<PAGE>
As filed with the Securities and Exchange Commission on May 31, 1996
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-4
Registration Statement
Under
The Securities Act of 1933
----------------------
COMPASS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 6711 63-0593897
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
15 South 20th Street
Birmingham, Alabama 35223
(205) 933-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------------
Jerry W. Powell, Esquire
General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
(205) 933-3960
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable following 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>
================================================================================
Title of each class Amount to Proposed Proposed Amount of
of securities be maximum maximum registration
to be registered registered offering aggregate fee
(1) price per offering
share price (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $2.00 par 550,000 (2) $10,944,704 $3,775
value
================================================================================
</TABLE>
(1) Based upon the maximum number of shares anticipated to be issued pursuant
to an Agreement and Plan of Merger dated December 14, 1995 between the
Registrant and Royall Financial Corporation. The actual number of shares
to be issued will vary depending on the closing sales prices of Compass
Bancshares, Inc. common stock over a specified period.
(2) Not applicable.
(3) Computed in accordance with Rule 457(f) under the Securities Act of 1933,
as amended, based on the book value as of March 31, 1996 of the securities
to be received by the Registrant in exchange for the securities registered
hereby.
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 shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
COMPASS BANCSHARES, INC.
------------------------------------
CROSS REFERENCE SHEET
(Pursuant to Item 501(b) of Regulation S-K
and Item 1 of Part I of Form S-4)
<TABLE>
<CAPTION>
S-4 Item Number and Heading Location of Proxy Statement/Prospectus Heading
- --------------------------------------------------------------------------------------------------
<S> <C>
A. Information About the Transaction
---------------------------------
1. Forepart of Forepart of Registration Statement; Outside
Registration Statement Front Cover Page of Prospectus
and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Table of Contents; Available Information;
Back Cover Pages of Incorporation of Certain Documents by
Prospectus Reference; Introduction
3. Risk Factors, Ratio Introduction; Summary; Risk Factors; Selected
of Earnings to Fixed Financial Data; Market Prices; The Merger;
Charges and Other Supervision and Regulation; Index to Financial
Information Statements of Royall
4. Terms of the Forepart of Registration Statement;
Transaction Introduction; Summary; The Merger; Description
Compass Common and Preferred Stock; Comparison
of Rights of Shareholders of Royall and
Compass; Information About Compass; Appendix I
and Appendix II
5. Pro Forma Financial Selected Financial Data
Information
6. Material Contacts Summary; Recommendation of Board of
with the Company Being Directors; The Merger; Information About
Acquired Royall
7. Additional Not Applicable
Information Required
for Reoffering by
Persons and Parties
Deemed to be
Underwriters
8. Interests of Named Relationships with Independent Accountants;
Experts and Counsel Experts; Legal Opinions
9. Disclosure of Indemnification
Commission Position on
Indemnification for
Securities Act
Liabilities
B. Information About the Registrant
--------------------------------
10. Information With Available Information; Incorporation of
Respect to S-3 Certain Documents by Reference; Summary;
Registrants Recent Developments; Selected Financial Data;
Market Prices; Information About Compass
11. Incorporation of Incorporation of Certain Documents by
Certain Information by Reference; Information About Compass
Reference
12. Information With Not Applicable
Respect to S-2 or S-3
Registrants
13. Incorporation of Not Applicable
Certain Information by
Reference
14. Information With Not Applicable
Respect to Registrants
Other Than S-2 or S-3
Registrants
C. Information About the Company Being Acquired
--------------------------------------------
15. Information With Not Applicable
Respect to S-3
Companies
16. Information With Not Applicable
Respect to S-2 or S-3
Companies
17. Information With Introduction; Summary; The Merger; Selected
Respect to Companies Financial Data; Market Prices; Information
Other Than S-2 or S-3 About Royall; Comparison of Rights of
Companies Stockholders of Royall and Compass; Index to
Financial Statements of Royall
D. Voting and Management Information
---------------------------------
18. Information if The Proxy Card; Incorporation of Certain
Proxies, Consents or Documents by Reference; Introduction; Summary;
Authorizations Are to The Merger; Information About Compass;
be Solicited Information About Royall; Relationships with
Independent Accountants; Experts; Appendix II
19. Information if Not Applicable
Proxies, Consents or
Authorizations Are Not
to be Solicited, or in
an Exchange Offer
</TABLE>
<PAGE>
ROYALL FINANCIAL CORPORATION COMPASS BANCSHARES, INC.
PROXY STATEMENT/PROSPECTUS
Compass Bancshares, Inc., a Delaware corporation ("Compass"), has
filed this Proxy Statement/Prospectus with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Compass $2.00 par value
common stock ("Compass Common Stock") to be issued in the proposed merger (the
"Merger") of Compass Equitable Texas, Inc. ("Compass Texas"), a Texas
corporation and wholly-owned subsidiary of Compass, with and into Royall
Financial Corporation, a Texas corporation ("Royall").
This Proxy/Statement Prospectus constitutes the proxy statement of
Royall relating to the solicitation of proxies for use at the special meeting of
shareholders of Royall (the "Meeting") scheduled to be held on _________
___________, 1996 at ____ __.M. Palestine time, at ______________________ in
Palestine, Texas, and any adjournments thereof. At the Meeting, the shareholders
of Royall will consider and vote upon a proposal to approve, ratify, confirm and
adopt the Agreement and Plan of Merger dated as of December 14, 1995, by and
between Compass and Royall (the "Merger Agreement"), as amended, providing for,
among other things, the merger of Compass Texas with and into Royall and, in
connection therewith, the receipt by Royall shareholders of Compass Common
Stock.
The Merger Agreement provides for the holders of Royall common stock,
par value $100 per share ("Royall Common Stock"), at the effective time of the
Merger (the "Effective Time"), other than dissenting shareholders, to receive
aggregate merger consideration ("Merger Consideration") of 550,000 shares of
Compass Common Stock (as adjusted due to the exercise of dissenter's rights).
Holders of Royall Common Stock shall receive for each share of Royall Common
Stock held at the Effective Time a number of shares of Compass Common Stock
equal to (i) 550,000 shares of Compass Common Stock to be issued to the holders
of Royall Common Stock divided by (ii) the number of shares of Royall Common
Stock outstanding immediately prior to the Effective Time (the "Per Share Merger
Consideration"). In the event the average closing sale price of the Compass
Common Stock as reported by the NASDAQ National Market System for the 20 days of
trading following the mailing of this Proxy Statement/Prospectus (the "Share
Determination Market Value") is less than $29.00 per share, Royall may either
(i) terminate the Merger Agreement, or (ii) agree to accept an aggregate of
550,000 shares of Compass Common Stock. In the event Royall exercises its option
to terminate the Merger Agreement, Compass shall have the right to reject such
termination by agreeing to issue a number of shares of Compass Common Stock
equal to the quotient of $15,950,000 divided by the Share Determination Market
Value. Any decision by the Board of Directors of Royall regarding whether to
terminate the Merger Agreement will be made in its sole discretion and could
result in either (i) Royall shareholders receiving Merger Consideration with an
aggregate market value of less than $15,950,000, (ii) the termination of the
Merger Agreement, or (iii) Compass agreeing to increase the number of shares of
Compass Common Stock constituting the Merger Consideration. If the Board of
Directors of Royall elects to terminate the Merger Agreement, there can be no
assurance that Compass will agree to increase the number of shares of Compass
Common Stock and that the Merger Agreement will not terminate, in which event
the Royall shareholders would not receive any Merger Consideration but would
retain their Royall Common Stock.
On May ___, 1996, there were 3,999-11/12ths shares of Royall Common
Stock issued and outstanding.
Assuming that (i) there will be 3,999-11/12ths shares of Royall Common
Stock issued and outstanding immediately prior to the Effective Time, and (ii)
the Share Determination Market Value will be $_______ (the average closing sale
price of the Compass Common Stock as reported by the NASDAQ National Market
System for the 20 days of trading preceding _________, 1996), Compass will be
required to issue an aggregate of 550,000 shares of Compass Common Stock to the
Royall shareholders and each shareholder of Royall (except for shareholders
choosing to exercise their dissenters' rights) will be entitled to receive
approximately 137.50 shares of Compass Common Stock for each share of Royall
Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be
reduced by the number of shares that would otherwise be issued to dissenting
shareholders.
<PAGE>
Compass will not issue fractional shares of Compass Common Stock, but
instead will pay cash to any shareholder otherwise entitled to receive a
fractional share. Such cash payment shall be based on the Per Share Merger
Consideration.
See "Summary--The Merger"; "Summary--Dissenters' Rights"; "The Merger-
- -General"; "The Merger--Dissenters' Rights"; Appendix I; and Appendix II.
Consummation of the Merger is subject to the receipt of required
governmental approvals, the approval of the holders of two-thirds of the
outstanding Royall Common Stock and certain other conditions, all as more fully
described in this Proxy Statement/Prospectus. See "Summary--Shareholder Votes
Required; Conditions to Consummation and Regulatory Approvals; Termination";
"The Merger--Other Terms and Conditions"; and Appendix I.
This Proxy Statement/Prospectus also constitutes the prospectus of
Compass with respect to the shares of Compass Common Stock to be issued to the
holders of Royall Common Stock in the Merger; however, it does not cover resales
of shares of Compass Common Stock upon consummation of the proposed
reorganization, and no person is authorized to use this Proxy
Statement/Prospectus in connection with any such resale. See "Resale of Compass
Stock".
This Proxy Statement/Prospectus is first being mailed or delivered to
Royall shareholders on or about _________, 1996.
Compass Common Stock is publicly traded in the over-the-counter market
and quoted on the NASDAQ National Market System. On May __, 1996, the last
reported sale price per share of Compass Common Stock was $___. No active public
trading market exists for the Royall Common Stock.
THE SECURITIES OF COMPASS BANCSHARES, INC. OFFERED IN CONNECTION WITH THE
MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
All information concerning Compass and Compass Texas has been
furnished by Compass, and all information regarding Royall has been furnished by
Royall.
ROYALL SHAREHOLDERS ARE URGED TO REVIEW AND CAREFULLY
CONSIDER THE RISKS DESCRIBED UNDER "RISK FACTORS".
The date of this Proxy Statement/Prospectus is ___________, 1996.
<PAGE>
PROXY STATEMENT/PROSPECTUS
Table of Contents
AVAILABLE INFORMATION........................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................................................... 1
INTRODUCTION................................................................. 3
Parties to the Merger................................................ 5
The Merger........................................................... 6
Reasons for the Merger; Recommendation of
Boards of Directors.......................................... 7
The Meeting.......................................................... 8
Record Date.......................................................... 8
Shareholder Votes Required........................................... 8
Dissenters' Rights................................................... 9
Conditions to Consummation and
Regulatory Approvals; Termination............................ 9
Federal Income Tax Consequences...................................... 9
Accounting Treatment................................................. 10
RISK FACTORS................................................................. 11
SELECTED FINANCIAL DATA...................................................... 13
MARKET PRICES................................................................ 15
THE MERGER................................................................... 16
General.............................................................. 16
Background and Reasons for the Merger................................ 17
Opinion of Financial Advisor......................................... 18
Operations After the Merger.......................................... 22
Other Terms and Conditions........................................... 22
Additional Agreements................................................ 24
Business Pending Effective Time...................................... 25
Amendment; Termination............................................... 25
Exchange of Shares........................................................... 26
Dissenters' Rights................................................... 26
Federal Income Tax Consequences...................................... 28
Government Approvals................................................. 29
Accounting Treatment................................................. 29
SUPERVISION AND REGULATION................................................... 30
General.............................................................. 30
Compass, Compass of Texas and
Compass Bancorporation....................................... 30
The Subsidiary Banks................................................. 32
Other................................................................ 33
DESCRIPTION OF COMPASS COMMON AND PREFERRED
STOCK................................................................ 34
Compass Common Stock................................................. 34
Dividends............................................................ 34
Preemptive Rights.................................................... 35
Voting Rights........................................................ 35
Liquidation.......................................................... 35
Compass Preferred Stock.............................................. 35
COMPARISON OF RIGHTS OF
SHAREHOLDERS OF ROYALL AND COMPASS................................... 36
Charter and By-Law Provisions
Affecting Compass Stock...................................... 36
Certain Differences Between the Corporation
Laws of Texas and Delaware and Corresponding
Charter and Bylaw Provisions....................................... 36
Mergers.............................................................. 36
Appraisal Rights..................................................... 37
Special Meetings..................................................... 37
Actions Without a Meeting............................................ 38
Election of Directors................................................ 38
Voting on Other Matters.............................................. 38
Preemptive Rights.................................................... 39
Dividends............................................................ 39
Liquidation Rights................................................... 39
Limitation of Liability and
Indemnification...................................................... 40
Removal of Directors................................................. 40
Inspection of Books and Records...................................... 41
Antitakeover Provisions.............................................. 41
RESALE OF COMPASS STOCK...................................................... 41
INFORMATION ABOUT COMPASS.................................................... 42
Incorporation of Certain Documents by
Reference.................................................... 42
Interests of Certain Persons......................................... 42
INFORMATION ABOUT ROYALL..................................................... 42
Services, Employees and Properties................................... 42
Competition.......................................................... 42
Legal Proceedings.................................................... 43
Market Price and Dividends........................................... 43
Beneficial Ownership of Royall Common Stock by
Royall Management and Principal Shareholders................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ROYALL
BANKSHARES, INC...................................................... 46
Results of Operations................................................ 46
General.............................................................. 46
Net Interest Income.................................................. 46
Provision for Loan Losses............................................ 50
Non-interest Income.................................................. 50
Operating Expenses................................................... 50
Federal Income Taxes................................................. 51
Capital Resources, Liquidity and Financial
Condition.................................................... 51
Capital Resources.................................................... 51
Liquidity............................................................ 52
Interest Rate Sensitivity............................................ 53
Investment Securities................................................ 55
Deposits............................................................. 56
Loans................................................................ 57
Allowance for Loan Losses and Risk
Elements..................................................... 57
Nonaccrual, Past Due and Restructured Loans.......................... 59
Return on Equity and Assets.......................................... 60
RELATIONSHIPS WITH INDEPENDENT
ACCOUNTANTS.................................................................. 60
EXPERTS...................................................................... 60
LEGAL OPINIONS............................................................... 61
INDEMNIFICATION.............................................................. 61
OTHER MATTERS................................................................ 61
<PAGE>
AVAILABLE INFORMATION
Compass has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act for the registration
of the Compass Common Stock proposed to be issued and exchanged in the Merger.
This Proxy Statement/Prospectus was filed as a part of the Registration
Statement.
This Proxy Statement/Prospectus does not contain all of the information
forth in the Registration Statement, as certain parts are permitted to be
omitted by the rules and regulations of the Commission. For further information
pertaining to Compass, the Compass Common Stock, and related matters, reference
is made to the Registration Statement, including the exhibits filed as a part
thereof, which may be inspected at, and copies of which may be obtained by mail
from, the Public Reference Branch of the Commission referred to below.
Compass is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the Commission's public reference rooms located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and the public reference facilities in the New
York Regional Office, 13th Floor, Seven World Trade Center, New York, New York
10048, and the Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621-2511. Copies of such
materials can be obtained at prescribed rates by writing to the Securities and
Exchange Commission, Public Reference Branch, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
This Proxy Statement/Prospectus incorporates documents by reference
which are not included herein or delivered herewith. These documents concerning
Compass (other than certain exhibits to such documents) are available to each
beneficial owner of Royall Common Stock, without charge and upon request, from
the Controller of Compass at 15 South 20th Street, Birmingham, Alabama 35233
(telephone no. (205) 558-5740). In order to ensure timely delivery of the
documents, any such request should be made by _______, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Compass with the Commission are
incorporated herein by reference:
(i) Compass' Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 0-6032);
(ii) Compass' Proxy Statement dated March 6, 1996, relating to its annual
meeting of shareholders held on April 9, 1996 (File No. 0-6032);
(iii) Compass' Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 (File No. 0-6032);
(iv) The description of Compass Common Stock contained in its Proxy
Statement dated April 16, 1982, relating to its Annual Meeting held
May 17, 1982 (File No. 0-6032).
All documents filed by Compass pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Meeting are incorporated herein by reference, and shall be deemed a part
hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this Proxy
Statement/Prospectus, shall be deemed to be modified or superseded for purposes
of this Proxy Statement/Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is deemed to be
incorporated herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part of this Proxy
Statement/Prospectus, except as so modified or superseded.
-1-
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by Compass, Compass Texas, Royall or their
respective affiliates. This Proxy Statement/Prospectus does not constitute an
offer to exchange or sell, or a solicitation of an offer to exchange or
purchase, any securities other than the Compass Common Stock offered hereby, nor
does it constitute an offer to exchange or sell or a solicitation of an offer to
exchange or purchase such securities in any state or other jurisdiction to any
person to whom such an offer or solicitation would be unlawful.
Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of securities made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of Compass, Compass
Texas, Royall or their respective affiliates since the date of this Proxy
Statement/Prospectus.
-2-
<PAGE>
PROXY STATEMENT/PROSPECTUS
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Royall Financial
Corporation, a Texas corporation ("Royall"), for use at the special meeting of
Royall shareholders to be held at the time and place set forth in the foregoing
notice and at any adjournments thereof (the "Meeting"). This Proxy
Statement/Prospectus is also a prospectus for the shares of Compass Bancshares,
Inc. ("Compass") $2.00 par value common stock ("Compass Common Stock") to be
issued in connection with the merger (the "Merger") of Compass Equitable Texas,
Inc. ("Compass Texas"), a Delaware corporation and wholly-owned subsidiary of
Compass formed for the purpose of effecting the Merger, with and into Royall.
The following proposals will be considered and voted upon at the Meeting:
(1) To approve, ratify, confirm and adopt an Agreement and Plan of Merger,
dated as of December 14, 1995, by and between Compass and Royall, as
amended (the "Merger Agreement"), pursuant to which Compass Texas will
be merged with and into Royall; and
(2) To consider and transact such other business as may properly come
before the Meeting.
The Board of Directors of Royall has fixed May __, 1996 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Meeting and any adjournments thereof (the "Record Date"). As of such date,
Royall had (i) 1,000,000 shares of common stock, $100 par value per share
("Royall Common Stock"), authorized, of which 3,999-11/12ths shares were issued
and outstanding. As of the Record Date, the Royall Common Stock was held of
record by 47 persons or entities. Each share of Royall Common Stock entitles the
holder of record on the Record Date to one vote as to the Merger and one vote as
to any other proposal to be voted on at the Meeting. The presence, in person or
by proxy, of the holders of a majority of the shares of Royall Common Stock
entitled to vote at the Meeting is necessary to constitute a quorum at the
Meeting. The affirmative vote of the holders of at least two-thirds of the
outstanding shares of Royall Common Stock, is required for approval of the
Merger. ROYALL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL
OF THE MERGER. See "Summary--Record Date"; "Summary--Shareholder Votes
Required"; "The Merger--General"; "The Merger--Other Terms and Conditions"; and
Appendix I.
The directors and executive officers of Royall and the Bank control,
with the power to vote, an aggregate of 2,434.91 shares of Royall Common Stock,
comprising approximately 60.87% of the total shares of Royall Common Stock
issued and outstanding as of the Record Date. Officers, directors and certain
shareholders of Royall owning 2,932.07 shares of Royall Common Stock, comprising
approximately 73.3% of the total shares of Royall Common Stock issued and
outstanding as of the Record Date, have agreed, pursuant to a Voting Agreement
and Irrevocable Proxy (the "Proxy"), to vote their shares in favor of the
Merger. As a result, because such officers, directors and shareholders have the
power to vote over two-thirds of the shares of Royall Common Stock issued and
outstanding and entitled to vote at the Meeting, the effect of their agreement
to vote in favor of the Merger is to assure approval of the Merger by the Royall
shareholders, subject to the termination rights contained in the Merger
Agreement. See "Summary--Reasons for the Merger; Recommendation of Board of
Directors"; "Summary--Shareholder Votes Required"; "The Merger--General"; "The
Merger--Additional Agreements"; and "Information About Royall--Management and
Principal Shareholders".
Proxies in the form enclosed are solicited by Royall's Board of
Directors. Any such proxy, if received in time for voting and not revoked, will
be voted at the Meeting in accordance with the shareholder's instructions. If no
instructions are given on the proxy, the proxy will be voted in favor of the
Merger. Failure to submit a proxy or to vote at the Meeting will have the same
effect as a vote against the Merger. At present, Royall's Board of Directors
knows of no other matters to be presented at the Meeting, but if other matters
are properly presented, the persons named
-3-
<PAGE>
in the proxy will vote or refrain from voting in accordance with the
recommendation of Royall's Board of Directors pursuant to the discretionary
authority conferred by the proxy. See "Other Matters"; "The Merger--Dissenters'
Rights"; and Appendix II.
A proxy may be revoked at any time prior to its exercise by filing, at
Royall's principal office, a duly executed proxy bearing a later date or a
written notice revoking such proxy. Any shareholder entitled to vote at the
Meeting may attend the Meeting and vote in person by written ballot on any
matter presented for a vote at such Meeting, whether or not such shareholder has
given a proxy previously, and such action will constitute a revocation of any
prior proxy.
Proxies will be solicited initially by mail, and may also be solicited
personally, by telephone, facsimile transmission or other means by the
directors, officers and employees of Royall, with no special or extra
compensation therefor, although such officers, directors and employees may be
reimbursed for out-of-pocket expenses incurred in connection with the
solicitation. Arrangements will also be made with custodians, nominees, and
fiduciaries for the forwarding of soliciting materials to the beneficial owners
of Royall Common Stock held of record by such persons, and Royall may reimburse
such custodians, nominees, and fiduciaries for reasonable out-of-pocket expenses
that they incur in that connection. Expenses incurred in connection with the
Merger, including those attributable to the solicitation of proxies, will be
paid by the party to the Merger Agreement incurring the expense.
Brokerage firms, banks, nominees, fiduciaries and other custodians are
requested to forward these proxy materials to the beneficial owners of Royall
Common Stock held of record by them, and Royall will reimburse them, upon
request, for their reasonable expenses incurred in connection with such mailing
or other communications with such beneficial owners.
Compass' principal executive offices are located at 15 South 20th
Street, Birmingham, Alabama 35233, and its telephone number is (205) 933-3000.
Royall's principal executive offices are located at 2121 South Loop 256,
Palestine, Texas 75802, and its telephone number is (903) 729-6944.
-4-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The following is a brief summary of certain information relating to
the Merger contained elsewhere in this Proxy Statement/Prospectus. This summary
is not intended to describe all material information relating to the Merger and
is qualified in its entirety by reference to the more detailed information and
financial statements contained elsewhere in this Proxy Statement/Prospectus,
including the Appendices hereto and the documents referred to herein or
incorporated by reference. Shareholders are urged to read carefully the entire
Proxy Statement/Prospectus and the related documents.
Parties to the Merger
Compass is a Delaware corporation which was organized in 1970. It is
a bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). Substantially all of Compass' revenues are
derived from its subsidiaries, which are primarily banks located in Alabama,
Texas and Florida.
Compass owns Compass Bank ("Compass Bank"), a state bank headquartered
in Birmingham, Alabama, Central Bank of the South, a state bank headquartered in
Anniston, Alabama and Compass Bank, a Florida state member bank headquartered in
Jacksonville, Florida. These wholly-owned commercial and savings bank
subsidiaries conduct a general, full-service commercial and consumer banking
business through 88 banking offices located in 46 communities in Alabama and 24
banking offices in Florida. Compass Bank also is engaged in the investment,
trust and equipment leasing businesses, and other bank operating activities.
Compass Banks of Texas, Inc., a Delaware corporation ("Compass of
Texas"), is a wholly-owned subsidiary of Compass. Compass of Texas and its
wholly-owned subsidiary, Compass Bancorporation of Texas, Inc., a Delaware
corporation ("Compass Bancorporation"), are bank holding companies registered
with the Federal Reserve under the BHC Act. Compass Bancorporation owns Compass
Bank-Houston in Houston, Texas ("Compass Bank-Houston"), Compass Bank-Dallas in
Dallas, Texas ("Compass Bank-Dallas"), Compass Bank-San Antonio in San Antonio,
Texas ("Compass Bank-San Antonio"), River Oaks Trust Company, a trust company
located in Houston, Texas ("River Oaks Trust Company"), Compass Texas
Management, Inc., a Texas corporation ("Compass Management"), and Peoples
Bancshares, Inc., and its wholly owned subsidiary Compass Bank-Central Texas,
located in Belton, Texas. Compass Bank-Houston has filed an application with the
Federal Deposit Insurance Corporation ("FDIC") and the Banking Commissioner of
Texas (the "Commissioner") to merge with Compass Bank-Dallas and Compass Bank-
San Antonio. It is contemplated that the merger will be consummated prior to
June 30, 1996. Compass Management provides management services to affiliated
banks. These wholly-owned commercial bank subsidiaries conduct a general, full-
service commercial and consumer banking business through 41 banking offices in
Houston, Texas, 26 banking offices in Dallas, Texas and 10 banking offices in
San Antonio, Texas.
During 1995, Compass acquired Southwest Bankers, Inc., and its bank
subsidiary, The Bank of San Antonio, located in San Antonio, Texas. In 1996,
Compass has acquired Flower Mound Bancshares, Inc. and its bank subsidiary,
Security Bank, located in Flower Mound, Texas; Equitable BankShares, Inc. and
its bank subsidiary, Equitable Bank, located in Dallas, Texas; Post Oak Bank
located in Houston, Texas; and Peoples Bancshares, Inc. and its bank subsidiary,
The Peoples National Bank, located in Belton, Texas. Announced acquisitions
which are pending include the Merger; Texas American Bank located in San
Antonio, Texas; ProBank located in The Woodlands, Texas; the San
- --------------------------------------------------------------------------------
-5-
<PAGE>
Antonio branches of Coastal Banc ssb; and CFB Bancorp, Inc. and its subsidiary
Community First Bank of Jacksonville, Florida.
Compass Texas is a Delaware corporation and a wholly-owned subsidiary
of Compass and was formed for the purpose of effecting the Merger and the
acquisition of Equitable BankShares, Inc.
On March 31, 1996, Compass and its subsidiaries had consolidated
assets of $10.2 billion, consolidated deposits of $7.9 billion, and total
shareholders' equity of $722 million. Of Compass' $10.2 billion of consolidated
assets, approximately $6.0 billion are held in Alabama, $3.6 billion are held in
Texas, and $605 million are held in Florida. See "Available Information";
"Incorporation of Certain Documents by Reference"; "Selected Financial Data";
and "Information About Compass".
Royall is a Texas corporation which was organized in 1979. It is a
bank holding company registered with the Federal Reserve under the BHC Act. The
Royall National Bank of Palestine (the "Bank"), a wholly-owned subsidiary of
Royall, is a national banking association organized under the laws of the United
States in 1904. The Bank has its principal office in Palestine, Texas at 519
North Sycamore and has another branch in Palestine at 2121 South Loop 256, and a
branch in Lufkin, Texas at 1610 South First Street.
On March 31, 1996, Royall had consolidated total assets of $108
million, consolidated total deposits of $93 million, and total shareholders'
equity of $11 million. See "Selected Financial Data"; "Information About
Royall"; "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Royall"; and Financial Statements of Royall.
The Merger
The Merger Agreement provides for the holders of Royall Common stock,
par value $100 per share ("Royall Common Stock"), at the effective time of the
Merger (the "Effective Time"), other than dissenting shareholders, to receive
aggregate merger consideration ("Merger Consideration") of 550,000 shares of
Compass Common Stock (as adjusted due to the exercise of dissenter's rights).
Holders of Royall Common Stock shall receive for each share of Royall Common
Stock held at the Effective Time a number of shares of Compass Common Stock
equal to (i) 550,000 shares of Compass Common Stock to be issued to the holders
of Royall Common Stock divided by (ii) the number of shares of Royall Common
Stock outstanding immediately prior to the Effective Time (the "Per Share Merger
Consideration"). In the event the average closing sale price of the Compass
Common Stock as reported by the NASDAQ National Market System for the 20 days of
trading following the mailing of this Proxy Statement/Prospectus (the "Share
Determination Market Value") is less than $29.00 per share, Royall may either
(i) terminate the Merger Agreement, or (ii) agree to accept an aggregate of
550,000 shares of Compass Common Stock. In the event Royall exercises its option
to terminate the Merger Agreement, Compass shall have the right to reject such
termination by agreeing to issue a number of shares of Compass Common Stock
equal to the quotient of $15,950,000 divided by the Share Determination Market
Value. Any decision by the Board of Directors of Royall regarding whether to
terminate the Merger Agreement will be made in its sole discretion and could
result in either (i) Royall shareholders receiving Merger Consideration with an
aggregate market value of less than $15,950,000, (ii) the termination of the
Merger Agreement, or (iii) Compass agreeing to increase the number of shares of
Compass Common Stock constituting the Merger Consideration. If the Board of
Directors of Royall elects to terminate the Merger Agreement, there can be no
assurance that Compass will agree to increase the number of shares of Compass
Common Stock and that the Merger Agreement will not terminate, in which event
the Royall shareholders would not receive any Merger Consideration but would
retain their Royall Common Stock.
-6-
<PAGE>
On May ___, 1996, there were 3,999-11/12ths shares of Royall Common
Stock issued and outstanding.
Assuming that (i) there will be 3,999-11/12ths shares of Royall Common
Stock issued and outstanding immediately prior to the Effective Time, and
(ii) the Share Determination Market Value will be $_______ (the average closing
sale price of the Compass Common Stock as reported by the NASDAQ National Market
System for the 20 days of trading preceding _________, 1996), Compass will be
required to issue an aggregate of 550,000 shares of Compass Common Stock to the
Royall shareholders and each shareholder of Royall (except for shareholders
choosing to exercise their dissenters' rights) will be entitled to receive
approximately 137.50 shares of Compass Common Stock for each share of Royall
Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be
reduced by the number of shares that would otherwise be issued to dissenting
shareholders.
Compass will not issue fractional shares of Compass Common Stock, but
instead will pay cash to any shareholder otherwise entitled to receive a
fractional share. Such cash payment shall be based on the average closing sale
price for Compass Common Stock as reported by the NASDAQ National Market System
for the 30 trading days immediately preceding the Effective Time.
Royall will be the surviving entity in the Merger; however, the
officers and directors of Compass Texas will be the officers and directors of
Royall after the Merger. Compass intends that Royall's personnel will remain
following the Merger. See "The Merger--General"; and "Information About Royall".
The Merger Agreement also provides that the number of shares of
Compass Common Stock to be received by Royall shareholders in the Merger will be
adjusted to give effect to any stock splits with respect to Compass Common Stock
occurring between the date of execution of the Merger Agreement and the
Effective Time. See "Introduction"; "Summary--Dissenters' Rights"; "The Merger--
General"; "The Merger--Dissenters' Rights"; Appendix I; and Appendix II.
The Merger Agreement was the result of arm's-length negotiations
between representatives of Royall and Compass. Royall's Board of Directors
believes the terms of the Merger are fair and, in this regard, obtained an
opinion from Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") with
respect to the fairness, from a financial point of view, of the Merger to the
Royall shareholders. The fairness opinion is attached to this Proxy
Statement/Prospectus as Appendix III. See "Summary--Reasons for the Merger;
Recommendation of Board of Directors"; "The Merger--Background and Reasons for
the Merger"; and Appendix III.
Reasons for the Merger; Recommendation of Boards of Directors
Consummation of the Merger offers the holders of Royall Common Stock
the opportunity to acquire an equity interest in a larger, more diversified
financial institution, which is interested in expanding its operations in Texas,
but which is not dependent solely upon the economic conditions of the Palestine
and Lufkin areas of East Texas. Compass Common Stock is publicly traded and has
a history of paying dividends. Royall's Board of Directors anticipates that the
Merger will expand the banking products and services offered to Royall's
customers and community and will enable Royall's facilities to compete more
effectively among banks and non-bank financial institutions. As part of a much
larger holding company system, Royall's facilities will be provided with
specialized staff resources in accounting, auditing, investment, trust
management, loan review, marketing, data processing and electronic funds
transfer services.
-7-
<PAGE>
The Merger Agreement was the result of arm's-length negotiations
between representatives of Royall and Compass. Subject to the shareholders of
Royall receiving Merger Consideration with a market value (as determined in
accordance with the Merger Agreement) of at least $15,950,000, Royall's Board of
Directors believes the Merger to be in the best interests of Royall's
shareholders. ROYALL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ROYALL
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER and has authorized consummation
thereof subject to approval of the Royall shareholders and the satisfaction of
certain other conditions. See "Introduction"; See "Summary--Parties to the
Merger"; "Summary--The Merger"; "The Merger--Background and Reasons for the
Merger"; "The Merger--Other Terms and Conditions"; "Description of Compass
Common and Preferred Stock"; "Comparison of Rights of Shareholders of Royall and
Compass"; "Information About Compass"; and "Information About Royall".
Sheshunoff has delivered an opinion to the Board of Directors of
Royall to the effect that, based upon and subject to the qualifications
described in such opinion, the terms of the Merger, including the consideration
to be received by the holders of Royall Common Stock, are fair and equitable
from a financial point of view. For additional information concerning the
matters considered by Sheshunoff in reaching its opinion, the limitations on its
review, and the fees received or to be received by it, see "The Merger -
Fairness Opinion" and Appendix I.
The Meeting
The Meeting will be held on ______, ________, 1996 at ____ __.M.,
Palestine time, at _________________________________________, in Palestine,
Texas for the purposes of (i) approving, ratifying, confirming and adopting the
Merger Agreement; and (ii) transacting such other business as may properly come
before the Meeting.
Record Date
The Record Date has been set by Royall's Board of Directors as the
close of business on May __, 1996. Only holders of Royall's Common Stock as of
such date will be entitled to vote at the Meeting. See "Introduction".
Shareholder Votes Required
The Merger must be approved by the affirmative vote of the holders of
at least two-thirds of the shares of the Royall Common Stock issued and
outstanding and entitled to vote at the Meeting.
The directors and executive officers of Royall and the Bank control,
with the power to vote, an aggregate of 2,434.91 shares of Royall Common Stock,
comprising approximately 60.87% of the total shares of Royall Common Stock
issued and outstanding and entitled to vote at the Meeting. Officers, directors
and certain shareholders of Royall owning 2,932.07 shares of Royall Common
Stock, comprising approximately 73.3% of the total shares of Royall Common Stock
issued and outstanding as of the Record Date, have agreed, pursuant to the
Proxy, to vote their shares in favor of the Merger. As a result, because such
officers, directors and shareholders have the power to
-8-
<PAGE>
vote over two-thirds of the shares of Royall Common Stock issued and outstanding
and entitled to vote at the Meeting, the effect of their agreement to vote in
favor of the Merger is to assure approval of the Merger by the Royall
shareholders, subject to the termination rights contained in the Merger
Agreement.
Compass Texas has 10,000 shares of common stock, par value $0.01 per
share, issued and outstanding, all of which are owned and held by Compass.
Subject to the satisfaction or waiver of all of the conditions to the parties'
obligations to effect the Merger, Compass, as the sole shareholder of Compass
Texas, will approve the Merger Agreement in the manner prescribed by the General
Corporation Law of the State of Delaware ("GCL"). See "The Merger--General".
Dissenters' Rights
Holders of Royall Common Stock who timely object to the Merger, and
who otherwise comply with the provisions of the Texas Business Corporation Act
("TBCA"), will be entitled to exercise dissenters' rights. See "The Merger--
Dissenters' Rights"; "Comparison of Rights of Shareholders of Royall and
Compass--Dissenters' Rights"; and Appendix II.
Conditions to Consummation and Regulatory Approvals; Termination
Consummation of the Merger is subject to approval of the Merger by the
shareholders of Royall, receipt of certain required regulatory approvals from
the Federal Reserve under the BHC Act, the FDIC and the Commissioner, and the
satisfaction or waiver of a number of other conditions. It is expected that the
Federal Reserve, the FDIC and the Commissioner will issue their respective
approvals of the transaction. See "The Merger--Governmental Approvals".
The Federal Reserve approved a formal application under the BHC Act on
April 22, 1996. Following Federal Reserve approval, the United States Department
of Justice ("Justice Department"), pursuant to the BHC Act, had 15 days in which
to bring an action opposing the Merger under the antitrust laws, which action
would stay the Merger unless otherwise ordered by an appropriate judicial
authority. Such 15 day period expired with no action being taken by the Justice
Department. The Justice Department has a similar 15 to 30 day period in which to
object to the Merger after FDIC approval. No Justice Department objection or
adverse action is anticipated.
The respective boards of directors of Compass and Royall may terminate
the Merger Agreement as a result of, among other things, the failure of any of
the several conditions to each of their respective obligations to close, or if
the Effective Time does not occur on or before September 14, 1996 or such later
date agreed to in writing by Compass and Royall. See "The Merger--Other Terms
and Conditions"; "The Merger--Business Pending Effective Time"; "The Merger--
Amendment; Termination"; "The Merger--Government Approvals"; and Appendix I.
Federal Income Tax Consequences
In the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
("Liddell, Sapp"), counsel to Compass and Compass Texas, based upon certain
representations and assumptions, the Merger, if consummated in accordance with
the Merger Agreement, will qualify as a "reorganization" under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and, as a result of
such qualification, no gain or loss will be recognized by holders of Royall
Common Stock for federal income tax purposes upon receipt of Compass Common
Stock in accordance with the Merger Agreement. Any gain attributable to cash
received by holders of Royall Common Stock in lieu of fractional shares of
Compass Common Stock or upon exercise of their dissenters' rights will be taxed
-9-
<PAGE>
as ordinary income (loss) or capital gain (loss) depending upon each
shareholder's situation. No information is provided herein with respect to the
tax consequences, if any, of the Merger to shareholders under any state, local
or foreign tax laws. ROYALL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS AS TO ALL TAX CONSEQUENCES OF THE MERGER AFFECTING THEM. See "The
Merger--Federal Income Tax Consequences".
Compass expects to receive an opinion from Liddell, Sapp at the
closing of the transaction contemplated by the Merger Agreement (the "Closing")
that the Merger will qualify as a reorganization under Section 368(a) of the
Code in satisfaction of a condition to consummation of the Merger. See "The
Merger--Other Terms and Conditions" and "Legal Opinions".
Accounting Treatment
Compass will account for the Merger under the pooling-of-interests
method for financial reporting and all other purposes. Compass has received a
letter from KPMG Peat Marwick LLP, which will be updated as of the Effective
Time, to the effect that the Merger will qualify for pooling-of-interests
accounting treatment. See "The Merger--Accounting Treatment".
-10-
<PAGE>
RISK FACTORS
Royall shareholders currently control Royall through their ability to
elect the Board of Directors and vote on various matters affecting Royall. The
Merger will transfer control of Royall from Royall's shareholders to Compass. As
of the Effective Time, the shareholders of Royall will become shareholders of
Compass, a multi-bank holding company. As a result of the Merger, the former
shareholders of Royall will no longer have the ability to control or influence
the management policies of Royall's operations, and as shareholders of Compass
their ability to influence the management policies of Compass will be limited
due to the fact that they will hold a relatively small percentage of the voting
stock of Compass.
Compass' banking subsidiaries compete with other banking institutions
on the basis of service, convenience and, to some extent, price. Due in part to
both regulatory changes and consumer demands, banks have experienced increased
competition from other financial entities offering similar products. Competition
from both bank and non-bank organizations is expected to continue. See
"Information about Royall--Competition".
In addition, general economic conditions impact the banking industry.
The credit quality of Compass' loan portfolio necessarily reflects, among other
things, the general economic conditions in the areas in which it conducts its
business. The continued financial success of Compass and its subsidiaries
depends somewhat on factors which are beyond Compass' control, including
national and local economic conditions, the supply and demand for investable
funds, interest rates and federal, state and local laws affecting these matters.
Any substantial deterioration in any of the foregoing conditions could have a
material adverse effect on Compass' financial condition and results of
operations, which, in all likelihood, would adversely affect the market price of
Compass Common Stock. See "Market Prices".
Compass' Restated Certificate of Incorporation, as amended (the
"Certificate"), and Bylaws contain several provisions which may make Compass a
less attractive target for acquisition by anyone who does not have the support
of Compass' Board of Directors. Such provisions include, among other things, the
requirement of a supermajority vote of shareholders or directors to approve
certain business combinations and other corporate actions, a minimum price
provision, several special procedural rules, a staggered Board of Directors, and
the limitation that shareholder actions without a meeting may only be taken by
unanimous written shareholder consent. Royall's Articles of Incorporation and
Bylaws do not contain similar restrictions, although under Texas law Royall's
shareholders may take action without a meeting only by unanimous written
consent. See "Comparison of Rights of Shareholders of Royall and Compass--
Charter and Bylaw Provisions Affecting Compass Common Stock" and "Information
About Compass-Recent Developments".
In the event the Share Determination Market Value is less than $29.00
per share, Royall may either (i) terminate the Merger Agreement, or (ii) agree
to accept an aggregate of 550,000 shares of Compass Common Stock. In the event
Royall exercises its option to terminate the Merger Agreement, Compass shall
have the right to reject such termination by agreeing to issue a number of
shares of Compass Common Stock equal to the quotient of $15,950,000 divided by
the Share Determination Market Value. Any decision by the Board of Directors of
Royall regarding whether to terminate the Merger Agreement will be made in its
sole discretion and could result in either (i) Royall shareholders receiving
Merger Consideration with an aggregate market value of less than $15,950,000,
(ii) the termination of the Merger Agreement, or (iii) Compass agreeing to
increase the number of shares of Compass Common Stock constituting the Merger
Consideration. If the Board of Directors of Royall elects to terminate the
Merger Agreement, there can be no assurance that Compass will agree to increase
the number of shares of Compass Common Stock and that the Merger Agreement will
not terminate, in which event the Royall shareholders would not receive any
Merger Consideration but would retain their Royall Common Stock.
In addition, since the market price of the shares of Compass Common
Stock to be delivered as the Merger Consideration is determined based on an
average of the closing prices of Compass Common Stock as reported by
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<PAGE>
the NASDAQ National Market System over a period of time, it is possible for the
shareholders of Royall to receive shares of Compass Common Stock with a market
value less than $15,950,000 at the Effective Time of the Merger.
See "Supervision and Regulation" for a description of the regulatory
considerations relating to the ownership of Compass Common Stock.
-12-
<PAGE>
SELECTED FINANCIAL DATA
The following table, except for the lines designated as pro forma,
summarizes certain unaudited consolidated historical financial data of Compass,
and certain unaudited consolidated historical financial data of Royall. The
table also summarizes, where indicated, certain pro forma financial data for
Compass, giving effect to the acquisition of Royall assuming that the Merger had
been effective at the beginning of 1991. Due to immateriality, the historical
data of Compass as of and for the years ended December 31, 1995, 1994, 1993,
1992, and 1991 has not been restated to reflect the February 1996 acquisition of
Flower Mound Bancshares, Inc. or the April 1996 acquisition of Equitable
BankShares, Inc. which were accounted for under the pooling-of-interests method
of accounting. The historical data of Royall and Compass as of and for the years
ended December 31, 1995, 1994, 1993, 1992 and 1991 is derived from the audited
financial statements of Royall and Compass, respectively. The pro forma income
information is not necessarily indicative of the results of operations had the
proposed transaction occurred at the beginning of 1991, nor is it necessarily
indicative of the results of future operations. This information should be read
in conjunction with the historical consolidated financial statements and the
related notes included elsewhere or incorporated by reference in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
As of and (amounts in thousands except per share data)
for
the Three As of and for the Years Ended
Months December 31,
Ended
March 31,
------------- ----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets
Compass $ 10,165,474 $ 10,262,247 $ 9,265,137 $ 7,453,859 $ 7,210,151 $ 6,898,873
Royall 108,322 106,597 104,667 108,071 67,688 65,989
Total Deposits
Compass 7,852,867 7,729,112 7,188,913 5,733,309 5,532,599 5,224,136
Royall 93,363 91,826 91,166 95,119 59,023 59,202
Long-term debt
Compass 609,827 584,852 487,916 328,938 207,730 20,336
Royall -- -- -- -- -- --
Total shareholders' equity
Compass 721,637 706,668 611,673 561,587 518,269 455,455
Royall 10,945 10,750 9,846 9,772 7,714 6,475
Net interest income
Compass 91,235 349,655 336,768 334,146 322,774 262,659
Royall 1,336 5,136 4,750 3,784 2,668 2,622
Net income before
extraordinary item
Compass 36,043 110,265 101,246 92,679 77,870 63,009
Royall 401 1,004 1,078 1,593 835 1,198
Net income per
common share before
extraordinary item
Compass
Historical 0.93 2.88 2.65 2.39 2.00 1.68
Pro Forma (1) 0.92 2.86 2.64 2.40 2.00 1.69
</TABLE>
-13-
<PAGE>
s
<TABLE>
<CAPTION>
As of and for (amounts in thousands except per share data)
the Three
Months As of and for the Years Ended
Ended December 31,
March 31,
------------ -----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net income per
common share before
extraordinary item
Royall
Historical 100.25 251.00 269.50 398.25 208.75 335.76
Equivalent Pro Forma (2) 126.50 393.26 363.01 330.01 275.01 232.38
Cash dividends per
common share
Compass
Historical 0.32 1.12 0.92 0.76 0.67 0.59
Pro Forma 0.31 1.11 0.89 0.71 0.58 0.52
Royall
Historical -- 100.00 100.00 -- 62.49 161.02
Equivalent Pro Forma (2) 42.63 152.63 122.38 97.63 79.75 71.50
Shareholders' equity
(book value) per common
share
Compass
Historical 18.66 18.52 16.13 14.83 13.10 11.57
Pro Forma 18.68 18.54 16.16 14.87 13.11 11.57
Royall
Historical 2,736.18 2,687.41 2,461.60 2,443.02 1,928.48 1,814.84
Equivalent Pro Forma (2) 2,568.55 2,549.30 2,222.05 2,044.67 1,802.66 1,590.91
Weighted average
number of shares
outstanding
Compass
Historical 38,864 38,340 38,147 38,137 37,811 36,543
Pro Forma 39,414 38,890 38,697 38,687 38,361 37,093
Royall
Historical 4 4 4 4 4 4
Number of common
shares outstanding at end
of period
Compass
Historical 38,667 38,152 37,922 37,877 37,810 37,378
Pro Forma 39,217 38,702 38,472 38,427 38,360 37,928
Royall
Historical 4 4 4 4 4 4
</TABLE>
- --------------------
(1) Net income per common share before extraordinary item represents primary
earnings per share (i.e., the amount of earnings attributable to each
share of common stock outstanding, including common stock equivalents).
(2) Royall's Equivalent Pro Forma per share amounts are computed by
multiplying Compass' Pro Forma amounts by the exchange ratio.
-14-
<PAGE>
MARKET PRICES
Compass Common Stock is traded in the national over-the-counter
securities market. Since July 1984, it has been quoted under the symbol "CBSS"
on the NASDAQ National Market System.
The following table sets forth for the periods indicated the high and
low sales prices for Compass Common Stock reported through the NASDAQ National
Market System published in The Wall Street Journal. The prices shown do not
-----------------------
include retail mark-ups, mark-downs or commissions. All share values have been
rounded to the nearest 1/8 of one dollar.
<TABLE>
<CAPTION>
Compass Common
--------------
Stock
-----
Period High Low
------ ---- ---
<S> <C> <C>
1994
----
First Quarter 24 21
Second Quarter 26-3/4 23
Third Quarter 26 23
Fourth Quarter 23-3/4 21
1995
----
First Quarter 28 21-1/2
Second Quarter 29-1/4 25-1/2
Third Quarter 33-3/4 28-1/2
Fourth Quarter 33-1/2 30-1/8
1996
----
First Quarter 35 30-3/4
Second Quarter
(through ______,
1996)
</TABLE>
On December 14, 1995, the business day immediately preceding the
announcement of the execution of the Merger Agreement, the last reported sale
price for Compass Common Stock was $32.00. On __________, 1996 the last reported
sale price for Compass Common Stock was $___. There is no assurance that such
transactions or those reflected in the table of actual high and low sales prices
represent all or a representative sample of the actual transactions which
occurred or that the high and low prices shown reflect the full ranges at which
transactions occurred during the period indicated.
There is no active public trading market for Royall Common Stock,
although it is traded infrequently in private transactions about which Royall's
management has little reliable information regarding price.
-15-
<PAGE>
THE MERGER
The following information relating to the Merger is not intended to be
a complete description of all information relating to the Merger and is
qualified in its entirety by reference to more detailed information contained
elsewhere in this Proxy Statement/Prospectus, including the Appendices hereto
and the documents referred to herein or incorporated herein by reference. A copy
of the Merger Agreement is included as Appendix I, and is incorporated herein by
reference.
General
The Merger Agreement provides for the merger of Compass Texas with and
into Royall in accordance with the terms and conditions of the Merger Agreement.
Royall will be the surviving entity in the Merger and the separate existence of
Compass Texas will cease. After the Effective Time, the officers and directors
of Compass Texas will be the officers and directors of Royall. Compass intends
that Royall's personnel will remain following the Merger. See "Summary--
Conditions to Consummation and Regulatory Approvals"; "The Merger--Operations
After the Merger"; "The Merger--Government Approvals"; and Appendix I.
The Merger Agreement provides for the holders of Royall Common Stock
at the Effective Time, other than dissenting shareholders, to receive Merger
Consideration of 550,000 shares of Compass Common Stock (as adjusted due to the
exercise of dissenter's rights). Holders of Royall Common Stock shall receive
for each share of Royall Common Stock held at the Effective Time a number of
shares of Compass Common Stock equal to (i) 550,000 shares of Compass Common
Stock to be issued to the holders of Royall Common Stock divided by (ii) the
number of shares of Royall Common Stock outstanding immediately prior to the
Effective Time. In the event the Share Determination Market Value is less than
$29.00 per share, Royall may either (i) terminate the Merger Agreement, or (ii)
agree to accept an aggregate of 550,000 shares of Compass Common Stock. In the
event Royall exercises its option to terminate the Merger Agreement, Compass
shall have the right to reject such termination by agreeing to issue a number of
shares of Compass Common Stock equal to the quotient of $15,950,000 divided by
the Share Determination Market Value. Any decision by the Board of Directors of
Royall regarding whether to terminate the Merger Agreement will be made in its
sole discretion and could result in either (i) Royall shareholders receiving
Merger Consideration with an aggregate market value of less than $15,950,000,
(ii) the termination of the Merger Agreement, or (iii) Compass agreeing to
increase the number of shares of Compass Common Stock constituting the Merger
Consideration. If the Board of Directors of Royall elects to terminate the
Merger Agreement, there can be no assurance that Compass will agree to increase
the number of shares of Compass Common Stock and that the Merger Agreement will
not terminate, in which event the Royall shareholders would not receive any
Merger Consideration but would retain their Royall Common Stock.
