage Capital...................................... $ 52,045 $ 15,360 $ 36,685
Tier 1 Capital........................................ 51,457 20,480 30,977
Total Capital......................................... 57,878 40,960 16,918
</TABLE>
Shareholders' equity was $52.6 million and $47.2 million at June 30, 1997 and
December 31, 1996, respectively. The $52.6 million at June 30, 1997 does not
include $7.5 million in debentures issued in February 1997 that is considered
Tier 1 capital for regulatory purposes.
SELECTED FINANCIAL DATA FOR GROSSMONT BANK
The following financial data for Grossmont Bank should be read in
conjunction with the Financial Statements of Grossmont Bank and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Grossmont Bank for the Years ended December 31, 1996,
1995 and 1994." The statement of income and balance sheet data as of and for the
years ended December 31, 1996 and 1995 have been derived from Grossmont Bank's
financial statements which have been audited by Ernst & Young LLP, independent
public accountants. The statement of income and balance sheet data as of and for
the years ended December 31, 1994 and 1992 have been derived from
24
<PAGE>
Grossmont Bank's financial statements which have been audited by KPMG Peat
Marwick LLP, independent auditors. The statement of income and balance sheet
data as of and for the year ended December 31, 1993 have been derived from
Grossmont Bank's audited financial statements.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA (IN THOUSANDS)
Interest income............................ $ 40,445 $ 35,162 $ 29,809 $ 25,206 $ 26,002
Interest expense........................... 10,604 8,715 7,302 6,614 7,731
------------- ------------- ------------- ------------- -------------
Net interest income...................... 29,841 26,447 22,507 18,592 18,271
Provision for loan losses.................. 1,100 200 350 985 7,608
------------- ------------- ------------- ------------- -------------
Net interest income after provision for
loan losses............................ 28,741 26,247 22,157 17,607 10,663
Other operating income..................... 4,919 4,032 6,726 5,682 6,299
Other operating expense.................... 22,799 20,692 21,201 21,158 25,946
------------- ------------- ------------- ------------- -------------
Income before income taxes............... 10,861 9,587 7,682 2,131 (8,984)
Provision for income taxes................. 4,307 2,309 2,675 395 (1,867)
------------- ------------- ------------- ------------- -------------
Net income................................. $ 6,554 $ 7,278 $ 5,007 $ 1,736 $ (7,117)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA (YEAR END, IN THOUSANDS)
Total assets............................... $ 628,927 $ 473,387 $ 452,860 $ 446,715 $ 367,584
Securities................................. 173,129 154,155 127,580 175,449 87,259
Loans...................................... 383,421 260,376 253,507 210,063 216,933
Allowance for loan losses.................. 6,844 5,882 6,095 6,161 6,154
Total deposits............................. 567,724 414,370 406,506 402,586 327,586
Total shareholders' equity................. 53,820 50,820 37,477 32,650 30,914
PERFORMANCE RATIOS
Return on average assets................... 1.22% 1.60% 1.12% 0.46% (1.95)%
Return on average common equity............ 12.40 16.98 14.26 5.56 (9.24)
Net interest margin........................ 6.36 6.49 5.63 5.59 5.83
Efficiency ratio........................... 64.27 67.51 72.52 87.16 105.60
ASSET QUALITY RATIOS
Nonperforming assets to loans and other
real estate.............................. 0.31% 1.35% 1.71% 4.07% 2.45%
Net charge-offs (recoveries) to average
loans (annualized)....................... 0.05 0.16 0.18 0.47 1.74
Allowance for loan losses to total loans... 1.78 2.26 2.40 2.93 2.84
Allowance for loan losses to non-performing
loans.................................... 580.49 167.53 159.22 72.11 116.00
CAPITAL RATIOS
Leverage ratio............................. 7.48% 9.29% 8.26% 7.31% 8.41%
Tier 1 risk-based capital ratio............ 10.55 14.05 12.44 12.62 13.08
Total risk-based capital ratio............. 11.80 15.31 13.70 13.89 14.60
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GROSSMONT BANK FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
OVERVIEW
Total assets for Grossmont Bank at December 31, 1996, 1995 and 1994 were
$628.9 million, $473.4 million and $452.9 million, respectively. Loans totaled
$383.4 million at December 31, 1996, an increase of $123.0 million or 47.2% from
$260.4 million at year end 1995. Deposits experienced a similar growth pattern,
increasing 37.0% to $567.7 million at year end 1996 from $414.4 million at year
end 1995.
Grossmont Bank's net income totaled $6.6 million in 1996, a decrease of
$724,000 or 10% from the 1995 net income of $7.3 million. The decrease in net
income from 1995 to 1996 was due primarily to a significantly higher tax
provision in 1996 than in 1995. Grossmont Bank's effective tax rate increased
from 24.1% in 1995 to 39.7% in 1996 as a result of a $2.0 million non-recurring
positive adjustment in 1995. Pre-tax income at Grossmont Bank in 1996 increased
$1.3 million or 13.3% to $10.9 million from the 1995 level of $9.6 million.
Grossmont Bank's net income in 1995 increased $2.3 million or 45.4% from the
1994 level of $5.0 million. Grossmont Bank's 1994 net income included a $1.6
million non-recurring gain from the settlement of a law suit and a $1.1 million
gain from the sale of Grossmont Bank's trust department. Grossmont Bank also
earned $366,000 of non recurring trust fees in 1994.
Grossmont Bank's return on average assets for the years ended December 31,
1996, 1995, and 1994 was 1.22%, 1.60% and 1.12%, respectively. Grossmont Bank's
return on common equity for the years ended December 31, 1996, 1995 and 1994 was
12.4%, 17.0% and 14.3%, respectively.
RESULT OF OPERATIONS
NET INTEREST INCOME
Net interest income in 1996 totaled $29.8 million, an increase of $3.4
million or 12.8% from 1995. The increase in net interest income from 1995 to
1996 was due primarily to a 15.3% increase in average earning assets during the
year, including a 20.7% increase in average loans. Interest expense in 1996 grew
at a higher rate than interest income as Grossmont Bank's yield on average
earning assets dropped 2 basis points in 1996 to 8.61% while its cost of average
interest bearing liabilities increased 20 basis points to 3.21%. This lower net
interest spread offset the positive effects of the volume increase in earning
assets and caused Grossmont Bank's net interest margin to decline to 6.36% in
1996 from 6.49% in 1995.
Net interest income in 1995 totaled $26.4 million, an increase of $3.9
million or 17.5% from 1994. The increase in net interest income from 1994 to
1995 was due primarily to a higher yielding mix of earning assets and higher
overall yields received on average assets. Average earnings assets increased
1.9% to $407.3 million in 1995 while average loans outstanding increased 10.2%.
Grossmont Bank's mix of earning assets increased its yield on average earnings
assets 117 basis points in 1995 to 8.63% while Grossmont Bank's cost of average
interest bearing liabilities increased 56 basis points to 3.01%. The higher net
spreads earned in 1995 caused Grossmont Bank's net interest margin to increase
to 6.49% from 5.63% in 1994.
26
<PAGE>
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. All average
balances are daily average balances. Non accruing loans have been included in
the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEAR ENDING 12/31/96 YEAR ENDING 12/31/95
--------------------------------- ---------------------------------
ANNUALIZED ANNUALIZED
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCES PAID RATE BALANCES PAID RATE
----------- ------- ---------- ----------- ------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets
Loans................. $305,448 $30,334 9.93% $253,012 $26,059 10.30%
Securities............ 149,826 9,374 6.26 116,051 6,940 5.98
Fed funds sold........ 14,200 737 5.19 38,244 2,163 5.66
----------- ------- ----------- -------
Total interest
earning assets.... 469,474 40,445 8.61 407,307 35,162 8.63
Less allowance for loan
loss.................. 6,311 5,974
----------- -----------
Total earning assets net
of allowance.......... 463,163 401,333
Non-earning Assets...... 72,023 53,565
----------- -----------
TOTAL ASSETS........ $535,186 $454,898
----------- -----------
----------- -----------
LIABILITIES &
SHAREHOLDERS EQUITY
Interest bearing
liabilities
Interest bearing
demand deposits..... $ 53,246 530 1.00 $ 45,889 438 0.95
MMC & Savings
Accounts............ 160,921 4,293 2.67 161,634 4,368 2.70
TCD's................. 114,717 5,713 4.98 80,914 3,862 4.77
Repo/Fed Funds
purchased........... 1,599 68 4.25 1,201 47 3.91
----------- ------- ----------- -------
Total interest
bearing
liabilities....... 330,483 10,604 3.21 289,638 8,715 3.01
Non-interest bearing
liabilities
Non-interest bearing
demand deposits..... 144,804 114,846
Other liabilities..... 7,065 7,556
Shareholders Equity..... 52,834 42,858
----------- -----------
TOTAL LIABILITIES &
EQUITY............ $535,186 $454,898
----------- ------- ----------- -------
----------- -----------
Net Interest Income..... $29,841 $26,447
------- -------
------- -------
Net Interest Spread..... 5.40 5.62
Net Interest Margin..... 6.36 6.49
<CAPTION>
YEAR ENDING 12/31/94
---------------------------------
ANNUALIZED
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCES PAID RATE
----------- ------- ----------
<S> <C> <C> <C>
ASSETS
Interest Earning Assets
Loans................. $229,605 $21,140 9.21%
Securities............ 160,046 8,205 5.13
Fed funds sold........ 10,187 464 4.55
----------- -------
Total interest
earning assets.... $399,838 29,809 7.46
Less allowance for loan
loss.................. 5,997
-----------
Total earning assets net
of allowance.......... 393,841
Non-earning Assets...... 52,253
-----------
TOTAL ASSETS........ $446,094
-----------
-----------
LIABILITIES &
SHAREHOLDERS EQUITY
Interest bearing
liabilities
Interest bearing
demand deposits..... $ 47,691 526 1.10
MMC & Savings
Accounts............ 173,763 4,249 2.45
TCD's................. 71,816 2,375 3.31
Repo/Fed Funds
purchased........... 4,527 152 3.36
----------- -------
Total interest
bearing
liabilities....... 297,797 7,302 2.45
Non-interest bearing
liabilities
Non-interest bearing
demand deposits..... 104,659
Other liabilities..... 8,517
Shareholders Equity..... 35,121
-----------
TOTAL LIABILITIES &
EQUITY............ $446,094
----------- -------
-----------
Net Interest Income..... $22,507
-------
-------
Net Interest Spread..... 5.01
Net Interest Margin..... 5.63
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on the growth of the loan portfolio,
the amount of net loan losses incurred and management's estimation of potential
future losses on an ongoing evaluation of portfolio risk and economic
conditions. The provisions for loan losses equaled $1.1 million in 1996 compared
to $200,000 in 1995 and $350,000 in 1994. The increase in the provision for loan
losses for 1996 compared to prior periods reflects the rapid growth in Grossmont
Bank's loan portfolio.
27
<PAGE>
OTHER OPERATING INCOME
Other operating income for 1996 was $4.9 million, an increase of $887,000 or
22.0% over the 1995 level. This increase was primarily due to increases in
service charges on deposit accounts and merchant credit card fees of $279,000
and $460,000, respectively.
Other operating income for 1995 was $4.0 million, a decrease of $2.7 million
from the $6.7 million recorded in 1994. This decrease was the result of
unusually high income recorded in 1994 as the result of several non-recurring
items as follows: $1.6 million received for litigation settlement, a $1.1
million gain recorded on the sale of the trust department and $366,000 in
non-recurring trust fees earned by the trust department.
OTHER OPERATING EXPENSE
Other operating expense totaled $22.8 million in 1996, an increase of $2.1
million or 10.2% from 1995. The increase from 1995 to 1996 was due primarily to
a $1.4 million or 14.06% increase in salaries and benefits and a $342,000
increase in goodwill amortization. The increase in salaries and benefits was the
result of the bank's efforts to recruit experienced local bankers disaffected by
the acquisition of local competitors by larger banks. The increase in goodwill
amortization in 1996 reflected a full year of goodwill amortization compared to
three months of goodwill amortization in 1995 associated with the change of
control on September 30, 1995. Other operating expense totaled $20.7 million in
1995, a decrease of $509,000 or 2.4% from the $21.2 million recorded in 1994.
This decrease was primarily due to a $482,000 decrease in FDIC assessment fees
that resulted from the FDIC reduction of rates charged on deposit balances. In
addition to this decrease, the bank also experienced lower losses associated
with the sale of assets than were experienced in 1994.
The efficiency ratio for Grossmont Bank equaled 64.3%, 67.5% and 72.5% for
1996, 1995 and 1994, respectively. The decreasing trend in efficiency ratio has
been due primarily to significant increases in earning assets and Grossmont
Bank's efforts to control overhead expenses.
INCOME TAXES
Income tax expense includes federal taxes paid at the statutory rate plus
income tax components of the California franchise tax. The amount of federal
income tax expense is a function of Grossmont Bank's taxable income, the amount
of tax exempt income, the amount of non-deductible interest expense and the
amount of other non-deductible expenses, including goodwill amortization.
Grossmont Bank currently has a tax-sharing agreement with GB, whereby it
dividends an amount to GB on a quarterly basis sufficient enough to fund its
share of GB's consolidated tax liability. Income tax expense at Grossmont Bank
for 1996 was $4.3 million. Income tax expense at Grossmont Bank for 1995 was
$2.3 million, which included a one time positive adjustment of approximately
$2.0 million caused by the reversal of a valuation allowance for a deferred tax
asset that resulted in an effective tax rate of only 24.1%. Income tax expense
at Grossmont Bank for 1994 was $2.7 million based on pre-tax earnings of $7.7
million. The effective tax rate of 34.8% included a partial benefit of prior
years tax loss carry-forwards.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans at December 31, 1996 equaled $383.4 million, an increase of
$123.0 million or 47.3% from the year end 1995 total of $260.4 million. At
December 31, 1996, total loans represented 67.5% of deposits and 61.0% of total
assets. At December 31, 1995, total loans represented 62.8% of deposits and
55.0% of total assets.
28
<PAGE>
The following table sets forth the amount of loans outstanding in each
category and the percentage of total loans outstanding for each category as of
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
IN THOUSANDS AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial & Industrial.......................... $ 119,281 31.1% $ 90,266 34.7% $ 89,199 35.2%
Real Estate Loans
Construction & land development................ 23,341 6.1 16,688 6.4 23,986 9.5
1 to 4 family residential...................... 63,169 16.5 48,298 18.5 44,597 17.6
Multi-family residential....................... 8,966 2.3 2,710 1.0 3,750 1.5
Commercial..................................... 138,693 36.2 83,523 32.1 71,293 28.1
Foreign Bank..................................... -- -- -- -- 5,727 2.3
Consumer......................................... 28,793 7.5 16,150 6.2 13,965 5.5
Other............................................ 1,178 0.3 2,741 1.1 990 0.4
---------- --- ---------- --- ---------- -----
Total Loans.................................. $ 383,421 100% $ 260,376 100% $ 253,507 100%
---------- --- ---------- --- ---------- -----
---------- --- ---------- --- ---------- -----
</TABLE>
The maturity ranges of the commercial and industrial and real estate
construction loan portfolio and the amount of such loans with fixed interest
rates and floating rates in each maturity as of December 31, 1996 are summarized
in the following table:
<TABLE>
<CAPTION>
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
IN THOUSANDS OR LESS FIVE YEARS YEARS TOTAL
- ------------------------------------------------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial & Industrial
Floating rate............................................. $ 93,302 $ -- $ -- $ 93,302
Fixed rate............................................. $ 8,114 $ 16,590 $ 1,275 $ 25,979
Real Estate Loans
Construction & land development
Floating rate............................................. 21,108 -- -- 21,108
Fixed rate............................................. 1,739 494 -- 2,233
1 to 4 family residential
Floating rate............................................. 28,012 11,320 2,939 42,271
Fixed rate............................................. 188 2,930 17,780 20,898
Commercial/Multifamily
Floating rate............................................. 83,208 562 1,246 85,016
Fixed rate............................................. 4,588 33,352 24,703 62,643
Consumer.......................................................... 14,760 10,200 3,833 28,793
Other............................................................. 1,178 -- -- 1,178
---------- ----------- ----------- ----------
Total......................................................... $ 256,197 $ 75,448 $ 51,776 $ 383,421
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
29
<PAGE>
NON-PERFORMING ASSETS
Grossmont Bank has developed procedures to achieve and maintain a high level
of credit quality in its loan portfolio. These procedures include a Credit
Quality Assurance Process that begins with approval of lending policies and
underwriting guidelines by the Grossmont Bank Board of Directors, an independent
loan review department staffed with experienced lending personnel, low
individual lending limits for officers, Senior Loan Committee approval for large
credit relationships and quality loan documentation procedures. The loan review
department has developed a system to identify and analyze weaknesses in the
portfolio and to report credit risk grade changes on a monthly basis to
Grossmont Bank management and directors. Grossmont Bank also maintains a system
to monitor loan concentrations based on Standard Industrial Codes, real estate
collateral types and large credits. Grossmont Bank also monitors delinquency
levels for any negative or adverse trends. There can be no assurance, however,
that Grossmont Bank's loan portfolio will not become adversely affected by
declining economic conditions.
Grossmont Bank generally places a loan on nonaccrual status and ceases
accruing interest when loan repayments of all principal and interest is
uncertain. All loans are past due after 90 days unless the loan is both well
collateralized and in the process of collection. Cash payments received while a
loan is classified as nonaccrual are recorded as a reduction of principal as
long as doubt exists as to collection of all principal and interest due.
Grossmont Bank regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as non-performing loans and potential
problem loans. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible writedowns or appropriate additions to
the allowance for loan losses. Grossmont Bank records real estate acquired by
foreclosure at the lesser of the outstanding loan balance, net of any reduction
in basis, or the fair value at the time of foreclosure, less estimated costs to
sell.
Non-performing assets at December 31, 1996 were $1.2 million, compared with
$3.5 million at December 31, 1995 and $4.3 million at December 31, 1994. The
ratio of non-performing assets to loans and other real estate owned equaled
0.31%, 1.35% and 1.71% at December 31, 1996, 1995 and 1994, respectively. During
1994 and 1995, non-accrual loans included one fully secured loan of $3.4
million. All interest due on this loan was paid and recognized on a cash receipt
basis. The loan remained on non-accrual for all of 1995 and was subsequently
paid in full in 1996.
The following table sets forth information regarding non-performing assets
as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
Non-Accrual Loans................................................ $ 1,178 $ 3,437 $ 3,811
Accruing 90 or more days past due................................ 1 74 518
--------- --------- ---------
Total Non-Performing Assets.................................. $ 1,179 $ 3,511 $ 4,329
--------- --------- ---------
--------- --------- ---------
Non-Performing Assets to Total Loans & Other Real Estate......... 0.31% 1.35% 1.71%
</TABLE>
30
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and related data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
Balance, beginning of year....................................... $ 5,882 $ 6,095 $ 6,161
Provision charged to operating expense........................... 1,100 200 350
Loans charged off, net of recoveries............................. (138) (413) (416)
--------- --------- ---------
Balance, end of year............................................. $ 6,844 $ 5,882 $ 6,095
--------- --------- ---------
--------- --------- ---------
</TABLE>
SECURITIES
The following table summarizes the amortized cost of securities held by
Grossmont Bank as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasuries.................................................... $ 34,498 $ 54,203 $ 75,129
U.S. Government Agencies........................................... 132,943 94,550 52,439
Municipals......................................................... 5,642 5,211 342
---------- ---------- ----------
Total Securities............................................... $ 173,083 $ 153,964 $ 127,910
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
IN THOUSANDS 1996 1995 1994
- ------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Available for sale................................................. $ 19,881 $ 45,108 $ 36,816
Held to maturity................................................... 153,248 109,047 90,764
---------- ---------- ----------
$ 173,129 $ 154,155 $ 127,580
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table presents the amortized cost of securities classified as
available for sale and their approximate values at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- --------------------------------------------------------- ----------- ------------- ------------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
U.S. Treasuries.......................................... $ 4,925 $ -- $ 6 $ 4,919
U.S. Government Agencies................................. 14,910 52 -- 14,962
----------- --- --- ---------
Total Securities..................................... $ 19,835 $ 52 $ 6 $ 19,881
----------- --- --- ---------
----------- --- --- ---------
</TABLE>
31
<PAGE>
The following table presents the amortized cost of securities classified as
held to maturity and their approximate values at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------- ------------- ----------
IN THOUSANDS
<S> <C> <C> <C> <C>
U.S. Treasuries........................................ $ 29,573 $ 230 $ 24 $ 29,779
U.S. Government Agencies............................... 118,033 691 430 118,294
Municipals............................................. 5,642 -- 40 5,602
---------- ----- ----- ----------
Total Securities................................... $ 153,248 $ 921 $ 494 $ 153,675
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
DEPOSITS
Total deposits at December 31, 1996 increased to $567.7 million from $414.4
million at December 31, 1995, an increase of $153.4 million or 37%. Grossmont
Bank's ratio of average non-interest bearing demand deposits to average deposits
for the years ended December 31, 1996, 1995 and 1994 was 30.5%, 28.4% and 26.3%,
respectively.
The year-end balance and weighted average rates paid on deposits for each of
the years ended December 31, 1996, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Savings Accounts................................. $ 34,956 2.1% $ 36,078 2.2% $ 45,776 2.3%
Super-Now Accounts............................... 63,716 1.0 45,385 1.0 47,517 1.1
Money Market Checking............................ 136,895 2.8 110,164 2.9 121,914 2.5
TCD's < $100,000................................. 72,510 5.0 51,007 4.7 40,323 3.3
TCD's > $100,000................................. 73,473 4.9 40,564 4.8 32,668 3.3
---------- ---------- ----------
Total interest bearing deposits................ 381,550 3.2 283,198 3.0 288,198 2.5
Non-interest bearing deposits.................... 186,174 131,172 118,308
---------- ---------- ----------
Total Deposits............................... $ 567,724 2.2 $ 414,370 2.2 $ 406,506 1.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table sets forth the maturity of Grossmont Bank's certificates
of deposit that are $100,000 or greater as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C>
3 months or less............................................. $ 46,927 $ 16,783 $ 18,849
Between 3 months and 1 year.................................. 23,885 22,170 13,402
Over 1 year.................................................. 2,661 1,611 417
--------- --------- ---------
Total.................................................... $ 73,473 $ 40,564 $ 32,668
--------- --------- ---------
--------- --------- ---------
</TABLE>
CAPITAL RESOURCES
Shareholders' equity at the bank level was $53.8 million, $50.8 million and
$37.5 million at December 31, 1996, 1995 and 1994, respectively. The increase of
$3.0 million from 1995 to 1996 is a result of Grossmont Bank's net income less
approximately $3.5 million of dividends to GB during 1996. The
32
<PAGE>
increase from 1994 to 1995 was a result of the bank's retained earnings as well
as a mark to market of the balance sheet at September 30, 1995 to account for
the acquisition by the investor group under purchase accounting methods.
For further discussion concerning Capital Resources, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of GB
for the Six Months ended June 30, 1997 and June 30, 1996--Financial
Condition--Capital Resources."
The following table provides a comparison of Grossmont Bank's leverage and
risk-weighted capital ratios as of December 31, 1996 to the regulatory
standards:
<TABLE>
<CAPTION>
WELL-
CAPITALIZED
12/31/96 MINIMUM MINIMUM
BANK RATIO REQUIRED REQUIRED
----------- ------------- -------------
<S> <C> <C> <C>
Leverage Ratio.............................................. 7.48% 3.00% 5.00%
Tier 1 risk-based capital ratio............................. 10.55% 4.00% 8.00%
Total risk-based capital ratio.............................. 11.80% 8.00% 10.00%
</TABLE>
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages. Also pursuant to FDICIA, each federal banking agency has
promulgated regulations setting the levels at which an insured institution would
be considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized" for purposes
of taking "prompt correction action." Under the FDIC's regulations, Grossmont
Bank is classified as "well capitalized."
33
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held at the offices of GB, 4320 La
Jolla Village Drive, Suite 355, San Diego, California 92122 on Monday, November
10, 1997 at 4:00 p.m. local time.
GB SHAREHOLDERS ARE REQUESTED TO PROMPTLY SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID PRE-ADDRESSED ENVELOPE.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE MEETING WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE MERGER OR THE
STOCK OPTION PROPOSAL, AS THE CASE MAY BE.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The purposes of the Special Meeting are (a) to consider and vote upon the
approval of the principal terms of the Merger, (b) approve the Stock Option
Proposal and (c) to transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
FOR THE REASONS SET FORTH ON PAGES 37 AND 38 HEREIN, THE GB BOARD HAS, BY
UNANIMOUS VOTE, APPROVED THE MERGER AGREEMENT AND RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER. THE GB BOARD ALSO RECOMMENDS A
VOTE "FOR" APPROVAL OF THE STOCK OPTION PROPOSAL.
RECORD DATE; STOCK ENTITLED TO VOTE
Only holders of record of GB Common Stock on the Record Date will be
entitled to receive notice of, and to vote at, the Special Meeting and any
postponements or adjournments thereof.
VOTES REQUIRED; QUORUM
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of GB Common Stock entitled to vote at the Special
Meeting is required to approve the principal terms of the Merger.
Approval of the Stock Option Proposal will require the affirmative vote of
holders of more than 75% of the outstanding shares of GB Common Stock entitled
to vote (excluding common stock owned by Messers. Sarver, Severson and Skillern
and any person whose GB stock ownership would be attributable to any one of
those individuals under the Code).
As of the Record Date, there were 2,014,036 shares of GB Common Stock
outstanding. Each holder of shares of GB Common Stock outstanding on the Record
Date will be entitled to one vote for each share held of record upon each matter
properly submitted at the Special Meeting and any postponement or adjournment
thereof. A majority of all shares of GB Common Stock entitled to vote,
represented in person or by proxy, constitutes a quorum. Abstentions and broker
non-votes are each included in the determination of the number of shares
present; however, they are not counted as votes in favor of the principal terms
of the Merger or in favor of the Stock Option Proposal, as the case may be. THE
FAILURE TO VOTE, AN ABSTENTION OR A BROKER NON-VOTE, THUS, HAS THE SAME EFFECT
AS A VOTE AGAINST THE PRINCIPAL TERMS OF THE MERGER OR AGAINST THE STOCK OPTION
PROPOSAL, AS THE CASE MAY BE.
If a quorum is not obtained, or fewer shares of GB Common Stock are voted in
favor of the principal terms of the Merger or the Stock Option Proposal, as the
case may be, than the number required for approval, it is expected that the
Special Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and at any subsequent
reconvening of the Special Meeting, all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the Special
Meeting (except for any proxies which have theretofore effectively been revoked
or withdrawn).
VOTING OF PROXIES
Shares represented by proxies properly executed and received in time to be
voted at the Special Meeting will be voted in accordance with the instructions
indicated on the proxies. Proxies which do not
34
<PAGE>
contain voting instructions will be voted "FOR" the proposal to approve the
principal terms of the Merger and "FOR" the Stock Option Proposal, as the case
may be. All proxies voted "FOR" such matters, including proxies on which no
instructions are indicated, may, at the discretion of the proxy holder, be voted
"FOR" a motion to adjourn or postpone the Special Meeting to another time and/or
place for the purpose of soliciting additional proxies or otherwise; PROVIDED,
HOWEVER, that no proxy which is voted against approval of the principal terms of
the Merger or against the Stock Option Proposal or on which the relevant
shareholder specifically abstains from voting with respect to such approval will
be voted in favor of any such adjournment or postponement.
It is not expected that any matters other than as described herein will be
brought before the Special Meeting. If, however, other matters are properly
brought before the Special Meeting, persons appointed as proxies will have
discretion to vote or act thereon in their best judgment.
REVOCABILITY OF PROXIES
The presence of a shareholder at the Special Meeting (or at any postponement
or adjournment thereof) will not automatically revoke such shareholder's proxy.
However, a shareholder may revoke a proxy at any time prior to its exercise by
(a) delivery to the Secretary of GB of a written notice of revocation prior to
the Special Meeting (or, if the Special Meeting is adjourned or postponed, prior
to the time the adjourned or postponed meeting is actually held); (b) delivery
to the Secretary of GB of a duly executed proxy bearing a later date prior to
the Special Meeting (or, if the Special Meeting is adjourned or postponed, prior
to the time the adjourned or postponed meeting is actually held); or (c)
attending the Special Meeting (or, if the Special Meeting is adjourned or
postponed, by attending the adjourned or postponed meeting) and voting in
person. Any written revocation of proxy or other related communications should
be addressed to Peggy J. Standefer, GB Bancorporation, 4320 La Jolla Village
Drive, Suite 355, San Diego, California 92122.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of GB
and/or Grossmont Bank may solicit proxies from GB Shareholders personally or by
telephone or telegram without additional remuneration therefor. GB will also
provide persons, firms, banks and corporations holding shares in their names or
in the names of nominees, which in any case are beneficially owned by others,
with proxy materials for transmittal to such beneficial owners and will
reimburse such record owners for their expenses in doing so. GB will bear the
cost of solicitation of proxies from its own shareholders.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, the directors and officers of GB beneficially held,
in the aggregate, the ability to direct the voting with respect to 939,250
shares of GB Common Stock, comprising approximately 46.6% of the voting power of
the GB Common Stock outstanding on the Record Date. In addition, pursuant to the
Shareholder Agreements, the directors of GB, in their capacity as shareholders,
together holding or controlling an aggregate of 939,250 shares of GB Common
Stock (or approximately 46.6% of the shares of GB Common Stock outstanding on
the Record Date), have agreed to vote their shares in favor of the principal
terms of the Merger. Such shares include 198,000 shares of GB Common Stock owned
by SOLC. SOLC is owned by members of the Simmons family, including Harris H.
Simmons, L.E. Simmons and David Simmons. Roy W. Simmons is the Chairman of
Zions, Harris H. Simmons is the President and Chief Executive Officer and a
director of Zions and L.E. Simmons is a director of Zions. David Simmons, the
son of Roy W. Simmons and the brother of Harris H. Simmons and L.E. Simmons, is
a director of GB and the President of SOLC. In addition, as of the Record Date,
Zions owned 98,000 shares of GB Common Stock (or approximately 4.9% of the
shares of GB Common Stock outstanding on the Record Date).
If all such persons and institutions vote their shares in favor of the
principal terms of the Merger, the principal terms of the Merger will be
approved by the requisite vote of GB Common Stock.
35
<PAGE>
THE MERGER
THIS SECTION OF THE PROXY STATEMENT-PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED MERGER, AND SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT-PROSPECTUS, INCLUDING THE APPENDICES HERETO, AND THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE. A COPY OF THE MERGER AGREEMENT IS SET FORTH AS
APPENDIX A TO THIS PROXY STATEMENT-PROSPECTUS, AND THE TEXT THEREOF IS
INCORPORATED HEREIN BY REFERENCE; REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGER. GB SHAREHOLDERS ARE URGED TO READ
CAREFULLY THE MERGER AGREEMENT AND EACH OF THE OTHER APPENDICES HERETO IN THEIR
ENTIRETY.
BACKGROUND OF THE MERGER
An investment group that included members of Grossmont Bank's and Zions'
management purchased Bancomer Holding Company, the previous owner of Grossmont
Bank, in September 1995 and changed its name to GB. Since the time of that
acquisition, the Board of Directors and management of GB have periodically
reviewed and discussed the goals and objectives of GB and various strategic
alternatives available to GB.
For the first 18 months after the acquisition of Grossmont Bank, GB's Board
of Directors and management chose to enhance shareholder value and GB's banking
franchise by expanding Grossmont Bank through the opening of new offices and the
recruitment of additional, seasoned San Diego business bankers. These actions,
coupled with the disintermediation of customers resulting from the Wells Fargo/
First Interstate merger and the related branch closures in San Diego County,
have resulted in significant asset and earnings growth for GB. In addition, GB
increased its regulatory capital in February 1997 through the issuance of $7.5
million of trust preferred capital securities.
More recently, the GB Board and management began to explore additional
options available to further expand GB's San Diego banking franchise and to
provide a source of liquidity for GB investors. These options have included (i)
the acquisition of local banks for cash; (ii) an initial public offering of GB
Common Stock to provide a marketable and more easily valued currency for making
local bank acquisitions in stock-for-stock transactions; and (iii) a business
combination with a larger, well-capitalized strategic banking partner.
In April 1997, the Chairman of GB submitted a package of relevant
information on GB to three potential acquirors identified by GB. Shortly
thereafter, an additional potential acquiror expressed interest in the
acquisition of GB and was provided the same package of material. Management of
GB met and conducted discussions with representatives from each of these four
institutions and discussed their level of interest in GB and general terms for
the pricing of an acquisition. Based upon these preliminary expressions of
interest, GB invited two institutions that it identified as being able to
provide the best offer and strategic fit to perform detailed due diligence of GB
and to present a final proposal. In June 1997, the GB Board also engaged
Goldman, Sachs & Co. as its financial advisor, which performed due diligence on
the two potential acquirors, evaluated preliminary offers, evaluated the current
and future prospects for both institutions' stock and rendered an opinion as to
the fairness of the Conversion Number.
Upon the completion of GB's due diligence of both potential acquirors and
the potential acquirors' due diligence of GB, final offers were presented to the
GB Board on July 3, 1997. Following a detailed evaluation of each proposal,
including a review of strategic alternatives and a determination of the fairness
of the Conversion Number by GB's financial advisor, the GB Board unanimously
approved the Merger Agreement and the transactions contemplated therein.
36
<PAGE>
EFFECT OF MERGER
At the Effective Time, GB will merge with and into Zions, and Zions will be
the surviving corporation in the Merger and will continue its corporate
existence under Utah law. The separate corporate existence of GB will then
cease.
Upon the Merger becoming effective, each share of GB Common Stock issued and
outstanding at the Effective Time (other than (a) shares which have not been
voted in favor of the approval of the principal terms of the Merger and with
respect to which Dissenters' Rights shall have been perfected in accordance with
the CGCL and (b) shares held directly or indirectly by Zions) will be converted
automatically into the right to receive 2.2748 shares of Zions Common Stock.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARD OF DIRECTORS
ZIONS
The Zions Independent Directors Committee has unanimously approved the
Merger Agreement and has determined that the Merger and the issuance of the
Zions Common Stock pursuant thereto are fair to, and in the best interests of,
the shareholders of Zions. The approval of the Merger Agreement by the
shareholders of Zions is not required.
GB
The GB Board has unanimously approved the Merger Agreement and the
transactions contemplated thereby and has determined that the Merger is fair to,
and in the best interests of, GB and its shareholders. As a consequence, the GB
Board unanimously recommends that the holders of GB Common Stock vote to approve
the principal terms of the Merger. The GB Board believes that the Merger will
enable holders of GB Common Stock to realize both increased value and liquidity.
The GB Board also believes that this business combination will provide
additional opportunities for the continued growth of Grossmont Bank. In
considering its decision to approve the Merger Agreement, the GB Board consulted
with its outside counsel regarding the legal terms of the Merger and the GB
Board's fiduciary obligations in its consideration of the proposed Merger. The
GB Board also consulted with its financial advisor, Goldman, Sachs & Co.,
regarding the financial aspects and fairness of the proposed Merger.
In reaching its determination to approve the terms of the Merger, the GB
Board considered the following material factors from both a short-term and
long-term perspective:
(i) the GB Board's familiarity with, and review of, the business,
financial condition, results of operations and prospects of GB, including,
but not limited to, its potential growth, development, productivity and
profitability and the business risks associated therewith;
(ii) the current and prospective environment within which GB operates,
including national and local economic conditions, the increased competitive
environment for financial institutions generally, the increased regulatory
burden on financial institutions and the trend toward consolidation in the
financial services industry;
(iii) the potential appreciation in the market and book value of GB's
Common Stock if it remained an independent institution;
(iv) the proposals of all potential acquirers who expressed serious
interest in acquiring GB;
(v) information concerning the business, financial condition, results of
operations, asset quality and prospects of Zions, including the long-term
growth potential for Zions Common Stock, the future growth prospects of
Zions after a merger with GB and the potential synergies expected from the
Merger and the business risks associated therewith;
37
<PAGE>
(vi) the advantages and disadvantages of GB remaining as an independent
institution, either privately or publicly owned, or affiliating with a
larger institution;
(vii) the fact that the Merger can be effected on a tax-free basis for GB
Shareholders and the potential for appreciation and growth of the market and
book value of Zions Common Stock following the Merger;
(viii) the short and long-term interests of GB and its shareholders, the
interests of GB's employees and customers and the interests of the community
that may be served better by an appropriate affiliation with a larger
institution that can provide capital for growth and additional financial
services to the community while allowing Grossmont Bank to remain a
locally-managed community bank; and
(ix) the compatibility with respect to the business and management
philosophies of GB and Zions and Zions' strong, proven commitment to the
communities it serves.
The foregoing discussion of the information and factors considered by the GB
Board is not intended to be exhaustive, but constitutes the material factors
considered by the GB Board. In reaching its determination to approve and
recommend the principal terms of the Merger, the GB Board did not assign
relative or specific weights to the foregoing factors and individual directors
may have weighed such factors differently.
FOR THE REASONS SET FORTH ABOVE, THE GB BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AS FAIR TO AND IN THE BEST INTERESTS OF GB AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT GB SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
PRINCIPAL TERMS OF THE MERGER.
OPINION OF FINANCIAL ADVISOR
Goldman Sachs was retained by GB to act as its financial advisor and
performed due diligence on the two potential acquirors, evaluated preliminary
offers, evaluated the current and future prospects of both institutions' stock
and rendered an opinion as to the fairness of the Conversion Number, all in
connection with a possible merger or sale of all or a portion of GB. At a
meeting of the GB Board held on July 3, 1997, Goldman Sachs made a presentation
on financial aspects of the Merger and delivered to the GB Board its oral
opinion (which opinion was subsequently delivered to the GB Board in written
form dated July 7, 1997) dated as of July 3, 1997 to the effect that, as of the
date of such opinion, based on the matters set forth in such opinion, the
proposed Conversion Number pursuant to the Merger Agreement was fair to the
holders of the GB Common Stock. Goldman Sachs has confirmed its July 3, 1997
opinion by delivery of its written opinion to the GB Board, dated the date of
this Proxy Statement-Prospectus, stating that, as of the date hereof and based
on the matters set forth in such opinion, the proposed Conversion Number
pursuant to the Merger Agreement is fair to the holders of the GB Common Stock.
Goldman Sachs has consented to the inclusion of its opinion, dated the date
hereof, in this Proxy Statement-Prospectus (the "Goldman Sachs Opinion").
THE FULL TEXT OF THE GOLDMAN SACHS OPINION, DATED THE DATE OF THIS PROXY
STATEMENT-PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
APPENDIX B TO THIS PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. THE DESCRIPTION OF THE GOLDMAN SACHS OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX B. THE GOLDMAN SACHS OPINION
IS SUBSTANTIALLY IDENTICAL TO THE OPINION DELIVERED TO THE GB BOARD DATED JULY
3, 1997. GB SHAREHOLDERS ARE URGED TO READ THE GOLDMAN SACHS OPINION IN ITS
ENTIRETY.
38
<PAGE>
Goldman Sachs is a nationally recognized investment banking firm and was
selected by GB based on the firm's reputation and experience in investment
banking in general, its recognized expertise in the valuation of banking
businesses and because of its familiarity with, and prior work for, GB. Goldman
Sachs, as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
In connection with rendering its opinions dated July 3, 1997 and the date
hereof, Goldman Sachs, among other things: (i) reviewed the Merger Agreement;
(ii) reviewed annual audited financial statements for GB (and its predecessor
Bancomer Holding Company) and Grossmont Bank for the five years ended December
31, 1996; (iii) reviewed the Annual Reports to Stockholders and Annual Reports
on Form 10-K of Zions for the five years ended December 31, 1996; (iv) reviewed
certain interim reports to stockholders and Quarterly Reports on Form 10-Q of
Zions; (v) reviewed certain internal financial analyses and forecasts for GB and
Zions prepared by their respective managements; (vi) held discussions with
members of the senior managements of GB and Zions regarding the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the Merger Agreement and the past and current business operations, financial
condition and future prospects of their respective companies; (vii) reviewed the
reported price and trading activity for the Zions Common Stock; (viii) compared
certain financial information for GB and Zions and stock market information for
Zions with similar information for certain other companies the securities of
which are publicly traded; (ix) reviewed the financial terms of certain recent
business combinations in the commercial banking industry and (x) performed such
other studies and analyses as Goldman Sachs deemed appropriate. In addition, in
connection with rendering the Goldman Sachs Opinion, Goldman Sachs reviewed the
Registration Statement of which this Proxy Statement-Prospectus is a part.
In connection with rendering the Goldman Sachs Opinion, as set forth
therein, Goldman Sachs relied without independent verification upon the accuracy
and completeness of all the financial and other information reviewed by it and
has assumed such accuracy and completeness for purposes of such opinion. With
GB's consent, Goldman Sachs assumed that the financial forecasts (including,
without limitation, certain information regarding under-performing and
non-performing assets and net charge-offs) were reasonably prepared on a basis
reflecting the best currently available judgments and estimates of GB and Zions,
and that such forecasts would be realized in the amounts and at the times
contemplated thereby. Goldman Sachs is not an expert in the evaluation of loan
and lease portfolios for purposes of assessing the adequacy of the allowances
for losses with respect thereto, and assumed, with GB's consent, that such
allowances for each of GB and Zions are in the aggregate adequate to cover all
such losses. In addition, Goldman Sachs has not reviewed individual credit files
nor has it made an independent evaluation or appraisal of the assets and
liabilities of GB and Zions or any of their respective subsidiaries and has not
been furnished with any such evaluation or appraisal.
The following is a summary of the material financial analyses presented by
Goldman Sachs to the GB Board in connection with providing its opinion to the GB
Board on July 3, 1997, and does not purport to be a complete description of the
analyses performed by Goldman Sachs. Goldman Sachs used substantially the same
types of financial analyses in preparing its written opinion dated as of the
date of this Proxy Statement-Prospectus as it used in providing its opinion
dated as of July 3, 1997.
SUMMARY OF TERMS OF PROPOSED TRANSACTION
Goldman Sachs reviewed the terms of the proposed Merger, including the form
of consideration offered, the expected method of accounting, the Conversion
Number, the closing price of Zions Common Stock as of July 2, 1997, and the
resulting notional price per share of GB Common Stock pursuant to the proposed
Merger. The proposed form of consideration offered in connection with the Merger
was Zions Common Stock. The proposed method of accounting for the Merger was the
pooling method. The notional
39
<PAGE>
price per share of GB Common Stock for the Merger was $82.14, determined by
multiplying the Conversion Number by the closing price of the Zions Common Stock
on July 2, 1997 (the "Notional Price"). The Notional Price, therefore, was
necessarily dependent on the closing price of the Zions Common Stock at a
specific time. Based upon the Notional Price, the aggregate consideration to be
received by holders of GB Common Stock in the Merger is approximately $178
million.
In addition to reviewing the Notional Price resulting from the Merger, the
analyses described indicated values resulting from the Merger expressed as
multiples of GB's earnings for the twelve months ended March 31, 1997 and of
estimates of GB's 1997 and 1998 earnings, as well as multiples of various
measures of GB book value. In performing these analyses, Goldman Sachs used
estimates based upon the earnings estimates prepared by GB management (the "GB
Estimates"). Under these analyses the Notional Price reflected (i) a multiple of
20.4 times GB earnings for the twelve months ending March 31, 1997, (ii) a
multiple of 17.3 times the GB Estimate of GB 1997 earnings, and (iii) a multiple
of 14.0 times the GB Estimate of GB 1998 earnings. The Notional Price also
reflected (i) a multiple of 3.5 times GB stated book value as of May 31, 1997,
and (ii) a multiple of 4.2 times GB tangible book value.
DIVIDEND DISCOUNT ANALYSIS
Using a discounted dividend analysis, Goldman Sachs estimated the present
value of the future dividend streams and terminal values that GB and Zions
combined could produce over the five year period from January 1, 1998 to
December 31, 2002 and over the three year period from January 1, 1998 to
December 31, 2000. The estimate of GB future net income assumed earnings growth
rates for the three and five year periods of 16.9 percent and was based on GB
management's earnings estimate. The growth of Zions net income assumed earnings
growth for the three and five year period of 14.0 percent and was based on Zions
management's earnings estimate. Using assumed discount rates of 12.5, 15.0 and
17.5 percent and multiples of price to trailing earnings for the twelve-month
periods ending December 31, 2000 and December 31, 2002 ranging from 13.0 times
to 20.0 times for both periods, Goldman Sachs calculated net present values
ranging from $71 to $119 per share of GB Common Stock for the three-year period
and $71 to $126 per share of GB Common Stock for the five-year period. The
analysis assumed a dividend payout ratio of 25%, annual cost savings of $1.2
million, assumed terminal values of each dividend stream equal to various
multiples of estimated earnings for the twelve months ending December 31, 2000
and December 31, 2002, as the case may be, and assumed ongoing annual stock
repurchases of 2% of the outstanding fully diluted shares at 15.3 times the
following year's estimated earnings.
SELECTED TRANSACTION ANALYSIS
Goldman Sachs reviewed certain information relating to 14 selected bank
mergers in California announced since January 1993 and prior to July 3, 1997 in
which the aggregate consideration paid was in excess of $75 million (the
"California Selected Bank Mergers"). Goldman Sachs divided the California
Selected Bank Mergers according to the year in which each respective Merger was
announced. The California Selected Bank Mergers consist of: SC Bancorp/Western
Bancorp, 1st Business Corp./Mellon Bank and CU Bancorp/Pacific Century Financial
in 1997; Eldorado Bancorp/Dartmouth Capital, ValliCorp Holdings/Westamerica
Bancorp, Far East National Bank/Bank SinoPac, California Bancshares/US Bancorp
and First Interstate/Wells Fargo in 1996; First Los Angeles Bank/City National
Corp., BanCal Tri-State/Union Bank, and Metrobank/Comerica in 1995; Levy
Bancorp/First Interstate in 1994; and Pacific Western/Comerica and San Diego
Financial/First Interstate in 1993. Such analysis indicated that the median
multiples of consideration paid to book value, tangible book value and to the
latest 12 month earnings per share for the 1997, 1996 and 1995 California
Selected Bank Mergers were 2.1, 2.2 and 1.4 times, 2.2, 2.5 and 1.4 times and
22.4, 17.6 and 9.8 times, respectively, compared to a multiple of price to book
value of GB of 3.5 times, a multiple of price to tangible book value of GB of
4.2 times and a multiple of price to GB's earnings per share for the 12-month
period ended March 31, 1997 of 20.4 times.
40
<PAGE>
SELECTED COMPANY ANALYSIS--ZIONS
Based on publicly available information and IBES earnings estimates, Goldman
Sachs reviewed and compared actual and estimated selected financial, operating
and stock market information and financial ratios of Zions, a group of 7
additional Western and Midwestern large-capitalization banking organizations
consisting of BankAmerica Corporation, Banc One Corporation, Wells Fargo & Co.,
U.S. Bancorp, First Chicago NBD, Washington Mutual and KeyCorp (the "Zions
Selected Large Cap Banks"), and a group of 5 additional western
small-capitalization banking organizations consisting of UnionBanCal, First
Security, Pacific Century Financial, First Hawaiian and Westamerica (the "Zions
Selected Small Cap Banks"). IBES is a data service that monitors and publishes
compilations of earnings estimates by selected research analysts regarding
companies of interest to institutional investors. Such information and ratios
included, among other things, equity market capitalization, price-earnings
ratios, price to book value ratios, price to tangible book value ratios,
dividend yields and certain profitability data.
Goldman Sachs noted for the GB Board that, among other things: (i) Zions had
a ratio of market price to 1997 and 1998 IBES estimated earnings of 19.0 and
17.6, respectively, as compared with a median ratio of market price to 1997 and
1998 IBES estimated earnings of 16.0 and 13.4 for the Zions Selected Large Cap
Banks and 13.4 and 12.3 for the Zions Selected Small Cap Banks; (ii) Zions had a
ratio of market price to book value, as of March 31, 1997, of 4.1, as compared
with a median ratio of market price to book value for Zions Selected Large Cap
Banks and Zions Selected Small Cap Banks, as of March 31, 1997, of 2.7 and 1.8,
respectively; and (iii) Zions had a ratio of market price to tangible book
value, as of March 31, 1997, of 4.5, as compared with a median ratio of market
price to tangible book value for the Zions Selected Large Cap Banks and Zions
Selected Small Cap Banks, as of March 31, 1997, of 3.6 and 1.9, respectively.
OTHER ANALYSES
Goldman Sachs also reviewed, among other things, selected investment
research reports on, and earnings estimates for, Zions Common Stock. Goldman
Sachs examined the implied premiums to market price and to core deposits.
Goldman Sachs prepared a summary of the historical financial and market
performance of Zions, summarized Zions management estimates of financial
performance in 1997 and, based on publicly available information, analyzed
Zions' deposit market share and branch presence in the region in which it
operates.
The summary set forth above describes the material analyses that Goldman
Sachs performed and presented to the GB Board on July 3, 1997, and does not
purport to be a complete description of such analyses. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or a summary description.
Goldman Sachs believes that its analyses must be considered as a whole and
that selecting portions of its analyses without considering all factors and
analyses would create an incomplete view of the analyses and processes
underlying its opinion. In its analyses, Goldman Sachs relied upon numerous
assumptions made by GB and Zions with respect to industry performance, general
business and economic conditions, and other matters, many of which are beyond
the control of GB or Zions. Analyses based upon forecasts of future results are
not necessarily indicative of actual values, which may be significantly more or
less favorable than suggested by such analyses. No company or transaction used
as a comparison in the analyses is identical to GB or Zions or to the Merger.
Additionally, estimates of the value of businesses do not purport to be
appraisals or necessarily reflective of the prices at which businesses actually
may be sold. Because such estimates are inherently subject to uncertainty, none
of the GB Board, Goldman Sachs, Zions or any other person assumes responsibility
for the accuracy of such estimates. Goldman Sachs analyses were prepared solely
for purposes of its opinions rendered July 3, 1997 and the date of this Proxy
Statement-Prospectus provided to the GB Board regarding the fairness of the
Conversion Number
41
<PAGE>
pursuant to the Merger to holders of GB Common Stock, and do not purport to be
appraisals or necessarily reflect the prices at which GB or its securities
actually may be sold.
For the services of Goldman Sachs as financial advisor to GB in connection
with the Merger, pursuant to an engagement letter dated June 13, 1997, GB has
agreed to pay Goldman Sachs a transaction fee of $400,000 in connection with a
sale of GB, whether such sale takes the form of a merger or a combination or any
other transaction(s) resulting in a change of control of GB. $200,000 of this
fee became payable upon the execution of the Merger Agreement. GB has also
agreed to pay Goldman Sachs its reasonable out-of-pocket expenses, including the
reasonable fees and disbursements of its counsel, and to indemnify Goldman Sachs
against certain liabilities, including certain liabilities arising under the
federal securities laws. Goldman Sachs has provided certain investment banking
and advisory services to GB from time to time, for which it has received, and
will receive, customary compensation, including acting as financial advisor for
GB in connection with the Merger Agreement. In addition, Goldman Sachs has
provided, and may provide in the future, certain investment banking services to
Zions, for which it has received, and will receive, customary compensation.
Goldman Sachs has advised GB that, in the ordinary course of its business as
a full-service securities firm, Goldman Sachs may, subject to certain
restrictions, actively trade the equity and/or debt securities of Zions for its
own account or for the accounts of its customers, and, accordingly, may at any
time hold a long or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Merger. The discussion may not apply in the special
circumstances of particular GB Shareholders, such as GB Shareholders that are
securities dealers, financial institutions, persons who hold GB Common Stock as
part of a straddle or hedging or conversion transaction or foreign persons.
Further, the following does not discuss any aspects of state, local or foreign
taxation. This discussion is based upon laws, regulations, rulings and decisions
now in effect and on proposed regulations, all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision. No ruling has been or will be requested from the Internal
Revenue Service on any tax matter relating to the Merger.
Prior to the date of the Proxy Statement Prospectus, Sullivan & Cromwell,
special counsel to Zions, has advised Zions and GB that in its opinion, for U.S.
federal income tax purposes:
(a) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and Zions and GB will each be a party to the
reorganization within the meaning of Section 368(b) of the Code;
(b) except with respect to cash received in lieu of fractional share
interests, holders of GB Common Stock will not recognize gain or loss for
federal income tax purposes as a result of the receipt of Zions Common Stock
in the Merger;
(c) the basis of Zions Common Stock received by GB Shareholders in the
Merger (including any fractional share for which cash is received) will
equal the basis of GB Common Stock for which it is exchanged; and
(d) the holding period of Zions Common Stock received by GB Shareholders
in the Merger (including any fractional share for which cash is received)
will include the holding period of GB Common Stock for which it is
exchanged, assuming that such GB Common Stock is a capital asset in the
hands of the holder thereof at the Effective Time.
Such opinion will be confirmed immediately prior to the Effective Time.
A GB Shareholder who receives cash in the Merger in lieu of a fractional
share interest in Zions Common Stock will be treated for federal income tax
purposes as having received the fractional share
42
<PAGE>
interest and then having received cash in redemption of such interest. Each GB
Shareholder who receives cash in lieu of a fractional interest will recognize
gain or loss as of the Effective Time equal to the difference between the amount
of cash received and the portion of such GB Shareholder's adjusted tax basis in
the shares of GB Common Stock allocable to such fractional share interest. Any
gain or loss generally will be capital gain or loss if such GB Shareholder holds
GB Common Stock as a capital asset at the Effective Time and will be long-term
capital gain or loss if the holding period (determined as described above) for
the fractional share interest deemed to be received and then redeemed is more
than one year. Under recently enacted legislation, an individual GB Shareholder
is generally subject to a maximum capital gains rate of 28% for GB Common Stock
held more than one year and a maximum capital gains rate of 20% for GB Common
Stock held in excess of 18 months.
GB Shareholders who exercise their Dissenters' Rights and who receive cash
in exchange for their respective shares will be treated as having received such
payment in redemption of such shares. In general, if such shares are held as a
capital asset at the Effective Time, the holder will recognize capital gain or
loss measured by the difference between the amount of cash received and the
holder's adjusted tax basis for the shares. If, however, the holder owns, either
actually or constructively, any GB Common Stock that is exchanged in the Merger
for Zions Common Stock, the payment for dissenting shares to such holder could,
in certain circumstances, be treated as dividend income. In general, under the
constructive ownership rules of the Code, a holder may be considered to own
stock that is owned, and in some cases constructively owned, by certain related
individuals or entities, as well as stock that the holder (or related
individuals or entities) has the right to acquire by exercising an option or
converting a convertible security. Each holder who contemplates exercising
Dissenters' Rights should consult such holder's own tax advisor as to the
possibility that any payment to such holder will be treated as dividend income.
Consummation of the Merger is conditioned, among other things, on
confirmation immediately prior to the Effective Time of the opinion of Sullivan
& Cromwell to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code; (ii) Zions and GB will each be
a party to that reorganization; (iii) except with respect to cash received in
lieu of fractional share interests, holders of GB Common Stock will not
recognize gain or loss for federal income tax purposes as a result of the
receipt of Zions Common Stock in the Merger; (iv) the basis of the Zions Common
Stock received by the GB Shareholders in the Merger will equal the basis of the
GB Common Stock for which it is exchanged; and (v) the holding period of the
Zions Common Stock received by the GB Shareholders in the Merger will include
the holding period of GB Common Stock for which it is exchanged, assuming that
such GB Common Stock is a capital asset in the hands of the holder thereof at
the Effective Time. An opinion of counsel is not binding on the Internal Revenue
Service, and there can be no assurance that the Internal Revenue Service will
not take a position contrary to one or more of the positions reflected herein or
that the positions herein will be upheld by the courts if challenged by the
Internal Revenue Service. The opinion of Sullivan & Cromwell summarized above is
or will be based, among other things, on representations contained in
certificates of Zions, GB and others and on certain assumptions.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH HOLDER OF GB COMMON STOCK AND OTHER FACTORS,
EACH SUCH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER (INCLUDING THE
APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS).
REGULATORY APPROVALS
FEDERAL RESERVE BOARD APPROVAL
The Merger is subject to prior approval by the Federal Reserve Board under
Section 3 of the BHCA, which requires that the Federal Reserve Board take into
consideration, among other things, competition,
43
<PAGE>
the financial and managerial resources and future prospects of the holding
companies and banks concerned and the convenience and needs of the communities
to be served. The BHCA prohibits the Federal Reserve Board from approving the
Merger if (a) it would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States; or (b) its effect in any section of
the country may be substantially to lessen competition or tend to create a
monopoly, or if it would in any other manner be in restraint of trade, unless
the Federal Reserve Board finds that the anti-competitive effects of the Merger
are clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served. The Federal Reserve Board has the authority to deny an application if it
concludes that the combined organization would have an inadequate capital
structure, taking into account, among other factors, the nature of the business
and operations and plans for expansion. Furthermore, the Federal Reserve Board
must also assess the records of the depository institution subsidiaries of Zions
and GB under the Community Reinvestment Act of 1977, as amended (the "CRA"). The
CRA requires that the Federal Reserve Board evaluate, when evaluating an
application, each depository institution's record of meeting the credit needs of
its local communities, including low- and moderate-income neighborhoods,
consistent with safe and sound operation and take such record into account when
evaluating certain regulatory applications.
Under the BHCA, the Merger may not be consummated until the thirtieth day
following the date of Federal Reserve Board approval unless such time period is
shortened with the concurrence of the United States Department of Justice. If
the United States Department of Justice were to commence an action challenging
the Merger on antitrust grounds during such period, commencement of such action
would stay the effectiveness of the Federal Reserve Board approval, unless a
court specifically orders otherwise.
Zions submitted a notice seeking approval of the Merger and related matters
to the Federal Reserve Board on August 15, 1997. Such approval was obtained on
September 30, 1997.
CALIFORNIA COMMISSIONER OF FINANCIAL INSTITUTIONS APPROVAL
Because Grossmont Bank is a state-chartered bank, Zions must obtain the
approval of the State Commissioner pursuant to Section 700 ET SEQ. of the
California Financial Code. Zions submitted an application seeking approval of
the Merger and related matters to the State Commissioner on August 15, 1997.
Such approval was obtained on September 30, 1997.
Zions and GB are not aware of any material governmental approvals or actions
that are required for consummation of the Merger, except as described above.
Should any such approval or action be required, it is currently contemplated
that such approval or action would be sought.
RESALE OF ZIONS COMMON STOCK
All shares of Zions Common Stock received by GB Shareholders in the Merger
will be freely transferrable, except that shares of Zions Common Stock received
by such shareholders who are deemed to be "affiliates" (as defined for purposes
of Rule 145 under the Securities Act) of GB as of the date of the Special
Meeting may be resold by them only pursuant to an effective registration
statement under the
44
<PAGE>
Securities Act covering resales of such shares or in transactions permitted by
the resale provisions of Rule 145 of the Securities Act (or pursuant to Rule 144
under the Securities Act in the case of such persons who become affiliates of
Zions) or as otherwise permitted under the Securities Act. Persons who may be
deemed to be affiliates of GB generally include individuals or entities that
control, are controlled by, or are under common control with, such entities and
may include certain officers and directors of such entities as well as principal
shareholders of such entities.
GB has agreed in the Merger Agreement to use its best efforts to obtain a
written agreement from each person who is identified as a possible "affiliate"
(as defined for purposes of Rule 145 under the Securities Act) of GB providing
that such person will not, sell, pledge, transfer or otherwise dispose of any
shares of Zions Common Stock to be received by such person in the Merger, except
in compliance with the applicable provisions of the Securities Act, and not to
take any action or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a pooling-of-interests for
accounting purposes. The Shareholder Agreements executed by the directors of GB
contain such provisions.
Commission guidelines indicate that the pooling-of-interests method
generally will not be challenged on the basis of selling of shares by affiliates
of the acquiring or the acquired company if such affiliates do not dispose of
any shares (other than a "DE MINIMIS" number of shares) of the stock they
received in connection with the Merger during the period beginning 30 days
before the Merger and ending when financial results covering at least 30 days of
post-merger operations of the combined enterprise have been published. See "The
Merger--Accounting Treatment."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL
In considering the recommendations of the GB Board, GB Shareholders should
be aware that Zions and certain members of the Boards of Directors and
managements of GB and Zions have certain interests in the transactions
contemplated by the Merger Agreement that are in addition to the interests of
shareholders generally and which may create potential conflicts of interest.
These interests include, among other things, the following: (i) in September
1995, GB was purchased from a trust for which a Mexican bank was the beneficial
owner by an investor group which included Zions and certain members of the
current managements of GB and Zions. This investor group included Robert G.
Sarver, Allan W. Severson and Christopher L. Skillern, who are, respectively,
the Chairman and Chief Executive officer, the President and the Secretary of GB.
The investor group also included Roy W. Simmons, Harris W. Simmons, L.E. Simmons
and David Simmons who are, respectively, the Chairman of the Board of Directors,
the President and Chief Executive Officer and a director, a director of Zions
and a director of GB; (ii) certain members of the Board of Directors and the
management of GB are members of the Board of Directors of Zions or are
affiliated with members of the Board of Directors and the management of Zions;
(iii) certain members of the Board of Directors and the management of GB are
direct or indirect beneficial owners of Zions Common Stock; (iv) certain members
of the Board of Directors and the management of Zions are direct or indirect
beneficial owners of GB Common Stock; (v) in connection with the Merger, options
to acquire an aggregate of 151,000 shares of GB Common Stock which are held by
directors and officers of GB and Grossmont Bank will be accelerated and become
exercisable at an average exercise price of $20.70 per share; (vi) in connection
with the Merger, Grossmont Bank will enter into employment agreements and
non-competition agreements with certain officers of GB and Grossmont Bank; and
(vii) Zions will indemnify the directors and officers of GB and Grossmont Bank
from certain liabilities and provide them with directors' and officers'
liability insurance. These interests are more fully described below or elsewhere
in this Proxy Statement-Prospectus.
INTERRELATED MANAGEMENTS AND STOCK OWNERSHIP
Robert G. Sarver is Chairman of the Board of GB and a director of Zions. Mr.
Sarver controls 343,000 shares or approximately 17% of the outstanding GB Common
Stock, and he owns options to purchase an additional 20,000 shares which will be
accelerated in connection with the Merger. Mr. Sarver also owns
45
<PAGE>
412,840 shares or less than 1% of the outstanding shares of Zions Common Stock.
David Simmons, a director of GB and Grossmont Bank, is the son of Roy W.
Simmons, the Chairman of the Board of Zions, the brother of Harris H. Simmons,
the President and Chief Executive Officer and a director of Zions, and the
brother of L.E. Simmons, a director of Zions. David Simmons also is the
President of SOLC, an investment company owned by members of the Simmons family,
which owns 198,000 shares or approximately 9.9% of the outstanding shares of
Common Stock of GB and 1,991,376 shares or 3.42% of the outstanding shares of
Common Stock of Zions. Also, Zions owns 98,000 shares or approximately 4.9% of
the outstanding shares of Common Stock of GB.
EMPLOYMENT AGREEMENTS
It is a condition to the obligation of Zions to consummate the Merger that
each of Allan W. Severson and Christopher L. Skillern enter into employment
agreements with Grossmont Bank (the "Employment Agreements") pursuant to which
Messrs. Severson and Skillern will be employed by Grossmont Bank as President
and Chief Executive Officer and as Executive Vice President and Chief Credit
Officer, respectively, of Grossmont Bank with the duties and responsibilities as
are specified in the By-Laws of Grossmont Bank, for a period of five years
commencing on the Effective Date (the "Period of Employment"). Grossmont Bank
will agree to pay Messrs. Severson and Skillern, at a minimum, a base annual
salary equal to the base annual salary paid to such employees as of June 1,
1997, payable in monthly installments during each fiscal year, or portion
thereof, in the Period of Employment. The respective Employment Agreements for
Messrs. Severson and Skillern also provide that if the employee is terminated by
Grossmont Bank prior to the end of the Period of Employment, other than for a
material breach of his Employment Agreement or for cause, or if the employee
terminates his employment prior to the end of the Period of Employment because
he is not elected or re-elected to or is removed from his officer position, he
is not vested with the power and authority of his officer position, or if he
loses significant duties and responsibilities, Grossmont Bank shall pay him an
amount equal to the sum of his annual base salary ($225,000 and $155,000,
respectively) and average bonus for the last three years ($55,000 and $37,667,
respectively), multiplied by the number of years remaining under the term of his
Employment Agreement. If either Mr. Severson or Mr. Skillern elects to terminate
his employment other than for the reasons indicated above, Grossmont Bank will
pay him $50,000 annually until the earlier of the second anniversary of the date
of termination or the end of the Period of Employment as consideration for his
agreement not to compete against Zions in San Diego County during this time
period. In addition, under the Employment Agreements, Messrs. Severson and
Skillern will be entitled to other employee benefits, including vacation and
sick leave, participation in Zions' value-sharing plan and incentive stock plan
and participation in Zions' benefit plans. In connection with such Employment
Agreements, Messrs. Severson and Skillern will be required to agree during the
Non-Competition Period (as defined herein) not to engage in the banking business
other than on behalf of Grossmont Bank or its affiliates within San Diego
County, (ii) directly or indirectly own, manage, operate, control, be employed
by, or provide management or consulting services in any capacity to any firm,
corporation, or other entity (other than Grossmont Bank or its affiliates)
engaged in the banking business in San Diego County, or (iii) directly or
indirectly solicit or otherwise intentionally cause any employee, officer, or
member of the respective Boards of Directors of Grossmont Bank or Zions or any
of their affiliates to engage in any action prohibited under (i) or (ii) above.
As used herein, the Non-Competition Period means the period of time from the
Effective Date until (i) the fifth anniversary of the Effective Date or (ii) in
the event that the Period of Employment is terminated, the earlier of the fifth
anniversary of the Effective Date or the second anniversary of the date of such
termination. See "The Merger Agreement--Conditions."
In addition, in connection with the Merger Agreement, it is anticipated that
Robert G. Sarver will enter into a non-competition agreement (the
"Non-Competition Agreement") with Grossmont Bank and Zions pursuant to which Mr.
Sarver will agree for a period of five years not to engage in the banking
business other than on behalf of Grossmont Bank or its affiliates within San
Diego County, (ii) directly or indirectly own, manage, operate, control, be
employed by, or provide management or consulting services in any capacity to any
firm, corporation, or other entity (other than Grossmont Bank or its affiliates)
engaged
46
<PAGE>
in the banking business in San Diego County, or (iii) directly or indirectly
solicit or otherwise intentionally cause any employee, officer, or member of the
respective Boards of Directors of Grossmont Bank or Zions or any of their
affiliates to engage in any action prohibited under (i) or (ii) above. During
the term of the Non-Competition Agreement, Mr. Sarver will be paid $24,000 per
year for each year that he serves as Chairman of the Board of Grossmont Bank.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
The Merger Agreement provides that from and after the Effective Time through
the third anniversary of the Effective Time, Zions will indemnify each director
and officer of GB and Grossmont Bank, determined as of the Effective Time,
against certain liabilities arising out of matters existing or occurring at or
prior to the Effective Time to the extent to which such indemnified parties were
entitled under California law, GB's Articles of Incorporation and GB's Bylaws in
effect on July 3, 1997. Zions will also advance expenses as incurred to the
extent permitted under California law, GB's Articles of Incorporation and GB's
Bylaws. In addition, for a period of three years after the Effective Time, Zions
has agreed to use its reasonable best efforts to maintain in effect the current
policies of directors' and officers' liability insurance maintained by GB,
provided that Zions is in no event obligated to spend in connection therewith
any amount per annum in excess of 125% of the amount of annual premiums paid by
GB for such insurance as of the date of the Merger Agreement.
DISSENTERS' RIGHTS
The rights of shareholders who dissent to the Merger are governed by
specific legal provisions contained in Chapter 13 (Sections 1300-1312) of the
CGCL, the text of which is attached as Appendix C hereto. The description of
dissenters' rights contained in this Proxy Statement-Prospectus is qualified in
its entirety by reference to those sections of the CGCL.
If the Merger is completed, certain GB Shareholders who have fully complied
with all applicable provisions of Chapter 13 of the CGCL may have the right to
require GB to purchase the shares of GB Common Stock held by them for cash at
the fair market value of those shares on the day before the terms of the Merger
were first announced, excluding any appreciation or depreciation because of the
Merger. Persons who are beneficial owners of shares of GB Common Stock but whose
shares are held by another person, such as a trustee, broker or nominee, should
instruct the record holder to follow the procedures outlined below if such
persons wish to dissent with respect to any or all of their shares. Under the
CGCL, no GB Shareholder who is entitled to exercise Dissenters' Rights has any
right at law or in equity to attack the validity of the Merger or to have the
Merger set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the Merger has been legally voted in
favor of the Merger.
Shares of GB Common Stock must be purchased by GB upon demand from a
dissenting shareholder if such shareholder has complied with all applicable
requirements. For a GB Shareholder to exercise the right to have GB purchase his
or her shares of GB Common Stock, the procedures to be followed under Chapter 13
of the CGCL include the following requirements:
(a) The GB Shareholder of record must not vote the shares in favor of
the Merger. The GB Shareholder may vote part of his or her shares for the
Merger without losing the right to have purchased those shares which were
voted against the Merger or as to which the GB Shareholder has abstained
from voting.
(b) Any such GB Shareholder who voted against the Merger or abstained
from voting, and who wishes to have purchased his or her shares which were
voted against the Merger or shares which were abstained from voting, must
make a written demand to have GB purchase those shares for cash at their
fair market value. The demand must include the information specified below
under "--Demand for Purchase" and must be received by GB not later than 30
days after the date the Approval Notice (as defined below) is mailed to such
shareholder.
47
<PAGE>
Within ten days after the approval of the Merger by GB Shareholders, the
holders of shares of GB Common Stock who voted against the Merger or abstained
from voting must be notified by GB of the approval (the "Approval Notice") and
GB must offer all of these shareholders a cash price for their shares which GB
considers to be the fair market value of the shares on the day before the terms
of the Merger were first announced, excluding any appreciation or depreciation
because of the proposed Merger. The statement of price will constitute an offer
by GB to purchase at the price stated any dissenting shares, unless they lose
their status as dissenting shares. The Approval Notice also must contain a brief
description of the procedures to be followed under Chapter 13 of the CGCL in
order for GB Shareholder to exercise the right to have GB purchase his or her
shares and attach a copy of the relevant provisions of the CGCL.
DEMAND FOR PURCHASE
Merely voting or delivering a proxy directing a vote against the approval of
the Merger, or failing to deliver a proxy or vote as to approval of the Merger,
does not constitute a demand for purchase. A written demand is essential. A
shareholder's written demand must be delivered to GB within 30 days after the
date on which the Approval Notice was mailed to the GB Shareholder.
In all cases, the written demand that the dissenting shareholder must
deliver to GB must:
(a) be made by the person who was the GB Shareholder of record on the
Record Date set for voting on the Merger (or his or her duly authorized
representative) and not by someone who is merely a beneficial owner of the
shares and not by a GB Shareholder who acquired the shares subsequent to the
Record Date;
(b) state the number of dissenting shares; and
(c) include a demand that GB purchase the shares at what the GB
Shareholder claims to be the fair market value of such shares on the day
before the terms of the Merger were first announced, excluding any
appreciation or depreciation because of the proposed Merger. Because the
parties announced the proposed Merger on July 7, 1997, it is GB's position
that this day is July 6, 1997. GB Shareholder's statement of fair market
value constitutes an offer by such dissenting shareholder to sell the shares
of GB Common Stock to GB at the price for GB Common Stock specified in such
statement.
In addition, it is recommended that the following be complied with to ensure
that the demand is properly executed and delivered:
(a) The demand should be sent by registered or certified mail, return
receipt requested.
(b) The demand should be signed by the GB Shareholder of record (or his
or her duly authorized representative) exactly as his or her name appears on
the stock certificates evidencing the shares.
(c) A demand for the purchase of dissenting shares owned jointly by more
than one person should identify and be signed by all such holders.
(d) Any person signing a demand for purchase in any representative
capacity (such as attorney-in-fact, executor, administrator, trustee or
guardian) should indicate his or her title and, if GB so requests, furnish
written proof of his or her capacity and authority to sign the demand.
A GB Shareholder may not withdraw a demand for payment without the consent
of GB. Under the terms of the CGCL, a demand by a shareholder is not effective
for any purpose unless it is received by GB within 30 days after the date the
Approval Notice is mailed to such shareholder.
48
<PAGE>
OTHER REQUIREMENTS
Within 30 days after the date on which the Approval Notice is mailed by GB
to GB Shareholders, the shareholder's certificates representing any shares of GB
Common Stock which the GB Shareholder demands be purchased must be submitted to
GB at its principal office, or at the office of any transfer agent thereof, to
be stamped with a statement that the shares are dissenting shares. Upon
subsequent transfer of these shares, the new certificates will be similarly
stamped and marked with the name of the original dissenting shareholder.
If GB and a dissenting GB Shareholder agree that the shares held by such GB
Shareholder are eligible for Dissenters' Rights and agree upon the price of such
shares, the dissenting GB Shareholder is entitled to receive from GB the agreed
price with interest thereon at the legal rate on judgments from the date of such
agreement. Any agreement fixing the fair market value of dissenting shares as
between GB and the holders thereof must be filed with the Secretary of GB at the
address set forth below. Subject to certain provisions of Section 1306 and
Chapter 5 of the CGCL, payment of the fair market value of the dissenting shares
shall be made within 30 days after the amount thereof has been agreed upon or
within 30 days after the statutory or contractual conditions to the Merger are
satisfied, whichever is later. Cash dividends, if any, declared and paid by GB
upon the dissenting shares after the date of approval of the principal terms of
the Merger by GB Shareholders and prior to payment for the shares shall be
credited against the total amount to be paid to GB Shareholders exercising
Dissenters' Rights.
If GB and a dissenting GB Shareholder fail to agree on either the fair
market value of the shares or on the eligibility of the shares to be purchased,
then the GB shareholder, GB or Zions may file a complaint for judicial
resolution of the dispute in the superior court of the proper county. The
complaint must be filed within six months after the date on which the Approval
Notice is mailed to the GB Shareholder. If a complaint is not filed within six
months, the shares will lose their status as dissenting shares. Two or more
dissenting GB Shareholders may join as plaintiffs or be joined as defendants in
such an action. If the eligibility of the shares is at issue, the court will
first decide this issue. If the fair market value of the shares is in dispute,
the court will determine, or shall appoint one or more impartial appraisers to
assist in the determination of, the fair market value. The costs of the action
will be assessed or apportioned as the court considers equitable, but if the
appraisal exceeds the price offered to the GB Shareholder, GB will be required
to pay such costs, including, in the discretion of the court, attorneys' fees,
expert witnesses' fees and interest if the value awarded by the court for the
shares is more than 125% of the price offered by GB to the GB Shareholder.
Any demands, notices, certificates or other documents required to be
delivered to GB may be sent by mail or delivered in person to Peggy J.
Standefer, Assistant Secretary, GB Bancorporation, 4320 La Jolla Village Drive,
Suite 355, San Diego, California 92122.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, it is expected that the
Merger will be accounted for as a pooling-of-interests in accordance with
generally accepted accounting principles. Under this method of accounting, the
previously recorded assets and liabilities of Zions and GB would be carried
forward to the Surviving Corporation at their recorded amounts; income and
expenses of the Surviving Corporation would include income and expenses of Zions
and GB for the entire fiscal year in which the Merger occurs; and the reported
results of the separate corporations for prior periods would be combined and
restated as the results of the Surviving Corporation.
In the event that the requisite shareholder approval is not obtained for the
ratification of the Stock Option Proposal and the Merger Agreement is not
terminated, the Merger will be treated as a purchase transaction rather than a
pooling for accounting purposes, and the vote of GB Shareholders to approve the
principal terms of the Merger Agreement will be resolicited.
49
<PAGE>
THE MERGER AGREEMENT
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN OF THE TERMS AND CONDITIONS OF
THE MERGER AGREEMENT AND RELATED MATTERS. THIS SUMMARY OF THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT
AS SET FORTH IN APPENDIX A HERETO AND THE TEXT THEREOF IS INCORPORATED BY
REFERENCE HEREIN.
THE MERGER
The Merger Agreement was entered into by and between Zions and GB as of July
3, 1997, and was amended September 5, 1997. Pursuant to the Merger Agreement, at
the Effective Time, GB will merge with and into Zions, and Zions will be the
surviving corporation in the Merger. The separate corporate existence of GB will
then cease.
CONVERSION OF GB COMMON STOCK
Under the terms of the Merger Agreement, each share of GB Common Stock
issued and outstanding at the Effective Time (other than shares which have not
been voted in favor of the principal terms of the Merger Agreement and with
respect to which Dissenters' Rights shall have been perfected in accordance with
the CGCL) will be converted into the right to receive 2.2748 shares of Zions
Common Stock. At the Effective Time, each option or right to purchase shares of
GB Common Stock outstanding immediately prior to the Effective Time shall be
canceled.
EFFECTIVE TIME
The Merger will become effective upon the filing of articles of merger and
related documents with the Utah Division of Corporation and Commercial Code or
on such later date as may be specified in such articles. At the Effective Time,
GB shall be merged with and into Zions. GB's separate corporate existence will
thereupon cease.
EXCHANGE OF STOCK CERTIFICATES
As of the Effective Time, Zions will deposit, or will cause to be deposited,
with a bank or trust company selected by Zions (which may be a subsidiary of
Zions) (the "Exchange Agent"), certificates representing the shares of Zions
Common Stock and cash in lieu of fractional shares to be exchanged and unpaid
dividends and distributions, if any, pursuant to the Merger Agreement for GB
Common Stock (the "Merger Consideration").
As soon as reasonably practicable after the Effective Time, but in no event
later than three business days thereafter, the Exchange Agent will mail to each
GB Shareholder who holds of record immediately prior to the Effective Time
shares of GB Common Stock (excluding any shares canceled pursuant to the Merger
Agreement or dissenting GB shares) a letter of transmittal (the "Letter of
Transmittal"), and instructions for use in effecting the surrender of the
certificates representing shares of GB Common Stock (a "Certificate") in
exchange for the Merger Consideration.
Upon surrender of a Certificate or Certificates to the Exchange Agent,
together with a duly executed Letter of Transmittal, the holder of such
Certificate(s) will be entitled to receive in exchange therefor a certificate (a
"Zions Certificate") representing that number of shares of Zions Common Stock
into which the shares represented by the Certificate(s) surrendered have been
converted pursuant to the Merger Agreement and a check representing the amount
of cash in lieu of any fractional shares and unpaid dividends and distributions,
if any, which such holder has the right to receive in respect of the Certificate
surrendered pursuant to the Merger Agreement. After the Effective Date and until
surrendered, each Certificate will be deemed to represent only the right to
receive the Merger Consideration.
50
<PAGE>
No dividends or other distributions declared after the Effective Time on
Zions Common Stock will be paid with respect to any shares of GB Common Stock
represented by a Certificate until such Certificate is surrendered. Following
surrender of any such Certificate, there will be paid to the holder of the Zions
Certificates issued in exchange therefor, without interest, the amount of
dividends or other distributions with a record date after the Effective Time
payable with respect to whole shares of Zions Common Stock and not paid prior to
the surrender date, less the amount of any withholding taxes which may be
required, and, at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but before surrender
and a payment date after surrender payable with respect to whole shares of Zions
Common Stock, less the amount of any withholding taxes which may be required.