On May ___, 1996, there were 3,999-11/12ths shares of Royall Common
Stock issued and outstanding.
Assuming that (i) there will be 3,999-11/12ths shares of Royall Common
Stock issued and outstanding immediately prior to the Effective Time, and
(ii) the Share Determination Market Value will be $_______ (the average closing
sale price of the Compass Common Stock as reported by the NASDAQ National Market
System for the 20 days of trading preceding _________, 1996), Compass will be
required to issue an aggregate of 550,000 shares of Compass Common Stock to the
Royall shareholders and each shareholder of Royall (except for shareholders
choosing to exercise their dissenters' rights) will be entitled to receive
approximately 137.50 shares of Compass Common Stock for each share of Royall
Common Stock held.
Notwithstanding the foregoing, the Merger Consideration will be
reduced by the number of shares that would otherwise be issued to dissenting
shareholders.
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Compass will not issue fractional shares of Compass Common Stock, but
instead will pay cash to any shareholder otherwise entitled to receive a
fractional share. Such cash payment shall be based on the Per Share Merger
Consideration.
The Merger Agreement also provides that the Merger Consideration,
consisting of shares of Compass Common Stock, shall be adjusted to give effect
to any stock splits with respect to Compass Common Stock occurring between the
date of execution of the Merger Agreement and the Effective Time. See "Summary--
The Merger"; "Summary--Dissenters' Rights"; "The Merger--Dissenters' Rights";
Appendix I; and Appendix II.
The Merger must be approved by the affirmative vote of the holders of
two-thirds of the outstanding shares of Royall Common Stock entitled to vote at
the Meeting. See "Introduction"; "Summary--Shareholder Votes Required"; "The
Merger--Other Terms and Conditions"; and Appendix I.
Officers, directors and certain shareholders of Royall and the Bank
owning 2,932.07 shares of Royall Common Stock, comprising approximately 73.3% of
the total shares of Royall Common Stock issued and outstanding as of the Record
Date, have agreed, pursuant to the Proxy, to vote their shares in favor of the
Merger. As a result, because such officers, directors and shareholders have the
power to vote over two-thirds of the shares of Royall Common Stock issued and
outstanding and entitled to vote at the Meeting, the effect of their agreement
to vote in favor of the Merger is to assure approval of the Merger by the Royall
shareholders, subject to the termination rights contained in the Merger
Agreement.
Compass Texas has 10,000 shares of common stock, $0.01 par value per
share, issued and outstanding, all of which is owned and held by Compass.
Subject to the satisfaction or waiver of all of the conditions to the parties'
obligations to effect the Merger, Compass, as sole shareholder of Compass Texas,
will approve the Merger Agreement in the manner prescribed by the GCL. See
"Summary--Shareholder Votes Required".
The Merger will be effective as soon as practicable following the
receipt of all necessary regulatory approvals and the satisfaction of all
conditions to the consummation of the Merger. At the Effective Time, by
operation of law, holders of Royall Common Stock (other than those shareholders
who perfect their dissenters' rights of appraisal) will become owners of Compass
Common Stock and will no longer be owners of Royall Common Stock. After the
Effective Time, all certificates for Royall Common Stock will represent the
right to receive Compass Common Stock pursuant to the Merger Agreement, but
otherwise will be null and void after such date. See "Summary--Dissenters'
Rights"; "The Merger--Dissenters' Rights"; and Appendix II.
Background and Reasons for the Merger
Royall began analyzing the possible sale or merger of Royall in July
1995 and, utilizing the services of Sheshunoff, solicited indications of
interest. As a result of this endeavor, Compass submitted a written proposal for
a possible affiliation of the two entities which was evaluated by the Board of
Directors of Royall in November 1995, at which time management was authorized to
pursue a definitive agreement with Compass. In evaluating whether to affiliate
with Compass, Royall's Board of Directors considered the value of Royall Common
Stock, competitive conditions in the market served by Royall, the prospects for
trading Royall Common Stock, Royall's future growth prospects in light of the
East Texas economy, the fact that Compass Common Stock is publicly traded,
thereby representing a more liquid investment than Royall Common Stock, the
appreciation in the price of Compass Common Stock over the past ten years and
Compass' history of paying dividends. In addition, Royall believed that
affiliating with Compass, a larger financial institution with significantly
greater financial resources and expertise, offered expansion opportunities and
services not otherwise available to Royall and its customers, which would better
enable Royall to compete. Royall's Board of Directors determined that Royall's
competitive position and the value of its stock could best be enhanced through
affiliation with Compass. See "Summary--The Merger"; "Summary--Reasons for the
Merger; Recommendation of Board of Directors"; and
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Royall--Capital Resources, Liquidity and Financial Condition".
Compass and Compass of Texas have considered expansion opportunities
in East Texas to expand into additional market areas. Acquiring Royall will
result in economies of scale and increase the markets served by Compass'
affiliates. It will also assist Compass' Texas affiliates in providing the
management and organizational flexibility needed to expand elsewhere in East
Texas by branching and other acquisitions.
Following arm's length negotiations between representatives of Compass
and Royall, Compass and Royall entered into the Merger Agreement on December 14,
1995. The aggregate price to be paid to holders of Royall Common Stock resulted
from negotiations which considered the historical earnings and dividends of
Compass and Royall, the earnings potential and deposit base of Royall, potential
growth in Royall's market, Royall's asset quality and the effect of the Merger
on the shareholders, customers and employees of Compass and Royall. See
"Summary--The Merger".
Subject to the shareholders of Royall receiving Merger Consideration
with a market value (as determined in accordance with the Merger Agreement) of
at least $15,950,000, Royall's Board of Directors believes the Merger to be in
the best interest of Royall's shareholders. Moreover, Sheshunoff has delivered
an opinion to the Board of Directors of Royall to the effect that, based upon
and subject to the qualifications described in such opinion, the terms of the
Merger, including the Merger Consideration, are fair and equitable from a
financial point of view. ROYALL'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
ROYALL'S SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER and has authorized
consummation thereof, subject to approval of Royall's shareholders and the
satisfaction of certain other conditions. See "Summary--Reasons for the Merger;
Recommendation of Board of Directors".
Opinion of Financial Advisor
In September 1995, Royall retained Sheshunoff, an investment banking
firm based in Austin, Texas, on the basis of its experience, to prepare an
information package and contact potential purchasers identified by Sheshunoff
for the purpose of effecting a sale, merger, exchange or other similar
transaction with respect to the shares of Royall. Additionally, Royall retained
Sheshunoff to render a written fairness opinion (the "Opinion") to the Board of
Directors of Royall. Sheshunoff has been in the business of consulting for the
banking industry for over twenty years, including the appraisal and valuation of
banking institutions and their securities in connection with mergers and
acquisitions and equity offerings. Sheshunoff has a long history of familiarity
and involvement with the banking industry nationwide, as well as familiarity
with the Texas market and recent transactions in this market. Sheshunoff renewed
the negotiated terms of the Merger Agreement, including corporate governance
matters. Prior to being retained for this assignment, Sheshunoff has provided
professional services and products to Royall and Compass. The revenues derived
from such services and products are insignificant when compared to the firm's
total gross revenues.
On December 21, 1995, in connection with their consideration of the
Merger Agreement, Sheshunoff issued its Opinion to the Board of Directors of
Royall that, in its opinion as investment bankers, the terms of the Merger as
provided in the Merger Agreement are fair and equitable, from a financial
perspective, to Royall and its shareholders. The Opinion is based upon
conditions as they existed on September 30, 1995. A copy of the Opinion is
attached as an exhibit to this Proxy Statement/Prospectus and should be read in
its entirety by Royall's shareholders. Sheshunoff's written opinion does not
constitute an endorsement of the Merger or a recommendation to any shareholder
as to how such shareholder should vote.
In rendering its Opinion, Sheshunoff reviewed certain publicly
available information concerning Royall and Compass. Sheshunoff considered many
factors in making its evaluation. In arriving at its Opinion regarding the
fairness of the transaction, Sheshunoff reviewed: (i) the Merger Agreement;
(ii) the external auditor's reports to
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the Board of Directors of Royall and the internal audit function of Compass;
(iii) the September 30, 1995 balance sheet and income statement for each
organization and the audited December 31, 1994 an December 31, 1993 balance
sheet and income statement for each organization; (iv) each organization's rate
sensitivity analysis reports; (v) each organization's listing of marketable
securities showing rate, maturity and market value as compared to book value;
(vi) each organization's internal loan classification list; (vii) a listing of
other real estate owned for each organization; (viii) the budget and long range
operating plan of Royall; (ix) a listing of unfunded letters of credit and any
other off-balance sheet risks for each organization; (x) the minutes of the
Board of Directors meetings of Royall; (xi) the Board report for each
organization; (xii) the listing and description of significant real properties
for each organization; (xiii) the directors and officers liability and blanket
bond insurance policies for each organization; and (xiv) market conditions and
current trading levels of outstanding equity securities of both organizations.
Sheshunoff conducted an on-site review of Royall and Compass.
In reaching its Opinion, Sheshunoff analyzed the total purchase price
on a fair market value basis using standard evaluation techniques (as discussed
below) including comparable sales multiples (market value), net present value,
cash flow analysis, return on investment and the price as a percentage of total
assets based on certain assumptions of projected growth, earnings and dividends
and a range of discount rates from 10% to 15%. Sheshunoff also considered as one
of the methods of determining the fairness of the transaction, the projected pro
forma impact on Royall's earnings per share and equity per share
(appreciation/dilution analysis), which was based upon stand-alone financial
projections for both Royall and Compass compared with pro forma financial
projections.
In performing its analysis, Sheshunoff relied upon financial
projections for Royall which were prepared and furnished by the management of
Royall. Compass's projections were prepared by Sheshunoff based on its review of
publicly available information, discussions with the management of Compass and
an on-site due diligence review of Compass. Royall and Compass do not publicly
disclose internal management projections of the type provided to Sheshunoff in
connection with its review of the Merger. Such projections were not prepared
with a view towards public disclosure. The projections were based on numerous
variables and assumptions which are inherently uncertain, including without
limitation, factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such projections.
In addition, Sheshunoff discussed with the management of Royall and
Compass the relative operating performance and future prospects of each
organization, primarily with respect to the current level of their earnings and
future expected operating results, giving weight to Sheshunoff's assessment of
the future of the banking industry and each organization's performance within
the industry. Sheshunoff compared the results of operation of Royall with the
results of operation of a peer group comprised of all Texas banks with total
assets of $100 to 499 million (203) banks). Sheshunoff compared the results of
operation of Compass with the results of operation of a national peer group
comprised of all bank holding companies with total assets between $5 billion and
$10 billion (33 holding companies).
Many variables affect the value of banks, not the least of which is
the uncertainty of future events, so that the relative importance of the
valuation differs in different situations, with the result that appraisal
theorists argue bout which variables are the most appropriate ones on which to
focus. However, most appraisers agree that the primary financial variables to be
considered are earnings, equity, dividends or dividend-paying capacity, asset
quality and cash flow. In addition, in most instances, if not all, value is
further tempered by non-financial factors such as marketability, voting rights
or block size, history of past sales of the banking company's stock, nature and
relationship of the other shareholdings in the bank, and special ownership or
management considerations.
Market value is generally defined as the price, established on an
------------
"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The market value in connection with the evaluation of control of a bank
is determined by the previous sales of banks in the state or region. In valuing
a business enterprise, when sufficient comparable trade data is available, the
market value deserves greater weighing than the net asset value and similar
emphasis as the investment value as discussed below.
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Sheshunoff maintains substantial files concerning the prices paid for
banking institutions nationwide. The database includes transactions involving
Texas banking organizations with total assets of less than $500 million and
which sold from December 21, 1994 to December 21, 1995 (the "Texas Market
Comparables") and over the past five years. The database provides comparable
pricing and financial performance data for banking organizations sold or
acquired. Organized by different peers groups, the data presents averages of
financial performance and purchase price levels, thereby facilitating a valid
comparative purchase price analysis. In analyzing the transaction value of
Royall, Sheshunoff has considered the market approach and has evaluated price to
equity and price to earnings multiples of the Texas Market Comparable. The
following table provides the 31 banking organizations included in the Texas
Market Comparable:
<TABLE>
<CAPTION>
Purchase Price Purchase Price Purchase Price to
Seller City State to Equity (x) to Total Assets(%)
Earnings (x)
<S> <C> <C> <C> <C> <C>
Benson Financial Corp. San Antonio TX 1.81 12.27 16.08
Texas Bank Baytown TX 1.44 9.36 12.97
Cypress Nat'l Bank Houston TX 1.57 N/M 13.20
First Midlothian Midlothian TX 1.50 16.14 11.66
Citizens Equity Corp Weatherford TX 1.63 10.68 14.37
Texline State Bank Texline TX 1.43 14.71 14.74
Bank of Robstown Robstown TX 1.16 13.51 13.07
QuestStar Bank, NA Houston TX 2.54 10.71 13.13
Friona Bancorp Friona TX 1.45 12.21 15.30
Liberty National Bank Austin TX 2.01 9.03 18.56
La Porte State Bank La Porte TX 1.68 N/M 10.88
Alice Bancshares Alice TX 1.26 17.97 20.90
Texas Capital Bncshr Houston TX 1.68 11.99 11.93
Southeast Bancshares Dallas TX 1.30 12.86 12.61
Camino Real Bncshrs San Antonio TX 1.23 9.83 10.45
First NB-Big Spring Big Spring TX 1.17 17.80 17.76
Cettlemen's Fin'l Austin TX 1.65 12.96 12.10
Memphis State Bank Memphis TX 1.23 13.22 11.43
First NB of Taft Taft TX 1.33 14.16 19.72
Citizens State Bank Roby TX 1.00 7.71 9.18
Valley-Hi Inv. Co. San Antonio TX 1.24 6.87 8.79
Tomball Natl Bncshrs Tomball TX 1.23 9.43 9.53
Lee County National Gidings TX 1.82 8.60 15.64
Citizens State Bank Lometa TX 1.25 N/M 10.07
Tanglewood Bncshares Houston TX 2.20 12.92 14.79
First Bank Houston TX 1.63 11.00 18.03
Comfort Bancshares Comfort TX 1.49 11.68 14.91
First Tule Bancorp Tulia TX 1.24 9.52 13.54
United Bancshares Rosenberg TX 2.00 15.59 12.01
New Braunfels Bncshr New Braunfels TX 2.17 13.11 15.58
Natl's Commerce Bank Houston TX 2.23 11.03 20.15
Averages 1.57x 12.03x 13.97%
Royall Financial Corp. Palestine TX 1.63x 17.22x 16.69%
</TABLE>
Comparable Sales Multiples. Sheshunoff calculated an "Adjusted Book
Value" of $4,227.07 per share based on Royall's September 30, 1995 equity and
the average price to equity multiple of 1.57x for the Texas Market Comparable.
Sheshunoff calculated an "Adjusted Earnings Value" of $3,073.67 per share based
on Royall's estimated 1995 earnings and the average price to earnings multiple
of 12.03x for the Texas Market Comparable. These compare to a transaction value
for the Merger of 1.63x Royall's September 30, 1995 equity and 17.22x Royall's
estimated 1995 earnings. The financial performance characteristics of the
banking organizations in the Texas Market Comparable vary, sometimes
substantially, from those of Royall. When the variance is significant
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for relevant performance factors, adjustments to the price multiples are
appropriate when comparing them to the transaction value.
The investment value is sometimes referred to as the income value or
----------------
earnings value. One investment value method frequently used estimates the
present value of an enterprise's future earnings or cash flow. Another popular
investment value method is to determine the level of current annual benefits
(earnings, cash flow, dividends, etc.), and then capitalize one or more of the
benefit types using an appropriate capitalization rate such as an earnings or
dividend yield. Yet another method of calculating investment value is a cash
flow analysis of the ability of a banking company to service acquisition debt
obligations (at a certain price level) while providing sufficient earnings for
reasonable dividends and capital adequacy requirements. In connection with the
cash flow analysis, the return on investment that would accrue to a prospective
buyer at the transaction value is calculated. The investment value methods which
were analyzed in connection with this transaction were the net present value
analysis, the cash flow analysis and the return on investment analysis, which
were discussed below.
Net Present Value Analysis. The investment or earnings value of any
banking organization's stock is an estimate of the present value of the future
benefits, usually earnings, cash flow or dividends, which will accrue to the
stock. An earnings value is calculated using an annual future earnings stream
over a period of time of not less than ten years and the residual value of the
earnings stream after ten years, assuming no earnings growth, and an appropriate
capitalization rate (the net present value discount rate). Sheshunoff's
computations were based on an analysis of the banking industry, the economic and
competitive situations in Royall's market area, its current financial condition
and historical levels of growth and earnings. Using a net present value discount
rate of 12%, an acceptable discount rate considering the risk-return
relationship most investors would demand for an investment of this type as of
the valuation date, the "Net Present Value of Future Earnings" equaled $3,830.86
per share.
Cash Flow Analysis. The cash flow method assumes the formation of a
one-bank holding company with maximum leverage according to Federal Reserve
guidelines and analyzes the ability of the bank to retire holding company
acquisition debt within a reasonable period of time while maintaining adequate
capital. Using this method Sheshunoff arrived at a value of $5,450.00 per share.
Return on Investment Analysis. Return on investment analysis ("ROI")
also assumes the formation of a one-bank holding company using maximum
regulatory leverage and analyzes the ten year ROI of a 33.33% equity investment
at the transaction value of $4,400.00 per share for Royall compared to a
liquidation at book value in the year 2005 and a sale at ten times projected
earnings for the year 2005. This ROI analysis provides a benchmark for assessing
the validity of the transaction value of a majority block of stock. The ROI
analysis is one approach to valuing a going concern, and is directly impacted by
the earnings stream, dividend payout levels an levels of debt, if any. Other
financial and nonfinancial factors indirectly affect the ROI; however, these
factors more directly influence the level of ROI an investor would demand from
an investment in a majority block of stock of a specific bank at a certain point
in time. The ROI assuming liquidation at book value in 2005 equaled 9.05%, and
the ROI assuming sale at ten times projected earnings in 2005 equaled 15.17%.
Transaction Value as a Percentage of Total Assets. Furthermore, a price
level indicator, the transaction value as a percentage of total assets, may be
used to confirm the validity of the transaction value. the transaction values as
a percentage of total assets facilitates a truer price level comparison with
comparable banking organizations, regardless of the differing levels of equity
capital earnings. In this instance, a transaction value of $4,400.00 per share
results in a transaction value as a percentage of total assets of 16.69%.
Finally, another test of appropriateness for the transaction value of a
majority block of stock is the net present value-to-transaction value ratio.
Theoretically, an earnings stream may be valued through the use of a net present
value analysis. In Sheshunoff's experience with majority block community bank
sock valuations, it has determined that a relationship does exist between the
net present value of an "average" community banking organization and the
transaction value of a majority block of the banking organization's stock. The
net present
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value-to-transaction value ratio equals 87.07% for Royall. There are
many other factors to consider, when valuing a going concern, which do not
directly impact the earnings stream and the net present value but which do exert
a degree of influence over the fair market value of a going concern. These
factors include, but are not limited to, the general condition of the industry,
the economic and competitive situations in the market area and the expertise of
the management of the organization being value.
Projected Impact on Company Shareholders. Sheshunoff considered this
transaction as a merger rather than a purchase. Consideration was given to the
levels of book value and earnings per share appreciation or dilution percentages
between the merger partners over the next three to five years after
consummation. To justify the fairness of the transaction for Royall
shareholders, it is important to project, based upon realistic projections of
future performance, a positive impact for Royall shareholders. It is important
to note that the appreciation/dilution analysis is one of the methods utilized
by Sheshunoff. The projected appreciation/dilution analysis supports
Sheshunoff's Opinion as to the fairness of the transaction to Royall's
shareholders from a financial point of view. This analysis does not address
future shareholder transactions involving Compass stock after consummation of
the transaction.
Neither Royall nor Compass imposed any limitations upon the scope of
the investigation to be performed by Sheshunoff in formulating such Opinion. In
rendering its Opinion, Sheshunoff did not independently verify the asset quality
and financial condition of Royall or Compass, but instead relied upon the data
provided by or on behalf of Royall and Compass to be true and accurate in all
material respects.
For its services as independent financial analyst for the transaction,
including the rendering of its Opinion referred to above, Royall has agreed to
pay Sheshunoff aggregate fees of 1.50% of the total consideration paid, which
includes the professional fee for the Opinion. Prior to being retained for this
assignment, Sheshunoff has provided professional services and products to Royall
and Compass. The revenues derived from such services and products are
insignificant when compared to the firm's total gross revenues.
Operations After the Merger
Compass and the Bank presently intend that immediately following the
completion of the Merger, the Bank will be merged with and into Compass Bank-
Houston, subject to the necessary regulatory approvals. Thereafter, the separate
existence of the Bank will cease, and the former offices of the Bank will become
branches of Compass Bank-Houston. See "Summary--Conditions to Consummation and
Regulatory Approvals; Termination"; "The Merger--General"; and "The Merger--
Other Terms and Conditions".
Other Terms and Conditions
The Merger Agreement contains a number of terms, conditions,
representations and covenants which must be satisfied as of the Effective Time,
including, but not limited to, the following:
(i) The receipt of regulatory approvals, which approvals shall not
have imposed any condition or requirement which in the judgment
of Compass would adversely impact the economic or business
benefits of the transactions contemplated by the Merger
Agreement or otherwise would in the judgment of Compass be so
burdensome as to render inadvisable the consummation of the
Merger, and the expiration of any applicable waiting periods
with respect thereto. See "The Merger--Government Approvals";
(ii) The consummation of the Merger will not violate any injunction,
order or decree of any court or governmental body having
competent jurisdiction;
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(iii) The approval of the Merger Agreement by Royall's shareholders
entitled to vote at the Meeting;
(iv) The Registration Statement relating to the Compass Common Stock
shall be effective under the Securities Act and any applicable
state securities or blue sky laws and no stop order suspending
the effectiveness of the Registration Statement shall be in
effect and no proceedings for such purpose, or any proceedings
under the Commission or applicable state securities authorities
rules with respect to the transaction contemplated hereby,
shall be pending before or threatened by the Commission or any
applicable state securities or blue sky authorities;
(v) All representations and warranties of Royall and Compass shall
be true and correct in all material respects as of the date of
the Merger Agreement and at and as of the Effective Time ;
(vi) Royall, Compass and Compass Texas shall have performed in all
material respects all obligations and agreements and in all
material respects complied with all covenants and conditions
contained in the Merger Agreement to be performed or complied
with by them prior to the Effective Time;
(vii) There shall not have occurred a Material Adverse Effect with
respect to Royall or the Bank;
(viii) The directors of Royall and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing Royall
and the Bank from any and all claims of such directors (except
as to their deposits and accounts and as to rights of
indemnification pursuant to the Articles of Incorporation or
Association and the Bylaws of Royall or the Bank, which rights
shall survive the Merger) and shall have delivered to Compass
their resignations as directors of the Bank;
(ix) The officers of Royall and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing Royall
and the Bank from any and all claims of such officers (except
as to deposits and accounts and as to rights of indemnification
pursuant to the Bylaws of Royall or the Bank, which rights
shall survive the Merger);
(x) Compass and Royall shall have received the opinions of counsel
to Royall and Compass acceptable to them as to certain matters;
(xi) The holders of no more than 5% of the Royall Common Stock shall
have demanded or be entitled to demand payment of the fair
value of their shares as dissenting shareholders;
(xii) Compass shall have received a letter from KPMG Peat Marwick
LLP, dated as of the Effective Time, to the effect that the
Merger will qualify for pooling-of-interests accounting
treatment if closed and consummated in accordance with the
Merger Agreement;
(xiii) There shall be no Royall indebtedness;
(xiv) Compass shall have received from holders of Royall Common Stock
receiving at least 50% of the total Merger Consideration a
representation that they have no plan or intention to sell or
otherwise dispose of shares of Compass Common Stock received
pursuant to the Merger;
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(xv) Compass and Compass Texas shall have received an opinion of
counsel satisfactory to them that the Merger will qualify as a
reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended;
(xvi) Royall shall have delivered to Compass a schedule of all
transactions in the capital stock (or instruments exercisable
for or convertible into capital stock) of Royall of which
Royall has knowledge from and including the date of the Merger
Agreement through the Effective Time;
(xvii) Compass shall have determined, in its sole judgment, that
certain liabilities and obligations of Royall and the Bank do
not have a Material Adverse Effect;
(xviii) All warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire Royall
Common Stock shall have been exercised or converted, or shall
have expired, lapsed or terminated, prior to the Effective
Time;
(xix) Compass shall have received section 368 certificates and
Proxies within the periods specified for receipt of such
certificates and Proxies as set forth in the Merger Agreement;
(xx) The administrative services agreement between the Bank and a
former director the Bank shall have been terminated and Royall
and the Bank shall have obtained a release from all
obligations under such agreement, which termination and
release shall be in form and substance satisfactory to
Compass;
(xxi) The Bank and Royall shall have delivered to the directors of
Royall and the Bank an instrument dated the Effective Time
releasing such directors from any and all claims of Royall and
the Bank (except as to indebtedness or other contractual
liabilities); provided, however, that such releases shall not
release an action against such directors by Compass or Compass
Texas in connection with the transactions contemplated by the
Merger Agreement; See "Summary--Federal Income Tax
Consequences" and "The Merger--Federal Income Tax
Consequences"; and
(xxii) Compass and Royall shall have received certificates of the
other as to certain items described above.
Any condition to the consummation of the Merger, except the required shareholder
and regulatory approvals, may be waived in writing by the party to the Merger
Agreement entitled to the benefit of such condition. See Appendix I.
Additional Agreements
Each of the directors, executive officers and principal shareholders of
Royall has entered into a Pooling Transfer Restrictions Agreement with Compass
and Royall pursuant to which they have agreed, among other things, (i) not to
transfer any of their respective shares of Royall Common Stock within 30 days
prior the Effective Time, (ii) not to transfer any shares of Compass Common
Stock acquired by them in the Merger until the publication of financial results
covering at least 30 days of post-Merger combined operations of Royall and
Compass, except for shareholder pledges to secure loans, provided the lender
agrees to be bound by the terms of the Pooling Transfer Restrictions Agreement,
and (iii) not otherwise to transfer such Compass Common Stock except in
compliance with the applicable provisions of the Securities Act and the Exchange
Act and the respective rules and regulations thereunder.
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Officers, directors and certain shareholders of Royall and the Bank
owning 2,932.07 shares of Royall Common Stock, comprising approximately 73.3% of
the total shares of Royall Common Stock issued and outstanding as of the Record
Date, have agreed, pursuant to the Proxy, to vote their shares in favor of the
Merger. As result, because such officers, directors and shareholders have the
power to vote over two-thirds of the shares of Royall Common Stock issued and
outstanding and entitled to vote at the Meeting, the effect of their agreement
to vote in favor of the Merger is to assure approval of the Merger by the Royall
shareholders, subject to the termination rights contained in the Merger
Agreement.
Business Pending Effective Time
The Merger Agreement imposes certain limitations on the conduct of
Royall's business pending consummation of the Merger. Among other things, Royall
must conduct its businesses only in the ordinary course, consistent with prudent
banking practices. See "The Merger--Other Terms and Conditions"; and Appendix I.
Amendment; Termination
The Merger Agreement may be amended or supplemented at any time, before
or after the Meeting, by an instrument in writing duly executed by all the
parties thereto. However, no change which reduces the Merger Consideration or
which materially and adversely affects the rights of Royall's shareholders can
be made after the Meeting without the required approval of Royall's
shareholders.
In addition to termination due to pricing issues (see "Summary--The
Merger"; and "The Merger--General"), the Merger Agreement may be terminated and
the Merger abandoned, notwithstanding approval by Royall shareholders, at any
time before the Effective Time by:
(i) Mutual written consent duly authorized by the Boards of
Directors of Compass and Royall;
(ii) Compass (a) if Compass learns or becomes aware of a state of
facts or breach or inaccuracy of any representation or warranty
of Royall which constitutes a Material Adverse Effect, as
defined in the Merger Agreement, (b) due to certain unacceptable
environmental circumstances pursuant to Section 6.10 of the
Merger Agreement, or (c) if the conditions to the obligations of
Compass and Compass Texas to effect the Merger contained in the
Merger Agreement are not satisfied or waived in writing by
Compass;
(iii) Royall if Royall's conditions to Closing contained in the Merger
Agreement are not satisfied or waived in writing by Royall;
(iv) Compass or Royall if the Effective Time shall not have occurred
on or before September 14, 1996, or such later date agreed to in
writing by Compass and Royall; or
(v) Compass or Royall if any court of competent jurisdiction in the
United States or other United States (federal or state)
governmental body shall have issued an order, decree or ruling
or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other
action is final and nonappealable. See "Summary--Conditions to
Consummation and Regulatory Approvals; Termination"; "The
Merger--General"; "The Merger--Other Terms and Conditions"; and
Appendix I.
Upon termination of the Merger Agreement, the Merger Agreement shall be
void and have no effect, without any liability on the part of any party or its
directors, officers or shareholders, except that the parties are not relieved of
liability for any breach of the Merger Agreement.
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Exchange of Shares
Promptly after the Effective Time, the Exchange Agent will furnish each
holder of record of Royall Common Stock as of the Effective Time with
transmittal materials for use in exchanging certificates representing Royall
Common Stock for certificates representing Compass Common Stock in accordance
with the Exchange Agent Agreement. The transmittal materials will contain
information and instructions with respect to the procedure for exchanging such
certificates. The certificates for Compass Common Stock will be delivered to the
persons entitled thereto within a reasonable time after good delivery of Royall
Common Stock certificates for exchange accompanied by the appropriate
transmittal materials.
Under the terms of the Merger Agreement, Compass will not issue
certificates representing fractional shares of Compass Common Stock, and in lieu
thereof shall pay cash to any holder of Royall Common Stock otherwise entitled
to receive such fractional share. Such cash payment shall be based on the Per
Share Merger Consideration. See "Summary--Federal Income Tax Consequences"; "The
Merger--Federal Income Tax Consequences"; and Appendix I.
Persons who are entitled to receive Compass Common Stock pursuant to
the Merger will not be entitled to vote such Compass Common Stock or to receive
any dividends thereon until they have properly surrendered their Royall Common
Stock certificates in exchange for Compass Common Stock.
Upon the Effective Time of the Merger, former Royall shareholders will
cease to have any rights as shareholders of Royall, and the Royall shareholders
shall have only the right to receive the Merger Consideration specified in the
Merger Agreement or, in the case of dissenting shareholders, to exercise their
rights under Texas law. See "The Merger--Dissenters' Rights".
Dissenters' Rights
By following the specific procedures set forth in the TBCA, Royall
shareholders have a statutory right to dissent from the Merger. If the Merger is
approved and consummated, any Royall shareholder who properly perfects his
dissenters' rights will be entitled, upon consummation of the Merger, to receive
an amount of cash equal to the fair value of his shares of Royall Common Stock
rather than receiving the consideration set forth in the Merger Agreement. The
following summary is not a complete statement of statutory dissenters' rights of
appraisal, and such summary is qualified by reference to the applicable
provisions of the TBCA, which are reproduced in full in Appendix II to this
Proxy Statement/Prospectus. A shareholder must complete each step in the precise
order prescribed by the statute to perfect his dissenter's rights of appraisal.
Any shareholder who desires to dissent from the Merger shall file a
written objection to the Merger with Royall prior to the Meeting at which a vote
on the Merger shall be taken, stating that the shareholder will exercise his
right to dissent if the Merger is effective and giving the shareholder's address
to which notice thereof shall be sent. A vote against the Merger is not
sufficient to perfect a shareholder's dissenter's rights of appraisal. If the
Merger is effected, each shareholder who sent notice to Royall as described
above and who did not vote in favor of the Merger will be deemed to have
dissented from the Merger ("Dissenting Shareholder"). Failure to vote against
the Merger will not constitute a waiver of the dissenters' rights of appraisal;
on the other hand, a vote in favor of the Merger will constitute such a waiver.
Royall, as survivor of the Merger, will be liable for discharging the
rights of Dissenting Shareholders and shall, within ten (10) days of the
Effective Time, notify the Dissenting Shareholders in writing that the Merger
has been effected. Each Dissenting Shareholder so notified shall, within ten
(10) days of the delivery or mailing of such notice, make a written demand on
Compass at 15 South 20th Street, Birmingham, Alabama 35233, for payment of the
fair value of the Dissenting Shareholder's shares as estimated by the Dissenting
Shareholder. Such demand shall
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state the number and class of shares owned by the Dissenting Shareholder. The
fair value of the shares shall be the value thereof as of the date immediately
preceding the Meeting, excluding any appreciation or depreciation in
anticipation of the Merger. Dissenting Shareholders who fail to make a written
demand within the ten (10) day period will be bound by the Merger and lose their
rights to dissent. Within twenty (20) days after making a demand, the Dissenting
Shareholder shall submit certificates representing his shares of Royall Common
Stock to Compass for notation thereon that such demand has been made.
Within twenty (20) days after receipt of a Dissenting Shareholder's
demand letter as described above, Compass shall deliver or mail to the
Dissenting Shareholder written notice (i) stating that Compass accepts the
amount claimed in the demand letter and agrees to pay that amount within ninety
(90) days after the Effective Time upon surrender of the relevant certificates
of Royall Common Stock duly endorsed by the Dissenting Shareholder, or
(ii) containing Compass' written estimate of the fair value of the shares of
Royall Common Stock together with an offer to pay such amount within ninety
(90) days after the Effective Time if Compass receives notice, within sixty
(60) days after the Effective Time, stating that the Dissenting Shareholder
agrees to accept that amount and surrender of the relevant certificates of
Royall Common Stock duly endorsed by the Dissenting Shareholder. In either case,
the Dissenting Shareholder shall cease to have any ownership interest in Royall,
Compass or the Bank following payment of the agreed value.
If the Dissenting Shareholder and Compass cannot agree on the fair
value of the shares within sixty (60) days after the Effective Time, the
Dissenting Shareholder or Compass may, within sixty (60) days of the expiration
of the initial sixty (60) day period, file a petition in any court of competent
jurisdiction in Anderson County, Texas requesting a finding and determination of
the fair value of the Dissenting Shareholder's shares. If no petition is filed
within the appropriate time period, then all Dissenting Shareholders who have
not reached an agreement with Compass on the value of their shares shall be
bound by the Merger and lose their rights to dissent. After a hearing concerning
the petition, the court shall determine which Dissenting Shareholders have
complied with the provisions of the TBCA and have become entitled to the
valuation of, and payment for, their shares, and shall appoint one or more
qualified appraisers to determine the value of the shares of Royall Common Stock
in question. The appraisers shall determine such value and file a report with
the court. The court shall then in its judgment determine the fair value of the
shares of Royall Common Stock, which judgment shall be binding on Compass and on
all Dissenting Shareholders receiving notice of the hearing. The court shall
direct Compass to pay such amount, together with interest thereon, beginning
ninety-one (91) days after the Effective Time to the date of judgment, to the
Dissenting Shareholders entitled thereto. The judgment shall be payable upon the
surrender to Compass of certificates representing shares of Royall Common Stock
duly endorsed by the Dissenting Shareholders. Upon payment of the judgment, the
Dissenting Shareholders shall cease to have any interest in Royall, Compass or
the Stock. All court costs and fees of the appraisers shall be allotted between
the parties in the manner that the court determines is fair and Royall.
Any Dissenting Shareholder who has made a written demand on Compass for
payment of the fair value of his Royall Common Stock shall not thereafter be
entitled to vote or exercise any other rights as a shareholder except the
statutory right of appraisal as described herein and the right to maintain an
appropriate action to obtain relief on the ground that the Merger would be or
was fraudulent. In the absence of fraud in the transaction, a Dissenting
Shareholder's statutory right to appraisal is the exclusive remedy for the
recovery of the value of his shares or money damages to the shareholder with
respect to the Merger.
Any Dissenting Shareholder who has made a written demand on Compass for
payment of the fair value of his Royall Common Stock may withdraw such demand at
any time before payment for his shares or before a petition has been filed with
an appropriate court for determination of the fair value of such shares. If a
Dissenting Shareholder withdraws his demand, or if he is otherwise unsuccessful
in asserting his dissenters' rights of appraisal, such Dissenting Shareholder
shall be bound by the Merger and his status as a shareholder shall be restored
without prejudice to any corporate proceedings, dividends, or distributions
which may have occurred during the interim.
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See Summary--Dissenters' Rights"; "Comparison of Rights of Shareholders of
Royall and Compass--Appraisal Rights"; and Appendix II.
It is a condition to Compass' obligations under the Merger Agreement
that not more than 5% of the outstanding shares of Royall Common Stock shall
have been determined to be held by dissenting or potentially dissenting
shareholders. If such condition is not met, Compass will be entitled to
terminate the Merger Agreement. See "The Merger Agreement--Other Terms and
Conditions".
See "The Merger--Federal Income Tax Consequences" for a description of
the tax consequences of exercising dissenters' rights.
Federal Income Tax Consequences
In the opinion of Liddell, Sapp, the Merger, if consummated in
accordance with the Merger Agreement, will qualify as a "reorganization" within
the meaning of Section 368(a) of the Code. An opinion of counsel is not binding
on the Internal Revenue Service ("IRS") or the courts.
Liddell, Sapp has relied upon certain assumptions and representations
in issuing its opinion, including the following:
1. The Merger and the Bank Merger will be respected as separate
transactions for federal income tax purposes. This matter is
discussed in greater detail below.
2. Royall shareholders will receive only Compass Common Stock in the
Merger and they will not receive or be deemed by the IRS to
receive any cash (other than cash paid in lieu of fractional
shares of Compass Common Stock) or other property which would
constitute "boot" for federal income tax purposes.
3. Compass has received representations from certain Royall
shareholders receiving at least 50% of the Compass Common Stock
issued in the Merger stating that they have no present intention
to dispose of the Compass Common Stock received.
In such counsel's opinion, the following federal income tax
consequences to Royall shareholders will result from the qualification of the
Merger as a reorganization under Section 368(a) of the Code:
1. A Royall shareholder will not recognize any gain or loss upon the
exchange of his Royall Common Stock solely for Compass Common
Stock.
2. The aggregate tax basis of Compass Common Stock received by a
Royall shareholder in the Merger will be the same as the
aggregate basis of the Royall Common Stock surrendered in
exchange therefor. For purposes of allocating this aggregate
basis to individual shares of Compass Common Stock received, the
IRS position is that each separate block of stock surrendered
shall be treated separately. Under this rule, for example, if a
Royall shareholder surrenders two blocks of Royall Common Stock
in the Merger, having an adjusted basis of $1.00 per share for
the first block and $2.00 per share for the second block, the
Compass Common Stock which he receives in exchange for each share
of Royall Common Stock in the first block will have a basis of
$1.00, and the Compass Common Stock which he receives in exchange
for each share of Royall Common Stock in the second block will
have a basis of $2.00.
3. The holding period of Compass Common Stock to be received by each
Royall shareholder will include the period during which he held
the Royall Common Stock surrendered in exchange
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therefor, provided that the Royall Common Stock is held as a
capital asset on the date of the exchange.
4. The payment of cash in lieu of fractional shares of Compass
Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by Compass.
Such cash payment will be treated as having been received as a
distribution in full payment in exchange for the stock redeemed
as provided in Section 302 of the Code.
5. For a Royall shareholder who dissents from the Merger and
receives solely cash in exchange for his or her Royall Common
Stock, such cash will be treated as having been received by such
shareholder as a distribution in redemption of his or her stock,
subject to the provisions and limitations of Section 302 of the
Code.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN
FOR GENERAL INFORMATION ONLY. ROYALL SHAREHOLDERS ARE URGED TO CONSULT WITH
THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN INCOME
OR OTHER TAX LAWS.
Compass expects to receive a legal opinion from Liddell, Sapp at the
Closing that the Merger will qualify as a reorganization under Section 368(a) of
the Code in satisfaction of a condition to consummation of the Merger. See "The
Merger--Other Terms and Conditions".
Government Approvals
The Merger is subject to, and conditioned upon, receipt of approval
from the Commissioner and either approval of a formal application under the BHC
Act by the Federal Reserve, or confirmation by the Federal Reserve that a formal
application under the BHC Act is not required. The Bank Merger will also require
the approval of the FDIC and the Commissioner.
The Federal Reserve has approved a formal application under the BHC Act
on April 22, 1996 and, as a result, the Merger could not be consummated for a
period of 15 days after Federal Reserve approval. In addition, the Bank Merger
may not be consummated for a period of 15 to 30 days following FDIC approval.
During either such 15 to 30 day waiting period, the Justice Department may
object to the Merger on antitrust grounds, which action will stay the
consummation of the transactions unless otherwise ordered by an appropriate
judicial authority. Neither Royall nor Compass has any reason to believe that
the Justice Department will take any action to stay the approval of the Merger.
Approval of the Bank Merger is not a condition to consummation of the Merger.
The Texas Banking Act allows out-of-state bank holding companies to
acquire bank holding companies that own or control state or national banks
located within Texas. The Commissioner must make a recommendation to the Federal
Reserve as to whether the transaction should be approved under the BHC Act. To
date, the parties are not aware of and do not expect any adverse recommendation
from the Commissioner. See "Summary--Conditions to Consummation and Regulatory
Approvals"; "Termination"; and "Supervision and Regulation".
Accounting Treatment
Compass expects to account for the Merger using the "pooling-of-
interests" method of accounting. Compass has received a letter from KPMG Peat
Marwick LLP, which will be updated as of the Effective Time, to the effect that
the Merger will qualify for pooling-of-interests accounting treatment. Under
this accounting method, at the Effective Time, Royall's assets and liabilities
will be added at their recorded book values to those of Compass, and its
shareholders' equity will be added to Compass' consolidated balance sheet.
Income and other financial statements
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of Compass issued after consummation of the Merger will be restated
retroactively to reflect the consolidated operations of Royall and Compass as if
the Merger had taken place prior to the periods covered by such financial
statements. See "Summary--Accounting Treatment"; "Selected Financial Data"; and
"The Merger--Other Terms and Conditions".
SUPERVISION AND REGULATION
General
Bank holding companies and banks are regulated extensively under both
federal and state law. Compass, Compass of Texas and Compass Bancorporation are
subject to regulation by the Federal Reserve and their respective bank
subsidiaries (the "Subsidiary Banks") are subject to regulation by the FDIC
and/or the appropriate state banking departments. The deposits of each of the
Subsidiary Banks are insured by the FDIC, and Compass Bank and Compass Bank,
N.A., are members of the Federal Reserve System. Although the various laws and
regulations which apply to Compass and its Subsidiary Banks are intended to
insure safe and sound banking practices, they are mainly intended to benefit
depositors and the federal deposit insurance fund, not the shareholders of
Compass. The following discussion highlights certain laws and regulations
affecting Compass and the Subsidiary Banks and should be read in conjunction
with the more detailed information incorporated by reference herein. See
"Incorporation of Documents by Reference".
Compass, Compass of Texas and Compass Bancorporation
Compass, Compass of Texas and Compass Bancorporation are bank holding
companies within the meaning of the BHC Act and are registered as such with the
Federal Reserve. As bank holding companies, Compass, Compass of Texas and
Compass Bancorporation are required to file with the Federal Reserve an annual
report and such additional information as the Federal Reserve may require
pursuant to the BHC Act. The Board may also make examinations of the Company and
each of its subsidiaries. Under the BHC Act, bank holding companies are
prohibited, with certain exceptions, from acquiring direct or indirect ownership
or control of more than five percent of the voting shares of any company
engaging in activities other than banking or managing or controlling banks or
furnishing services to or performing services for their banking subsidiaries.
However, the BHC Act authorizes the Federal Reserve to permit bank holding
companies to engage in, and to acquire or retain shares of companies that
engage in, activities which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
The BHC Act requires a bank holding company to obtain the prior
approval of the Federal Reserve before it may acquire substantially all of the
assets of any bank or ownership or control of any voting shares of any bank if,
after such acquisition, it would own or control, directly or indirectly, more
than five percent of the voting shares of any such bank. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act")
permits bank holding companies to acquire banks located in any state without
regard to whether the transaction is prohibited under any state law (except that
states may establish the minimum age of their local banks (up to a maximum of 5
years) subject to interstate acquisition of out-of-state bank holding
companies).
The Federal Reserve Act generally imposes certain limitations on
extensions of credit and other transactions by and between banks which are
members of the Federal Reserve System and other affiliates (which includes any
holding company of which such bank is a subsidiary and any other non-bank
subsidiary of such holding company). Banks which are not members of the Federal
Reserve System are also subject to these limitations. Further, federal law
prohibits a bank holding company and its subsidiaries from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") enacted major regulatory reforms, stronger capital standards for
savings associations and stronger civil and criminal enforcement
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provisions. FIRREA allows the acquisition of healthy and failed savings
associations by bank holding companies and imposes no interstate barriers on
such bank holding company acquisitions. With certain qualifications, FIRREA also
allows bank holding companies to merge acquired savings and loans into their
existing commercial bank subsidiaries. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
In December of 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. This act recapitalized the Bank
Insurance Fund ("BIF"), of which the Subsidiary Banks are members, substantially
revised statutory provisions, including capital standards, restricted certain
powers of state banks, gave regulators the authority to limit officer and
director compensation and required holding companies to guarantee the capital
compliance of their banks in certain instances. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized", as defined by regulations recently adopted by the Federal
Reserve, the FDIC and the other federal depository institution regulatory
agencies. A depository institution is well capitalized if it significantly
exceeds the minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below such measure and critically undercapitalized if it fails to
meet any critical capital level set forth in the regulations. The critical
capital level must be a level of tangible equity capital equal to not less than
2% of total tangible assets and not more than 65% of the minimum leverage ratio
to be prescribed by regulation (except to the extent that 2% would be higher
than such 65% level). An institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital
requirements, the regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital and, ultimately, require the
appointment of a conservator or receiver for the institution. The obligation of
a controlling bank holding company under FDICIA to fund a capital restoration
plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets
or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's claim may be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution (including the payment of dividends) if, after making such payment
or distribution, the institution would be undercapitalized. FDICIA also
restricts the acceptance of brokered deposits by insured depository institutions
and contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At December 31, 1995, the Subsidiary Banks were "well capitalized", and
were not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA required the FDIC to establish a system of
risk-based assessments for federal deposit insurance, by which banks
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that pose a greater risk of loss to the FDIC (based on their capital levels and
the FDIC's level of supervisory concern) pay a higher insurance assessment.
The Subsidiary Banks
In general, federal and state banking laws and regulations govern all
areas of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks and bank
holding companies if such payments may be deemed to constitute an unsafe and
unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank and Central Bank of the South are both organized under the
laws of the State of Alabama. Compass Bank is a member of the Federal Reserve
System. Compass Bank and Central Bank of the South are supervised, regulated and
regularly examined by the Alabama State Banking Department and Compass Bank is
also regulated and examined by the Federal Reserve. Compass Bank, N.A. is a
national banking association subject to supervision, regulation and examination
by the Office of the Comptroller of the Currency ("OCC"). Compass Bank-Houston,
Compass Bank-Dallas and Compass Bank-San Antonio, all of which are organized
under the laws of the State of Texas, are state banks that are not members of
the Federal Reserve System. The Texas banks are supervised, regulated and
regularly examined by the Department and the FDIC. The Subsidiary Banks, as
participants in the BIF and the Savings Association Insurance Fund of the FDIC,
are subject to the provisions of the Federal Deposit Insurance Act and to
examination by and regulations of the FDIC.
Compass Bank is governed by Alabama laws restricting the declaration
and payment of dividends to ninety percent (90%) of annual net income until its
surplus funds equal at least twenty percent (20%) of capital stock. Compass Bank
has surplus in excess of this amount. Compass Bank-Houston, Compass Bank-Dallas
and Compass Bank-San Antonio, governed by the laws of the State of Texas, are
restricted in the declaration and payment of dividends to undivided profits;
that is, the portion of equity capital of a state bank equal to the balance of
its net profits, income, gains and losses since the date of its formation, less
subsequent distributions to shareholders and transfers to surplus or capital
under share dividends or by board resolution. Compass Bank-Florida, governed by
the laws of the State of Florida, may declare and pay dividends not to exceed
the current period's net profits combined with the net retained profits of the
previous two years--after charging off bad debts, depreciation, and other
worthless assets and after making provision for reasonably anticipated future
losses on loans and other assets--and may, with the approval of the Department
of Banking and Finance of the State of Florida, declare and pay dividends from
retained net profits which accrued prior to the preceding two years; provided
that, prior to declaring any dividend, the bank shall carry twenty percent (20%)
of its net profits for such preceding period as is covered by the dividend to
its surplus fund until such surplus fund shall at least equal the amount of the
bank's common and preferred stock issued and outstanding. As members of the
Federal Reserve System, Compass Bank and Compass Bank-Florida are also subject
to dividend limitations imposed by the Federal Reserve that are similar to those
applicable to national banks. The approval of the OCC is required if the total
of all dividends declared by a national bank in any calendar year exceeds the
total of the net profits of the respective bank for that year, plus its retained
net profits for the preceding two years, less any required transfers to surplus.
Federal law further provides that no insured depository institution may
make any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would not satisfy one or more of its
minimum capital requirements. Moreover, the federal bank regulatory agencies
also have the general authority to limit the dividends paid by insured banks if
such payments may be deemed to constitute an unsafe and unsound practice.
Insured banks are prohibited from paying dividends on its capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
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The Community Reinvestment Act of 1977 ("CRA") and the regulations of
the Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit needs of their local
community or communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of such financial institutions. The
CRA and such regulations provide that the appropriate regulatory authority will
assess the records of regulated financial institutions in satisfying their
continuing and affirmative obligations to help meet the credit needs of their
local communities as part of their regulatory examination of the institution.