CONDUCT OF THE BUSINESS OF GB PRIOR TO THE MERGER
Pursuant to the Merger Agreement, GB has agreed that, during the period from
the date of the Merger Agreement until the Effective Time, except as permitted
by the Merger Agreement, it and each of its subsidiaries will, among other
things, (a) conduct its business in the usual, regular and ordinary course of
business consistent with past practice, (b) use its reasonable best efforts to
maintain and preserve intact its business organization, properties, leases,
employees and advantageous business relationships and retain the services of its
officers and key employees, (c) take no action which would adversely affect or
delay the ability of GB or Zions to obtain any necessary approvals, consents or
waivers of any governmental authority required for the transactions contemplated
in the Merger Agreement or to perform its covenants and agreements on a timely
basis under the Merger Agreement, and (d) take no action that is reasonably
likely to have a Material Adverse Effect (as defined in the Merger Agreement) on
GB or Grossmont Bank.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties from
GB and Zions relating to, among other things, (a) corporate organization and
similar corporate matters; (b) capital structure; (c) subsidiary ownership; (d)
financial statements; (e) compliance with respect to filing requirements of
certain regulatory agencies; (f) authorization, execution, delivery, performance
and enforceability of the Merger Agreement and related matters; (g) insurance
policies; (h) title to assets; (i) absence of material litigation; (j) filing of
tax returns and payment of taxes; (k) compliance with applicable laws; (l)
absence of regulatory action; (m) performance of obligations under certain
contracts, leases, indentures and other agreements; (n) certain contracts
relating to certain employment, consulting and benefit matters; (o) brokers and
finders fees; (p) absence of material changes or events since March 31, 1997;
(q) compliance with environmental laws; (r) retirement and other employee plans
and matters relating to the Employee Retirement Income Security Act of 1974, as
amended; (s) insider loans; (t) compliance with the CRA; and (u) certain bank
regulatory matters.
CERTAIN COVENANTS
FORBEARANCE BY GB
GB has covenanted and agreed that, during the period from the date of the
Merger Agreement to the Effective Time and subject to certain exceptions, GB and
Grossmont Bank will not, without the prior written consent of Zions, (a) incur
any indebtedness for borrowed money other than in the ordinary course of
business; (b) adjust, split, combine or reclassify any capital stock; (c) make,
declare or pay any dividend or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; (d) grant any stock appreciation rights or grant
any individual, corporation or other entity any right to acquire any shares of
its capital stock; (e) issue any additional shares of capital stock except as
required pursuant to stock options outstanding as of the date of the Merger
Agreement; (f) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties, leases or assets except in the ordinary course of business
consistent with past practice and except pursuant to contracts or agreements in
force on
51
<PAGE>
the date of the Merger Agreement; (g) make any capital expenditures, other than
(i) capital expenditures made in the ordinary course of business consistent with
past practice in amounts not exceeding $250,000, individually or in the
aggregate, and (ii) capital expenditures in connection with certain branch
acquisitions and openings; (h) except pursuant to commitments existing on the
date of the Merger Agreement, increase in any manner the compensation or fringe
benefits of any of its employees or directors, or create or institute, or make
any payments pursuant to, any severance plan or package, or pay any pension or
retirement allowance not required by any existing plan or agreement to any such
employees or directors, or become a party to, amend or commit itself to fund or
otherwise establish any trust or account related to any employee benefit plan,
with or for the benefit of any employee, other than general increases in the
aggregate compensation paid to all employees of GB in the ordinary course of
business consistent with past practice not in excess of 4.5% in any 12-month
period or any amendment required by applicable law, or voluntarily accelerate
the vesting of any stock options or other compensation or benefit; (i) other
than in the ordinary course of business consistent with past practice, make any
investment either by contributions to capital, property transfers, or purchase
of any property or assets of any person, provided that GB may make no
acquisition of business operations without Zions' prior consent and provided,
further that this restriction does not apply to any investment related to bids
to acquire additional branches which are outstanding as of the date of the
Merger Agreement and which have been disclosed to Zions; (j) other than with
respect to loans or contracts for deposits made in the ordinary course of
business consistent with past practice, enter into or terminate any contract or
agreement, or make any change in any of its leases or contracts, other than with
respect to those involving aggregate payments of less than, or the provision of
goods or services with a market value of less than, $25,000; (k) settle any
claim, action or proceeding involving any liability of GB or any of its
subsidiaries for money damages in excess of $50,000 or material restrictions
upon the operations of GB or any of its subsidiaries; (l) except in the ordinary
course of business and in amounts less than $250,000, waive or release any
material right or collateral or cancel or compromise any extension of credit or
other debt or claim; (m) make, renegotiate, renew, increase, extend or purchase
any loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit, or make any commitment in respect of any of the foregoing,
except (i) in the ordinary course of business consistent with past practice and
in conformity with all applicable GB policies and procedures and (ii) any loans
or advances as to which GB (or a subsidiary thereof) has a legally binding
obligation to make such loan or advance as of the date of the Merger Agreement;
(n) except as Zions may request, change its method of accounting as in effect at
December 31, 1996, except as required by changes in GAAP as concurred with by
GB's independent auditors; (o) engage in any merger, consolidation or other
similar transaction with, or acquire a significant portion of the capital stock
or assets of, any other corporate or other entity except in the ordinary course
of business or in connection with foreclosures and collection on secured
interests; (p) enter into any new activities or lines of business, or cease to
conduct any activities or lines of business that it conducts on the date hereof,
or conduct any business activity not consistent with past practice; (q) amend
its articles of incorporation or its by-laws; or (r) agree to, or make any
commitment to, take any of the actions described above.
SHAREHOLDER MEETINGS
GB has agreed to take all action necessary in accordance with applicable law
and the terms of its articles of incorporation and bylaws to convene a meeting
of GB Shareholders to consider and vote upon the principal terms of the Merger.
Except to the extent that to do so would constitute a violation of their
fiduciary duty, the GB Board will recommend that GB Shareholders approve the
principal terms of the Merger.
ACQUISITION PROPOSALS
GB has agreed that neither it, any of its subsidiaries nor any of their
respective officers or directors will, and that GB shall direct and use its
reasonable best efforts to cause its employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it
52
<PAGE>
or any of its subsidiaries) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to GB Shareholders) with respect to a
merger, consolidation or similar transaction involving, or any purchase of all
or any significant portion of the assets or any equity securities of, GB or any
of its subsidiaries (any such proposal or offer being hereinafter referred to as
an "Acquisition Proposal") or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to an Acquisition Proposal, or otherwise facilitate any effort
or attempt to make or implement an Acquisition Proposal. Notwithstanding the
foregoing, GB may enter into discussions or negotiations, or provide information
in connection with, a possible Acquisition Proposal if the GB Board reasonably
determines, following receipt of advice from GB's legal counsel, that such
discussions or negotiations must be commenced, or such information must be
furnished, in the exercise of its fiduciary duty.
INDEMNIFICATION OF DIRECTORS AND OFFICERS; INSURANCE
Zions has agreed that from the Effective Date through the third anniversary
of the Effective Date, Zions will indemnify and hold harmless each present and
former director and officer of GB or any subsidiary of GB determined as of the
Effective Time (the "Indemnified Parties"), against any costs or expenses,
including reasonable attorneys' fees, judgments, fines, losses, claims, damages
or liabilities, incurred in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal, administrative or investigative,
arising out of matters existing or occurring at or prior to the Effective Time
(including with respect to this Merger Agreement or any of the transactions
contemplated hereby), whether asserted, claimed or arising prior to, at or after
the Effective Time, to the extent to which such Indemnified Parties were
entitled under California law and GB's articles of incorporation or by-laws in
effect on the date hereof.
In addition, for a period of three years after the Effective Time, Zions
shall use its reasonable best efforts to cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained by
GB (provided that Zions may substitute therefor policies of comparable coverage
with respect to claims arising from facts or events which occurred before the
Effective Time); PROVIDED, HOWEVER, that in no event shall Zions be obligated to
expend in connection therewith any amount per annum in excess of 125% of the
amount of the annual premiums paid as of the date of the Merger Agreement by GB
for such insurance (the "Maximum Amount"). If the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, Zions shall use all reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for an annual premium
equal to the Maximum Amount. Notwithstanding the foregoing, prior to the
Effective Time, Zions may request GB to, and GB shall, purchase insurance
coverage, on such terms and conditions as shall be acceptable to Zions,
extending for a period of three years GB's directors' and officers' liability
insurance coverage in effect as of the date of the Merger Agreement (covering
past or future claims with respect to periods before the Effective Time).
CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS
Pursuant to the Merger Agreement, Zions and GB have made filings and
applications with the Federal Reserve Board and the State Commissioner in order
to obtain all approvals, consents and waivers of governmental agencies or
regulatory authorities necessary or appropriate for the consummation of the
transactions contemplated by the Merger Agreement. Furthermore, Zions and GB
have agreed to (a) cooperate with one another (i) in promptly determining what
filings are required to be made or approvals, consents or waivers are required
to be obtained under any relevant federal, state or foreign law or regulation,
(ii) in providing the other a reasonable opportunity to review and comment upon
drafts of such filings, and (iii) in promptly making any such filings,
furnishing information required in connection therewith and seeking in a timely
manner to obtain any such approvals, consents or waivers and (b) deliver
53
<PAGE>
to the other copies of publicly available portions of all such filings and
applications promptly after they are filed.
ACCESS TO INFORMATION
Upon reasonable notice, GB has agreed to afford to the other party and its
representatives access, during normal business hours throughout the period prior
to the Effective Time, to the books, records, properties, personnel and to such
other information Zions may reasonably request; PROVIDED, HOWEVER, that no
investigation pursuant to such access shall affect or be deemed to modify any
representation or warranty made in the Merger Agreement. Pursuant to a
confidentiality agreement between GB and Zions, dated June 10, 1997, Zions
agreed not to use any information obtained pursuant to access for any purpose
unrelated to the consummation of the transactions contemplated by the Merger
Agreement.
SECURITIES ACT
GB has agreed to identify to Zions, as soon as practicable after the date of
the GB Special Meeting, all persons who GB believes to be "affiliates" (as that
term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act) of
GB (the "Affiliates"). GB has agreed to use its best efforts to obtain from each
Affiliate a written agreement providing that each such person will agree not to
sell, pledge, transfer or otherwise dispose of the shares of Zions Common Stock
to be received by such person in the Merger except in compliance with the
applicable provisions of the Securities Act and not to take any action or cause
to be taken any action, whether before or after the Effective Time, which would
disqualify the Merger as a pooling-of-interests for accounting purposes. The
Shareholder Agreements executed by the directors of GB contain such provisions.
REORGANIZATION TREATMENT; POOLING
Zions and GB have agreed not to take or cause to be taken any action,
whether before or after the Effective Time, which would disqualify the Merger as
a "reorganization" within the meaning of Section 368 of the Code or as a
pooling-of-interests for accounting purposes.
CONDITIONS
The obligation of Zions and GB to effect the Merger is subject to the
satisfaction or waiver prior to the Effective Time of certain conditions,
including (a) the approval of GB Shareholders of the principal terms of the
Merger by no less than the requisite percentage of the outstanding voting stock
of each class of GB, in accordance with the CGCL; (b) the receipt by Zions and
GB of the approvals, consents or waivers with respect to the Merger Agreement
and the transactions contemplated thereby (i) by the State Commissioner pursuant
to California law and (ii) by the Federal Reserve Board, and all applicable
statutory waiting periods having expired; and the receipt by Zions and GB of all
other regulatory approvals, consents or waivers of governmental authorities or
other persons that, in the opinion of counsel for Zions, are necessary or
appropriate for the consummation of the transactions contemplated by the Merger
Agreement; PROVIDED, HOWEVER, that no such approval, consent or waiver will be
deemed to have been received if it includes any non-customary condition or
requirement that, individually or in the aggregate, (i) would result in a
Material Adverse Effect on Zions or any of its subsidiaries or (ii) would reduce
the economic and business benefits of the transactions contemplated by the
Merger Agreement to Zions in so significant and adverse a manner that Zions, in
its judgment, would not have entered into this Merger Agreement had such
condition or requirement been known at the date hereof; (c) the satisfaction of
all other requirements prescribed by law which are necessary to the consummation
of the Merger and any transactions necessary to consummate the Merger; (d)
neither Zions nor GB being subject to any order, decree or injunction of a court
or agency of competent jurisdiction which enjoins or prohibits the consummation
of the Merger or any transaction necessary to consummate the Merger, and no
litigation or proceeding shall be pending against Zions or GB or any of their
subsidiaries brought by any governmental
54
<PAGE>
agency seeking to prevent consummation of the Merger or any transaction
necessary to consummate the Merger; (e) no statute, rule, regulation, order,
injunction or decree shall having been enacted, entered, promulgated,
interpreted, applied or enforced by any governmental authority which prohibits,
restricts or makes illegal consummation of the Merger or any other transaction
contemplated by the Merger Agreement; (f) the Registration Statement having
become effective and no stop order suspending the effectiveness of the
Registration Statement having been issued and no proceedings for that purpose
having been initiated or threatened by the Commission; (g) the receipt by Zions
and GB of the opinion of Sullivan & Cromwell, no later than 30 days from the
date of the Merger Agreement, and confirmed immediately prior to the Effective
Time, substantially to the effect that for federal income tax purposes (i) the
Merger will be a reorganization within the meaning of Section 368(a) of the
Code; (ii) Zions and GB will each be a party to that reorganization; (iii)
except with respect to cash received in lieu of fractional share interests,
holders of GB Common Stock will not recognize gain or loss for federal income
tax purposes as a result of the receipt of Zions Common Stock in the Merger;
(iv) the basis of the Zions Common Stock received by GB Shareholders in the
Merger will equal the basis of GB Common Stock for which it is exchanged; and
(v) the holding period of the Zions Common Stock received by GB Shareholders in
the Merger will include the holding period of GB Common Stock for which it is
exchanged, assuming that such GB Common Stock is a capital asset in the hands of
the holder thereof at the Effective Time; (h) each of Alan W. Severson and
Christopher L. Skillern having entered into an employment agreement with
Grossmont Bank; (i) the CRA rating of Grossmont Bank being no lower than
"satisfactory"; (j) Zions having received all state securities laws and "Blue
Sky" permits necessary to consummate the transactions contemplated by the Merger
Agreement; and (k) as of the Effective Time, the Zions Common Stock being
included for quotation on NASDAQ.
The obligation of Zions to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of certain additional
conditions, including (a) (i) Zions having received from GB's independent
certified public accountants a "cold comfort" letter or "specified procedures"
letter, dated (A) the effective date of the Registration Statement and (B)
shortly prior to the Effective Date, with respect to certain financial
information regarding GB, and (ii) GB having received from GB's independent
public accountants a letter confirming that activities of GB would not preclude
the Merger from being treated as a pooling-of-interests for accounting purposes;
(b) each of the representations and warranties of GB contained in the Merger
Agreement being true and correct on the date of the Merger Agreement and being
true and correct in all material respects at the Effective Time (or on the date
when made in the case of any representation or warranty which specifically
relates to an earlier date or period) unless failure of a representation or
warranty to be true would not individually or in the aggregate have a material
adverse effect; (c) GB having performed, or having caused to be performed, in
all material respects, each of its covenants and agreements contained in the
Merger Agreement required to be performed at or prior to the Effective Time; (d)
Zions having received the written resignation of each director (in such
director's capacity as director) of GB, effective as of the Effective Time; (e)
holders of no more than 10% of the outstanding shares of GB Common Stock having
given notice that their shares of GB Common Stock be treated as dissenting
shares; (f) Zions having received a conformed copy of a certificate of
satisfaction of the Franchise Tax Board of the State of California that all
taxes imposed by law on GB have been paid or secured, as filed with the
Secretary of State for the State of California pursuant to Section 1103 of the
CGCL; (g) all outstanding options, calls or commitments relating to shares of GB
capital stock or any outstanding securities, obligations or agreements
convertible into or exchangeable for, or giving any person any right (including,
without limitation, preemptive rights), to subscribe for or acquire from GB any
share of its capital stock having been exercised in full; (h) the non-existence
of any pending litigation, controversy, claim, action or proceeding against GB
or any of its subsidiaries before any court or governmental agency, which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on GB or Grossmont Bank or to hinder or delay consummation of the
transactions contemplated hereby and, to GB's knowledge after reasonable
inquiry, no such litigation, proceeding, controversy, claim or action having
been threatened or contemplated; and (i) receipt by Zions from
55
<PAGE>
Hogan & Hartson, counsel to GB, of an opinion, in form and substance reasonably
satisfactory to Zions, covering such matters as are customarily covered in
opinions delivered in similar transactions.
The obligation of GB to effect the Merger is also subject to the
satisfaction or waiver prior to the Effective Time of certain additional
conditions, including (a) GB having received from Zions' independent certified
public accountants a "cold comfort" letter or letters or "specified procedures"
letter or letters, dated (A) the effective date of the Registration Statement
and (B) shortly prior to the Effective Date, with respect to certain financial
information regarding Zions; (b) each of the representations, warranties and
covenants of Zions contained in the Merger Agreement being true and correct on
the date of the Merger Agreement and being true and correct in all material
respects on the Effective Date as if made on such date (or on the date when made
in the case of any representation or warranty which specifically relates to an
earlier date or period); (c) Zions having performed, or having caused to be
performed, in all material respects, each of its covenants and agreements
contained in the Merger Agreement required to be performed at or prior to the
Effective Time; and (d) the receipt by GB from Sullivan & Cromwell, counsel to
Zions, of an opinion, in form and substance reasonably satisfactory to GB,
covering such matters as are customarily covered in opinions delivered in
similar transactions.
WAIVER AND AMENDMENT
Prior to the Effective Time, any provision of the Merger Agreement may be
waived by the party benefitted by the provision or by both parties, or amended
or modified at any time (including the structure of the transaction) by an
agreement in writing between the parties and approved by the respective Boards
of Directors.
TERMINATION
TERMINATION
The Merger Agreement may be terminated, and the Merger abandoned, prior to
the Effective Time, either before or after its approval by the shareholders of
GB: (a) by the mutual consent of Zions and GB, if the board of directors of each
so determines by vote of a majority of the members of its entire board; (b) by
Zions or GB, by written notice to the other party, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event of (i) the failure of GB Shareholders to approve the principal terms of
the Merger Agreement at the Special Meeting or (ii) a material breach by the
other party to the Merger Agreement of any representation, warranty, covenant or
agreement contained herein which is not cured or not curable within 30 days
after written notice of such breach is given to the party committing such breach
by the other party; (c) by Zions or GB, by written notice to the other parties,
if either (i) any approval, consent or waiver of a governmental authority
required to permit consummation of the Merger or any transaction necessary to
consummate the Merger shall have been denied or (ii) any governmental authority
of competent jurisdiction shall have issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the Merger or any transaction
necessary to consummate the Merger; (d) by Zions or GB, by written notice to the
other party, if its board of directors so determines by vote of a majority of
the members of its entire board, in the event that the Merger is not consummated
by March 31, 1998, unless the failure to so consummate by such time is due to
the breach of any representation, warranty or covenant contained in the Merger
Agreement by the party seeking to terminate; (e) by Zions, by written notice to
GB, if GB takes, causes to be taken or allows to be taken any action in
connection with a merger of GB with a third party; or (f) by GB, by written
notice to Zions, prior to the approval by GB Shareholders of the principal terms
of the Merger Agreement, if GB receives an Acquisition Proposal on terms and
conditions which the GB Board determines, after receiving the advice of its
outside counsel, (i) that to proceed with the Merger will violate the fiduciary
duties of the GB Board to GB Shareholders and (ii) to accept such proposal.
56
<PAGE>
EFFECT OF TERMINATION
In the event of the termination of the Merger Agreement by either Zions or
GB, as provided above, the Merger Agreement shall thereafter become void. There
shall be no liability on the part of any party to the Merger Agreement or their
respective officers or directors, except that any such termination shall be
without prejudice to the rights of any party to the Merger Agreement arising out
of the willful breach by any other party of any covenant or willful
misrepresentation contained in the Merger Agreement.
TERMINATION FEE
In the event of a termination of the Agreement as a result of certain
Acquisition Proposals, GB has agreed to pay to Zions $3.0 million.
57
<PAGE>
THE SHAREHOLDER AGREEMENTS
Zions has entered into Shareholder Agreements with Messrs. Paul Baker,
Thomas Rogers, David Simmons, Robert McKee, Allan W. Severson and Robert G.
Sarver (the "Director Shareholders"), each a director of GB. The Director
Shareholders, holding in the aggregate shares representing approximately 46.6%
of the total voting power of GB Common Stock as of the Record Date, each agreed,
in consideration of the substantial expenses incurred by Zions in connection
with the Merger Agreement and as a condition to Zions entering into the Merger
Agreement, to vote or to cause to be voted, or execute a written consent with
respect to, all of such Director Shareholder's shares of GB Common Stock in
favor of adoption and approval of the Merger Agreement and the Merger at every
meeting of GB Shareholders at which such matters are considered and at every
adjournment thereof and in connection with every proposal to take action by
written consent with respect thereto.
Each Shareholder Agreement also provides that the Director Shareholder will
not, and will not permit any entity under its control to, deposit any of such
Director Shareholder's shares of GB Common Stock in a voting trust or subject
any such shares to any agreement, arrangement or understanding with respect to
the voting of such shares inconsistent with the Shareholder Agreement entered
into by that Director Shareholder. In addition, the Director Shareholders each
agreed not to sell, assign, pledge, encumber, transfer or otherwise dispose of
any of his shares of GB Common Stock during the term of the relevant Shareholder
Agreement except in connection with the exercise of rights.
The Director Shareholders also agreed in the Shareholder Agreements executed
by them that at any time following the Effective Time, they and any entity
controlled by them will not (a) disclose confidential information regarding GB
or Grossmont Bank to any third parties, except as required by law, regulation, a
court order, in the defense of litigation for which GB or Grossmont Bank may be
liable, or in any actions relating to the Shareholder Agreements or the Merger
Agreement and the transactions contemplated thereby; or (b) solicit, directly or
indirectly, on its own behalf or on behalf of any other person or entity,
management personnel employed by Zions or any of its subsidiaries immediately
after the Effective Time for employment with any other business.
Each of the Director Shareholders also agreed in the Shareholder Agreements
not to sell, transfer or otherwise dispose of Zions Common Stock issued to such
Director Shareholder in the Merger unless (i) such sale, transfer or other
disposition has been registered under the Securities Act; (ii) such sale,
transfer or other disposition is made in conformity with Rule 145 promulgated by
the Commission under the Securities Act; or (iii) in the opinion of counsel
reasonably acceptable to Zions, or a "no action" letter obtained by such
Director Shareholder from the staff of the Commission states that, such sale,
transfer or other disposition is otherwise exempt from registration under the
Securities Act.
The Shareholder Agreements will terminate upon the earlier to occur of the
Effective Time and the date on which the Merger Agreement is terminated in
accordance with its terms, except the obligations described in the immediately
preceding paragraph and those relating to confidentiality shall survive such
termination.
The Shareholder Agreements bind the actions of the signatories thereto only
in their capacity as GB Shareholders. Those directors of GB who signed
Shareholder Agreements are not and could not be contractually bound to abrogate
their fiduciary duties as directors of GB. Accordingly, while such
shareholders/directors are, under the Shareholder Agreements executed by them,
contractually bound to vote as a GB Shareholder in favor of the Merger, their
fiduciary duties as directors of GB nevertheless required them to act in their
capacity as directors in the best interest of GB when they decided to approve
the Merger. In addition, such shareholders/directors will continue to be bound
by their fiduciary duties as directors of GB with respect to any decisions they
may take in connection with the Merger or otherwise.
58
<PAGE>
COMPARISON OF ZIONS COMMON STOCK AND GB COMMON STOCK
DESCRIPTION OF ZIONS CAPITAL STOCK
The authorized capital stock of Zions as of the date hereof consists of
100,000,000 shares of Zions Common Stock, of which 60,025,863 shares were
outstanding as of June 30, 1997 and 3,000,000 shares of preferred stock, no par
value, none of which are outstanding. Shares of Zions Common Stock are not
subject to redemption, conversion or sinking fund provisions.
GENERAL
Upon consummation of the Merger, shareholders of GB will become shareholders
of Zions, a Utah corporation. Thus, the Utah Revised Business Corporation Act
and Zions' Articles of Incorporation ("Articles") and Bylaws will govern the
rights of GB Shareholders. Since the applicable state law, Articles and Bylaws
of Zions and GB are not the same, the Merger will result in certain differences
in the rights of the holders of GB Common Stock. The following is a summary of
certain of the more significant differences.
VOTING RIGHTS
GENERAL.
The holders of Zions Common Stock, like the holders of GB Common Stock
(except as stated below), are generally entitled to one vote for each share held
of record on all matters submitted to a shareholder vote. GB's Shareholders have
the right to cumulate votes and to give one candidate a number of votes equal to
the number of directors to be elected multiplied by the number of votes to which
his shares are entitled. Holders of Zion's Common Stock do not have cumulative
voting rights.
SPECIAL VOTES FOR CERTAIN TRANSACTIONS.
Zions' Articles contain provisions requiring super majority shareholder
votes to approve certain types of transactions. In the absence of these
provisions, either the transactions would require approval by a majority of the
shares voted at a meeting or no shareholder vote would be required.
Zions' Articles require that certain "business transactions" between Zions
or a subsidiary and a "related person" be approved by the affirmative votes of
the holders of not less than 80% of the voting power of all outstanding voting
stock of Zions. A "related person" is generally defined by Zions' Articles to
mean a person, corporation, partnership, or group acting in concert that
beneficially owns 10% of more of the voting power of Zions' outstanding voting
stock.
The "business transactions with a related person" subject to Zions' special
vote requirements include a merger or consolidation involving Zions or a
subsidiary of Zions with a related person; the sale, lease, exchange, transfer
or other disposition of all or any substantial part of the assets of either
Zions or a subsidiary of Zions to, with or for the benefit of a related person;
the issuance, sale, exchange or other disposition by Zions or a subsidiary of
Zions to a related person of securities of Zions or a subsidiary of Zions having
an aggregate fair market value of $5 million or more; any liquidation, spinoff,
splitoff, splitup, or dissolution of Zions by or on behalf of a related person;
any recapitalization or reclassification of the securities of Zions or other
transaction that would have the effect of increasing the voting power of a
related person or reducing the number of shares of each class of voting
securities outstanding; and any agreement, contract, or other arrangement
providing for any of the transactions set forth above.
Zions' special shareholder vote requirements for business transactions with
related persons do not apply to any transaction approved by a majority of the
"continuing directors" or if various specified conditions are met. A continuing
director is any member of the Zions Board who is not a related person or an
interested shareholder or an affiliate or associate of a related person and who
was a director on
59
<PAGE>
February 21, 1986 or became a director subsequent to that date and whose
election or nomination for election by Zions' shareholders was approved by a
majority of the continuing directors then on the Board.
GB's Articles and Bylaws have no similar provision.
SHAREHOLDER RIGHTS PLAN
The Zions Board in September 1996 adopted a Shareholder Protection Rights
Plan ("Shareholder Rights Plan") and declared a dividend of one Right (a
"Right") on each outstanding share of Zions Common Stock. The Shareholder Rights
Plan was not adopted in response to any specific effort to acquire control of
Zions. Rather, it was adopted to deter abusive takeover tactics that can be used
to deprive shareholders of the full value of their investment.
Until it is announced that a person or group has acquired 10% or more of
Zions Common Stock (an "Acquiring Person") or commences a tender offer that will
result in such person or group owning 10% or more of Zions Common Stock, the
Rights will be evidenced by the Common Stock certificates, will automatically
trade with the Common Stock and will not be exercisable. Thereafter, separate
Rights certificates will be distributed and each Right will entitle its holder
to purchase Participating Preferred Stock having economic and voting terms
similar to those of one share of Common Stock for an exercise price of $90.00.
Upon announcement that any person or group has become an Acquiring Person,
then 10 days thereafter (or such earlier or later date as the Zions Board may
decide) (the "Flip-in Date") each Right (other than Rights beneficially owned by
any Acquiring Person or transferees thereof, which Rights become void) will
entitle its holder to purchase, for the exercise price, a number of shares of
Zions Common Stock or Participating Preferred Stock having a market value of
twice the exercise price.
Also, if after an Acquiring Person controls Zions' Board of Directors Zions
is involved in a merger or sells more than 50% of its assets or earning power
(or has entered an agreement to do any of the foregoing) and, in the case of a
merger, the Acquiring Person will receive different treatment than all other
shareholders or the Person with whom the merger occurs is the Acquiring Person
or a person affiliated or associated with the Acquiring Person, each Right will
entitle its holder to purchase, for the exercise price, a number of shares of
common stock of the Acquiring Person having a market value of twice the exercise
price. If any person or group acquires between 10% and 50% of the Zions Common
Stock, Zions' Board of Directors may, at its option, exchange one share of Zions
Common Stock for each Right.
The Rights may be redeemed by the Board of Directors for $0.01 per Right
prior to the Flip-in Date.
GB has no comparable plan.
BOARD OF DIRECTORS
DIRECTOR LIABILITY.
Zions' Articles contain a "director liability" provision. This provision
generally shields a director from monetary damages to the corporation or its
shareholders for a breach of fiduciary duty as a director other than a breach of
a director's duty of loyalty, acts or omissions not taken in good faith or which
involve intentional misconduct or a knowing violation of law, authorizing the
unlawful payment of dividends, and transactions in which a director receives an
improper benefit.
GB is organized under the laws of California. Under the CGCL, a corporation
has the power to indemnify a director who was or is a party or is threatened to
be made a party to any proceeding (other than an action by or in the right of
the corporation to procure a judgment in its favor) against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with the proceeding if that person acted in good faith and in a
manner the person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to
60
<PAGE>
believe the conduct of the person was unlawful. The corporation may also
indemnify a director in an action by or in the right of the corporation to
procure a judgment in its favor against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith, and in a manner the person believed to
be in the best interests of the corporation and its shareholders, except that no
indemnification shall be made under this subdivision for any of the following:
(1) in respect of any claim, issue or matter as to which the person shall have
been adjudged to be liable to the corporation in the performance of that
person's duty to the corporation and its shareholders, unless and only to the
extent that the court in which the proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine; (2) of amounts paid in settling or
otherwise disposing of a pending action without court approval; (3) of expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval.
GB's Bylaws permit the corporation to indemnify each of its agents to the
maximum extent permitted by the CGCL.
CLASSIFIED BOARD.
Zions' Articles divide the Zions Board into three classes, each consisting
of one-third (or as near as may be) of the whole number of the Board of
Directors. Utah law requires that each class contain as equal a number of
directors as possible. One class of directors is elected at each annual meeting
of shareholders, and each class serves for a term of three years.
The number of directors which constitute Zions' full Board of Directors may
be increased or decreased only by amendment of the Bylaws, which requires the
affirmative vote of two-thirds of the total number of directors constituting the
entire Board, or by the shareholders of Zions at a regular or special meeting by
the affirmative vote of two-thirds of the outstanding and issued shares entitled
by statute to vote. Except as otherwise required by law, vacancies on the Zions
Board, including vacancies resulting from an increase in the size of the Board,
may be filled by the affirmative vote of a majority of the remaining directors
even though less than a quorum of the Zions Board. Zions' directors elected by
the Board to fill vacancies serve for the full remainder of the term of the
class to which they have been elected. Any directorship filled by reason of an
increase in the number of directors may be filled for a term of office
continuing only until the next election of directors by the shareholders.
GB's Articles and Bylaws do not provide for a classified Board of Directors.
Instead, GB's Bylaws provide for a Board of Directors consisting of not less
than five and no more than nine individuals who are to be elected annually. GB's
bylaw provisions governing vacancies are similar to Zions' except that no
express provisions detail procedures governing the expansion of the Board.
REMOVAL AND REPLACEMENT OF DIRECTORS.
Zion's Articles provide that any director (or the entire Board of Directors)
may be removed from office by shareholder vote only if such removal is approved
by the holders of two-thirds of the issued and outstanding shares then entitled
to vote at an election of directors. Zion's Bylaws provide that any vacancy
occurring in the board may be filled by the affirmative vote of a majority of
the remaining directors.
GB's Bylaws do not address expressly the removal of directors. Thus, removal
of GB's directors is governed by the CGCL, which provides that directors may be
removed in accordance with certain procedures. Vacancies may be filled by a
majority of the remaining directors except that vacancies created by the removal
of a director are filled by shareholder vote.
61
<PAGE>
SHAREHOLDER MEETINGS
Utah law provides that special meetings of a corporation's shareholders may
be called by the board of directors or such other persons authorized by the
bylaws to call a special meeting or by the holders of at least ten percent of
all the votes entitled to be cast on any issue proposed to be considered at the
special meeting. Under Zions' Bylaws, special meetings may be called by the
president or by the Board of Directors.
GB's Bylaws provide for a special meeting of shareholders to be called by
the chairman of the board, the president, or by one or more shareholders holding
not less than 10% of the votes entitled to be cast at a meeting.
AMENDMENT OF ARTICLES AND BYLAWS
Zions' Articles require the affirmative votes of the holders of two-thirds
of all outstanding voting stock of Zions to approve any amendment to Zions'
Articles, except that to repeal or amend the provisions in the article regarding
business transactions with related persons requires the affirmative vote of 80%
of the issued and outstanding stock entitled to vote. Zions' Bylaws may be
amended by an affirmative vote of two-thirds of the total number of directors
constituting the entire Board or by the affirmative vote of two-thirds of the
issued and outstanding shares entitled to vote.
Under the CGCL, GB's Articles may be amended by an affirmative majority vote
of all shareholder votes cast. GB's Bylaws provide that they may be amended or
repealed by the affirmative vote of a majority of the outstanding shares
entitled to vote, or by written consent of such shareholders, or, subject to the
right of shareholders, by the board of directors, provided that the amendment
does not change the authorized number of directors.
DISSENTERS' RIGHTS
Zions is incorporated under the laws of Utah. Utah law provides for
dissenters' rights in a variety of transactions including: any plan of merger to
which a corporation is a party (other than mergers or consolidations not
requiring a shareholder vote); certain sales, leases, exchanges or other
dispositions of all or substantially all of the assets of a corporation; and
certain share exchanges. However, shareholders of a Utah business corporation
are not entitled to dissenters' rights in any of the transactions mentioned
above if their stock is either listed on a national securities exchange or on
NASDAQ or held of record by 2,000 or more shareholders. The aforementioned
provisions do not apply if the shareholder will receive for his shares anything
except shares of the corporation surviving the consummation of the plan of
merger or share exchange, shares of a corporation whose shares are listed on a
national securities exchange or NASDAQ or held of record by not less than 2,000
holders, or cash in lieu of fractional shares. Zions Common Stock currently is
listed for trading on NASDAQ and has more than 2,000 shareholders of record.
GB is incorporated under the law of California. Under California law,
dissenters' rights are generally eliminated for shares having a highly liquid
public market including shares listed on a securities exchange. However,
dissenters' rights exist with respect to mergers, consolidations or
reorganizations if dissenters' shares are subject to certain restrictions upon
transfer, if the applicable corporation is not a public corporation or if a
substantial proportion (5%) of the holders of a particular class of shares
demand appraisal rights.
GB Common Stock is not listed on any securities exchange. For a description
of dissenters rights applicable to this transaction under the CGCL, see "The
Merger--Dissenters' Rights."
PREFERRED STOCK
Zions' Articles authorize Zions to issue up to 3,000,000 shares of Zions
preferred stock, no par value.
62
<PAGE>
The authorized shares of preferred stock are issuable in one or more series
on the terms set by the resolution or resolutions of the Zions Board providing
for the issuance thereof. Each series of preferred stock would have such
dividend rate, which might or might not be cumulative, such voting rights, which
might be general or special, and such liquidation preferences, redemption and
sinking funds provisions, conversion rights or other rights and preferences, if
any, as the Zions Board may determine. Except for such rights as may be granted
to the holders of any series of preferred stock in the resolution establishing
such series or as required by law, all of the voting and other rights of the
shareholders of Zions belong exclusively to the holders of Zions Common Stock.
Zions has reserved 160,000 shares of Participating Preferred Stock for
issuance upon exercise of the Rights under Zions' Shareholder Rights Plan.
GB's Articles authorize the issuance of 10,000,000 shares of preferred
stock, without par value.
DIVIDEND RIGHTS
Utah law generally allows a corporation, subject to restrictions in its
certificate of incorporation, to declare and pay dividends in cash or property,
but only if the corporation is solvent and payment would not render the
corporation insolvent. Zions' Articles place no further restrictions on
distributions. Thus, the holders of Zions Common Stock are entitled to dividends
when, as and if declared by the Zions Board out of funds legally available
therefor. However, if Zions preferred stock is issued, the Zions Board may grant
preferential dividend rights to the holders of such stock which would prohibit
payment of dividends on Zions Common Stock unless and until specified dividends
on the preferred stock had been paid.
Under the CGCL, a corporation may make a distribution to its shareholders if
either of two tests is met. First, a corporation may make a distribution out of
its retained earnings. Second, if there are no retained earnings, a corporation
may make a distribution provided that after giving effect to the distribution
the assets of the corporation (exclusive of certain intangibles) are at least
equal to one and a quarter times its liabilities (excluding certain deferred
items) and its current assets are at least equal to its current liabilities.
With regard to the liquidity portion of this test, if the average of the
earnings of the corporation before taxes on income and before interest expense
for the two proceeding fiscal years is not at least equal to the average of the
interest expense of the corporation for such years, the current assets must be
at least one and a quarter times the current liabilities. However, this
liquidity test is inapplicable to any corporation not classifying its assets
into current and fixed under generally accepted accounting principles.
Under California law, neither a corporation nor any of its subsidiaries may
make any distribution to the corporation's shareholders if the corporation or
the subsidiary making the distribution is, or as a result thereof would be,
likely to be unable to meet its liabilities as they mature.
LIQUIDATION RIGHTS
Upon liquidation, dissolution or winding up of Zions, whether voluntary or
involuntary, the holders of Zions Common Stock are entitled to share ratably in
the assets of the corporation available for distribution after all liabilities
of the corporation have been satisfied. However if preferred stock is issued by
Zions, the Board of Directors may grant preferential liquidation rights to the
holders of such stock which would entitle them to be paid out of the assets of
Zions available for distribution before any distribution is made to the holders
of Zions Common Stock.
The rights of the holders of GB Common Stock in the event of a liquidation
are substantially similar to those applicable to Zions' shareholders. Under the
CGCL, upon dissolution or liquidation by the court, after all known liabilities
and obligations of the corporation have been satisfied, any remaining assets or
proceeds would be distributed among its shareholders according to their
respective rights and preferences.
63
<PAGE>
INSPECTION RIGHTS
GB's Bylaws permit inspection of accounting books and records, the record of
shareholders, and minutes of proceedings of the corporation's various meetings
upon written demand by a shareholder or holder of a voting trust certificate,
provided that this shareholder holds at least 5% in the aggregate of the
outstanding voting shares of the corporation, or 1% of such voting shares and
has filed a Schedule 14B with the Commission.
Zions' Articles and Bylaws contain no similar provision.
64
<PAGE>
ACCELERATION OF STOCK OPTIONS
GENERAL
As of July 31, 1997, there were outstanding options to purchase 151,000
shares of GB Common Stock at an average exercise price of $20.70 per share.
Messrs. Sarver, Severson and Skillern held options to acquire 20,000, 45,000 and
30,000 shares of GB Common Stock, respectively, and options to acquire 56,000
shares of GB Common Stock were held by other officers and employees. Under the
terms of the Stock Option Plan, outstanding options generally become exercisable
to the extent of one-seventh of the shares covered by the option at the time of
grant and an additional one-seventh of such shares on each of the six
anniversaries of the date of grant. As a result of the transactions contemplated
by the Merger Agreement, however, each outstanding option will become fully
exercisable 30 days before the Effective Time of the Merger in accordance with
the terms of the Stock Option Plan. Each share of GB Common Stock issued prior
to the Effective Time upon the exercise of outstanding options will be converted
automatically at the Effective Time (subject to Dissenters' Rights) into 2.2748
shares of Zions Common Stock. It is a condition to the Merger that all
outstanding options be exercised prior to the Effective Time of the Merger.
The options held by Messers. Sarver, Severson and Skillern and other
officers and employees of GB were issued under the Stock Option Plan adopted by
the GB Board in December 1995. The Stock Option Plan was approved by the GB
Shareholders in March 1996. Under the Stock Option Plan, a committee appointed
by the GB Board (the "Committee") has discretion to grant options to eligible
individuals and to interpret and administer the Stock Option Plan. The specific
terms of each option granted pursuant to the Stock Option Plan are set out in an
option agreement that has been approved by the Committee.
As of July 31, 1997, outstanding options were exercisable as to 41,000
shares of GB Common Stock. Outstanding options for an additional 110,000 shares
of GB Common Stock will accelerate and become exercisable 30 days before the
Effective Time of the Merger. In the case of Messrs. Sarver, Severson and
Skillern, outstanding options were exercisable as to 5,714, 12,857 and 8,571
shares of GB Common Stock, respectively, as of July 31, 1997, and options for an
additional 14,286, 32,143, and 21,429 shares of GB Common Stock, respectively,
will accelerate and become exercisable under the Stock Option Plan during such
30-day period.
Notwithstanding the foregoing, however, Messrs. Sarver, Severson and
Skillern have agreed that the acceleration of vesting of certain options held by
them will not occur to the extent such acceleration would otherwise constitute a
"parachute payment" for federal income tax purposes, unless approved by more
than 75% of the voting power of all outstanding stock (not including stock owned
or constructively owned by or for Messrs. Sarver, Severson and Skillern) as of
the Record Date.
VOTE ON ACCELERATION OF CERTAIN STOCK OPTIONS
The GB Shareholders are being asked to approve separately the acceleration
of the vesting of certain outstanding stock options to acquire GB Common Stock
held by Robert G. Sarver, Allan W. Severson and Christopher L. Skillern, to the
extent such acceleration would otherwise constitute a "parachute payment" to
such individuals. If the separate approval by the GB Shareholders of the Stock
Option Proposal is not obtained, Messrs. Sarver, Severson and Skillern have
agreed that they will forfeit all rights to the presently unvested options to
the extent that acceleration of vesting would otherwise constitute a "parachute
payment" (the "excess options") and such excess options will terminate at the
Effective Time. If such GB Shareholder approval is not obtained, an additional
consequence may be that the Merger would not be treated as a
pooling-of-interests for accounting purposes. See "The Merger Agreement--Certain
Covenants--Reorganization Treatment; Pooling." Under such circumstances, the
Merger may not occur unless Zions waives the condition that all options be
exercised prior to the consummation of the Merger. If Zions waives the
condition, and the Merger would be accounted for as a purchase transaction
rather than a pooling, there would be a different financial statement impact on
Zions and the vote of GB Shareholders to approve the principal terms of the
Merger Agreement would be resolicited.
65
<PAGE>
Approval of the Stock Option Proposal will not reduce the number of shares
of Zions Common Stock that GB Shareholders will receive upon consummation of the
Merger. Likewise, the failure to approve the Stock Option Proposal will not
increase the number of shares of Zions Common Stock issuable to the GB
Shareholders upon consummation of the Merger, nor will it increase the number of
shares of Zions Common Stock issued to any other holder of options.
PURPOSE OF VOTE
Section 280G of the Code will disallow the deduction by Zions of any portion
of payments or compensation made to "disqualified individuals" that are
characterized as "excess parachute payments" as described below. Also, section
4999 of the Code will impose a 20% nondeductible excise tax on any disqualified
individual who receives an "excess parachute payment." To be considered
parachute payments, the payments must (i) be in the nature of compensation, (ii)
be contingent on a change in ownership or control of GB and (iii) have a present
value, when combined with all other such payments, that equals or exceeds three
times the disqualified individual's base amount. The base amount is equal to the
disqualified individual's average annual compensation for federal income tax
purposes over the five years immediately before the year in which the change in
ownership or control occurs (or, if shorter, the period of employment). If
payments are considered parachute payments, they generally will be treated as
"excess parachute payments" to the extent that the present value of the
parachute payment exceeds the disqualified individual's base amount, unless the
parties establish, by clear and convincing evidence, that such payments
constitute reasonable compensation for services rendered before the change in
ownership or control.
Messrs. Sarver, Severson and Skillern are considered disqualified
individuals of GB under sections 280G and 4999 of the Code. In addition, the
accelerated vesting of options received by these three individuals in connection
with the Merger is in the nature of compensation and is contingent on a change
in ownership or control for purposes of sections 280G and 4999 of the Code.
Because the present value of the accelerated vesting to each of Messrs. Sarver,
Severson and Skillern, as determined under the Code, will exceed three times
their respective base amounts, any portion of the value that exceeds each
disqualified individual's base amount will constitute an "excess parachute
payment" (subject to the reasonable compensation exception described above). The
amounts that would be deemed to be "excess parachute payments" to Messrs.
Sarver, Severson and Skillern are $349,018, $617,708 and $382,630, respectively
(based on an assumed price of $80 per share for GB Common Stock and applicable
federal interest rates effective for September 1997). These payments would be
nondeductible by Zions, and the recipient of such payments would be subject to a
20% excise tax (in addition to regular income tax) on the amount of the
payments.
An exception to the foregoing tax treatment applies, however, to any payment
made by a non-publicly traded corporation if (i) such payment is approved by a
vote of holders of more than 75% of the voting power of all outstanding stock
(not including stock owned or constructively owned by or for the recipient of
such payments under Section 318(a) of the Code) immediately prior to the change
in ownership or control and (ii) there is adequate disclosure to the
shareholders of all material facts concerning such payments.
Messrs. Sarver, Severson and Skillern have agreed that, in the event that
the requisite shareholder approval is not obtained in connection with the Stock
Option Proposal, they will forfeit all rights to the excess options and the
excess options will terminate at the Effective Time. An additional consequence
may be that the Merger would not be treated as a pooling-of-interests for
accounting purposes. See "The Merger Agreement--Certain
Covenants--Reorganization Treatment; Pooling." Under such circumstances, the
Merger may not occur unless Zions waives the condition that all options be
exercised prior to the consummation of the Merger. If Zions waives the
condition, and the Merger would be accounted for as a purchase transaction
rather than a pooling, there would be a different financial statement impact of
the Merger on Zions, and the vote of GB Shareholders to approve the principal
terms of the Merger Agreement would be resolicited.
66
<PAGE>
VOTE REQUIRED FOR APPROVAL; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the Stock Option Proposal will require the affirmative vote of
more than 75% of the outstanding shares of GB Common Stock as of the Record Date
(excluding common stock owned by Messers. Sarver, Severson and Skillern and any
person whose GB stock ownership would be attributable to any one of those
individuals under the Code). The GB Board recommends that GB Shareholders
approve the Stock Option Proposal.
VALIDITY OF ZIONS COMMON STOCK
The validity of the shares of Zions Common Stock to be issued in the Merger
has been passed upon by Sullivan & Cromwell, Los Angeles, California, counsel
for Zions.
EXPERTS
The consolidated financial statements of Zions as of December 31, 1996 and
1995, and for each of the years in the three year period ended December 31,
1996, incorporated by reference herein have been incorporated by reference
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Grossmont Bank and subsidiary as of
December 31, 1994 and for the year then ended, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included herein, and upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of GB Bancorporation at December 31,
1996 and 1995, and for the year ended December 31, 1996, and the financial
statements of Grossmont Bank as of December 31, 1995 and for the year then
ended, included in this Proxy Statement-Prospectus and referred to and
incorporated in the Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GB BANCORPORATION CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Statement of Condition as of June 30, 1997 and 1996........................................... F-2
Consolidated Statement of Income for the six months ended June 30, 1997 and 1996........................... F-3
Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996....................... F-4
Notes to the Consolidated Financial Statements............................................................. F-5
Report of Independent Auditors............................................................................. F-6
Consolidated Statement of Condition as of December 31, 1996 and 1995....................................... F-7
Consolidated Statement of Income for the year ended December 31, 1996 and the three months ended December
31, 1995 (unaudited)..................................................................................... F-8
Consolidated Statement of Stockholders' Equity for the year ended December 31, 1996 and the three months
ended December 31, 1995 (unaudited)...................................................................... F-9
Consolidated Statement of Cash Flows for the year ended December 31, 1996 and the three months ended
December 31, 1995 (unaudited)............................................................................ F-10
Notes to Consolidated Financial Statements................................................................. F-11
GROSSMONT BANK FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................. F-26
Statement of Condition as of December 31, 1995............................................................. F-27
Statement of Income for the year ended December 31, 1995................................................... F-28
Statement of Stockholder's Equity for the year ended December 31, 1995..................................... F-29
Statement of Cash Flows for the year ended December 31, 1995............................................... F-30
Notes to Financial Statements.............................................................................. F-31
Independent Auditors' Report............................................................................... F-43
Consolidated Statement of Condition as of December 31, 1994................................................ F-44
Consolidated Statement of Income for the year ended December 31, 1994...................................... F-45
Consolidated Statement of Changes in Stockholder's Equity for the year ended December 31, 1994............. F-46
Consolidated Statement of Cash Flows for the year ended December 31, 1994.................................. F-47
Notes to Consolidated Financial Statements................................................................. F-48
</TABLE>
F-1
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash and due from banks.......................................................... $ 60,540,000 $ 51,579,000
Investments
Securities available for sale.................................................. 16,398,000 35,200,000
Securities held to maturity.................................................... 162,565,000 112,729,000
Loans net of reserve for loan losses............................................. 445,685,000 296,633,000
Bank equipment and property, net................................................. 8,811,000 8,583,000
Interest receivable and other assets............................................. 13,578,000 13,223,000
Intangibles...................................................................... 8,676,000 9,547,000
-------------- --------------
Total Assets..................................................................... $ 716,253,000 $ 527,494,000
-------------- --------------
-------------- --------------
Deposits
Demand......................................................................... $ 215,198,000 $ 149,939,000
Interest-bearing demand........................................................ 221,928,000 172,382,000
Savings........................................................................ 37,240,000 34,513,000
Time........................................................................... 164,947,000 109,161,000
-------------- --------------
Total deposits................................................................... 639,313,000 465,995,000
Interest payable and other liabilities........................................... 16,817,000 9,001,000
Notes payable.................................................................... -- 8,928,000
Long-term debt................................................................... 7,500,000 --
-------------- --------------
Total liabilities................................................................ 663,630,000 483,924,000
Stockholders' equity
Common stock no par value, 10,000,000 authorized;
issued and outstanding 2,013,893 in 1997 and 2,000,000 in 1996............... 40,417,000 40,000,000
Retained earnings................................................................ 11,865,000 3,638,000
Unrealized gains on securities available for sale, net........................... 341,000 (68,000)
-------------- --------------
Total stockholders' equity....................................................... 52,623,000 43,570,000
-------------- --------------
$ 716,253,000 $ 527,494,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Loans, including fees.............................................................. $ 20,359,000 $ 13,603,000
Federal funds sold................................................................. 275,000 237,000
Investments securities
U.S. Treasury.................................................................... 805,000 1,620,000
U.S. government agencies and corporations........................................ 4,660,000 2,884,000
Other............................................................................ 23,000 --
------------- -------------
Total Interest Income.............................................................. 26,122,000 18,344,000
Interest Expense
Deposits......................................................................... 6,966,000 4,728,000
Other............................................................................ 484,000 428,000
------------- -------------
Total Interest Expense............................................................. 7,450,000 5,156,000
------------- -------------
Net Interest Income................................................................ 18,672,000 13,188,000
Provision for loan losses.......................................................... 1,230,000 300,000
------------- -------------
Net interest income after provision for loan loss.................................. 17,442,230 12,888,000
------------- -------------
Other operating income.............................................................
Service Charges on deposit accounts................................................ 1,584,000 1,090,000
Other real estate owned, net....................................................... 49,000 66,000
Gain on sale of loans.............................................................. 18,000 15,000
Other.............................................................................. 1,676,000 1,138,000
------------- -------------
Total other operating income....................................................... 3,327,000 2,309,000
------------- -------------
Other operating expenses
Salaries and employee benefits................................................... 6,749,000 5,342,000
Occupancy, net................................................................... 1,101,000 1,088,000
Furniture and equipment.......................................................... 763,000 646,000
Legal............................................................................ 71,000 128,000
Other............................................................................ 4,340,230 3,569,000
------------- -------------
Total other operating expenses..................................................... 13,024,230 10,773,000
------------- -------------
Income before Income Taxes......................................................... 7,745,000 4,424,000
Income tax expense................................................................. 3,010,000 1,843,000
------------- -------------
Net Income......................................................................... $ 4,735,000 $ 2,581,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income:..................................................................... $ 4,735,000 $ 2,581,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and Amortization................................................. 1,338,000 1,556,000
Provision for Loan Loss....................................................... 1,230,000 300,000
Gain on sale of loans......................................................... (18,000) (15,000)
Gain on sale of other assets, net............................................. (10,000) (39,000)
Gain on Sale of Real Estate................................................... (49,000) (66,000)
Decrease (increase) in interest receivable and other assets................... -- (1,452,000)
Increase (decrease) in payable and other liabilities.......................... 8,139,000 (975,000)
Increase in intangible assets................................................. (117,000) --
-------------- --------------
Net cash provided by operating activities....................................... 15,248,000 1,890,000
-------------- --------------
INVESTING ACTIVITIES
Net increase in loans outstanding............................................... (73,298,000) (47,110,000)
Purchase of investment securities held to maturity.............................. (29,752,000) (26,971,000)
Maturities of investment securities held to maturity............................ 19,000,000 22,000,000
Principal repayment of investment securities held to maturity................... 1,210,000 756,000
Purchase of securities available for sale....................................... (129,000) (383,000)
Maturities of securities available for sale..................................... 5,000,000 10,000,000
Purchase of bank equipment and property......................................... (1,042,000) (1,048,000)
Proceeds from the sale of other assets.......................................... 10,000 39,000
Proceeds from sales of Real Estate.............................................. 409,000 66,000
Proceeds from sale of loans..................................................... 2,812,000 4,881,000
-------------- --------------
Net cash used in investing activities........................................... (75,780,000) (37,770,000)
-------------- --------------
FINANCING ACTIVITIES
Net increase in deposits........................................................ 71,666,000 52,039,000
Payment on notes payable........................................................ (8,214,000) (714,000)
Proceeds from issuance of trust securities...................................... 7,500,000 --
Issuance of common stock........................................................ 417,000 --
-------------- --------------
Net cash provided by financing activities......................................... 71,369,000 51,325,000
-------------- --------------
Net increase in cash and cash equivalents......................................... 10,837,000 15,445,000
-------------- --------------
Cash and cash equivalents at beginning of period.................................. 49,702,000 36,134,000
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 60,539,000 $ 51,579,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
GB BANCORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for audited financial
statements. In the opinion of management, all adjustments (consisting of the
normal recurring accruals) considered necessary for a fair presentation of the
financial position of the Company have been included. Operating results for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements of GB Bancorporation for the year ended December 31, 1996
included elsewhere herein.
NOTE 2--LONG TERM DEBT
In January 1997, the Company formed GB Capital Trust (the trust), a trust
formed under the laws of the State of Delaware, and issued 7,500 share of
capital securities for $7,500,000. Proceeds of the capital securities were
invested in Junior Subordinate Deferrable Interest Debentures issued by the
Company. The Junior Subordinate Deferrable Interest Debentures have a 30 year
term and have preference over common securities of the Trust in certain
circumstances with respect to distribution and amount payable on redemption of
trust securities or liquidation of the Trust. The proceeds from the Subordinate
Junior Deferrable Interest Debentures were used to payoff a promissory note with
Norwest Bank.
F-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GB Bancorporation
We have audited the accompanying consolidated statement of condition of GB
Bancorporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated statement of condition is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated statement of
condition. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GB Bancorporation at December 31, 1996 and 1995, and the result of its
operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Orange County, California
February 10, 1997
F-6
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 49,702,000 $ 36,134,000
Investments:
Securities available for sale.................................................. 20,706,000 45,108,000
Securities held to maturity.................................................... 153,248,000 109,047,000
Loans, net of allowance for loan losses of $6,844,000 and $5,882,000 in 1996 and
1995, respectively............................................................. 376,577,000 254,494,000
Bank equipment and property, net................................................. 8,500,000 8,180,000
Interest receivable and other assets............................................. 13,578,000 11,988,000
Intangibles...................................................................... 9,177,000 9,918,000
-------------- --------------
Total assets..................................................................... $ 631,488,000 $ 474,869,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand......................................................................... $ 186,097,000 $ 130,758,000
Interest-bearing demand........................................................ 200,611,000 155,549,000
Savings........................................................................ 34,956,000 36,078,000
Time........................................................................... 145,983,000 91,571,000
-------------- --------------
Total deposits................................................................... 567,647,000 413,956,000
Interest payable and other liabilities........................................... 8,469,000 10,098,000
Notes payable.................................................................... 8,214,000 9,643,000
-------------- --------------
Total liabilities................................................................ 584,330,000 433,697,000
Commitments and contingencies (NOTE 12)
Stockholders' equity:
Common stock, no par value, 10,000,000 authorized; 2,000,000 issued and
outstanding.................................................................... 40,000,000 40,000,000
Retained earnings................................................................ 7,130,000 1,057,000
Unrealized gains on securities available for sale, net........................... 28,000 115,000
-------------- --------------
Total stockholders' equity....................................................... 47,158,000 41,172,000
-------------- --------------
$ 631,488,000 $ 474,869,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1995
1996 (UNAUDITED)
------------- --------------
<S> <C> <C>
Interest income:
Loans, including fees........................................................... $ 30,334,000 $ 6,469,000
Federal funds sold.............................................................. 737,000 508,000
Investment securities:
U.S. Treasury................................................................. 2,910,000 867,000
U.S. Government agencies and corporations..................................... 6,464,000 1,169,000
Other......................................................................... 20,000 --
------------- --------------
Total interest income............................................................. 40,465,000 9,013,000
Interest expense:
Deposits........................................................................ 10,531,000 2,333,000
Other........................................................................... 809,000 225,000
------------- --------------
Total interest expense............................................................ 11,340,000 2,558,000
------------- --------------
Net interest income............................................................... 29,125,000 6,455,000
Provision for loan losses......................................................... 1,100,000 200,000
------------- --------------
Net interest income after provision for loan losses............................... 28,025,000 6,255,000
------------- --------------
Other operating income:
Service charges on deposit accounts............................................. 2,370,000 537,000
Other........................................................................... 2,549,000 546,000
------------- --------------
Total other operating income...................................................... 4,919,000 1,083,000
------------- --------------
Other operating expenses:
Salaries and employee benefits.................................................. 11,546,000 2,555,000
Occupancy, net.................................................................. 2,192,000 538,000
Furniture and equipment......................................................... 1,368,000 312,000
Legal........................................................................... 206,000 268,000
Other........................................................................... 7,600,000 1,770,000
------------- --------------
Total other operating expenses.................................................... 22,912,000 5,443,000
------------- --------------
Income before income taxes........................................................ 10,032,000 1,895,000
Income tax expense................................................................ 3,959,000 838,000
------------- --------------
Net income........................................................................ $ 6,073,000 $ 1,057,000
------------- --------------
------------- --------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
COMMON STOCK SECURITIES
------------------------- RETAINED AVAILABLE
SHARES AMOUNT EARNINGS FOR SALE TOTAL
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1995
(unaudited)............................ 2,000,000 $ 40,000,000 $ -- $ -- $ 40,000,000
Unrealized gain on securities
(unaudited)............................ -- -- -- 115,000 115,000
Net Income (unaudited)................... -- -- 1,057,000 -- 1,057,000
---------- ------------- ------------ ------------ -------------
Balance at December 31, 1995............. 2,000,000 40,000,000 1,057,000 115,000 41,172,000
Unrealized loss on securities............ -- -- -- (87,000) (87,000)
Net income............................... -- -- 6,073,000 -- 6,073,000
---------- ------------- ------------ ------------ -------------
Balance at December 31, 1996............. 2,000,000 $ 40,000,000 $ 7,130,000 $ 28,000 $ 47,158,000
---------- ------------- ------------ ------------ -------------
---------- ------------- ------------ ------------ -------------
</TABLE>
See accompanying notes.
F-9
<PAGE>
GB BANCORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995
DECEMBER 31, 1996 (UNAUDITED)
----------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. 6$,073,000....... $ 1,057,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 3,111,000 332,000
Provision for loan loss.............................................. 1,100,000 200,000
Write down of real estate............................................ -- 109,000
Gain on sale of loans................................................ (30,000) --
Gain on sale of other assets, net.................................... (110,000) (31,000)
Increase (decrease) in interest receivable and other assets.......... (1,590,000) 285,000
Decrease in interest payable and other liabilities................... (1,629,000) (535,000)
Increase in intangible assets........................................ -- (238,000)
----------------- -------------------
Net cash provided by operating activities................................ 6,925,000 1,179,000
----------------- -------------------
INVESTING ACTIVITIES
Net increase in loans outstanding...................................... (131,020,000) (10,164,000)
Purchases of investment securities held to maturity.................... (82,563,000) (39,650,000)
Maturities of investment securities held to maturity................... 36,000,000 5,000,000
Principal repayment on investment securities held to maturity.......... 1,455,000 470,000
Purchases of securities available for sale............................. (5,743,000) (9,974,000)
Maturities of securities available for sale............................ 30,000,000 15,000,000
Purchases of bank equipment and property............................... (1,678,000) (435,000)
Proceeds from sale of bank equipment and property...................... 39,000 --
Proceeds from the sale of other assets................................. 66,000 33,000
Proceeds from sale of loans............................................ 7,825,000 1,871,000
----------------- -------------------
Net cash used in investing activities.................................. (145,619,000) (37,849,000)
----------------- -------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits.................................... 153,691,000 (7,793,000)
Payment of notes payable............................................... (1,429,000) (357,000)
----------------- -------------------
Net cash provided by (used in) financing activities...................... 152,262,000 (8,150,000)
----------------- -------------------
Net increase (decrease) in cash and cash equivalents..................... 13,568,000 (44,820,000)
Cash and cash equivalents at beginning of period......................... 36,134,000 80,954,000
----------------- -------------------
Cash and cash equivalents at end of period............................... $ 49,702,000 $ 36,134,000
----------------- -------------------
----------------- -------------------
SUPPLEMENTAL CASH FLOW AND NONCASH INVESTING AND FINANCING ACTIVITIES
INFORMATION:
Cash paid during the period for interest................................. $ 11,254,000 $ 2,468,000
----------------- -------------------
----------------- -------------------
Cash paid during the period for taxes.................................... $ 5,565,000 $ 1,440,000
----------------- -------------------
----------------- -------------------
</TABLE>
See accompanying notes.
F-10
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated statements of condition include the accounts
of GB Bancorporation (the Company) and its wholly-owned subsidiary, Grossmont
Bank (the Bank). All significant intercompany transactions have been eliminated
upon consolidation. The accounting and reporting policies of GB Bancorporation
conform to generally accepted accounting principles and to general practices
within the banking industry. The following is a description of the more
significant policies.
BASIS OF PRESENTATION
On September 30, 1995, GB Bancorporation acquired all the outstanding shares
of Grossmont Bank from Bancomer for $50,000,000. GB Bancorporation accounted for
the acquisition using the purchase method of accounting, and, accordingly, the
purchase price was allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. The excess of the
purchase price over the fair values of the net assets acquired was $9,437,000.
Of this amount, $8,339,000 has been recorded as goodwill to be amortized on the
straight-line basis over 15 years. Accumulated amortization expense amounted to
$690,000 at December 31, 1996.
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 amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.
CASH AND DUE FROM BANKS
The Federal Reserve Bank requires Grossmont Bank to maintain a daily
required reserve balance. All highly liquid investment with an original maturity
of less than three months are considered cash equivalents.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
In accordance with Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (FAS 115),
management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Company has the ability at the
time of purchase to hold securities until maturity, they are classified as held
to maturity. Investment securities held to maturity are stated at cost, adjusted
for amortization of premiums and accretion of discounts over the period to
maturity of the related security. Securities to be held for indefinite periods
of time, but not necessarily to be held to maturity or on a long-term basis, are
classified as available for sale and carried at fair value with unrealized gains
or losses, net of related income taxes, reported as a separate component of
stockholders' equity. Realized gains or losses on the sale of securities
available for sale, if any, are determined using the adjusted cost of the
specific securities sold. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other related factors.
F-11
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are carried at the unpaid principal, less an allowance for estimated
future losses. Interest on commercial and real estate mortgage loans is accrued
based on principal amounts outstanding. Interest on consumer loans is computed
on the interest method. The accrual of interest on loans is discontinued when,
in management's judgment, a reasonable doubt exists as to the collectibility of
principal or interest payments in the normal course of business. Interest on
such loans accrued in prior periods is charged against the allowance for loan
losses. Interest accrued on such loans in the current period is reversed from
interest income. A loan is restored to accrual status when the loan becomes both
well-secured and it is in the process of collection.
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risk in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience and current economic conditions which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN (FAS 114) and in October 1994, the FASB
issued SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME
RECOGNITION AND DISCLOSURE (FAS 118). Under the provisions of FAS 114, a loan is
considered impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. FAS 114 defines methods of measuring impairment and, if the measure
of the impaired loan is less than the recorded investment in the loan, requires
a creditor to increase a valuation allowance with a corresponding charge to
provision for loan losses. FAS 118 amends FAS 114 to allow a creditor to use
existing methods for recognizing interest income on impaired loans. In addition,
FAS 118 amends certain disclosure requirements of FAS 114. The Bank adopted FAS
114 and 118 in 1995. The effect of adopting these statements was not material to
the Bank's financial position or result of operations.
LOAN FEES
Nonrefundable loan fees and related direct costs associated with the
origination of purchase of loans are deferred, and the net fees or cost are
recognized as an adjustment to interest income over the contractual life of the
loans using the interest method.
BANK EQUIPMENT AND PROPERTY
Equipment and property are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to expense over the estimated useful lives
of the assets on a straight-line basis. Amortization of leasehold improvements
is computed on a straight-line basis over the terms of the leases or the
estimated useful lives of the improvements, whichever is shorter.
F-12
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options, because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123), requires use of option valuation models. As a result, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the opinion grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option. There was no
deferred compensation related to options issued in 1996 and 1995.
INCOME TAXES
GB Bancorporation files a consolidated federal income tax return and a
combined California state franchise tax return with Grossmont Bank.
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (FAS 109). FAS 109
requires the use of the asset and liability method of accounting for taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and approximate market
value of securities available for sale as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
1996
U.S. Treasury............................................ $ 4,925,000 $ -- $ 6,000 $ 4,919,000
U.S. Government Agencies................................. 14,910,000 52,000 -- 14,962,000
Equity securities........................................ 825,000 -- -- 825,000
------------- ----------- ----------- -------------
$ 20,660,000 $ 52,000 $ 6,000 $ 20,706,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
1995
U.S. Treasury............................................ $ 10,052,000 $ 73,000 $ -- $ 10,125,000
U.S. Government Agencies................................. 34,865,000 148,000 30,000 34,983,000
------------- ----------- ----------- -------------
$ 44,917,000 $ 221,000 $ 30,000 $ 45,108,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-13
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
2. SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and approximate market value at December 31, 1996 by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ -- $ --
Due after one year through five years.......................... 19,835,000 19,881,000
Equity securities.............................................. 825,000 825,000
------------- -------------
$ 20,660,000 $ 20,706,000
------------- -------------
------------- -------------
</TABLE>
There were no sales of securities in 1996 and 1995.
3. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and approximate market
value of investment securities held to maturity as of December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
1996
U.S. Treasury..................... $ 29,573,000 $ 230,000 $ 24,000 $ 29,779,000
U.S. Government Agencies.......... 118,033,000 691,000 430,000 118,294,000
Municipals........................ 5,642,000 -- 40,000 5,602,000
-------------- ----------- ----------- --------------
$ 153,248,000 $ 921,000 $ 494,000 $ 153,675,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
1995
U.S. Treasury..................... $ 44,151,000 $ 635,000 $ 85,000 $ 44,701,000
U.S. Government Agencies.......... 59,685,000 195,000 141,000 59,739,000
Municipals........................ 5,211,000 -- 58,000 5,153,000
-------------- ----------- ----------- --------------
$ 109,047,000 $ 830,000 $ 284,000 $ 109,593,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
F-14
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
3. INVESTMENT SECURITIES HELD TO MATURITY (CONTINUED)
The amortized cost and approximate market value at December 31, 1996 by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
COST MARKET VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less...................................... $ 32,560,000 $ 32,660,000
Due after one year through five years........................ 71,741,000 72,054,000
Due after five years through ten years....................... 41,519,000 41,460,000
Due after ten years.......................................... 358,000 470,000
Mortgage-backed securities................................... 7,070,000 7,031,000
-------------- --------------
$ 153,248,000 $ 153,675,000
-------------- --------------
-------------- --------------
</TABLE>
At December 31, 1996, investment securities held to maturity with a book
value of $26,100,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
At December 31, 1996 and 1995 loans consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Commercial................................................... $ 184,695,000 $ 115,055,000
Interim construction......................................... 22,084,000 15,841,000
Consumer..................................................... 56,143,000 49,545,000
Real estate.................................................. 122,559,000 81,305,000
-------------- --------------
$ 385,481,000 $ 261,746,000
Less:
Deferred loan fees......................................... (2,060,000) (1,370,000)
Allowance for loan losses.................................. (6,844,000) (5,882,000)
-------------- --------------
$ 376,577,000 $ 254,494,000
-------------- --------------
-------------- --------------
</TABLE>
The Bank's loan portfolio consists primarily of loans to borrowers within
San Diego County. As of December 31, 1996, the Bank had $191,123,000 of
commercial, interim construction and real estate loans which were secured by
real estate located in San Diego County. The remaining balance of these loan
types are secured by real estate in other areas. Generally, these loans are
secured by first trust deeds and do not exceed 75% of the properties' appraised
values at origination. The portfolio is well diversified in both project type
and areas within the San Diego County region. Project types include
single-family residences, multi-family residences, commercial office buildings
and centers, industrial buildings and special purpose projects. Generally, loans
are either underwritten as permanent mortgages (with a 15-year or longer
amortization but a shorter maturity), or are expected to be repaid from the
proceeds of permanent financing or proceeds from the sale of the project or
other assets of the borrowers.
F-15
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing interest totaled $1,403 as of December 31, 1996.
There were $1,177,823 and $3,437,466 of loans on nonaccrual status as of
December 31, 1996 and 1995, respectively. Interest income of $75,894 and $31,961
would have been recorded for the year ended December 31, 1996 and three months
ended December 31, 1995, respectively, if nonaccrual loans had been performing
in accordance with their original terms.
In addition to the above, the Bank serviced real estate loans for others
approximating $5,825,000 and $6,686,000 at December 31, 1996 and 1995,
respectively.
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ -------------------
<S> <C> <C>
Balance, beginning of period.............................. $5,882,000 $ 5,952,000
Provision charged to operating expense.................... 1,100,000 200,000
Loans charged off, net of recoveries...................... (138,000) (270,000)
------------ -------------------
Balance, end of period.................................... $6,844,000 $ 5,882,000
------------ -------------------
------------ -------------------
</TABLE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize estimated losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions and the repayment capabilities of the borrowers.
In the normal course of business, the Bank has made loans to certain
directors, officers and their affiliates under terms consistent with the Bank's
general lending policies. Such loans aggregated approximately $306,000 and
$233,000 at December 31, 1996 and 1995, respectively.
5. BANK EQUIPMENT AND PROPERTY
Equipment and property at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land and buildings................................................ $ 6,330,000 $ 6,236,000
Leasehold improvements............................................ 3,182,000 2,948,000
Furniture, fixtures and equipment................................. 6,759,000 5,827,000
------------ ------------
16,271,000 15,011,000
------------ ------------
Less accumulated depreciation and amortization.................... (7,771,000) (6,831,000)
------------ ------------
$ 8,500,000 $ 8,180,000
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
6. DEPOSITS
Time deposits at December 31, 1996 and 1995 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Time deposits of $100,000 or more............................. $ 73,473,000 $ 40,564,000
Time deposits under $100,000.................................. 72,510,000 51,007,000
-------------- -------------
$ 145,983,000 $ 91,571,000
-------------- -------------
-------------- -------------
</TABLE>
The following summarizes the maturity of time deposits of $100,000 or more
at December 31, 1996:
<TABLE>
<S> <C>
Three months or less........................................... $46,927,000
Over three months through twelve months........................ 23,885,000
Over twelve months............................................. 2,661,000
----------
$73,473,000
----------
----------
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
--------------- -----------------------
<S> <C> <C>
Interest-bearing demand............................ $ 4,080,000 $ 1,136,000
Savings............................................ 738,000 213,000
Time............................................... 5,713,000 1,209,000
--------------- -----------
$ 10,531,000 $ 2,558,000
--------------- -----------
--------------- -----------
</TABLE>
7. SHORT-TERM BORROWINGS
At December 31, 1996, the Bank has unsecured Federal Funds Facility lines of
credit totaling $45,000,000, which accrued interest at the Federal Funds. The
facility was made up of two independent lines of credit, one for $20,000,000,
with an expiration of July 31, 1997, and one for $25,000,000 with no specific
expiration but subject to periodic reviews and adjustments by the issuing bank.
Management expects that, in the normal course of business, Federal Funds
Facility lines of credit will be renewed or replaced with other lines of credit,
if necessary.
At December 31, 1996 and 1995, there were no outstanding advances from the
lines of credit. Interest expense related to the lines of credit was $42,000 for
the year ended December 31, 1996, and there was no interest expense for the
three months ended December 31, 1995.
8. NOTES PAYABLE
Notes payable bear interest at the fed funds rate plus 2.75% (9.81% at
December 31, 1996). Principal and interest are payable quarterly. The notes are
secured by the outstanding common stock of the Bank. The Company must comply
with certain financial and other covenants, including maintaining a minimum net
worth and other financial ratios. The Company was in compliance with all
covenants at December 31, 1996. Scheduled annual principal payments for each of
the five years, through the period ended December 31, 2001, are $1,429,000.
F-17
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (FAS 107), requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair value is estimated as of December 31, 1996 and
1995, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount is assumed to be the fair value because of the liquidity
of these instruments.
INVESTMENT SECURITIES
Fair values are based on quoted market prices available as of the statement
of condition date. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories. The fair value
estimates do not take into consideration the value of the loan portfolio in the
event the loans had to be sold outside the parameters of normal operating
activities.
The fair value of fixed rate loans and non-performing or adversely
classified adjustable rate loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loans. The discount
rates used for performing fixed rate loans are the Bank's current offer rates
for comparable instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be the
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings and NOW accounts, and money market and checking
accounts, is equal to the amount payable on
F-18
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
demand as of the statement of condition date. The fair value of time
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
The fair values of the financial instruments at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ------------------------------
CARRYING FAIR VALUE CARRYING FAIR VALUE
AMOUNT ESTIMATES AMOUNT ESTIMATES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.................... $ 49,702,000 $ 49,702,000 $ 36,134,000 $ 36,134,000
Investment securities........................ 173,954,000 174,381,000 154,155,000 154,701,000
Loans, net................................... 376,577,000 368,635,000 254,494,000 248,605,000
Financial liabilities:
Deposits..................................... 567,647,000 569,008,000 414,370,000 413,238,000
<CAPTION>
1996 1995
------------------------------ ------------------------------
CONTRACT FAIR VALUE CONTRACT FAIR VALUE
AMOUNT ESTIMATES AMOUNT ESTIMATES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit................. $ 168,276,000 $ 2,284,000 $ 109,907,000 $ 1,611,000
Standby letters of credit.................... 3,723,000 56,000 2,481,000 37,000
</TABLE>
F-19
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. INCOME TAXES
The components of income tax expense for the year ended December 31, 1996
and three months ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current:
Federal......................................................... $ 3,446,000 $ 769,000
State........................................................... 1,216,000 250,000
------------ ------------
Total current................................................. 4,662,000 1,019,000
Deferred:
Federal......................................................... (630,000) (188,000)
State........................................................... (7,000) 7,000
------------ ------------
Total deferred................................................ (637,000) (181,000)
------------ ------------
Change in valuation allowance..................................... (66,000) --
------------ ------------
Total income taxes................................................ $ 3,959,000 $ 838,000
------------ ------------
------------ ------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Litigation settlement......................................... $ 132,000 $ 232,000
Pension expenses.............................................. 1,286,000 1,571,000
Software amortization......................................... 541,000 663,000
Deferred compensation......................................... 402,000 421,000
Deferred loan fees............................................ 872,000 623,000
Loan loss allowance, due to differences in computation of bad
debts....................................................... 2,685,000 2,440,000
State taxes................................................... 450,000 --
Accrued compensation.......................................... 378,000 324,000
Other......................................................... 158,000 413,000
------------- -------------
Total gross deferred tax assets................................. 6,904,000 6,687,000
Less valuation allowance...................................... (761,000) (827,000)
------------- -------------
Net deferred tax assets......................................... $ 6,143,000 $ 5,860,000
------------- -------------
------------- -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation................................................ $ (460,000) $ (262,000)
State taxes................................................... -- (50,000)
Acquisition fair value adjustment............................. (658,000) (836,000)
------------- -------------
Deferred tax liabilities........................................ $ (1,118,000) $ (1,148,000)
------------- -------------
------------- -------------
</TABLE>
F-20
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
10. INCOME TAXES (CONTINUED)
Based upon the level of historical taxable income in previous years and
projections for future taxable income over the periods in which the temporary
differences giving rise to deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences, net of the existing valuation allowance at
December 31, 1996.
A reconciliation of total income taxes for the year ended December 31, 1996
and the three months ended December 31, 1995 to the amount computed by applying
the applicable statutory federal income tax rate of 34% to earnings before
income taxes follows:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Computed expected income taxes........................... $3,511,000 $644,000
Increase (decrease) in taxes resulting from:
State tax net of federal benefit....................... 737,000 144,000
Decrease in valuation allowance........................ (66,000) --
Nondeductible expenses and other, net.................. (223,000) 50,000
---------- --------
$3,959,000 838,000
---------- --------
---------- --------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
NONCONTRIBUTORY PENSION PLAN
The Company has noncontributory pension plans covering substantially all
full-time employees. The plans provide benefits based upon years of service and
final average earnings, offset by the benefits provided by the former Employee
Stock Ownership Plan.
F-21
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' funded status and amounts recorded
in the Company's financial statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
QUALIFIED NON-QUALIFIED QUALIFIED NON-QUALIFIED
PLAN PLAN PLAN PLAN
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations............................................... $ 4,326,000 $2,118,000 $ 3,528,000 $2,373,000
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Accumulated benefit obligation........................................... $ 4,597,000 $2,118,000 $ 3,772,000 $2,373,000
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
Projected benefit obligation for service-to-date........................... $ 5,719,000 $2,118,000 $ 4,659,000 $2,373,000
Plan assets at fair value.................................................. (5,665,000) -- (4,862,000) --
----------- ------------- ----------- -------------
Plan assets less (greater) than projected benefit obligations.............. 54,000 2,118,000 (203,000) 2,373,000
Unrecognized prior service cost............................................ 283,000 -- 321,000 --
Unrecognized net asset existing at January 1, 1987......................... 101,000 -- 109,000 --
Unrecognized net gain...................................................... 270,000 17,000 646,000 20,000
----------- ------------- ----------- -------------
Accrued pension liability.................................................. $ 708,000 $2,135,000 $ 873,000 $2,393,000
----------- ------------- ----------- -------------
----------- ------------- ----------- -------------
</TABLE>
Net pension expense for the qualified plan for the year ended December 31,
1996 and the three months ended December 31, 1995 included the following
components:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Service cost........................................................ $ 391,000 $ 70,000
Interest cost....................................................... 303,000 68,000
Actual return on plan assets........................................ (580,000) (250,000)
Net amortization and deferral....................................... 68,000 145,000
----------- -----------
Net pension expense............................................. $ 182,000 $ 33,000
----------- -----------
----------- -----------
</TABLE>
In determining the annual pension expense and benefit obligations, the
Company's actuaries assumed compensation level increases of 4.0% over ten years
and a long-term rate of return on plan assets of 9% for the qualified plan. The
discount rate used for 1996 and 1995 was 6.5% for both the qualified plan and
the non-qualified plan.