The results of such examinations are made public and are taken into account upon
the filing of any application to establish a domestic branch, to merge or to
acquire the assets or assume the liabilities of a bank. In the case of a bank
holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
Other
Other legislative and regulatory proposals regarding changes in
banking, and the regulation of banks, thrifts and other financial institutions,
are being considered by the executive branch of the Federal government, Congress
and various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulations of banks
and the financial services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will affect
Compass or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is
treated as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws and, therefore, is subject to certain
reporting requirements and regulatory controls by the Commission, the United
States Department of the Treasury and the Federal Reserve. Compass Brokerage,
Inc., a wholly-owned subsidiary of Compass Bank, is a discount brokerage service
registered with the Commission and the National Association of Securities
Dealers, Inc. The subsidiary is subject to certain reporting requirements and
regulatory control by these agencies. Compass Bancshares Insurance, Inc., a
wholly-owned subsidiary of Compass Bank, is a licensed insurance agent or broker
for various insurance companies. The insurance subsidiary and its licensed
agents are subject to reporting and licensing regulations of the Alabama
Insurance Commission.
References under the heading "Supervision and Regulation" to applicable
statutes are brief summaries of portions thereof, do not purport to be complete
and are qualified in their entirety by reference to such statutes.
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DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK
The following summary of the terms and provisions of the Compass Common
Stock and the Compass Preferred Stock does not purport to be complete and is
qualified in its entirety by reference to Compass' Restated Certificate of
Incorporation and the Certificates of Amendment thereto, which include the
express terms of the Compass Common Stock and the Compass Preferred Stock. Such
Certificates are filed as exhibits to the Registration Statement of which this
Proxy Statement/Prospectus is a part.
Compass Common Stock
Compass is incorporated under the General Corporation Law of the State
of Delaware ("GCL"). Compass is authorized to issue 100,000,000 shares of
Compass Common Stock, of which 39,631,263 shares were issued and outstanding on
April 30, 1996. Compass' Board of Directors may at any time, without additional
approval of the holders of Compass Common Stock, issue additional authorized but
previously unissued shares of Compass Common Stock.
Dividends
Holders of Compass Common Stock are entitled to receive dividends
ratably when, as and if declared by Compass' Board of Directors from assets
legally available therefor, after payment of all dividends on preferred stock,
if any is outstanding. Under Delaware law, Compass may pay dividends out of
surplus or net profits for the fiscal year in which declared and/or for the
preceding fiscal year, even if its surplus accounts are in a deficit position.
Dividends paid by its subsidiary banks, principally Compass Bank, are the
primary source of funds available to Compass for payment of dividends to its
shareholders and for other needs. Compass' Board of Directors intends to
maintain its present policy of paying regular quarterly cash dividends. The
declaration and amount of future dividends will depend on circumstances existing
at the time, including Compass' earnings, financial condition and capital
requirements, as well as regulatory limitations and such other factors as
Compass' Board of Directors deems relevant.
Compass' principal assets and sources of income consist of investments
in its operating subsidiaries, which are separate and distinct legal entities.
Federal and state banking regulations applicable to Compass and its banking
subsidiaries require minimum levels of capital which limit the amounts available
for payment of dividends. Compass Bank is governed by Alabama laws restricting
the declaration and payment of dividends to 90% of annual net income until its
surplus funds equal at least 20% of capital stock. Compass Bank's surplus
exceeded this amount as of December 31, 1995 by $29 million. Compass Bank-
Houston, Compass Bank-Dallas and Compass Bank-San Antonio, which are governed by
the laws of the State of Texas, are restricted in the declaration and payment of
dividends to undivided profits; that is, the portion of equity capital of a
state bank equal to the balance of its net profits, income, gains and losses
since the date of its formation, less subsequent distributions to shareholders
and transfers to surplus or capital under share dividends or by board
resolution. Compass Bank-Florida, governed by the laws of the State of Florida,
may declare and pay dividends not to exceed the current period's net profits
combined with the net retained profits of the previous two years--after charging
off bad debts, depreciation, and other worthless assets and after making
provision for reasonably anticipated future losses on loans and other assets--
and may, with the approval of the Department of Banking and Finance of the State
of Florida, declare and pay dividends from retained net profits which accrued
prior to the preceding two years; provided that, prior to declaring any
dividend, the bank shall carry twenty percent (20%) of its net profits for such
preceding period as is covered by the dividend to its surplus fund until such
surplus fund shall at least equal the amount of the bank's common and preferred
stock issued and outstanding. As members of the Federal Reserve System, Compass
Bank and Compass Bank-Florida are also subject to dividend limitations imposed
by the Federal Reserve that are similar to those applicable to national banks.
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of the net profits of the
respective bank for that year, plus its retained net profits for the preceding
two years, less any required transfers to surplus. See "Incorporation of
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Certain Documents by Reference"; "Summary--Reasons for the Merger;
Recommendation of Board of Directors"; "Risk Factors"; "Selected Financial
Data"; "Market Prices"; "Comparison of Rights of Shareholders of Royall and
Compass--Dividends"; and "Information About Compass".
Preemptive Rights
The holders of Compass Common Stock do not have preemptive rights to
subscribe for a proportionate share of any additional securities issued by
Compass before such securities are offered to others. The absence of preemptive
rights increases Compass' flexibility to issue additional shares of Compass
Common Stock in connection with acquisitions, employee benefit plans and for
other purposes, without affording the holders of Compass Common Stock a right to
subscribe for their proportionate share of those additional securities. Any
further issuance of Compass Common Stock after the Effective Time may reduce
former Royall shareholders' proportionate interest in Compass.
Voting Rights
The holders of Compass Common Stock are entitled to one vote per share
on all matters presented to shareholders. Holders of Compass Common Stock are
not entitled to cumulate their votes in the election of directors. Cumulative
voting rights, if provided for, entitle shareholders to a number of votes equal
to the product of the number of shares held and the number of directors to be
elected and allow shareholders to distribute such votes among any number of
nominees for director or cast such votes entirely for one director. Cumulative
voting rights tend to enhance the voting power of minority shareholders. See
"Comparison of Rights of Shareholders of Royall and Compass--Cumulative Voting
for Directors".
Liquidation
Upon liquidation, dissolution or the winding up of the affairs of
Compass, holders of Compass Common Stock are entitled to receive their pro rata
portion of the remaining assets of Compass after the holders of Compass
preferred stock have been paid in full any sums to which they may be entitled.
Compass Preferred Stock
Compass has authorized 25,000,000 shares of $.10 par value preferred
stock. The preferred stock is issuable in one or more series and Compass' Board
of Directors, subject to certain limitations, is authorized to fix the number of
shares, dividend rate, liquidation prices, redemption, conversion, voting
rights, and other terms. Compass' Board of Directors may issue preferred stock
without approval of the holders of Compass Common Stock. No shares of preferred
stock are outstanding as of the date hereof. See "Risk Factors" and "Comparison
of Rights of Shareholders of Royall and Compass--Dividends".
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COMPARISON OF RIGHTS OF
SHAREHOLDERS OF ROYALL AND COMPASS
Charter and By-Law Provisions Affecting Compass Stock
Compass' Certificate and Bylaws contain several provisions which may
make Compass a less attractive target for an acquisition of control by anyone
who does not have the support of Compass' Board of Directors. Such provisions
include, among other things, the requirement of a supermajority vote of
shareholders or directors to approve certain business combinations and other
corporate actions, a minimum price provision, several special procedural rules,
a staggered Board of Directors, and the limitation that shareholder actions
without a meeting may only be taken by unanimous written shareholder consent.
Royall's Articles of Incorporation, as amended, and Bylaws do not contain
similar restrictions, except that the TBCA requires that actions of shareholders
without a meeting be by unanimous written consent, unless the Articles of
Incorporation provide for actions by holders of the number of shares that would
be required for action at a meeting. Royall's Articles of Incorporation and
By-Laws do not provide for such shareholder action by less than unanimous
consent.
The foregoing summary is qualified in its entirety by reference to
Compass' Certificate and Bylaws, which are available upon written request from
Compass and which are on file with the Commission, and to the Articles of
Incorporation, as amended, and Bylaws of Royall, which are available upon
request from Royall. See "Available Information"; "Incorporation of Certain
Documents by Reference"; "Risk Factors"; and "Information About Compass".
In addition to the foregoing differences between Royall's and Compass'
charters, as a result of the Merger, Royall shareholders, whose rights are
governed by the TBCA, will become shareholders of Compass, and their rights as
shareholders will then be governed primarily by the GCL.
Certain Differences Between the Corporation Laws of Texas and Delaware and
Corresponding Charter and Bylaw Provisions
Certain differences between the Delaware and Texas corporation laws, as
well as a description of the corresponding provisions contained in Compass' and
Royall's respective charter and By-Laws, as such differences may affect the
rights of shareholders, are set forth below. The following summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the TBCA and the GCL.
Mergers
Both Texas law and Delaware law generally permit a merger to become
effective without the approval of the surviving corporation's shareholders if
the articles of incorporation of the surviving corporation do not change
following the merger, the amount of the surviving corporation's common stock to
be issued or delivered under the plan of merger does not exceed twenty percent
(20%) of the total shares of outstanding voting stock immediately prior to the
acquisition, and the board of directors of the surviving corporation adopts a
resolution approving the plan of merger.
Where shareholder approval is required under Texas law, a merger must
be approved by the holders of two-thirds of the outstanding shares of the Texas
corporation entitled to vote thereon, unless there is a class of stock that is
entitled to vote as a class, in which event the merger must be approved by the
holders of two-thirds of the outstanding shares of stock of each class entitled
to vote as a class and by the holders of two-thirds of the outstanding shares
otherwise entitled to vote. Where shareholder approval is required under
Delaware law, a merger can be approved by a majority vote of the outstanding
shares of capital stock of each class entitled to vote thereon. Compass'
Certificate requires supermajority approval by its Board of Directors and
shareholders in certain
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cases, as described above. See "Risk Factors" and "Comparison of Rights of
Shareholders of Royall and Compass--Charter and Bylaw Provisions Affecting
Compass Stock".
Appraisal Rights
Shareholders of Texas corporations are entitled to exercise certain
dissenters' rights in the event of a sale, lease, exchange or other disposition
of all, or substantially all, of the property and assets of the corporation,
and, with the exceptions discussed below, a merger or consolidation.
Shareholders of a Delaware corporation shall have rights of appraisal in
connection with certain mergers or consolidations. In addition, a Delaware
corporation may, but is not required to, provide in its certificate of
incorporation that appraisal rights shall be available to shareholders in the
event of an amendment to the certificate of incorporation, the sale of all or
substantially all of the assets of the corporation, or the occurrence of any
merger or consolidation regarding which appraisal rights are not otherwise
available and in which that Delaware corporation is not the surviving or
resulting company. No such provision is included in Compass' Certificate. The
appraisal rights of a shareholder of a Texas corporation are set forth in
Appendix II. See "Summary--Dissenters' Rights"; "The Merger--Dissenters'
Appraisal Rights"; and Appendix II.
No appraisal rights are available under either Texas or, except as
described below, Delaware law for the holders of any shares of a class or series
of stock of a Texas or Delaware corporation to a merger if that corporation
survives the merger and the merger did not require the vote of the holders of
that class or series of such corporation's stock; provided, however, that under
Delaware law appraisal rights will be available in any event to shareholders of
a Delaware corporation who are required to accept consideration for their shares
other than the consideration described below.
Both Texas and Delaware law have a provision which states that
shareholders do not have appraisal rights in connection with a merger where, on
the record date fixed to determine the shareholders entitled to vote on the
merger or consolidation, the stock of the corporation is listed on a national
securities exchange or is held of record by more than 2,000 shareholders, unless
any of the following exceptions concerning consideration paid to the shareholder
for his shares are met. Under Texas law, a shareholder will be entitled to
dissent and be paid for his shares if, notwithstanding the above, the
shareholder is required to accept for his shares any consideration other than
(a) shares of stock of a corporation which, immediately after the effective date
of the merger, are listed on a national securities exchange or are held of
record by not less than 2,000 shareholders, and (b) cash in lieu of fractional
shares otherwise entitled to be received. The Delaware statute contains a
similar consideration provision which is somewhat broader. Appraisal rights will
be available to shareholders of a Delaware corporation in the event of a merger
or consolidation if such shareholders are required by the terms of an agreement
of merger or consolidation to accept for their stock anything other than
(a) shares of stock of the corporation surviving or resulting from such merger
or consolidation, or depository receipts in respect thereof, (b) shares of stock
of any other corporation or depository receipts in respect thereof, which at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or held of record by more than 2,000 shareholders,
(c) cash in lieu of fractional shares or fractional depository receipts of a
corporation described in (a) and (b) above, or (d) any combination of the shares
of stock, depository receipts and cash in lieu of fractional shares or
fractional depositary receipts described in (a), (b) and (c) above.
Special Meetings
A special meeting of shareholders of a Texas corporation may be called
by the holders of shares entitled to cast not less than ten percent (10%) of all
shares entitled to vote at the meeting, unless a different percentage, not to
exceed fifty percent (50%), is provided in the Articles of Incorporation.
Shareholders of Delaware corporations do not have a right to call special
meetings unless such right is conferred upon the shareholders in the
corporation's Certificate of Incorporation or Bylaws. Royall's By-Laws provide
that special meetings of shareholders may be called at any time by the
President, the Board of Directors or one or more shareholders the aggregate of
whose
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shares comprise not less than one-tenth of all the shares entitled to vote
at the meeting. Compass' Certificate prohibits shareholders from calling special
meetings.
Actions Without a Meeting
Under Texas law, the shareholders may act without a meeting if a
consent in writing to such action is signed by all shareholders; provided,
however, that the Articles of Incorporation may provide that the shareholders
may take action without a meeting if a consent in writing to such action is
signed by the shareholders having the minimum number of votes that would be
necessary to take such action at a meeting. Royall's Articles of Incorporation,
as amended, do not so provide. Delaware law provides that shareholders may take
action without a meeting if a consent in writing to such action is signed by the
shareholders having the minimum number of votes that would be necessary to take
such action at a meeting, unless prohibited in the Certificate of Incorporation.
Compass' Certificate prohibits shareholder action by written consent except
where such action is taken unanimously. See "Risk Factors".
Election of Directors
Pursuant to Texas law, unless otherwise provided in the Articles of
Incorporation, shareholders shall be entitled to cumulative voting in the
election of directors if they provide the secretary of the corporation with
written notice prior to the day of the election of their intent to cumulate
their votes. Absent such notice, the directors of a corporation shall be elected
by a plurality of the votes cast by the holders of shares entitled to vote in
the election of directors at a meeting of shareholders at which a quorum is
present. Royall's Articles of Incorporation, as amended, prohibit cumulative
voting. Holders of Compass Common stock are not entitled to cumulate their votes
in the election of directors. See "Description of Compass Common and Preferred
Stock--Voting Rights".
Voting on Other Matters
Under Texas law, an amendment to the Articles of Incorporation requires
the approval of the holders of at least two-thirds of the outstanding shares of
the corporation entitled to vote thereon, and the holders of two-thirds of the
outstanding shares of each class or series entitled to vote thereon as a class,
unless a different number, not less than a majority, is specified in the
Articles of Incorporation. The Articles of Incorporation, as amended, of Royall
do not so specify. Delaware law provides that amendments to the Certificate of
Incorporation must be approved by the holders of a majority of the corporation's
stock entitled to vote thereon, and the holders of a majority of the outstanding
stock entitled to vote thereon as a class, unless the Certificate of
Incorporation requires the vote of a larger portion of the outstanding stock or
any class thereof. The Certificate of Incorporation of Compass does not provide
for approval by more than a majority vote.
The sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the Articles of Incorporation) of all, or substantially all, the property and
assets, with or without the goodwill, of a Texas corporation, if not made in the
usual and regular course of its business, requires the approval of the holders
of at least two-thirds of the outstanding shares of the corporation entitled to
vote thereon, and the holders of two-thirds of the outstanding shares of each
class or series entitled to vote thereon as a class, unless the Articles of
Incorporation require the vote of a different number, not less than a majority,
of the shares outstanding. Royall's Articles of Incorporation, as amended, do
not provide for a different voting requirement or entitle the shares of any
class or series to vote thereon. A Delaware corporation may sell, lease or
exchange all or substantially all of its property and assets when and as
authorized by the holders of a majority of the outstanding stock of the
corporation entitled to vote thereon, unless the Certificate of Incorporation
requires the vote of a larger portion of the outstanding stock. The Certificate
of Incorporation of Compass does not so provide.
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Under Texas law, the dissolution of a corporation requires the approval
of the holders of at least two-thirds of the total outstanding shares of the
corporation, and the holders of two-thirds of the outstanding shares of each
class or series entitled to vote thereon as a class, unless a different amount,
not less than a majority, is specified in the Articles of Incorporation. Each
outstanding share of a Texas corporation is entitled to vote on dissolution. The
Articles of Incorporation, as amended, of Royall do not provide for a different
number of shares for approval of dissolution or permit the shares of any class
or series to vote thereon. Delaware law requires that dissolution must be
approved by the holders of a majority of the corporation's stock entitled to
vote thereon, unless the Certificate of Incorporation requires the vote of a
larger portion of the outstanding stock. Compass' Certificate does not provide
for approval by more than a majority vote.
Preemptive Rights
Under Texas law, shareholders possess preemptive rights as to the
issuance of additional or treasury securities by the corporation, unless the
corporation's Articles of Incorporation provide otherwise. Royall's Articles of
Incorporation, as amended, do not deny preemptive rights and, therefore,
Royall's shareholders have preemptive rights as to newly issued and treasury
shares. Shareholders of Compass on the other hand, do not possess such
preemptive rights.
Dividends
A Delaware corporation may pay dividends not only out of surplus (the
excess of net assets over capital) but also out of net profits for the current
or preceding fiscal year if it has not surplus; provided, however, that if the
capital of the corporation has been decreased to an amount less than the
aggregate amount of the capital represented by the issued and outstanding stock
having a preference upon the distribution of assets, no dividends may be
declared out of net profits. A Texas corporation may make distributions only out
of surplus.
Holders of Compass Common Stock are entitled to receive dividends
ratably when, as and if declared by Compass' Board of Directors from assets
legally available therefor, after payment of all dividends on preferred stock,
if any is outstanding.
Royall's Bylaws provide that, subject to provisions of law and the
provisions of Royall's Articles of Incorporation, the Royall Board of Directors
may declare and Royall may pay dividends on its outstanding shares in cash,
property or its own stock. Royall's Articles of Incorporation, as amended, do
not contain restrictions as to the ability of the Royall Board of Directors to
declare dividends. See "Incorporation of Certain Documents by Reference";
"Summary--Parties to the Merger"; "Summary--Reasons for the Merger;
Recommendation of Board of Directors"; "Selected Financial Data"; "Market
Prices"; "Description of Compass Common and Preferred Stock"; and "Information
About Royall--Market Price and Dividends".
Liquidation Rights
Generally under Texas and Delaware law, shareholders are entitled to
share ratably in the distribution of assets upon the dissolution of their
corporation. Preferred shareholders typically do not participate in the
distribution of assets of a dissolved corporation beyond their established
contractual preferences. Once the rights of preferred shareholders have been
fully satisfied, common shareholders are entitled to the distribution of any
remaining assets.
Upon liquidation, dissolution or the winding up of the affairs of
Compass, holders of Compass Common stock are entitled to receive their pro rata
portion of the remaining assets of Compass after the holders of Compass
preferred stock have been paid in full any sums to which they may be entitled.
Compass Preferred Stock has a liquidation value of $100.00 per share, plus
accrued and unpaid dividends. Royall has no preferred stock and, therefore, upon
the liquidation, dissolution or winding up of the affairs of Royall, the
shareholders of Royall are presently entitled to receive their pro rata portion
of the assets of Royall available for distribution.
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Limitation of Liability and Indemnification
Both Texas and Delaware law permit a corporation to set limits on the
extent of a director's liability. Both Texas and Delaware law permit a
corporation to indemnify its officers, directors, employees and agents if such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation. Indemnification is not
allowed under either Texas or Delaware law, absent a court order to the
contrary, if an officer, director, employee or agent of the corporation is
finally adjudged liable to the corporation.
Under Compass' Certificate of Incorporation, as amended, a director
will not be liable to Compass or its shareholders for monetary damages for any
breach of fiduciary duty as a director, except (i) for breach of a director's
duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payment of
dividend or unlawful stock purchase or redemption, or (iv) any transaction from
which the director derived an improper personal benefit. Compass' Certificate of
Incorporation, as amended, authorizes indemnification of officers, directors and
others to the fullest extent permitted by Delaware law. See "Available
Information"; "Incorporation By Reference of Certain Documents"; and
"Indemnification".
Royall's Articles of Incorporation provide that each director and
officer or former director or officer or any person who may have served at the
request of Royall as a director or officer of another corporation in which
Royall owns shares of capital stock or of which Royall is a creditor (and their
heirs, executors, and administrators) may be indemnified by Royall against
reasonable costs and expenses incurred by him in connection with any action,
suit, or proceeding to which he may be made a party by reason of his being or
having been such director or officer, except in relation to any actions, suits,
or proceedings in which he has been adjudged liable because of willful
misfeasance, bad faith, negligence, or reckless disregard of the duties involved
in the conduct of his office, or in the event of a settlement, each director and
officer (and his heirs, executors, and administrators) may be indemnified by
Royall against payments made, including reasonable costs and expenses, provided
that such indemnity shall be conditioned upon the prior determination by a
resolution of two-thirds of those members of the Board of Directors of Royall
who are not involved in the action, suit, or proceeding that the director or
officer has no liability by reason of willful misfeasance, bad faith,
negligence, or reckless disregard of the duties involved in the conduct of his
office, and provided further that if a majority of the members of the Board of
Directors of Royall are involved in the action, suit, or proceeding, such
determination shall have been made by a written opinion of independent counsel.
Amounts paid in settlement shall not exceed costs, fees, and expenses which
would have been reasonably incurred if the action, suit, or proceeding had been
litigated to a conclusion. Such a determination by the Board of Directors, or by
independent counsel, and the payments of amounts by Royall on the basis thereof
shall not prevent a shareholder from challenging such indemnification by
appropriate legal proceedings on the grounds that the person indemnified was
liable to Royall or its security holders by reason of willful misfeasance, bad
faith, negligence or reckless disregard of the duties involved in the conduct of
his office. The foregoing rights and indemnification shall not be exclusive of
any other rights to which the officers and directors may be entitled according
to law.
Removal of Directors
A Texas corporation may provide in its Articles of Incorporation or
Bylaws, and Royall's Bylaws do provide, that a director can be removed with or
without cause by a vote of the holders of not less than a majority of the shares
entitled to vote. A majority of shareholders of a Delaware corporation may
remove a director with or without cause, unless the directors are classified and
elected for staggered terms, in which case, directors may be removed only for
cause. Compass' Certificate provides for a classified board, and any such
removal must be for cause after a supermajority vote (80%) of the shareholders.
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Inspection of Books and Records
Under Texas law, any person who has been a shareholder of record for at
least six (6) months preceding his demand, or who is the holder of at least five
percent (5%) of all of the outstanding shares of a corporation, is entitled to
examine a corporation's relevant books and records for any proper purpose. Under
Delaware law, any shareholder has such a right.
Antitakeover Provisions
Delaware has enacted antitakeover legislation. Compass has opted out of
such provisions as provided thereby. Certain provisions of Compass' charter and
Bylaws limiting a takeover without the support of its Board of Directors are
described in "Comparison of Rights of Shareholders of Royall and Compass--
Charter and Bylaw Provisions Affecting Compass Stock". Texas has not enacted
similar legislation.
Although certain of the specific differences between the voting and
other rights of Royall shareholders and Compass shareholders are discussed
above, the foregoing summary is not intended to be a complete statement of the
comparative rights of such shareholders under Texas and Delaware law, or the
rights of such persons under the respective charters and Bylaws of Compass and
Royall. Nor is the identification of certain specific differences meant to
indicate that other differences do not exist. The foregoing summary is qualified
in its entirety by reference to the particular requirements of the TBCA and the
GCL, and the specific provisions of Compass' Certificate and Bylaws, and
Royall's Articles of Incorporation, as amended, and Bylaws.
RESALE OF COMPASS STOCK
The Compass Common Stock to be issued to holders of Royall Common Stock
upon consummation of the Merger will be freely transferable under the Securities
Act, except for shares issued to any person who may be an "affiliate" of Royall
within the meaning of Rule 145 under the Securities Act. The directors and
executive officers of Royall, the beneficial owners of 10% or more of Royall
Common Stock and certain of their related interests may be deemed to be
affiliates of Royall. Such affiliates are not permitted to transfer any Compass
Common Stock except in compliance with the Securities Act and the rules and
regulations thereunder. Such affiliates have delivered to Compass a written
agreement in substantially the form of Exhibit A to the Merger Agreement
providing that each such affiliate will not (i) sell, pledge, transfer or
otherwise dispose of any of such affiliate's Royall Common Stock within 30 days
prior to the Effective Time (ii) sell, pledge, transfer or otherwise dispose of
any shares of Compass Common Stock until the publication of financial results
covering at least 30 days of post-Merger combined operations of Royall and
Compass, except for loans to any such affiliates secured by a pledge of all or
part of such Compass Common Stock, provided the lender agrees to be bound by the
terms of such written agreement, and (iii) agrees not to transfer any Compass
Common Stock except in compliance with the applicable provisions of the
Securities Act and the Exchange Act and the respective rules and regulations
thereunder. See "Summary--Accounting Treatment"; "The Merger--Accounting
Treatment"; and Appendix I.
Pursuant to the Merger Agreement, holders of shares of Royall Common
Stock that will be entitled to receive more than fifty percent (50%) of the
aggregate Merger Consideration have represented to Compass their intention not
to sell or otherwise dispose of the shares of Compass Common Stock received in
the Merger. As a condition to consummation of the Merger, the representation
from Royall shareholders receiving at least 50% of the aggregate Merger
Consideration that they have no current plan or present intention to sell or
otherwise dispose of the shares of Compass Common Stock received pursuant to the
Merger must remain true as of the Effective Time. See "The Merger--Other Terms
and Conditions".
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INFORMATION ABOUT COMPASS
Incorporation of Certain Documents by Reference
Certain documents filed by and relating to Compass, including Compass'
Annual Report on Form 10-K for the year ended December 31, 1995 are incorporated
herein by reference. See "Available Information"; "Incorporation of Certain
Documents by Reference"; and "Recent Developments."
Interests of Certain Persons
No director or executive officer of Compass has any material direct or
indirect financial interest in Royall or the Merger, except as a director,
executive officer or shareholder of Compass or its subsidiaries.
INFORMATION ABOUT ROYALL
Services, Employees and Properties
Royall is a Texas bank holding company registered under the BHC Act,
and is regulated as such by the Federal Reserve. Royall's principal assets
consist of cash and all of the issued and outstanding common stock of the Bank.
The Bank is a national banking association organized in 1904. Since its
formation in 1979, Royall has not engaged in any substantive activities other
than those related to the Bank.
In July 1988, Bank entered into a Purchase of Assets and Liability
Assumption Agreement with the Federal Deposit Insurance Corporation as Receiver
for American Bank pursuant to which the Bank acquired substantially all of the
assets of American Bank. In July 1993, the Bank acquired Community Bank through
a consolidation. The deposits of the Bank are insured by the FDIC to the fullest
extent permitted by law.
The principal office of the Bank is located in downtown Palestine,
Texas. The Bank has a full service branch located on South Loop 256. The Bank
has a second full service branch located in Lufkin, Texas. There are attached
drive-through facilities at each of the downtown, South Loop and Lufkin
facilities. The Bank provides a broad range of products and services to its
customers, most of whom are located in Angelina and Anderson Counties, Texas.
Each full service location offers all of the Bank's services which include
checking accounts, savings accounts, certificates of deposit, individual
retirement accounts, annuities, and personal and commercial loans.
On January 31, 1996, the Bank had 58 full-time employees, 21 of whom
were officers, and 8 part-time employees. On January 31, 1996, the Bank had 10
directors and 4 advisory directors. Outside directors are compensated for their
services.
See "Information About Royall--Management and Principal Shareholders";
"Information About Royall--Committees and Meetings of the Board of Directors";
and "Information About Royall--Executive Compensation".
Competition
The banking business is highly competitive. There are numerous other
banking facilities located within the Bank's primary service areas and such
banking facilities compete directly with the Bank with regard to the full range
of commercial banking services. To a certain extent, the Bank also competes for
deposits and loans with branches of savings and loan associations located in and
around the Bank's primary service areas and for loans with credit unions and
finance companies located in or near the Bank's primary service areas.
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The Bank also faces competition from a wide variety of depository
institutions from other geographical areas which compete for deposits, loans and
bank-related services. As deregulation of depository institutions and financial
services continues, competition from nonbank financial intermediaries such as
savings and loan associations, credit unions, mortgage companies, insurance
companies and other financial institutions may be expected to intensify. The
Bank and similar institutions have also experienced significant competition for
deposits from money market mutual funds and other money center banks' offerings
of high yielding deposit accounts. Some of the institutions with which the Bank
competes have capital and resources much larger than those of the Bank, and some
are not subject to the same regulatory restrictions.
Legal Proceedings
In the normal course of their businesses, Royall and the Bank from time
to time are involved in legal proceedings. Other than such proceedings
incidental to their businesses, Royall's management is not aware of any pending
or threatened legal proceedings which, upon resolution, would have a material
adverse effect upon Royall's financial condition or results of operations. The
continued absence of such proceedings is a condition to Compass' obligation to
consummate the Merger. See "The Merger--Other Terms and Conditions".
Market Price and Dividends
There is no active public trading market for the Royall Common Stock.
As of May __, 1996, Royall Common Stock was held by 47 holders of record. While
Royall paid no dividend in 1993, dividends of $399,990, $399,992 and $249,958
were paid in 1995, 1994 and 1992, respectively. See "Market Prices"; "Comparison
of Rights of Shareholders of Royall and Compass Dividends"; Information About
Royall--Regulatory Commitments"; and "Information About Royall--Management and
Principal Shareholders".
Beneficial Ownership of Royall Common Stock by Royall Management and
Principal Shareholders
The following table shows as of January 31, 1996 the number of shares
of Royall Common Stock, beneficially owned by each director and executive
officer of Royall, each person known by Royall to be the beneficial owner of
more than 5% of the outstanding shares of Royall Common Stock, and information
for all Royall directors and executive officers as a group. The table also sets
forth the name and address for each person known by Royall to be the beneficial
owner of more than 5% of the outstanding shares of Royall Common Stock.
-43-
<PAGE>
<TABLE>
<CAPTION>
Names of Directors and Number of Shares
Executive Officers and of Stock Percent of Total
Names and Addresses of 5% Beneficially Outstanding
Shareholders Owned(1) Shares
- -------------------------- ---------------- ----------------
<S> <C> <C>
David E. Foster 10 *
Frank George 10 *
Bill C. Green 10 *
W. Barry James 20 *
C.L. Kolstad, III 10 *
P. O. Box 1368
Palestine, Texas 75802
John W. McDonough 304.5 7.61%
7214 Royal Lane
Dallas, Texas 75230
John G. McDonough 432 10.80
8411 Preston Rd. #655-LB23
Dallas, Texas 75225
Robert E. McKelvey 10 *
Mrs. Helen G. Moran 485.67 12.17
834 Fifth Avenue
New York, New York 10021
John P. Moran 20 *
Frances Royall Sidford(2) 200.66 5.02
P. O. Box 4243
Park City, UT 84060
John R. Royall(3) 677 16.93
2600 Republic Tower II
325 N. St. Paul St.
Dallas, Texas 75201
Rebecca Royall(4) 216.66 5.24
5313 Livingston
Dallas, Texas 75209
Tucker Boyd Royall(5)
P. O. Box 202 226.66 5.67
Palestine, Texas 75802
Ann Fish Welty 13 *
T.A. Welty, III 14 *
T.A. Welty, III and 600 15.00
Ann Fish Welty
P. O. Box 925
Palestine, Texas 75802
T.A. Welty, IV 87.75 2.19
1013 Swanson Drive
Palestine, Texas 75801
Royall Directors and 2434.91 60.87%
Executive Officers(14)
as a Group
</TABLE>
-44-
<PAGE>
- -------------------------------
(1) As of January 31, 1996, there were 3,999-11/12ths shares of Royall
Common Stock outstanding.
(2) Includes 38 shares held by Frances R. Sidford Trust U/W Frances K.
Royall, and 35 shares held by Frances Royall Trust U/W Tucker K.
Royall.
(3) Includes 114 shares held by John R. Royall Trust U/W Frances K. Royall,
104 shares held by John R. Royall Trust U/W Fannie Mae Royall, 102
shares held by John R. Royall Trust U/W N.R. Royall, Jr., and 58 shares
held by N.R. Royall, III Trust U/W N.R. Royall, Jr., Mr. Royall is the
Trustee of each such Trust.
(4) Includes 54 shares held by Rebecca Royall Trust U/W Frances K. Royall
and 35 shares held by Rebecca Royall Trust U/W Tucker K. Royall.
(5) Includes 54 shares held by Tucker B. Royall Trust U/W Frances K.
Royall, 35 shares held by Tucker B. Royall Trust U/W Tucker W. Royall
and 10 shares held with Deborah S. Royall as joint tenants with right
of survivorship.
- -------------------------------
The persons listed above will receive the same Merger Consideration
described in "The Merger--General" as the other Royall shareholders for each
share of Royall Common Stock held at the Effective Time.
The directors and officers of Royall and the Bank control, with the
power to vote, an aggregate of 2,434.91 shares of Royall Common Stock,
representing approximately 60.87% of the total shares of Royall Common Stock
issued and outstanding. See "Introduction"; "Summary--Shareholder Votes
Required"; and "The Merger--General".
Officers, directors and certain shareholders of Royall and the Bank
owning 2,932.07 shares of Royall Common Stock, comprising approximately 73.3% of
the total shares of Royall Common Stock issued and outstanding as of the Record
Date, have agreed, pursuant to the Proxy, to vote their shares in favor of the
Merger. As a result, because such officers, directors and shareholders have the
power to vote over two-thirds of the shares of Royall Common Stock issued and
outstanding and entitled to vote at the Meeting, the effect of their agreement
to vote in favor of the Merger is to assure approval of the Merger by the Royall
shareholders, subject to the termination rights contained in the Merger
Agreement.
-45-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ROYALL BANKSHARES, INC.
The following discussion provides certain information regarding the
financial condition and results of operations of Royall. This discussion should
be read in conjunction with Royall's Financial Statements and Notes to Financial
Statements presented elsewhere in this Proxy Statement/Prospectus. See "Index to
Royall Financial Statements".
Results of Operations
General
The earnings of Royall depend primarily on Royall's net interest income
(i.e., the difference between the income earned on Royall's income and
investments and the interest paid on its deposits and other borrowed funds).
Among the factors affecting net interest income are the type, volume and quality
of the Bank's assets, the type and volume of its deposits and other borrowed
funds, and the relative sensitivity of its interest-earning assets and its
interest-bearing liabilities to changes in market interest rates.
Royall's income is also affected by fees it receives from other banking
services, by its provision for loan losses and by the level of its operating
expenses. All aspects of Royall's operations are affected by general market,
economic and competitive conditions.
Net income for the three month period ending March 31, 1996 was
$401,000 compared with $361,000 for the same period in 1995, a $40,000 increase.
Royall reported net income of $1,004,000 for the year ended December 31, 1995, a
decrease from net income of $1,078,000 for the year ended December 31, 1994.
Pretax income was $1,849,000 for the year ended December 31, 1995, a $223,000
increase from the $1,627,000 earned during the year ended December 31, 1994.
Royall had net income of $1,593,000 for the year ended December 31, 1993, and
$835,000 for the year ended December 31, 1992. Changes occurring in the major
components of the Royall's income statement for such periods are discussed
below.
Net Interest Income
Net interest income is the primary source of income for Royall and
represents the amount by which interest and fees generated by earning assets
exceed the cost of funds, primarily interest paid to Royall's depositors on
interest-bearing accounts. Net interest income for the three month period ending
March 31, 1996 was $1,336,000 compared to $1,247,000 for the same period in
1995, an $89,000 increase.
Net interest income was $5,136,000 for the year ended December 31,
1995, an 8.1% increase from net interest income of $4,750,000 for the year ended
December 31, 1994. Average rates earned on interest bearing assets increased
from 6.96% as of December 31, 1994 to 7.97% as of December 31, 1995. Average
loans, net of unearned discount, of $46.6 million for the year ended December
31, 1995 increased 10% over average loans of $41.9 million for the same period
in 1994. Average deposits for the year ended December 31, 1995 were $89.1
million, a decrease of 2.5% of average deposits of $91.4 million for the same
period in 1994.
Net interest income was $4,750,000 for the year ended December 31, 1994
compared to $3,784,000, an increase of $966,000 or 26%. Average rates earned on
interest bearing assets increased from 6.85% as of December 31, 1993 to 6.96% as
of December 31, 1994. Average loans, net of unearned discount, of $42,432,000 as
of December 31, 1994 increased by $584,000 over December 31, 1993 loans of
$41,848,000. Average deposits for the year ended December 31, 1994 were $91.4
million, a 4% decrease from deposits as of December 31, 1993 of $95.1 million.
-46-
<PAGE>
For the year ended December 31, 1993, net interest income increased
$1,163,000 or 31% over the year ended December 31, 1992. Net interest income
increased $160,000 in 1992 or 6.1% over 1991 net interest income of $2,437,000.
The increase of $1,163,000 in 1993 was due primarily to the acquisition of the
Community State Bank, Lufkin, Texas (herein "Community Bank") in July 1993.
The following table sets forth for the periods indicated an analysis of
net interest income by each major category of interest-earning assets and
interest-bearing liabilities. The rates earned and paid on each major type of
asset and liability account are set forth beside the average level in the
account for the period, and the average yields on all interest-earning assets
and the average rate paid on all interest-bearing liabilities are also
summarized.
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
1996 1995
---------------------------------- ----------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Inc/Exp Rate Balance Inc/Exp Rate
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1) $ 51,977 $1,283 9.93% $ 43,484 $1,036 9.66%
Securities held to maturity -- -- 43,767 634 5.87%
Securities available for sale 38,594 567 5.91% -- --
Federal funds sold 4,576 63 5.54% 2,841 37 6.05%
--------- ---------- -------- --------- ---------- --------
Total 95,147 1,913 8.09% 89,732 1,707 7.72%
Non-interest earning assets:
Cash and due from banks 5,671 5,148
Other assets 5,552 5,762
Allowance for possible loan losses 358 454
--------- ---------
Total $106,728 $101,096
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
NOW, money market and savings $ 38,448 210 2.20% $ 40,553 187 1.87%
Certificates of deposit 28,152 312 4.46% 24,542 216 3.57%
Other borrowings 3,199 53 6.66% 3,348 55 6.66%
--------- ---------- -------- --------- ---------- --------
Total 69,799 575 3.31% 68,443 458 2.71%
Noninterest bearing demand deposits 25,239 22,249
Other liabilities 888 633
--------- ---------
Total Liabilities 95,926 91,325
Stockholders' equity 10,802 9,771
--------- ---------
Total $ 106,728 $ 101,096
========= ---------- ========= ----------
Net interest income $ 1,338 $ 1,249
========== -------- ========== --------
Net yield on interest earning assets 5.66% 5.65%
======== ========
</TABLE>
(1) Includes non-accrual loans. See notes to Consolidated Financial Statements
of Royall.
-47-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended December 31
1995 1994 1993
----------------------------- ---------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $ 46,650 $ 4,656 9.98% $ 41,971 $ 3,815 9.09% $ 31,747 $ 2,830 8.91%
Securities held to maturity 41,841 2,451 5.86% 48,034 2,553 5.31% 41,333 2,326 5.63%
Securities available for sale -- -- -- -- -- -- -- -- --
Federal funds sold 2,929 183 6.25% 3,896 168 4.31% 4,352 150 3.45%
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
Total 91,420 7,290 7.97% 93,901 6,536 6.96% 77,432 5,306 6.85%
Non-interest earning assets:
Cash and due from banks 5,544 5,627 6,175
Other assets 5,838 7,104 3,888
Allowance for possible loan losses 442 461 385
--------- --------- ---------
Total $ 103,244 $ 107,093 $ 87,880
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
NOW, money market and savings $ 39,039 800 2.05% $ 42,289 795 1.88% $ 35,102 651 1.85%
Certificates of deposit 26,881 1,137 4.23% 26,413 805 3.05% 25,370 784 3.09%
Other borrowings 3,293 217 6.59% 3,253 186 5.72% 1,754 88 5.02%
--------- ---------- -------- --------- ---------- -------- --------- ---------- -------
Total 69,213 2,154 3.11% 71,955 1,786 2.48% 62,226 1,523 2.45%
Noninterest bearing demand deposits 23,180 22,679 16,408
Other liabilities 622 2,354 592
--------- --------- ---------
Total Liabilities 93,015 96,988 79,226
Stockholders' equity 10,229 10,105 8,654
--------- --------- ---------
Total $ 103,244 $ 107,093 $ 87,880
========= ---------- ========= ---------- ========= ----------
Net interest income $ 5,136 $ 4,750 $ 3,783
========== -------- ========== -------- ========== --------
Net yield on interest earning assets 5.62% 5.06% 4.89%
======== ======== ========
</TABLE>
(1) Includes non-accrual loans. See notes to Consolidated Financial Statements
of Royall.
Changes in interest income and interest expense can result from
variances in both volume and rate. Royall has an asset and liability management
strategy designed to provide a proper balance between rate sensitive assets and
rate sensitive liabilities to attempt to maximize interest margins, and to
provide adequate liquidity for anticipated needs.
-48-
<PAGE>
The following table sets forth for the periods indicated a summary of
the changes in interest earned and interest paid resulting from changes in
volume and rate.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months Ended Year Ended Year Ended
March 31, 1996 December 31, 1995 December 31, 1994
--------------------------- --------------------------- --------------------------
Change Change Change
1996 Attributed to 1995 Attributed to 1994 Attributed to
to ---------------------------- to --------------------------- to --------------------------
1995 Volume Rate Mix Volume Rate Mix Volume Rate Mix
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 247 $ 210 $ 37 $ - $ 841 $ 425 $ 374 $ 42 $ 985 $ 910 $ 57 $ 18
Securities (67) (75) 10 (2) (102) (329) 264 (37) 227 378 (130) (21)
Fed funds sold 26 30 (3) (1) 5 (42) 76 (19) 18 (15) 37 (4)
----- ----- ---- ----- ----- ----- ----- ---- ------ ------ ---- ----
Increase (decrease) in
interest income $ 206 $ 165 $ 44 $ (3) $ 754 $ 54 $ 714 $ 14 $1,230 $1,273 $ 36 $ (7)
===== ===== ==== ===== ===== ===== ===== ==== ====== ====== ==== ====
Interest expense:
Savings and transaction
accounts $ 23 $ (10) $ 34 $ (1) $ 5 $ (61) $ 72 $ (6) $ 144 $ 132 $ 10 $ 2
Certificates of deposit 96 32 56 8 332 14 312 6 21 32 (10) (1)
Other borrowings (2) (2) - - 31 2 28 1 98 75 12 11
----- ----- ---- ----- ----- ----- ----- ---- ------ ------ ---- ----
Increase (decrease) in
interest expense $ 117 $ 20 $ 90 $ 7 $ 368 $ (45) $ 412 $ 1 $ 263 $ 239 $ 12 $ 12
===== ===== ==== ===== ===== ===== ===== ==== ====== ====== ==== ====
</TABLE>
-49-
<PAGE>
Provision for Loan Losses
Royall National Bank allowance for loan losses is established through
charges to operating income in the form of the provision for loan losses. Actual
loan losses or recoveries of loan losses are charged or credited directly to the
allowance for loan losses.
A $20,000 provision for loan losses was recorded for the period ending
March 31, 1996. No such provision was made in 1995. Royall National Bank
recorded no provision for loan losses for the periods ended December 31, 1995
and December 31, 1994. Management determined that no provision was necessary in
1995 and 1994 and that the allowance for loan losses was adequate. The allowance
for loan losses expressed as a percentage of outstanding loans net of unearned
interest was 0.74% and 1.03% as of December 31, 1995 and December 31, 1994
respectively. This decrease in percentage from 1994 to 1995 is the result of
improved credit quality of the loan portfolio as well as current economic
conditions and increased volume of the loan portfolio.
Non-accrual loans increased by $146,551 for the period ending March 31,
1996. This increase was primarily due to a delay in foreclosure of a real estate
loan and a consumer bankruptcy, both of which loans are well collateralized. For
the years ended 1995, 1994, 1993, total non-accrual, past due greater than 90
days and restructured loans remained fairly consistent with a $23,811 decrease
from 1994 to 1995.
Non-interest Income
Non-interest income, which includes, among other things, service
charges and fees, increased 8.6% from $372,000 for the three month period ended
March 31, 1995 to $407,000 for the three month period ended March 31, 1994.
Non-interest income increased 6.5% from $1,530,000 for the year ended
December 31, 1994 to $1,629,000 for the year ended December 31, 1995. The
increase was attributable primarily to an increase in transaction account
service charges.
Non-interest income increased 35% from $1,132,000 to $1,530,000 for the
years ended December 31, 1993 and 1994, respectively. An increase of $352,000 in
service charges on deposit accounts made up the majority of this increase.
Non-interest income increased $331,000, or 41.3%, from $801,000 for the
year ended December 31, 1992 to $1,132,000 for the year ended December 31, 1993.
The increase was primarily due to the merger with Community Bank.
Operating Expenses
Non-interest expenses include expenses which Royall incurs in the
normal course of operations such as employee compensation and benefits,
occupancy expense, data processing charges, FDIC insurance premiums,
communication expense, professional fees, advertising and supplies and
depreciation and amortization of furniture and equipment. Non-interest expense
for the three month period ending March 31, 1995 was $1,088,000 compared to
$1,096,000 for the same period in 1996, an increase of less than 1%. These
expenses increased 5.6% from $4,653,000 for the year ended December 31, 1994 to
$4,916,000 for the twelve months ended December 31, 1995. The increase in other
operating expenses is mainly attributable to an increase of $300,000 in merger
expenses.
Operating expenses for the year 1994 increased $1,014,000 or 27.8% to
$4,653,000 from $3,639,000 for the year ended 1993. This increase was primarily
a result of the merger with Community Bank.
Operating expenses for the year ending December 31, 1993, increased by
$1,085,000, or 42.4%, from the year ended December 31, 1992, primarily as a
result of the merger with Community Bank in July, 1993.
-50-
<PAGE>
Federal Income Taxes
In 1993, Royall adopted Statement of Financial Accounting Standards No
109, "Accounting for Income Taxes" (FAS 109). As permitted under the new rules,
prior years' financial statements have not been restated. The cumulative effects
of adopting FAS 109 as of January 1, 1993 was an increase in income of $797,996.
The provision for income taxes for the three month period ending March
31, 1996 was $226,702 compared to a provision of $170,250 for the same period in
1995.
Royall's provision for income taxes was $845,058 and $548,800 for the
years ended December 31, 1995 and 1994, respectively. As of December 31, 1995,
Royall has no net operating loss carryforwards nor investment and minimum tax
credit carryovers for federal income tax purposes. Royall has a deferred tax
liability of $366,610 at December 31, 1995.
Royall's provision for federal income taxes was $455,874 and $8,060 for
1993 and 1992, respectively. Federal income taxes for 1993 consisted of $29,305
in current federal income taxes and $426,569 in deferred federal income taxes.
Current taxes for 1992 result from the alternative minimum tax.
Capital Resources, Liquidity and Financial Condition
Capital Resources
The OCC has adopted risk-based and leverage capital measures to assist
in the assessment of the capital adequacy of the banks it regulates. The
principal objectives of the risk-based measures are to (i) make regulatory
capital requirements more sensitive to differences in risk profiles among
financial institutions; (ii) factor off-balance sheet exposures into the
assessment of capital adequacy; (iii) minimize disincentives to holding liquid,
low-risk assets; and (iv) achieve greater consistency in the evaluation of the
capital adequacy of financial institutions.
The risk-based capital guidelines include both a definition of capital
and a framework for calculating risk weighted assets by assigning assets and
off-balance sheet items to broad risk categories. A financial institution's
risk-based capital ratio is calculated by dividing its qualifying capital (the
numerator of the ratio) by its risk weighted assets (the denominator).
The risk-based capital ratio focuses principally on broad categories of
credit risk. The risk-based ratio does not, however, incorporate other factors
that can affect a bank's financial condition. These factors include overall
interest rate exposure, liquidity, funding and market risks, the quality and
level of earnings, investment or loan portfolio concentrations, the quality of
loans and investments, the effectiveness of loan and investment policies, and
management's ability to monitor and control financial and operating risks.
The Bank is a national bank and as such its qualifying total capital
consists of two types of capital components "core capital elements" (comprising
Tier 1 capital) and "supplementary capital elements" (comprising Tier 2
capital). Certain assets are deducted from a financial institution's capital for
the purpose of calculating the risk-based capital ratio.
Assets and credit equivalent amounts of off-balance sheet items are
assigned to one of four risk categories, according to certain criteria. The
aggregate dollar value of the amount in each category is then multiplied by the
risk weight associated with that category. The resulting weighted values from
each of the risk categories are added together, and this sum is the financial
institution's total risk weighted assets that comprise the denominator of the
risk-based capital ratio. Assets deducted from a bank's capital in determining
the numerator of the risk-based capital ratio are not included as part of the
financial institution's risk weighted assets.
-51-
<PAGE>
Risk weights for off-balance sheet items are determined by a two-step
process. First, the "credit equivalent amount" of off-balance sheet items is
determined, in most cases by multiplying the off-balance sheet items by a credit
conversion factor. Second, in most cases, the credit equivalent amount is
assigned to the appropriate risk category according to designated criteria.
National Banks are required to maintain a minimum risk-based capital
ratio of total capital (after deductions) to risk weighted assets of 8%. In
general, 50% of this ratio must consist of Tier I capital. Certain restrictions
and limitations also apply regarding the calculation of Tier 1 capital. Tier 2
capital elements that are not used as part of Tier I capital generally will
qualify for inclusion in a financial institution's capital base up to a maximum
of 100% of the financial institution's Tier 1 capital. As of March 31, 1996, the
Bank's Tier 1 risk-based capital ratio was 16.4%.
In addition, the OCC has promulgated capital leverage guidelines
designed to supplement the risk-based capital guidelines. The principal
objective of the leverage ratio is to address the extent to which a financial
institution could leverage its equity capital base. The OCC requires national
banks to meet a minimum leverage capital requirement of Tier 1 capital to total
assets of not less than 3% for a bank that is not anticipating or experiencing
significant growth and is highly rated (i.e., a composite rating of 1 on a scale
of 1 to 5). Banks that the OCC determines are anticipating or experiencing
significant growth or that are not highly rated must meet a minimum leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The Bank's leverage ratio was 8.48% as of March 31, 1996 and 8.11% as
of December 31, 1995.
Liquidity
Royall's asset and liability management policy is intended to maintain
adequate liquidity and thereby enhance its ability to raise funds to support
asset growth, meet deposit withdrawals and lending needs, maintain reserve
requirements, and otherwise sustain operations. Royall accomplishes this through
management of the maturities of its interest earning assets and interest-bearing
liabilities. Liquidity is monitored daily and overall interest rate risk is
assessed through reports showing both sensitivity ratios and existing dollar
"gap" data. Royall believes is present position to be adequate to meet its
current and foreseeable liquidity needs.
The liquidity of Royall is maintained in the form of readily marketable
securities, demand deposits with commercial banks, vault cash and federal funds
sold. While the minimum liquidity requirement for banks is determined by federal
bank regulatory agencies as a percentage of deposit liabilities, Royall's
management monitors liquidity requirements as warranted by interest rate trends,
changes in the economy and the scheduled maturity and interest rate sensitivity
of the investment and loan portfolio, deposits and anticipated loan fundings. In
addition to the liquidity provided by the foregoing, Royall has correspondent
relationships with other institutions with available unsecured lines of credit
to purchase overnight funds totalling $8,000,000 should additional liquidity be
needed. These lines are subject to restrictions such as the financial strength
of Royall and the lender's ability to facilitate the credit.
On December 31, 1993, Royall adopted the provisions of FAS 115. The
opening balance of shareholders' equity was increased by $464,745 to reflect the
net unrealized holding gains, net of tax, on securities classified as available
for sale which were previously carried at amortized cost. As of March 31, 1996,
Royall's available-for-sale portfolio account totalled $37,040,169 out of a
total security portfolio of $37,622,869.
Average non-interest bearing demand deposits were $25,239,000 for the
period ending March 31, 1996 compared to $22,249,00 as of March 31, 1995, an
increase of $2,990,000. Average non-interest bearing demand deposits were
$23,179,000 as of December 31, 1995, an increase of $499,000 over the average
balance as of December 31, 1994 of $22,680,000. Average interest bearing
deposits were $65,922,000 as of December 31, 1995 compared to $68,702,000 as of
December 31, 1994 and $71,541,000 as of December 31, 1993.
-52-
<PAGE>
Net cash generated by operating activities was $2,139,169, $1,949,362,
$1,924,994 and $1,483,684 as of the end of 1995, 1994, 1993 and 1992,
respectively. Proceeds from principal paydowns and maturities of investment
securities were $10,201,479, $12,032,382, $23,209,763 and $23,902,209 for the
same periods. Sales of loans were immaterial for 1995 through 1992. Royall
utilized these funds to originate loans and purchase investment securities.
Loans originated, net of principal collected, were $7,435,181 and $2,051,798 in
1995 and 1994, respectively.
Funds utilized for the purchase of bank premises and equipment were
$260,822, $728,721 and $238,914 during 1995, 1994 and 1993. On July 1, 1993
Royall acquired Community Bank for $4,800,000.
Interest Rate Sensitivity
Interest rate sensitivity refers to the relationship between market
interest rates and net interest income resulting from the repricing of certain
assets and liabilities. Interest rate risk arises when an earning asset matures
or when its rate of interest changes in a time frame different from that of the
supporting interest-bearing liability. One way to reduce the risk of significant
adverse effects on net interest income of market rate fluctuations is to
minimize the difference between rate sensitive assets and liabilities, referred
to as "gap," by maintaining a similar interest rate sensitivity position of the
assets and liabilities within a particular time frame.
Maintaining an equilibrium between rate sensitive assets and
liabilities will reduce some of the risk associated with adverse changes in
market rates, but it will not guarantee a stable net interest spread because
yields and rates may change simultaneously and by different amounts. These
changes in market spreads could materially affect the overall net interest
spread even if assets and liabilities were perfectly matched. If more assets
than liabilities reprice within a given period, an asset sensitive position or
"positive gap" is created. During a positive gap, a decline in market rates will
have a negative impact on net reprice in a given period, a liability sensitive
position or "negative gap" is created (rate sensitivity ratio is less than 100%)
and a decline in interest rates will have a positive impact on net interest
income.
-53-
<PAGE>
The following table shows interest sensitivity gaps for these different
intervals as of March 31, 1996.
Estimated Period of Potential Repricing
(Dollars in Thousands)
<TABLE>
<CAPTION>
Over Over
One Day to Three to Six Months
Three Six to One Over One
Floating Months Months Year Year Total
--------- ------ ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets ("ISA")
Loans
Loans (Fixed Rate) -- $ 2,988 $ 1,272 $ 3,074 $25,904 $33,238
Loans (Floating Rate) $ 8,658 2,970 2,970 5,940 -- 20,538
Securities
Securities (Fixed Rate) -- 1,246 3,108 3,642 29,341 37,337
Securities (Floating Rate) -- 653 -- -- -- 653
Fed Funds Sold 4,840 -- -- -- -- 4,840
------- -------- -------- -------- ------- -------
TOTAL Interest Sensitive Assets $13,498 $ 7,857 $ 7,350 $ 12,656 $55,245 $96,606
======= ======== ======== ======== ======= =======
Interest Sensitive Liabilities ("ISL")
Interest Bearing Deposits
NOW Accounts $ -- $ 20,623 $ -- $ -- $ -- $20,623
Savings Account -- 7,998 -- -- -- 7,998
Money Market -- 10,418 -- -- -- 10,418
Certificates of Deposit -- 10,723 9,643 5,356 2,800 28,522
------- -------- -------- -------- ------- -------
Total Deposits -- 49,762 9,643 5,356 2,800 67,561
Notes Payable -- 45 45 93 3,021 3,204
------- -------- -------- -------- ------- -------
TOTAL Interest Sensitive Liabilities -- $ 49,807 $ 9,688 $ 5,449 $ 5,821 $70,765
======= ======== ======== ======== ======= =======
PERIODIC GAP $13,498 $(41,950) $ (2,338) $ 7,207 $49,424 $25,841
CUMULATIVE GAP $13,498 $(28,452) $(30,790) $(23,583) $25,841
PERIODIC GAP TO TOTAL EARNINGS ASSETS 13.97% (43.42)% (2.42)% (7.46)% 51.16%
</TABLE>
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis. These prepayments may have significant
effects on Royall's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of
Royall's exposure to changes in interest rates.
-54-
<PAGE>
Investment Securities
Set forth is a distribution of Royall's investment securities by contractual
maturity dates at March 31, 1996 (mortgage-backed securities are classified
in the period of final maturity):
<TABLE>
<CAPTION>
(Dollars in Thousands)
-----------------------------------------------------------------------------------
Maturing
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- ----------------- ---------------- --------------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to -- -- -- -- -- -- -- -- --
maturity:
Securities available for
sale: (1)
U.S. Treasury $2,011 4.53% $10,552 5.09% -- -- -- -- $12,563
Government Agency 5,643 6.53 13,626 6.39 -- -- -- -- 19,269
Mortgage-backed 225 6.54 4,227 6.46 -- -- $ 689 6.56% 5,141
Municipal -- -- 67 4.55 -- -- -- -- 67
Certificates of Deposit 297 4.83 -- -- -- -- -- -- 297
------ ------ ------- ------ ------ ------ ------ ------ -------
Total Securities $8,176 5.61% $28,472 5.63% -- -- $ 689 6.56% $37,337
====== ====== ======= ====== ====== ====== ====== ====== =======
</TABLE>
(1) Yields are not presented on a tax-equivalent basis.
-55-
<PAGE>
Deposits
The daily average balances and average rates paid by category of deposit at
the dates shown below are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
As of March 31, 1996 As of December 31,
--------------------- ----------------------------------
1995 1994
---- ----
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 25,239 -- $ 25,501 -- $ 24,559 --
NOW accounts 20,632 2.09% 20,248 2.02% 18,956 1.39%
Money market 9,861 2.56 10,044 2.52 14,290 2.36
Savings 7,955 2.06 8,298 2.09 8,945 2.16
Time 28,152 4.43 27,738 4.51 24,419 3.22
-------- ------ -------- ------ -------- ------
TOTAL $ 91,839 2.50% $ 91,829 2.27% $ 91,169 1.73%
======== ====== ======== ====== ======== ======
</TABLE>
The scheduled maturities of certificates of deposit in denominations of
$100,000 or more at March 31, 1996 and December 31, 1995, including public
funds, are shown below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Due in three months or less $ 3,176 $ 2,910
Due in over three to six 1,965 2,162
months
Due in over six to twelve 814 739
months
Due in over twelve months -- --
---------------- ----------------
Total $ 5,955 $ 5,811
================ ================
</TABLE>
-56-
<PAGE>
Loans
The following table classifies Royall's loans according to type as of the
dates shown:
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31,
----------------------
March 31,
1996 1995 1994
---------- ------ ------
<S> <C> <C> <C>
Real estate development $ 507 $ 876 $ 787
Real estate one-to-four family residential 20,888 18,937 13,754
mortgages
Real estate commercial 7,793 7,784 7,836
Real estate other 1,039 1,040 1,542
---------- -------- ------
Total 30,227 28,637 23,919
Installment 16,986 17,040 12,004
Commercial 5,360 5,990 7,758
Other Loans 1,414 1,413 1,424
Less unearned discounts (1,380) (1,382) (766)
---------- --------- -------
Total $52,607 $51,698 $44,339
========== ========= =======
</TABLE>
Total loans net of unearned income and allowance for possible loan losses
increased 17% in 1995 from 1994 levels. At March 31, 1996, total loans exceeded
year-end 1995 levels by 2%.
Of fixed rate loans aggregating $33,238,000 as of March 31, 1996, loans
totalling $7,334,000 mature within one year, while loans totalling $15,641,000
mature within one to five years. Floating rate loans as of March 31, 1996
totalled $20,538,000. Commercial and real estate loans with a fixed rate and
maturing within one year at March 31, 1996 totalled $4,601,094 while those with
a fixed rate and maturing within one to five years totalled $2,923,000. Real
estate construction loans with a fixed rate and maturing within one year at
March 31, 1996, totalled $342,906 while there were no loans with a fixed rate
and maturing within one to five years.
Of fixed rate loans aggregating $30,848,000 as of December 31, 1995, loans
totalling $7,072,000 matured within one year, while loans totalling $14,475,000
matured within one to five years. Floating rate loans as of December 31, 1995
totalled $20,307,000. Commercial and real estate loans with a fixed rate and
maturing within one year at December 31, 1995 totalled $5,157,000 while those
with a fixed rate and maturing within one to five years totalled $3,150,000.
Real estate construction loans with a fixed rate and maturing within one year at
December 31, 1995 totalled $324,016 while those with a fixed rate and maturing
within one to five years totalled $462,721.
Allowance for Loan Losses and Risk Elements
The provision for loan losses represents a determination by Royall's
management of the amount necessary to be charged to operating income and
transferred to the allowance for loan losses to maintain a level which it
considers adequate in relation to the risk of future losses inherent in the loan
portfolio. It is Royall's policy to provide for exposure to losses of
specifically identified credits and a general allowance for the remainder of the
loan portfolio, and, while it is also Royall's policy to charge off in the
current period those loans in which a loss is deemed to exist, risks of future
losses also exist which cannot be quantified precisely or attributed to
particular loans or classes of loans.
-57-
<PAGE>
In assessing the adequacy of its allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of significant individual loans and of
the portfolio in the aggregate. This review takes into consideration the
judgments of the responsible lending officer, the senior credit officer, the
chief executive officer, the loan review officer and the Board of Directors, and
also those of bank regulatory agencies that review the loan portfolio as part of
their regular examinations of Royall and the Bank.
In evaluating the allowance for loan losses, management also considers
Royall's loan loss experience, the amount of past due and non-performing loans,
current and anticipated economic conditions, and other appropriate information.
The allowance for loan losses also reflects an analysis of the risks associated
with each class of loans.
The allowance for loan losses at March 31, 1996 was $363,533, compared to
$380,981 at December 31, 1995, and $456,558 at December 31, 1994. Although
management believes the allowance for loan losses to be adequate as of the date
presented, a small monthly provision was commenced during the first quarter of
1996 to maintain this adequacy.
<TABLE>
<CAPTION>
(Dollars in Thousands)
As of and for
the Three As of and for the Years
Transaction in allowance for Months Ended Ended
possible loan losses March 31, December 31,
- ---------------------------- ------------- -----------------------
1996 1995 1994
------------- --------- ----------
<S> <C> <C> <C>
Balance at Beginning of period $ 380,981 $ 456,558 $ 514,615
Charge-offs
- -----------
Commercial 1,584 25,174 10,244
Real estate-mortgage -- 1,808 11,325
Real estate-construction -- -- 2,067
Installment loans 34,629 82,684 56,230
Credit card and related plan 7,773 38,371 29,113
------------ --------- ----------
Total charge-offs 43,986 148,037 108,979
Recoveries
- ----------
Commercial 770 18,911 9,754
Real estate-mortgage 300 19,589 1,602
Real estate-construction -- -- 5,119
Installment loans 3,163 27,596 31,300
Credit card and related plan 2,305 6,364 3,147
------------ --------- ----------
Total recoveries 6,538 72,460 50,922
Net charge-offs (recoveries) 37,448 75,577 58,057
Provision charged to expense 20,000 -- --
Balance at end of period $ 363,533 $ 380,981 $ 456,558
============ ========= ==========
Net charge-offs (recoveries) as a
percentage of average loans
(annualized for 1996) 0.072% 0.161% 0.134%
</TABLE>
-58-
<PAGE>
Nonaccrual, Past Due and Restructured Loans
The following is an analysis of non-performing assets as of the dates shown:
<TABLE>
<CAPTION>
(Dollars in Thousands)
March 31, December 31,
1996 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 177,944 $ 31,393 $ 45,633
Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments 19,142 11,980 20,693
Troubled debt restructuring -- 3,604 4,462
------------ -------- --------
Total $ 197,086 $ 46,977 $ 70,788
Interest income included in net income for 2,514 409 1,807
period
Foregone interest on nonaccrual loans 4,329 3,251 4,436
</TABLE>
The accrual of interest on a loan is discontinued when, in the opinion of
management (based upon such criteria as default in payment, decline of cash
flow, bankruptcy and other financial conditions which could result in default),
the borrower's financial condition is such that the collection of interest is
doubtful. Management believes the risks in these loans to be significant as
there may be some portion of the principal which will become uncollectible. As
of March 31, 1996, loans totalling $177,944 or 0.3% of total net loans
outstanding, were on a non-accrual basis, therefore, no income was being
recognized.
Placing a loan on non-accrual status has a two-fold impact on net interest
income. First, it generally causes an immediate charge against earnings with
respect to that particular loan. Second, it eliminates future interest earnings
with respect to that particular loan. Interest on such loans is not recognized
until all of the principal is collected or until the loan is returned to a
performing status.
Non-accrual loans increased by $146,551 from $45,978 at March 31, 1995 to
$177,944 at March 31, 1996. The increase was primarily due to a real estate loan
in the amount of $108,832 involved with a divorce, and three commercial loans
for vehicles totalling $43,753 for one customer involved in a bankruptcy. The
real estate has an appraisal value of $118,000. The vehicles include a 1995
Lincoln automobile with NADA retail value of $27,900, a 1994 Chevrolet Van with
NADA retail value of $12,000, and a 4 Wheeler with an estimated value of $3,500
for a total collateralized value of $43,400. Non-accrual loans decreased by
$14,240 from $45,633 at December 31, 1994, to $31,393 at December 31, 1995. The
decrease was primarily due to payoff of real estate loan for $13,746.
The anticipated amounts of charge-offs by category during the next full year
of operations are as follows:
<TABLE>
<S> <C>
Commercial $ 25,000
Real estate-mortgage 2,000
Installment 82,000
Overdrafts 86,400
--------
$195,400
========
</TABLE>
-59-
<PAGE>
Return on Equity and Assets
The return on equity and return on assets for the periods shown below are as
follows:
<TABLE>
<CAPTION>
For the Three
Months Ended For the Years Ended
March 31, December 31,
-------------- ----------------------
1996 1995 1994
-------------- ---------- ---------
<S> <C> <C> <C>
Return on Average Assets 1.50% 0.95% 1.01%
Return on Average Equity 14.85% 9.75% 10.99%
Average Equity to Average Assets Ratio 10.12% 10.08% 9.41%
Dividend Payout Ratio -- 39.83% 37.11%
</TABLE>
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
Compass' Board of Directors appointed KPMG Peat Marwick LLP as independent
auditors for Compass for the year ending December 31, 1995. KPMG Peat Marwick
LLP has served as Compass' independent auditors continuously since 1971.
Royall's Board of Directors appointed Harrell, Rader, Bonner & Bolton, LLP as
independent auditors for Royall for the year ending December 31, 1995. Harrell,
Rader, Bonner & Bolton, LLP has served as Royall's independent auditors
continuously since 1985.
Compass and Royall have been advised by KPMG Peat Marwick LLP and Harrell,
Rader, Bonner & Bolton, LLP that neither KPMG Peat Marwick LLP nor Harrell,
Rader, Bonner & Bolton, LLP has any direct financial interest or any material
indirect financial interest in Compass, Royall or the Bank other than arising
from that firm's employment as auditor for Compass or Royall.
EXPERTS
The consolidated financial statements of Compass as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995
have been incorporated herein and in the Registration Statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements of Royall as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995,
have been included herein and in the Registration Statement in reliance upon the
report of Harrell, Rader, Bonner & Bolton, LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
-60-
<PAGE>
LEGAL OPINIONS
Jerry W. Powell, Esquire, General Counsel, Secretary and an employee of
Compass, has rendered an opinion concerning the validity of the securities being
offered pursuant to this Proxy Statement/Prospectus and certain other matters.
As of December 31, 1995, Mr. Powell was the beneficial owner of an aggregate of
approximately 51,183 shares of Compass Common Stock. Liddell, Sapp has passed
upon, among other things, certain federal income tax consequences of the Merger,
and the receipt by Compass of its opinion as to such federal income tax
consequences of the Merger is a condition to the Closing of the Merger.
Zeleskey, Cornelius, Hallmark, Roper & Hicks L.L.P. and Liddell, Sapp are also
expected to render legal opinions as to certain matters acceptable to Royall and
Compass, respectively.
INDEMNIFICATION
Compass' By-Laws contain provisions similar to those of Section 145 of the
GCL, which authorize Compass to indemnify its officers, directors, employees and
agents to the full extent permitted by law. See "Comparison of Rights of
Shareholders of Royall and Compass--Certain Differences Between the Corporation
Laws of Texas and Delaware and Corresponding Charter and By-Law Provisions--
Limitation of Liability and Indemnification".
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Compass, Compass
has been informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
OTHER MATTERS
Royall's Board of Directors does not know of any matters to be presented at
the Meeting other than those set forth above. If any other matters are properly
brought before the Meeting or any adjournment thereof, the enclosed proxy will
be voted in accordance with the recommendations of Royall's Board of Directors
unless "Authority Withheld" is indicated in the appropriate box on the proxy.
See "Introduction".
-61-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
of
ROYALL FINANCIAL CORPORATION
AND SUBSIDIARY
- --------------------------------------------------------------------------------
Page
----
1. Auditors' Reports regarding the December 31, 1995 and 1994
Consolidated Financial Statements F-3
2. Consolidated Balance Sheet as of December 31, 1995 and 1994 F-4
3. Consolidated Statements of Income or the Years Ended
December 31, 1995, 1994 and 1993 F-7
4. Consolidated Statements of changes in Stockholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993 F-9
5. Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995 F-11
6. Notes to Consolidated Financial Statements F-14
7. Supplemental Information - Individual Financial Statements
of Parent Company F-25
8. Consolidated Balance Sheet as of March 31, 1996 and 1995 (audited) F-31
9. Consolidated Balance Sheet for the Three Months Ended
March 31, 1996 and 1995 (unaudited) F-32
10. Consolidated Statements of Income for the Three Months Ended
March 31, 19996 and 1995 F-35
11. Consolidated Statement of Changes in Stockholders' Equity for
the Thee Months Ended March 31, 1996 and 1995 (unaudited) F-36
12. Consolidated Statement of Cash Flows fo the Three Months
Ended March 31, 1996 and 1995 (unaudited) F-37
13. Notes to Unaudited Financial Statements F-37
F-1
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
AND
EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1995
F-2
<PAGE>
[LETTERHEAD OF HARRELL, RADER, BONNER & BOLTON, L.L.P. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Royall Financial Corporation
We have audited the accompanying consolidated balance sheets of Royall
Financial Corporation and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
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 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 financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Royall
Financial Corporation and subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Harrell, Rader, Bonner & Bolton, LLP
Palestine, Texas
January 26, 1996
F-3
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
F-4
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------ -------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 7,176,452 $ 7,009,962
FEDERAL FUNDS SOLD 2,175,000 3,710,000
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government agencies - 23,548,863
U.S. Treasury notes - 16,777,948
State and municipal - 68,737
Federal Home Loan Bank stock 481,400 452,400
Federal Reserve Bank stock 43,500 43,500
Other investments 50,000 98,000
------------ ------------
Total investment securities held
to maturity (market value of
$574,900 in 1995 and $39,091,652
in 1994) 574,900 40,989,448
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Government agencies 24,642,007 -
U.S. Treasury notes 13,575,108 -
Interest bearing deposits with banks 495,000 2,672,000
State and municipal 67,627 -
------------ ------------
Total 38,779,742 2,672,000
Unrealized appreciation (depreciation) - net 242,801 (210,177)
------------ ------------
Total investment securities available
for sale 39,022,543 2,461,823
LOANS
Commercial 10,562,032 11,902,660
Installment 12,775,082 8,443,537
Real estate - construction 876,000 787,000
Real estate - mortgage loans 27,458,598 22,713,965
Credit card 1,353,922 1,163,784
Other 71,907 111,893
------------ ------------
53,097,541 45,122,839
Less:
Unearned discount 1,381,547 766,448
Allowance for loan losses 380,980 456,558
------------ ------------
Net loans 51,335,014 43,899,833
BANK PREMISES AND EQUIPMENT - net 3,296,126 3,296,949
ACCRUED INTEREST RECEIVABLE 898,035 962,553
GOODWILL - net 1,600,020 1,873,991
OTHER ASSETS 518,511 462,817
------------ ------------
TOTAL ASSETS $106,596,601 $104,667,376
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------ -------------
<S> <C> <C>
DEPOSITS
Demand - interest bearing $30,292,315 $33,246,544
Demand - non-interest bearing 25,499,486 24,556,036
Savings 8,297,068 8,944,919
Other time 27,737,349 24,418,739
----------- -----------
Total deposits 91,826,218 91,166,238
ADVANCES FROM FEDERAL HOME LOAN BANK 3,203,914 3,365,846
ACCRUED INTEREST AND OTHER LIABILITIES 450,223 132,396
DEFERRED FEDERAL INCOME TAX PAYABLE 366,610 156,486
----------- -----------
TOTAL LIABILITIES 95,846,965 94,820,966
STOCKHOLDERS' EQUITY
Common stock; par value $100; 1,000,000
shares authorized; 4,000 issued and
outstanding 400,000 400,000
Additional paid-in capital 2,393,804 2,393,804
Retained earnings 7,795,583 7,191,323
Unrealized appreciation (depreciation)
on investment securities - net of
deferred taxes 160,249 (138,717)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,749,636 9,846,410
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $106,596,601 $104,667,376
============ ============
</TABLE>
F-6
<PAGE>
Page 1 of 2
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,655,770 $3,815,373 $2,830,277
Interest on deposits with banks 99,028 196,993 129,172
Interest on investment securities:
Obligations of U.S. Government 2,330,139 2,353,527 2,194,167
State and political subdivisions 3,115 3,185 3,016
Other interest income 202,131 166,536 149,780
---------- ---------- ----------
Total interest income 7,290,183 6,535,614 5,306,412
INTEREST EXPENSE
Interest on deposits 1,936,866 1,599,221 1,443,076
Interest on long-term borrowing 217,386 186,344 79,421
---------- ---------- ----------
Total interest expense 2,154,252 1,785,565 1,522,497
NET INTEREST INCOME 5,135,931 4,750,049 3,783,915
Provision for loan losses - - 25,000
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,135,931 4,750,049 3,758,915
OTHER OPERATING INCOME
Service charges 1,329,780 1,261,565 909,976
Gain on sale of securities - - 17,468
Other operating income 299,593 268,248 204,076
---------- ---------- ----------
Total other operating income 1,629,373 1,529,813 1,131,520
OTHER OPERATING EXPENSES
Salaries and employment expenses 2,067,215 2,062,693 1,674,301
Occupancy expenses 338,911 293,716 257,068
Equipment expenses 234,114 205,500 86,444
Data processing expenses 185,727 273,466 279,805
Regulatory expenses 141,616 249,120 198,751
Other operating expenses 1,948,413 1,568,775 1,142,762
---------- ---------- ----------
Total other operating expenses 4,915,996 4,653,270 3,639,131
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 1,849,308 1,626,592 1,251,304
FEDERAL INCOME TAX EXPENSE 845,058 548,800 455,874
---------- ---------- ----------
</TABLE>
F-7
<PAGE>
Page 2 of 2
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 1,004,250 1,077,792 795,430
CUMULATIVE BENEFIT ON PRIOR YEARS OF
CHANGE IN METHOD OF ACCOUNTING FOR
DEFERRED TAX ASSETS - - 797,996
---------- ---------- ----------
NET INCOME $1,004,250 $1,077,792 $1,593,426
========== ========== ==========
EARNINGS PER SHARE $ 251.06 $ 269.45 $ 398.36
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
Page 1 of 2
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation
Common Paid-in Retained (Depreciation)
Stock Capital Earnings on Securities
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $400,000 $2,393,804 $4,920,097 $ -
Unrealized appreciation in
investment securities - - - 464,745
Add:
Net income for the year ended
December 31, 1993 - - 1,593,426 -
---------- ---------- ---------- -------------
BALANCE, DECEMBER 31, 1993 $400,000 $2,393,804 $6,513,523 $ 464,745
Reclassification of
investment securities - - - (669,170)
Amortization of unrealized
loss on invest-
ment securities - - - 65,708
Add:
Net income for the year ended
December 31, 1994 - - 1,077,792 -
Deduct:
Dividends - - 399,992 -
---------- ---------- ---------- -------------
</TABLE>
F-9
<PAGE>
Page 2 of 2
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation
Common Paid-in Retained (Depreciation)
Stock Capital Earnings on Securities
---------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 400,000 2,393,804 7,191,323 (138,717)
Reclassification of investment securities - - - 211,355
Amortization of unrealized loss on invest-
ment securities - - - 87,611
Add:
Net income for the year ended
December 31, 1995 - - 1,004,250 -
Deduct:
Dividends - - 399,990 -
---------- ------------ ---------- -------------
BALANCE, DECEMBER 31, 1995 $400,000 $2,393,804 $7,795,583 $ 160,249
========== ============ ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
Page 1 of 3
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING 1995 1994 1993
ACTIVITIES ------------- ------------- --------------
<S> <C> <C> <C>
Net Income $ 1,004,250 $ 1,077,792 $ 1,593,426
Adjustments to reconcile net
income to net cash provided
from operating activities
Provision for loan losses - - 25,000
Provision for losses on other - 13,157 13,577
real estate
Provision for depreciation 261,645 272,286 202,328
Amortization 167,097 160,139 87,357
Deferred income taxes 191,441 351,094 (353,208)
Amortization of investment
security discounts and premiums 215,578 335,285 412,344
Gain on sale of fixed assets - (10,532) -
Gain (loss) on sale of other real (7,573) (560) 933
estate owned
(Increase) decrease in
Other assets (75,614) 115,771 24,545
Interest receivable 64,518 (116,331) (9,386)
Increase (decrease) in
Accrued interest payable and other
liabilities 317,827 (248,739) (71,922)
----------- ----------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,139,169 1,949,362 1,924,994
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment
securities held to maturity 48,000 9,973,382 -
Proceeds from maturity of
investment securities available
for sale 10,153,479 2,058,000 23,209,763
Purchases of investment securities
held to maturity (29,000) (8,863,297) (151,600)
Purchases of investment securities
available for sale (6,081,250) - (19,237,523)
</TABLE>
F-11
<PAGE>
Page 2 of 3
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net (increase) decrease in
short-term investments 1,535,000 (160,000) 6,130,000
Net (increase) decrease in loans (7,435,181) (2,051,798) (2,745,335)
Premises remodeling and purchases
of equipment (260,822) (728,721) (238,914)
Purchases and improvements of
other real estate owned (57,576) (26,699) (106,682)
Sales of fixed assets - 11,844 -
Sales of other real estate owned 56,783 86,853 86,722
Cash acquired in acquisition of
Community State Bank - - 2,443,047
Acquisition of Community State Bank (170) (177,713) (5,045,184)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (2,070,737) 121,851 4,344,294
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from Federal Home Loan Bank 903,574 1,893,238 1,997,408
Repayments to Federal Home Loan Bank (1,065,506) (1,200,245) (355,414)
Net increase (decrease) in demand
deposits, NOW accounts, savings
accounts and certificates of deposit 659,980 (3,953,197) (3,047,128)
Cash dividends (399,990) (399,992) -
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 98,058 (3,660,196) (1,405,134)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 166,490 (1,588,983) 4,864,154
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 7,009,962 8,598,945 3,734,791
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,176,452 $ 7,009,962 $ 8,598,945
</TABLE>
F-12
<PAGE>
Page 3 of 3
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $2,106,567 $1,795,221 $1,561,041
Income taxes 692,000 274,813 41,420
DISCLOSURE OF ACCOUNTING POLICY
For purposes of the statements of cash flows, the Company considers cash on
hand and monies on deposit with other banks to be cash equivalents.
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Unrealized gain in marketable debt
securities $ 242,801
==========
Loans transferred to other real estate during
the year $ 32,515
==========
Proceeds from sale of other real estate financed
through loans $ -
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
Page 1 of 11
ROYALL FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation. The consolidated
-----------------------------------------------------
financial statements of Royall Financial Corporation (the Company) include the
accounts of the Royall National Bank (the Bank). Royall National Bank is a
wholly-owned subsidiary of Royall Financial Corporation. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Nature of operations. Royall National Bank provides a variety of banking
--------------------
services to individuals and businesses located primarily in the Anderson
County and Angelina County areas. Its primary deposit products are non-
interest bearing demand deposits and interest bearing demand and savings
deposits and certificates of deposit. Its primary lending products are
commercial business, real estate mortgage, installment and credit card loans.
Use of estimates. The preparation of financial statements in conformity with
----------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment securities. Investment securities are stated at cost adjusted for
---------------------
amortization of premiums and accretion of discounts, which are computed using
the constant yield method and recognized as adjustments to interest income.
In addition, securities classified as available for sale or trading are
adjusted to fair value in accordance with Statement of Financial Accounting
Standard (SFAS) #115. Gains or losses on disposition are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
Loans and allowance for loan losses. Loans are stated at the amount of unpaid
-----------------------------------
principal, reduced by unearned discount and an allowance for loan losses.
Unearned discount on installment loans is recognized as income over the terms
of the loans by the rule of seventy-eights method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. The allowance for loan losses is established
through a provision for loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of interest is
doubtful.
F-14
<PAGE>
Page 2 of 11
SIGNIFICANT ACCOUNTING POLICIES (continued)
Premises and equipment. Bank premises and equipment are carried at original
----------------------
cost less accumulated depreciation. Depreciation is computed using both the
straight-line method and the accelerated depreciation method over the
estimated useful life of the asset. Costs incurred for maintenance and
repairs are expensed currently.
Income tax. Provisions for deferred income taxes are made as a result of
----------
temporary differences between financial and taxable income. The principle
differences resulting in deferred taxes are differences in provision for loan
losses, depreciation expense and gain or loss on investment securities for
financial and taxable income.
Fair value of financial instruments. Statement of Financial Accounting
-----------------------------------
Standards No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instruments. Statements No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those
assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans are estimated using discounted cash
flow analysis, based on interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss experience and
risk characteristics. The carrying amount of accrued interest receivable
approximates its fair value.
F-15
<PAGE>
Page 3 of 11
SIGNIFICANT ACCOUNTING POLICIES (concluded)
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The carrying
amount of accrued interest payable approximates fair value.
Federal Home Loan Bank advances payable: The fair values of advances from
Federal Home Loan Bank are estimated using discounted cash flow analysis,
based on interest rates currently being offered for similar advances.
Trust fees. In accordance with established industry practice, income from
----------
trust fees is reported on the cash basis. Reporting of such fees on an
accrual basis would have no material effect on reported income.
INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate market
values as shown in the consolidated balance sheets of the Company are as
follows:
<TABLE>
<CAPTION>
Held-to-maturity:
- -----------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
Federal Home Loan Bank stock $ 481,400 $ - $ - $ 481,400
Federal Reserve Bank stock 43,500 - - 43,500
Other investments 50,000 - - 50,000
----------- ---------- ---------- -----------
$ 574,900 $ - $ - $ 574,900
=========== ========== =========== ===========
December 31, 1994:
U.S. Government agencies $23,548,863 $ - $ 929,206 $22,619,657
U.S. Treasury notes 16,777,948 - 967,047 15,810,901
State and municipal 68,737 - 1,543 67,194
Federal Home Loan Bank stock 452,400 - - 452,400
Federal Reserve Bank stock 43,500 - - 43,500
Other investments 98,000 - - 98,000
----------- ---------- ---------- -----------
$40,989,448 $ - $1,897,796 $39,091,652
=========== ========== ========== ===========
</TABLE>
F-16
<PAGE>
Page 4 of 11
INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
Available-for-sale:
- -------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Government agencies $24,642,007 $320,861 $ - $24,962,868
U.S. Treasury notes 13,575,108 - 78,733 13,496,375
Interest bearing deposits
with banks 495,000 - - 495,000
State and Municipal 67,627 673 - 68,300
----------- ---------- ---------- -----------
$38,779,742 $321,534 $78,733 $39,022,543
=========== ========== ========== ===========
December 31, 1994
Interest bearing deposits
with banks $ 2,672,000 $ - $ - $ 2,672,000
=========== ========== ========== ===========
</TABLE>
At December 31, 1995 and 1994, respectively, investment securities were pledged
to secure public deposits and for other purposes required or permitted by law.
At December 31, 1995, securities pledged had an amortized cost of $1,507,005 and
a fair market value of $1,511,648. At December 31, 1994, securities pledged had
an amortized cost of $1,522,970 and a fair market value of $1,509,267.
There were no sales of securities during 1995 or 1994.
The maturities of investment securities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
----------------
Due in one year or less $ - $ - $ 5,173,051 $ 5,111,934
Due from one year to five
years - - 32,163,928 30,567,171
Due from five years to ten
years - - 2,288,319 2,108,729
Due after ten years - - 770,250 709,918
Federal Home Loan Bank
stock 481,400 481,400 452,400 452,400
Federal Reserve Bank stock 43,500 43,500 43,500 43,500
Other investments 50,000 50,000 98,000 98,000
----------- ----------- ----------- -----------
Total $ 574,900 $ 574,900 $40,989,448 $39,091,652
----------- ----------- ----------- -----------
Available-for-sale:
------------------
Due in one year or less $ 7,681,605 $ 7,703,785 $ 2,276,000 $ 2,276,000
Due from one year to five
years 30,398,103 30,617,946 396,000 396,000
Due from five years to
ten years - - - -
Due after ten years 700,034 700,812 - -
----------- ----------- ----------- -----------
38,779,742 39,022,543 2,672,000 2,672,000
----------- ----------- ----------- -----------
$39,354,642 $39,597,443 $43,661,448 $41,763,652
=========== =========== =========== ===========
</TABLE>
F-17
<PAGE>
Page 5 of 11
INVESTMENT SECURITIES (continued)
Investment securities with multiple maturities were allocated based on their
final maturity.
On December 31, 1993, the Bank adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Certain debt and equity investment
securities are required to be individually classified into one of three
catagories: held-to-maturity, available-for-sale, or trading. At each
reporting date, the appropriateness of the classification is reassessed. At
December 31, 1993, the Bank classified all investment securities as available-
for-sale and recorded unrealized appreciation of $704,159. In March, 1994,
all investment securities, excluding interest bearing deposits with other
banks (certificates of deposit), were transferred to held-to-maturity.
Consequently, on March 31, 1994, the Bank adjusted the transferred investments
to their fair values. The Bank recorded unrealized depreciation of $1,013,894,
resulting in net unrealized depreciation of $309,735. On December 31, 1995,
all debt securities were transferred to available-for-sale. Consequently, on
December 31, 1995, the Bank adjusted the transferred investments to their fair
values. The Bank recorded unrealized appreciation of $320,235 at the date of
transfer, resulting in net unrealized appreciation of $242,801. Following is a
schedule reflecting the adjustments made in 1994 and 1995 as a result of the
transfers.
<TABLE>
<CAPTION>
Unrealized
Unrealized Deferred (Gain) loss-
Gain (loss)- Asset Stockholders'
Investments (Liability) Equity
------------- ----------- --------------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 704,159 $(239,414) $(464,745)
Reclassification to held-to-
maturity, March 31, 1994 (1,013,894) 344,724 669,170
Amortization of the unrealized
depreciation 99,558 (33,850) (65,708)
----------- --------- ---------
Balance, December 31, 1994 (210,177) 71,460 138,717
Amortization of the unrealized
depreciation 132,743 (45,132) (87,611)
Reclassification to available-
for-sale, December 31, 1995 320,235 (108,880) (211,355)
----------- --------- ---------
Balance, December 31, 1995 $ 242,801 $ (82,552) $(160,249)
=========== ========= =========
</TABLE>
When a transfer of investment securities is made from available-for-sale to
held-to-maturity, SFAS No. 115 requires that the unrealized holding loss at
the date of the transfer continue to be reported as a separate component of
shareholders' equity and be amortized over the remaining lives of the
transferred securities. Accordingly, the unrealized loss was being amortized
by the straight-line method over twenty-eight months until the securities were
transferred to available-for-sale at December 31, 1995, at which time the
unamortized balance was removed from the balance sheet.
F-18
<PAGE>
Page 6 of 11
CREDIT RISK CONCENTRATIONS
The Bank has a concentration in commercial real estate and mortgage lending.
Such loans amounted to $28,334,598 and $23,500,965, or twenty-seven and
twenty-two percent of total assets at December 31, 1995 and 1994,
respectively. The Bank requires collateral and records a first lien on all
such collateral. In the making of real estate collateralized loans, as with
all types of loans, the Bank adheres closely to its written loan policies,
requiring current credit and financial information about the borrower and
other evidence of the borrower's forecasted ability to repay the loan.
Substantially all of the Bank's customers are residents of Anderson and
Angelina Counties.
The Bank maintains deposits with its correspondent bank in excess of FDIC
coverage.
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses is shown below:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 456,558 $ 514,633
Provision - -
Recoveries credited to reserve 72,458 45,943
Losses charged to reserve (148,036) (104,018)
---------- ----------
Balance at end of year $ 380,980 $ 456,558
========== ==========
</TABLE>
Impaired loans totaled $52,057 at December 31, 1995.
BANK PREMISES AND EQUIPMENT - NET
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Bank building and land $3,360,835 $2,965,386
Automobiles 83,840 83,840
Furniture and fixtures 1,180,908 1,083,307
Computers and equipment 730,224 730,224
Remodeling in progress - 232,227
---------- ----------
5,355,807 5,094,984
Less accumulated depreciation 2,059,681 1,798,035
---------- ----------
$3,296,126 $3,296,949
========== ==========
</TABLE>
Depreciation expense for 1995, 1994 and 1993 totaled $261,645, $272,286 and
$202,328, respectively. The useful lives of the assets range from 3 to 40
years.
F-19
<PAGE>
Page 7 of 11
GOODWILL
Goodwill arises from the 1993 purchase of Community State Bank. Goodwill is
being amortized using the straight-line method over 15 years. Amortization
expense charged to operations for 1995, 1994 and 1993 totaled $111,783,
$131,853 and $59,071, respectively.
<TABLE>
<CAPTION>
OTHER ASSETS
Analysis of other assets is shown below:
1995 1994
-------- --------
<S> <C> <C>
Core deposit intangibles - net $229,036 $257,322
Prepaid expenses and other assets 157,110 146,201
Receivable due from insurance bond
company - -
Real estate and repossessions 22,367 14,000
Federal income tax receivable 109,998 45,294
-------- --------
$518,511 $462,817
-------- ========
</TABLE>
Core deposit intangibles represent a premium paid to Federal Deposit Insurance
Corporation for the core deposits of a failed bank. Amortization on the
premium totaled $28,286 for 1995, 1994 and 1993, respectively, and is being
amortized over 14 years.
ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1995 and 1994, the Bank had advances from the Federal Home
Loan Bank (FHLB) in the amounts of $3,203,914 and $3,365,846, respectively,
due in monthly installments for periods ranging from 19 months to 324 months,
including interest at the FHLB replacement cost rate at the time of each
individual advance. All first mortgage loans on one-to-four family
residential dwellings have been pledged as collateral for the advances.
The Bank became a member of FHLB on July 21, 1992 and has subscribed to the
required amount of FHLB stock. At future year-end dates, the Bank may be
required to subscribe to additional amounts of FHLB stock, depending on the
level of residential mortgage loans and total assets of the Bank at that year-
end date.
The Bank is also required to maintain a deposit account with FHLB in an amount
at least equal to the amounts then currently due and payable to the FHLB. The
balance of the account at December 31, 1995 and 1994 was $78,118 and $443,061,
respectively, and was adequate to meet the requirement.
CERTIFICATES OF DEPOSIT
Individual certificates of deposit of $100,000 or more totaled $5,730,207 and
$3,321,146 as of December 31, 1995 and 1994, respectively. These certificates
of deposit mature over the next 12 months.
F-20
<PAGE>
Page 8 of 11
TRUST ASSETS
Property (other than cash deposits) held by the Bank in fiduciary or agency
capacities for its customers are not included in the accompanying consolidated
financial statements, since such assets are not assets of the Bank.
INCOME TAX
The provision for Federal income tax applicable to net income in the
consolidated financial statements of income for the years ended December 31,
1995, 1994 and 1993, is comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense:
Current $693,862 $197,706 $ 29,305
Deferred 151,196 351,094 426,569
-------- -------- --------
$845,058 $548,800 $455,874
======== ======== ========
</TABLE>
A reconciliation between the amount of actual income tax expense and the
amount computed by multiplying the applicable statutory rate by income before
Federal income tax is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax expense
computed at statutory rate $628,765 $553,042 $438,493
Increase (decrease) in tax resulting
from:
Nondeductible merger related expenses 104,737 - -
Nontaxable income (11,297) - -
Nondeductible goodwill 38,006 - -
Federal income tax prior years 77,491 - -
Nondeductible miscellaneous expenses 7,356 6,136 6,458
Alternative minimum tax - - 29,305
Other, net - (10,378) (18,382)
-------- -------- ---------
$845,058 $548,800 $455,874
======== ======== =========
</TABLE>
The following temporary differences gave rise to the deferred tax liability at
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Income recognized for financial
accounting, but not tax accounting $ 19,684 $ 39,369
Difference in financial accounting and
tax basis of investment securities 129,195 (38,715)
Difference in financial accounting and
tax basis of plant, property and equipment 224,900 210,232
Difference in financial accounting and
tax basis of allowance for loan losses (7,169) (47,408)
Difference in financial accounting and
tax basis of other real estate - (6,992)
-------- --------
Total $366,610 $156,486
======== ========
</TABLE>
F-21
<PAGE>
Page 9 of 11
Amounts for deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax liability $373,779 $282,346
======== ========
Deferred tax assets $ 7,169 $125,860
======== ========
Valuation allowance $ - $ -
======== ========
</TABLE>
Effective January 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes, which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the
financial statement and tax bases of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
deferred tax assets to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period
plus or minus the net changes in deferred tax assets and liabilities.
The effect of adopting SFAS No. 109 on 1993 net income was a net decrease of
$426,569. The cumulative effect of the accounting change on years prior to
January 1, 1993, an increase of $797,996, is included in income for the year
ended December 31, 1993.
COMMITMENTS AND CONTINGENCIES
Off-balance-sheet commitments. In the ordinary course of business, there are
-----------------------------
outstanding various commitments to extend credit, commitments under credit
card arrangements and commercial letters of credit.
The Bank had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Commercial and mortgage unfunded
lines of credit $1,498,751 $2,137,876
Credit card unfunded lines of
credit 1,881,049 1,797,822
Letters of credit 79,345 168,120
---------- ----------
$3,459,145 $4,103,818
========== ==========
</TABLE>
Such loans are recorded in the financial statements when they become payable.
The Company does not expect and has not recorded any losses for these
commitments. See the note "Financial instruments with off-balance-sheet risk"
for further discussion of these loans.
F-22
<PAGE>
Page 10 of 11
COMMITMENTS AND CONTINGENCIES (concluded)
Financial instruments with off-balance-sheet risk. 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. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the consolidated
statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
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. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount and type of collateral obtained, if deemed
necessary by the Bank extension of credit, varies and is based on management's
credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities
to customers. The Bank's policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making
commitments to extend credit.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1995
-----------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,351,452 $ 9,351,452
Time deposits 495,000 495,000
Investment securities 38,859,642 39,102,443
Loans, net of allowance 51,335,014 50,719,141
Financial liabilities:
Deposits 91,826,218 91,989,998
Advances from Federal Home Loan Bank 3,203,914 3,263,979
</TABLE>
F-23
<PAGE>
Page 11 of 11
FAIR VALUES OF FINANCIAL INSTRUMENTS (concluded)
The carrying amounts in the preceding schedule are included in the statement
of financial condition under the applicable captions.
PURCHASE OF COMMUNITY STATE BANK
On July 1, 1993, the Bank acquired Community State Bank in a transaction
accounted for by the purchase method. The Bank paid $32.00 per common share,
or $4,800,000, to the holders of record, on that date, of the 150,000 common
shares issued and outstanding.
Community State Bank was converted to a national bank and is operated as a
branch of Royall National Bank. The results of operations of Community Bank
for the twelve months ended December 31, 1995 and 1994 and for the six months
ended December 31, 1993 are included in the consolidated statement of income
for Royall Financial Corporation for the years ended December 31, 1995, 1994
and 1993, respectively.
RELATED PARTY TRANSACTIONS
At December 31, 1995, officers and directors of the Company and the Bank had
loans due the Bank as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 3,267,938
1995 Loans 1,758,485
1995 Repayments (2,301,572)
-----------
Balance at December 31, 1995 $ 2,724,851
===========
</TABLE>
In addition, the officers and directors had deposits, including demand,
savings and time, at the Bank totaling $6,128,531 and $7,315,107 at December
31, 1995, and 1994, respectively.
PROPOSED SALE OF COMPANY
On December 14, 1995, the Company entered into an agreement, subject to
shareholder and regulatory approval, with Compass Bancshares, Inc. (Compass)
whereby 100% of the Company's outstanding common stock will be acquired by
Compass. Upon approval, it is anticipated that the transaction will be
consummated in the first half of 1996.
RECLASSIFICATION
Certain items in the 1994 and 1993 financial statements have been reclassified
for comparative purposes.
F-24
<PAGE>
SUPPLEMENTAL INFORMATION
INDIVIDUAL FINANCIAL STATEMENTS OF PARENT COMPANY
F-25
<PAGE>
[LETTERHEAD OF HARRELL, RADER, BONNER & BOLTON, L.L.P. APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL INFORMATION
To the Board of Directors
Royall Financial Corporation
Our report on our audits of the consolidated financial statements of
Royall Financial Corporation at December 31, 1995 and 1994, appears on page
one. Those audits were for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The individual financial
statements of the parent company in the following section are presented for
purposes of additional analysis and are not a required part of the
consolidated financial statements. Such material has been subjected to the
auditing procedures applied in the audits of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
Harrell, Rader, Bonner & Bolton, L.L.P.
Palestine, Texas
January 26, 1996
F-26
<PAGE>
ROYALL FINANCIAL CORPORATION
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- ----------
<S> <C> <C>
CASH $ 1,977 $ 2,509
RECEIVABLES 26,614 13,605
OTHER ASSETS - net 229,036 257,320
INVESTMENTS IN SUBSIDIARY, AT EQUITY 10,492,009 9,572,976
----------- ----------
TOTAL ASSETS $10,749,636 $9,846,410
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY
Common stock; par value $100; 1,000,000 shares
authorized; 4,000 issued and outstanding $ 400,000 $ 400,000
Additional paid-in capital 2,393,804 2,393,804
Retained earnings 7,795,583 7,191,323
Unrealized appreciation (depreciation) on
investment securities of subsidiary - net
of deferred taxes 160,249 (138,717)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 10,749,636 9,846,410
----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $10,749,636 $9,846,410
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
ROYALL FINANCIAL CORPORATION
(PARENT ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
INCOME $ - $ -
EXPENSES
Taxes 8,993 9,040
Legal and accounting 980 400
Amortization 28,286 28,286
Merger expenses 12,568 -
Miscellaneous - 29
---------- ----------
TOTAL EXPENSES 50,827 37,755
---------- ----------
LOSS BEFORE FEDERAL INCOME TAX
AND EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 50,827 37,755
FEDERAL INCOME TAX EXPENSE (BENEFIT) (13,009) (12,837)
---------- ----------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARY (37,818) (24,918)
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 1,042,068 1,102,710
---------- ----------
NET INCOME $1,004,250 $1,077,792
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ROYALL FINANCIAL CORPORATION
(PARENT ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation
Common Paid-in Retained (Depreciation)
Stock Capital Earnings on Securities
---------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $400,000 $2,393,804 $6,513,523 $ 464,745
Reclassification of investment securities - - - (669,170)
Amortization of unrealized loss on investment securities - - - 65,708
Add:
Net income for the year ended December 31, 1994 - - 1,077,792 -
Deduct:
Dividends - - 399,992 -
---------- ------------ ---------- -------------
BALANCE, DECEMBER 31, 1994 400,000 2,393,804 7,191,323 (138,717)
Reclassification of investment securities - - - 211,355
Amortization of unrealized loss on investment securities - - - 87,611
Add:
Net income for the year ended December 31, 1995 - - 1,004,250 -
Deduct:
Dividends - - 399,990 -
---------- ------------ ---------- -------------
BALANCE, DECEMBER 31, 1995 $400,000 $2,393,804 $7,795,583 $ 160,249
========== ============ ========== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-29
<PAGE>
ROYALL FINANCIAL CORPORATION
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1995 1994
---------- ----------
<S> <C> <C>
Net Income $1,004,250 $1,077,792
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in (earnings) net of dividends received (620,069) (696,210)
Amortization 28,286 28,286
(Increase) decrease in Receivables (13,009) (9,520)
---------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 399,458 400,348
---------- ----------
CASH USED BY INVESTING ACTIVITIES
Cash invested in subsidiary - -
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (399,990) (399,992)
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (399,990) (399,992)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (532) 356
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,509 2,153
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,977 $ 2,509
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest NONE NONE
Income taxes NONE NONE
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the statements of cash flows, the Company considers cash on
hand and all monies on deposit with other banks to be cash equivalents.