It is the Company's policy to fund pension costs as accrued for the
qualified plan. Unfunded past service liability related to the qualified plan is
being amortized over a 30 year period to 2012. Employees become automatically
vested if qualified plans are terminated.
F-22
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
401K PLAN
The Company has an employee 401(k) plan covering substantially all
employees. Under terms of the plan, the Company contributes one-half of each
eligible participant's annual contributions up to a maximum Company contribution
of 3%. The Company's contributions to the plan for the year ended December 31,
1996 and the three months ended December 31, 1995 was $141,000 and $30,000,
respectively.
DEFERRED COMPENSATION PLANS
The Bank has adopted deferred compensation plans which provide for
additional compensation to designated officers based upon the return on equity
of the Bank. The awards vest ratably over three years beginning after the year
of the award. Payment of awards is deferred until the participant terminates
employment with the Bank. The total deferred compensation expense under the
plans for the year ended December 31, 1996 and the three months ended December
31, 1995 was $56,000 and $9,000, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statement of condition.
The contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
Commitments to extend credit amounting to $168,267,000 were outstanding at
December 31, 1996. Commitments to extend credit are agreements to lend to a
customer as long as there is not violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit amounting to $3,723,000 were outstanding at
December 31, 1996. Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support private borrowing arrangements.
Most guarantees will expire within one year. The Company generally requires
collateral or other security to support financial instruments with credit risk.
Management does not anticipate that any material loss will result from the
outstanding commitments to extend credit or standby letters of credit.
F-23
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1996, aggregate net minimum annual rental commitments for
certain real property under noncancelable operating leases having an initial or
remaining term of more than one year are as follows:
<TABLE>
<S> <C>
1997........................................................... $1,038,000
1998........................................................... 1,063,000
1999........................................................... 961,000
2000........................................................... 884,000
2001........................................................... 891,000
Thereafter..................................................... 5,427,000
----------
10,264,000
Future minimum rental income................................... (888,000)
----------
$9,376,000
----------
----------
</TABLE>
The leases provide for additional rents based on increases in the Consumer
Price Index and require payment of real estate taxes and insurance. Total rent
expense, net of sublease rental income of $116,000, was $944,000 for the year
ended December 31, 1996. Rent expense for the three months ended December 31,
1995 was $255,632.
13. REGULATORY MATTERS (UNAUDITED)
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. Under these guidelines, at December 31, 1995, the
Bank was considered "well capitalized" by the Federal Deposit Insurance
Corporation (FDIC). As of December 31, 1996, management believes that the Bank
meets all capital adequacy requirements to which it is subject. In addition,
there have been no conditions or events since the notification from the FDIC
that Management believes would change the Bank's category.
The FDIC requires that the Bank maintain minimum amounts of capital. The
Bank exceeded all applicable capital requirements to be classified as "well
capitalized" as of December 31, 1996, as defined by the FDIC as follows:
<TABLE>
<CAPTION>
WELL
CAPITALIZED GROSSMONT
REQUIREMENT BANK
------------------------------ -----
<S> <C> <C>
Risk-based capital ratio................ GREATER THAN OR EQUAL TO 10% 11.80%
Tier 1 Risk-based capital ratio......... GREATER THAN OR EQUAL TO 6% 10.55%
Tier 1 leveraged capital ratio.......... GREATER THAN OR EQUAL TO 5% 7.48%
</TABLE>
F-24
<PAGE>
GB BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 IS UNAUDITED)
13. REGULATORY MATTERS (UNAUDITED) (CONTINUED)
During the year ended December 31, 1996, the Bank's total assets exceeded
$500,000,000, making it a "large" financial institution. As a "large" financial
institution, the Bank will be required to comply with additional requirements of
the Federal Deposit Insurance Corporation Improvement Act of 1991.
14. STOCK OPTION PLAN
The 1996 Stock Option Plan (the Plan) authorizes the Company to issue up to
170,000 shares of common stock to employees, directors and any subsidiary or
parent corporation of the Company. Options granted under the Plan generally vest
over seven years and are exercisable for a period of up to ten years from the
date of grant. Incentive stock options are granted at prices which approximate
the fair value of the common shares at the date of the grant as determined by
the Board of Directors. During 1996, options to purchase 152,000 shares of the
Company stocks were granted at $20 - $25 per share, of which, 22,734 are
exercisable at December 31, 1996.
Adjusted pro forma information regarding net income as required by SFAS 123
determined using the "minimum value" method of option pricing was not materially
different from reported net income and thus not separately disclosed.
15. SUBSEQUENT EVENTS
In January 1997, the Company formed GB Capital Trust (the Trust), a trust
formed under the laws of the State of Delaware, for the sole purpose of issuing
7,500 shares of capital securities for $7,500,000. Proceeds of the capital
securities will be invested in Junior Subordinate Deferrable Interest Debentures
to be issued by the Company. The Junior Subordinate Deferrable Interest
Debentures have a 30 year term and have preference over the common securities of
the Trust in certain circumstances with respect to distribution and amount
payable on redemption of trust securities or liquidation of the Trust.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Grossmont Bank
We have audited the accompanying statement of condition of Grossmont Bank
(the Bank) as of December 31, 1995 and the related statements of income,
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Bank at December 31,
1995 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Orange County, California
February 9, 1996
F-26
<PAGE>
GROSSMONT BANK
STATEMENT OF CONDITION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks....................................................... $36,134,000
Federal funds sold............................................................ --
Investments:
Securities available for sale............................................... 45,108,000
Securities held to maturity................................................. 109,047,000
Loans, net of allowance for loan losses of $5,882,000......................... 254,494,000
Bank equipment and property, net.............................................. 8,180,000
Real estate held for sale..................................................... --
Interest receivable and other assets.......................................... 11,883,000
Intangible assets............................................................. 8,541,000
-----------
Total Assets.................................................................. $473,387,000
-----------
-----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits
Demand...................................................................... $131,172,000
Interest-bearing demand..................................................... 155,549,000
Savings..................................................................... 36,078,000
Time........................................................................ 91,571,000
-----------
Total deposits................................................................ 414,370,000
Interest payable and other liabilities........................................ 8,197,000
-----------
Total liabilities............................................................. 422,567,000
Commitments and contingencies (NOTE 11)
STOCKHOLDER'S EQUITY:
Common stock, $1.50 par value; 3,000,000 shares authorized; 1,199,755 shares
issued and outstanding...................................................... 1,800,000
Additional paid-in capital.................................................... 48,400,000
Retained earnings............................................................. 505,000
Unrealized gains on securities available for sale, net........................ 115,000
-----------
Total stockholder's equity.................................................... 50,820,000
-----------
$473,387,000
-----------
-----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
GROSSMONT BANK
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Interest income:
Loans, including fees........................................................ $26,059,000
Federal funds sold........................................................... 2,163,000
Investment securities:
U.S. Treasury.............................................................. 4,028,000
U.S. government agencies and corporations.................................. 2,900,000
Other...................................................................... 12,000
----------
Total interest income.......................................................... 35,162,000
Interest expense:
Deposits..................................................................... 8,668,000
Other........................................................................ 47,000
----------
Total interest expense......................................................... 8,715,000
----------
Net interest income............................................................ 26,447,000
Provision for loan losses...................................................... 200,000
----------
Net interest income after provision for loan losses............................ 26,247,000
----------
Other operating income:
Service charges on deposit accounts.......................................... 2,091,000
Gain on sale of loans........................................................ 28,000
Other........................................................................ 1,913,000
----------
Total other operating income................................................... 4,032,000
----------
Other operating expenses:
Salaries and employee benefits............................................... 10,123,000
Occupancy, net............................................................... 2,111,000
Furniture and equipment...................................................... 1,111,000
Legal........................................................................ 561,000
Other........................................................................ 6,786,000
----------
Total other operating expenses................................................. 20,692,000
----------
Income before income taxes..................................................... 9,587,000
Income tax expense............................................................. 2,309,000
----------
Net income..................................................................... $7,278,000
----------
----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
GROSSMONT BANK
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK ADDITIONAL SECURITIES TOTAL
------------------------ PAID-IN RETAINED AVAILABLE STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS FOR SALE EQUITY
---------- ------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 1,199,755 $ 1,800,000 $ 4,513,000 $ 31,344,000 $ (210,000) $ 37,447,000
Net income -- -- -- 7,278,000 -- 7,278,000
Dividends paid to parent
company:
Before October 1, 1995 -- -- -- (1,300,000) -- (1,300,000)
After October 1, 1995 -- -- -- (696,000) -- (696,000)
Unrealized gains on securities -- -- -- -- 254,000 254,000
Effect of 100% acquisition of
parent company -- -- 43,887,000 (36,121,000) 71,000 7,837,000
---------- ------------ ------------- -------------- ----------- -------------
Balance at December 31, 1995 1,199,755 $ 1,800,000 $ 48,400,000 $ 505,000 $ 115,000 $ 50,820,000
---------- ------------ ------------- -------------- ----------- -------------
---------- ------------ ------------- -------------- ----------- -------------
</TABLE>
See accompanying notes.
F-29
<PAGE>
GROSSMONT BANK
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net income.................................................................... $7,278,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 501,000
Provision for loan losses................................................... 200,000
Write down of real estate................................................... 160,000
Gain on sale of loans....................................................... (28,000)
Gain on sale of other assets, net........................................... (26,000)
Increase in interest receivable and other assets............................ (2,118,000)
Decrease in interest payable and other liabilities.......................... (710,000)
Decrease in tangible assets................................................. (393,000)
-----------
Net cash provided by operating activities..................................... 4,864,000
-----------
INVESTING ACTIVITIES
Net increase in loans outstanding............................................. (10,595,000)
Purchases of investment securities held to maturity........................... (39,738,000)
Maturities of investment securities held to maturity.......................... 19,553,000
Principal repayment on investment securities held to maturity................. 1,902,000
Purchases of securities available for sale.................................... (44,933,000)
Maturities of securities available for sale................................... 36,641,000
Purchase of other investment.................................................. (25,000)
Purchases of bank equipment and property...................................... (1,060,000)
Proceeds from sale of bank equipment and property............................. 19,000
Proceeds from sale of loans................................................... 4,444,000
Proceeds from the sale of other assets........................................ 57,000
-----------
Net cash used in investing activities......................................... (33,735,000)
-----------
FINANCING ACTIVITIES
Net increase in deposits...................................................... 7,864,000
Cash dividends................................................................ (1,996,000)
-----------
Net cash provided by financing activities..................................... 5,868,000
-----------
Net decrease in cash and cash equivalents..................................... (23,003,000)
Cash and cash equivalents at beginning of year................................ 59,137,000
-----------
Cash and cash equivalents at end of year...................................... 3$6,134,000
-----------
-----------
SUPPLEMENTAL CASH FLOW AND NONCASH INVESTING AND FINANCING ACTIVITIES
INFORMATION:
Cash paid during the year for interest........................................ $8,591,000
-----------
-----------
Cash paid during the year for taxes........................................... $4,300,000
-----------
-----------
</TABLE>
See accompanying notes.
F-30
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Grossmont Bank (the Bank) is a wholly-owned subsidiary of GB Bancorporation.
The accounting and reporting policies of the Bank conform to generally accepted
accounting principles and to general practices within the banking industry. The
following is a description of the more significant policies:
BASIS OF PRESENTATION
Prior to September 30, 1995, the Bank was a wholly-owned subsidiary of
Bancomer-Mexico (Bancomer). On September 30, 1995, GB Bancorporation acquired
all the outstanding shares of the Bank from Bancomer for $50,000,000. GB
Bancorporation accounted for the acquisition using the purchase method of
accounting, and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was $9,437,000. Of this amount, $7,837,000 related to the Bank
and has been reflected in the Bank's statement of condition as of December 31,
1995 by adjusting the Bank's September 30, 1995 carrying amounts as follows:
<TABLE>
<S> <C>
Loans:...................................................... $(1,169,000)
Bank equipment and property................................. 1,597,000
Other assets................................................ 470,000
Goodwill.................................................... 6,939,000
-----------
$ 7,837,000
-----------
-----------
</TABLE>
Goodwill is being amortized on the straight line method over 15 years.
The statement of income for the year ended December 31, 1995, reflects the
effect of amortization due to the changes in carrying values discussed above.
The Bank's retained earnings of $36,121,000 at September 30, 1995 were
transferred to additional paid in capital. Retained earnings at December 31,
1995 reflects the results of operations since September 30, 1995 less the fourth
quarter dividends of $696,000.
The unaudited pro forma net interest income and net income for the year
ended December 31, 1995, assuming the acquisition had occurred at the beginning
of 1994, were $26,415,000 and $6,907,000, respectively.
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 amounts reported in those statements and
accompanying notes. Actual results may differ from such estimates.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
In accordance with Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (FAS 115),
management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Bank has the ability at the
time of purchase to hold securities until maturity, they are classified as held
to maturity. Investment securities held to maturity are stated at cost, adjusted
for amortization of premiums and accretion of discounts over the period to
maturity of the related security. Securities to be held for indefinite periods
of time, but not
F-31
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
necessarily to be held to maturity or on a long-term basis, are classified as
available for sale and carried at fair value with unrealized gains or losses,
net of related income taxes, reported as a separate component of stockholders'
equity. Realized gains or losses on the sale of securities available for sale,
if any, are determined using the adjusted cost of the specific securities sold.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates, prepayment risk
and other related factors.
LOANS
Interest on commercial and real estate mortgage loans is accrued based on
principal amounts outstanding. Interest on consumer loans is computed on the
interest method. The accrual of interest on loans is discontinued when, in
management's judgment, a reasonable doubt exists as to the collectibility of
principal or interest payments in the normal course of business. Interest on
such loans accrued in prior periods is charged against the allowance for loan
losses. Interest accrued on such loans in the current period is reversed from
interest income. A loan is restored to accrual status when the loan becomes both
well-secured and it is in the process of collection.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience and current economic conditions which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible are charged off and deducted from the
allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN (FAS 114) and in October 1994, the FASB
issued SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME
RECOGNITION AND DISCLOSURE (FAS 118). Under the provisions of FAS 114, a loan is
considered impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. FAS 114 defines methods of measuring impairment and, if the measure
of the impaired loan is less than the recorded investment in the loan, it
requires a creditor to create a valuation allowance with a corresponding charge
to bad debt expense. FAS 118 amends FAS 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans. In addition, FAS 118
amends certain disclosure requirements of FAS 114. The Bank adopted FAS 114 and
118 in 1995. The effect of adopting these statements was not material to the
Bank's financial position or result of operations.
LOAN FEES
Nonrefundable loan fees and related direct costs associated with the
origination or purchase of loans are deferred, and the net fees or cost are
recognized as an adjustment to interest income over the contractual life of the
loans using the interest method.
F-32
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANK EQUIPMENT AND PROPERTY
Bank equipment and property are stated at cost less accumulated depreciation
and amortization. Depreciation is charged to expense over the estimated useful
lives of the assets on a straight-line basis. Amortization of leasehold
improvements is computed on a straight-line basis over the terms of the leases
or the estimated useful lives of the improvements, whichever is shorter.
REAL ESTATE HELD FOR SALE
Real estate held for sale is stated at the lower of cost or estimated market
value and represents land held by GB Capital through a consolidated joint
venture. GB Capital was dissolved during 1995 and the land was transferred to
Grossmont Bank and subsequently written-off.
INCOME TAXES
The Bank files a consolidated federal income tax return and a combined
California state franchise tax return with GB Bancorporation (the Parent). In
accordance with the tax sharing agreement with its Parent, income tax amounts
are determined as if the Bank filed separate tax returns.
The Bank accounts for income taxes using Statement of Financial Accounting
Standards No. 109 ACCOUNTING FOR INCOME TAXES (FAS 109). FAS 109 requires the
use of the asset and liability method of accounting for taxes. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under FAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash, due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods. The Federal Reserve Bank requires the Bank to
maintain a daily required reserve balance.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses and approximate market
value of securities available for sale as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury.................................... $ 10,052,000 $ 73,000 $ -- $ 10,125,000
U.S. Government Agencies......................... 34,865,000 148,000 30,000 34,983,000
------------- ----------- ----------- -------------
$ 44,917,000 $ 221,000 $ 30,000 $ 45,108,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-33
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SECURITIES AVAILABLE FOR SALE (CONTINUED)
The amortized cost and approximate market value at December 31, 1995 by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 10,052,000 $ 10,125,000
Due after one year through five years.......................... 34,865,000 34,983,000
------------- -------------
$ 44,917,000 $ 45,108,000
------------- -------------
------------- -------------
</TABLE>
There were no sales of securities in 1995.
3. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and approximate market
value of investment securities held to maturity as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury................................. $ 44,151,000 $ 635,000 $ 85,000 $ 44,701,000
U.S. Government Agencies...................... 59,685,000 195,000 141,000 59,739,000
Municipals.................................... 5,211,000 -- 58,000 5,153,000
-------------- ----------- ----------- --------------
$ 109,047,000 $ 830,000 $ 284,000 $ 109,593,000
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
The amortized cost and approximate market value at December 31, 1995 by
contractual maturity, is shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED MARKET
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less...................................... $ 22,171,000 $ 22,272,000
Due after one year through five years........................ 58,206,000 58,578,000
Due after five years through ten years....................... 19,762,000 19,747,000
Due after ten years.......................................... 330,000 480,000
Mortgage-backed securities................................... 8,578,000 8,516,000
-------------- --------------
$ 109,047,000 $ 109,593,000
-------------- --------------
-------------- --------------
</TABLE>
At December 31, 1995, investment securities held to maturity with a book
value of $5,600,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
F-34
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
At December 31, 1995 loans consist of the following:
<TABLE>
<S> <C>
Commercial.................................................... $115,055,000
Interim construction.......................................... 15,841,000
Consumer...................................................... 49,545,000
Real estate................................................... 81,305,000
-----------
261,746,000
Less:
Deferred loan fees.......................................... (1,370,000)
Allowance for loan losses................................... (5,882,000)
-----------
$254,494,000
-----------
-----------
</TABLE>
The Bank's loan portfolio consists primarily of loans to borrowers within
San Diego County. As of December 31, 1995, the Bank had $103,997,000 of
commercial, interim construction and real estate loans which were secured by
real estate located in San Diego County. Generally, these loans are secured by
first trust deeds and do not exceed 75% of the properties' appraised values at
origination. The portfolio is well diversified in both project type and areas
within the San Diego County region. Project types include single-family
residences, multi-family residences, commercial office buildings and centers,
industrial buildings and special purpose projects. Generally, loans are either
underwritten as permanent mortgages (with a 15-year or longer amortization but a
shorter maturity), or are expected to be repaid from the proceeds of permanent
financing or proceeds from the sale of the project or other assets of the
borrowers.
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing interest totaled $74,286 as of December 31, 1995.
There were $3,437,466 of loans on nonaccrual status as of December 31, 1995.
Interest income of $31,961 would have been recorded for the year ended December
31, 1995, if nonaccrual loans had been performing in accordance with their
original terms.
In addition to the above, the Bank serviced real estate loans for others
approximating $6,686,000 at December 31, 1995.
A summary of the activity in the allowance for loan losses for the year
ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Balance, beginning of year...................................... $6,095,000
Provision charged to operating expense.......................... 200,000
Loans charged off, net of recoveries............................ (413,000)
---------
Balance, end of year............................................ $5,882,000
---------
---------
</TABLE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize estimated losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions and the repayment capabilities of the borrowers. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review
F-35
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES (CONTINUED)
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments related to
information available to them at the time of their examination.
In the normal course of business, the Bank has made loans to certain
directors, officers and their affiliates under terms consistent with the Bank's
general lending policies. Such loans aggregated approximately $232,596 at
December 31, 1995.
5. BANK EQUIPMENT AND PROPERTY
Bank equipment and property at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Land and buildings............................................. $6,236,000
Leasehold improvements......................................... 2,948,000
Furniture, fixtures and equipment.............................. 5,827,000
----------
15,011,000
Less accumulated depreciation and amortization................. (6,831,000)
----------
$8,180,000
----------
----------
</TABLE>
6. DEPOSITS
Time deposits at December 31, 1995 are comprised of the following:
<TABLE>
<S> <C>
Time deposits of $100,000 or more.............................. $40,564,000
Time deposits under $100,000................................... 51,007,000
----------
$91,571,000
----------
----------
</TABLE>
The following summarizes the maturity of time deposits of $100,000 or more
at December 31, 1995:
<TABLE>
<S> <C>
Three months or less........................................... $16,783,000
Over three months through twelve months........................ 22,170,000
Over twelve months............................................. 1,611,000
----------
$40,564,000
----------
----------
</TABLE>
Interest expense on deposits for the years ended December 31, 1995 is
comprised of the following:
<TABLE>
<S> <C>
Interest-bearing demand......................................... $3,922,000
Savings......................................................... 884,000
Time............................................................ 3,862,000
---------
$8,668,000
---------
---------
</TABLE>
F-36
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
6. DEPOSITS (CONTINUED)
At December 31, 1995, the Bank's parent, GB Bancorporation, held a $414,000
index money market account.
7. SHORT-TERM BORROWINGS
At December 31, 1995, the Bank has unsecured Federal Funds Facility lines of
credit totaling $20,000,000, which accrue interest at the Federal Funds rate.
There is no amount outstanding at year-end. There was no interest expense for
the year ended December 31, 1995. The $5,000,000 line expires February 29, 1996
and the $15,000,000 line expires July 31, 1996. Management expects that, in the
normal course of business, Federal Funds Facility lines of credit that expire
will be renewed or replaced by other lines of credit, if necessary.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (FAS 107), requires that the Bank disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount is assumed to be the fair value because of the liquidity
of these instruments.
INVESTMENT SECURITIES
Fair values are based on quoted market prices available as of the statement
of condition date. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories. The fair value
estimates do not take into consideration the value of the loan portfolio in the
event the loans had to be sold outside the parameters of normal operating
activities.
The fair value of fixed rate loans and non-performing or adversely
classified adjustable rate loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loans. The discount
rates used for performing fixed rate loans are the Bank's current offer rates
for comparable instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be the
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
F-37
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings and NOW accounts, and money market and checking
accounts, is equal to the amount payable on demand as of the statement of
condition date. The fair value of time certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Bank's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair value is estimated as of December 31, 1995, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
The fair values of the Bank's financial instruments at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
CARRYING FAIR VALUE
AMOUNT ESTIMATES
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.................................. $ 36,134,000 $ 36,134,000
Investment securities...................................... 154,155,000 154,701,000
Loans, net................................................. 254,494,000 248,605,000
Financial liabilities:
Deposits................................................... 414,370,000 413,238,000
<CAPTION>
CONTRACT FAIR VALUE
AMOUNT ESTIMATES
-------------- --------------
<S> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit............................... $ 109,907,000 $ 1,611,000
Standby letters of credit.................................. 2,481,000 37,000
</TABLE>
F-38
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
9. INCOME TAXES
The components of income tax expense for the year ended December 31, 1995
are as follows:
<TABLE>
<S> <C>
Current:
Federal....................................................... $3,126,000
State......................................................... 1,106,000
----------
Total current............................................... 4,232,000
Deferred:
Federal....................................................... 4,000
State......................................................... --
----------
Total deferred.............................................. 4,000
----------
Change in valuation allowance................................... (1,927,000)
----------
Total income taxes.............................................. $2,309,000
----------
----------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Litigation settlement......................................... $ 232,000
Pension expenses.............................................. 1,571,000
Software amortization......................................... 663,000
Deferred compensation......................................... 421,000
Deferred loan fees............................................ 623,000
Loan loss allowance, due to differences in computation
of bad debts................................................ 2,440,000
Accrued compensation.......................................... 324,000
Other......................................................... 413,000
----------
Total gross deferred tax assets................................. 6,687,000
Less valuation allowance...................................... (827,000)
----------
Net deferred tax assets......................................... $5,860,000
----------
----------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation............................................. $ (262,000)
State taxes................................................... (50,000)
Acquisition fair value adjustment............................. (836,000)
----------
Net deferred tax liabilities.................................. $(1,148,000)
----------
----------
</TABLE>
Based upon the level of historical taxable income in previous years and
projections for future taxable income over the periods in which the temporary
differences giving rise to deferred tax assets are
F-39
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
9. INCOME TAXES (CONTINUED)
deductible, management believes it is more likely than not the Bank will realize
the benefits of these deductible differences, net of the existing valuation
allowance at December 31, 1995.
A reconciliation of total income taxes for the year ended December 31, 1995
to the amount computed by applying the applicable statutory federal income tax
rate of 34% to earnings before income taxes follows:
<TABLE>
<S> <C>
Computed expected income taxes.................... $ 3,260,000
Increase (decrease) in taxes resulting from:
State tax net of federal benefit................ 778,000
Decrease in valuation allowance................. (1,927,000)
Nondeductible expenses.......................... 43,000
Other, net...................................... 155,000
--------------
$ 2,309,000
--------------
--------------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Bank has noncontributory pension plans covering substantially all
full-time employees. The plans provide benefits based upon years of service and
final average earnings, offset by the benefits purchased by the former Employee
Stock Ownership Plan.
The following table sets forth the plans' funded status and amounts recorded
in the Bank's financial statements at December 31, 1995:
<TABLE>
<CAPTION>
NON-QUALIFIED
QUALIFIED PLAN PLAN
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations...................... $ 3,528,000 $ 2,373,000
-------------- --------------
-------------- --------------
Accumulated benefit obligation.................. $ 3,772,000 $ 2,373,000
-------------- --------------
-------------- --------------
Projected benefit obligation for
service-to-date................................. $ 4,659,000 $ 2,373,000
Plan assets at fair value......................... (4,862,000) --
-------------- --------------
Plan assets less (greater) than projected
benefit obligations............................. (203,000) 2,373,000
Unrecognized prior service cost................... 321,000 --
Unrecognized net asset existing at January 1,
1987............................................ 109,000 --
Unrecognized net gain............................. 646,000 20,000
-------------- --------------
Accrued pension liability......................... $ 873,000 $ 2,393,000
-------------- --------------
-------------- --------------
</TABLE>
F-40
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net pension expense for the qualified plan for the year ended December 31,
1995 included the following components:
<TABLE>
<S> <C>
Service cost...................................... $ 281,000
Interest cost..................................... 271,000
Actual return on plan assets...................... (1,000,000)
Net amortization and deferral..................... 580,000
--------------
Net pension expense............................. $ 132,000
--------------
--------------
</TABLE>
In determining the annual pension expense and benefit obligations, the
Bank's actuaries assumed compensation level increases of 4.5% to 5.0% over ten
years and a long-term rate of return on plan assets of 9% for the qualified
plan. The discount rate used was 6.5% for both the qualified plan and the non-
qualified plan.
It is the Bank's policy to fund pension costs as accrued for the qualified
plan. Unfunded past service liability related to the qualified plan is being
amortized over a 30 year period to 2012. Employees become automatically vested
if qualified plans are terminated.
The Bank has an employee 401(k) plan covering substantially all employees.
Under terms of the plan, the Bank contributes one-half of each eligible
participant's annual contributions up to a maximum Bank contribution of 3%. The
Bank's contributions to the plan for the year ended December 31, 1995 was
$121,439.
The Bank adopted a deferred compensation plan in 1994 which provides for
additional compensation to designated officers based upon the return on equity
of the Bank. The award vests ratably over three years beginning after the year
of the award. Payment of awards is deferred until the participant terminates
employment with the Bank. The total deferred compensation expense under the plan
for the year ended December 31, 1995 was $36,000.
11. COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statement of condition.
The contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
Commitments to extend credit amounting to $109,907,000 were outstanding at
December 31, 1995. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit amounting to $2,481,000 were outstanding at
December 31, 1995. Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a
F-41
<PAGE>
GROSSMONT BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
customer to a third party. Those guarantees are primarily issued to support
private borrowings arrangements. Most guarantees will expire within one year.
The Bank generally requires collateral or other security to support financial
instruments with credit risk. Management does not anticipate that any material
loss will result from the outstanding commitments to extend credit or standby
letters of credit.
At December 31, 1995, aggregate net minimum annual rental commitments for
certain real property under noncancellable operating leases having an initial or
remaining term of more than one year are as follows:
<TABLE>
<S> <C>
1996.............................................. $ 802,000
1997.............................................. 728,000
1998.............................................. 683,000
1999.............................................. 617,000
2000.............................................. 550,000
Thereafter........................................ 4,080,000
--------------
$ 7,460,000
--------------
--------------
</TABLE>
The leases provide for additional rents based on increases in the Consumer
Price Index and require payment of real estate taxes and insurance. Total rent
expense was $1,028,000 for the year ended December 31, 1995.
12. REGULATORY MATTERS (UNAUDITED)
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
was signed into law on December 19, 1991. Regulations implementing the prompt
correction action provisions of FDICIA became effective on December 19, 1992.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under these
guidelines, at December 31, 1995, the Bank was considered "well capitalized."
The Federal Deposit Insurance Corporation (FDIC) requires that the Bank
maintain minimum amounts of capital. The Bank exceeded all applicable capital
requirements to be classified as "well capitalized" as of December 31, 1995, as
defined by the FDIC as follows:
<TABLE>
<CAPTION>
WELL
CAPITALIZED
REQUIREMENT GROSSMONT BANK
-------------- --------------
<S> <C> <C>
Risk-based capital ratio.......................... 310% 15.31%
Tier 1 Risk based capital ratio................... 36% 14.05%
Tier 1 leveraged capital ratio.................... 35% 9.29%
</TABLE>
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Grossmont Bank
La Mesa, California:
We have audited the accompanying consolidated statement of condition of
Grossmont Bank and subsidiary (the "Bank") as of December 31, 1994, and the
related consolidated statements of income, changes in stockholder's equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides 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 Grossmont
Bank and subsidiary as of December 31, 1994, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its method of accounting for certain investments in 1994 to adopt the
provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
KPMG Peat Marwick LLP
San Diego, California
January 20, 1995
F-43
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
--------------
<S> <C>
ASSETS
Cash and due from banks........................................................................... $ 33,187,000
Federal funds sold................................................................................ 25,950,000
Investments:
Securities available for sale................................................................... 36,816,000
Securities held to maturity..................................................................... 90,764,000
Loans, net of allowance for loan losses of $6,095,000............................................. 247,412,000
Bank equipment and property, net.................................................................. 8,285,000
Real estate held for sale......................................................................... 160,000
Interest receivable and other assets.............................................................. 10,286,000
--------------
$ 452,860,000
--------------
LIABILITIES AND STOCKHOLDER'S EQUITY
DEPOSITS:
Demand.......................................................................................... $ 118,308,000
Interest-bearing demand......................................................................... 169,431,000
Savings......................................................................................... 45,776,000
Time............................................................................................ 72,991,000
--------------
Total deposits................................................................................ 406,506,000
Interest payable and other liabilities............................................................ 8,907,000
--------------
Total liabilities............................................................................. 415,413,000
--------------
STOCKHOLDER'S EQUITY:
Common stock, $1.50 par value; 3,000,000 shares authorized, 1,199,755 shares issued and
outstanding................................................................................... 1,800,000
Additional paid-in capital...................................................................... 4,513,000
Retained earnings............................................................................... 31,344,000
Unrealized losses on securities available for sale, net......................................... (210,000)
--------------
Total stockholder's equity.................................................................... 37,447,000
Commitments and contingencies..................................................................... $ 452,860,000
--------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
INTEREST INCOME:
Interest and fees on loans....................................................................... $ 21,140,000
Federal funds sold............................................................................... 463,000
Investment securities:
U.S. Treasury.................................................................................. 5,170,000
U.S. government agencies and corporations...................................................... 2,979,000
Other.......................................................................................... 57,000
-------------
Total interest income........................................................................ 29,809,000
INTEREST EXPENSE:
Deposits......................................................................................... 7,150,000
Other............................................................................................ 152,000
-------------
Total interest expense....................................................................... 7,302,000
-------------
Net interest income.......................................................................... 22,507,000
Provision for loan losses.......................................................................... 350,000
-------------
Net interest income after provision for loan losses.......................................... 22,157,000
-------------
OTHER OPERATING INCOME:
Service charges on deposit accounts.............................................................. 2,050,000
Trust fees....................................................................................... 366,000
Litigation settlement............................................................................ 1,591,000
Gain on sale of Trust Department, net............................................................ 1,133,000
Gain on sale of loans............................................................................ 25,000
Other............................................................................................ 1,561,000
-------------
Total other operating income................................................................. 6,726,000
-------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits................................................................... 9,989,000
Occupancy, net................................................................................... 2,125,000
Furniture and equipment.......................................................................... 1,071,000
Other real estate owned, net..................................................................... 116,000
Legal............................................................................................ 1,325,000
Other............................................................................................ 6,575,000
-------------
Total other operating expenses............................................................... 21,201,000
-------------
Income before income taxes......................................................................... 7,682,000
Income tax expense................................................................................. 2,675,000
-------------
Net income................................................................................... $ 5,007,000
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
UNREALIZED
LOSSES ON
COMMON STOCK ADDITIONAL SECURITIES TOTAL
-------------------------- PAID-IN RETAINED AVAILABLE STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS FOR SALE EQUITY
------------ ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993..................... 1,199,755 $ 1,800,000 $ 4,513,000 $ 26,337,00 $ -- $ 32,650,000
Net income................. -- -- -- 5,007,000 -- 5,007,000
Unrealized losses on
securities available for
sale, net................ -- -- -- -- (210,000) (210,000)
------------ ------------ ------------ ------------- ----------- -------------
Balance at December 31,
1994..................... 1,199,755 $ 1,800,000 $ 4,513,000 $ 31,344,000 $ (210,000) $ 37,447,000
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................................ $ 5,007,000
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization................................................................... 528,000
Provision for loan losses....................................................................... 350,000
Provisions for losses on other real estate owned................................................ 106,000
Loss (gain) on sale of securities available for sale, net....................................... 8,000
Gain on sale of loans........................................................................... (25,000)
Gain on sale of Trust Department................................................................ (1,133,000)
Loss (gain) on sale of other assets, net........................................................ (41,000)
Increase in allowance for securities available for sale, net of tax............................. 210,000
Decrease (increase) in interest receivable and other assets..................................... 1,253,000
Increase (decrease) in interest payable and other liabilities................................... (2,572,000)
--------------
Net cash provided by (used in) operating activities........................................... 3,691,000
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans outstanding............................................................... (47,405,000)
Purchases of investment securities held to maturity............................................. (5,562,000)
Maturities of investment securities held to maturity............................................ 5,000,000
Principal repayment on investment securities held to maturity................................... 4,064,000
Purchases of securities available for sale...................................................... (56,437,000)
Maturities of securities available for sale..................................................... 82,200,000
Proceeds from sale of securities available for sale............................................. 17,993,000
Net proceeds from sale of Trust Department...................................................... 1,133,000
Purchases of bank equipment and property........................................................ (1,502,000)
Proceeds from sale of bank equipment and property............................................... 618,000
Proceeds from sale of loans..................................................................... 2,999,000
Net (increase) decrease in real estate held for sale............................................ 267,000
Proceeds from the sale of other real estate owned............................................... 3,991,000
--------------
Net cash provided by (used in) investing activities........................................... 7,359,000
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits........................................................................ 3,920,000
--------------
Net increase (decrease) in cash and cash equivalents.............................................. 14,970,000
Cash and cash equivalents at beginning of year.................................................... 44,167,000
--------------
Cash and cash equivalents at end of year.......................................................... $ 59,137,000
--------------
--------------
SUPPLEMENTAL CASH FLOW AND NONCASH INVESTING AND FINANCING ACTIVITIES INFORMATION:
Cash paid during the year for interest:......................................................... $ 7,325,000
--------------
--------------
Cash paid during the year for taxes............................................................. $ 2,860,000
--------------
--------------
NONCASH INVESTING ACTIVITIES:
Additions to the other real estate owned acquired in settlement of loans........................ $ 571,000
--------------
--------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Grossmont Bank and subsidiary (the
"Bank") conform to generally accepted accounting principles and to general
practices within the banking industry. The following is a description of the
more significant policies:
(A) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Grossmont Bank
and its wholly-owned subsidiary, GB Capital. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Grossmont Bank is an indirect, wholly-owned subsidiary of Bancomer-
Mexico ("Bancomer").
In December 1994, Bancomer announced their intent to sell the Bank.
(B) INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE:
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("Statement
115"), management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Bank has the ability at
the time of purchase to hold securities until maturity, they are classified as
held to maturity. Investment securities held to maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts over the period
to maturity of the related security. Securities to be held for indefinite
periods of time, but not necessarily to be held to maturity or on a long-term
basis are classified as available for sale and carried at fair value with
unrealized gains or losses reported as a separate component of equity. Realized
gains or losses on the sale of securities available for sale, if any, are
determined using the adjusted cost of the specific securities sold. Securities
held for indefinite periods of time include securities that management intends
to use as part of its asset/liability management strategy and that may be sold
in response to changes in interest rates, prepayment risk and other related
factors. Effective January 1, 1994, the Bank adopted Statement 115.
(C) LOANS:
Interest on commercial and real estate mortgage loans is accrued based on
principal amounts outstanding. Interest on consumer loans is computed on the
interest method. The accrual of interest on loans is discontinued when, in
management's judgment, a reasonable doubt exists as to the collectability of
principal or interest payments in the normal course of business. Interest on
such loans accrued in prior periods is charged against the allowance for loan
losses. Interest accrued on such loans in the current period is reversed from
interest income. A loan is restored to accrual status when the loan becomes both
well-secured and it is in the process of collection.
(D) ALLOWANCE FOR LOAN LOSSES:
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience and current economic conditions which may affect the
borrowers' ability to pay and the underlying collateral value of the loans.
Loans which are deemed to be uncollectible
F-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are charged off and deducted from the allowance. The provision for loan losses
and recoveries on loans previously charged off are added to the allowance.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" ("Statement 114") and in October 1994, the
FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" ("Statement 118"). Under the
provisions of Statement 114, a loan is considered impaired when it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Statement 114 defines methods of
measuring impairment and, if the measure of the impaired loan is less than the
recorded investment in the loan, it requires a creditor to create a valuation
allowance with a corresponding charge to bad debt expense. Statement 118 amends
Statement 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans. In addition, Statement 118 amends certain
disclosure requirements of Statement 114. Statement 114 and 118 apply to
financial statements for fiscal years beginning after December 15, 1994 and
initial adoption is required to be reflected prospectively. The Bank does not
expect these Statements to have a material impact on its financial position or
results of operations.
(E) LOAN FEES:
Nonrefundable loan fees and related direct costs associated with the
origination or purchase of loans are deferred, and the net fees or costs are
recognized as an adjustment to interest income over the contractual life of the
loans using the interest method.
(F) BANK EQUIPMENT AND PROPERTY:
Bank equipment and property are stated at cost less accumulated depreciation
and amortization. Depreciation is charged to expense over the estimated useful
lives of the assets on a straight-line basis. Amortization of leasehold
improvements is computed on a straight-line basis over the terms of the leases
or the estimated useful lives of the improvements, whichever is shorter.
(G) REAL ESTATE HELD FOR SALE:
Real estate held for sale is stated at the lower of cost or estimated market
value and represents land held by GB Capital through a consolidated joint
venture.
(H) OTHER REAL ESTATE OWNED:
Other real estate owned is recorded at the lower of the recorded loan
balance or the estimated fair value of the property at the time of acquisition.
Fair value is based on current appraisals less estimated selling and holding
costs. The excess of the recorded loan balance over the estimated fair value of
the property at the time of acquisition is charged to the allowance for loan
losses. Any subsequent write-downs are charged to operating expenses and
recognized as a valuation allowance. Subsequent increases in the fair value of
the asset less selling costs reduces the valuation allowance, not below zero,
and is credited to income. Operating expenses of such properties, net of related
income, and gains and losses on their disposition are included in other
operating expenses.
F-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) INCOME TAXES:
The Bank files a consolidated federal income tax return and a combined
California state franchise tax return with Bancomer Holding Company of
California (the Parent). In accordance with the tax sharing agreement with its
Parent, income tax amounts are determined as if the Bank filed separate tax
returns, except for certain benefits related to the acquisition of the Bank
which Bancomer claims.
The Bank accounts for income taxes using Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Statement 109
requires the use of the asset and liability method of accounting for taxes.
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(J) TRUST ASSETS:
In accordance with the usual practice of banks, assets and liabilities held
by the Bank in fiduciary or agency capacity for clients are not included in the
Bank's consolidated financial statements as such items are not assets or
liabilities of the Bank (Note 14).
(K) CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash, due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
NOTE 2 SECURITIES AVAILABLE FOR SALE
The book value, gross unrealized gains and losses and approximate market
value of securities available for sales as of December 31, 1994, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
1994
U.S. Treasury............................................ $ 17,227,000 $ 2,000 $ 310,000 $ 16,919,000
U.S. government agencies................................. 19,919,000 -- 22,000 19,897,000
------------- ----------- ---------- -------------
$ 37,146,000 $ 2,000 $ 332,000 $ 36,816,000
------------- ----------- ---------- -------------
------------- ----------- ---------- -------------
</TABLE>
The maturity distribution based on amortized cost and approximate market
value at December 31, 1994 by contractual maturity, is shown below. Expected
maturities will differ from contractual maturities
F-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 2 SECURITIES AVAILABLE FOR SALE (CONTINUED)
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
----------------------------
AMORTIZED APPROXIMATE
COST MARKET VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 27,033,000 $ 26,954,000
Due after one year through five years.......................... 10,113,000 9,862,000
------------- -------------
$ 37,146,000 $ 36,816,000
------------- -------------
------------- -------------
</TABLE>
Proceeds from the sale of securities available for sale were $17,993,000
during 1994. Gross gains of $1,000, and gross losses of $9,000 were realized on
those sales during 1994.
NOTE 3 INVESTMENT SECURITIES HELD TO MATURITY
The book value, gross unrealized gains and losses and approximate market
value of investment securities held to maturity as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
1994
U.S. Treasury.......................................... $ 57,902,000 $ 19,000 $ 1,552,000 $ 56,369,000
U.S. government agencies............................... 32,520,000 3,000 1,499,000 31,024,000
Other.................................................. 342,000 -- 21,000 321,000
------------- ----------- ------------ -------------
$ 90,764,000 $ 22,000 $ 3,072,000 $ 87,714,000
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
The maturity distribution based on amortized cost and approximate market
value at December 31, 1994 by contractual maturity is shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or pre-pay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
----------------------------
AMORTIZED APPROXIMATE
COST MARKET VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 16,177,000 $ 16,006,000
Due after one year through five years.......................... 68,033,000 65,490,000
Due after five years through ten years......................... 5,925,000 5,575,000
Due after ten years............................................ 629,000 643,000
------------- -------------
$ 90,764,000 $ 87,714,000
------------- -------------
------------- -------------
</TABLE>
At December 31, 1994, investment securities held to maturity with a book
value of $6,785,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
F-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 4 LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
At December 31, 1994 loans consist of the following:
<TABLE>
<CAPTION>
1994
--------------
<S> <C>
Commercial.................................................................... $ 112,879,000
Interim construction.......................................................... 24,262,000
Consumer...................................................................... 44,027,000
Real Estate................................................................... 73,542,000
--------------
254,710,000
--------------
Less:
Deferred loan fees.......................................................... (1,203,000)
Allowance for loan losses................................................... (6,095,000)
--------------
$ 247,412,000
--------------
--------------
</TABLE>
The Bank's loan portfolio consists primarily of loans to borrowers within
San Diego County. As of December 31, 1994, the Bank had approximately
$45,621,000 of commercial and interim construction loans which were secured by
real estate located in San Diego County. Generally, these loans are secured by
first trust deeds and do not exceed 75% of the properties' appraised values at
origination. The portfolio is well diversified in both project type and areas
within the San Diego County region. Project types include single-family
residences, multi-family residences, commercial office buildings and centers,
industrial buildings and special purpose projects. Generally, loans are either
underwritten as permanent mortgages (with a 15-year or longer amortization but a
shorter maturity), or are expected to be repaid from the proceeds of permanent
financing or proceeds from the sale of the project or other assets of the
borrowers.
Loans contractually past due 90 days or more as to interest or principal
payments and still accruing interest totaled $518,000 as of December 31, 1994.
There were $3,812,000 of loans on nonaccrual status as of December 31, 1994.
Interest income of $40,000 would have been recorded for the year ended December
31, 1994 if nonaccrual loans had been performing in accordance with their
original terms.
In addition to the above, the Bank services real estate loans for others
approximating $7,838,000 at December 31, 1994.
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Balance, beginning of year...................................................... $ 6,161,000
Provision charged to operating expense.......................................... 350,000
Loans charged off, net of recoveries............................................ (416,000)
------------
Balance, end of year............................................................ $ 6,095,000
------------
------------
</TABLE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize estimated losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions and the repayment capabilities of the borrowers. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the
F-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 4 LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES (CONTINUED)
allowance based on their judgments related to information available to them at
the time of their examination.
In the normal course of business, the Bank has made loans to certain
directors, officers, and their affiliates under terms consistent with the Bank's
general lending policies. Such loans aggregated approximately $5,648,000 at
December 31, 1994.
NOTE 5 OTHER REAL ESTATE OWNED
A summary of the activity in the allowance for OREO is as follows:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Balance, beginning of year..................................................... $ 1,022,000
Provisions charged to expense.................................................. 106,000
Charge-offs.................................................................... (1,128,000)
-------------
Balance, end of year........................................................... $ --
-------------
-------------
</TABLE>
NOTE 6 BANK EQUIPMENT AND PROPERTY
Bank equipment and property at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Land and buildings............................................................. $ 6,088,000
Leasehold improvements......................................................... 2,750,000
Furniture, fixtures and equipment.............................................. 5,432,000
-------------
14,270,000
Less accumulated depreciation and amortization................................. (5,985,000)
-------------
$ 8,285,000
-------------
-------------
</TABLE>
NOTE 7 DEPOSITS
Time deposits at December 31, 1994 are comprised of the following:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Time deposits of $100,000 or more.............................................. $ 32,668,000
Time deposits under $100,000................................................... 40,323,000
-------------
$ 72,991,000
-------------
-------------
</TABLE>
The following summarizes the maturity of time deposits of $100,000 or more
at December 31, 1994:
<TABLE>
<S> <C>
Three months or less............................................................ $18,849,000
Over three months through twelve months......................................... 13,402,000
Over twelve months.............................................................. 417,000
-----------
$32,668,000
-----------
-----------
</TABLE>
F-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 7 DEPOSITS (CONTINUED)
Interest expense on deposits at December 31, 1994 is comprised of the
following:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Interest-bearing demand......................................................... $ 3,715,000
Savings Time.................................................................... 1,060,000
Time............................................................................ 2,375,000
------------
$ 7,150,000
------------
------------
</TABLE>
Bancomer, the Bank's parent, held a $230,000 time deposit at December 31,
1994. In addition, Mercury Bank and Trust, Limited, a subsidiary of Bancomer,
held at $6,000,000 time certificate of deposit at December 31, 1994. These funds
were pledged as collateral for letters of credit and short-term loans made by
the Bank to the parent's customers. Interest paid is based on the LIBOR rate.
NOTE 8 SHORT-TERM BORROWINGS
At December 31, 1994, the Bank has unsecured Federal Funds Facility lines of
credit totaling $20,000,000 which accrue interest at the Federal Funds rate.
There is no amount outstanding at year-end. Interest expense related to these
borrowings of $68,000 was incurred during 1994. The $5,000,000 line expires
February 28, 1995 and the $15,000,000 line expires July 31, 1995. Management
expects that, in the normal course of business, Federal Funds Facility lines of
credit that expire will be renewed or replaced by other lines of credit if
necessary.
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("Statement 107"), requires that the Bank
disclose estimated fair values for its financial instruments. The following
summary presents a description of the methodologies and assumptions used to
determine such amounts.
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount is assumed to be the fair value because of the liquidity
of these instruments.
INVESTMENT SECURITIES
Fair values are based on quoted market prices available as of the statement
of condition date. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories. The fair value
estimates do not take into consideration the value of the loan portfolio in the
event the loans had to be sold outside the parameters of normal operating
activities.
The fair value of fixed rate loans and non-performing or adversely
classified adjustable rate loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market
F-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
discount rates that reflect the credit and interest rate risk inherent in the
loans. The discount rates used for performing fixed rate loans are the Bank's
current offer rates for comparable instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings and NOW accounts, and money market and checking
accounts, is equal to the amount payable on demand as of the statement of
condition date. The fair value of time certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities. No
value has been assigned to the Bank's long-term relationships with its deposit
customers (core deposit intangible) since its not a financial instrument as
defined under Statement 107.
ACCRUED INTEREST RECEIVABLE AND PAYABLE
Fair value is considered to be equal to the carrying value of the accrued
interest receivable and payable as they are short-term in nature and the related
amounts approximate fair value or are receivable or payable on demand.
SHORT-TERM BORROWINGS
Carrying amounts of borrowings under lines of credit approximate fair
values.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Bank's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair value is estimated as of December 31, 1994, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
F-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of the Bank's financial instruments at December 31, 1994 are
as follows:
<TABLE>
<CAPTION>
1994
-------------------------------------
FAIR VALUE
CARRYING AMOUNT ESTIMATES
---------------- -------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................ $ 59,137,000 $ 59,137,000
Investment securities................................ 127,580,000 124,530,000
Loans, net........................................... 247,412,000 240,541,000
Financial liabilities--deposits...................... 406,506,000 406,352,000
<CAPTION>
FAIR VALUE
CONTRACT AMOUNT ESTIMATES
---------------- -------------------
<S> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit......................... $ 92,009,000 $ 1,380,000
Standby letters of credit............................ 2,381,000 36,000
</TABLE>
NOTE 10 INCOME TAXES
The components of income tax expense for the year ended December 31, 1994
are as follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Current:
Federal....................................................................... $ 2,569,000
State......................................................................... 625,000
------------
Total current............................................................... 3,194,000
------------
Deferred:
Federal....................................................................... (66,000)
------------
Total deferred.............................................................. (66,000)
Change in valuation allowance................................................... (453,000)
------------
Total income taxes.......................................................... $ 2,675,000
------------
------------
</TABLE>
F-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 10 INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1994
-------------
<S> <C>
Deferred tax assets:
OREO property, principally due to differences in valuation of property....... $ 44,000
Litigation settlement........................................................ 570,000
Pension expenses............................................................. 1,796,000
Software amortization........................................................ 717,000
Deferred compensation........................................................ 438,000
Deferred loan fees........................................................... 548,000
Loan loss allowance, due to differences in computation of bad debts.......... 2,721,000
State taxes.................................................................. 134,000
Other........................................................................ 450,000
-------------
Total gross deferred tax assets............................................ 7,418,000
Less valuation allowance..................................................... (3,749,000)
-------------
Net deferred tax assets.................................................... 3,669,000
-------------
-------------
Net deferred tax liabilities--
plants and equipment, principally due to differences in depreciation......... $ (285,000)
-------------
-------------
</TABLE>
Based upon the level of historical taxable income in previous years and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Bank will realize the benefits of these deductible differences, net of the
existing valuation at December 31, 1994.
A reconciliation of total income taxes for the year ended December 31, 1994
to the amount computed by applying the applicable statutory federal income tax
rate of 34% to earnings before income taxes follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Computed expected income taxes.................................................. $ 2,612,000
Increase (decrease) in taxes resulting from:
State tax for which no federal benefit is available........................... 134,000
Decrease in valuation allowance............................................... (453,000)
Benefit of net operating loss carryforwards................................... (45,000)
Other, net.................................................................... 427,000
------------
$ 2,675,000
------------
------------
</TABLE>
NOTE 11 EMPLOYEE BENEFIT PLANS
The Bank has noncontributory pension plans covering substantially all
full-time employees. The plans provide benefits based upon years of service and
final average earnings, offset by the benefits purchased by the former Employee
Stock Ownership Plan.
F-57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 11 EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the plans' funded status and amounts recorded
in the Bank's consolidated financial statements at December 31, 1994:
<TABLE>
<CAPTION>
1994
---------------------------------
QUALIFIED
PLAN NON-QUALIFIED PLAN
------------- ------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations............................... $ 2,524,000 $ 2,500,000
------------- ------------------
Accumulated benefit obligations ("ABO").................. $ 2,682,000 $ 2,500,000
------------- ------------------
Projected benefit obligation for service-to-date........... $ 3,447,000 $ 2,500,000
Plan assets at fair value.................................. (3,748,000) --
------------- ------------------
Plan assets less (greater) than projected benefit
obligations.............................................. (301,000) 2,500,000
Unrecognized prior service cost............................ 360,000 (255,000)
Unrecognized net asset existing at Janauary................ 118,000 --
Unrecognized net gain...................................... 820,000 127,000
Adjusted required to recognize minimum liability........... -- 128,000
------------- ------------------
Accrued pension liability.................................. $ 997,000 $ 2,500,000
------------- ------------------
------------- ------------------
</TABLE>
Net pension expense for the qualifed plan at December 31, 1994 included the
following components:
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Service cost..................................................................... $ 258,000
Interest cost.................................................................... 239,000
Actual return on plan assets..................................................... 151,000
Net amortization and deferral.................................................... (638,000)
-----------
Net pension expense............................................................ $ 10,000
-----------
-----------
</TABLE>
In determining the annual pension expense and benefit obligations, the
Bank's actuaries assumed compensation level increases of 4.5% to 5.5% over ten
years and a long-term rate of return on plan assets of 9% for the qualified
plan. The discount rate used for 1994 was 7.5% for the qualified plan and the
non-qualified plan.
It is the Bank's policy to fund pension costs as accrued for the qualified
plan. Unfunded past service liability related to the qualified plan is being
amortized over a 30-year period to 2012. Employees become automatically vested
if qualified plans are terminated.
The Bank has an employee 401(k) plan covering substantially all employees.
Under terms of the plan, the Bank contributes one-half of each eligible
participant's annual contributions up to a maximum Bank contribution of 3%. The
Bank's contributions to the plan for the year ended December 31, 1994 were
$101,000.
During 1994, the Bank terminated a deferred compensation plan which provided
for additional compensation to officers. The annual award to each eligible
employee was computed under a formula which considered the income of the Bank,
return on average assets, and growth in assets as compared to its peer group.
Awards vest ratably over three years beginning after the year of award. Payment
of awards is
F-58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 11 EMPLOYEE BENEFIT PLANS (CONTINUED)
deferred until the participant terminates employment with the Bank. The total
deferred compensation expense under this plan for 1994 was $17,000.
The Bank adopted another deferred compensation plan in the current year
which provides for additional compensation to designated officers based upon the
return on equity of the Bank. The award vests ratably over three years beginning
after the year of the award. Payment of awards is deferred until the participant
terminates employment with the Bank. The total deferred compensation expense
under the new plan for 1994 was $127,000.
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statements of
condition. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
Commitments to extend credit amounting to $92,009,000 were outstanding at
December 31, 1994. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit amounting to $2,381,000 were outstanding at
December 31, 1994. Standby letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support private borrowing arrangements. Most
guarantees will expire within one year. The Bank generally requires collateral
or other security to support financial instruments with credit risk. Management
does not anticipate that any material loss will result from the outstanding
commitments to extend credit or standby letters of credit.
At December 31, 1994, aggregate net minimum annual rental commitments for
certain real property under noncancellable operating leases having an initial or
remaining term of more than one year are as follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
1995............................................................................ $ 829,000
1996............................................................................ 565,000
1997............................................................................ 540,000
1998............................................................................ 478,000
1999............................................................................ 406,000
Thereafter...................................................................... 3,869,000
------------
Total......................................................................... $ 6,687,000
------------
------------
</TABLE>
F-59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE 12 COMMITMENTS AND CONTINGENCIES (CONTINUED)
The leases provide for additional rents based on increases in the Consumer
Price Index and require payment of real estate taxes and insurance. Total rent
expense was $984,000 for the year ended December 31, 1994.
Because of the nature of its activities, the Bank is at all times subject to
pending and threatened legal actions which arise out of the normal course of its
business. The Bank has been named in a class action lawsuit involving a breach
of Western Trusts Service's fiduciary duties (Note 14). The matter is in the
discovery stages and management does not believe any material liability will
result.
During 1994, the Bank was awarded $1,591,000 in punitive damages and
insurance coverage in settlement of a legal action.
NOTE 13 REGULATORY MATTERS (UNAUDITED)
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
was signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized", "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." Under these
guidelines, at December 31, 1994, the Bank was considered "well capitalized."
The Federal Deposit Insurance Corporation ("FDIC") requires that the Bank
maintain minimum amounts of capital. The Bank exceeded all applicable capital
requirements to be classified as "well capitalized" as of December 31, 1994, as
defined by the FDIC as follows:
<TABLE>
<CAPTION>
WELL CAPITALIZED REQUIREMENT GROSSMONT BANK
------------------------------- ----------------
<S> <C> <C>
Risk-based capital ratio.................................... GREATER THAN OR EQUAL TO 10% 13.70%
Tier 1 Risk-based capital ratio............................. GREATER THAN OR EQUAL TO 6% 12.44%
Tier 1 leveraged capital ratio.............................. GREATER THAN OR EQUAL TO 6% 8.26%
</TABLE>
As a result of the 1994 FDIC examination of the Bank, the Memorandum of
Understanding ("MOU") which was issued in 1992 was terminated.
NOTE 14 TRUST SALE
On January 5, 1994, following regulatory approval, the Bank sold all of the
trust business of Western Trust Services, a division of the Bank, to an
unrelated party for $2,500,000. The sale resulted in a pretax net gain of
$1,133,000. This gain has been adjusted for additional compensation paid to the
principals, and for other costs related to the disposal, based upon the net
profit of the sale. Total settlement amounts paid to the principals related to
the disposal of the trust business totaled approximately $722,000. The
consolidated financial statements have not been restated to report separately
the net assets and operating results of this discontinued operation as the
amounts are immaterial to the consolidated financial statements taken as a
whole.
F-60
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE THIRD DAY OF JULY, 1997
BY AND BETWEEN
ZIONS BANCORPORATION
AND
GB BANCORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
RECITALS.................................................................................................. 1
ARTICLE I. THE MERGER
SECTION 1.1. Structure of the Merger............................................................... 1
SECTION 1.2. Effect on Outstanding Shares.......................................................... 2
SECTION 1.3. Exchange Procedures................................................................... 2
SECTION 1.4 Dissenters' Rights.................................................................... 3
SECTION 1.5. Options............................................................................... 4
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. Conduct of the Company's Business Prior to the Effective Time......................... 4
SECTION 2.2. Forbearance by the Company............................................................ 4
SECTION 2.3. Cooperation........................................................................... 6
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the Company......................................... 6
SECTION 3.2. Representations and Warranties of the Acquiror........................................ 15
ARTICLE IV. COVENANTS
SECTION 4.1. Acquisition Proposals................................................................. 16
SECTION 4.2. Certain Policies of the Company....................................................... 17
SECTION 4.3. Employees............................................................................. 17
SECTION 4.4. Access and Information................................................................ 17
SECTION 4.5. Certain Filings, Consents and Arrangements............................................ 18
SECTION 4.6. Indemnification; Directors' and Officers' Insurance................................... 18
SECTION 4.7. Additional Agreements................................................................. 19
SECTION 4.8. Publicity............................................................................. 19
SECTION 4.9. Registration Statement; Proxy Statement............................................... 19
SECTION 4.10. Shareholders' Meeting................................................................. 20
SECTION 4.11. Notification of Certain Matters....................................................... 20
SECTION 4.12. Tax-Free Reorganization Treatment; Pooling............................................ 20
SECTION 4.13. Shareholder Agreements; Affiliate's Letters........................................... 20
SECTION 4.14. Director Resignations................................................................. 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 4.15. No Omission of Material Fact.......................................................... 21
SECTION 4.16. Blue Sky; NASDAQ Listing.............................................................. 21
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. Conditions to All Parties' Obligations................................................ 21
SECTION 5.2. Conditions to the Obligations of the Acquiror......................................... 24
SECTION 5.3. Conditions to the Obligation of the Company........................................... 24
ARTICLE VI. TERMINATION
SECTION 6.1. Termination........................................................................... 24
SECTION 6.2. Effect of Termination................................................................. 25
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. Effective Date and Effective Time..................................................... 25
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. Certain Definitions; Interpretation................................................... 25
SECTION 8.2. Survival.............................................................................. 26
SECTION 8.3. Waiver................................................................................ 26
SECTION 8.4. Counterparts.......................................................................... 26
SECTION 8.5. Governing Law......................................................................... 26
SECTION 8.6. WAIVER OF JURY TRIAL.................................................................. 26
SECTION 8.7. Expenses.............................................................................. 26
SECTION 8.8. Notices............................................................................... 27
SECTION 8.9. Entire Agreement; Etc................................................................. 27
SECTION 8.10. Assignment............................................................................ 28
LIST OF ANNEXES
Annex I -- Company Rights
Annex II -- Form of Shareholder's Agreement
Annex III -- Form of Employment Agreement
</TABLE>
ii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquiror.............................................................................. 1
Acquiror Common Stock................................................................. 1
Acquiror Reports...................................................................... 29
Acquisition Proposal.................................................................. 30
Affiliates............................................................................ 37
Benefit Plans......................................................................... 17
BHC Act............................................................................... 1
BIF................................................................................... 10
California Commissioner............................................................... 12
Certificate........................................................................... 3
CGCL.................................................................................. 2
Code.................................................................................. 2
Company............................................................................... 1
Company Bank.......................................................................... 6
Company Common Stock.................................................................. 1
Company Disclosure Letter............................................................. 10
Company Reports....................................................................... 12
Company's knowledge................................................................... 45
Conversion Number..................................................................... 2
Costs................................................................................. 32
Covered Person........................................................................ 25
Dissenters' Shares.................................................................... 2
Dissenting Shareholder................................................................ 2
Effective Date........................................................................ 45
Effective Time........................................................................ 45
Employees............................................................................. 17
Environmental Law..................................................................... 22
ERISA................................................................................. 17
ERISA Affiliate....................................................................... 18
Exchange Act.......................................................................... 23
Exchange Agent........................................................................ 3
FDIC.................................................................................. 10
Federal Reserve Board................................................................. 1
GAAP.................................................................................. 9
Government Regulators................................................................. 15
Hazardous Material.................................................................... 23
Indemnified Parties................................................................... 32
knowledge of the Company.............................................................. 45
material.............................................................................. 46
Material Adverse Effect............................................................... 46
Maximum Amount........................................................................ 33
Meeting............................................................................... 35
Merger................................................................................ 2
Merger Consideration.................................................................. 2
NASDAQ................................................................................ 3
OREO.................................................................................. 23
Participation Facility................................................................ 22
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Pension Plan.......................................................................... 17
person................................................................................ 46
Plan.................................................................................. 1
Plans................................................................................. 17
Proxy Statement/Prospectus............................................................ 34
Registration Statement................................................................ 34
Rights................................................................................ 1
Shareholder Agreements................................................................ 36
subsidiary............................................................................ 46
Surviving Corporation................................................................. 2
Termination Fee....................................................................... 45
Trust................................................................................. 7
UBCA.................................................................................. 2
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of the third day of July, 1997 (this
"Plan"), by and between ZIONS BANCORPORATION (the "Acquiror") and GB
BANCORPORATION (the "Company").
RECITALS:
A. THE ACQUIROR. The Acquiror is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Utah, with its
principal executive offices located in Salt Lake City, Utah. The Acquiror is a
bank holding company duly registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"). As of the date hereof, the Acquiror has
100,000,000 authorized shares of common stock, no par value per share ("Acquiror
Common Stock"), of which no more than 60,080,923 shares were outstanding as of
the date hereof. The Acquiror has received an opinion from its financial advisor
confirming the fairness of the Merger to its shareholders from a financial point
of view.
B. THE COMPANY. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of California, with
its principal executive offices located in San Diego, California. As of the date
hereof, the Company has 10,000,000 authorized shares of common stock, no par
value per share ("Company Common Stock"), of which no more than 2,165,036 shares
were outstanding as of the date hereof (including 151,143 shares issuable upon
the exercise of certain options), and has no other class of capital stock
authorized. The Company is a bank holding company duly registered with the
Federal Reserve Board under the BHC Act.
C. RIGHTS, ETC. The Company does not have any shares of its capital stock
reserved for issuance, any outstanding option, call or commitment relating to
shares of its capital stock or any outstanding securities, obligations or
agreements convertible into or exchangeable for, or giving any person any right
(including, without limitation, preemptive rights) to subscribe for or acquire
from it, any shares of its capital stock (collectively, "Rights"), except
pursuant to the options described on Annex I hereto (which includes details on
the terms and conditions of any Rights, including the grantee, vesting periods
and exercise prices of any options).
D. BOARD APPROVALS. The Board of Directors of the Company and the
Independent Committee of the Board of Directors of the Acquiror have duly
approved this Plan and have duly authorized its execution and delivery.
E. INTENTION OF THE PARTIES. It is the intention of the parties to this
Plan that (a) the Merger (as hereinafter defined) for federal income tax
purposes shall qualify as a "reorganization" within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"), and (b) the
Merger for accounting purposes shall qualify as a "pooling of interests."
In consideration of their mutual promises and obligations hereunder, the
parties hereto adopt and make this Plan and prescribe the terms and conditions
hereof and the manner and basis of carrying it into effect, which shall be as
follows:
ARTICLE I. THE MERGER
SECTION 1.1. STRUCTURE OF THE MERGER. On the Effective Date (as defined in
Section 7.1), the Company will merge (the "Merger") with and into the Acquiror,
with the Acquiror being the surviving corporation (the "Surviving Corporation"),
pursuant to the provisions of, and with the effect provided in the Utah Business
Corporation Act (the "UBCA") and the California General Corporation Law (the
"CGCL"). The Surviving Corporation shall continue to be governed by the UBCA and
its separate corporate existence with all of its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger. At the Effective
Time (as defined in Section 7.1), the articles of incorporation and by-laws of
the Surviving Corporation shall be the articles of incorporation and by-laws of
the Acquiror immediately prior to the Effective Time.
<PAGE>
SECTION 1.2. EFFECT ON OUTSTANDING SHARES.
(a) At the Effective Time, automatically and without any action on the
part of any holder thereof, each share of Company Common Stock issued and
outstanding at the Effective Time (other than shares held by holders (each,
a "Dissenting Shareholder") who perfect their rights to dissent under the
CGCL (the "Dissenters' Shares")), shall be converted into the right to
receive 2.2748 (the "Conversion Number", or, on a fully diluted basis and
assuming there are no Dissenters' Shares, 4.925 million shares in the
aggregate) shares of the Acquiror Common Stock (the aggregate of all such
shares of Acquiror Common Stock is hereinafter called the "Merger
Consideration"). Upon the payment by the Surviving Corporation of the "fair
value" of any Dissenters' Shares in accordance with the CGCL, such
Dissenters' Shares shall be cancelled and retired and shall cease to exist,
and no exchange or further payment shall be made with respect thereto.
(b) No fractional shares of Acquiror Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of Acquiror
Common Stock pursuant hereto, cash adjustments will be paid to holders in
respect of any fractional share of Acquiror Common Stock that would
otherwise be issuable; the amount of such cash adjustment shall be equal to
such fractional proportion of the average closing price of Acquiror Common
Stock as quoted on the Nasdaq National Market ("NASDAQ") for the five
trading days ending on the third business day immediately prior to the
Effective Time.
SECTION 1.3. EXCHANGE PROCEDURES. (a) At and after the Effective Time,
each certificate theretofore representing shares of Company Common Stock (each,
a "Certificate") shall represent only the right to receive the applicable
portion of the Merger Consideration without interest and any cash in lieu of
fractional shares deliverable pursuant hereto without interest.
(b) As of the Effective Time, the Acquiror shall deposit, or shall cause
to be deposited, with such bank or trust company as the Acquiror shall elect
(which may be a subsidiary of the Acquiror) (the "Exchange Agent"), for the
benefit of the holders of shares of Company Common Stock, for exchange in
accordance with this Section 1.3, the Merger Consideration and cash in lieu
of fractional shares to be paid pursuant to Section 1.2 and deposited
pursuant to this Section 1.3 in exchange for outstanding shares of Company
Common Stock.
(c) As soon as practicable after the Effective Time, but in no event
later than three business days thereafter, the Acquiror shall cause the
Exchange Agent to mail to each holder of record of a Certificate or
Certificates the following: (i) a letter of transmittal specifying 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,
which shall be in a form and contain any other customary provisions as the
Acquiror may reasonably determine; and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration and cash in lieu of fractional shares. Upon the proper
surrender of a Certificate to the Exchange Agent, together with a properly
completed and duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor (1) a
certificate representing the number of whole shares of Acquiror Common Stock
and (2) a check representing the amount of cash in lieu of any fractional
shares and unpaid dividends and distributions, if any, which such holder has
the right to receive in respect of the Certificate surrendered pursuant to
the provisions hereof, and the Certificate so surrendered shall forthwith be
cancelled. No interest will be paid or accrued on the Merger Consideration
or on the cash in lieu of fractional shares payable to holders of
Certificates. In the event of a transfer of ownership of any shares of
Company Common Stock not registered in the transfer records of the Company,
the exchange described in this Section 1.3(c) may nonetheless be effected
and a check for the cash to be paid in lieu of fractional shares may be
issued to the transferee if the Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by documents
sufficient, in the discretion of the Acquiror and the Exchange Agent, (i) to
evidence and effect such transfer but
2
<PAGE>
for the provisions of Section 1.3(e) hereof and (ii) to evidence that all
applicable stock transfer taxes have been paid.
(d) Whenever a dividend or other distribution is declared by the
Acquiror on Acquiror Common Stock, the record date for which is at or after
the Effective Time, the declaration shall include dividends or other
distributions on all shares issuable pursuant to this Plan; PROVIDED,
HOWEVER, that no dividend or other distribution declared or made on Acquiror
Common Stock shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Acquiror Common Stock represented thereby
until the holder of such Certificate shall duly surrender such Certificate
in accordance with this Section 1.3. Following such surrender of any such
Certificate, there shall be paid to the holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions having a record date after the Effective
Time theretofore payable with respect to such whole shares of Acquiror
Common Stock and not yet paid and (ii) at the appropriate payment date, the
amount of dividends or other distributions having (x) a record date after
the Effective Time but prior to surrender and (y) a payment date subsequent
to surrender with respect to such whole shares of Acquiror Common Stock.
(e) From and after the Effective Time, there shall be no transfers on
the stock transfer records of the Company of any shares of Company Common
Stock that were outstanding immediately prior to the Effective Time. If
after the Effective Time Certificates are presented to the Acquiror or the
Surviving Corporation, they shall be cancelled and exchanged for the Merger
Consideration and the cash in lieu of fractional shares deliverable in
respect thereof pursuant to this Plan in accordance with the procedures set
forth in this Section 1.3.
(f) Any portion of the aggregate Merger Consideration or cash deposited
with the Exchange Agent pursuant to Section 1.2(b) hereof that remains
unclaimed by the shareholders of the Company for six months after the
Effective Time shall be returned by the Exchange Agent to the Surviving
Corporation. Any shareholder of the Company who has not theretofore complied
with this Section 1.3 shall thereafter be entitled to look only to the
Surviving Corporation for payment of the Merger Consideration and cash in
lieu of fractional shares deliverable in respect of each share of Company
Common Stock held by such shareholder without any interest thereon. If
Certificates are not surrendered or the consideration therefor is not
claimed prior to the date on which such consideration would otherwise
escheat to or become the property of any governmental unit or agency, the
unclaimed consideration shall, to the extent permitted by abandoned property
and any other applicable law, become the property of the Surviving
Corporation (and to the extent not in its possession shall be paid over to
the Surviving Corporation), free and clear of all claims or interest of any
person previously entitled to such claims. Notwithstanding the foregoing,
none of the Acquiror, the Surviving Corporation, the Exchange Agent or any
other person shall be liable to any former holder of Company Common Stock
for any amount delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by the Exchange Agent, the posting by such person of a bond in such amount
as the Exchange Agent may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration and any cash in lieu of fractional shares deliverable in
exchange therefor.
SECTION 1.4. DISSENTERS' RIGHTS. Any Dissenting Shareholder who shall be
entitled to be paid the "fair value" of his or her Dissenters' Shares, as
provided in Section 1300 of the CGCL, shall not be entitled to the Merger
Consideration in respect thereof unless and until such Dissenting Shareholder
shall have
3
<PAGE>
failed to perfect or shall have effectively withdrawn or lost such Dissenting
Shareholder's right to dissent from the Merger under the CGCL, and shall be
entitled to receive only the payment provided for by Section 1300 of the CGCL
with respect to such Dissenters' Shares. If any Dissenting Shareholder shall
fail to perfect or shall have effectively withdrawn or lost such right to
dissent, the Dissenters' Shares held by such Dissenting Shareholder shall
thereupon be treated as though such Dissenters' Shares had been converted into
the right to receive the Merger Consideration pursuant to Section 1.2 hereof.
SECTION 1.5. OPTIONS. At the Effective Time, any option granted by the
Company or its subsidiaries to purchase shares of Company Common Stock which is
outstanding and exercisable immediately prior to the Effective Time and has not
been exercised at the Effective Time shall be terminated.
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. CONDUCT OF THE COMPANY'S BUSINESS PRIOR TO THE EFFECTIVE
TIME. Except as expressly provided in this Plan, during the period from the
date of this Plan to the Effective Time, the Company shall, and shall cause each
of its subsidiaries to, (i) conduct its business in the usual, regular and
ordinary course of business consistent with past practice, (ii) use its
reasonable best efforts to maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (iii)
take no action which would adversely affect or delay the ability of the Company,
the Acquiror or any of their subsidiaries to obtain any necessary approvals,
consents or waivers of any governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely basis
under this Plan and (iv) take no action that is reasonably likely to have a
Material Adverse Effect (as defined in Section 8.1 hereof) on the Company or on
Grossmont Bank, a wholly owned subsidiary of the Company (the "Company Bank").
SECTION 2.2. FORBEARANCE BY THE COMPANY. During the period from the date
of this Plan to the Effective Time, the Company shall not, and shall not permit
any of its subsidiaries, without the prior written consent of the Acquiror, to:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the
obligations of any other person, except in connection with any commitments
to incur indebtedness or guarantee the obligations of GB Capital Trust, a
wholly owned subsidiary of the Company (the "Trust"), related to the
Company's and the Trust's $7.5 million liquidation amount of 10 1/4% Capital
Securities;
(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or grant any stock
appreciation rights or grant, sell or issue to any individual, corporation
or other person any right or option to acquire, or securities evidencing a
right to convert into or acquire, any shares of its capital stock or issue
any additional shares of capital stock except in each case pursuant to the
exercise of stock options outstanding as of the date hereof as set forth on
Annex I and on the terms in effect on the date hereof;
(c) other than in the ordinary course of business consistent with past
practice and pursuant to policies currently in effect, sell, transfer,
mortgage, encumber or otherwise dispose of any of its properties, leases or
assets to any person, or cancel, release or assign any indebtedness of any
such person, except pursuant to contracts or agreements in force as of the
date of this Plan;
(d) make any capital expenditures, other than (i) capital expenditures
made in the ordinary course of business consistent with past practice in
amounts not exceeding $250,000, individually or in the aggregate, and (ii)
capital expenditures in connection with the opening of a branch of the
Company Bank in La Jolla, California and capital expenditures in connection
with any bids to acquire
4
<PAGE>
additional branches which are outstanding as of the date hereof and which
have been notified to the Acquiror prior to the date hereof;
(e) except pursuant to commitments existing on the date hereof, increase
in any manner the compensation or fringe benefits of any of its employees or
directors, or create or institute, or make any payments pursuant to, any
severance plan or package, or pay any pension or retirement allowance not
required by any existing plan or agreement to any such employees or
directors, or become a party to, amend or commit itself to fund or otherwise
establish any trust or account related to any Benefit Plan (as defined in
Section 3.1(p)), with or for the benefit of any employee, other than general
increases in the aggregate compensation paid to all employees of the Company
in the ordinary course of business consistent with past practice not in
excess of 4.5% in any 12-month period or any amendment required by
applicable law (provided that any such amendment shall provide the least
increase to cost permitted under such applicable law), or voluntarily
accelerate the vesting of any stock options or other compensation or
benefit;
(f) other than in the ordinary course of business consistent with past
practice, make any investment either by contributions to capital, property
transfers, or purchase of any property or assets of any person, PROVIDED
that the Company shall make no acquisition of business operations without
the Acquiror's prior consent; PROVIDED, FURTHER that this Section 2.1(f)
shall not apply to any investment related to bids to acquire additional
branches which are outstanding as of the date hereof and which have been
notified to the Acquiror prior to the date hereof;
(g) other than with respect to loans or contracts for deposits made in
the ordinary course of business consistent with past practice, enter into or
terminate any contract or agreement, or make any change in any of its leases
or contracts, other than with respect to those involving aggregate payments
of less than, or the provision of goods or services with a market value of
less than, $25,000;
(h) settle any claim, action or proceeding involving any liability of
the Company or any of its subsidiaries for money damages in excess of
$50,000 or material restrictions upon the operations of the Company or any
of its subsidiaries;
(i) except in the ordinary course of business and in amounts less than
$250,000, waive or release any material right or collateral or cancel or
compromise any extension of credit or other debt or claim; PROVIDED,
HOWEVER, that the Company may take (or permit a subsidiary to take) any such
action if, within two business days after the Company requests in writing
(which request shall include information and analyses sufficient for
Acquiror to assess the proposed action) that the Acquiror consent to the
taking of such action, the Acquiror has approved such request in writing or
has not responded in writing to such request;
(j) make, renegotiate, renew, increase, extend or purchase any loan,
lease (credit equivalent), advance, credit enhancement or other extension of
credit, or make any commitment in respect of any of the foregoing, except
(i) in the ordinary course of business consistent with past practice and in
conformity with all applicable Company policies and procedures and (ii) any
loans or advances as to which the Company (or a subsidiary thereof) has a
legally binding obligation to make such loan or advance as of the date
hereof and a description of which has been provided by the Company in
writing to the Acquiror prior to the execution of this Plan;
(k) except as contemplated by Section 4.2 hereof, change its method of
accounting as in effect at December 31, 1996, except as required by changes
in generally accepted accounting principles ("GAAP") as concurred in by the
Company's independent auditors;
(l) engage in any merger, consolidation or other similar transaction
with, or acquire a significant portion of the capital stock or assets of,
any other corporate or other entity except in the ordinary course of
business or in connection with foreclosures and collection on secured
interests;
5
<PAGE>
(m) enter into any new activities or lines of business, or cease to
conduct any activities or lines of business that it conducts on the date
hereof, or conduct any business activity not consistent with past practice;
(n) amend its articles of incorporation or its by-laws; or
(o) agree to, or make any commitment to, take any of the actions
prohibited by this Section 2.2 hereof.