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
F-30
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
F-31
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
F-32
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- ------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 7,398,817 $ 5,208,822
FEDERAL FUNDS SOLD 4,840,000 1,105,000
INVESTMENT SECURITIES
Held-to-maturity 582,700 41,693,468
Available-for-sale 37,337,169 2,081,000
------------- ------------
Total 37,919,869 43,774,468
Unrealized appreciation (depreciation) - net (69,209) (176,992)
------------- ------------
Total investment securities 37,850,660 43,597,476
LOANS
Commercial 9,726,621 10,720,049
Installment 12,871,606 9,391,514
Real estate-mortgage 29,551,091 22,725,979
Real estate-construction 507,000 598,000
Credit card 1,277,735 1,210,226
Other 81,793 155,584
------------- ------------
54,015,846 44,801,352
Less:
Unearned discount 1,380,472 946,215
Allowance for loan losses 363,532 449,413
------------- ------------
Net loans 52,271,842 43,405,724
BANK PREMISES AND EQUIPMENT - net 3,239,336 3,269,732
ACCRUED INTEREST RECEIVABLE 810,904 832,180
GOODWILL - net 1,567,979 1,838,542
OTHER ASSETS 342,934 456,141
------------- ------------
TOTAL ASSETS $108,322,472 $ 99,713,617
============ ============
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
-------------- --------------
<S> <C> <C>
DEPOSITS
Demand $ 57,039,768 $ 51,912,433
Savings 7,998,957 8,893,954
Other time 28,324,763 24,885,050
Total deposits 93,363,488 85,691,437
ADVANCES FROM FEDERAL HOME LOAN BANK 3,169,639 3,333,455
ACCRUED INTEREST AND OTHER LIABILITIES 584,115 291,452
DEFERRED FEDERAL INCOME TAX PAYABLE 260,526 167,769
-------------- --------------
TOTAL LIABILITIES 97,377,768 89,484,113
STOCKHOLDERS' EQUITY
Common stock; par value $100; 1,000,000
shares authorized; 4,000 issued and outstanding 400,000 400,000
Additional paid-in capital 2,393,804 2,393,804
Retained earnings 8,196,578 7,552,514
Unrealized appreciation (depreciation) on investment
securities - net of deferred taxes (45,678) (116,814)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 10,944,704 10,229,504
TOTAL LIABILITIES AND -------------- --------------
STOCKHOLDERS' EQUITY $ 108,322,472 $ 99,713,617
============== ==============
</TABLE>
F-34
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- -------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,282,693 $ 1,036,274
Interest on deposits with banks 6,521 32,089
Interest on investment securities:
Obligations of U.S. Government agencies 550,695 599,173
Other interest income 71,929 38,942
--------------- -------------
Total interest income 1,911,838 1,706,478
INTEREST EXPENSE
Interest on deposits 522,710 405,114
Interest on long-term borrowing 52,646 54,317
--------------- -------------
Total interest expense 575,356 459,431
NET INTEREST INCOME 1,336,482 1,247,047
Provision for loan losses 20,000 -
--------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,316,482 1,247,047
OTHER OPERATING INCOME
Service charges 318,533 316,495
Other operating income 88,199 55,433
--------------- -------------
Total other operating income 406,732 371,928
OTHER OPERATING EXPENSES
Salaries and employment expenses 503,402 493,408
Occupancy expenses 77,000 77,115
Equipment expenses 55,299 54,583
Data processing expenses 41,669 37,579
Regulatory expenses 10,493 59,812
Other operating expenses 407,654 365,037
--------------- -------------
Total other operating expenses 1,095,517 1,087,534
--------------- -------------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 627,697 531,441
FEDERAL INCOME TAX EXPENSE 226,702 170,250
--------------- -------------
NET INCOME $ 400,995 $ 361,191
=============== =============
EARNINGS PER SHARE $ 100.25 $ 90.30
=============== =============
</TABLE>
F-35
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation
Common Paid-in Retained (Depreciation)
Stock Capital Earnings on Securities
------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 400,000 $ 2,393,804 $ 7,191,323 $ (138,717)
Amortization of unrealized loss on
investment securities - - - 21,903
Net income for the three months ended
March 31, 1995 - - 361,191 -
Dividends - - - -
------------ -------------- -------------- ---------------
BALANCE, MARCH 31, 1995 $ 400,000 $ 2,393,804 $ 7,552,514 $ (116,814)
============ ============== ============== ===============
BALANCE, DECEMBER 31, 1995 $ 400,000 $ 2,393,804 $ 7,795,583 $ 160,249
Change in unrealized gain (loss) on
securities available-for-sale - - - (205,927)
Net income for the three months ended
March 31, 1996 - - 400,995 -
Dividends - - - -
------------ -------------- -------------- ---------------
BALANCE, MARCH 31, 1996 $ 400,000 $ 2,393,804 $ 8,196,578 $ (45,678)
============ ============== ============== ===============
</TABLE>
F-36
<PAGE>
ROYALL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 400,995 $ 361,191
Adjustments to reconcile net income to net cash
provided from operating activities
Provision for loan losses 20,000 -
Provision for depreciation 57,765 64,304
Amortization 32,041 35,449
Gain on sale of assets (4,607) -
Amortization of investment security discounts and premiums 37,238 58,769
(Increase) decrease in
Other assets 175,577 6,676
Interest receivable 87,131 130,373
Increase (decrease) in
Accrued interest payable and other liabilities 133,892 159,056
-------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 940,032 $ 815,818
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 12,107 -
Proceeds from maturity of investment securities held-to-maturity - 293,712
Purchases of investment securities held-to-maturity 7,800 (1,056,500)
Proceeds from maturity of investment securities available-for-sale 1,389,734 591,000
Purchases of investment securities available-for-sale - -
Net (increase) decrease in short-term investments (2,665,000) 2,605,000
Net (increase) decrease in loans (956,828) 494,109
Purchases of equipment (8,475) (37,087)
-------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,220,662) 2,890,234
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to Federal Home Loan Bank (34,275) (32,391)
Net increase (decrease) in demand deposits, NOW
accounts, savings accounts and certificates of deposit 1,537,270 (5,474,801)
-------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,502,995 (5,507,192)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 222,365 (1,801,140)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,176,452 7,009,962
-------------- --------------
CASH AND CASH EQUIVALENTS AT MARCH 31, 1996 AND 1995 $ 7,398,817 $ 5,208,822
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the three months ended March 31, 1996 and 1995 for:
Interest $ 574,222 $ 425,330
Income taxes - -
DISCLOSURE OF ACCOUNTING POLICY
</TABLE>
For purposes of the statement of cash flows, the Company considers cash on hand
and monies on deposit with other banks to be cash equivalents.
F-37
<PAGE>
INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate market
values as shown in the consolidated balance sheets of the Company are as
follows:
<TABLE>
<CAPTION>
Held-to-maturity:
----------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
March 31, 1996:
Federal Home Loan Bank stock $ 489,200 $ - $ - $ 489,200
Federal Reserve Bank stock 43,500 - - 43,500
Other investments 50,000 - - 50,000
--------------- ---------------- ---------------- ----------------
$ 582,700 $ - $ - $ 582,700
=============== ================ ================ ================
March 31, 1995:
U.S. Government agencies $ 24,323,148 $ - $ 385,773 $ 23,937,375
U.S. Treasury notes 16,749,452 - 614,432 16,135,020
State and municipal 68,468 - 420 68,048
Federal Home Loan Bank stock 458,900 - - 458,900
Federal Reserve Bank stock 43,500 - - 43,500
Other investments 50,000 - - 50,000
--------------- ---------------- ---------------- ----------------
$ 41,693,468 $ - $ 1,000,625 $ 40,692,843
=============== ================ ================ ================
<CAPTION>
Available-for-sale:
------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
March 31, 1996:
U.S. Government agencies $ 24,410,207 $ 74,496 $ - $ 24,484,703
U.S. Treasury notes 12,562,617 - 144,433 12,418,184
Interest bearing deposits with banks 297,000 - - 297,000
State and Municipal 67,345 728 - 68,073
--------------- ---------------- ---------------- ----------------
$ 37,337,169 $ 75,224 $ 144,433 $ 37,267,960
=============== ================ ================ ================
March 31, 1995:
Interest bearing deposits with banks $ 2,081,000 $ - $ - $ 2,081,000
=============== ================ ================ ================
</TABLE>
At March 31, 1996 and 1995, respectively, investment securities were pledged
to secure public deposits and for other purposes required or permitted by
law. At March 31, 1996, securities pledged had an amortized cost of
$1,502,935 and a fair market value of $1,500,052. At March 31, 1995,
securities pledged had an amortized cost of $1,518,845 and a fair market
value of $1,521,929.
There were no sales of securities during 1996 or 1995.
F-38
<PAGE>
----------------------
APPENDIX I
MERGER AGREEMENT
----------------------
<PAGE>
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
COMPASS BANCSHARES, INC.
AND
ROYALL FINANCIAL CORPORATION
Dated as of December 14, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I................................................................... 1
THE MERGER............................................................. 1
SECTION 1.1 The Merger......................................... 1
----------
SECTION 1.2 Effective Time..................................... 1
--------------
SECTION 1.3 Certain Effects of the Merger...................... 2
-----------------------------
SECTION 1.4 Articles of Incorporation and By-Laws.............. 2
-------------------------------------
SECTION 1.5 Directors and Officers............................. 2
----------------------
SECTION 1.6 Conversion of Shares............................... 2
--------------------
SECTION 1.7 Shareholders' Meeting.............................. 3
---------------------
SECTION 1.8 Registration of the Compass Common Stock........... 4
----------------------------------------
SECTION 1.9 Closing............................................ 4
-------
ARTICLE II.................................................................. 5
DISSENTING SHARES; EXCHANGE OF SHARES.................................. 5
SECTION 2.1 Dissenting Shares.................................. 5
-----------------
SECTION 2.2 Exchange of Shares................................. 5
------------------
ARTICLE III................................................................. 6
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 6
SECTION 3.1 Organization and Qualification..................... 7
------------------------------
SECTION 3.2 Company Capitalization............................. 7
----------------------
SECTION 3.3 Bank Capitalization; Other Securities.............. 8
-------------------------------------
SECTION 3.4 Authority Relative to the Agreement................ 8
-----------------------------------
SECTION 3.5 No Violation....................................... 8
------------
SECTION 3.6 Consents and Approvals............................. 9
----------------------
SECTION 3.7 Regulatory Reports................................. 9
------------------
SECTION 3.8 SEC Status; Securities Issuances................... 10
--------------------------------
SECTION 3.9 Financial Statements............................... 10
--------------------
SECTION 3.10 Absence of Certain Changes........................ 11
---------------------------
SECTION 3.11 Company Indebtedness............................... 13
--------------------
SECTION 3.12 Litigation......................................... 13
----------
SECTION 3.13 Tax Matters........................................ 13
-----------
SECTION 3.14 Employee Benefit Plans............................. 14
----------------------
SECTION 3.15 Employment Matters................................. 17
------------------
SECTION 3.16 Leases, Contracts and Agreements................... 17
--------------------------------
SECTION 3.17 Related Company Transactions....................... 18
----------------------------
SECTION 3.18 Compliance with Laws............................... 18
--------------------
SECTION 3.19 Insurance.......................................... 18
---------
SECTION 3.20 Loans.............................................. 19
-----
SECTION 3.21 Fiduciary Responsibilities......................... 19
--------------------------
SECTION 3.22 Patents, Trademarks and Copyrights................. 19
----------------------------------
SECTION 3.23 Environmental Compliance........................... 19
------------------------
SECTION 3.24 Regulatory Actions................................. 21
------------------
SECTION 3.25 Title to Properties; Encumbrances.................. 21
---------------------------------
SECTION 3.26 Shareholder List................................... 22
----------------
SECTION 3.27 Proxy Statement.................................... 22
---------------
i
<PAGE>
SECTION 3.28 Dissenting Shareholders............................ 23
-----------------------
SECTION 3.29 Section 368 Representations........................ 23
---------------------------
SECTION 3.30 Employee Stock Options............................. 24
----------------------
SECTION 3.31 Accounting Matters................................. 24
------------------
SECTION 3.32 Representations Not Misleading..................... 24
------------------------------
ARTICLE IV.................................................................. 24
REPRESENTATIONS AND WARRANTIES
OF COMPASS........................................................ 24
SECTION 4.1 Organization and Authority......................... 24
--------------------------
SECTION 4.2 Authority Relative to Agreement.................... 25
-------------------------------
SECTION 4.3 Financial Reports.................................. 26
-----------------
SECTION 4.4 Capitalization..................................... 26
--------------
SECTION 4.5 Consents and Approvals............................. 27
----------------------
SECTION 4.6 Proxy Statement.................................... 27
---------------
SECTION 4.7 Availability of Compass Common Stock............... 27
------------------------------------
SECTION 4.8 Representations Not Misleading..................... 28
------------------------------
ARTICLE V................................................................... 28
COVENANTS OF THE COMPANY............................................... 28
SECTION 5.1 Affirmative Covenants of the Company............... 28
------------------------------------
SECTION 5.2 Negative Covenants of the Company.................. 30
---------------------------------
ARTICLE VI.................................................................. 33
ADDITIONAL AGREEMENTS.................................................. 33
SECTION 6.1 Access To, and Information Concerning,
--------------------------------------
Properties and Records....................................... 33
----------------------
SECTION 6.2 Filing of Regulatory Approvals..................... 34
------------------------------
SECTION 6.3 Miscellaneous Agreements and Consents.............. 34
-------------------------------------
SECTION 6.4 Company Indebtedness............................... 34
--------------------
SECTION 6.5 Best Good Faith Efforts............................ 34
-----------------------
SECTION 6.6 Exclusivity........................................ 34
-----------
SECTION 6.7 Public Announcement................................ 35
-------------------
SECTION 6.8 Employee Benefit Plans............................. 35
----------------------
SECTION 6.9 Merger of Bank..................................... 36
--------------
SECTION 6.10 Environmental Investigation; Right to
-------------------------------------
Terminate Agreement.......................................... 36
-------------------
SECTION 6.11 Cooperation on Texas Receipts...................... 40
-----------------------------
SECTION 6.12 Exchange Agreement................................. 41
------------------
SECTION 6.13 Corporate Tax Consequences......................... 41
--------------------------
ARTICLE VII................................................................. 41
CONDITIONS TO CONSUMMATION OF THE MERGER............................... 41
SECTION 7.1 Conditions to Each Party's Obligation
-------------------------------------
to Effect the Merger............................... 41
--------------------
SECTION 7.2 Conditions to the Obligations of
--------------------------------
Compass and Compass Texas to Effect the Merger..... 41
----------------------------------------------
SECTION 7.3 Conditions to the Obligations of the
------------------------------------
Company to Effect the Merger....................... 43
----------------------------
ii
<PAGE>
ARTICLE VIII................................................................ 44
TERMINATION; AMENDMENT; WAIVER......................................... 44
SECTION 8.1 Termination........................................ 44
-----------
SECTION 8.2 Effect of Termination.............................. 45
---------------------
SECTION 8.3 Amendment.......................................... 45
---------
SECTION 8.4 Extension; Waiver.................................. 45
-----------------
ARTICLE IX.................................................................. 45
SURVIVAL............................................................... 45
SECTION 9.1 Survival of Representations and Warranties......... 45
------------------------------------------
ARTICLE X................................................................... 46
MISCELLANEOUS.......................................................... 46
SECTION 10.1 Expenses........................................... 46
--------
SECTION 10.2 Brokers and Finders................................ 46
-------------------
SECTION 10.3 Entire Agreement; Assignment....................... 46
----------------------------
SECTION 10.4 Further Assurances................................. 46
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SECTION 10.5 Enforcement of the Agreement....................... 46
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SECTION 10.6 Severability....................................... 47
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SECTION 10.7 Notices............................................ 47
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SECTION 10.8 Governing Law...................................... 48
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SECTION 10.9 Descriptive Headings............................... 48
--------------------
SECTION 10.10 Parties in Interest................................ 48
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SECTION 10.11 Counterparts....................................... 48
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SECTION 10.12 Incorporation by References........................ 49
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SECTION 10.13 Certain Definitions................................ 49
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ATTACHMENTS
EXHIBITS
A. Pooling Transfer Restrictions Agreement
B. Exchange Agent Agreement
C. Pooling of Interest Criteria
D. Voting Agreement and Irrevocable Proxy
E. Opinion of Counsel for the Company and the Bank
F. Opinion of Counsel for Compass and Compass Texas
G. Compass Representations Certificate
LIST OF SCHEDULES
Schedule 3.2 Company Capitalization
Schedule 3.3 Bank Capitalization; List of Equity Ownership
iii
<PAGE>
Schedule 3.5 Violations of Law; Conflicts of Interest; Share Litigation;
Termination of Existence
Schedule 3.6 Company Prior Consents
Schedule 3.7 Regulatory Reports
Schedule 3.10 Absence of Material Changes or Adverse Effects
Schedule 3.12 Company Legal Proceedings
Schedule 3.13 Tax Liabilities
Schedule 3.14(a) Employee Welfare Benefit Plans
Schedule 3.14(b) Employee Pension Benefit Plans
Schedule 3.14(c) Deferred Compensation, Bonus and Stock Purchase Plans
Schedule 3.14(l) Additional Payments Due Under Deferred Compensation, Bonus,
Employee Welfare Benefit Plans and Employee Pension Benefit
Plans
Schedule 3.15 Employment Contracts and Collective Bargaining Agreements
Schedule 3.16 Leases, Subleases, Contracts and Agreements; Participations;
Default of Contracts; Marketable Title
Schedule 3.17 Related Company Transactions
Schedule 3.18 Compliance with Laws
Schedule 3.19 Insurance Policies
Schedule 3.20 Loans Exceeding Legal Lending Limit, Troubled Loans
Schedule 3.22 Patents, Trademarks and Copyrights
Schedule 3.23 Environmental Compliance
Schedule 3.24 Regulatory Actions; Agreements
Schedule 3.25 Title to Properties; Title Policies; Property
Schedule 3.29 Company Shareholders Disposing of Stock
Schedule 3.30 Stock Option Plans
iv
<PAGE>
Schedule 4.2 Compass Prior Consents
Schedule 5.1(d) Insurance Policies to be Maintained
Schedule 5.1(j) List of Accounts and Safe Deposit Boxes
Schedule 5.1(k) List of Liabilities and Obligations of the Company and the Bank
Schedule 5.1(o) List of Proxy Holders Voting Affirmatively for the Agreement
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of December 14, 1995,
by and among Compass Bancshares, Inc. a Delaware corporation ("Compass"), and
Royall Financial Corporation, a Texas corporation ("Company").
WHEREAS, Compass desires to affiliate with the Company and its wholly owned
subsidiary, The Royall National Bank of Palestine, a national banking
association (the "Bank"), and the Company and the Bank desire to affiliate with
Compass in the manner provided in this Agreement;
WHEREAS, Compass and the Company believe that the Merger (as defined
herein) of the Company with an existing or to-be-formed subsidiary ("Compass
Texas") of Compass incorporated under the laws of the State of Delaware to be
added as a party to this Agreement after the date hereof in the manner provided
by, and subject to the terms and conditions set forth in, this Agreement and all
exhibits, schedules and supplements hereto is desirable and in the best
interests of their respective institutions and shareholders; and
WHEREAS, the respective boards of directors of the Company and Compass have
approved this Agreement and the proposed transactions substantially on the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
----------
hereof, and in accordance with the Texas Business Corporation Act (the "TBCA")
and the General Corporation Law of the State of Delaware (the "GCL"), Compass
Texas shall be merged with and into the Company (the "Merger") as soon as
practicable following the satisfaction or waiver, if permissible, of the
conditions set forth in Article VII hereof. Following the Merger, the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
the separate corporate existence of Compass Texas shall cease. Compass shall
not be deemed a party to the Merger for the purposes of Article 5.06 of the TBCA
or the GCL. The Merger is intended to be a reorganization qualifying under
Sections 354, 368(a)(1)(A), and 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended (the "Code").
SECTION 1.2 Effective Time. The Merger shall be consummated by the
--------------
filing by the Texas Secretary of State of Articles of Merger, in the form
required by and executed in
<PAGE>
accordance with the relevant provisions of the TBCA, and by the filing by the
Delaware Secretary of State of a Certificate of Merger in the form required by
and executed in accordance with the relevant provisions of the GCL and by the
issuance of a Certificate of Merger by the Secretary of State of Texas. (The
date of such issuance and filing or such other time and date as may be specified
in the Articles and Certificate of Merger shall be the "Effective Time").
SECTION 1.3 Certain Effects of the Merger. The Merger shall have the
-----------------------------
effects set forth in Article 5.06 of the TBCA and in the GCL.
SECTION 1.4 Articles of Incorporation and By-Laws. The Articles of
-------------------------------------
Incorporation and the By-Laws of the Company, in each case as in effect at the
Effective Time, shall be the Articles of Incorporation and By-Laws of the
Surviving Corporation.
SECTION 1.5 Directors and Officers. The directors and officers of
----------------------
Compass Texas at the Effective Time shall be the directors and officers of the
Surviving Corporation and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
SECTION 1.6 Conversion of Shares. (a) Each share of the Company's
--------------------
common stock, par value $100.00 per share ("Company Common Stock"), issued and
outstanding immediately prior to the Effective Time (the Company Common Stock is
sometimes called the "Shares"), other than Dissenting Shares (as defined in
Section 2.1), shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and represent the right to receive the
consideration payable as set forth below (the "Merger Consideration") to the
holder of record thereof, without interest thereon, upon surrender of the
certificate representing such Share. For the purposes of determining the number
of Shares issued and outstanding, the number of Shares issued and outstanding
shall be increased by the number and class of Shares that may be acquired upon
exercise or conversion of any warrant, option, convertible debenture or other
security entitling the holder thereof to acquire Shares which is in effect or
outstanding prior to the Effective Time.
(b) Each holder of Company Common Stock shall receive Merger Consideration
equal to the quotient of 550,000 shares of Compass common stock, $2.00 par value
per share ("Compass Common Stock"), divided by the number of Shares of Company
Common Stock outstanding immediately prior to the Effective Time for each share
of Company Common Stock so held. In the event the average closing sale price of
the Compass Common Stock as reported by the NASDAQ National Market System for
the 20 days of trading preceding the tenth
2
<PAGE>
business day prior to the first business day following the last received
regulatory approval from the FDIC and the FRB (all as defined in Section 3.5)
and the expiration of any applicable waiting period with respect thereto (the
"Share Determination Market Value") is less than $29.00 per share, the Company
may either (i) terminate this Agreement (the "Pricing Termination Option") by
written notice to Compass within ten business days after the Share Determination
Market Value of less than $29.00 per share is capable of being determined, or
(ii) agree to accept an aggregate of 550,000 shares of Compass Common Stock. In
the event the Company exercises its Pricing Termination Option pursuant to the
preceding sentence within the specified ten business day period, this Agreement
shall be terminated, but Compass shall have the right to reject such termination
of the Agreement by the Company (the "Termination Rejection") by agreeing to
issue a number of shares of Compass Common Stock equal to the quotient of
$15,950,000 divided by the Share Determination Market Value. Such Termination
Rejection shall be exercised by a notice to the Company within five business
days following the date on which Compass receives notice of the Company's
exercise of the Pricing Termination Option. In the event Compass fails to notify
the Company of its exercise of the Termination Rejection within the five
business day period after the receipt of notice from the Company of its exercise
of the Pricing Termination Option, this Agreement shall be terminated. In the
event the Company fails to notify Compass of its election to terminate this
Agreement within the initial ten business day period, the Company shall be
deemed to have agreed to accept an aggregate of 550,000 shares of Compass Common
Stock. The aggregate number of shares of Compass Common Stock to be exchanged
for each Share, respectively, shall be adjusted appropriately to reflect any
stock dividends or splits with respect to Compass Common Stock, when the record
date or payment occurs prior to the Effective Time.
(c) Compass will not issue any certificates for any fractional shares of
Compass Common Stock otherwise issuable pursuant to the Merger. In lieu of
issuing such fractional shares, Compass shall pay cash to any holder of Shares
otherwise entitled to receive such fractional share. Such cash payment shall be
based on the average closing sale price for Compass Common Stock as reported by
the NASDAQ National Market System for the thirty days of trading of Compass
Common Stock immediately preceding the Effective Time.
SECTION 1.7 Shareholders' Meeting. The Company, acting through its
---------------------
Board of Directors, shall, in accordance with applicable law:
(a) duly call, give notice of, convene and hold a meeting (the
"Shareholders' Meeting") of its shareholders as soon as practicable for the
purpose of approving and adopting this Agreement;
3
<PAGE>
(b) require no greater than the minimum vote required by applicable law of
each class of the Shares in order to approve the Merger;
(c) include in the Proxy Statement (defined in paragraph (d) below) the
unanimous recommendation of its Board of Directors that the shareholders of the
Company vote in favor of the approval and adoption of this Agreement; and
(d) use its best efforts (i) to obtain and furnish the information
required to be included by it in the Proxy Statement and cause the Proxy
Statement to be mailed to its shareholders at the earliest practicable time
following the date of this Agreement, and (ii) to obtain the approval and
adoption of the Merger by shareholders holding at least the minimum number of
Shares of each class of the Shares entitled to vote at the Shareholders' Meeting
to approve the Merger under applicable law. The letter to shareholders, notice
of meeting, proxy statement and form of proxy to be distributed to shareholders
in connection with the Merger shall be in form and substance reasonably
satisfactory to Compass, and are collectively referred to herein as the "Proxy
Statement."
SECTION 1.8 Registration of the Compass Common Stock.
----------------------------------------
(a) Compass shall file a registration statement (the "Registration
Statement") with the Securities and Exchange Commission ("SEC") under the
Securities Act of 1933 ("Securities Act") covering the shares of Compass Common
Stock to be issued to Company shareholders in the Merger.
(b) Within 30 days after the date hereof, the Company shall enter into and
cause each Company shareholder who is an "affiliate" (as defined in SEC Rule
405) of the Company to enter into with Compass a written agreement in
substantially the form of Exhibit A attached hereto.
SECTION 1.9 Closing. Upon the terms and subject to the conditions
-------
hereof, as soon as practicable after the vote of the shareholders of the Company
in favor of the approval and adoption of this Agreement has been obtained, and
the satisfaction or waiver, if permissible, of the conditions set forth in
Article VII hereof, the Company and Compass Texas shall execute and deliver the
Articles of Merger and the Certificate of Merger, as described in Section 1.2,
and the parties hereto shall take all such other and further actions as may be
required by law to make the Merger effective. Prior to the filing referred to
in this Section, a closing (the "Closing") will be held at the office of
Liddell, Sapp, Zivley, Hill & LaBoon, L. L. P. in Houston, Texas (or such other
place as the parties may agree) for the purpose of confirming all of the
foregoing.
4
<PAGE>
ARTICLE II.
DISSENTING SHARES; EXCHANGE OF SHARES
SECTION 2.1 Dissenting Shares. Notwithstanding anything in this
-----------------
Agreement to the contrary, Shares which are issued and outstanding immediately
prior to the Effective Time and which are held by shareholders who have not
voted such shares in favor of the Merger and who shall have delivered a written
demand for payment of the fair value of such shares within the time and in the
manner provided in Article 5.12 of the TBCA (the "Dissenting Shares") shall not
be converted into or be exchangeable for the right to receive the Merger
Consideration provided in Section 1.6 of this Agreement, unless and until such
holder shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the TBCA. If any such holder shall
have so failed to perfect or shall have effectively withdrawn or lost such
right, such holder's Shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the Merger Consideration without any interest thereon.
SECTION 2.2 Exchange of Shares.
------------------
(a) Compass shall deposit or cause to be deposited in trust with
River Oaks Trust Company, Houston, Texas (the "Exchange Agent"), pursuant to an
exchange agent agreement in substantially the form attached hereto as Exhibit B
(the "Exchange Agreement"), prior to the Effective Time cash in an aggregate
amount estimated to be sufficient to make the cash payments in lieu of
fractional shares of Compass Common Stock pursuant to Section 1.6 hereof and to
make the appropriate cash payments, if any, to holders of Dissenting Shares
(such amounts being hereinafter referred to as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions jointly given by the
Company and Compass, promptly make the payments in lieu of fractional shares out
of the Exchange Fund upon surrender of Shares in accordance with Section 2.2(b).
Payments to dissenting shareholders shall be made as required by Article 5.12 of
the TBCA. Subject to holding sufficient cash to make prompt payments to holders
of Shares, the Exchange Agent shall invest the Exchange Fund in The Starburst
Government Money Market Fund, managed by Compass Bank, Birmingham, Alabama, an
affiliate of Compass. The Exchange Fund shall not be used for any other
purpose, except as provided in this Agreement.
(b) Promptly after the Effective Time, the Exchange Agent shall mail
to each record holder of an outstanding certificate or certificates which as of
the Effective Time represented Shares (the "Certificates"), a form letter of
transmittal approved by the Company and Compass (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the
5
<PAGE>
Certificates for payment therefor. Upon surrender to the Exchange Agent of a
Certificate, together with such letter of transmittal duly executed, the holder
of such Certificate shall be entitled to receive in exchange therefor cash and
Compass Common Stock in the amount provided in Section 1.6, and such Certificate
shall forthwith be canceled. Compass shall provide the Exchange Agent with
certificates for Compass Common Stock, as requested by the Exchange Agent, in
the amounts provided in Section 1.6 hereof. No interest will be paid or accrued
on the cash payable upon surrender of the Certificate and no dividend will be
disbursed with respect to the shares of Compass Common Stock until the holder's
Shares are surrendered in exchange therefor. If payment or delivery of Compass
Common Stock is to be made to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of payment that
the Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment and delivery of
Compass Common Stock to a person other than the registered holder of the
Certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.2, each Certificate (other
than Certificates representing Dissenting Shares) shall represent for all
purposes the right to receive the Merger Consideration without any interest
thereon.
(c) After the Effective Time, the stock transfer ledger of the
Company shall be closed and there shall be no transfers on the stock transfer
books of the Company of the Shares which were outstanding immediately prior to
such time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be promptly presented to the Exchange Agent
and exchanged as provided in this Article II.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of the Company
for six months after the Effective Time shall be paid to Compass, and the
holders of Shares not theretofore presented to the Exchange Agent shall look to
Compass only, and not the Exchange Agent, for the payment of any Merger
Consideration in respect of such shares.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the representations and warranties set forth
in this Article III to Compass. The Company shall deliver to Compass on or
before the close of business on the 14th business day after the date of this
Agreement, the Schedules to this Agreement referred to in this Article III which
shall be subject to review and approval by Compass in its sole discretion
6
<PAGE>
within fourteen (14) business days of Compass' receipt of such Schedules. The
Company agrees at the Closing to provide Compass and Compass Texas with
supplemental Schedules reflecting any changes thereto between the date of such
Schedules and the date of the Closing.
SECTION 3.1 Organization and Qualification. The Company is a Texas
------------------------------
corporation and a bank holding company under the Bank Holding Company Act of
1956, as amended, and is duly organized, validly existing and in good standing
under the laws of the State of Texas and all laws, rules, and regulations
applicable to bank holding companies. The Bank is a national banking
association, duly organized, validly existing and in good standing under the
laws of the United States of America, and is a member of the Federal Reserve
System. Each of the Company and the Bank has all requisite corporate power and
authority to carry on its business as now being conducted and to own, lease and
operate its properties and assets as now owned, leased or operated. Except as
set forth on Schedule 3.17, the Company does not own or control any Affiliate
(as defined in Section 3.17) or Subsidiary (as defined in Section 10.13(a))
other than the Bank. True and correct copies of the Articles of Incorporation
or Association and Bylaws of the Company and the Bank, with all amendments
thereto through the date of this Agreement, have been delivered by the Company
to Compass. The Bank is duly qualified or licensed to do business and is in
good standing in the State of Texas. The nature of the business of the Company
and the Bank and their respective activities, as currently conducted, do not
require them to be qualified to do business in any jurisdiction other than the
State of Texas.
SECTION 3.2 Company Capitalization. As of the date hereof, the
----------------------
authorized capital stock of the Company consists solely of 1,000,000 shares of
Company Common Stock, of which 3,999 and 11/12ths shares are issued and
outstanding, and none of which are held in treasury. Except as set forth on
Schedule 3.2, there are no outstanding subscriptions, options, convertible
securities, rights, warrants, calls, or other agreements or commitments of any
kind issued or granted by, or binding upon, the Company or the Bank to purchase
or otherwise acquire any security of or equity interest in the Company or the
Bank. Except as set forth on Schedule 3.2, there are no outstanding
subscriptions, options, rights, warrants, calls, convertible securities or other
agreements or commitments obligating the Company to issue any shares of the
Company, or to the knowledge of the Company, irrevocable proxies or any
agreements restricting the transfer of or otherwise relating to shares of its
capital stock of any class. All of the Shares that have been issued have been
duly authorized, validly issued and are fully paid and non-assessable, and were
not issued in violation of any preemptive rights. There are no restrictions
applicable to the payment of dividends on the Shares except pursuant to the TBCA
and applicable banking laws and regulations and all dividends declared prior to
the date hereof have been paid.
7
<PAGE>
SECTION 3.3 Bank Capitalization; Other Securities. All of the
-------------------------------------
issued and outstanding shares of the capital stock of the Bank (i) are duly
authorized, validly issued, fully paid and, except as provided in the National
Bank Act, nonassessable, (ii) except as referred to in Schedule 3.3 are free and
clear of any liens, claims, security interests and encumbrances of any kind, and
(iii) there are no irrevocable proxies with respect to such shares and there are
no outstanding or authorized subscriptions, options, warrants, calls, rights, or
other agreements or commitments of any kind restricting the transfer of,
requiring the issuance or sale of, or otherwise relating to any of such shares
of capital stock to any person. The Company owns, directly, all of the issued
and outstanding capital stock of the Bank. Set forth on Schedule 3.3 hereto is
a list of all equity ownership by the Company or the Bank for the account of the
Company or the Bank in any other person other than the Bank (the "Other
Securities"). The Company or the Bank owns each Other Security free and clear of
any lien, encumbrance, security interest or charge.
SECTION 3.4 Authority Relative to the Agreement. The Company has
-----------------------------------
full corporate power and authority, and, except for the approval by the
Company's shareholders, no further proceedings on the part of the Company are
necessary, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby which have been duly and validly authorized by
its Board of Directors. This Agreement has been duly executed and delivered by
the Company and is a duly authorized, valid, legally binding and enforceable
obligation of the Company, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, or other similar laws relating to creditors' rights
generally and general equitable principles, and subject to such shareholder
approvals and such approval of regulatory agencies and other governmental
authorities having authority over the Company as may be required by statute or
regulation. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not conflict with, or
result in any violation or breach of or default under the respective Articles of
Incorporation or Association or By-Laws of the Company or the Bank or any
agreement, document or instrument by which the Company or the Bank is obligated
or bound.
SECTION 3.5 No Violation. Except as set forth on Schedule 3.5,
------------
neither the execution, delivery nor performance of this Agreement in its
entirety, nor the consummation of all of the transactions contemplated hereby,
following the receipt of such approvals as may be required from the Company's
shareholders, the SEC, the Office of the Comptroller of the Currency ("OCC"),
the Federal Deposit Insurance Corporation ("FDIC"), the Board of Governors of
the Federal Reserve System ("FRB"), and the Texas Department of Banking
("Department") will (i) violate (with or without the giving of notice or the
passage of time), any law, order, writ, judgment, injunction, award, decree,
rule, statute,
8
<PAGE>
ordinance or regulation applicable to the Company or the Bank or (ii) be in
conflict with, result in a breach or termination of any provision of, cause the
acceleration of the maturity of any debt or obligation pursuant to, constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of the Company or the Bank pursuant to,
any terms, conditions or provisions of any note, license, instrument, indenture,
mortgage, deed of trust or other agreement or understanding or any other
restriction of any kind or character, to which the Company or the Bank is a
party or by which any of their assets or properties are subject or bound.
Except as set forth on Schedule 3.5, there are no proceedings pending or, to the
knowledge of the Company or the Bank, threatened, against the Company, the Bank
or involving the Shares, at law or in equity or before or by any foreign,
federal, state, municipal or other governmental court, department, commission,
board, bureau, agency, instrumentality or other person which may result in
liability to Compass or Compass Texas upon the consummation of the transactions
contemplated hereby or which would prevent or delay such consummation. Except
as set forth in Schedule 3.5, or as contemplated hereby, the corporate
existence, business organization, assets, licenses, permits, authorizations and
contracts of the Company and the Bank will not be terminated or impaired by
reason of the execution, delivery or performance by the Company of this
Agreement or consummation by the Company of the transactions contemplated
hereby, assuming the receipt of required shareholder and regulatory approvals.
SECTION 3.6 Consents and Approvals. The Company's Board of
----------------------
Directors (at a meeting called and duly held) has unanimously determined that
the Merger is fair to the Company's shareholders and has unanimously resolved to
recommend approval and adoption of this Agreement by the Company's shareholders.
Except as described in Schedule 3.6 hereto, no prior consent, approval or
authorization of, or declaration, filing or registration with any person,
domestic or foreign, is required of the Company in connection with the
execution, delivery and performance by the Company of this Agreement and the
transactions contemplated hereby or the resulting change of control of the Bank,
except the filing of the Articles of Merger under the TBCA, the Certificate of
Merger under the GCL, and such approvals as may be required from the SEC, the
FRB, the OCC, the FDIC and the Department and holders of Shares under the TBCA.
SECTION 3.7 Regulatory Reports. Except as set forth on Schedule
------------------
3.7, the Company and the Bank have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the FRB, the OCC, the Department, the FDIC, or any
other regulatory authority having jurisdiction over any such persons, other than
plans, reports or information listed on Schedule 3.7.
9
<PAGE>
SECTION 3.8 SEC Status; Securities Issuances. The Company is not
--------------------------------
subject to the registration provisions of Section 12 of the Exchange Act nor the
rules and regulations of the SEC promulgated under Section 12 of the Exchange
Act, other than anti-fraud provisions of such act. All issuances of securities
by the Company and the Bank have been registered under the Securities Act, the
Securities Act of the State of Texas, the National Bank Act, and all other
applicable laws or were exempt from any such registration requirements.
SECTION 3.9 Financial Statements. The Company has provided Compass
--------------------
with a true and complete copy of the audited consolidated statement of financial
position of the Company and the Bank as of December 31, 1994, and the related
consolidated statements of income, shareholders' equity and changes in cash
flows for the years ended December 31, 1994 and 1993, plus consolidating
financial statements of the Bank, and the consolidated statements of financial
position of the Company and the Bank as of March 31, June 30 and September 30,
1995 and the related consolidated statements of income, shareholders' equity and
changes in cash flows for the three-, six- and nine-month periods ended March
31, June 30 and September 30, 1995, and promptly following their availability
the Company will provide Compass with the Company's audited consolidated
statement of financial position of the Company and the Bank as of December 31,
1995 and the related consolidated statements of income, shareholders' equity and
changes in cash flow for the year ended December 31, 1995 (such consolidated
statements of financial position and the related consolidated statements of
income, shareholders' equity and changes in cash flows are collectively referred
to herein as the "Consolidated Financial Statements"), plus all consolidating
financial statements for the Bank (collectively, with the Consolidated Financial
Statements and the notes and schedules thereto, referred to as the "Financial
Statements"). Except as described in the notes to the Consolidated Financial
Statements, the Consolidated Financial Statements, including the consolidated
statement of financial position and the related consolidated statements of
income, shareholders' equity and changes in cash flows (including the related
notes thereto) of the Company and the Bank, fairly present the financial
position of the Company and the Bank as of the dates thereof and the results of
operations and changes in consolidated financial position of the Company and the
Bank for the periods then ended, in conformity with Generally Accepted
Accounting Principles ("GAAP") applied on a basis consistent with prior periods
(subject, in the case of the unaudited interim financial statements, to normal
year-end adjustments and the fact that they do not contain all of the footnote
disclosures required by GAAP), except as otherwise noted therein, and the
accounting records underlying the Consolidated Financial Statements accurately
and fairly reflect in all material respects the transactions of the Company and
the Bank. As of their dates, the Consolidated Financial Statements conformed,
or will conform when delivered, in all material respects with all
10
<PAGE>
applicable rules and regulations promulgated by the FRB, the OCC, the
Department, and the FDIC. Neither the Company nor the Bank have any liabilities
or obligations of a type which should be included in or reflected on the
Financial Statements if prepared in accordance with GAAP, whether related to tax
or non-tax matters, accrued or contingent, due or not yet due, liquidated or
unliquidated, or otherwise, except as and to the extent disclosed or reflected
in the Financial Statements. The Company will provide Compass with the
unaudited consolidated and unconsolidated statements of financial position of
the Company and the Bank as of the end of each month hereafter, prepared on a
basis consistent with prior periods and promptly following their availability,
the Company will provide Compass with the Reports of Condition and Statements of
Income ("Call Reports") of the Bank for all periods ending after September 30,
1995. The Company and the Bank have no off balance sheet liabilities associated
with financial derivative products or potential liabilities associated with
financial derivative products.
SECTION 3.10 Absence of Certain Changes. Except as and to the
--------------------------
extent set forth on Schedule 3.10, since September 30, 1995 (the "Balance Sheet
Date") neither the Company nor the Bank has:
(a) made any amendment to its Articles of Incorporation or
Association or Bylaws or changed the character of its business in any material
manner;
(b) suffered any Material Adverse Effect (as defined in Section
10.13(b));
(c) entered into any agreement, commitment or transaction except in
the ordinary course of business and consistent with prudent banking practices;
(d) except in the ordinary course of business and consistent with
prudent banking practices, incurred, assumed or become subject to, whether
directly or by way of any guarantee or otherwise, any obligations or liabilities
(absolute, accrued, contingent or otherwise);
(e) permitted or allowed any of its property or assets to be subject
to any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind (other than statutory liens not yet delinquent) except in the
ordinary course of business and consistent with prudent banking practices;
(f) except in the ordinary course of business and consistent with
prudent banking practices, canceled any debts, waived any claims or rights, or
sold, transferred, or otherwise disposed of any of its properties or assets;
11
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(g) disposed of or permitted to lapse any rights to the use of any
trademark, service mark, trade name or copyright, or disposed of or disclosed to
any person other than its employees or agents, any trade secret not theretofore
a matter of public knowledge;
(h) except as set forth on Schedule 3.10 and except for regular
salary increases granted in the ordinary course of business within the Company's
or the Bank's 1995 budget and consistent with prior practices, granted any
increase in compensation or paid or agreed to pay or accrue any bonus,
percentage compensation, service award, severance payment or like benefit to or
for the credit of any director, officer, employee or agent, or entered into any
employment or consulting contract or other agreement with any director, officer
or employee or adopted, amended or terminated any pension, employee welfare,
retirement, stock purchase, stock option, stock appreciation rights,
termination, severance, income protection, golden parachute, savings or profit-
sharing plan (including trust agreements and insurance contracts embodying such
plans), any deferred compensation, or collective bargaining agreement, any group
insurance contract or any other incentive, welfare or employee benefit plan
program or agreement maintained by the Company or the Bank, for the directors,
employees or former employees of the Company or the Bank ("Employee Benefit
Plan");
(i) directly or indirectly declared, set aside or paid any dividend
or made any distribution in respect to its capital stock or redeemed, purchased
or otherwise acquired, or arranged for the redemption, purchase or acquisition
of, any shares of its capital stock or other of its securities, except for
dividends paid to the Company by the Bank and regular dividends on the Company
Common Stock consistent with past practice;
(j) organized or acquired any capital stock or other equity
securities or acquired any equity or ownership interest in any person (except
through settlement of indebtedness, foreclosure, the exercise of creditors'
remedies or in a fiduciary capacity, the ownership of which does not expose the
Company or the Bank to any liability from the business, operations or
liabilities of such person);
(k) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(l) made any or acquiesced with any change in any accounting methods,
principles or practices;
(m) experienced any material adverse change in relations with
customers or clients of the Company or the Bank;
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(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered into,
modified or amended any contract or commitment, other than in the ordinary
course of business and consistent with prudent banking practices; or
(o) agreed, whether in writing or otherwise, to take any action the
performance of which would change the representations contained in this Section
3.10 in the future so that any such representation would not be true in all
material respects as of the Closing.
SECTION 3.11 Company Indebtedness. The Company has delivered to
--------------------
Compass true and complete copies of all loan documents ("Company Loan
Documents") related to indebtedness of the Company and its subsidiaries,
including the Bank, other than deposits and indebtedness of the Bank incurred in
the ordinary course of business and consistent with prudent banking practices
("Company Indebtedness"), and made available to Compass all material
correspondence concerning the status of Company Indebtedness.
SECTION 3.12 Litigation. Except as set forth on Schedule 3.12,
----------
there are no actions, suits, claims, investigations, reviews or other
proceedings pending or, to the knowledge of the Company or the Bank, threatened
against the Company or the Bank or involving any of their respective properties
or assets, at law or in equity or before or by any foreign, federal, state,
municipal, or other governmental court, department, commission, board, bureau,
agency, or other instrumentality or person or any board of arbitration or
similar entity ("Proceeding"). The Company will notify Compass immediately in
writing of any Proceedings against the Company or the Bank.
SECTION 3.13 Tax Matters. The Company and the Bank have duly filed
-----------
all tax returns required to be filed by them involving a tax liability or other
material potential detriment for failure to file (the "Filed Returns"). The
Company and the Bank have paid, or have established adequate reserves for the
payment of, all federal income taxes and all state and local income taxes and
all franchise, property, sales, employment, foreign or other taxes required to
be paid with respect to the periods covered by the Filed Returns. With respect
to the periods for which returns have not yet been filed, the Company and the
Bank have established adequate reserves determined in accordance with GAAP for
the payment of all federal income taxes and all state and local income taxes and
all franchise, property, sales, employment, foreign or other taxes. Except as
described in Schedule 3.13, the Company and the Bank have no direct or indirect
liability for the payment of federal income taxes, state and local income taxes,
and franchise, property, sales, employment or other taxes in excess of amounts
paid or reserves established. Except as set forth on Schedule 3.13, the Company
has not entered into any tax sharing
13
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agreement or other agreement regarding the allocation of the tax liability of
the Company or the Bank or similar arrangement with its Subsidiaries. Set forth
on Schedule 3.13 are the dates of filing of all Filed Returns and any amendments
thereto which relate to federal or state income or franchise taxes. Neither the
Company nor the Bank have filed any Internal Revenue Service ("IRS") Forms 1139
(Application for Tentative Refund). Except as set forth on Schedule 3.13, there
are no pending questions raised in writing by the IRS or other taxing authority
for taxes or assessments of the Company or the Bank, nor are there any
outstanding agreements or waivers extending the statutory period of limitation
applicable to any tax return of the Company or the Bank for any period. The
Company and the Bank have withheld from employee wages and paid over to the
proper governmental authorities all amounts required to be so withheld and paid
over. For the purposes of this Agreement, the term "tax" shall include all
federal, state and local taxes and related governmental charges and any interest
or penalties payable in connection with the payment of taxes.
SECTION 3.14 Employee Benefit Plans. With respect to all employee
----------------------
benefit plans and programs in which employees of the Company or the Bank
participate the following are true and correct:
(a) Schedule 3.14(a) lists each "employee welfare benefit plan" (as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained by the Company or the Bank or to which the
Company or the Bank contributes or is required to contribute, including any
multiemployer welfare plan (such employee welfare benefit plans being
hereinafter collectively referred to as the "Welfare Benefit Plans") and sets
forth (i) the amount of any liability of the Company or the Bank for
contributions more than thirty days past due with respect to each Welfare
Benefit Plan as of the date hereof and as of the end of any subsequent month
ending prior to the Closing and (ii) the annual cost attributable to each of the
Welfare Benefit Plans; no Welfare Benefit Plan provides for continuing benefits
or coverage for any participant, beneficiary or former employee after such
participant's or former employee's termination of employment except as may be
required by Section 4980B of the Code and Sections 601-608 of ERISA;
(b) Schedule 3.14(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of ERISA and not exempted under Section 4(b) or 201 of
ERISA) maintained by the Company or the Bank or to which the Company or the Bank
contributes or is required to contribute, including any multiemployer plan (as
defined in Section 3(37) of ERISA) (such employee pension benefit plans being
hereinafter collectively referred to as the "Pension Benefit Plans");
(c) Schedule 3.14(c) lists each deferred compensation plan, bonus
plan, stock option plan, employee stock purchase plan, restricted stock, excess
benefit plan, incentive compensation,
14
<PAGE>
stock bonus, cash bonus, severance pay, golden parachute, life insurance, all
nonqualified deferred compensation arrangements, rabbi trusts, cafeteria plans,
dependant care plans, all unfunded plans and any other employee benefit plans or
programs, agreements, arrangements or commitments not required under a previous
subsection to be listed (other than normal policies concerning holidays,
vacations and salary continuation during short absences for illness or other
reasons) maintained by the Company or the Bank (referred to as "Other
Programs");
(d) All of the Pension Benefit Plans and Welfare Benefit Plans and
any related trust agreements or annuity contracts (or any other funding
instruments) and all Other Programs comply currently, and have complied in all
material respects in the past, both as to form and operation, with the
provisions of ERISA, the Code and with all other applicable laws, rules and
regulations governing the establishment and operation of the Pension Benefit
Plans, Welfare Benefit Plans and all Other Programs; all necessary governmental
approvals relating to the establishment of the Pension Benefit Plans have been
obtained; and with respect to each Pension Benefit Plan that is intended to be
tax-qualified under Section 401(a) or 403(a) of the Code, a favorable
determination letter as to the qualification under the Code of each such Pension
Benefit Plan and each material amendment thereto has been issued by the Internal
Revenue Service (and nothing has occurred since the date of the last such
determination letter which resulted in, or is likely to result in the revocation
of such determination);
(e) Each Welfare Benefit Plan, each Pension Benefit Plan and each
Other Program has been administered in compliance with the requirements of the
Code, ERISA and all other applicable laws, and all reports and disclosures
required by ERISA, the Code and any other applicable laws with respect to each
Welfare Benefit Plan, Pension Benefit Plan and each Other Program have been
timely filed;
(f) On and after January 1, 1975, neither the Company, the Bank nor
any plan fiduciary of any Welfare Benefit Plan or Pension Benefit Plan has
engaged in any transaction in violation of Section 406 of ERISA (for which
transaction no exemption exists under Section 408 of ERISA) or in any
"prohibited transaction" as defined in Section 4975(c)(1) of the Code (for which
no exemption exists under Section 4975(c)(2) or 4975(d) of the Code);
(g) Neither the Company, the Bank nor any corporation or other trade
or business controlled by or under common control with the Company (as
determined under Sections 414(b) and 414(c) of the Code) ("Common Control
Entity") is, or has been within the past five years, a contributing sponsor (as
defined in Section 4001(a)(13) of ERISA) of a Pension Benefit Plan subject to
the provisions of Title IV of ERISA, nor has the Company, the Bank or a Common
Control Entity maintained or participated in any employee pension benefit plan
(defined in Section 3(2) of ERISA) subject to
15
<PAGE>
the provision of Title IV of ERISA. In addition, neither the Company, nor the
Bank nor a Common Control Entity (i) is a party to a collective bargaining
agreement, (ii) has maintained or contributed to, or has participated in or
agreed to participate in, a multiemployer plan (as defined in Section 3(37) of
ERISA), or (iii) has made a complete or partial withdrawal from a multiemployer
plan (as defined in Section 3(37) of ERISA) so as to incur withdrawal liability
as defined in Section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under Section 4207 or 4208 of ERISA);
(h) True and complete copies of each Welfare Benefit Plan, Pension
Benefit Plan and each Other Program, related trust agreements or annuity
contracts (or any other funding instruments), summary plan descriptions, the
most recent determination letter issued by the Internal Revenue Service with
respect to each Pension Benefit Plan, the most recent application for a
determination letter from the Internal Revenue Service with respect to each
Pension Benefit Plan and Annual Reports on Form 5500 Series filed with any
governmental agency for each Welfare Benefit Plan, Pension Benefit Plan and
Other Program for the two most recent plan years, have been furnished to
Compass;
(i) All Welfare Benefit Plans, Pension Benefit Plans, and Other
Programs, related trust agreements or annuity contracts (or any other funding
instruments), are legally valid and binding and in full force and effect and
there are no promised increases in benefits (whether expressed, implied, oral or
written) under any of these plans nor any obligations, commitments or
understandings to continue any of these plans, (whether expressed, implied, oral
or written) except as required by Section 4980B of the Code and Sections 601-608
of ERISA;
(j) There are no claims pending with respect to, or under, any
Pension Benefit Plan, Welfare Benefit Plan or any Other Program, other than
routine claims for plan benefits, and there are no disputes or litigation
pending or threatened with respect to any such plans;
(k) No action has been taken, nor has there been a failure to take
any action that would subject any person or entity to any liability for any
income, excise or other tax or penalty in connection with any Pension Benefit
Plan, Welfare Benefit Plan or any Other Program, other than for income taxes due
with respect to benefits paid; and
(l) Except as otherwise set forth in Schedule 3.14(l), neither the
execution and delivery of this Agreement nor the consummation of the transaction
contemplated hereby will (i) result in any payment to be made by the Company or
the Bank (including, without limitation, severance, unemployment compensation,
golden parachute (defined in Section 280G of the Code), or otherwise)
16
<PAGE>
becoming due to any employee, director or consultant or (ii) increase any
benefits otherwise payable under any Welfare Benefit Plan, Pension Benefit Plan,
or any Other Program.
SECTION 3.15 Employment Matters. Except as disclosed on Schedule
------------------
3.15, neither the Company nor the Bank is a party to any oral or written
contracts or agreements granting benefits or rights to employees or any
collective bargaining agreement or to any conciliation agreement with the
Department of Labor, the Equal Employment Opportunity Commission or any federal,
state or local agency which requires equal employment opportunities or
affirmative action in employment. There are no unfair labor practice complaints
pending against the Company or the Bank before the National Labor Relations
Board and no similar claims pending before any similar state, local or foreign
agency. To the knowledge of the Company and the Bank, there is no activity or
proceeding of any labor organization (or representative thereof) or employee
group to organize any employees of the Company or the Bank, nor of any strikes,
slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to
any such employees. The Company and the Bank are in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours, and neither
the Company nor the Bank is engaged in any unfair labor practice.
SECTION 3.16 Leases, Contracts and Agreements. Schedule 3.16 sets
--------------------------------
forth an accurate and complete description of all leases, subleases, licenses,
contracts and agreements to which the Company or the Bank is a party or by which
the Company or the Bank is bound which obligate or may obligate the Company or
the Bank to pay in the aggregate for an amount in excess of $25,000 over the
entire term of any such agreement or related contracts of a similar nature which
in the aggregate obligate or may obligate the Company or the Bank to pay in the
aggregate for an amount in excess of $25,000 over the entire term of such
related contracts (the "Contracts"). The Company has delivered to Compass true
and correct copies of all Contracts. For the purposes of this Agreement, the
Contracts shall be deemed not to include loans made by, repurchase agreements
made by, spot foreign exchange transactions of, bankers acceptances of,
agreements with Bank customers for trust services, or deposits by the Company or
the Bank, but does include unfunded loan commitments and letters of credit
issued by the Company or the Bank where the borrowers' total direct and indirect
indebtedness to the Bank is in excess of $25,000. Except as set forth in
Schedule 3.16, no participations or loans have been sold which have buy back,
recourse or guaranty provisions which create contingent or direct liabilities of
the Company or the Bank. All of the Contracts are legal, valid and binding
obligations of the parties to the Contracts enforceable in accordance with their
terms, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to creditors' rights generally and to
general equitable principles, and are in full force and effect.
17
<PAGE>
Except as described in Schedule 3.16, all rent and other payments by the Company
and the Bank under the Contracts are current, there are no existing defaults by
the Company or the Bank under the Contracts and no termination, condition or
other event has occurred which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute a default.
Each of the Company and the Bank has a good and marketable leasehold interest in
each parcel of real property leased by it free and clear of all mortgages,
pledges, liens, encumbrances and security interests.
SECTION 3.17 Related Company Transactions. Except as set forth on
----------------------------
Schedule 3.17, there are no agreements, instruments, commitments, extensions of
credit, tax sharing or allocation agreements or other contractual agreements of
any kind between or among the Company, whether on its own behalf or in its
capacity as trustee or custodian for the funds of any employee benefit plan (as
defined in ERISA), and any of its Affiliates (including the Bank). The term
"Affiliate" as used in this Agreement means, with respect to any person, any
person that, directly or indirectly, controls, is controlled by, or is under
common control with, such person in question. For the purposes of this
definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with") as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
SECTION 3.18 Compliance with Laws. Except as set forth on Schedule
--------------------
3.18, neither the Company nor the Bank is in material default in respect to or
is in violation of (i) any judgment, order, writ, injunction or decree of any
court or (ii) any statute, law, ordinance, rule, order or regulation of any
governmental department, commission, board, bureau, agency or instrumentality,
federal, state or local, including (for purposes of illustration and not
limitation) capital and FRB reserve requirements, capital ratios and loan
limitations of the FRB, the OCC or the FDIC; and the consummation of the
transactions contemplated by this Agreement will not constitute such a default
or violation as to the Company or the Bank. The Company and the Bank have all
permits, licenses, and franchises from governmental agencies required to conduct
their businesses as they are now being conducted.
SECTION 3.19 Insurance. The Company and the Bank have in effect the
---------
insurance coverage (including fidelity bonds) described in Schedule 3.19 and
have had similar insurance in force for the last 5 years. Except as provided in
Schedule 3.19, there have been no claims under such bonds within the last 5
years and neither the Company nor the Bank is aware of any facts which would
form the basis of a claim under such bonds. Neither the Company nor the Bank
has any reason to believe that the existing fidelity coverage
18
<PAGE>
would not be renewed by its carrier on substantially the same terms.
SECTION 3.20 Loans. Each loan reflected as an asset in the
-----
Financial Statements is the legal, valid and binding obligation of the obligor
of each loan, enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles.
The Bank does not have in its portfolio any loan exceeding its legal lending
limit, and except as disclosed on Schedule 3.20, the Bank has no known
significant delinquent, substandard, doubtful, loss, nonperforming or problem
loans. A list of all loans of the Bank which have been classified by any
governmental agency or by the Bank's management according to the Bank's loan
policy guidelines has previously been delivered to Compass, together with a past
due list and non-accrual list.
SECTION 3.21 Fiduciary Responsibilities. The Company and the Bank
--------------------------
have performed in all material respects all of their respective duties as a
trustee, custodian, guardian or as an escrow agent in a manner which complies in
all respects with all applicable laws, regulations, orders, agreements,
instruments and common law standards.
SECTION 3.22 Patents, Trademarks and Copyrights. Except as set
----------------------------------
forth in Schedule 3.22, neither the Company nor the Bank require the use of any
material patent, patent application, invention, process, trademark (whether
registered or unregistered), trademark application, trade name, service mark,
copyright, or any material trade secret for the business or operations of the
Company or the Bank. The Company and the Bank own or are licensed or otherwise
have the right to use the items listed in Schedule 3.22.
SECTION 3.23 Environmental Compliance. Except as set forth in
------------------------
Schedule 3.23:
(a) The Company, the Bank and any property owned or operated by them
are in material compliance with all applicable Environmental Laws (as defined in
Section 10.13(c)) and have obtained and are in material compliance with all
permits, licenses and other authorizations (individually a "Permit", and
collectively "Permits") required under any Environmental Law. There is no past
or present event, condition or circumstance that could (1) materially interfere
with the conduct of the business of the Company or the Bank in the manner now
conducted relating to such entity's compliance with Environmental Laws, (2)
constitute a violation of any Environmental Law or (3) which could have a
Material Adverse Effect upon the Company or the Bank;
(b) None of the Company or its Subsidiaries currently leases,
operates, owns, or exercises managerial functions at, nor has
19
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formerly leased, operated, owned, or exercised managerial functions at, any
facility or real property that is subject to any actual, potential, or, to the
knowledge of the Company or the Bank, threatened Proceeding under any
Environmental Law;
(c) There are no Proceedings pending or, to the knowledge of the
Company or the Bank, threatened against the Company or the Bank under any
Environmental Law or relating to the release, threatened release, management,
treatment, storage, or disposal of, or exposure to Polluting Substances, and
neither the Company nor the Bank has received any notice (whether from any
regulatory body or private person) of any claim under or violation of, or
potential or threatened violation of, any Environmental Law;
(d) There are no actions or Proceedings pending or, to the knowledge
of the Company or the Bank, threatened under any Environmental Law involving the
release or threat of release of any Polluting Substances (as defined in Section
10.13(d)) at or on any property where Polluting Substances generated by the
Company or the Bank have been disposed, treated or stored;
(e) There is no Property for which the Company or the Bank is or was
required to obtain or have any Permit under an Environmental Law to construct,
demolish, renovate, occupy, operate, or use such Property or any portion of it;
(f) Neither the Bank nor the Company has generated any Polluting
Substances for which it was required under an Environmental Law to execute any
waste disposal manifest or receipt;
(g) There has been no release of Polluting Substances in or on any
Property in violation of any Environmental Laws or which would require
remediation or any report or notification to any governmental or regulatory
authority;
(h) There are no underground or above ground storage tanks on or
under any Property which are not in material compliance with Environmental Laws
and any Property previously containing such tanks has been remediated in
compliance with all Environmental Laws;
(i) There is no asbestos containing material on any Current
Controlled Property (as defined below) or any Collateral Property (as defined
below); and
(j) The Company and the Bank have complied in all material respects
with the guidelines issued by the FDIC on February 25, 1993, and any other
governmental authority with jurisdiction over the Bank or the Company, that
direct banks to implement programs to reduce the potential for banks to incur
liability under, or to
20
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assess the compliance of borrowers or Collateral Property with, Environmental
Laws.
(k) For purposes of this Section 3.23 and Section 6.10, "Property"
includes (1) any property (whether real or personal) which the Company or the
Bank currently or in the past has leased, operated or owned or managed in any
manner including without limitation any property acquired by foreclosure or deed
in lieu thereof (respectively, "Current Controlled Property" and "Former
Controlled Property," and collectively "Controlled Property") and (2) property
now held as security for a loan or other indebtedness to the Company or the Bank
or property currently proposed as security for loans or other credit the Bank or
the Company is currently evaluating whether to extend or has committed to extend
a loan ("Collateral Property").
SECTION 3.24 Regulatory Actions. Except as set forth on Schedule
------------------
3.24, there are no actions or proceedings pending or, to the knowledge of the
Company and the Bank, threatened against the Company or the Bank by or before
the FRB, the OCC, the FDIC, the Environmental Protection Agency, the Texas
Natural Resource Conservation Commission, or any other nation or government, any
state or political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government. Except as set forth on Schedule 3.24, neither the Bank nor the
Company is subject to a formal or informal agreement, memorandum of
understanding, enforcement action with or any type of financial assistance by
any regulatory authority having jurisdiction over such entity. Neither the
Company nor the Bank has taken or agreed to take any action or has knowledge of
any fact or circumstance that would materially impede or delay receipt of any
required regulatory approval. Except as set forth in Schedule 3.24, the Company
and the Bank have not received or been made aware of any complaints or inquiries
under the Community Reinvestment Act, the Fair Housing Act, the Equal Credit
Opportunity Act or any other state or federal anti-discrimination fair lending
law and, to the knowledge of the Company and the Bank, there is no fact or
circumstance that would form the basis of any such complaint or inquiry.
SECTION 3.25 Title to Properties; Encumbrances. Except as set forth
---------------------------------
on Schedule 3.25, each of the Company and the Bank has unencumbered, good,
legal, and marketable title to all its properties and assets, real and personal,
including, without limitation, all the properties and assets reflected in the
Financial Statements except for those properties and assets disposed of for fair
market value in the ordinary course of business and consistent with prudent
banking practice since the date of the Financial Statements. Except as set
forth on Schedule 3.25, the Company has a title policy in full force and effect
from a title insurance company which, to the best of Company's knowledge, is
solvent, insuring good and indefeasible title to all
21
<PAGE>
real property owned by the Company and the Bank in favor of the Company or the
Bank, whichever is applicable. The Company has made available to Compass all of
the files and information in the possession of the Company or the Bank
concerning such properties, including any title exceptions which might affect
marketable title or value of such property. The Company and the Bank each hold
good and legal title or good and valid leasehold rights to all assets that are
necessary for them to conduct their respective businesses as they are
currently being conducted. Except as set forth on Schedule 3.25, the Company
owns all furniture, equipment, art and other property used to transact business
presently located on its premises.
SECTION 3.26 Shareholder List. The Company has no holder or holders
----------------
of any outstanding warrant, option or convertible debenture or other security
entitling the holder thereof to acquire Shares. The Company has provided to
Compass prior to the date of this Agreement a list of the holders of Shares as
of September, 1995 containing the names, addresses and number of Shares held of
record, which is accurate in all respects as of such date, and the Company will
promptly, and in any event prior to the mailing of the Proxy Statement, advise
Compass of any significant changes thereto.
SECTION 3.27 Proxy Statement. None of the information supplied or
---------------
to be supplied by the Company or the Bank, or, to the knowledge of the Company
or the Bank, by any of their respective directors, officers, employees or agents
for inclusion in:
(a) the Proxy Statement; or
(b) any registration statement or other documents to be filed with
the SEC or any regulatory or governmental agency or authority in
connection with the transactions contemplated hereby, at the
respective times such documents are filed, and, with respect to
the Proxy Statement, when first mailed to the shareholders of
Company;
will 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, in light of
the circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the Shareholders' Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that the Company or the Bank
is responsible for filing with any regulatory or governmental agency in
connection with the Merger will comply in all material respects with the
provisions of applicable law.
22
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SECTION 3.28 Dissenting Shareholders. The Company and the Bank, and
-----------------------
their respective directors, have no knowledge of any plan or intention on the
part of any Company shareholders to make written demand for payment of the fair
value of such Shares in the manner provided in Article 5.12 of the TBCA.
SECTION 3.29 Section 368 Representations. (a) There is no plan or
---------------------------
intention by any Company shareholder who is anticipated to receive one percent
(1%) or more of the total Merger Consideration ("1% Shareholder") and, to the
knowledge of the Company, the Bank, and their respective directors, there is no
plan or intention by any of the remaining Company shareholders, to sell or
otherwise dispose of shares of Compass Common Stock received pursuant to the
Merger that would reduce all such shareholders' holdings to a number of shares
having a total fair market value at the Effective Time of less than fifty
percent (50%) of the total fair market value of all of the Company's capital
stock outstanding immediately prior to the Effective Time. For purposes of this
Section 3.29, shares of the Company's capital stock surrendered by dissenting
shareholders and shares of the Company's capital stock sold, redeemed or
otherwise disposed of prior or subsequent to and as a part of the overall
transaction contemplated by the Merger will be considered to be capital stock of
the Company outstanding immediately prior to the Merger.
(b) The Company has set forth on Schedule 3.29 all knowledge of the
Company and the Bank and their respective directors about the plans or
intentions of any other Company shareholders to sell or otherwise dispose of the
Compass Common Stock to be received pursuant to the Merger.
(c) Neither Compass nor Compass Texas will assume any debts or
obligations of the holders of the Shares as part of the Merger.
(d) Except as set forth on Schedule 3.29, there have not been any
sales or redemptions of the Company's capital stock in contemplation of the
Merger. Schedule 3.29 sets forth all transactions in the capital stock of the
Company since December 31, 1994.
(e) The liabilities of the Company assumed by Compass as a part of the
Merger and the liabilities to which the transferred assets of the Company are
subject were incurred by the Company in the ordinary course of its business.
(f) The Company and its shareholders will pay their own expenses which
are incurred in connection with the Merger.
(g) The Company has not disposed of any assets (either as a dividend
or otherwise) constituting more than 10% of the fair market value of all of its
assets (ignoring any liabilities) at any
23
<PAGE>
time either during the past twelve months or in contemplation of the Merger.
(h) The Company is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(i) The Company is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
SECTION 3.30 Employee Stock Options. Except as set forth on
----------------------
Schedule 3.30, there are no Company employee stock option plans or provisions in
any other plan, program, or arrangement providing for the issuance or grant of
any other interest in respect of the capital stock of the Company or the Bank.
SECTION 3.31 Accounting Matters. Neither the Company nor any of its
------------------
affiliates has taken or agreed to take any action that would prevent Compass
from accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto.
SECTION 3.32 Representations Not Misleading. No representation or
------------------------------
warranty by the Company in this Agreement, nor any statement, summary, exhibit
or schedule furnished to Compass or Compass Texas by the Company or the Bank
under and pursuant to, or in anticipation of this Agreement, contains or will
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained herein or therein not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF COMPASS
Compass hereby makes the representations and warranties set forth in
this Article IV to the Company.
SECTION 4.1 Organization and Authority.
--------------------------
(a) Compass is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to conduct its business as now conducted, to own,
lease and operate its properties and assets as now owned, leased or operated and
to enter into and carry out its obligations under this Agreement.
(b) Compass is a bank holding company under the Bank Holding Company
Act of 1956, as amended, and in good standing under all laws, rules and
regulations applicable to bank holding companies. Compass is duly qualified or
licensed and in good standing in each
24
<PAGE>
jurisdiction which requires such qualification where it owns or leases
properties or conducts business.
SECTION 4.2 Authority Relative to Agreement. Compass has full
-------------------------------
corporate power and authority and no further corporate proceedings on the part
of Compass are necessary to execute and deliver this Agreement and to consummate
the transactions contemplated hereby, all of which have been duly and validly
authorized by Compass' Board of Directors. This Agreement has been duly
executed and delivered by Compass and is a duly authorized, valid, legally
binding and enforceable obligation of Compass, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and general equitable principles, and
subject to such shareholder approvals and such approval of regulatory agencies
and other governmental authorities having authority over Compass as may be
required by statute or regulation. Compass is not in violation of or default
under its Certificate of Incorporation or By-Laws or any agreement, document or
instrument under which Compass is obligated or bound, or any law, order,
judgment, injunction, award, decree, statute, rule, ordinance or regulation
applicable to Compass or any of its Subsidiaries, the violation or breach of
which could have a Material Adverse Effect on Compass and its Subsidiaries taken
as a whole. Except as set forth on Schedule 4.2, neither the execution,
delivery nor performance of this Agreement in its entirety, nor the consummation
of all the transactions contemplated hereby, following the receipt of such
approvals as may be required from the SEC, the OCC, the FRB, the FDIC, and the
Department will (i) violate (with or without the giving of notice or passage of
time), any law, order, writ, judgment, injunction, award, decree, rule, statute,
ordinance or regulation applicable to Compass, or (ii) be in conflict with,
result in a breach or termination of any provision of, cause the acceleration of
the maturity of any debt or obligation pursuant to, constitute a default (or
give rise to any right of termination, cancellation or acceleration) under, or
result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of Compass pursuant to, any terms,
conditions or provisions of any note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which Compass is a party or by which any of its assets
or properties are bound. Except as set forth on Schedule 4.2, there are no
proceedings pending or, to the knowledge of Compass, threatened, against
Compass, at law or in equity or before any foreign, federal, state, municipal or
other governmental court, department, commission, board, bureau, agency,
instrumentality or other person which may result in liability to the Company or
the Bank on the consummation of the transactions contemplated hereby or which
would prevent or delay such consummation. Except as set forth in Schedule 4.2,
or as contemplated hereby, the corporate existence, business, organization,
assets, licenses, permits, authorizations and
25
<PAGE>
contracts of Compass will not be terminated or impaired by reason of the
execution, delivery or performance by Compass of this Agreement or consummation
by Compass of the transactions contemplated hereby, assuming receipt of the
required regulatory approvals.
SECTION 4.3 Financial Reports. Compass has previously furnished the
-----------------
Company a true and complete copy of (i) the 1994 Annual Report to Shareholders,
which report (the "Compass 1994 Annual Report") includes, among other things,
consolidated balance sheets of Compass and its Subsidiaries as of December 31,
1994 and 1993, the related consolidated statements of income, shareholders'
equity and cash flows for the years ended December 31, 1994, 1993 and 1992 and
(ii) Compass' quarterly reports on Form 10-Q for the quarters ended March 31,
June 30, and September 30, 1995 (the "Quarterly Reports") which reports include
among other things unaudited balance sheets of Compass and its Subsidiaries as
of March 31, June 30, and September 30 1995 and December 31, 1994, and the
related unaudited consolidated statements of income and cash flows for the
three-, six- and nine-month periods ending March 31 and June 30, September 1995
and 1994. The financial statements contained in the Compass 1994 Annual Report
and such Quarterly Reports have been prepared in conformity with GAAP applied on
a basis consistent with prior periods. The consolidated balance sheets of
Compass and its subsidiaries as of December 31, 1994 and 1993 contained in the
Compass 1994 Annual Report fairly present the consolidated financial condition
of Compass and its Subsidiaries as of the dates thereof, and the related
consolidated statements of income, shareholders' equity and cash flows of
Compass and its Subsidiaries contained therein fairly present the results of
operations and cash flows thereof for the fiscal years then ended. The unaudited
consolidated financial statements of Compass and its Subsidiaries as of March
31, June 30, and September 30, 1995 and 1994, contained in Compass' Quarterly
Reports, fairly present the financial condition, the results of the operations
and changes in cash flows thereof as of such dates and for the periods
indicated. For the purposes of this Agreement, all financial statements referred
to in this Section 4.3 shall be deemed to include any notes to such financial
statements. Compass has made all filings required to be made in compliance with
the Exchange Act. None of the information contained in the Compass 1994 Annual
Report or Compass' Quarterly Reports is false or misleading with respect to any
material fact, or omits to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
SECTION 4.4 Capitalization. The shares of Compass Common Stock to
--------------
be issued pursuant to this Agreement, when so issued, will be registered under
the Securities Act and will be duly and validly authorized and issued, fully
paid and nonassessable, and not issued in violation of any preemptive rights.
As of September 30, 1995, Compass had 38,133,630 shares of common stock, $2.00
per share par
26
<PAGE>
value, issued and outstanding. None of the shares of Compass Common Stock to be
issued pursuant to this Agreement will be subject to any lien, charge,
encumbrance, claim, rights of others, mortgage, pledge or security interest, and
none will be subject to any agreements or understandings among any persons with
respect to the voting or transfer of such shares of Compass Common Stock except
as contemplated hereby.
SECTION 4.5 Consents and Approvals. No prior consent, approval or
----------------------
authorization of, or declaration, filing or registration with any person,
domestic or foreign, is required of or by Compass in connection with the
execution, delivery and performance by Compass of this Agreement and the
transactions contemplated hereby or the resulting change in control of the
Company and the Bank, except the filing of Articles of Merger under the TBCA,
the filing of the Certificate of Merger under the GCL, and such approvals as may
be required from the SEC, the FRB, the OCC, the Department and the FDIC.
SECTION 4.6 Proxy Statement. None of the information supplied or to
---------------
be supplied by Compass, or, to the best knowledge of Compass, any of its
directors, officers, employees or agents for inclusion in:
(a) the Proxy Statement; or
(b) any registration statement or other documents to filed with the
SEC or any regulatory or governmental agency or authority in
connection with the transactions contemplated herein, at the
respective times such documents are filed, and, with respect to
the Proxy Statement, when first mailed to the shareholders of
the Company;
will 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, in light of
the circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the Shareholders' Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Shareholders' Meeting. All documents that Compass is responsible
for filing with any regulatory or governmental agency in connection with the
Merger will comply in all material respects with the provisions of applicable
law.
SECTION 4.7 Availability of Compass Common Stock. Compass has
------------------------------------
available a sufficient number of authorized and unissued shares of Compass
Common Stock to pay the Merger Consideration, and Compass will not take any
action during the term of this Agreement that will cause it not to have a
sufficient number of authorized
27
<PAGE>
and unissued shares of Compass Common Stock to pay the Merger Consideration.
SECTION 4.8 Representations Not Misleading. No representation or
------------------------------
warranty by Compass in this Agreement, nor any statement or exhibit furnished to
the Company or the Bank under and pursuant to, or in anticipation of this
Agreement, contains or will contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements contained herein
or therein not misleading.
ARTICLE V.
COVENANTS OF THE COMPANY
SECTION 5.1 Affirmative Covenants of the Company. For so long as
------------------------------------
this Agreement is in effect, the Company shall, and shall use its best efforts
to cause its Subsidiaries, including the Bank (collectively, the "Acquired
Companies") to, from the date of this Agreement to the Closing, except as
specifically contemplated by this Agreement:
(a) operate and conduct the businesses of the Acquired Companies in
the ordinary course of business and consistent with prudent banking practices;
(b) preserve intact the Acquired Companies' corporate existence,
business organization, assets, licenses, permits, authorizations, and business
opportunities;
(c) comply with all material contractual obligations applicable to the
Acquired Companies' operations;
(d) maintain all the Acquired Companies' properties in good repair,
order and condition, reasonable wear and tear excepted, and maintain the
insurance coverages described in Schedule 5.1(d) (which shall list all Property
insured by such coverages) or obtain comparable insurance coverages from
reputable insurers which, in respect to amounts, types and risks insured, are
adequate for the business conducted by the Acquired Companies and consistent
with the existing insurance coverages;
(e) in good faith and in a timely manner (i) cooperate with Compass
and Compass Texas in satisfying the conditions in this Agreement, (ii) assist
Compass and Compass Texas in obtaining as promptly as possible all consents,
approvals, authorizations and rulings, whether regulatory, corporate or
otherwise, as are necessary for Compass and Compass Texas and the Company (or
any of them) to carry out and consummate the transactions contemplated by this
Agreement, including all consents, approvals and authorizations required by any
agreement or understanding existing at the Closing between the Company and any
governmental agency or other third party, (iii) furnish information concerning
the
28
<PAGE>
Acquired Companies not previously provided to Compass required for inclusion in
any filings or applications that may be necessary in that regard and (iv)
perform all acts and execute and deliver all documents necessary to cause the
transactions contemplated by this Agreement to be consummated at the earliest
possible date;
(f) timely file with the FRB, the OCC, the Department, and the FDIC,
all financial statements and other reports required to be so filed by any of the
Acquired Companies and to the extent permitted by applicable law, promptly
thereafter deliver to Compass copies of all financial statements and other
reports required to be so filed;
(g) comply in all material respects with all applicable laws and
regulations, domestic and foreign;
(h) promptly notify Compass upon obtaining knowledge of any default,
event of default or condition with which the passage of time or giving of notice
would constitute a default or an event of default under the Company Loan
Documents and promptly notify and provide copies to Compass of any material
written communications concerning the Company Loan Documents;
(i) between the date of this Agreement and Closing, promptly give
written notice to Compass upon obtaining knowledge of any event or fact that
would cause any of the representations or warranties of the Company contained in
or referred to in this Agreement to be untrue or misleading in any material
respect;
(j) deliver to Compass a list (Schedule 5.1(j)), dated as of the
Effective Time, showing (i) the name of each bank or institution where the
Company and the Bank have accounts or safe deposit boxes, (ii) the name(s) in
which such accounts or boxes are held and (iii) the name of each person
authorized to draw thereon or have access thereto;
(k) deliver to Compass a list (Schedule 5.1(k)), dated as of the
Effective Time, showing all liabilities and obligations of Company and the Bank,
except those arising in the ordinary course of their respective businesses,
incurred since the Balance Sheet Date, certified by an officer of Company;
(l) promptly notify Compass of any material change or inaccuracies in
any data previously given or made available to Compass or Compass Texas pursuant
to this Agreement; and
(m) cause the Bank to terminate that certain Administrative Services
Agreement dated July 1, 1993 between the Bank and Karl Lemke ("Services
Agreement") and obtain a release from any obligations under the Services
Agreement, the form and substance of which shall be satisfactory to Compass;
29
<PAGE>
(n) provide to Compass on or before the 14th business day after the
date hereof true and correct copies of statements from each 1% Shareholder with
respect to his plan or intention to sell or otherwise dispose of the Compass
Common Stock to be received pursuant to the Merger ("Section 368 Certificates");
(o) deliver to Compass on or before the 14th business day after the
date hereof an executed Voting Agreement and Irrevocable Proxy in substantially
the form attached hereto as Exhibit D ("Proxies") whereby the persons listed in
Schedule 5.1(o) have agreed that they will vote the Shares owned by them in
favor of this Agreement and the transactions contemplated hereby, subject to
required regulatory approvals, and that they will retain the right to vote such
Shares during the terms of this Agreement and have given Compass a proxy to vote
such Shares in favor of the Merger if they should fail to do so; and
(p) provide access, to the extent that the Company or the Bank have
the right to provide access, to any or all Property (as defined in Section 3.23)
so as to enable Compass to physically inspect any structure or components of any
structure on such Property, including without limitation surface and subsurface
testing and analyses.
SECTION 5.2 Negative Covenants of the Company. Except with the
---------------------------------
prior written consent of Compass or as otherwise specifically permitted by this
Agreement, the Company will not and will use its best efforts not to permit the
Bank, or any other Subsidiary of the Company, to, from the date of this
Agreement to the Closing:
(a) make any amendment to its articles of incorporation or association
or bylaws;
(b) make any change in the methods used in allocating and charging
costs, except as may be required by applicable law, regulation or GAAP and after
notice to Compass;
(c) make any change in the number of shares of the capital stock
issued and outstanding, or issue, reserve for issuance, grant, sell or authorize
the issuance of any shares of its capital stock or subscriptions, options,
warrants, calls, rights or commitments of any kind relating to the issuance or
sale of or conversion into shares of its capital stock;
(d) contract to create any obligation or liability (absolute,
accrued, contingent or otherwise) except in the ordinary course of business and
consistent with prudent banking practices;
(e) contract to create any mortgage, pledge, lien, security interest
or encumbrances, restrictions, or charge of any kind (other than statutory liens
for which the obligations secured
30
<PAGE>
thereby shall not become delinquent), except in the ordinary course of business
and consistent with prudent banking practices;
(f) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its material properties or assets,
except in the ordinary course of business and consistent with prudent banking
practices;
(g) sell any real estate owned as of the date of this Agreement or
acquired thereafter, which real estate qualifies as "other real estate owned"
under accounting principles applicable to it, except in the ordinary course of
business and consistent with prudent banking practices and applicable banking
laws and regulations;
(h) dispose of or permit to lapse any rights to the use of any
material trademark, service mark, trade name or copyright, or dispose of or
disclose to any person other than its employees any material trade secret not
theretofore a matter of public knowledge;
(i) except as set forth on Schedule 3.10 and except for regular
salary increases granted in the ordinary course of business within the Company
or the Bank's 1995 budget and consistent with prior practices, grant any
increase in compensation or directors' fees, or pay or agree to pay or accrue
any bonus or like benefit to or for the credit of any director, officer,
employee or other person or enter into any employment, consulting or severance
agreement or other agreement with any director, officer or employee, or adopt,
amend or terminate any Employee Benefit Plan or change or modify the period of
vesting or retirement age for any participant of such a plan;
(j) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of shares of its capital stock other than the
payment of dividends in the regular course of business, consistent with past
practices, and in accordance with applicable laws and regulations, not exceeding
in the aggregate 40% of the net income of the Company determined in accordance
with GAAP, applied on a basis consistent with past periods, reduced by (i) any
income of the Company resulting from any restoration to income of any portion of
a reserve for possible loan losses or any other contingency or valuation reserve
of the Company or the Bank, (ii) any income resulting from adjustments under FAS
109, (iii) any income resulting from a change to the accounting principles or
policies applied by the Company or the Bank, the effect of which is to increase
income during the period in which the net income is calculated ("Earnings
Period") or to shift income to the Earnings Period from any other period prior
to or subsequent to the Earnings Period, (iv) any gains from sales of
securities, (v) any income or gain resulting from any sale of other real estate
or other assets, or (vi) any extraordinary item of income (as defined by GAAP);
31
<PAGE>
(k) except through settlement of indebtedness, foreclosure, the
exercise of creditors' remedies or in a fiduciary capacity, acquire the capital
stock or other equity securities or interest of any person;
(l) make any capital expenditure or a series of expenditures of a
similar nature in excess of $25,000 in the aggregate;
(m) make any income tax or franchise tax election or settle or
compromise any federal, state, local or foreign income tax or franchise tax
liability, or, except in the ordinary course of business consistent with prudent
banking practices, make any other tax election or settle or compromise any other
federal, state, local or foreign tax liability;
(n) except for negotiations and discussions between the parties
hereto relating to the transactions contemplated by this Agreement or as
otherwise permitted hereunder, enter into any transaction, or enter into, modify
or amend any contract or commitment other than in the ordinary course of
business and consistent with prudent banking practices;
(o) except as contemplated by this Agreement, adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization or business combination
of the Company or the Bank;
(p) issue any certificates of deposit except in the ordinary course
of business and in accordance with prudent banking practices;
(q) make any investments except in the ordinary course of business and
in accordance with prudent banking practices;
(r) modify, amend, waive or extend either the Company Loan Documents
or any rights under such agreements;
(s) modify any outstanding loan, make any new loan, or acquire any
loan participation, unless such modification, new loan, or participation is made
in the ordinary course of business and in accordance with prudent banking
practices;
(t) sell or contract to sell any part of the Bank premises;
(u) change any fiscal year or the length thereof;
(v) take or agree to take any action that would prevent Compass from
accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto; or
32
<PAGE>
(w) prepay in whole or in part the Company Indebtedness; or
(x) enter into any agreement, understanding or commitment, written or
oral, with any other person which is in any manner inconsistent with the
obligations of the Company and its directors and the Bank under this Agreement
or any related written agreement. Nothing contained in this Section 5.2 or in
Section 5.1 is intended to influence the general management or overall
operations of the Company or the Bank in a manner not permitted by applicable
law and the provisions thereof shall automatically be reduced in compliance
therewith.
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.1 Access To, and Information Concerning, Properties and
-----------------------------------------------------
Records. During the pendency of the transactions contemplated hereby, the
- -------
Company shall, to the extent permitted by law, give Compass, its legal counsel,
accountants and other representatives full access, during normal business hours,
throughout the period prior to the Closing, to all of the Company's and the
Bank's properties, books, contracts, commitments and records, permit Compass to
make such inspections (including without limitation, physical inspection of the
surface and subsurface of any property thereof and any structure thereon) as
they may require and furnish to Compass during such period all such information
concerning the Company and the Bank and their affairs as Compass may reasonably
request. All information disclosed by the Company to Compass which is
confidential and is so identified to Compass as confidential shall be held
confidential by Compass and its representatives, except to the extent counsel to
Compass has advised it such information is required to or should be disclosed in
filings with regulatory agencies or governmental authorities or in proxy
materials delivered to shareholders of the Company. In the event this Agreement
is terminated pursuant to the provisions of Article VIII, upon the written
request of the Company, Compass agrees to return to the Company all copies of
such confidential information. In the event this Agreement is terminated
pursuant to the provisions of Article VIII, Compass agrees that, for a period of
one year following the date of such termination, it will not use such
confidential information about the Bank to solicit customers of the Bank as of
the date of such termination. Notwithstanding the preceding sentence, Compass
shall not be deemed to be in violation of this Section by virtue of (i) Compass'
continued transactions, including marketing, with customers of the Bank who also
maintain accounts or loans with Compass at other banking offices of Compass,
(ii) Compass' advertising in publications or other media that are normally
distributed or transmitted in geographic areas that include the geographic
markets served by the Bank, or (iii) the acquisition by Compass of another
depository institution possessing branches or similar deposit or loan
33
<PAGE>
facilities in the geographic markets serviced by the Bank on the date of this
Agreement.
SECTION 6.2 Filing of Regulatory Approvals. As soon as reasonably
------------------------------
practicable, Compass shall file all notices and applications to the FRB, the
OCC, the Department and the FDIC which Compass deems necessary or appropriate to
complete the transactions contemplated herein, including the subsequent merger
of the Bank and a Texas banking corporation and indirect wholly-owned subsidiary
of Compass ("Compass Bank"). Compass will deliver to the Company, and the
Company will deliver to Compass, copies of all non-confidential portions of any
such applications.
SECTION 6.3 Miscellaneous Agreements and Consents. Subject to the
-------------------------------------
terms and conditions of this Agreement, Compass and the Company agree to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date hereof, the transactions contemplated by this Agreement. Compass
and the Company shall use their respective best efforts to obtain or cause to be
obtained consents of all third parties and governmental and regulatory
authorities necessary or desirable for the consummation of the transactions
contemplated herein.
SECTION 6.4 Company Indebtedness. Prior to the Effective Time, the
--------------------
Company shall pay all regularly scheduled payments on all Company Indebtedness
and shall cooperate with Compass in taking such actions as are reasonably
appropriate or necessary in connection with the redemption, prepayment,
modification, satisfaction or elimination of any outstanding indebtedness of the
Company or the Bank with respect to which a consent is required to be obtained
to effectuate the Merger and the transactions contemplated by this Agreement and
has not been so obtained.
SECTION 6.5 Best Good Faith Efforts. All parties hereto agree that
-----------------------
the parties will use their best good faith efforts to secure all regulatory
approvals necessary to consummate the Merger and other transactions provided
herein and to satisfy the other conditions to Closing contained herein.
SECTION 6.6 Exclusivity. During the terms of this Agreement, the
-----------
Company shall not solicit, entertain or negotiate with respect to any offer to
acquire the Company or the Bank from any other person. During the term of this
Agreement, neither the Company nor the Bank shall provide information to any
other person in connection with a possible acquisition of the Company or the
Bank. Immediately upon receipt of any such unsolicited offer, the Company will
communicate to Compass the terms of any proposal or request for information and
the identity of parties involved.
34
<PAGE>
SECTION 6.7 Public Announcement. Subject to written advice of
-------------------
counsel with respect to legal requirements relating to public disclosure of
matters related to the subject matter of this Agreement, the timing and content
of any announcements, press releases or other public statements concerning the
proposal contained herein will occur upon, and be determined by, the mutual
consent of the Company and Compass.
SECTION 6.8 Employee Benefit Plans. Compass presently intends that,
----------------------
after the Merger, Compass, the Company and the Bank will not make additional
contributions to the employee benefit plans sponsored by the Company or the Bank
immediately prior to the Merger.
Compass agrees that the employees of the Company and the Bank will be
entitled to participate as newly hired employees in the employee benefit plans
and programs maintained for employees of Compass and its affiliates, in
accordance with the respective terms of such plans and programs, and Compass
shall take all actions necessary or appropriate to facilitate coverage of the
Company's and the Bank's employees in such plans and programs from and after the
Effective Time, subject to the following:
(i) Employee Welfare Benefit Plans and Programs: Each employee of the
Company and the Bank will be entitled to credit for prior service with the
Company and the Bank for all purposes under the employee welfare benefit plans
and other employee benefit plans and programs (other than those described in
subparagraph (ii) below and any stock option plans) sponsored by Compass to the
extent the Company or the Bank sponsored a similar type of plan which the
Company or Bank employee participated in immediately prior to the Effective
Time. Any preexisting condition exclusion applicable to such plans and programs
shall be waived with respect to any Bank or Company employee. For purposes of
determining each Company or Bank employee's benefit for the year in which the
Merger occurs under the Compass vacation program, any vacation taken by a
Company or Bank employee immediately preceding the Effective Time for the year
in which the Merger occurs will be deducted from the total Compass vacation
benefit available to such Company or Bank employee for such year. Compass
agrees that for purposes of determining the number of vacation days available
with respect to each Company or Bank employee for the year in which the Merger
occurs, that the number of vacation days for such year shall be determined under
the Company or Bank vacation policy in effect as of January 1, 1995. Compass
further agrees to credit each Company or Bank employee for the year during which
such coverage under the Compass welfare benefit plan begins, with any
deductibles already incurred during such year under the Company's group health
plan.
(ii) Employee Pension Benefit Plans: Each Company and Bank employee
shall be entitled to credit for past service with the Company and Bank for the
purpose of satisfying any eligibility or
35
<PAGE>
vesting periods applicable to the Compass employee pension benefit plans which
are subject to Sections 401(a) and 501(a) of the Code (including, without
limitation, the Compass 401(k)/ESOP Plan). Notwithstanding the foregoing,
Compass shall not grant any prior years of service credit to employees of the
Company and the Bank with respect to any defined benefit pension plans sponsored
(or contributed to) by Compass; instead, Company and Bank employees shall be
treated as newly hired employees of Compass as of the date following the
Effective Time for purposes of determining eligibility, vesting and benefit
accruals thereunder.
On or before, but effective as of the Effective Time, the Company and
the Bank may take such actions as may be necessary to cause each individual
employed by the Company and the Bank immediately prior to the Effective Time to
have a fully vested and nonforfeitable interest in such employee's account
balance under the 401(k) plan sponsored by the Company as of the Effective Time.
SECTION 6.9 Merger of Bank. Compass presently intends to cause the
--------------
Bank to merge into Compass Bank immediately after the Merger, and the Company
agrees to cause the Bank to execute documents and take actions (conditioned on
the Merger being effective) and otherwise cooperate with Compass during the time
the Merger transaction is pending in order to facilitate such merger of the Bank
into Compass Bank immediately after the Closing.
SECTION 6.10 Environmental Investigation; Right to Terminate
-----------------------------------------------
Agreement.
- ---------
(a) Compass and its consultants, agents and representatives, shall
have the right to the same extent that the Company or the Bank has such right,
but not the obligation or responsibility, to inspect any Property, including,
without limitation, for the purpose of conducting asbestos surveys and sampling,
and other environmental assessments and investigations ("Environmental
Inspections"), all of which will be at Compass' expense. Compass' right to
conduct Environmental Inspections shall include the right to sample and analyze
air, sediment, soil and groundwater of any Property to the same extent that the
Company or the Bank has such right. Compass may conduct such Environmental
Inspections at any time but shall complete such inspections on or prior to the
45th day after the date hereof.
(b) The Bank or the Company, as appropriate, shall give to Compass
written notice of any Property acquired, leased, managed or controlled by the
Bank or the Company or in which the Bank or the Company acquires a security
interest between the date hereof and the date 240 days after the date hereof
("Interim Acquisition"). Such written notice shall be given to Compass within 5
business days of the date of an Interim Acquisition. Compass may elect to
conduct an Environmental Inspection of any such Property which is the subject of
an Interim Acquisition and the time periods set
36
<PAGE>
forth in this Section 6.10 for the performance of Environmental Inspections,
secondary investigations (hereinafter defined) and for Compass' giving of notice
to the Bank of non-acceptability and need for remediation (as set forth below)
shall commence on the date written notice of the respective Interim Acquisition
is received by Compass; provided however, Compass shall in all events notify the
Company of any Property which is unacceptable and requires remediation on or
before the 102nd day after the date hereof.
(c) Compass shall notify the Company prior to any physical inspections
of Property, and the Company may place reasonable restrictions on the time of
such inspections. If, as a result of any such Environmental Inspection, further
investigation ("secondary investigation") including, without limitation, test
borings, soil, water and other sampling is deemed desirable by Compass, Compass
shall notify the Company of the Properties on which it intends to conduct a
secondary investigation on or prior to the 52nd day after the date hereof.
Compass shall notify the Company of any Properties that, in the sole discretion
of Compass, are not acceptable and require remediation on or prior to the 102nd
day after the date hereof.
(d) With respect to any Current Controlled Property that Compass has
notified the Company is not acceptable and requires remediation, subject to the
expenditure limitation provided in subsection (e) below, the Company shall
promptly prepare a remediation plan acceptable to Compass, obtain approval of
such remediation plan by the Texas Natural Resource Conservation Commission or
any other appropriate governmental authority ("Environmental Regulatory
Authority"), and perform and complete the remediation contemplated by any such
plan, on or prior to the 240th day after the date hereof ("Remediation
Completion Date").
(e) With respect to any Collateral Property that Compass has notified
the Company is not acceptable and requires remediation, the Company agrees
promptly to obtain access to such Collateral Property from the person who owns,
operates, leases or otherwise exercises managerial control over any such
Collateral Property and to obtain a written estimate ("Remediation Estimate")
from an environmental professional acceptable to Compass of all costs of
remediating any such Collateral Property (including the costs of preparing a
remediation plan acceptable to Compass and approved by the appropriate
Environmental Regulatory Authority) and to cause the Bank to add to its loan
loss reserve the lesser of (a) the expenditures arising in connection with (i)
remediation, removal or monitoring (ii) correction of any violation of any
applicable Environmental Law, (iii) preparing and obtaining approval by the
appropriate Environmental Regulatory Authority of remediation plans with respect
to Collateral Properties, and (iv) obtaining Remediation Estimates, and (b) the
outstanding balance of the loan or indebtedness secured by such Collateral
Property. A remediation plan prepared by the Third Party Owner and acceptable
to Compass
37
<PAGE>
may be the basis of the Remediation Estimate. If the expenditures set forth in
clause (a) above would exceed 80% of the outstanding balance of such loan or
indebtedness, the Company will cause the Bank to increase its loan loss reserve
by the outstanding amount of the loan or indebtedness. Notwithstanding the
foregoing, and without limiting any rights of Compass to terminate this
Agreement, the Company shall not be obligated to incur aggregate expenditures in
excess of $150,000 in connection with remediation or monitoring of any Property,
preparing and obtaining approval by the appropriate Environmental Regulatory
Authority of remediation plans with respect to Controlled Properties, in
connection with obtaining Remediation Estimates in connection with Collateral
Properties and in connection with making allocations to the Bank's loan loss
reserve.
(f) The Company and the Bank agree to indemnify and hold harmless
Compass for any claims for damage to the Property or injury or death to persons
directly or indirectly attributable to the actions or omissions (other than
negligent actions or omissions) of Compass or its agents in performing any
Environmental Inspection or secondary investigation of the Property. Compass
shall have no liability or responsibility of any nature whatsoever for the
results, conclusions or other findings related to any Environmental Inspection,
secondary investigation or other environmental survey. If this Agreement is
terminated, then except as otherwise required by law, Compass shall have no
obligation to make any reports to any governmental authority of the results of
any Environmental Inspection, secondary investigation or other environmental
survey, but such reporting shall remain the responsibility of and within the
discretion of the Company or the Bank, as the case may be. Compass shall have
no liability to the Company or its Subsidiaries for making any report of such
results to any governmental authority, Compass will notify the Company of the
delivery of a report of results to an environmental authority prior to or
contemporaneously with the delivery of such report.