SECTION 2.3. COOPERATION. The Company shall, and the Company shall cause
its subsidiaries to, cooperate with Acquiror in completing the transactions
contemplated hereby and shall not take, cause to be taken or agree or make any
commitment to take any action: (i) that would cause any of the representations
or warranties of it that are set forth in Article III hereof not to be true and
correct, or (ii) that is inconsistent with or prohibited by Section 2.1 or
Section 2.2 hereof.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Acquiror, that, except as specifically disclosed
in a letter of the Company delivered to the Acquiror prior to the date hereof
(and making specific reference to the Section of this Plan for which an
exception is taken) (the "Company Disclosure Letter"):
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan
with respect to the Company are true and correct.
(b) CAPITAL STOCK. All outstanding shares of capital stock of the
Company and its subsidiaries have been duly authorized and validly issued,
are fully paid and (except pursuant to Section 662 of the California
Financial Code) non-assessable and are not subject to any preemptive rights.
(c) DUE ORGANIZATION. The Company Bank is a California banking
corporation duly incorporated, validly existing and in good standing under
the laws of the State of California. The Company Bank is a member of the
Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
(the "FDIC") and all of its deposits are subject to assessment by the BIF.
(d) AUTHORITY. Each of the Company and its subsidiaries has the
corporate power and authority, and is duly qualified in all jurisdictions
(except for such qualifications the absence of which, in the aggregate,
would not have a Material Adverse Effect on the Company) where such
qualification is required, to carry on its business as it is now being
conducted and to own all its properties and assets, and it has all federal,
state, local, and foreign governmental authorizations necessary for it to
own or lease its properties and assets and to carry on its business as it is
now being conducted.
(e) SUBSIDIARIES; SIGNIFICANT INVESTMENTS. The only subsidiaries of
the Company are the Company Bank and the Trust. All of the shares of capital
stock of each of the Company's subsidiaries are owned directly and of record
by the Company free and clear of all liens, claims, encumbrances and
restrictions on transfer and there are no Rights with respect to any such
capital stock. None of the Company or any of such subsidiaries owns any
equity securities, any security convertible or exchangeable into an equity
security or any rights to acquire any equity security, except for shares of
such subsidiaries held by the Company.
6
<PAGE>
(f) SHAREHOLDER APPROVALS. (i) Subject to the receipt of required
shareholder approval of this Plan, this Plan and the transactions
contemplated herein have been duly authorized by all necessary corporate
action of the Company. In addition, the Company has received the written
opinion of Goldman, Sachs & Co. to the effect that the Merger Consideration
to be received by the shareholders of the Company is fair to such
shareholders from a financial point of view. This Plan is a valid and
binding agreement of the Company enforceable against it in accordance with
its terms, subject as to enforcement to applicable bankruptcy, insolvency,
receivership, conservatorship, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(ii) The affirmative vote approving the principal terms of this Plan of
a majority of the outstanding shares of Company Common Stock entitled to
vote on this Plan is the only shareholder vote required for approval of the
Plan and consummation of the Merger and the other transactions contemplated
hereby.
(g) NO VIOLATIONS. The execution, delivery and performance of this
Plan by the Company do not, and the consummation of the transactions
contemplated hereby or thereby by the Company and any of its subsidiaries
will not, constitute (i) a breach or violation of, or a default under, any
law, rule or regulation or any judgment, decree, order, governmental permit
or license to which the Company or any of its subsidiaries (or any of their
respective properties) is subject, which breach, violation or default would,
individually or in the aggregate, have a Material Adverse Effect on the
Company and its subsidiaries taken as a whole, (ii) a breach or violation
of, or a default under, the articles of incorporation or by-laws or similar
organizational documents of the Company or any subsidiary of the Company or
(iii) a breach or violation of, or a default under (or an event which with
due notice or lapse of time or both would constitute a default under), or
result in the termination of, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or
other encumbrance upon any of the properties or assets of the Company or any
subsidiary of the Company under, any of the terms, conditions or provisions
of any note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which the Company or any subsidiary
of the Company is a party, or to which any of their respective properties or
assets may be bound or affected, except for any of the foregoing that,
individually or in the aggregate, would not have a Material Adverse Effect
on the Company and its subsidiaries taken as a whole; and the consummation
of the transactions contemplated hereby will not require any approval,
consent or waiver under any such law, rule, regulation, judgment, decree,
order, governmental permit or license or the approval, consent or waiver of
any other party to any such agreement, indenture or instrument, other than,
as to the Company, (i) the required approvals, consents and waivers of
governmental authorities referred to in Section 5.1(b) hereof and (ii) any
other approvals, consents or waivers the absence of which, individually or
in the aggregate, would not result in a Material Adverse Effect on the
Company and its subsidiaries taken as a whole.
(h) REPORTS. (i) Since September 30, 1995, each of the Company and the
Company Bank has effected all registrations and filed all reports and
statements, together with any amendments required to be made with respect
thereto, which it was required to effect or file with (a) the Federal
Reserve Board, (b) the United States Department of the Treasury, (c) the
California Commissioner of Financial Institutions or his predecessor (the
"California Commissioner"), and (d) any other governmental or regulatory
authority or agency having jurisdiction over its operations (the "Company
Reports"). Each of the balance sheets or statements of condition contained
(including any related notes and schedules) in the Company Reports fairly
present the financial position of the entity or entities to which it relates
as of its date and each of the statements of operation and retained earnings
and of cash flows or equivalent statements contained in the Company Reports
(including any related notes and schedules) fairly present the results of
operations, retained earnings and cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein
(subject, in the
7
<PAGE>
case of unaudited interim statements, to normal year-end audit adjustments
that are not material in amount or effect), in each case in accordance with
GAAP applicable to bank holding companies during the periods involved,
except as may be noted therein.
(ii) The Company Bank has made available to the Acquiror its
Consolidated Reports of Condition and Consolidated Reports of Income for the
calendar quarters dated September 30, 1995 and thereafter. All of such
Consolidated Reports of Condition and Consolidated Reports of Income,
including the related schedules and memorandum items, were prepared in
accordance with GAAP applied in all material respects or, to the extent
different from GAAP, accounting principles mandated by the applicable
instructions to such Consolidated Reports of Condition or Consolidated
Reports of Income.
(iii) No adjustments are required to be made to the equity capital
account of the Company Bank as reported on any of the Consolidated Reports
of Condition referred to in Section 3.1(h)(ii) hereof in order to conform
such equity capital account to equity capital as would be determined in
accordance with GAAP as of such date.
(iv) The Company has furnished to the Acquiror (i) its annual report on
Form FR Y-6 as filed with the Federal Reserve Board as of December 31, 1996,
and (ii) its quarterly reports on Forms FR Y-9C and FR Y-9LP as filed with
the Federal Reserve Board as of March 31, 1997.
(i) ABSENCE OF UNDISCLOSED LIABILITIES AND CERTAIN CHANGES OR
EVENTS. Since March 31, 1997, the Company and its subsidiaries have not
incurred any material liability, except in the ordinary course of their
business consistent with past practice. Since March 31, 1997, there has not
been any change in the condition (financial or other), properties, business,
results of operations or prospects of the Company or its subsidiaries which,
individually or in the aggregate, has had, or is reasonably likely to have,
a Material Adverse Effect on the Company or the Company Bank (other than
changes (i) in banking laws or regulations, or interpretations thereof, that
affect the banking industry generally, (ii) in the general level of interest
rates or (iii) in GAAP).
(j) GUARANTEES; SURETYSHIPS; CONTINGENT LIABILITIES. The Company
Disclosure Letter lists and briefly describes all guarantees, matters of
suretyship and similar contingent liabilities, other than loan commitments,
of the Company and its subsidiaries.
(k) TAXES. (i) All federal, state, local and foreign tax returns
(including information returns) required to be filed by or on behalf of the
Company or its subsidiaries have been timely filed or requests for
extensions have been timely filed and any such extension shall have been
granted and not have expired, and all such filed returns are complete and
accurate in all material respects. All taxes shown on such returns have been
paid in full and adequate provision has been made for any such taxes (in
accordance with GAAP) on the Company's balance sheets set forth in the
Company Reports. There is no pending audit examination, assessment or
proposed assessment of a deficiency, or refund litigation with respect to
any taxes of the Company or its subsidiaries. All taxes, interest,
additions, and penalties due with respect to completed and settled
examinations or concluded litigation relating to it have been paid in full
or adequate provision has been made for any such taxes (in accordance with
GAAP) on the Company's balance sheet as set forth in the Company Reports.
Neither the Company nor its subsidiaries has executed an extension or waiver
of any statute of limitations on the assessment or collection of any tax due
that is currently in effect.
(ii) No liens or other security interests have been imposed on any
assets of the Company or its subsidiaries in connection with any failure (or
alleged failure) to pay any tax. The Company and its subsidiaries have
timely withheld, and paid over to the relevant governmental authority or
other appropriate payee, all taxes required to have been withheld and paid
in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other person. Neither the Company nor
any of its subsidiaries is a party to any tax allocation or sharing
agreement, is or has
8
<PAGE>
been a member of an affiliated group filing consolidated or combined tax
returns (other than a group the common parent of which is or was the
Company) or otherwise has any liability for the taxes of any person (other
than the Company or its subsidiaries). For purposes of this paragraph (k),
"taxes" includes all federal, state, local or foreign income, gross
receipts, windfall profits, severance, property, production, sales, use,
license, excise, franchise, employment, withholding or similar taxes imposed
on the income, properties or operations of the Company or its subsidiaries,
together with any interest additions or penalties with respect thereto and
any interest in respect of such additions or penalties.
(l) ABSENCE OF CLAIMS. As of the date hereof, there is no pending
litigation, controversy, claim, action or proceeding against the Company or
any of its subsidiaries before any court or governmental agency, and, to the
Company's knowledge after reasonable inquiry, no such litigation,
proceeding, controversy, claim or action has been threatened or is
contemplated.
(m) ABSENCE OF REGULATORY ACTIONS. Neither the Company nor any of its
subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depositary institution holding companies or engaged in the
insurance of bank and/or savings and loan deposits ("Government Regulators")
nor has it been advised by any Government Regulator that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(n) AGREEMENTS. (i) Except for this Plan and arrangements made in the
ordinary course of business, the Company and its subsidiaries are not bound
by any material contract (as defined in Item 601(b)(10) of Regulation S-K
under the Securities Act of 1933, as amended ("the Securities Act")) to be
performed after the date hereof that has not been disclosed to the Acquiror.
Neither the Company nor any of its subsidiaries is a party to an oral or
written (A) consulting agreement (other than data processing, software
programming and licensing contracts entered into in the ordinary course of
business) not terminable on 30 days' or less notice involving the payment of
more than $25,000 per annum, in the case of any such agreement with an
individual, or $50,000 per annum, in the case of any other such agreement,
(B) agreement with any executive officer or other key employee of the
Company or any of its subsidiaries the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a
transaction involving the Company or any of its subsidiaries of the nature
contemplated by this Plan and which provides for the payment of in excess of
$50,000, (C) agreement with respect to any executive officer of the Company
or any of its subsidiaries providing any term of employment or compensation
guarantee extending for a period longer than one year and for the payment of
in excess of $50,000 per annum, (D) agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Plan or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Plan or (E) agreement containing covenants that limit
the ability of the Company or any of its subsidiaries to compete in any line
of business or with any person, or that involve any restriction on the
geographic area in which, or method by which, the Company (including any
successor thereof) or any of its subsidiaries may carry on its business
(other than as may be required by law or any regulatory agency).
(ii) Neither the Company nor any of its subsidiaries is in default under
or in violation of any provision of any note, bond, indenture, mortgage,
deed of trust, loan agreement or other agreement to
9
<PAGE>
which it is a party or by which it is bound or to which any of its
respective properties or assets is subject.
(o) LABOR MATTERS. Neither the Company nor any of its subsidiaries is
a party to, or is bound by, any collective bargaining agreement, contract,
or other agreement or understanding with a labor union or labor
organization, nor is the Company or any of its subsidiaries the subject of
any proceeding asserting that it has committed an unfair labor practice or
seeking to compel it or any such subsidiary to bargain with any labor
organization as to wages and conditions of employment, nor is there any
strike, other labor dispute or organizational effort involving the Company
or any of its subsidiaries pending or threatened.
(p) EMPLOYEE BENEFIT PLANS. (i) All benefit and compensation plans,
contracts, policies or arrangements covering current employees or former
employees of the Company and its subsidiaries (the "Employees") and current
or former directors of the Company, including, but not limited to, "employee
benefit plans" within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and deferred
compensation, stock option, stock purchase, stock appreciation rights, stock
based, incentive and bonus plans (the "Benefit Plans"), are listed in the
Company Disclosure Letter. True and complete copies of all Benefit Plans,
including, but not limited to, any trust instruments and insurance contracts
forming a part of any Benefit Plans, and all amendments thereto have been
provided or made available to the Acquiror.
(ii) All employee benefit plans, other than "multiemployer plans" within
the meaning of Section 3(37) of ERISA, covering Employees (the "Plans"), to
the extent subject to ERISA, are in substantial compliance with ERISA. Each
Plan which is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA ("Pension Plan") and which is intended to be qualified
under Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service with respect to "TRA" (as defined
in Section 1 of Rev. Proc. 93-39) or has reliance on an Internal Revenue
Service opinion letter, and the Company is not aware of any pending action
or investigation to revoke such favorable determination letter. There is no
material pending or, to the knowledge of the Company, threatened litigation
relating to the Plans. Neither the Company nor any of its subsidiaries has
engaged in a prohibited transaction (as defined in Section 4975(c) of the
Code or 406(a) of ERISA) with respect to any Plan that is not covered by an
exception and, assuming the taxable period of such transaction expired as of
the date hereof, could subject the Company or any subsidiary to a tax or
penalty imposed by either Section 4975 of the Code or Section 502(i) of
ERISA in an amount which would be material.
(iii) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of its subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan", within
the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which
is considered one employer with the Company under Section 4001 of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Neither the Company, any of
its subsidiaries nor an ERISA Affiliate has contributed to a "multiemployer
plan", within the meaning of Section 3(37) of ERISA, at any time on or after
September 26, 1980. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan or by any
ERISA Affiliate within the 12-month period ending on the date hereof or will
be required to be filed in connection with the transactions contemplated by
this Plan.
(iv) All contributions accrued and required to be made under the terms
of any Plan have been timely made or have been reflected on the consolidated
financial statements of the Company included in the Company Reports. Neither
any Pension Plan nor any single-employer plan of an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate
has an outstanding funding
10
<PAGE>
waiver. Neither the Company nor any of its subsidiaries has provided, or is
required to provide, security to any Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(v) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within
the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of
the actuarial assumptions contained in the Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such
Plan, and there has been no material change in the financial condition of
such Plan since the last day of the most recent plan year.
(vi) Neither the Company nor any of its subsidiaries has any obligations
for retiree health and life benefits under any Benefit Plan. The Company or
the subsidiaries may amend or terminate any such Benefit Plan at any time
without incurring any liability thereunder.
(vii) The consummation of the transactions contemplated by this Plan
will not (x) entitle any employees of the Company or any of the subsidiaries
to severance pay, (y) accelerate the time of payment or vesting or trigger
any payment of compensation or benefits under, increase the amount payable
or trigger any other material obligation pursuant to, any of the Benefit
Plans or (z) result in any breach or violation of, or a default under, any
of the Benefit Plans.
(q) REAL PROPERTY. (i) The Company Disclosure Letter contains a
complete and correct list of (A) all real property or premises owned on the
date hereof, in whole or in part by the Company or any of its subsidiaries
and all indebtedness secured by any encumbrance thereon, and (B) all real
property or premises leased in whole or in part by the Company or any of its
subsidiaries, together with a list of all applicable leases, the name of the
lessor and any requirement of consent of the lessor to the transactions
contemplated herein. None of such premises or properties have been condemned
or otherwise taken by any public authority and no condemnation or taking is,
to the knowledge of the Company, threatened or contemplated and none thereof
is subject to any claim, contract or law which might affect its use or value
for the purposes now made of it. None of the premises or properties of the
Company or any of its subsidiaries is subject to any current interests of
third parties or other restrictions or limitations that would impair or be
inconsistent with the current use of such property by the Company or any of
its subsidiaries.
(ii) Each of the leases referred to in the Company Disclosure Letter is
valid and existing and in full force and effect, and no party thereto is in
default and no notice of a claim of default by any party has been delivered
to the Company or any of its subsidiaries or is now pending, and there does
not exist any event that with notice or the passing of time, or both, would
constitute a default or excuse performance by any party thereto, provided
that with respect to matters relating to any party other than the Company
the foregoing representation is based on the knowledge of the Company.
(r) TITLE. The Company and each of its subsidiaries has good title to
its properties and assets (other than (i) property as to which it is lessee
and (ii) real estate owned as a result of foreclosure, transfer in lieu of
foreclosure or other transfer in satisfaction of a debtor's obligation
previously contracted).
(s) KNOWLEDGE AS TO CONDITIONS. As of the date hereof, the Company
knows of no reason why the approvals, consents and waivers of governmental
authorities referred to in Section 5.1(b) should not be obtained without the
imposition of any condition of the type referred to in the provisos thereto.
11
<PAGE>
(t) COMPLIANCE WITH LAWS. Since September 30, 1995, the Company and
each of its subsidiaries have complied in all material respects with all
applicable laws. The Company and each of its subsidiaries has all permits,
licenses, certificates of authority, orders and approvals of, and has made
all filings, applications and registrations with, federal, state, local and
foreign governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted, or is
subject to no material liability or disability by reason of the failure to
have such permit, license, certificate of authority, order or approval or to
have made such filing, application or registration; all such permits,
licenses, certificates of authority, orders and approvals are in full force
and effect, and, to the knowledge of the Company, no suspension or
cancellation of any of them is threatened.
(u) FEES. Other than with respect to financial advisory services
performed for the Company by Goldman, Sachs & Co., in amounts and pursuant
to agreements previously disclosed to the Acquiror, neither the Company nor
any of its subsidiaries, nor any of their respective officers, directors,
employees or agents, has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted directly or indirectly for
the Company or any subsidiary of the Company, in connection with the Plan or
the transactions contemplated hereby.
(v) ENVIRONMENTAL MATTERS. (i) With respect to the Company and each of
its subsidiaries:
(A) Each of the Company and its subsidiaries and the Participation
Facilities (as defined below) is in substantial compliance with all
Environmental Laws (as defined below);
(B) There is no suit, claim, action, demand, executive or
administrative order, directive or proceeding pending or, to the
Company's knowledge, threatened, before any court, governmental agency or
board or other forum against it or any of its subsidiaries or any
Participation Facility (x) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (y)
relating to the presence of or release into the environment of any
Hazardous Material (as defined below), whether or not occurring at or on
a site owned, leased or operated by it or any of its subsidiaries or any
Participation Facility;
(C) To the Company's knowledge, there is no reasonable basis for any
suit, claim, action, demand, executive or administrative order, directive
or proceeding of a type described in Section 3.1(v)(i)(B) hereof;
(D) Neither the Company nor any subsidiary has received any notice,
demand letter, executive or administrative order, directive or request
for information from any Federal, state, local or foreign governmental
entity or any third party indicating that it may be in violation of, or
liable under, any Environmental Law, which notice, demand letter,
executive or administrative order, directive or request for information
as not been resolved to the satisfaction of the applicable governmental
entity;
(E) To the Company's knowledge, there are no underground storage
tanks on, in or under any properties or Participation Facility and no
underground storage tanks have been closed or removed from any properties
or Participation Facility which are or have been in the ownership of it
or any of its subsidiaries; and
(F) To the Company's knowledge, during and prior to the period of (l)
its or any of its subsidiaries' ownership or operation of any of their
respective current properties or (m) its or any of its subsidiaries'
participation in the management of any Participation Facility, there has
been no contamination by or release of Hazardous Material or oil in, on,
under or affecting such properties, except in compliance with, and as
would not result in liability under, any applicable Environmental Law;
12
<PAGE>
(ii) The following definitions apply for purposes of this Section
3.1(s): (w) "Participation Facility" means any facility in which the
applicable party (or a subsidiary of it) participates in the management
(including all property held as trustee or in any other fiduciary or agency
capacity) and, where required by the context, includes any party that could
reasonably be expected to be deemed the owner or operator of such property;
(x) "Environmental Law" means (i) any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, executive or administrative order, judgment, decree,
injunction, common law requirement or agreement with any governmental
entity, (A) relating to the protection, preservation or restoration of the
environment (which includes, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, structures, soil, surface land,
subsurface land, plant and animal life or any other natural resource), or to
human health or safety, or (B) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of, Hazardous Materials, in each
case as amended and as now in effect. The term Environmental Law includes,
without limitation, the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid
Waste Amendments thereto), the Federal Solid Waste Disposal Act and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, the
Federal Hazardous Materials Transportation Act, or any so-called "Superfund"
or "Superlien" law, each as amended and as now in effect, and (ii) any
common law or equitable doctrine (including, without limitation, injunctive
relief and tort doctrines such as negligence, nuisance, trespass and strict
liability) that may impose liability or obligations for injuries or damages
due to, or threatened as a result of, the presence of or exposure to any
Hazardous Material; and (z) "Hazardous Material" means any substance in any
concentration which is or could be detrimental to human health or safety or
to the environment, that is regulated or is listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, under any Environmental Law, whether by type or by quantity,
including any substance containing any such substance as a component.
Hazardous Material includes, without limitation, any toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste, industrial substance, oil or petroleum or any derivative or
by-product thereof, radon, radioactive material, asbestos, asbestos-
containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
(w) ALLOWANCE. The allowance for possible loan losses shown on the
Company's unaudited balance sheet as of March 31, 1997 was adequate, as of
the date thereof, under GAAP applicable to banks and bank holding companies.
The Company has disclosed to the Acquiror in writing prior to the date
hereof the amounts of all loans, leases, advances, credit enhancements,
other extensions of credit, commitments and interest-bearing assets of the
Company and its subsidiaries that have been classified as "Other Assets
Specially Mentioned", "Substandard", "Doubtful", "Loss", "Classified",
"Criticized", "Credit Risk Assets" or words of similar import. The Other
Real Estate Owned ("OREO") included in any non-performing assets of the
Company or any of its subsidiaries is carried at the lower of cost or market
value based on independent appraisals consistent with applicable regulatory
requirements.
(x) MATERIAL INTERESTS OF CERTAIN PERSONS. No officer or director of
the Company, or any "associate" (as such term is defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of any
such officer or director, has any material interest in any material contract
or property (real or personal), tangible or intangible, used in or
pertaining to the business of the Company or any of its subsidiaries.
(y) INSURANCE. All of the insurance policies and bonds maintained by
the Company and its subsidiaries are in full force and effect, the Company
and its subsidiaries are not in default thereunder
13
<PAGE>
and all material claims thereunder have been filed in due and timely
fashion. Since December 31, 1995, no material claim by the Company or any of
its subsidiaries on or in respect of an insurance policy or bond has been
declined or refused by the relevant insurer or insurers. In the best
judgment of the Company's management, such insurance coverage is adequate
and will be available in the future under terms and conditions substantially
similar to those in effect on the date hereof. Between the date hereof and
the Effective Time, the Company and its subsidiaries will maintain adequate
levels of insurance coverage and will submit all potential claims existing
prior to the Effective Time to its insurance carrier on or before the
Effective Time. The Company Disclosure Letter lists all insurance policies
maintained by or for the benefit of the Company, of its subsidiaries or any
of their directors, officers, employees or agents, specifying the (i) type
of policy, (ii) policy limits and (iii) self-insurance amounts.
(z) INVESTMENT SECURITIES. Except for pledges to secure public and
trust deposits, international letters of credit and reverse repurchase
agreements entered into in arm's-length transactions pursuant to normal
commercial terms and conditions and other pledges required by law, none of
the investments reflected in the consolidated balance sheet of the Company
included in the Company Reports for the quarter ended March 31, 1997, and
none of the material investments made by it or any of its subsidiaries since
December 31, 1996, is subject to any restriction (contractual, statutory or
otherwise) that would materially impair the ability of the entity holding
such investment freely to dispose of such investment at any time.
(aa) DERIVATIVES. Neither the Company nor any of its subsidiaries is
currently a party to any interest rate swap, cap, floor, option agreement,
other interest rate risk management arrangement or agreement or
derivative-type security or derivative arrangement or agreement.
(bb) BOOKS AND RECORDS. The books and records of the Company and its
subsidiaries have been, and are being, maintained in accordance with
applicable legal and accounting requirements and reflect in all material
respects the substance of events and transactions that should be included
therein.
(cc) CORPORATE DOCUMENTS. The Company has delivered to the Acquiror
true and complete copies of (i) its amended articles of incorporation and
amended by-laws and (ii) the articles of incorporation and by-laws of the
Company Bank.
(dd) COMPANY ACTION. The Board of Directors of the Company has adopted
resolutions recommending that the principal terms of this Plan be approved
by the shareholders of the Company and directing that this Plan be submitted
for consideration by the Company's shareholders at the Company's Meeting.
(ee) INDEMNIFICATION. Neither the Company nor any of its subsidiaries
is a party to any indemnification agreement with any of its present or
future directors, officers, employees, individual agents or other
individuals who serve or served in any other capacity with any other
enterprise at the request of the Company or a subsidiary of the Company (a
"Covered Person"), and to the knowledge of the Company, there are no claims
for which any Covered Person would be entitled to indemnification under
Section 4.6 if such provisions were deemed to be in effect.
(ff) LOANS. Each loan reflected as an asset on the Company's balance
sheet as of December 31, 1996 and each balance sheet date subsequent thereto
(i) is evidenced by notes, agreements or other evidences of indebtedness
which are true, genuine and what they purport to be and (ii) to the
knowledge of the Company and Company Bank, are not subject to any defenses
which may be asserted against Company Bank. All loans and extensions of
credit that have been made by Company Bank and that are subject to Sections
22(h), 23A and 23B of the Federal Reserve Act comply therewith.
14
<PAGE>
(gg) INTANGIBLE PROPERTY. To the best of the knowledge of the Company,
each of the Company and its subsidiaries owns or possesses the right, free
of the claims of any third party, to use all material trademarks, service
marks, trade names, copyrights, patents, and licenses currently used by it
in the conduct of its business. To the best of the knowledge of the Company,
no material product or service offered and no material trademark, service
mark, or similar right used by the Company or its subsidiaries infringes any
rights of any other person, and, as of the date hereof, neither the Company
nor any of its subsidiaries has received any written or oral notice of any
claim of such infringement.
(hh) FAIR LENDING; COMMUNITY REINVESTMENT ACT. As of the date hereof,
with the exception of routine investigation of consumer complaints, neither
the Company nor any of its subsidiaries has been advised that it is or may
be in violation of the Equal Credit Opportunity Act or the Fair Housing Act
or any similar federal or state statute. The Company Bank received a CRA
rating of "satisfactory" in its most recent CRA examination.
(ii) CAPITAL EXPENDITURES. Neither the Company nor any of its
subsidiaries has any outstanding commitments in the nature of capital
expenditures which in the aggregate exceed $500,000.
(jj) NO OMISSION OF MATERIAL FACT. No representation or warranty by
the Company in this Plan or under any documents, instruments, certificates
or schedules delivered pursuant hereto contains any untrue statement of
material fact, or omits to state a material fact necessary to make the
statements or facts contained herein or therein not misleading.
SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR. The Acquiror
represents and warrants to the Company that:
(a) RECITALS TRUE. The facts set forth in the Recitals of this Plan
with respect to the Acquiror are true and correct.
(b) CORPORATE ORGANIZATION AND QUALIFICATION. The Acquiror is a
corporation duly incorporated, validly existing and in good standing under
the laws of the State of Utah. The Acquiror is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted by it, requires such qualification,
except for such failure to qualify or be in such good standing which, when
taken together with all other such failures, would not have a Material
Adverse Effect on the Acquiror. The Acquiror has the requisite corporate and
other power and authority (including all federal, state, local and foreign
government authorizations) to carry on its respective businesses as they are
now being conducted and to own or lease their respective properties and
assets.
(c) CORPORATE AUTHORITY. The Acquiror has the requisite corporate
power and authority and has taken all corporate action necessary in order to
execute and deliver this Plan and to consummate the transactions
contemplated hereby. This Plan is a valid and binding agreement of the
Acquiror enforceable against the Acquiror in accordance with its terms
subject as to enforcement to applicable bankruptcy, insolvency,
receivership, conservatorship, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(d) NO VIOLATIONS. The execution, delivery and performance of this
Plan by the Acquiror do not, and the consummation of the transactions
contemplated hereby by the Acquiror will not, constitute (i) a breach or
violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license to which the
Acquiror (or any of its properties) is subject, which breach, violation or
default would, individually or in the aggregate, have a Material Adverse
Effect on the Acquiror, (ii) a breach or violation of, or a default under,
the articles of incorporation or by-laws of the Acquiror or (iii) a breach
or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge,
15
<PAGE>
security interest, charge or other encumbrance upon any of the properties or
assets of the Acquiror under, any of the terms, conditions or provisions of
any note, bond, indenture, deed of trust, loan agreement or other agreement,
instrument or obligation to which the Acquiror is a party, or to which any
of its properties or assets may be bound or affected, except for any of the
foregoing that, individually or in the aggregate, would not have a Material
Adverse Effect on the Acquiror; and the consummation of the transactions
contemplated hereby will not require any approval, consent or waiver under
any such law, rule, regulation, judgment, decree, order, governmental permit
or license or the approval, consent or waiver of any other party to any such
agreement, indenture or instrument, other than, as to the Acquiror, (i) the
required approvals, consents and waivers of governmental authorities
referred to in Section 5.1(b) hereof, and (ii) any other approvals, consents
or waivers the absence of which, individually or in the aggregate, would not
result in a Material Adverse Effect on the Acquiror.
(e) KNOWLEDGE AS TO CONDITIONS. As of the date hereto, the Acquiror
knows of no reason why the approvals, consents and waivers of governmental
authorities referred to in Section 5.1(b) should not be obtained without the
imposition of any condition of the type referred to in the provisos thereto.
(f) FEES. Other than with respect to financial advisory services
performed for the Acquiror by Alex. Brown & Sons Incorporated in amounts and
pursuant to agreements previously disclosed to the Company, neither the
Acquiror nor any of its subsidiaries, nor any of their respective officers,
directors, employees or agents, has employed any broker or finder or
incurred any liability for any financial advisory fees, brokerage fees,
commissions, or finder's fees, and no broker or finder has acted directly or
indirectly for the Acquiror or any subsidiary of the Acquiror, in connection
with the Plan or the transactions contemplated hereby.
(g) SEC REPORTS. (i) As of their respective dates, neither the
Acquiror's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, nor any other document filed by the Acquiror subsequent to December
31, 1996 under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, each
in the form (including exhibits) filed with the SEC (collectively, the
"Acquiror Reports"), contained or will contain any untrue statement of a
material fact or omitted or will omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading. Each of the
consolidated balance sheets or statements of condition contained or
incorporated by reference in Acquiror Reports (including in each case any
related notes and schedules) fairly presented in all material respects the
financial position of the entity or entities to which it relates as of its
date and each of the consolidated statements of income, consolidated
statements of changes in shareholders' equity and consolidated statements of
cash flows contained or incorporated by reference in Acquiror Reports
(including in each case any related notes and schedules) fairly presented in
all material respects the results of operations, shareholders' equity and
cash flows, as the case may be, of the entity or entities to which it
relates for the periods set forth therein (subject, in the case of unaudited
interim statements, to normal year-end audit adjustments that are not
material in amount or effect), in each case in accordance with GAAP during
the periods involved, except as may be noted therein.
(ii) The Acquiror has timely filed all reports, registrations and
statements, together with any amendments required to be made with respect
thereto, if any, that it was required to file since December 31, 1995 with
the SEC.
ARTICLE IV. COVENANTS
SECTION 4.1. ACQUISITION PROPOSALS. The Company agrees that neither it nor
any of its subsidiaries nor any of the respective officers and directors of the
Company or its subsidiaries shall, and the Company shall direct and use its
reasonable best efforts to cause its employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its
16
<PAGE>
subsidiaries) not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to shareholders of the Company) with respect
to a merger, consolidation or similar transaction involving, or any purchase of
all or any signif-icant portion of the assets or any equity securities of, the
Company or any of its subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
Notwithstanding the foregoing, the Company may enter into discussions or
negotiations, or provide information in connection with, a possible Acquisition
Proposal if the Board of Directors of the Company reasonably determines,
following receipt of advice of the Company's legal counsel, that such
discussions or negotiations must be commenced, or such information must be
furnished, in the exercise of its fiduciary duty. The Company will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing and shall make all reasonable efforts to enforce any confidentiality
agreements to which it or any of its subsidiaries is a party. The Company will
take the necessary steps to inform the appropriate individuals or entities
referred to in the first sentence hereof of the obligations undertaken in this
Section 4.1. The Company will notify the Acquiror immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with the Company.
SECTION 4.2. CERTAIN POLICIES OF THE COMPANY. At the written request of
the Acquiror, the Company shall modify and change its loan, litigation and real
estate valuation policies and practices (including loan classifications and
levels of reserves) immediately prior to the Effective Time so as to be
consistent on a mutually satisfactory basis with those of the Acquiror and GAAP.
The Company's representations, warranties and covenants contained in this Plan
shall not be deemed to be untrue or breached in any respect for any purpose as a
consequence of any modifications or changes undertaken solely on account of this
Section 4.2.
SECTION 4.3. EMPLOYEES. If any employee of the Company or any subsidiary
of the Company becomes a participant in any employment benefit plan, practice,
or policy of the Surviving Corporation, such employee shall be given credit
under such plan, practice, or policy for all service prior to the Effective Date
with the Company or such subsidiary of the Company for purposes of eligibility
and vesting, but not for benefit accrual purposes, for which such service is
taken into account or recognized, provided that there be no duplication of such
benefits as are provided under any employee benefit plans, practices, or
policies of the Company or any subsidiary of the Company that continue in effect
following the Effective Time.
SECTION 4.4. ACCESS AND INFORMATION. Upon reasonable notice, the Company
shall (and shall cause its subsidiaries to) afford to the Acquiror and its
representatives (including, without limitation, directors, officers and
employees of the Acquiror and its affiliates, and counsel, accountants and other
advisors retained by the Acquiror and its affiliates) such access (including,
without limitation, for the purpose of conducting supplemental due diligence
reviews) during normal business hours throughout the period prior to the
Effective Time to the books, records (including, without limitation, loan and
credit files, tax returns and work papers of independent auditors), properties,
personnel and to such other information as the Acquiror may reasonably request;
PROVIDED, HOWEVER, that no investigation pursuant to this Section 4.4 shall
affect or be deemed to modify any representation or warranty made herein.
17
<PAGE>
SECTION 4.5. CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. The Acquiror and
the Company shall (a) as soon as practicable make any filings and applications
required to be filed in order to obtain all approvals, consents and waivers of
governmental authorities necessary or appropriate for the consummation of the
transactions contemplated hereby and shall use their reasonable best efforts to
cause the applications for the approvals described in clauses (i) and (ii) of
Section 5.1(b) to be initially filed on or before July 31, 1997, and the
Acquiror shall afford the Company the opportunity to review drafts of such
filings and applications prior to their being filed with the applicable
governmental authorities, (b) cooperate with one another (i) in promptly
determining what filings are required to be made or approvals, consents or
waivers are required to be obtained under any relevant federal, state or foreign
law or regulation and (ii) in promptly making any such filings, furnishing
information required in connection therewith and seeking timely to obtain any
such approvals, consents or waivers and (c) deliver to the other copies of the
publicly available portions of all such filings and applications promptly after
they are filed.
SECTION 4.6. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) From and after the Effective Time through the third anniversary of
the Effective Date, the Acquiror agrees to indemnify and hold harmless each
present and former director and officer of the Company or any subsidiary of
the Company determined as of the Effective Time (the "Indemnified Parties"),
against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities (collectively,
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of matters existing or occurring at or prior to the Effective
Time (including with respect to this Plan or any of the transactions
contemplated hereby), whether asserted, claimed or arising prior to, at or
after the Effective Time, to the extent to which such Indemnified Parties
were entitled under California law and the Company's articles of
incorporation or by-laws in effect on the date hereof, and the Acquiror
shall also advance expenses as incurred to the extent permitted under
California law and the Company's articles of incorporation and by-laws.
(b) Any Indemnified Party wishing to claim indemnification under Section
4.6(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall as promptly as possible notify the Acquiror thereof,
but the failure to so notify shall not relieve the Acquiror of any liability
it may have to such Indemnified Party if such failure does not materially
prejudice Acquiror. In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after the Effective Time), (i)
the Acquiror shall have the right to assume the defense thereof and the
Acquiror shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Parties in connection with the defense thereof, except that
if the Acquiror elects not to assume such defense or counsel for the
Indemnified Parties advises in writing that there are issues which raise
conflicts of interest between the Acquiror and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and the
Acquiror shall pay the reasonable fees and expenses of one such counsel for
the Indemnified Parties in any jurisdiction promptly as statements thereof
are received, (ii) the Indemnified Parties will cooperate in the defense of
any such matter and (iii) the Acquiror shall not be liable for any
settlement effected without its prior written consent (which consent shall
not be unreasonably withheld); and PROVIDED, FURTHER, that the Acquiror
shall not have any obligation hereunder to any Indemnified Party when and if
a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is not permitted or is prohibited by applicable law.
(c) For a period of three years after the Effective Time, the Acquiror
shall use its reasonable best efforts to cause to be maintained in effect
the current policies of directors' and officers' liability insurance
maintained by the Company (provided that the Acquiror may substitute
therefor policies of comparable coverage with respect to claims arising from
facts or events which occurred before the Effective Time); PROVIDED,
HOWEVER, that in no event shall the Acquiror be obligated to expend, in
18
<PAGE>
order to maintain or provide insurance coverage pursuant to this Subsection
4.6(c), any amount per annum in excess of 125% of the amount of the annual
premiums paid as of the date hereof by the Company for such insurance (the
"Maximum Amount"). If the amount of the annual premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Amount, the
Acquiror shall use all reasonable efforts to maintain the most advantageous
policies of directors' and officers' insurance obtainable for an annual
premium equal to the Maximum Amount. Notwithstanding the foregoing, prior to
the Effective Time, the Acquiror may request the Company to, and the Company
shall, purchase insurance coverage, on such terms and conditions as shall be
acceptable to the Acquiror, extending for a period of three years the
Company's directors' and officers' liability insurance coverage in effect as
of the date hereof (covering past or future claims with respect to periods
before the Effective Time) and such coverage shall satisfy the Acquiror's
obligations under this Subsection (c).
(d) If Acquiror 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, proper provision shall be made so that the successors and assigns
of Acquiror shall assume the obligations set forth in this Section 4.6.
(e) The provisions of this Section 4.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
SECTION 4.7. ADDITIONAL AGREEMENTS. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its reasonable efforts
to take promptly, or cause to be taken promptly, all actions and to do promptly,
or cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Plan as soon as practicable, including using
efforts to obtain all necessary actions or non-actions, extensions, waivers,
consents and approvals from all applicable governmental entities, effecting all
necessary registrations, applications and filings (including, without
limitation, filings under any applicable state securities laws) and obtaining
any required contractual consents and regulatory approvals.
SECTION 4.8. PUBLICITY. The initial press release announcing this Plan
shall be a joint press release and thereafter the Company and the Acquiror shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the other or the transactions contemplated hereby and
in making any filings with any governmental entity or with any national
securities exchange with respect thereto.