(g) Compass shall have the right to terminate this Agreement in the
following circumstances:
(i) the Company's breach of any representation or warranty set forth
in Section 3.23,
(ii) the factual substance of any warranties set forth in Section 3.23
is not true and accurate irrespective of the knowledge or lack of knowledge of
the Company or Bank;
(iii) the results of such Environmental Inspection, secondary
investigation or other environmental survey are disapproved by Compass because
the Environmental Inspection, secondary investigation or other environmental
survey identifies violations or potential violations of Environmental Laws;
38
<PAGE>
(iv) if the Environmental Inspection, secondary investigation or other
environmental survey identifies any past or present event, condition or
circumstance that, based on the estimates of the environmental professionals
referred to in this Section 6.10, may require expenditures by the Bank, in
connection with (1) remediation or monitoring of any Controlled Property, (2)
preparing and obtaining approval by the appropriate Environmental Regulatory
Authority of remediation plans with respect to Controlled Properties, or (3)
obtaining Remediation Estimates in connection with Collateral Properties, which
when aggregated with any other expenditures or allocations to loan loss reserve
which may be incurred in connection with this subsection (iv), or subsections
(vi) or (ix) b)(1) below, may exceed $150,000;
(v) the presence of any underground or above ground storage tank in,
on or under any Property (1) which has not registered or which has not fully
qualified for and met all conditions necessary to be entitled to applicable
governmental remediation funds in the event a release of Polluting Substances
were to occur from any such tank, (2) from which a release of any Polluting
Substances has occurred or (3) which otherwise is in violation of an
Environmental Law;
(vi) the presence of any asbestos containing material in, on or under
any Controlled Property, the removal or monitoring of which would constitute a
Material Adverse Effect or which, based on the estimates of the environmental
professionals referred to in this Section 6.10, may require expenditures by the
Bank which, when aggregated with any other expenditures or allocations to loan
loss reserves which may be incurred in connection with this subsection (vi), or
subsection (iv) above or subsection (ix) b)(1) below, may exceed $150,000;
(vii) the additions to the Bank's loan loss reserve pursuant to (ix)
b)(2)(b) below, which when aggregated with any expenditures in subsection (vi)
and subsection (iv) above, may exceed $150,000;
(viii) Compass is not permitted to conduct an Environmental Inspection
or secondary investigation of any Property to the extent it deems appropriate;
(ix) If on or before the Remediation Completion Date,
a) for each Controlled Property identified by Compass as
unacceptable and requiring remediation:
(1) the Company does not deliver to Compass written evidence
acceptable to Compass that the Company has developed and fully implemented a
remediation plan approved by the applicable Environmental Regulatory Authority,
and the applicable Environmental Regulatory Authority has approved such
completed Remediation,
39
<PAGE>
(2) the Company notifies Compass in writing (a) that the Bank
has been unable to obtain timely approval by applicable Environmental Regulatory
Authorities of any remediation plan approved by Compass, (b) that the Bank has
been unable to timely implement any such approved remediation plan, (c) that any
such Controlled Property has been remediated by the Bank, but the applicable
Environmental Regulatory Authority will not approve the results of the
remediation, or that the Bank does not intend to remediate the Controlled
Property.
b) for each Collateral Property identified by Compass as
unacceptable and requiring remediation, the Company does not provide evidence
acceptable to Compass that:
(1) the Remediation Estimate for a particular Collateral
Property prepared by the Company was satisfactory to Compass, and
(2) the Bank increased its loan loss reserve by (A) the
aggregate sum of the expenditures associated with (i) remediation, removal or
monitoring, (ii) correction of any violations of any applicable Environmental
Law, (iii) preparing and obtaining approval by the appropriate Environmental
Regulatory Authority of remediation plans with respect to Collateral Properties,
or (iv) obtaining Remediation Estimates, or (B) the outstanding amount of the
loan or indebtedness secured by such Collateral Property, whichever is less.
(h) The Company agrees to make available to Compass and its
consultants, agents and representatives all documents and other material
relating to environmental conditions of the Property including, without
limitation, the results of other environmental inspections and surveys. The
Company also agrees that all engineers and consultants who prepared or furnished
such reports may discuss such reports and information with Compass and shall be
entitled to certify the same in favor of Compass and its consultants, agents and
representatives and make all other data available to Compass and its
consultants, agents and representatives. At the written request of the Company,
Compass agrees to provide the Company with a copy of all environmental reports
prepared by its consultants as a result of the Environmental Inspections,
secondary investigation or other environmental survey.
SECTION 6.11 Cooperation on Texas Receipts. The Company and Compass
-----------------------------
agree to cooperate in good faith and to use their best efforts, and the Company
agrees to take action reasonably requested by Compass, so as to cause the
Company not to have any Texas gross receipts, other than dividends from the
Bank, for purposes of Texas franchise taxes after the date of incorporation of
Compass Texas.
40
<PAGE>
SECTION 6.12 Exchange Agreement. Immediately prior to the Effective
------------------
Time, the Company and Compass agree to enter into, and Compass agrees to cause
Compass Texas to enter into, the Exchange Agreement with the Exchange Agent, or
if the Exchange Agent refuses to serve as exchange agent, such other exchange
agent as shall mutually agreed to by the Company and Compass.
SECTION 6.13 Corporate Tax Consequences. The Merger is intended to
--------------------------
be a reorganization qualifying under Sections 354, 368(a)(1)(A), and
368(a)(2)(E) of the Code, as amended, and the parties shall not take or agree to
take any action that would preclude the Merger from qualifying as a
reorganization.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect the
---------------------------------------------------
Merger. The respective obligations of each party to effect the Merger are
- ------
subject to the satisfaction or waiver of the following conditions prior to the
Effective Time:
(a) the receipt of regulatory approvals which approvals shall not
have imposed any condition or requirement which in the judgment of Compass would
adversely impact the economic or business benefits of the transactions
contemplated by this Agreement or otherwise would in the judgment of Compass be
so burdensome as to render inadvisable the consummation of the Merger, and the
expiration of any applicable waiting period with respect thereto;
(b) the Closing will not violate any injunction, order or decree of
any court or governmental body having competent jurisdiction;
(c) the approval of the Merger by the Company's shareholders entitled
to vote at the Shareholders' Meeting; and
(d) a registration statement covering the Compass Common Stock to be
issued in the Merger shall be effective under the Securities Act and any
applicable state securities or "blue sky" acts and no stop order suspending the
effectiveness of such registration statement shall be in effect and no
proceedings for such purpose, or any proceedings under the SEC or applicable
state securities authorities rules with respect to the transactions contemplated
hereby, shall be pending before or threatened by the SEC or any applicable state
securities or blue sky authorities.
SECTION 7.2 Conditions to the Obligations of Compass and Compass
----------------------------------------------------
Texas to Effect the Merger.
- --------------------------
The obligations of Compass and Compass Texas to effect the Merger are
subject to the satisfaction or waiver of the following conditions prior to the
Effective Time:
41
<PAGE>
(a) all representations and warranties of the Company shall be true
and correct in all material respects as of the date hereof and at and as of the
Closing, with the same force and effect as though made on and as of the Closing;
(b) the Company shall have performed in all material respects all
obligations and agreements and in all material respects complied with all
covenants and conditions, contained in this Agreement to be performed or
complied with by it prior to the Effective Time;
(c) there shall not have occurred a Material Adverse Effect with
respect to the Company or the Bank;
(d) the directors of the Company and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing the Company and the
Bank from any and all claims of such directors (except as to their deposits and
accounts, and as to rights of indemnification pursuant the Bylaws of the Company
or the Bank) and shall have delivered to Compass their resignations as directors
of the Bank;
(e) the officers of the Company and the Bank shall have delivered to
Compass an instrument dated the Effective Time releasing the Company and the
Bank from any and all claims of such officers (except as to deposits and
accounts, accrued compensation permitted by their respective agreements and
rights of indemnification pursuant to the Bylaws of the Company or the Bank);
(f) Compass shall have received the opinions of counsel to the
Company acceptable to it as to the matters set forth on Exhibit E attached
hereto;
(g) the holders of no more than 5% of the Shares shall have demanded
or be entitled to demand payment of the fair value of their shares as dissenting
shareholders;
(h) Compass shall have received a letter from KPMG Peat Marwick,
dated as of the Effective Time, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if closed and consummated in
accordance with this Agreement;
(i) there shall be no Company Indebtedness;
(j) Compass shall have received from holders of the Company's capital
stock receiving at least 50% of the total Merger Consideration a representation
that they have no plan or intention to sell or otherwise dispose of shares of
Compass Common Stock received pursuant to the Merger.
(k) Compass shall have received an opinion of its counsel
satisfactory to it that the Merger will qualify as a reorganization
42
<PAGE>
under Section 368(a) of the Internal Revenue Code of 1986, as amended;
(l) The Company shall have delivered to Compass a schedule of all
transactions in the capital stock (or instruments exercisable for or convertible
into capital stock) of the Company of which the Company has knowledge from and
including the date of this Agreement through the Effective Time;
(m) Compass shall have determined, in its sole judgment, that the
liabilities and obligations set forth on Schedule 5.1(k) do not have a Material
Adverse Effect;
(n) All warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire Shares shall have been
exercised or converted, or shall have expired, lapsed or terminated, prior to
the Effective Time;
(o) Compass shall have received the Section 368 Certificates and the
Proxies within the time periods specified for receipt of such Certificates and
as specified by Sections 5.1(n) and 5.1(o);
(p) the Services Agreement shall have been terminated and the Company
and the Bank shall have delivered to Compass a release from all obligations
under the Services Agreement, which termination agreement and release shall be
in form and substance satisfactory to Compass; and
(q) Compass shall have received certificates dated the Closing
executed by the Chairman of the Board of the Company and by the Chairman of the
Board of the Bank, and the Secretary or Cashier of the Company and the Bank,
respectively, certifying in such reasonable detail as Compass may reasonably
request, to the effect described in Sections 7.2(a), (b), (c), (g) and (i).
SECTION 7.3 Conditions to the Obligations of the Company to Effect
------------------------------------------------------
the Merger. The obligations of the Company to effect the Merger are subject to
- ----------
the satisfaction or waiver of the following conditions prior to the Effective
Time:
(a) all representations and warranties of Compass and Compass Texas
shall be true and correct in all material respects as of the date hereof and at
and as of the Closing, with the same force and effect as though made on and as
of the Closing;
(b) Compass and Compass Texas shall have performed in all material
respects all obligations and agreements and in all material respects complied
with all covenants and conditions contained in this Agreement to be performed or
complied with by either of them prior to the Effective Time; and
43
<PAGE>
(c) the Company shall have received the opinion of counsel to Compass
and Compass Texas acceptable to it, as to the matters set forth on Exhibit E
attached hereto;
(d) The Bank and the Company shall have delivered to the directors of
the Company and the Bank an instrument dated the Effective Time releasing such
directors from any and all claims of the Company and the Bank (except as to
indebtedness or other contractual liabilities); provided, however, that such
releases shall not release an action against such directors by Compass or
Compass in connection with the transactions contemplated by this Agreement; and
(e) the Company shall have received certificates dated the Closing,
executed by an appropriate officers of Compass and Compass Texas, respectively,
certifying, in such detail as the Company may reasonably request, to the effect
described in Sections 7.3(a) and (b).
ARTICLE VIII.
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination. This Agreement may be terminated and the
-----------
Merger contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the shareholders of the Company, but prior to the Effective Time:
(a) by mutual written consent duly authorized by the Boards of
Directors of Compass and the Company;
(b) by Compass (i) if Compass learns or becomes aware of a state of
facts or breach or inaccuracy of any representation or warranty of the Company
contained in Article III which constitutes a Material Adverse Effect, (ii)
pursuant to Section 6.10, (iii) the Schedules to this Agreement are not accepted
by Compass in its sole discretion, (iv) if Compass shall not have received the
Section 368 Certificates and the Proxies within the times specified by Sections
5.1(n) and 5.1(o), or (v) if any of the conditions to Closing contained in
Section 7.1 or 7.2 are not satisfied or waived in writing by Compass;
(c) by the Company if the conditions to Closing contained in Section
7.1 or 7.3 are not satisfied or waived in writing by the Company;
(d) by Compass or the Company if the Effective Time shall not have
occurred on or before the expiration of nine months from the date of this
Agreement or such later date agreed to in writing by Compass and the Company; or
(e) by Compass or the Company if any court of competent jurisdiction
in the United States or other United States (federal
44
<PAGE>
or state) governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have been final and
nonappealable.
SECTION 8.2 Effect of Termination. In the event of the termination
---------------------
and abandonment of this Agreement pursuant to Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of this Section 8.2 and Section 9.1. Nothing contained in this
Section 8.2 shall relieve any party from liability for any breach of this
Agreement.
SECTION 8.3 Amendment. (a) To the extent permitted by applicable
---------
law, this Agreement may be amended by action taken by or on behalf of the Board
of Directors of the Company, Compass and, if required, Compass Texas at any time
before or after adoption of this Agreement by the shareholders of the Company
but, after any submission of this Agreement to such shareholders for approval,
no amendment shall be made which reduces the Merger Consideration or which
materially and adversely affects the rights of the Company's shareholders
hereunder without any required approval of such shareholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of all
the parties.
(b) The parties hereto hereby agree to enter into an amendment of
this Agreement for the purpose of adding Compass Texas as a party hereto, which
amendment shall be made prior to any submission of this Agreement to
shareholders of the Company for their approval. As a condition to the Company's
entry into such an amendment, Compass Texas shall deliver to the Company a
certificate in substantially the form of Exhibit G attached hereto.
SECTION 8.4 Extension; Waiver. At any time prior to the Effective
-----------------
Time, the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX.
SURVIVAL
SECTION 9.1 Survival of Representations and Warranties. The parties
------------------------------------------
hereto agree that none of their respective representations and warranties
contained in this Agreement shall survive after the Effective Time.
45
<PAGE>
ARTICLE X.
MISCELLANEOUS
SECTION 10.1 Expenses. All costs and expenses incurred in
--------
connection with the transactions contemplated by this Agreement, including
without limitation, attorneys' fees, accountants' fees, other professional fees
and costs related to expenses of officers and directors of the Company and the
Bank, shall be paid by the party incurring such costs and expenses. Each party
hereto hereby agrees to and shall indemnify the other parties hereto against any
liability arising from any such fee or payment incurred by such party.
SECTION 10.2 Brokers and Finders. Other than with respect to Alex
-------------------
Sheshunoff & Co. Investment Banking engaged by the Company, all negotiations on
behalf of Compass and the Company relating to this Agreement and the
transactions contemplated by this Agreement have been carried on by the parties
hereto and their respective agents directly without the intervention of any
other person in such manner as to give rise to any claim against Compass,
Compass Texas, the Company or the Bank for financial advisory fees, brokerage or
commission fees, finder's fees or other like payment in connection with the
consummation of the transactions contemplated hereby.
SECTION 10.3 Entire Agreement; Assignment. This Agreement (a)
----------------------------
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof, and (b) shall not be assigned by operation of law or otherwise,
provided that Compass may assign its rights and obligations or those of Compass
Texas to any direct or indirect, wholly-owned, subsidiary of Compass, but no
such assignment shall relieve Compass of its obligations hereunder if such
assignee does not perform such obligations.
SECTION 10.4 Further Assurances. From time to time as and when
------------------
requested by Compass or its successors or assigns, the Company, the officers and
directors of the Company, or the Bank, shall execute and deliver such further
agreements, documents, deeds, certificates and other instruments and shall take
or cause to be taken such other actions, including those as shall be necessary
to vest or perfect in or to confirm of record or otherwise the Company's title
to and possession of, all of its property, interests, assets, rights,
privileges, immunities, powers, franchises and authority, as shall be reasonably
necessary or advisable to carry out the purposes of and effect the transactions
contemplated by this Agreement.
SECTION 10.5 Enforcement of the Agreement. The parties hereto agree
----------------------------
that irreparable damage would occur in the event that
46
<PAGE>
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which they are entitled at
law or in equity.
SECTION 10.6 Severability. The invalidity or unenforceability of
------------
any provision of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 10.7 Notices. All notices, requests, claims, demands and
-------
other communications hereunder shall be in writing and shall be deemed to have
been duly given when delivered if in person, by cable, telegram or telex or by
telecopy, or five business days after mailing if delivered by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
if to Compass or Compass Texas:
D. Paul Jones, Jr.
Chairman and Chief Executive Officer
Compass Bancshares, Inc.
701 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
Charles E. McMahen
Chairman and Chief Executive Officer
Compass Banks of Texas, Inc.
24 Greenway Plaza
Houston, Texas 72046
Telecopy No.: (713) 993-8500
with copies to:
Daniel B. Graves
Associate General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
47
<PAGE>
and
Annette L. Tripp
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
3400 Texas Commerce Tower, 600 Travis
Houston, Texas 77002
Telecopy No.: (713) 223-3717
if to the Company:
Terrence A. Welty III
Royall Financial Corporation
2121 South Loop 256
Palestine, Texas 75802
Telecopy No.:(903) 729-0559
with a copy to:
Jack D. Hicks
Zeleskey, Cornelius, Hallmark,
Roper & Hicks, L.L.P.
1616 South Chestnut
Lufkin, Texas 75901
Telecopy No.: (409) 632-6545
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 10.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Texas, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
laws thereof, except to the extent that the GCL governs aspects of the Merger.
SECTION 10.9 Descriptive Headings. The descriptive headings are inserted
--------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
SECTION 10.10 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.11 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
48
<PAGE>
SECTION 10.12 Incorporation by References. Any and all schedules,
---------------------------
exhibits, annexes, statements, reports, certificates or other documents or
instruments referred to herein or attached hereto are incorporated herein by
reference hereto as though fully set forth at the point referred to in the
Agreement.
SECTION 10.13 Certain Definitions.
-------------------
(a) "Subsidiary" shall mean, when used with reference to an entity, any
corporation, a majority of the outstanding voting securities of which are owned
directly or indirectly by such entity or any partnership, joint venture or other
enterprise in which any entity has, directly or indirectly, any equity interest.
(b) "Material Adverse Effect" shall mean any material adverse change in
the financial condition, assets, liabilities (absolute, accrued, contingent or
otherwise), reserves, business or results of operations of the Company and the
Bank taken as a whole (or when the reference is to Compass, to Compass and its
Subsidiaries, taken as a whole).
(c) "Environmental Laws" shall mean all federal, state and local laws,
ordinances, rules, regulations, guidance documents, directives, and decisions,
interpretations and orders of courts or administrative agencies or authorities,
relating to the release, threatened release, recycling, processing, use,
handling, transportation treatment, storage, disposal, remediation, removal,
inspection or monitoring of Polluting Substances or protection of human health
or safety or the environment (including, without limitation, wildlife, air,
surface water, ground water, land surface, and subsurface strata), including,
without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, as amended ("SARA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), Hazardous and Solid Waste Amendments
of 1984, as amended ("HSWA"), the Hazardous Materials Transportation Act, as
amended ("HMTA"), the Toxic Substances Control Act ("TSCA"), Occupational Safety
and Health Act ("OSHA"), Federal Water Pollution Control Act, Clean Air Act, and
any and all regulations promulgated pursuant to any of the foregoing.
(d) "Polluting Substances" shall mean those substances included within the
statutory or regulatory definitions, listings or descriptions of "pollutant,"
"contaminant," "toxic waste," "hazardous substance," "hazardous waste," "solid
waste," or "regulated substance" pursuant to CERCLA, SARA, RCRA, HSWA, HMTA,
TSCA, OSHA, and/or any other Environmental Laws, as amended, and shall include,
without limitation, any material, waste or substance which is or contains
explosives, radioactive materials, oil or any fraction thereof, asbestos, or
formaldehyde. To the extent that the laws or regulations of the State of Texas
establish a meaning
49
<PAGE>
for "hazardous substance," "hazardous waste," "hazardous materials," "solid
waste," or "toxic waste," which is broader than that specified in any of CERCLA,
SARA, RCRA, HSWA, HMTA, TSCA, OSHA or other Environmental Laws such broader
meaning shall apply.
(e) "Release" shall mean any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, disposing,
discarding or abandoning.
(f) "Knowledge" or "known" -- An individual shall be deemed to have
"knowledge" of or to have "known" a particular fact or other matter if (i) such
individual is actually aware of such fact or other matter, or (ii) a prudent
individual could be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a reasonably comprehensive
investigation concerning the truth or existence of such fact or other matter. A
corporation or bank shall be deemed to have "knowledge" of or to have "known" a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director or officer (or in any similar capacity) of the
corporation or bank, has, or at any time had, knowledge of such fact or other
matter. The Company and the Bank are understood to have undertaken a separate
investigation in connection with the transactions contemplated hereby to
determine the existence or absence of facts or other matters in the statement
qualified as "known" by, or the "knowledge" of, the Company or the Bank.
[SIGNATURE PAGE FOLLOWS]
50
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
ATTEST: COMPASS BANCSHARES, INC.
By /s/ Daniel B. Graves By /s/ D. Paul Jones, Jr.
--------------------- --------------------------------------------
Its Assistant Secretary Its Chairman and Chief Executive Officer
ATTEST: ROYALL FINANCIAL CORPORATION
By /s/ Linda Maness By /s/ Terrence A. Welty, III
--------------------- --------------------------------------------
Its Secretary Its Chairman of the Board
<PAGE>
EXHIBIT A
POOLING TRANSFER RESTRICTIONS AGREEMENT
---------------------------------------
This Pooling Transfer Restrictions Agreement (this "Agreement") is executed
and delivered this ____ day of December, 1995 by and between Compass Bancshares,
Inc. ("Compass"), Royall Financial Corporation (the "Company"), and the
undersigned shareholder of the Company (the "Shareholder").
WHEREAS, Compass and the Company entered into an Agreement and Plan of
Merger dated December 14, 1995 ("Merger Agreement") pursuant to which the
Company will be merged with an existing or to-be-formed subsidiary of Compass
(the "Merger"), and
WHEREAS, Compass has required as a condition to entering into the Merger
Agreement that the Company and the Shareholder and each other affiliate of the
Company deliver to Compass an agreement in substantially the form hereof,
NOW, THEREFORE, in consideration of Compass' agreement to enter into the
Merger Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned, intending to be
legally bound, hereby agree as follows:
1. The Shareholder agrees that he will not sell, pledge, transfer or
otherwise dispose of any shares of the Company's common stock, par value $100.00
per share ("Company Common Stock"), within 30 days prior to the Effective Time
(as defined in the Merger Agreement). The Shareholder further agrees that until
the publication of financial results covering at least 30 days of post-Merger
combined operations of the Company and Compass, he will not sell, pledge,
transfer or otherwise dispose of any shares of the Compass Common Stock to be
acquired by him in the Merger, except for pledges by the Shareholder of all or
part of such Shareholder's Compass Common Stock acquired in the Merger to secure
loans, provided the lender accepts any pledge of such Compass Common Stock
subject to the terms of this Agreement. The Shareholder further agrees that he
will not sell, pledge, transfer or otherwise dispose of any shares of the
Compass Common Stock to be acquired by him in the Merger except in a manner
which is consistent with any additional requirements for Compass' accounting for
the Merger as a pooling of interests, including without limitation any new
requirements imposed by the applicable provisions of the Securities Act of 1933,
the Securities Exchange Act of 1934, and the respective rules and regulations
thereunder.
2. The Shareholder further acknowledges and agrees that he will be subject
to Rule 145 promulgated by the Securities and Exchange Commission under the
Securities Act, and agrees not to transfer any Compass Common Stock received by
him in the Merger
<PAGE>
except in compliance with the applicable provisions of the Securities Act, the
Exchange Act, and the respective rules and regulations thereunder.
3. The Shareholder agrees that the shares of Compass Common Stock to be
issued to him in the merger will bear a restrictive transfer legend in
substantially the following form:
The shares represented by this certificate are subject to a Pooling
Transfer Restrictions Agreement dated _______ __, 1995 which restricts any
sale or other transfer of such shares prior to [insert due date of filing
of next Quarterly Report on Form 10-Q or Annual Report on Form 10-K that
will contain required combined financial results]. The issuer will furnish
to the record holder of this certificate, without charge, upon written
request to the issuer at its principal place of business, a copy of the
Pooling Transfer Restrictions Agreement.
Compass agrees to instruct its transfer agent to remove the restrictive legend
from any certificates evidencing shares subject hereto promptly following the
expiration of the transfer restrictions described in Section 1.
4. The Company agrees and the Shareholder acknowledges and agrees that
the Company will not permit the transfer of any shares of Company Common Stock
by the Shareholder or any other Company affiliate within 30 days prior to the
Effective Time.
5. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
2
<PAGE>
IN WITNESS WHEREOF, the undersigned set his hand effective as of the day
first written above.
COMPASS BANCSHARES, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
ROYALL FINANCIAL CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
_____________________________________
Signature of Shareholder
_____________________________________
Printed Name of Shareholder
Pooling Transfer Restrictions Agreement
3
<PAGE>
EXHIBIT B
EXCHANGE AGENT AGREEMENT
------------------------
This Exchange Agent Agreement, dated as of ___________, 1995, is made and
entered into by and among Compass Bancshares, Inc., a Delaware corporation
("Compass"), ________________________, a Delaware corporation ("Compass
Texas"), Royall Financial Corporation, a Texas corporation ("Company"), and
River Oaks Trust Company, a Texas trust company ("Exchange Agent").
PREAMBLE:
Pursuant to the Agreement and Plan of Merger dated as of December 14, 1995
("Merger Agreement") among Compass, Compass Texas and the Company, Compass Texas
shall, at the Effective Time, be merged into the Company. The name of the
surviving corporation shall be __________________ ("Surviving Corporation").
After the Effective Time, the outstanding shares of the Common Stock, par
value $100.00 per share (including for this purpose any shares of Common Stock
which can be acquired upon the exercise of any warrant, option, right,
convertible debt instrument or other security pursuant to which shares of Common
Stock may be obtained (collectively, "Derivative Securities")), of the Company
("Company Common Stock") shall solely represent, in the aggregate, the right to
payment by Compass of total Merger Consideration of ____________ shares of
Compass common stock, par value $2.00 per share ("Compass Common Stock") (or
cash in lieu of fractional shares), subject to the rights of qualified
dissenting shareholders of the Company.
The Company has requested Compass to designate the Exchange Agent in
connection with the exchange (the "Exchange") of shares of Company Common Stock
for shares of Compass Common Stock, subject to the terms and conditions hereof
and of the Merger Agreement. The Exchange Agent will receive Company Common
Stock delivered for exchange pursuant to the terms of the Merger Agreement, and
will process such certificates representing Company Common Stock
("Certificates") and related documents. Compass desires that the Exchange Agent
act in such capacity.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements and covenants contained herein, and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties,
intending to be legally bound, hereby agree as follows:
1. Appointment of Exchange Agent. River Oaks Trust Company is hereby
-----------------------------
appointed as the Exchange Agent for payment of the Merger
<PAGE>
Consideration to shareholders of the Company. Such appointment shall be in
accordance with the terms and conditions set forth herein.
2. Closing of Stock Transfer Books. At the Effective Time, the Company's
-------------------------------
stock transfer books will be closed and no transfers shall be permitted.
3. Duties of Exchange Agent. The Exchange Agent is authorized and directed
------------------------
to perform the following functions contemplated by the Merger Agreement and the
Letters of Transmittal (defined below):
(a) Distribution of Letters of Transmittal. The Exchange Agent shall
--------------------------------------
mail to the holders of record of Company Common Stock, by first class
United States mail, postage prepaid, copies of Letters of Transmittal,
including Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 in substantially the form attached hereto as Exhibit A
------- -
("Letters of Transmittal"), and return envelopes to the Exchange Agent, at
the earliest practicable time following the Effective Time. A form of Stock
Assignment, Power of Attorney and Lost Stock Certificate Affidavit will be
provided to the Exchange Agent for use by shareholders if necessary.
(b) Acceptance of Certificates.
--------------------------
(i) The Exchange Agent will examine the Letters of Transmittal, Certificates
and other documents and instruments delivered to the Exchange Agent by or on
behalf of holders tendering Company Common Stock and shall determine whether (i)
the Letters of Transmittal have been completed and executed properly, and are
accompanied by proper evidence of authority, (ii) Certificates corresponding to
the names of the registered holders, Certificate numbers and the number of
shares represented thereby with the information set forth in the Company's
shareholder and other records and which appear to be in negotiable, good
delivery form, properly endorsed or accompanied by stock powers with transfer
tax stamps or evidence of payment or exemption from transfer taxes affixed
(where required), and (iii) signatures are guaranteed (where required), all in
accordance with the terms and conditions of the Merger Agreement and the Letters
of Transmittal. The Exchange Agent shall accept Certificates which are
surrendered in accordance with the provisions of the Merger Agreement and
accompanied by the executed Letters of Transmittal. Such Certificates and
Letters of Transmittal shall only be accepted by the Exchange Agent and eligible
for payment hereunder if they have been properly executed and completed in
accordance with the instructions contained in the
2
<PAGE>
Letters of Transmittal and if the person or persons surrendering such
Certificates and Letters of Transmittal appears as a shareholder of record of
the number of shares surrendered on the list of shareholders supplied and
certified to the Exchange Agent by the Company ("Shareholder List") attached as
Exhibit B hereto. In the event the Exchange Agent shall have any questions as to
- ---------
whether a Certificate and Letters of Transmittal have been properly executed and
completed or whether the Certificates have been surrendered by the holder of
record thereof, the Exchange Agent shall promptly refer such questions to
Compass for resolution by Compass and the Exchange Agent shall be able to rely
on the written instructions and decisions of any officer of Compass.
Determination of all questions as to the proper completion or execution of the
Letters of Transmittal or as to the proper form for transfer of the Certificates
for Company Common Stock shall be made by Compass together with its attorneys,
and such other persons as Compass shall designate, and such determinations shall
be final and binding; provided, however, that the rejection by Compass of any
Letters of Transmittal or Certificates deemed by Compass to be ineffective to
transfer the Certificates shall not affect the right of any shareholder in or to
his respective share of the Merger Consideration;
(ii) If any defect or irregularity appears to exist in connection
with a purported tender, the Exchange Agent will notify promptly the
persons by whom the tender was made and will return all documents delivered
in connection therewith or take such action as is necessary or advisable to
cause such defect or irregularity to be cured;
(iii) Tenders may be made only as set forth in the Letters of
Transmittal;
(iv) Letters of Transmittal, and facsimiles thereof submitted to the
Exchange Agent, shall be marked by the Exchange Agent's designated officers
to show the date and time of receipt and their review and acceptance
thereof;
(v) At the close of business each Friday, the Exchange Agent shall
provide Compass and First National Bank of Boston, Compass' transfer agent
and registrar ("Transfer Agent") with a list of shareholders who have
properly tendered their Company Common Stock. In addition, the Exchange
Agent shall inform Compass in writing of the number of shares of Company
Common Stock which have been properly tendered and the number which have
been improperly tendered to the Exchange Agent during the week then ended
and on a cumulative basis through that day. The Exchange Agent shall
provide Compass such other
3
<PAGE>
information concerning the Company Common Stock as it may reasonably request.
Such communications should be sent to:
Compass Bancshares, Inc.
701 South 20th Street
Birmingham, Alabama 35233
Attn: Michael A. Bean
Telephone No. (205) 558-5740
With a copy to: First National Bank of Boston
Post Office Box 1865
Boston, Massachusetts 02105
Attn: Caroline Rees, Shareholder
Services Officer
Telephone No. (617) 575-2571
(c) Exchange Fund. In order to provide for payment of the Merger
-------------
Consideration in accordance with the terms of the Merger Agreement, Compass,
from time to time prior to or after the Effective Time, shall deposit or cause
to be deposited with the Exchange Agent cash in an amount sufficient to make
payments in lieu of fractional shares (the "Exchange Fund"). This Exchange Fund
shall not be used for any purpose except as provided by this Agreement.
(d) Compass Common Stock. Compass Texas and the Company shall jointly
--------------------
advise the Exchange Agent as to the number of shares of Compass Common Stock to
be distributed to each shareholder which shall be calculated by Compass Texas
and the Company as follows:
(i) Company Common Stock. Each holder of Company Common Stock shall
--------------------
receive Merger Consideration equal to ___________ shares of Compass Common Stock
for each share of Company Common Stock held immediately prior to the Effective
Time.
(ii) Fractional Shares. For each fractional share of Compass Common
-----------------
Stock which would be delivered upon the surrender of Company Common Stock, each
holder of Stock shall receive cash in an amount equal to the product of such
fraction and $_______________.
As soon as practicable after acceptance of properly executed
Certificates and accompanying Letters of Transmittal in accordance with the
terms of paragraph 3(b) hereof, the Exchange Agent shall instruct and Compass
shall cause the Transfer Agent to issue and mail certificates
4
<PAGE>
representing shares of Compass Common Stock to the shareholder surrendering such
certificates. The Exchange Agent shall promptly make the payments in lieu of
fractional shares out of the Exchange Fund upon surrender of the Certificates.
(e) Other Duties of Exchange Agent.
------------------------------
(i) The Exchange Agent shall have no obligation to make payment for
surrendered Certificates unless Compass shall have issued sufficient Compass
Common Stock or caused such stock to be issued and shall have deposited or
caused to be deposited in the Exchange Fund sufficient cash with which to pay
all amounts due and payable for such shares.
(ii) The Exchange Agent shall be regarded as having made no
representations or warranties as to the validity, sufficiency, value or
genuineness of any Certificates or the shares of Company Common Stock
represented thereby, and the Exchange Agent shall not be deemed to have made any
representations as to the value of such shares.
(iii) The Exchange Agent may rely on and shall be protected in acting
upon the written instructions of any officer of Compass or the Surviving
Corporation with respect to any matter relating to its actions or duties
hereunder; and the Exchange Agent shall be entitled to request further
instructions from Compass or the Surviving Corporation, as appropriate, and to
act in accordance therewith.
(iv) The Exchange Agent may consult attorneys satisfactory to the
Exchange Agent (including, without limitation, attorneys for Compass or the
Surviving Corporation) and the written advice and opinion of such attorneys
shall constitute full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
accordance with such advice or opinion.
(v) The Exchange Agent shall take all other actions which it or Compass
deems necessary or appropriate under the terms of the Merger Agreement, the
Letters of Transmittal and under the customs and practices normally applied to
transactions of this type and appropriate to the proper transfer of the Company
Common Stock and the proper maintenance of the Company's
5
<PAGE>
and Compass' shareholder books and records. Following payment in
accordance with the terms hereof, the Exchange Agent shall forward to
Compass all documents received by it in connection with tenders of
Certificates (including Letters of Transmittal, telegrams, facsimile
transmissions or letters representing tenders made without concurrent
deposit of certificates) and the tendered Certificates prominently marked
"CANCELLED" on the front thereof, via Federal Express or other means
acceptable to Compass.
4. Alteration of Instructions. The Exchange Agent shall follow and act
--------------------------
upon any written amendments, modifications or supplements to these instructions
and upon any further instructions from Compass or the Surviving Corporation in
connection with the Merger Agreement or any of the transactions contemplated
thereby.
5. Indemnification of Exchange Agent. Compass and the Surviving
---------------------------------
Corporation covenant and agree to indemnify the Exchange Agent and hold it
harmless against any loss, liability or expense it may incur in the absence of
negligence or bad faith on the part of the Exchange Agent arising out of or in
connection with the administration of its duties hereunder, including but not
limited to legal fees and other costs and expenses of defending or preparing to
defend against any claim or liabilities in connection with this Agreement.
6. Compensation for Services. Compass shall compensate the Exchange
-------------------------
Agent for its services hereunder.
7. Payment of Amounts Due Dissenting Shareholders. In the event that
----------------------------------------------
qualified dissenting shareholders of the Company exercise the rights afforded
them under the Texas Business Corporation Act, such shareholders may be entitled
to payment of an amount other than the Merger Consideration. Any payment for
shares other than the Merger Consideration will be paid only upon the written
instructions of the Surviving Corporation. The Exchange Agent may request and
shall be provided additional funds from the Surviving Corporation in order to
make any required payment to dissenting shareholders, and the Exchange Agent
shall return to Compass any Merger Consideration which would have otherwise been
payable to such persons. The Exchange Agent shall rely on the instructions of
the Surviving Corporation as to all matters covered by this paragraph,
including, without limitation, the time and amount of payment to dissenting
shareholders.
8. Unclaimed Funds. Any moneys or certificates deposited hereunder which
---------------
shall remain unclaimed by the holders of shares of
6
<PAGE>
Company Common Stock for a period of six (6) months following the Effective Time
shall, upon written request of the Surviving Corporation, be returned to
Compass, plus interest earned on the cash portion thereof and the shareholders
of Certificates not theretofore presented to and accepted by the Exchange Agent
shall look to Compass only, and not the Exchange Agent, for the payment of any
Merger Consideration in respect of such Certificates.
9. Investment of Exchange Fund. At the direction of the Surviving
---------------------------
Corporation, the Exchange Agent shall invest portions of the Exchange Fund and
remit earnings thereon monthly to the Surviving Corporation, provided that all
such investments shall be in The Starburst Government Money Market Fund (the
"Fund"), managed by Compass Bank, an Alabama banking corporation and an
affiliate of Compass, or if for any reason the Fund is not available to the
Exchange Agent as an investment alternative, as otherwise directed by the
Surviving Corporation.
10. Amendment. Except as otherwise expressly provided herein,
---------
neither this Agreement nor any provision hereof may be amended, modified,
waived, discharged or terminated except in a writing signed by all of the
parties hereto prior to the Effective Time or by Compass and the Exchange Agent
after the Effective Time; provided, however, that no amendment shall be made if
such modification shall reduce the amount of or eliminate the opportunity of any
shareholder to receive his share of the Merger Consideration contemplated by the
Merger Agreement.
11. Section Headings. The section headings used herein are for
----------------
convenience of reference only and shall not define or limit the provisions of
this Agreement.
12. GOVERNING LAW. THIS AGREEMENT AND THE APPOINTMENT OF THE
-------------
EXCHANGE AGENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS AND SHALL INURE TO THE BENEFIT OF AND BE BINDING UPON THE
SUCCESSORS AND ASSIGNS OF THE PARTIES HERETO.
13. Notices. Notices under this Agreement shall be deemed given if
-------
made in writing and sent via prepaid first-class United States mail, or by
nationally recognized overnight courier, to:
7
<PAGE>
If to Compass:
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
Associate General Counsel
If to the Exchange Agent:
River Oaks Trust Company
6990 Portwest, Suite 170
Houston, Texas 77024
Attn: Stephen K. Brownlow
Vice President and Trust Officer
If to the Company prior
to the Effective Time:
Royall Financial Corporation
2121 South Loop 256
Palestine, Texas 75802
Attn: Terrence A. Welty, III
If to Compass Texas or, following
the Effective Time, the
Surviving Corporation:
_________________________
c/o Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Attn: Daniel B. Graves
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. Conflict. In the event the terms of this Agreement conflict
--------
with the terms and provisions of the Merger Agreement, the terms and provisions
of the Merger Agreement shall be controlling.
16. Defined Terms. Capitalized terms not defined herein have the
-------------
meanings ascribed to them in the Merger Agreement.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized appointed officers on the date first written
above.
COMPASS BANCSHARES, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
___________________________________
By: _______________________________
Name: _____________________________
Title: ____________________________
ROYALL FINANCIAL CORPORATION
By: _______________________________
Name: _____________________________
Title: ____________________________
RIVER OAKS TRUST COMPANY
By: _______________________________
Name: _____________________________
Title: ____________________________
Exhibit A - Form of Letters of Transmittal
Exhibit B - Shareholder List
<PAGE>
EXHIBIT "A"
LETTER OF TRANSMITTAL
For Shares of Common Stock of
ROYALL FINANCIAL CORPORATION
Delivered Pursuant to the Agreement and Plan of Merger
dated as of December 14, 1995
By Mail or Overnight Delivery Service:
River Oaks Trust Company
6990 Portwest, Suite 170
Houston, Texas 77024
Attention: Mr. Stephen K. Brownlow
DO NOT HAND DELIVER
DESCRIPTION OF SHARES SURRENDERED
---------------------------------
Based on its stock transfer records, Royall Financial Corporation (the
"Company") has listed below your name, address and the certificate numbers
representing your shares of Common Stock, par value $100.00 per share
("Shares"), of the Company. If any of the listed information appears to be
incorrect, please notify Mr. Stephen K. Brownlow at (713) 867-1101 at once.
<TABLE>
<CAPTION>
Name, Address and Social Security
Number of Registered Holders Certificate(s) Surrendered
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Number of
Certificate Shares Represented
Number(s) by Certificate(s)
_______________________________ ______________ ____________________
Name ______________ ____________________
______________ ____________________
_______________________________
_______________________________
Address
_______________________________ Total Shares _________________
Social Security Number
================================================================================
</TABLE>
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Gentlemen:
I, as the registered holder of the above described Shares of the
Company, hereby tender to Compass Bancshares, Inc. ("Compass"), such Shares
pursuant to the Agreement and Plan of Merger dated as of December 14, 1995, as
amended ("the Merger Agreement"), by and between Compass, _______________
("Compass Texas"), and the Company. I hereby acknowledge receipt of the Proxy
Statement dated _______________, 1995, which described the merger ("Merger")
provided by the Merger Agreement.
I represent and warrant to Compass and Compass Texas that I am the
true and lawful owner of the Shares, and have full capacity, power and authority
to exchange the Shares, free and clear of all liens, restrictions and
encumbrances of any kind whatsoever, and the Shares will not be subject to any
adverse claim. I understand that River Oaks Trust Company, as Exchange Agent
for this exchange, may require additional documentation, and I agree, upon
request, to execute and deliver any additional documents or instruments deemed
by the Exchange Agent or Compass reasonably necessary to complete the exchange
of the Shares.
The authority conferred in this Letter of Transmittal shall not be
affected by, and shall survive, my death or incapacity, and any obligation I may
have hereunder shall be binding upon my successors, assigns, heirs, executors,
administrators, trustees in bankruptcy and personal and legal representatives.
I acknowledge that the tender of my Shares is irrevocable.
INSTRUCTIONS REGARDING ISSUANCE OF SHARES
If you wish to have the shares of Compass Common Stock to be issued
pursuant to the Merger Agreement in the name and at the address set forth above,
please sign and date this letter on page 3. If you wish to have the shares of
Compass Common Stock to be issued pursuant to the Merger Agreement in a name or
to an address other than the name and address specified above, please complete
the following section. You will be required to pay any transfer or other taxes
required by reason of the payment and delivery of Compass Common Stock to such
other person.
NEW CERTIFICATES TO BE ISSUED
IN A DIFFERENT NAME OR TO A DIFFERENT ADDRESS
If you are entitled to receive shares of Compass Common Stock and wish
to have certificates representing Compass Common Stock issued in a name or to an
address other than the name or address shown on your Company stock certificates,
please indicate the name and address of your assignee below:
Name and Address of Assignee
----------------------------
Name:_______________________________ Taxpayer I.D. No. or
(Type or print full name) Social Security No.:______________________
Address:________________________________________________________________________
City, State, Zip Code:__________________________________________________________
<PAGE>
PLEASE SIGN AND DATE BELOW AS INDICATED
THEN PLEASE COMPLETE SUBSTITUTE FORM W-9
Signatures _________________________________
_________________________________
Dated _________________________, 1996
Name(s) _____________________________________________________________
(Please Print)
Capacity _________________________________
(Full Title)
Address _________________________________
_________________________________
(Include Zip Code)
Area Code and Telephone Number _____________________________
Tax Identification or Social Security Number _____________________________
_______________________________________________________________________________
GUARANTEE OF SIGNATURES
(Must be signed by registered holder(s) as name(s) appear on the certificate(s)
or by person(s) authorized to become registered holder(s) by certificate(s) and
documents transmitted. If signing is by an officer or a corporation, or by an
attorney, executor, administrator, trustee, guardian, agent or other person
acting in a fiduciary or representative capacity, please set forth full title.
See Instruction 1.)
- -----------------
Authorized Signature __________________________________
Name __________________________________
(Please Print)
Title __________________________________
Name of Firm __________________________________
Address __________________________________
__________________________________
(Include Zip Code)
Area Code and Telephone Number __________________
Dated ____________________________, 1996
_______________________________________________________________________________
PLEASE COMPLETE SUBSTITUTE FORM W-9
IT IS THE LAST FORM IN THIS PACKAGE
_______________________________________________________________________________
-3-
<PAGE>
DO NOT WRITE IN SPACE BELOW
Date Received:__________ By:__________ Date:__________, 1996
<TABLE>
<CAPTION>
Company Compass No. of
Shares Shares Accepted Stock Certificate Fractional Cash Check
Surrendered for Exchange Certificate Nos. No. issued Shares Paid No.
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
</TABLE>
Accepted by:__________ Checked By:__________ Date:__________, 1996
-4-
<PAGE>
LETTER OF TRANSMITTAL
INSTRUCTIONS
1. Delivery of Letter of Transmittal and Certificates; Signature Guarantees.
Please send all certificates for Shares to River Oaks Trust Company, as Exchange
Agent (the "Exchange Agent"), with the Letter of Transmittal, or a facsimile
thereof, fully completed and signed by you, the registered holder(s). Compass
retains the right to require that a signature on the Letter of Transmittal and
the Share certificates be guaranteed by an Eligible Institution. An Eligible
Institution is a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc. (the "NASD") or a commercial
bank or trust company having an office, branch or agency located in the United
States. If Compass wishes to have your signature guaranteed by an Eligible
Institution, you will be notified by separate letter.
If certificates are registered in the name of a person other than you,
the certificate(s) must be duly endorsed or accompanied by stock powers signed
by the registered holder and the Letter of Transmittal. If the Letter of
Transmittal is executed by an officer on behalf of a corporation or by an
executor, administrator, trustee, guardian, attorney, agent or other person
acting in a fiduciary or representative capacity, the Exchange Agent reserves
the right to require that proper documentary evidence of the authority of the
person executing the Letter of Transmittal. If the tendered certificates are
owned of record by two or more joint owners, each of you must sign the Letter of
Transmittal. Questions regarding such evidence of authority may be referred to
Mr. Stephen K. Brownlow, a representative of the Exchange Agent, at (713) 867-
1101.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES, THE LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS IS AT YOUR OPTION
AND RISK. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS STRONGLY RECOMMENDED.
2. Issuance of Compass Common Stock. You will receive the Compass
Common Stock for your Shares only after receipt and acceptance by the Exchange
Agent and Compass of all of the certificates representing your Shares, a
properly completed and executed Letter of Transmittal, and any other required
documents and upon processing of the documents by the Exchange Agent.
3. Payment for Fractional Shares. As provided in Section 1.6(c) of
the Merger Agreement, Compass will not issue any certificates of Compass Common
Stock for fractional shares. In lieu of issuing fractional shares, Compass will
pay to any Company shareholder entitled to receive a fractional share of Compass
Common Stock, a cash payment based on a price of $_______ per share.
4. No Conditional Tenders; Waiver of Notice. No alternative,
conditional, irregular or contingent deliveries of Shares will be accepted. By
execution of the Letter of Transmittal or any manually signed facsimile thereof,
you waive any rights to receive any notice of the acceptance of your Shares for
exchange.
5. Signatures on Letter of Transmittal. In order for the Letter of
Transmittal to be properly signed by you, the signature must correspond exactly
with the name(s) as written on the face of the certificate(s).
If the Shares tendered hereby are owned of record by two or more joint
owners, all of you must sign the Letter of Transmittal.
If your Shares are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations of certificates.
-5-
<PAGE>
If the certificate(s) representing the Shares transmitted hereby are
registered in your name and the Letter of Transmittal is properly signed by you,
no endorsements of certificates or separate stock powers are required. In all
other cases, the certificate(s) representing the Shares transmitted hereby must
be endorsed or accompanied by appropriate stock powers, in either case signed
exactly as the name(s) of the registered holder(s) appear on the certificate(s),
and if required, signature(s) on such certificate(s) or stock power(s) must be
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any certificate or stock power is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of corporation or other acting in a fiduciary or representative
capacity, such person should so indicate when signing, and the Exchange Agent
reserves the right to require proper evidence of their authority to so act.
6. Irregularities. All questions as to the validity, form,
eligibility, acceptance of and delivery of Shares and the issuance of Compass
Common Stock and the payment of cash in lieu of fractional shares will be
determined by Compass, which determination shall be final and binding. Compass
reserves the absolute right to reject any or all tenders determined by Compass
not to be in appropriate form or which would, in the opinion of Compass'
counsel, be unlawful. Compass also reserves the absolute right in its sole
discretion, to waive any of the conditions hereof, or any defect in any tender
with respect to any particular Shares of any particular shareholder, and
Compass' interpretations of the terms and conditions of the Merger Agreement and
these instructions shall be final and binding. The Exchange Agent and Compass
shall not be obligated to give notice of defects or irregularities in tenders,
nor shall they incur any liability for failure to give any such notice. Tenders
will be deemed not to have been made until all defects and irregularities have
been cured or waived.
7. 31% Backup Withholding. Under the Federal income tax law, you
must provide Compass with a correct taxpayer identification number ("TIN")
unless an exemption applies. If the correct TIN is not provided, a $50 penalty
may be imposed upon you by the Internal Revenue Service and you will be subject
to backup withholding of 31% of the payments to be received by you.
8. Request for Assistance of Additional Copies. Questions and
requests for assistance or additional copies of the Letter of Transmittal may be
directed to the Exchange Agent at the address set forth at the top of page 1.
IMPORTANT TAX INFORMATION
Under the Federal income tax law, you are to provide Compass (as
payer) with a correct taxpayer identification number on Substitute Form W-9
below. If Compass is not provided with the correct taxpayer identification
number, you may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, all payments that are made to you with respect to Shares
(including any cash payable to you under the Merger Agreement in lieu of
fractional shares) may be subject to backup withholding.
Exempt shareholders (including among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Nonetheless, exempt shareholders should complete the
Substitute Form W-9 below and so indicate their exempt status by writing
"exempt" across the face of the Substitute Form W-9. In order for a foreign
individual to qualify as an exempt recipient, that shareholder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent. See
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional information.
If backup withholding applies, Compass is required to withhold 31% of
any payments made to the shareholder. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a
-6-
<PAGE>
refund may be obtained.
Purpose of Substitute Form W-9
To prevent backup withholding on payments that are made to you with
respect to shares of Compass Common Stock acquired as a result of the Merger or
with respect to cash payments, if any, receivable in lieu of fractional shares
pursuant to the Merger Agreement, you are required to notify Compass of your
correct taxpayer identification number by completing the form below certifying
that the taxpayer identification number provided on Substitute Form W-9 is
correct (or that you are awaiting a taxpayer identification number).
What Number to Give
As the record owner of the Shares, you are required to give Compass
your Social Security Number or Employer Identification Number. If the Shares
are in more than one name or are not in the name of the actual owners, consult
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidelines on which number to report.