SECTION 4.9. REGISTRATION STATEMENT; PROXY STATEMENT. As soon as
practicable after the date hereof, the Acquiror shall prepare a registration
statement (the "Registration Statement"), including a proxy statement/prospectus
(the "Proxy Statement/Prospectus") in respect of the Company's Meeting, for the
purpose of registering the Acquiror Common Stock to be issued pursuant hereto,
file the Registration Statement with the SEC and respond to comments of the
staff of the SEC. The Company represents and covenants that (a) all information
supplied by it to the Acquiror expressly for use in the Registration Statement
will be accurate and complete in all material respects and (b) none of the
information to be supplied by the Company will, in the case of the Proxy
Statement/Prospectus, as of the date the Proxy Statement/Prospectus is first
mailed to shareholders of the Company, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading, or, in the case of the Registration
Statement, when it becomes effective, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not misleading. The Acquiror represents and covenants that
(a) all information supplied by it expressly for use in the Registration
Statement will be accurate and complete in all material respects and (b) none of
the information to be supplied by the Acquiror will, in the case of the Proxy
Statement/Prospectus, as of the
19
<PAGE>
date the Proxy Statement/Prospectus is first mailed to shareholders of the
Company, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which such statements are made, not misleading, or,
in the case of the Registration Statement, when it becomes effective, be false
or misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements therein not misleading. The
Company shall cooperate with and assist the Acquiror in the preparation of the
Registration Statement and the Proxy Statement/Prospectus.
SECTION 4.10. SHAREHOLDERS' MEETING. The Company shall take all action
necessary, in accordance with applicable law and its articles of incorporation
and by-laws, to convene a meeting of the holders of the Company Common Stock
(the "Meeting") as promptly as practicable for the purpose of approving the
principal terms of this Plan. Except to the extent the Company's board of
directors reasonably determines otherwise in the exercise of its fiduciary
duties, following receipt of advice of the Company's legal counsel, the
Company's board of directors shall recommend at the Meeting that the principal
terms of this Plan be approved by its shareholders.
SECTION 4.11. NOTIFICATION OF CERTAIN MATTERS. Each party shall give
prompt notice to the others of: (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its subsidiaries subsequent to
the date of this Plan and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses or results of
operations of such party and its subsidiaries taken as a whole to which such
party or any subsidiary of such party is a party or is subject; and (b) any
material adverse change in the condition (financial or other), properties,
assets, business, results of operations or prospects of it and its subsidiaries
taken as a whole or the occurrence of any event which, so far as reasonably can
be foreseen at the time of its occurrence, is reasonably likely to result in any
such change. Each of the Company and the Acquiror shall give prompt notice to
the other party of any notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Plan.
SECTION 4.12. TAX-FREE REORGANIZATION TREATMENT; POOLING. Neither the
Acquiror nor the Company shall take or cause to be taken any action, whether
before or after the Effective Time, which would disqualify (a) the Merger as a
"reorganization" within the meaning of Section 368 of the Code or (b) the Merger
as a "pooling of interests" for accounting purposes.
SECTION 4.13. SHAREHOLDER AGREEMENTS; AFFILIATE'S LETTERS.
(a) The directors of the Company, in their capacities as shareholders,
have executed and delivered to the Acquiror shareholder agreements
substantially in the form of Annex II hereto (the "Shareholder Agreements"),
committing such persons, among other things, (i) to vote their shares of
Company Common Stock in favor of the Plan at the Company's Meeting, (ii) to
certain representations concerning the ownership of Company Common Stock and
Acquiror Common Stock to be received in the Merger, (iii) to certain
restrictions concerning the resale of Acquiror Common Stock received by such
individuals in the Merger and (iv) not to take any action which would
disqualify the Merger as a "pooling of interests" for accounting purposes.
(b) As soon as practicable after the date of the Company's Meeting, the
Company shall identify to the Acquiror all persons who the Company believes
to be affiliates of the Company as that term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act ("Affiliates"). With respect to any
such person, if any, who, at that time, has not previously executed a
Shareholder Agreement substantially in the form of Annex II hereto, the
Company shall use its best efforts to obtain a written agreement from such
person providing that each such person will agree not to sell, pledge,
transfer or otherwise dispose of the shares of Acquiror Common Stock to be
received by such person in the Merger except in compliance with the
applicable provisions of the Securities Act and not to take any action or
cause to be taken any action, whether before or after the Effective Time,
which would
20
<PAGE>
disqualify the Merger as a "pooling of interests" for accounting purposes.
The Company shall cause forms of such written agreement to be delivered to
each other person who the Company believes may be or become an Affiliate of
the Acquiror for purposes of enabling such persons to comply with the
exchange procedures set forth in Section 1.3(c) hereof.
SECTION 4.14. DIRECTOR RESIGNATIONS. The Company shall cause to be
delivered to the Acquiror at the Effective Time the resignations of the members
of the board of directors of the Company.
SECTION 4.15. NO OMISSION OF MATERIAL FACT. None of the information
regarding the Company or any of its subsidiaries or the transactions
contemplated hereby supplied or to be supplied by the Company or any of its
subsidiaries for inclusion in any documents or filings to be filed with any
regulatory authority in connection with the transactions contemplated hereby
will contain any untrue statement of material fact, or omit to state a material
fact necessary to make the statements or facts contained therein not misleading;
and no representation or warranty by the Company under any documents,
instruments, certificates or schedules to be delivered hereto will contain any
untrue statement of material fact, or omit to state a material fact necessary to
make the statements of facts contained therein not misleading.
SECTION 4.16. BLUE SKY; NASDAQ LISTING. Acquiror shall use its reasonable
best efforts (a) to list on NASDAQ, upon official notice of issuance, the
Acquiror Common Stock to be issued in the Merger and (b) to obtain all required
state securities laws and "Blue Sky" permits necessary to consummate the
transactions contemplated hereby.
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. CONDITIONS TO ALL PARTIES' OBLIGATIONS. The respective
obligations of the Acquiror and the Company to effect the Merger shall be
subject to the satisfaction or waiver prior to the Effective Time of the
following conditions:
(a) The shareholders of the Company shall have approved the principal
terms of the Merger by no less than the requisite percentage of the
outstanding voting stock of each class of the Company, in accordance with
the CGCL.
(b) The Acquiror and the Company shall have procured the approvals,
consents or waivers with respect to the Plan and the transactions
contemplated hereby (i) by the California Commissioner pursuant to
California law and (ii) by the Federal Reserve Board, and all applicable
statutory waiting periods shall have expired; and the parties shall have
procured all other regulatory approvals, consents or waivers of governmental
authorities or other persons that, in the opinion of counsel for the
Acquiror, are necessary or appropriate for the consummation of the
transactions contemplated by the Plan; PROVIDED, HOWEVER, that no approval,
consent or waiver referred to in this Section 5.1(b) shall be deemed to have
been received if it shall include any non-customary condition or requirement
that, individually or in the aggregate, (i) would result in a Material
Adverse Effect on the Acquiror or any of its subsidiaries or (ii) would
reduce the economic and business benefits of the transactions contemplated
by the Plan to the Acquiror in so significant and adverse a manner that the
Acquiror, in its judgment, would not have entered into this Plan had such
condition or requirement been known at the date hereof.
(c) All other requirements prescribed by law which are necessary to the
consummation of the Merger and any transactions necessary to consummate the
Merger shall have been satisfied.
(d) No party hereto shall be subject to any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger or any transaction necessary to consummate
the Merger, and no litigation or proceeding shall be pending against the
Acquiror or the Company or any of their subsidiaries brought by any
governmental agency seeking to prevent consummation of the Merger or any
transaction necessary to consummate the Merger.
21
<PAGE>
(e) No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated, interpreted, applied or enforced by any
governmental authority which prohibits, restricts or makes illegal
consummation of the Merger or any other transaction contemplated by this
Plan.
(f) The Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(g) The Acquiror and the Company shall have received an opinion of
Sullivan & Cromwell, no later than thirty (30) days from the date hereof,
and confirmed immediately prior to the Effective Time, substantially to the
effect that for federal income tax purposes (i) the Merger will be a
reorganization within the meaning of Section 368(a) of the Code; (ii) the
Acquiror and the Company will each be a party to that reorganization; (iii)
except with respect to cash received in lieu of fractional share interests,
holders of Company Common Stock will not recognize gain or loss for federal
income tax purposes as a result of the receipt of Acquiror Common Stock in
the Merger; (iv) the basis of the Acquiror Common Stock received by the
shareholders of the Company in the Merger will equal the basis of the
Company Common Stock for which it is exchanged; and (v) the holding period
of the Acquiror Common Stock received by the shareholders of the Company in
the Merger will include the holding period of the Company Common Stock for
which it is exchanged, assuming that such Company Common Stock is a capital
asset in the hands of the holder thereof at the Effective Time. Such opinion
may be based on, in addition to the review of such matters of law and fact
as counsel rendering the opinion considers appropriate, (i) representations
made at counsel's request by the Acquiror or the Company, shareholders of
the Acquiror or the Company, or any combination of such persons, (ii)
certificates provided at counsel's request by officers of the Acquiror or of
the Company and other appropriate persons and (iii) assumptions set forth in
the opinion with the consent of the Acquiror and the Company.
(h) Each of Alan W. Severson and Christopher L. Skillern shall have
entered into an employment agreement with the Company Bank substantially in
the form and substance as set forth in Annex III hereto.
(i) The CRA rating of the Company Bank shall be no lower than
"satisfactory."
(j) Acquiror shall have received all state securities laws and "Blue
Sky" permits necessary to consummate the transactions contemplated hereby.
(k) As of the Effective Time, the Acquiror Common Stock shall be
included for quotation on NASDAQ.
SECTION 5.2. CONDITIONS TO THE OBLIGATIONS OF THE ACQUIROR. The
obligations of the Acquiror to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) (i) The Acquiror shall have received from the Company's independent
certified public accountants a "cold comfort" letter or "specified
procedures" letter (as described in SAS No. 72), dated (A) the effective
date of the Registration Statement and (B) shortly prior to the Effective
Date, with respect to certain financial information regarding the Company,
each of such letters to be in the form customarily issued by "Big Six"
independent auditors in transactions of this type, and (ii) the Company
shall have received from the Company's independent public accountants a
letter confirming that activities of the Company would not preclude the
Merger from being treated as a "pooling of interests" for accounting
purposes (PROVIDED, HOWEVER, that for purposes of such letter, it may be
assumed that the Company satisfies the "independence" test).
(b) Each of the representations and warranties of the Company contained
in this Plan shall have been true and correct on the date hereof and shall
be true and correct in all material respects at the
22
<PAGE>
Effective Time (or on the date when made in the case of any representation
or warranty which specifically relates to an earlier date or period),
PROVIDED, HOWEVER, that for purposes of this Section 5.2(b) a representation
or warranty shall only fail to be true and correct at the Effective Time if
the failure of any such representation or warranty to be true and correct
has or constitutes, or is likely to have or constitute or relates to, either
individually or in the aggregate with other representations or warranties, a
Material Adverse Effect on the Company and its subsidiaries taken as a
whole; the Company shall have performed, or shall have caused to be
performed, in all material respects, each of its covenants and agreements
contained in this Plan required to be performed at or prior to the Effective
Time; and the Acquiror shall have received a certificate signed by the Chief
Executive Officer and the Chief Financial Officer of the Company, dated the
Effective Date, to the foregoing effect.
(c) The Acquiror shall have received the written resignation of each
director (in such director's capacity as director) of the Company, effective
as of the Effective Time.
(d) [AS AMENDED SEPTEMBER 5, 1997] Holders of no more than 10% of the
outstanding shares of Company Common Stock shall have given notice that
their shares of Company Common Stock be treated as Dissenters' Shares.
(e) The Acquiror shall have received a conformed copy of a certificate
of satisfaction of the Franchise Tax Board of the State of California that
all taxes imposed by law on the Company have been paid or secured, as filed
with the Secretary of State for the State of California pursuant to Section
1103 of the California Corporations Code.
(f) All outstanding Rights with respect to the Company Common Stock
shall have been exercised in full.
(g) There shall be no pending litigation, controversy, claim, action or
proceeding against the Company or any of its subsidiaries before any court
or governmental agency, which is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or the Company
Bank or to hinder or delay consummation of the transactions contemplated
hereby and, to the Company's knowledge after reasonable inquiry, no such
litigation, proceeding, controversy, claim or action has been threatened or
is contemplated.
(h) The Acquiror shall have received from Hogan & Hartson, counsel to
the Company, an opinion dated as of the Closing Date, in form and substance
reasonably satisfactory to the Acquiror, covering such matters as are
customarily covered in opinions delivered in similar transactions.
SECTION 5.3. CONDITIONS TO THE OBLIGATION OF THE COMPANY. The
obligation of the Company to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following
additional conditions:
(a) The Company shall have received from the Acquiror's independent
certified public accountants a "cold comfort" letter or letters or
"specified procedures" letter or letters (as described in SAS No. 72), dated
(A) the effective date of the Registration Statement and (B) shortly prior
to the Effective Date, with respect to certain financial information
regarding the Acquiror, each of such letters to be in the form customarily
issued by "Big Six" independent auditors in transactions of this type.
23
<PAGE>
(b) Each of the representations, warranties and covenants of the
Acquiror contained in this Plan shall have been true and correct on the date
hereof and shall be true and correct in all material respects on the
Effective Date as if made on such date (or on the date when made in the case
of any representation or warranty which specifically relates to an earlier
date or period), PROVIDED, HOWEVER, that for purposes of this Section 5.3 a
representation or warranty shall only fail to be true and correct at the
Effective Time if the failure of any such representation or warranty to be
true and correct has or constitutes or relates to, or is likely to have or
constitute or relate to, either individually or in the aggregate with other
representations or warranties, a Material Adverse Effect on the Acquiror;
the Acquiror shall have performed, or shall have caused to be performed, in
all material respects, each of its covenants and agreements contained in
this Plan required to be performed at or prior to the Effective Time; and
the Company shall have received certificates signed by the Chief Executive
Officer and the Chief Financial Officer of the Acquiror, dated the Effective
Date, to the foregoing effect.
(c) The Company shall have received from Sullivan & Cromwell, counsel to
the Acquiror, an opinion dated as of the Closing Date, in form and substance
reasonably satisfactory to the Company, covering such matters as are
customarily covered in opinions delivered in similar transactions.
ARTICLE VI. TERMINATION
SECTION 6.1. TERMINATION. This Plan may be terminated, and the Merger
abandoned, prior to the Effective Date, either before or after its approval by
the shareholders of the Company and the Acquiror:
(a) by the mutual consent of the Acquiror and the Company, if the board
of directors of each so determines by vote of a majority of the members of
its entire board;
(b) by the Acquiror or the Company, by written notice to the other
parties, if its board of directors so determines by vote of a majority of
the members of its entire board, in the event of (i) the failure of the
shareholders of the Company to approve the principal terms of the Plan at
its meeting called to consider such approval or (ii) a material breach by
the other party hereto of any representation, warranty, covenant or
agreement contained herein which is not cured or not curable within 30 days
after written notice of such breach is given to the party committing such
breach by the other party;
(c) by the Acquiror or the Company, by written notice to the other
parties, if either (i) any approval, consent or waiver of a governmental
authority required to permit consummation of the Merger or any transaction
necessary to consummate the Merger shall have been denied or (ii) any
governmental authority of competent jurisdiction shall have issued a final,
unappealable order enjoining or otherwise prohibiting consummation of the
Merger or any transaction necessary to consummate the Merger;
(d) by the Acquiror or the Company, by written notice to the other
parties, if its board of directors so determines by vote of a majority of
the members of its entire board, in the event that the Merger is not
consummated by March 31, 1998, unless the failure to so consummate by such
time is due to the breach of any representation, warranty or covenant
contained in this Plan by the party seeking to terminate;
(e) by the Acquiror, by written notice to the Company, if the Company
takes, causes to be taken or allows to be taken any action that, without
giving effect to the exception contained in Section 4.1 regarding the
exercise by the Company's board of directors of its fiduciary duties, would
otherwise be prohibited under Section 4.1; or
(f) by the Company, by written notice to the Acquiror prior to the
approval by the shareholders of the Company of the principal terms of this
Plan, if the Company receives an Acquisition Proposal
24
<PAGE>
on terms and conditions which the board of directors determines, after
receiving the advice of its outside counsel, (i) that to proceed with the
Merger will violate the fiduciary duties of the board of directors to the
Company's shareholders and (ii) to accept such proposal; PROVIDED, HOWEVER,
that the Company shall not be entitled to terminate this Plan pursuant to
this clause (f) unless it shall have provided the Acquiror with written
notice of such a possible determination (which written notice will inform
the Acquiror of the material terms and conditions of the Acquisition
Proposal, including the identity of the proponent) two business days prior
to such determination.
SECTION 6.2. EFFECT OF TERMINATION.
(a) In the event of the termination of this Plan by either the Acquiror
or the Company, as provided above, this Plan shall thereafter become void
and, subject to the provisions of Section 8.2, there shall be no liability
on the part of any party hereto or their respective officers or directors,
except that any such termination shall be without prejudice to the rights of
any party hereto arising out of the willful breach by any other party of any
covenant or willful misrepresentation contained in this Plan.
(b) The Company hereby agrees to pay the Acquiror, and the Acquiror
shall be entitled to receive payment of, a termination fee (the "Termination
Fee") of three million dollars ($3,000,000) upon the termination of this
Plan by the Acquiror pursuant to Section 6.1(e) hereof or the Company
pursuant to 6.1(f) hereof. Such payment shall be made to the Acquiror in
immediately available funds simultaneously with such termination, and the
payment of the Termination Fee shall be a condition to the effectiveness of
any termination pursuant to Section 6.1(e) hereof or Section 6.1(f) hereof.
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. EFFECTIVE DATE AND EFFECTIVE TIME. On such date as the
Acquiror selects, which shall be within 30 days after the last to occur of the
expiration of all applicable waiting periods in connection with approvals of
governmental authorities occurs and the receipt of all approvals of governmental
authorities and all conditions to the consummation of the Merger are satisfied
or waived, or on such earlier or later date as may be agreed in writing by the
parties, articles of merger shall be executed in accordance with all appropriate
legal requirements and shall be filed as required by law, and the Merger
provided for herein shall become effective upon such filing or on such date as
may be specified in such articles of merger. The date of such filing or such
later effective date is herein called the "Effective Date". The "Effective Time"
of the Merger shall be the time of such filing or as set forth in such articles
of merger.
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. CERTAIN DEFINITIONS; INTERPRETATION. As used in this Plan,
the following terms shall have the meanings indicated:
"knowledge of the Company" or the "Company's knowledge" means the actual
knowledge of any senior vice president of the Company or the Company Bank or
any officer of the Company or the Company Bank ranking senior to any such
senior vice president or any director of the Company or the Company Bank.
"material" means material to the Acquiror or the Company (as the case
may be) and its respective subsidiaries, taken as a whole.
"Material Adverse Effect", with respect to a person, means any
condition, event, change or occurrence that is reasonably likely to have a
material adverse effect upon (A) the condition (financial or other),
properties, assets, business, results of operations or prospects of such
person and its subsidiaries, taken as a whole, or (B) the ability of such
person to perform its obligations under, and to consummate the transactions
contemplated by, this Plan.
25
<PAGE>
"person" includes an individual, corporation, partnership, association,
trust or unincorporated organization.
"subsidiary", with respect to a person, means any other person
controlled by such person.
When a reference is made in this Plan to Sections or Annexes, such reference
shall be to a Section of, or Annex to, this Plan unless otherwise indicated. The
table of contents, tie sheet and headings contained in this Plan are for ease of
reference only and shall not affect the meaning or interpretation of this Plan.
Whenever the words "include", "includes", or "including" are used in this Plan,
they shall be deemed followed by the words "without limitation". Any singular
term in this Plan shall be deemed to include the plural, and any plural term the
singular.
SECTION 8.2. SURVIVAL. Only those agreements and covenants of the parties
that are by their terms applicable in whole or in part after the Effective Time
shall survive the Effective Time. All other representations, warranties,
agreements and covenants shall be deemed to be conditions of the Plan and shall
not survive the Effective Time. If the Plan shall be terminated, the agreements
of the parties in Section 8.6, Section 8.7 and the last three sentences of
Section 4.4 shall survive such termination.
SECTION 8.3. WAIVER. Prior to the Effective Time, any provision of this
Plan may be: (i) waived by the party benefitted by the provision; or (ii)
amended or modified at any time (including the structure of the transaction) by
an agreement in writing between the parties hereto approved by their respective
boards of directors.
SECTION 8.4. COUNTERPARTS. This Plan may be executed in counterparts, each
of which shall be deemed to constitute an original, but all of which together
shall constitute one and the same instrument.
SECTION 8.5. GOVERNING LAW. This Plan shall be governed by, and
interpreted in accordance with, the laws of the State of California, without
regard to conflicts of laws principles thereof.
SECTION 8.6. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS PLAN OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.7. EXPENSES. Each party hereto will bear all expenses incurred
by it in connection with this Plan and the transactions contemplated hereby.
26
<PAGE>
SECTION 8.8. NOTICES. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand, U.S. mail (with receipt), overnight
delivery (with receipt), telecopy, telegram or telex (confirmed in writing) to
such party at its address set forth below or such other address as such party
may specify by notice to the other party hereto.
If to the Company, to:
GB Bancorporation
4320 La Jolla Village Drive, Suite 270
San Diego, California 92122
Telecopier: (619) 239-7999
Attention: Robert G. Sarver, Chairman and
Chief Executive Officer
With copies to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Telecopier: (202) 637-5910
Attention: Stuart G. Stein
If to the Acquiror, to:
Zions Bancorporation
One South Main Street, Suite 1380
Salt Lake City, Utah 84111
Telecopier: (801) 524-2129
Attention: Dale M. Gibbons
With copies to:
Sullivan & Cromwell
444 South Flower Street
Los Angeles, California 90071
Telecopier: (213) 683-0457
Attention: Stanley F. Farrar
SECTION 8.9. ENTIRE AGREEMENT; ETC. This Plan represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made, other than the Confidentiality Agreement dated June 10, 1997
between the Acquiror and the Company. All terms and provisions of the Plan shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Except as to Section 4.6, nothing in this
Plan is intended to confer upon any other person any rights or remedies of any
nature whatsoever under or by reason of this Plan.
27
<PAGE>
SECTION 8.10. ASSIGNMENT. This Plan may not be assigned by any party
hereto without the written consent of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be executed
by their duly authorized officers as of the day and year first above written.
ZIONS BANCORPORATION
By: /s/ DALE M. GIBBONS
------------------------------------
Name: Dale M. Gibbons
Title: Chief Financial Officer
GB BANCORPORATION
By: /s/ ROBERT G. SARVER
------------------------------------
Name: Robert G. Sarver
Title: Chief Executive Officer
28
<PAGE>
APPENDIX B
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
PERSONAL AND CONFIDENTIAL
, 1997
Board of Directors
GB Bancorporation
4320 La Jolla Village Drive
Ste. 355
San Diego, CA 92122
Gentlemen:
You have requested our opinion as to the fairness to the holders of the
outstanding shares of Common Stock, no par value (the "Shares"), of GB
Bancorporation (formerly, Bancomer Holding Company) (the "Company") of the
Exchange Ratio (as defined below) in the proposed merger (the "Merger") of the
Company with Zions Bancorporation ("Zions") pursuant to the Agreement and Plan
of Merger dated as of July 3, 1997 by and between the Company and Zions (the
"Agreement"). Pursuant to the Agreement, among other things, each Share issued
and outstanding at the effective time of the Merger (other than Shares held by
holders who perfect their rights to dissent under applicable law) will be
converted into the right to receive 2.2748 (the "Exchange Ratio") Shares of
Common Stock, no par value ("Common Stock"), of Zions.
Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
the Company having provided certain investment banking services to the Company
from time to time. We also have provided certain investment banking services to
Zions from time to time and may provide investment banking services to Zions in
the future. Goldman, Sachs & Co. is a full service securities firm and in the
course of our normal trading activities we may from time to time effect
transactions, for our own account or the account of customers, and hold
positions in securities or options on securities of Zions. At the present time,
we own no shares of Common Stock of Zions.
In connection with this opinion, we have reviewed, among other things, the
Agreement; annual audited Financial Statements for the Company and Grossmont
Bank (a wholly-owned subsidiary of the Company) for the five years ended
December 31, 1996; Annual Reports to Stockholders and Annual Reports on Form
10-K of Zions for the five years ended December 31, 1996; certain interim
reports to the Company's Board of Directors and Quarterly Reports on Form 10-Q
for Zions; and certain internal financial analyses and forecasts for the Company
and for Zions prepared by their respective managements. We also have held
discussions with members of the senior management of the Company and Zions
regarding the past and current business operations, financial condition and
future prospects of their respective companies. In addition, we have reviewed
the reported price and trading activity for the Common Stock, compared certain
financial and stock market information for the Company and Zions with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the banking industry specifically and in other industries generally and
performed such other studies and analyses as we considered appropriate.
<PAGE>
GB Bancorporation
, 1997
Page 2
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us, and have assumed such accuracy and
completeness for purposes of rendering this opinion. In addition, we have not
made an independent evaluation or appraisal of the assets and liabilities of the
Company or Zions or any of their subsidiaries and we have not been furnished
with any such evaluation or appraisal. Our advisory services and the opinion
expressed herein are provided for the information and assistance of the Board of
Directors of the Company in connection with its consideration of the transaction
contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of the Shares should vote with respect to
such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair to the holders of the Shares.
Very truly yours,
- ---------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
APPENDIX C
CHAPTER 13. DISSENTERS' RIGHTS
1300 [SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER].--(a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-firm
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions: (1) Which were not immediately prior
to the reorganization or short-form merger either (A) listed on any nationals
securities exchange certified by the Commissioner of Corporations under
subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks
issued by the Board of Governors of the Federal Reserve System, and the notice
of meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that this
provision does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or regulation;
and provided, further, that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for payment are filed with
respect to 5 percent or more of the outstanding shares of that class. (2) Which
were outstanding on the date for the determination of shareholders entitled to
vote on the organization and (A) were not voted in favor of the reorganization
or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard
to the provisos in that paragraph), were voted against the reorganization, or
which were held of record on effective date of a short-form merger; provided,
however, that subparagraph (A) rather than subparagraph (B) of this paragraph
applies in any case where the approval required by Section 1201 is sought by
written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
1301 [DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF SHARES].--
(a) If, in the case of a reorganization, any shareholders of a corporation have
a right under Section 1300, subject to compliance with paragraphs (3) and (4) of
subdivision (b) thereof, to require the corporation to purchase their shares for
cash, such corporation shall mail to each such shareholder a notice of the
approval of the reorganization by its outstanding shares (Section 152) within 10
days after the date of such approval, accompanied by a copy of Sections 1300,
1302, 1303, 1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting shares, and a
brief description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
1
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. [DISSENTING SHARES, STAMPING OR ENDORSING].-- Within 30 days after
the date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303 [DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME OF
PAYMENT].-- (a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304 [DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS].-- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
2
<PAGE>
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305 [APPRAISERS DUTY AND REPORT; COURT JUDGEMENT; PAYMENT; APPEAL; COSTS OF
ACTION].-- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306 [DISSENTING SHAREHOLDERS: EFFECT OF PREVENTION OF PAYMENT OF FAIR
MARKET VALUE].-- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307 [DISSENTING SHARES, DISPOSITION OF DIVIDENDS].-- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308 [DISSENTING SHARES, RIGHTS AND PRIVILEGES].-- Except as expressly
limited in this chapter, holders of dissenting shares continue to have all the
rights and privileges incident to their shares, until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
3
<PAGE>
1309 [DISSENTING SHARES, LOSS OF STATUS]-- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310 [SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING].-- If
litigation is instituted to test the sufficiency or regularity of the votes of
the shareholders in authorizing a reorganization, any proceedings under Sections
1304 and 1305 shall be suspended until final determination of such litigation.
1311 [CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES].-- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312 [VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDER'S RIGHTS; BURDEN OF PROOF].-- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right at law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of the shareholders of which such shareholder is a member.
4
<PAGE>
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Utah law provides for indemnification of directors and officers as follows:
16-10A-902 AUTHORITY TO INDEMNIFY DIRECTORS.
(1) Except as provided in Subsection (4), a corporation may indemnify an
individual made a party to a proceeding because he is or was a director, against
liability incurred in the proceeding if:
(a) his conduct was in good faith; and
(b) he reasonably believed that his conduct was in, or not opposed to,
the corporation's best interests; and
(c) in the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(2) A director's conduct with respect to any employee benefit plan for a
purpose he reasonably believed to be in or not opposed to the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of Subsection (1)(b).
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(4) A corporation may not indemnify a director under this section:
(a) in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(b) in connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving action in his
official capacity, in which proceeding he was adjudged liable on the basis
that he derived an improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
16-10A-903 MANDATORY INDEMNIFICATION OF DIRECTORS.
Unless limited by its articles of incorporation, a corporation shall
indemnify a director who was successful, on the merits or otherwise, in the
defense of any proceeding, or in the defense of any claim, issue, or matter in
the proceeding, to which he was a party because he is or was a director of the
corporation, against reasonable expenses incurred by him in connection with the
proceeding or claim with respect to which he has been successful.
16-10A-907 INDEMNIFICATION OF OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS.
Unless a corporation's articles of incorporation provide otherwise:
(1) an officer of the corporation is entitled to mandatory
indemnification under Section 16-10a-903, and is entitled to apply for
court-ordered indemnification under Section 16-10a-905, in each case to the
same extent as a director;
(2) the corporation may indemnify and advance expenses to an officer,
employee, fiduciary, or agent of the corporation to the same extent as to a
director; and
II-1
<PAGE>
(3) a corporation may also indemnify and advance expenses to an officer,
employee, fiduciary, or agent who is not a director to a greater extent, if
not inconsistent with public policy, and if provided for by its articles of
incorporation, bylaws, general or specific action of its board of directors,
or contract.
16-10A-908 INSURANCE.
A corporation may purchase and maintain liability insurance on behalf of
person who is or was a director, officer, employee, fiduciary, or agent of the
corporation, or who, while serving as a director, officer, employee, fiduciary,
or agent of the corporation, is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee, fiduciary, or agent of
another foreign or domestic corporation or other person, or of an employee
benefit plan, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, fiduciary,
or agent, whether or not the corporation would have power to indemnify him
against the same liability under Sections 16-10a-902, 16-10a-903, or 16-10a-907.
Insurance may be procured from any insurance company designated by the board of
directors, whether the insurance company is formed under the laws of this state
or any other jurisdiction of the United States or elsewhere, including any
insurance company in which the corporation has an equity or any other interest
through stock ownership or otherwise.
16-10A-909 LIMITATIONS OF INDEMNIFICATION OF DIRECTORS.
(1) A provision treating a corporation's indemnification of, or advance for
expenses to, directors that is contained in its articles of incorporation or
bylaws, in a resolution of its shareholders or board of directors, or in a
contract (except an insurance policy) or otherwise, is valid only if and to the
extent the provision is not inconsistent with this part. If the articles of
incorporation limit indemnification or advance of expenses, indemnification and
advance of expenses are valid only to the extent not inconsistent with the
articles of incorporation.
(2) This part does not limit a corporation's power to pay or reimburse
expenses incurred by a director in connection with the director's appearance as
a witness in a proceeding at a time when the director has not been made a named
defendant or respondent to the proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. An Exhibit Index, containing a list of all exhibits filed with
this Registration Statement, is included beginning on page II-7.
(b) Financial Statement Schedules. Not applicable.
(c) Report, Opinion or Appraisal. Not applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(2) to deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information
II-2
<PAGE>
required to be presented by Article 3 of Regulation S-X is not set forth in
the prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(3) that prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(4) that every prospectus (i) that is filed pursuant to paragraph (3)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, as amended, and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(5) that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(6) to respond to requests for information that is incorporated by
reference into the Proxy Statement/Prospectus pursuant to Items 4, 10(b), 11
or 13 of Form S-4, within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the Effective Date of the registration statement through the
date of responding to the request.
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Salt Lake City,
Utah, on the third day of October, 1997.
ZIONS BANCORPORATION
By:
/s/ DALE M. GIBBONS
-----------------------------------------
Dale M. Gibbons,
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
*
------------------------------------------- President, Chief Executive October 3, 1997
Harris H. Simmons Officer and Director
/s/ DALE M. GIBBONS Senior Vice President Chief
------------------------------------------- Financial Officer October 3, 1997
Dale M. Gibbons
*
------------------------------------------- Controller October 3, 1997
Walter E. Kelly
*
------------------------------------------- Chairman and Director October 3, 1997
Roy W. Simmons
------------------------------------------- Director
Jerry C. Atkin
*
------------------------------------------- Director October 3, 1997
R.D. Cash
------------------------------------------- Director
L.E. Simmons
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
*
------------------------------------------- Director October 3, 1997
Grant R. Caldwell
*
------------------------------------------- Director October 3, 1997
I.J. Wagner
------------------------------------------- Director
Roger B. Porter
*
------------------------------------------- Director October 3, 1997
Dale W. Westergard
------------------------------------------- Director
Richard H. Madsen
------------------------------------------- Director
Robert G. Sarver
</TABLE>
*By: /s/ DALE M. GIBBONS
-------------------------
Dale M. Gibbons
AS ATTORNEY-IN-FACT
PURSUANT
TO THE POWER OF ATTORNEY
FILED AS A PART OF THIS
REGISTRATION STATEMENT
II-5
<PAGE>
EXHIBIT INDEX
(PURSUANT TO ITEM 601 OF REGULATION S-K)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
- ------------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of July 3, 1997, between Zions Bancorporation and GB
Bancorporation, as amended September 5, 1997, (included as Appendix A to the Proxy
Statement-Prospectus)
3.1 Restated Articles of Incorporation of Zions Bancorporation dated November 8, 1993, and filed
with the Department of Business Regulation, Division of Corporations of the State of Utah
on November 9, 1993 (incorporated by reference to Exhibit 3.1 to the Registrant's Form S-4
Registration Statement, File No. 33-51145, filed on November 22, 1993)
3.2 Restated Bylaws of Zions Bancorporation, dated November 8, 1993 (incorporated by reference to
Exhibit 3.2 to the Registrant's Form S-4 Registration Statement, File No. 33-51145, filed
November 22, 1993)
3.3 Articles of Amendment to the Restated Articles of Incorporation of Zions Bancorporation dated
April 30, 1997 and filed with the Department of Business Regulation, Division of
Corporations of the State of Utah on May 2, 1997 (incorporated by reference to Exhibit 3.1
of Zions Bancorporation's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, File No. 0-2610)
4.1 Shareholder Protection Rights Agreement, dated as of September 27, 1996, between Zions
Bancorporation and Zions First National Bank (incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K, filed October 12, 1996)
5.1 Opinion of Sullivan & Cromwell regarding the validity of the shares of Common Stock being
registered*................................................................................
5.2 Opinion of Callister Nebeker & McCullough, a Professional Corporation, regarding the validity
of the shares of Common Stock being registered*............................................
8 Opinion of Sullivan & Cromwell regarding tax matters*........................................
23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants for Zions
Bancorporation (filed herewith)............................................................
23.2 Consent of Ernst & Young LLP, independent certified public accountants for GB Bancorporation
and Grossmont Bank (filed herewith)........................................................
23.3 Consent of KPMG Peat Marwick LLP, independent auditors for Grossmont Bank (filed herewith)...
23.4 Consent of Sullivan & Cromwell*
23.5 Consent of Goldman, Sachs & Co. (filed herewith).............................................
23.6 Consent of Sullivan & Cromwell*
24.1 Power of Attorney*
99.1 Form of Proxy of GB Bancorporation (filed herewith)..........................................
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Zions Bancorporation:
We consent to the use of our report dated January 16, 1997, with respect to
the consolidated financial statements of Zions Bancorporation as of December 31,
1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996 incorporated herein by reference, and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
October 6, 1997
Salt Lake City, Utah
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports (a) dated February 10, 1997, with respect to the
consolidated financial statements of GB Bancorporation and (b) dated February
9, 1996 with respect to the financial statements of Grossmont Bank, all of
which are included in the Proxy Statement of GB Bancorporation that is made a
part of Amendment No. 1 to the Registration Statement (Form S-4 No. 333-36123)
and Prospectus of Zions Bancorporation for the registration of 4,925,024
shares of its common stock.
/s/ ERNST & YOUNG LLP
Orange County, California
October 6, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Grossmont Bank:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" and "Selected Financial Data for
Grossmont Bank" in the prospectus.
The Bank changed its method of accounting for certain investments in 1994 to
adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities".
/s/ KPMG Peat Marwick LLP
San Diego, California
October 6, 1997
<PAGE>
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
PERSONAL AND CONFIDENTIAL
October 6, 1997
Board of Directors
GB Bancorporation
4320 La Jolla Village Drive
Suite 355
San Diego, CA 92122
Re: Proxy Statement-Prospectus of GB Bancorporation
Gentlemen:
Reference is made to our opinion letter dated the date of the above mentioned
Proxy Statement-Prospectus with respect to the fairness to the holders of the
outstanding shares of Common Stock, no par value, of GB Bancorporation
(formerly, Bancomer Holding Company) (the "Company") of the Exchange Ratio
(as defined in the opinion letter) in the proposed merger (the "Merger") of
the Company with Zions Bancorporation ("Zions") pursuant to the Agreement and
Plan of Merger dated as of July 3, 1997 by and between the Company and Zions.
The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of GB Bancorporation in connection with its
consideration of the transaction contemplated therein and is not to be used,
circulated, quoted or otherwise referred to for any other purpose, nor is it
to be filed with, included in or referred to in whole or in part in any
registration statement, proxy statement, prospectus or any other document,
except in accordance with our prior written consent. We understand that the
Company has determined to include our opinion in the Proxy
Statement-Prospectus related to the Merger.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "Summary - The Merger - OPINION OF FINANCIAL ADVISOR", "The
Merger - Background of the Merger", "The Merger - Reasons for the Merger;
Recommendation of the Boards of Directors - GB" and "The Merger - Opinion of
Financial Advisor" in the above-mentioned Proxy Statement-Prospectus.
In providing such consent, except as may be required by the federal
securities laws, we do not intend that any person other than the Board of
Directors rely upon such opinion and we do not thereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Goldman, Sachs & Co.
- --------------------------------
(GOLDMAN, SACHS & CO.)
<PAGE>
PROXY
GB BANCORPORATION
4320 La Jolla Village Drive, Suite 355
San Diego, California 92122
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GB
BANCORPORATION FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON NOVEMBER
10, 1997.
The undersigned hereby constitutes and appoints Peggy Standefer and Robert
Esch or either of them, with full power of substitution, attorneys and proxies
of the undersigned, to represent the undersigned and vote all shares of the
common stock of GB Bancorporation which the undersigned would be entitled to
vote if personally present at GB Bancorporation's Special Meeting of
Shareholders to be held at the offices of GB Bancorporation, 4320 La Jolla
Village Drive, Suite 355, San Diego, California 92122 on November 10, 1997 at
4:00 p.m., local time, and at any postponement or adjournment thereof, in the
following manner:
1. APPROVAL OF THE PRINCIPAL TERMS OF THE MERGER
/ / FOR / / AGAINST / / ABSTAIN
2. APPROVAL OF ACCELERATION OF CERTAIN STOCK OPTIONS HELD BY DIRECTORS AND
OFFICERS
/ / FOR / / AGAINST / / ABSTAIN
OTHER MATTERS. The proxies are authorized to vote upon such other
business as may properly come before the Special Meeting, or any
postponement or adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ITEMS 1 AND 2.
(CONTINUED ON REVERSE SIDE)
<PAGE>
WHEN THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES IT REPRESENTS
WILL BE VOTED AT THE MEETING IN ACCORDANCE WITH THE CHOICES SPECIFIED ABOVE. IF
NO CHOICES ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS ONE AND TWO.
THE PROXY WILL BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE DESIGNATED
INDIVIDUALS WITH RESPECT TO MATTERS INCIDENT TO THE CONDUCT OF THE MEETING AND
ANY OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
POSTPONEMENT OR ADJOURNMENT THEREOF.
Please date and sign exactly as your name or names appear hereon. If more
than one owner exists, all should sign. When signing as attorney, executor,
administrator, trustee or guardian, give your full title as such. If the
signatory is a corporation or partnership, sign the full corporate or
partnership name by a duly authorized officer or partner.
Dated: ______________, 1997
___________________________
Signature
___________________________
Signature
___________________________
Type or Print
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND RETURN THIS PROXY CARD USING THE
ENCLOSED ENVELOPE