-7-
<PAGE>
SUBSTITUTE FORM W-9
Department of the Treasury
Internal Revenue Service
Taxpayer Identification Number
Part 1 - PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION Social Security Number
NUMBER IN THE BOX AT RIGHT AND CERTIFY BY or Employer Identifi-
SIGNING AND DATING BELOW cation Number
Part 2 - Check the following box if you are NOT subject to backup --------
withholding under the provisions of Section 3406(a)(1)(C) | |
of the Internal Revenue Code because (1) you have not --------
been notified that you are subject to backup withholding
as a result of failure to report all interest or divi-
dends or (2) the Internal Revenue Service has notified
you that you are no longer subject to backup withholding.
Part 3 - Check the following box if you are awaiting a Taxpayer --------
Identification Number. | |
--------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
By checking the box in Part 3, I certify under penalties of perjury that a
taxpayer identification number has not been issued to me, and either (a) I have
mailed or delivered an application to receive a taxpayer identification number
to the appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application in the
near future. I understand that if I do not provide a taxpayer identification
number within sixty (60) days, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number.
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
Signature: _______________________________ Date: ____________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR
ADDITIONAL DETAILS.
________________________________________________________________________________
-8-
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payer.--
Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
<TABLE>
<CAPTION>
- --------------------------------------------------------- ---------------------------------------------------------
Give the SOCIAL Give the EMPLOYER
For this type of account: SECURITY number For this type of account: IDENTIFICATION
of -- number of --
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, The legal entity (Do not
or pension trust furnish the identifying
2. Two or more individuals The actual owner of the number of the personal
(joint account) account or, if combined representative or trustee
funds, any one of the unless the legal entity
individuals (1) itself is not designated in
the account title.) (5)
3. Husband and wife (joint The actual owner of the
account) account or, if joint funds,
either person(1)
4. Custodian account of a The minor(2) 10. Corporate account The corporation
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if the minor 11. Religious, charitable, or The organization
account) is the only contributor, the educational organization
minor(1) account
12. Partnership account held
in the name of the business
6. Account in the name of The ward, minor, or 13. Association, club, or The organization
guardian or committee incompetent person(3) tax-exempt organization
for a designated ward,
minor, or incompetent
person
7. a The usual revocable The grantor-trustee(1) 14. A broker or registered The broker or nominee
savings trust nominee
account (grantor
is also trustee)
b So-called trust The actual owner(1) 15. Account with the The public entity
account that is Department of Agriculture
not a legal or in the name of a public
valid trust under entity (such as a State or
State law local government, school
district, or prison) that
8. Sole proprietorship The owner(4) receives agricultural
account program payments
- --------------------------------------------------------- ---------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
-9-
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Page 2
Obtaining a Number
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments include the
following:
. A corporation.
. A financial institution.
. An organization exempt from tax under section 501(a), or an individual
retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of 1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $600 or more and is paid in
the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
. Payments described in section 6049(b)(5) to nonresident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER. WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage
dividends, that are not subject to information reporting are also not subject to
backup withholding. For details, see the regulations under sections 6041,
6041A(a), 6045 and 6050A.
Privacy Act Notice.--Section 6109 requires most recipients of dividend, interest
or other payments to give taxpayer identification numbers to payers who must
report the payments to the IRS. The IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Beginning January 1, 1993, payers must generally
withhold 31% of taxable interest, dividend, and certain other payments to a
payee who does not furnish a taxpayer identification number to a payer. Certain
penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number.--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments.--If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information With Respect to Withholdings.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information.--Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE
-10-
<PAGE>
EXHIBIT C
POOLING OF INTEREST CRITERIA
----------------------------
ATTRIBUTES OF COMBINING ENTERPRISES
(a) Autonomy Condition. Each of the combining enterprises is autonomous and
has not been a subsidiary or division of another enterprise within two
years before the plan of combination is initiated.
(b) Independence Condition. Each of the combining enterprises is independent
of the other combining enterprises.
MANNER OF COMBINING INTERESTS
(c) One-Year Rule. The combination is effected in a single transaction or is
completed in accordance with a specific plan within one year after the plan
is initiated.
(d) Common-Stock-for-Common-Stock-Condition. An enterprise offers and issues
only common stock with rights identical to those of the majority of its
outstanding voting common stock in exchange for substantially all of the
voting common stock interest of another enterprise at the date the plan of
combination is consummated.
(e) Change-in-Equity-Interests Condition. None of the combining enterprises
changes the equity interest of the voting common stock in contemplation of
effecting the combination either within two years before the plan of
combination is initiated or between the dates the combination is initiated
and consummated; changes in contemplation of effecting the combination may
include distributions to stockholders and additional issuances, exchanges,
and retirements of securities.
(f) Treasury-Stock Condition. Each of the combining enterprises reacquires
shares of voting common stock only for purposes other than business
combinations, and no enterprise reacquires more than a normal number of
shares between the dates the plan of combination is initiated and
consummated.
(g) Proportionate-Interest Condition. The ratio of the interest of an
individual common stockholder to those of other common stockholders in a
combining enterprise remains the same as a result of the exchange of stock
to effect the combination.
(h) Voting-Rights Condition. The voting rights to which the common stock
ownership interests in the resulting combined enterprise are entitled are
exercisable by the stockholders; the stockholders are neither deprived of
nor restricted in exercising those rights for a period.
<PAGE>
(i) Contingency Condition. The combination is resolved at the date the plan is
consummated and no provisions of the plan relating to the issue of
securities or other consideration are pending.
ABSENCE OF PLANNED TRANSACTIONS
(j) The combined enterprise does not agree directly or indirectly to retire or
reacquire all or part of the common stock issued to effect the combination.
(k) The combined enterprise does not enter into other financial arrangements
for the benefit of the former stockholders of a combining enterprise, such
as a guaranty of loans secured by stock issued in the combination, that in
effect negates the exchange of equity securities.
(l) The combined enterprise does not intend or plan to dispose of a significant
part of the assets of the combining enterprises within two years after the
combination other than disposals in the ordinary course of business of the
formerly separate enterprise and to eliminate duplicate facilities or
excess capacity.
- 2 -
<PAGE>
EXHIBIT D
VOTING AGREEMENT AND IRREVOCABLE PROXY
--------------------------------------
This Voting Agreement and Irrevocable Proxy (this "Agreement") dated as of
December ___, 1995 is executed by and among Royall Financial Corporation, a
Texas corporation (the "Company"), Compass Bancshares, Inc., a Delaware
corporation ("Compass"), and the other persons who are signatories hereto
(referred to herein individually as a "Shareholder" and collectively as the
"Shareholders").
WHEREAS, the Company and Compass have executed that certain Agreement and
Plan of Merger dated December 14, 1995 (the "Merger Agreement") whereby the
Company will merge with an existing or to-be-formed wholly-owned subsidiary of
Compass (the "Merger"); and
WHEREAS, Section 6.11 of the Merger Agreement requires that the Company
deliver to Compass the irrevocable proxies of the Shareholders; and
WHEREAS, Compass and the Company are relying on the irrevocable proxies in
incurring expense in reviewing the Company's business, in preparing a proxy
statement, in proceeding with the filing of applications for regulatory
approvals, and in undertaking other actions necessary for the consummation of
the Merger;
NOW THEREFORE, the parties hereto agree as follows:
1. Each of the Shareholders hereby represents and warrants to Compass and
the Company that they are the registered holders of and have the exclusive right
to vote the shares of capital stock ("Stock") of the Company set forth below his
name on the signature pages hereto. Each Shareholder hereby agrees to vote at
the shareholders' meeting referred to in Section 1.7 of the Merger Agreement
(the "Meeting") the shares of Stock set forth below his name on the signature
pages hereto and all other shares of Stock such Shareholder owns of record as of
the date of the Meeting and to direct the vote of all shares of Stock which the
Shareholders own beneficially and have the power and authority to direct the
voting thereof as of the date of the Meeting (the "Shares") in favor of approval
of the Merger Agreement, and the other agreements and transactions contemplated
thereby.
2. In order better to effect the provisions of Section 1, each Shareholder
hereby revokes any previously executed proxies and hereby constitutes and
appoints Compass (the "Proxy Holder"), with full power of substitution, his true
and lawful proxy and attorney-in-fact to vote at the Meeting all of such
Shareholder's Shares in favor of the authorization and approval of the Merger
Agreement and the other agreements and transactions
<PAGE>
contemplated thereby, with such modifications to the Merger Agreement and the
other agreements and transactions contemplated thereby as the parties thereto
may make, in the event such Shareholder does not vote in favor of the
authorization and approval of the Merger Agreement and the other agreements and
transactions contemplated thereby; provided, however, that this proxy shall not
apply with respect to any vote on the Merger Agreement, and the other agreements
and transactions contemplated thereby, if the Merger Agreement shall have been
modified so as to reduce the amount of consideration to be received by the
Shareholders under the Merger Agreement in its present form.
3. Each Shareholder hereby covenants and agrees that until this Agreement
is terminated in accordance with its terms, each Shareholder will not, and will
not agree to, without the consent of Compass, directly or indirectly, sell,
transfer, assign, pledge, hypothecate, cause to be redeemed or otherwise dispose
of any of the Shares or grant any proxy or interest in or with respect to any
such Shares or deposit such shares into a voting trust or enter into another
voting agreement or arrangement with respect to such Shares except as
contemplated by this Agreement, unless the Shareholder causes the transferee of
such Shares to deliver to Compass an amendment to this Agreement whereby such
transferee or other holder becomes bound by the terms of this Agreement.
4. This proxy shall be limited strictly to the power to vote the Shares in
the manner set forth in Section 2 and shall not extend to any other matters.
5. The Shareholders acknowledge that Compass and the Company are relying
on this Agreement in incurring expense in reviewing the Company's business, in
preparing a proxy statement, in proceeding with the filing of applications for
regulatory approvals, and in undertaking other actions necessary for the
consummation of the Merger and that the proxy granted hereby is coupled with an
interest and is irrevocable to the full extent permitted by applicable law,
including Article 2.29C of the Texas Business Corporation Act. The Shareholders
and the Company acknowledge that the performance of this Agreement is intended
to benefit Compass.
6. The irrevocable proxy granted pursuant hereto shall continue in effect
until the earlier to occur of (i) the termination of the Merger Agreement, as it
may be amended or extended from time to time, or (ii) the consummation of the
Merger. In no event shall this Agreement apply to shares of common stock, par
value $2.00 per share, of Compass to be received by the Shareholders upon
consummation of the Merger.
7. The vote of the Proxy Holder shall control in any conflict between its
vote of the Shares and a vote by the Shareholders of the Shares and the Company
agrees to recognize the
2
<PAGE>
vote of the Proxy Holder instead of the vote of the Shareholders in the event
the Shareholders do not vote in favor of the approval of the Merger Agreement as
set forth in Section 1 hereof.
8. This Agreement may not be modified, amended, altered or supplemented
with respect to a particular Shareholder except upon the execution and delivery
of a written agreement executed by the Company, Compass and the Shareholder.
9. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
10. This Agreement, together with the Merger Agreement and the agreements
contemplated thereby, embody the entire agreement and understanding of the
parties hereto in respect to the subject matter contained herein. This
Agreement supersedes all prior agreements and understandings among the parties
with respect to such subject matter contained herein.
11. All notices, requests, demands and other communications required or
permitted hereby shall be in writing and shall be deemed to have been duly given
if delivered by hand or mail, certified or registered mail (return receipt
requested) with postage prepaid to the addresses of the parties hereto set forth
on below their signature on the signature pages hereof or to such other address
as any party may have furnished to the others in writing in accordance herewith.
12. This Agreement and the relations among the parties hereto arising from
this Agreement shall be governed by and construed in accordance with the laws of
the State of Texas.
[SIGNATURE PAGES FOLLOW]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
above written.
ROYALL FINANCIAL CORPORATION
By:________________________________
Name:______________________________
Title:_____________________________
Address:
2121 South Loop 256
Palestine, Texas 75802
Attention: Terrence A. Welty, III
COMPASS BANCSHARES, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
Address:
15 South 20th Street
Birmingham, Alabama 35233
Attention: Mr. Daniel B. Graves
Associate General Counsel
4
<PAGE>
SHAREHOLDERS:
___________________________________
___________________________________
Address: _________________________
_________________________
____________ shares of Common Stock
Pledgee: _________________________
Address: _________________________
_________________________
Loan No.: _________________________
5
<PAGE>
EXHIBIT E
OPINIONS REQUIRED FROM COUNSEL
TO THE COMPANY AND THE BANK
---------------------------
(i) the Company is a Texas corporation and a bank holding company under the
Bank Holding Company Act of 1956, as amended, and is duly organized, validly
existing and in good standing under the laws of the State of Texas. The Bank is
a national banking association, duly organized, validly existing and in good
standing under the laws of the United States of America. Each of the Company
and the Bank has all requisite corporate power and authority to carry on its
business as we know it to be conducted and to own, lease and operate its
properties and assets as now owned, leased or operated. Each of the Company and
the Bank is duly qualified and in good standing in Texas.
(ii) the Company has all requisite power and authority to execute and
deliver the Agreement and any other agreements contemplated by the Agreement
(collectively, the "Other Agreements") and to consummate the transactions
contemplated thereby; all acts (corporate or otherwise) and other proceedings
required to be taken by or on the part of the Company to execute and deliver the
Agreement and the Other Agreements and to consummate the transactions
contemplated therein have been duly and validly taken; and the Agreement and the
Other Agreements have been duly executed and delivered by, and constitute the
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, subject to the effect of (a) any applicable
bankruptcy, insolvency, reorganization or other law relating to or affecting
creditors' rights generally and (b) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
(iii) the authorized capital stock of the Company consists solely of
1,000,000 shares of Company Common Stock (as defined in the Agreement) of which
3999 and 11/12ths shares are issued and outstanding (none of which are held in
the treasury); the Company is the record holder of all of the issued and
outstanding capital stock of the Bank; all of the outstanding shares of the
Company Common Stock are validly issued, fully paid and nonassessable and all of
the capital stock of the Bank is validly fully paid and nonassessable; and to
the best of our knowledge, none of such stock was issued in violation of the
preemptive rights of any person;
(iv) to the best of our knowledge and except as set forth on Schedule 3.2 to
the Agreement, there are no outstanding subscriptions, options, rights,
warrants, calls, convertible securities, irrevocable proxies, or other
agreements or commitments obligating the Company or the Bank to issue any shares
of, restricting the transfer of, or otherwise relating to shares of their
respective capital stock of any class;
<PAGE>
(v) the execution and delivery by the Company of the Agreement does not and
the consummation of the transactions contemplated thereby will not contravene or
violate any provision of or constitute a default under (a) the articles of
incorporation or association or bylaws of the Company or the Bank, (b) to the
best of our knowledge and except as disclosed in the Agreement, any note,
license, instrument, mortgage, deed of trust, or other agreement or
understanding, permit, authorization or contract, order, arbitration award,
judgment or decree, or any other restriction of any kind or character known to
us to which the Company or the Bank is a party or by which the Company or the
Bank or any of their respective assets or properties is bound, and (c) to the
best of our knowledge and except as disclosed in the Agreement, any law,
regulation, rule, administrative regulation or decree of any court or any
governmental agency or body whether domestic or foreign applicable to the
Company or the Bank, or their respective assets or properties;
(vi) except as disclosed in the Agreement and except for such consents,
approvals, authorizations, actions or filings as have already been obtained by
Compass or Compass Texas, no consent, approval, authorization, action or filing
with any court, governmental agency or public body is required in connection
with the execution, delivery and performance by the Company of the Agreement;
(vii) except as set forth in Schedule 3.12 to the Agreement, to the best of
our knowledge, neither the Company nor the Bank is a party to any Proceeding (as
defined in the Agreement), nor to the best of our knowledge, is any Proceeding
threatened against or affecting the Company or the Bank, which by the terms of
the Agreement would required to be set forth in Schedule 3.12;
(viii) to the best of our knowledge and except as set forth on Schedule 3.18
to the Agreement, neither the Company nor the Bank is in material default under
any law or regulation, or under any order of any court, commission, board,
bureau, agency or instrumentality wherever located, the violation of which could
have a material adverse effect on the Company and the Bank taken as a whole; and
(ix) upon consummation of the transactions contemplated by the Agreement in
accordance with its terms and upon filing of the Articles of Merger relating to
the Merger by the Secretary of State of Texas, and upon filing by the Secretary
of State of Delaware of a Certificate of Merger the Merger will have been
legally consummated in accordance with the laws of the States of Texas and
Delaware with the consequences specified in Article 5.06 of the Texas Business
Corporation Act and Section 259 of the GCL.
-2-
<PAGE>
EXHIBIT F
OPINIONS REQUIRED FROM COUNSEL
TO COMPASS AND COMPASS TEXAS
----------------------------
(i) Compass and Compass Texas are each corporations duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and Compass is a bank holding company under the Bank Holding Company Act of
1956, as amended. Compass and Compass Texas have all requisite corporate power
and authority to carry on their business as now being conducted and to own,
lease and operate their properties as now owned, leased or operated. Compass and
Compass Texas are duly qualified and in good standing in the respective states
where such qualification is required.
(ii) Compass and Compass Texas each have all requisite power and authority
to execute and deliver the Agreement and to consummate the transactions
contemplated thereby; all acts (corporate or otherwise) and other proceedings
required to be taken by or on the part of Compass and Compass Texas (or either
of them) to execute and deliver the Agreement and to consummate the transactions
contemplated therein have been duly and validly taken; and the Agreement has
been duly executed and delivered by, and constitutes the valid and binding
obligation of each of Compass and Compass Texas enforceable against Compass and
Compass Texas in accordance with its terms, subject to the effect of (a) any
applicable bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law);
(iii) the shares of Compass Common Stock to be issued pursuant to the
Agreement are validly issued, fully paid and nonassessable; and, to the best of
our knowledge and except as contemplated by the Agreement, the shares of Compass
Common Stock issued pursuant to the Agreement are not subject to any agreements
or understandings to which Compass is a party with respect to the voting or
transfer of such shares, are not subject to any agreements or understandings
among any other parties with respect to the voting or transfer of such shares,
and have not been issued in violation of the preemptive rights of any person;
(iv) the execution and delivery by Compass and Compass Texas of the
Agreement does not and the consummation of the transactions contemplated thereby
will not contravene or violate any provision of or constitute a default under
(a) the certificate of incorporation or bylaws of Compass or Compass Texas, (b)
to the best of our knowledge and except as disclosed in the Agreement, any note,
license, instrument, mortgage, deed of trust, or other agreement or
understanding, permit, authorization or contract, order, arbitration award,
judgment of decree, or any other restriction of any kind known to us to which
Compass or Compass
<PAGE>
Texas is a party or by which Compass or Compass Texas or any of their assets or
properties is bound, the breach or violation of which could have a material
adverse effect on Compass and its Subsidiaries taken as a whole, and (c) to the
best of our knowledge and except as disclosed in the Agreement, any law,
regulation, rule, administrative regulation or decree of any court or any
governmental agency or body applicable to Compass or Compass Texas or their
respective assets or properties;
(v) except as disclosed in the Agreement and except for such consents,
approvals, authorizations, actions or filings as have already been obtained, no
consent, approval, authorization, action or filing with any court, governmental
agency or public body is required in connection with the execution, delivery and
performance by Compass and Compass Texas of the Agreement;
(vi) to the best of our knowledge, neither Compass nor Compass Texas is in
violation of or default under the respective Certificates of Incorporation or
Bylaws of Compass or Compass Texas or any agreement, document or instrument
under which Compass or Compass Texas is obligated or bound, or any law, order,
judgment, or regulation applicable to Compass or Compass Texas or any of their
Subsidiaries, the violation of which could have a material adverse effect on
Compass and its Subsidiaries taken as a whole; and
(vii) the shares of Compass Common Stock to be issued pursuant to the
Agreement have been registered under the Securities Act of 1933, as amended.
-2-
<PAGE>
EXHIBIT G
---------
COMPASS TEXAS REPRESENTATIONS CERTIFICATE
____________ ("Compass Texas") hereby represents and warrants to the
Company as follows. Capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Agreement and Plan of Merger dated December
14, 1995 by and between Compass Bancshares, Inc. and Royall Financial
Corporation (the "Agreement").
1. Compass Texas is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to conduct its business as now conducted, to own,
lease and operate its properties and assets, as now owned, leased or operated
and to enter into and carry out its obligations under the Agreement.
2. Compass Texas has full corporate power and authority and no further
corporate proceedings on the part of Compass Texas are necessary to execute and
deliver the Amendment to Agreement and Plan of Merger dated ___________, 1995
("Amendment") and to consummate the transactions contemplated thereby, all of
which have been duly and validly authorized by Compass Texas' Board of
Directors. The Amendment has been duly executed and delivered by Compass Texas
and is a duly authorized, valid, legally binding and enforceable obligation of
Compass Texas, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to creditors' rights generally and
general equitable principles, and subject to such shareholder approvals and such
approval of regulatory agencies and other governmental authorities having
authority over Compass Texas as may be required by statute or regulation.
Except as set forth on the Schedule attached hereto, neither the execution,
delivery nor performance of the Amendment in its entirety, nor the consummation
of all the transactions contemplated thereby, following the receipt of such
approvals as may be required from the SEC, the OCC, the FRB, the FDIC, and the
Department will (i) violate (with or without the giving of notice or passage of
time), any law, order, writ, judgment, injunction, award, decree, rule, statute,
ordinance or regulation applicable to Compass Texas.
3. No representation or warranty by Compass Texas in the Amendment, nor
any statement or exhibit furnished to the Company or the Bank under and pursuant
to, or in anticipation of the Amendment, contains or will contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements contained herein or therein not misleading.
<PAGE>
IN WITNESS WHEREOF, Compass Texas has executed this Certificate this _____
day of ____________, 1996.
_____________________________________
By:__________________________________
Name:________________________________
Title:_______________________________
2
<PAGE>
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
-----------------------------------------------
This First Amendment to Agreement and Plan of Merger (this "Amendment")
dated as of May 30, 1996 is entered into by and among Compass Bancshares, Inc.
("Compass"), Compass Equitable Texas, Inc. ("Compass Equitable") and Royall
Financial Corporation (the "Company").
WHEREAS, Compass and the Company entered into an Agreement and Plan of
Merger dated as of December 14, 1995 (the "Merger Agreement");
WHEREAS, the Merger Agreement requires Compass to form a new subsidiary
which shall be merged with and into the Company, with the Company being the
surviving entity;
WHEREAS, Compass Equitable is such new subsidiary; and
WHEREAS, Section 8.3 of the Merger Agreement requires Compass and the
Company to amend the Merger Agreement for the purpose of making Compass
Equitable a party thereto;
WHEREAS, Compass and the Company also desire to further amend the
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and in the Merger Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Capitalized terms used herein and not defined herein shall have the
meanings set forth in the Merger Agreement.
2. Upon execution of this Amendment, Compass Equitable shall become a
party to the Merger Agreement, shall be deemed to be Compass Texas as defined in
the Merger Agreement, and shall succeed to the rights and become subject to the
obligations of Compass Texas as provided in the Merger Agreement.
3. The execution of this Amendment shall not relieve Compass of its
obligations under the Merger Agreement.
4. The second sentence of Section 1.6(b) of the Agreement is amended
to read in full as follows:
In the event the average closing sale price of the Compass Common
Stock as reported by the NASDAQ National Market System for the 20 days
of trading following the date of mailing of the Proxy Statement (as
defined in Section 1.7) to the shareholders of the Company (the "Share
<PAGE>
Determination Market Value") is less than $29.00 per share, the
Company may either (i) terminate this Agreement (the "Pricing
Termination Option") by written notice to Compass within ten business
days after the Share Determination Market Value of less than $29.00
per share is capable of being determined, or (ii) agree to accept an
aggregate of 550,000 shares of Compass Common Stock.
5. Except as herein provided, the terms of the Merger Agreement
shall remain in full force and effect.
6. This Amendment may be executed in several counterparts, and by
the parties on separate counterparts, and all such counterparts, when so
executed and delivered, shall constitute but one and the same agreement.
IN WITNESS WHEREOF the parties have executed this Amendment as of the date
first written above.
ATTEST: COMPASS BANCSHARES, INC.
By: /s/ Daniel B. Graves By: /s/ Garrett R. Hegel
------------------------- ------------------------------
Its: Assistant Secretary Its: Chief Financial Officer
ATTEST: COMPASS EQUITABLE TEXAS, INC.
By: /s/ Daniel B. Graves By: /s/ Garrett R. Hegel
------------------------- -----------------------------
Its: Assistant Secretary Its: Treasurer
ATTEST: ROYALL FINANCIAL CORPORATION
By: /s/ Nancy Ludtke By: /s/ Terrence A. Welty, III
------------------------ -----------------------------
Its: Secretary Its: Chairman & Chief Executive
Officer
2
<PAGE>
---------------------------------
APPENDIX II
DISSENTER'S RIGHTS OF APPRAISAL
---------------------------------
<PAGE>
PROVISIONS OF THE TEXAS BUSINESS CORPORATION
RELATING TO
RIGHTS OF DISSENTING STOCKHOLDERS
Art. 5.11. Rights of Dissenting Shareholders in the Event of Certain Corporate
Actions
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and the
shareholder holds shares of a class or series that was entitled to vote thereon
as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including
any pledge, mortgage, deed of trust or trust indenture unless otherwise provided
in the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in
which the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
Art. 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in the
case of action other than a merger, or the surviving or new corporation (foreign
or domestic) or other entity that is liable to discharge the shareholder's right
of dissent, in the case of a merger, shall, within ten (10) days after the
action is effected, deliver or mail to the shareholder written notice that the
action has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or
APPENDIX II
-1-
<PAGE>
depreciation in anticipation of the proposed action. The demand shall state the
number and class of the shares owned by the shareholder and the fair value of
the shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the case
of action other than a merger, and the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the date the
action is effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the shareholder
may exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action. If
the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other
Appendix II
-2-
<PAGE>
entity, the petition shall be accompanied by such a list. The clerk of the
court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of a merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this
Appendix II
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<PAGE>
Article, any shareholder who fails to comply with the requirements of this
Article shall not be entitled to bring suit for the recovery of the value of his
shares or money damages to the shareholder with respect to the action.
Art. 5.13. Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
Appendix II
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<PAGE>
APPENDIX III
OPINION OF FINANCIAL ADVISOR
<PAGE>
December 21, 1995
Board of Directors
Royall Financial Corporation
519 North Sycamore
Palestine, Texas 75801
Members of the Board:
You have requested our opinion, as an independent financial analyst to the
common shareholders of Royall Financial Corporation, Palestine, Texas
("Company"), as to the fairness, from a financial point of view to the common
shareholders of Company, of the terms of the proposed merger of Company with and
into Compass Bancshares, Inc., Birmingham, Alabama ("Compass"). Pursuant to the
terms of the Agreement and Plan of Merger, each holder of Company Common Stock
shall receive Merger Consideration equal to the quotient of 550,000 shares of
Compass common stock, divided by the number of Shares of Company Common Stock
outstanding immediately prior to the Effective Time for each share of Company
Common Stock so held. In the event the average closing sale price of the
Compass Common Stock as reported by the NASDAQ National Market System for the 20
days of trading preceding the tenth business day prior to the first business day
following the last received regulatory approval from the FDIC and the FRB and
the expiration of any applicable waiting period with respect thereto is less
than $29.00 per share, the Company may either (i) terminate this Agreement by
written notice to Compass within ten business days after the Share Determination
Market Value of less than $29.00 per share is capable of being determined, or
(ii) agree to accept an aggregate of 550,000 shares of Compass Common Stock.
As part of its banking analysis business, Alex Sheshunoff & Co. Investment
Banking is continually engaged in the valuation of bank, bank holding company
and thrift securities in connection with mergers and acquisitions nationwide.
Prior to being retained for this assignment, Alex Sheshunoff & Co. Investment
Banking has provided professional services and products to Company and Compass.
The revenues derived from such services and products are insignificant when
compared to the firm's total gross revenues.
In connection with this assignment, we reviewed (i) the Agreement and Plan of
Merger dated December 14, 1995; (ii) the external auditor's reports to the Board
of Directors of Company and the internal audit function of Compass; (iii) the
September 30, 1995 balance sheet and income statement for each organization and
the audited December 31, 1994 and December 31, 1993 balance sheet and income
statement for each organization; (iv) each organization's rate sensitivity
analysis reports; (v) each organization's listing of marketable securities
showing rate, maturity and market value as compared to book value; (vi) each
organization's internal loan classification list; (vii) a listing of other real
estate owned for each organization; (viii) the budget and long range operating
plan of Company; (ix) a listing of unfunded letters of credit and any other off-
balance sheet risks for each organization; (x) the minutes of the Board of
Directors meetings of Company; (xi) the Board report for each organization;
(xii) the listing and description of significant real properties for each
organization; (xiii) the directors and officers liability and blanket bond
insurance policies for each organization; and (xiv) market conditions and
current trading levels of outstanding equity securities of both organizations.
We have also had discussions with the management of Company and Compass
regarding their respective financial results and have analyzed the most current
financial data available on Company and Compass. We also considered such other
information, financial studies, analyses and investigations, and economic and
market criteria which we deemed relevant. We have met with the management of
Company and Compass to discuss the foregoing information with them.
We have considered certain financial data of Company and Compass, and have
compared that data with similar data for other banks and bank holding companies
which have recently merged or been acquired; furthermore, we have considered the
financial terms of these business combinations involving said banks and bank
holding companies.
<PAGE>
We have not independently verified any of the information reviewed by us and
have relied on its being complete and accurate in all material respects. In
addition, we have not made an independent evaluation of the assets of Company
and Compass.
In reaching our opinion we took into consideration the financial benefits of the
proposed transaction to all Company shareholders. Based on all factors that we
deem relevant and assuming the accuracy and completeness of the information and
data provided to us by Company and Compass, it is our opinion as of December 21,
1995, that the terms of the proposed merger of Company with and into Compass are
fair to all Company shareholders from a financial point of view.
Our opinion does not constitute an endorsement of the merger or a recommendation
to any stockholder of Company as to how such stockholder should vote.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our opinion
as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Respectfully submitted,
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
AUSTIN, TEXAS
Wade Schuessler
Vice President
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20:
- -------
Section 17 of Article V of Compass' By-Laws provides in part as follows:
Without limitation, the Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding to the full extent
permitted by the General Corporation Law of Delaware, upon such
determination having been made as to his good faith and conduct as is
required by said General Corporation Law. Expenses incurred in defending a
civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding to the extent, if any, authorized by the Board of Directors in
accordance with the provisions of said General Corporation Law, officer,
employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation.
Under Section 145 of the Delaware General Corporation Law (the "GCL"),
directors, advisory directors and officers of a Delaware corporation are
entitled to indemnification permitted by the statute as provided in such
corporation's certificate of incorporation, by-laws, resolutions and other
proper action.
In addition, Article 8 of Compass' Restated Certificate of Incorporation,
as amended, provides:
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty of such
director, except (i) for breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the Delaware General Corporation Law,
or (iv) for any transaction from which the director derived an improper
personal benefit. No amendment to or repeal of this Article 8 shall apply
to or have any effect on the liability or alleged liability of any director
of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
This provision is identical to, and is authorized by, 1986 amendments to the
GCL, Section 102(b)(7).
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Compass
pursuant to the foregoing provisions, or otherwise, Compass has been advised
that in the opinion of the 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 Compass of expenses incurred or paid by a director, officer or
controlling person of Compass 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, Compass 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
II-1
<PAGE>
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 21: Exhibits and Financial Statement Schedules.
- ------- -------------------------------------------
An index to Exhibits appears at pages II-5 through II-6 hereof.
Item 22: Undertakings.
- ------- ------------
The undersigned Registrant hereby undertakes 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 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to 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.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 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.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on May 31, 1996.
COMPASS BANCSHARES, INC.
By: *
-----------------------------------------
D. Paul Jones, Jr.
Its Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
II-3
<PAGE>
SIGNATURE TITLE DATE
*
- ----------------------------------- Director, Chairman and May 31, 1996
D. Paul Jones, Jr. Chief Executive Officer
*
- ----------------------------------- Chief Financial Officer May 31, 1996
Garrett R. Hegel
*
- ----------------------------------- Chief Accounting Officer May 31, 1996
Michael A. Bean and Controller
- ----------------------------------- Director May __, 1996
Stanley M. Brock
- ----------------------------------- Director May __, 1996
Charles W. Daniel
*
- ----------------------------------- Director May 31, 1996
William Eugene Davenport
*
- ----------------------------------- Director May 31, 1996
Marshall Durbin, Jr.
*
- ----------------------------------- Director May 31, 1996
Tranum Fitzpatrick
*
- ----------------------------------- Director May 31, 1996
George W. Hansberry
*
- ----------------------------------- Director May 31, 1996
John S. Stein
- ----------------------------------- Director May __, 1996
Robert J. Wright
*By:/s/ Daniel B. Graves
-------------------------------
Daniel B. Graves, Attorney-in-fact May 31, 1996
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
============== ======================
2 Agreement and Plan of Merger by and between
Compass Bancshares, Inc. and Royall Financial
Corporation, dated as of December 14, 1995, as
amended (included as Appendix I to the Proxy
Statement/Prospectus in Part I of this
Registration Statement)
*3(a) Restated Certificate of Incorporation of the
Registrant dated May 17, 1982 (Filed with the
December 31, 1982 Form 10-K of the Registrant and
incorporated herein by reference) (File No. 0-6032)
*3(b) Certificate of Amendment dated May 20, 1986 to
Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 4(b) to Registration
Statement on Form S-8, Registration No. 33-39095,
and incorporated herein by reference) (File No.
0-6032)
*3(c) Certificate of Amendment dated May 15, 1987 to
Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1.2 to
Post-Effective Amendment No. 1 to Registration
Statement on Form S-4, Registration No. 33-10797
and incorporated herein by reference) (File No.
0-6032)
*3(d) Certificate of Amendment dated November 8, 1993 to
Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3(d) to Registration
Statement on Form S-4 Registration No. 33-51919
and incorporated herein by reference) (File No.
0-6032)
*3(e) Certificate of Amendment, dated September 19,
1994, to the Restated Certificate of Incorporation
of the Registrant (filed as Exhibit 3.5 to
Registration Statement on Form S-4 Registration
No. 33-55899, and incorporated herein by
reference) (File No. 0-6032)
*3(f) Bylaws of the Registrant (Amended and Restated as
of March 15, 1982) (Filed with the December 31,
1982 10-K of the Registrant and incorporated
herein by reference) (File No. 0-6032)
5 Opinion and consent of Jerry W. Powell, Esquire,
as to the legality of the securities being
registered
8 Opinion and consent of Liddell, Sapp, Zivley, Hill
& LaBoon, L.L.P., regarding tax matters
*10(a) Compass Bancshares, Inc., 1982 Long Term Incentive
Plan (incorporated by reference to Exhibit 1 to
the Company's Registration Statement on Form S-8
filed June 15, 1983, with the Commission).
II-5
<PAGE>
Exhibit Number Description of Exhibit
============== ======================
*10(b) Compass Bancshares, Inc. 1989 Long Term Incentive
Plan (filed as Exhibit 28 to Registration
Statement on Form S-8 Registration No. 39095 and
incorporated herein by reference) (File No. 0-6032)
*10(c) Supplemental Retirement Agreement dated as of
March 18, 1991, between the Registrant and Harry
B. Brock, Jr. (filed as Exhibit 10 to the December
31, 1991 Form 10-K of the Registrant and
incorporated herein by reference) (File No.
0-6032)
*10(d) Employment Agreement dated December 14, 1994,
between Compass Bancshares, Inc. and D. Paul
Jones, Jr. (filed as Exhibit 10(d) to the December
31, 1994 Form 10-K of the Registrant and
incorporated herein by reference) (File No. 0-6032)
*10(e) Employment Agreement dated December 14, 1994,
between Compass Bancshares, Inc. and Jerry W.
Powell (filed as Exhibit 10(e) to the December 31,
1994 Form 10-K of the Registrant and incorporated
herein by reference) (File No. 0-6032)
*10(f) Employment Agreement dated December 14, 1994,
between Compass Bancshares, Inc. and Garrett R.
Hegel (filed as Exhibit 10(f) to the December 31,
1994 Form 10-K of the Registrant and incorporated
herein by reference) (File No. 0-6032)
*10(g) Employment Agreement dated December 14, 1994,
between Compass Bancshares, Inc. and Byrd Williams
(filed as Exhibit 10(g) to the December 31, 1994
Form 10-K of the Registrant and incorporated
herein by reference) (File No. 0-6032)
*10(h) Employment Agreement dated December 14, 1994,
between Compass Bancshares, Inc. and Charles E.
McMahen (filed as Exhibit 10(h) to the December
31, 1994 Form 10-K of the Registrant and
incorporated herein by reference) (File No. 0-6032)
*13(a) The Registrant's Annual Report to Shareholders and
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (File No. 0-6032)
21 List of Subsidiaries of Compass Bancshares, Inc.
23(a) Consent of KPMG Peat Marwick LLP, Independent
Certified Public Accountants--Compass Bancshares,
Inc.
23(b) Consent of Harrell, Rader, Bonner & Bolton, LLP,
Independent Certified Public Accountants--Royall
Financial Corporation
II-6
<PAGE>
Exhibit Number Description of Exhibit
============== ======================
23(d) Consent of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P. (included in the opinion in Exhibit 8)
24(a) Power of Attorney
24(b) Compass Board of Directors Resolutions
99(a) Notice of Special Meeting of Shareholders of Royall
99(b) Form of Proxy for Special Meeting of Shareholders
of Royall
99(c) Chairman's letter to Royall Shareholders
__________________________
*Incorporated by reference
<PAGE>
May 31, 1996
Board of Directors
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Re: Compass Bancshares, Inc. -- Registration of 550,000 Shares of
Common Stock $2.00 Per Share Par Value on Securities and Exchange
Commission Form S-4
Dear Sirs:
In connection with the registration under the Securities Act of 1933,
as amended, of 550,000 shares of common stock, $2.00 per share par value (the
"Company Stock") of Compass Bancshares, Inc., a Delaware corporation (the
"Company"), for issuance and sale in the manner described in the Company's
registration statement on Form S-4 filed with the Securities and Exchange
Commission, to which this opinion is an exhibit (the "Registration Statement"),
I, as General Counsel to the Company, have examined such corporate records,
certificates and other documents as I have considered necessary or appropriate
for the purposes of this opinion.
On the basis of the foregoing, I am of the opinion that the shares of
the Company Stock offered pursuant to the Registration Statement have been duly
and validly authorized and are, or when issued in accordance with appropriate
corporate proceedings and the terms of the respective governing documents will
be, duly and validly issued, fully paid and nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Yours very truly,
/s/ Jerry W. Powell
----------------------
Jerry W. Powell
General Counsel
<PAGE>
Exhibit 8
May 31, 1996
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Gentlemen:
You have requested our opinion with respect to the disclosures
relating to the material federal income tax consequences generally applicable to
the receipt by shareholders of Royall Financial Corporation, a Texas corporation
("Royall"), of shares of common stock, $2.00 par value per share ("Compass
Common Stock"), of Compass Bancshares, Inc., a Delaware corporation ("Compass"),
in connection with the proposed merger (the "Merger") of Compass Equitable
Texas, Inc., a Delaware corporation ("Compass Texas") and a wholly-owned
subsidiary of Compass formed for the purpose of effecting the Merger, with and
into Royall, as described in the Proxy Statement/Prospectus relating to the
Merger (the "Proxy Statement/Prospectus") forming a part of the Registration
Statement on Form S-4 (the "Registration Statement") being filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act").
It is our opinion that the discussions and legal conclusions set forth
in the Proxy Statement/Prospectus under the heading "Summary-Federal Income Tax
Consequences" and "The Merger-Federal Income Tax Consequences" are accurate and
complete in all material respects and constitute our opinion of the material tax
consequences to shareholders of Equitable receiving Compass Common Stock in the
Merger.
Our opinion is based and conditioned upon the initial and continuing
accuracy of the facts and the factual matters assumed as set forth in the Proxy
Statement/Prospectus. Our opinion is also based upon existing provisions of the
Internal Revenue Code of 1986, as amended, regulations promulgated or proposed
thereunder and interpretations thereof by the Internal Revenue Service and the
courts, all of which are subject to change with prospective or retroactive
effect, and our opinion could be adversely affected or rendered obsolete by any
such change.
<PAGE>
Compass Bancshares, Inc.
May 31, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of our name in the Proxy Statement/Prospectus
under the captions "Summary-Federal Income Tax Consequences", "The Merger-
Federal Income Tax Consequences" and "Legal Opinions". In giving this consent,
we do not thereby admit that we are within the category of persons whose consent
is required under Section 7 of the Act and the rules and regulations thereunder.
Very truly yours,
LIDDELL, SAPP, ZIVLEY, HILL &
LABOON, L.L.P.
<PAGE>
LIST OF SUBSIDIARIES OF
COMPASS BANCSHARES, INC.
Name of Subsidiary Place of Incorporation
- ------------------ ----------------------
Compass Bank Alabama
Compass Bancshares Insurance, Inc. Alabama
Compass Brokerage, Inc. Alabama
Compass Mortgage Corporation Delaware
Compass Capital Markets, Inc. Alabama
Compass Multistate Services Alabama
Corporation
Compass Fiduciary Services, Ltd., Inc. Alabama
Compass Financial Corporation Alabama
Central Bank of the South Alabama
Compass Securities, Inc. Alabama
Central Land Holding Corporation Alabama
Compass Investments, Inc. Alabama
Compass Underwriters, Inc. Alabama
Compass Bank, N.A. United States
Compass Bank United States
Compass Banks of Texas, Inc. Delaware
Compass Bancorporation of Texas, Inc. Delaware
Compass Bank - Dallas Texas
River Oaks Trust Company Texas
Compass Texas Management, Inc. Texas
River Oaks Trust Corporation Texas
Compass Bank - Houston Texas
River Oaks Bank Building, Inc. Texas
River Oaks Securities, Inc. Texas
Peoples Bancshares, Inc. Texas
P.I. Holdings No. 1, Inc. Texas
P.I. Console, Inc. Texas
P.I. Holdings No. 2, Inc. Texas
Compass Bank - San Antonio Texas
Compass Bank-Central Texas Texas
<PAGE>
Exhibit 23(a)
ACCOUNTANT'S CONSENT
Board of Directors
Compass Bancshares, Inc.
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the Prospectus.
Our report refers to changes in the method of accounting for income taxes and
the method of accounting for certain investments in debt and equity securities.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
May 29, 1996
<PAGE>
Exhibit 23(b)
ACCOUNTANT'S CONSENT
Board of Directors
Royall Financial Corporation
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
HARRELL, RADER, BONNER & BOLTON, LLP
Palestine, Texas
May 31, 1996
<PAGE>
Exhibit 24(a)
POWER OF ATTORNEY
WHEREAS, Compass Bancshares, Inc. (the "Company") has agreed to file
registration statements and amendments thereto under the Securities Act of 1933,
as amended, with respect to the issuance and sale of shares of common stock of
the Company in connection with the acquisition by the Company of Royall
Financial Corporation;
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that the Company and
the undersigned directors and officers of said Company, individually as a
director and/or as an officer of the Company, hereby make, constitute and
appoint each of D. Paul Jones, Jr., Garrett R. Hegel, Jerry W. Powell, and
Daniel B. Graves their true and lawful attorney-in-fact for each of them and in
each of their names, places and steads to sign and cause to be filed with the
Securities and Exchange Commission said registration statement and any
appropriate amendments thereto, to be accompanied by prospectuses and any
appropriately amended prospectuses and any necessary exhibits.
The Company hereby authorizes said persons or any one of them to
execute said registration statement and amendments thereto on its behalf as
attorney-in-fact for it and its authorized officers, and to file the same as
aforesaid.
The undersigned directors and officers of the Company hereby authorize
said persons or any of one of them to sign said registration statements on their
behalf as attorney-in-fact and to amend, or remedy any deficiencies with respect
to, said registration statements by appropriate amendment or amendments and to
file the same as aforesaid.
DONE as of this the 20th day of November, 1995.
COMPASS BANCSHARES, INC.
By:/s/ D. Paul Jones, Jr.
------------------------------------------
D. Paul Jones, Jr.
Its Chairman and Chief Executive Officer
/s/ D. Paul Jones, Jr.
---------------------------------------------
D. Paul Jones, Jr.
/s/ Garrett R. Hegel
---------------------------------------------
Garrett R. Hegel
/s/ Michael A. Bean
---------------------------------------------
Michael A. Bean
---------------------------------------------
Stanley M. Brock
<PAGE>
--------------------------------------------
Charles W. Daniel
/s/ W. Eugene Davenport
--------------------------------------------
W. Eugene Davenport
/s/ Marshall Durbin, Jr.
--------------------------------------------
Marshall Durbin, Jr.
/s/ Tranum Fitzpatrick
--------------------------------------------
Tranum Fitzpatrick
/s/ George W. Hansberry, M.D.
--------------------------------------------
George W. Hansberry, M.D.
/s/ John S. Stein
--------------------------------------------
John S. Stein
--------------------------------------------
Robert J. Wright
<PAGE>
EXHIBIT 24(b)
CERTIFICATE OF THE ASSISTANT SECRETARY REGARDING
RESOLUTIONS OF THE BOARD OF DIRECTORS
OF COMPASS BANCSHARES, INC., RELATING TO
PROPOSED ACQUISITION OF ROYALL FINANCIAL CORPORATION AND ITS
SUBSIDIARY, ROYALL NATIONAL BANK OF PALESTINE, PALESTINE, TEXAS
I, the undersigned Assistant Secretary of Compass Bancshares, Inc., a
Delaware corporation, and a custodian of the minutes book and other records of
the Board of Directors of said Corporation, do hereby certify that the following
resolutions were adopted by the Board of Directors of said Corporation in a
meeting, duly called and held on November 20, 1995:
RESOLVED, that the Board of Directors of Compass Bancshares, Inc., a
Delaware corporation (the "Corporation"), has determined that it is
desirable and in the best interests of the Corporation and its stockholders
to acquire (the "Royall Acquisition") Royall Financial Corporation (the
"Company") and its wholly-owned subsidiary, The Royall National Bank (the
"Bank"), which are located in Palestine, Texas, in accordance with the
basic terms of such transaction as described to this Board by the Chairman
and Chief Executive Officer, the Chief Financial Officer, and/or the
General Counsel and Secretary of the Corporation at the meeting at which
these resolutions were adopted; and further
RESOLVED, that the proper officers of the Corporation, in consultation
with counsel, are authorized, empowered, and directed to negotiate the
terms and conditions of a definitive agreement and plan or plans of merger,
as well as any amendments or supplements thereto, among the Corporation,
the Company, the Bank, and any subsidiary banks or subsidiary corporations
of the Corporation now in existence or to be formed for the purposes of
effectuating the acquisition by the Corporation of the Company and the Bank
(referred to collectively herein as the "Agreement"), and to execute,
attest, and deliver the Agreement in such form as they, in their sole
discretion, shall approve, such approval to be conclusively evidenced by
their execution, attestation, and delivery of the Agreement; and further
RESOLVED, that all negotiations and any other actions taken and things
done heretofore by the officers of the Corporation with respect to the
execution, attestation, and delivery of written agreements in principle or
definitive agreements relating to the acquisition of the Company and the
Bank are hereby ratified and approved; and further
RESOLVED, that the organization of one or more corporations as a
subsidiary or subsidiaries of the Corporation or as a subsidiary or
subsidiaries of an existing affiliate of the Corporation for the purpose of
effectuating the Royall Acquisition is hereby authorized, approved, and
ratified in the event that it shall be determined or has been determined by
the officers of the Corporation, after consultation with counsel, that such
organization of a subsidiary is necessary or
<PAGE>
appropriate for the effectuation of the acquisition of the Company and the
Bank; and further
RESOLVED, that to the extent that the approval of the Corporation as
the sole stockholder of any of its subsidiaries is required in connection
with the Royall Acquisition, the Corporation hereby waives any and all
notice of a meeting or meetings of stockholders of any such subsidiary or
subsidiaries for the purposes of approving the Royall Acquisition or the
Agreement, and the Board of Directors of the Corporation hereby approves,
authorizes, and ratifies the Royall Acquisition and the Agreement as the
stockholder of its subsidiaries now existing or to be organized, it being
the intent of the Board of Directors of the Corporation that the approval
by the Corporation set forth in this resolution shall constitute any and
all approval required by law for the approval of the Royall Acquisition or
the Agreement by the Corporation as a stockholder; and further
RESOLVED, that the Corporation's and the Corporation's subsidiaries'
officers are authorized, empowered, and directed to prepare, or cause to be
prepared, and to execute, attest, and file all applications, or requests
for waiver of application requirements, which they shall deem necessary or
appropriate with the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision,
the Office of the Comptroller of the Currency, the Texas Department of
Banking, and any other appropriate bank and bank holding company regulatory
authorities with respect to the Royall Acquisition; and further
RESOLVED, that in the event that the Agreement shall contemplate that
the Corporation shall issue as consideration in connection with the Royall
Acquisition shares of its common stock or other securities of the
Corporation, the proper officers of the Corporation, in consultation with
counsel, are authorized and directed to prepare, execute, attest, and file
a Registration Statement on Form S-4 or other appropriate form for the
registration of securities (the "Registration Statement") with the United
States Securities and Exchange Commission (the "Commission") relating to
the Royall Acquisition and the proposed issuance of securities of the
Corporation as consideration in such transaction; and further
RESOLVED, that the proper officers of the Corporation are authorized,
empowered, and directed for and on behalf of the Corporation to do any and
all acts and things necessary or appropriate in connection with such filing
of the Registration Statement, including the execution, attestation, and
filing of any amendments or supplements thereto, to effectuate the
registration of securities of the Corporation to be issued in the Royall
Acquisition and the continuation of the effectiveness of the Registration
Statement; and further
RESOLVED, that each officer or director who may be required to execute
the Registration statement or any amendment or supplement to the
Registration Statement (whether on behalf of the Corporation or as an
officer of director
<PAGE>
thereof) is hereby authorized to constitute and appoint D. Paul Jones, Jr.,
Garrett R. Hegel, Jerry W. Powell, and Daniel B. Graves, and each of them
acting singularly, his true and lawful attorney-in-fact and agent with full
power of substitution for him and in his name, place, and stead in any and
all capacities, to sign the Registration Statement and any and all
amendments and supplements thereto; and further
RESOLVED, that the proper officers of the Corporation are authorized
in the name and on behalf of the Corporation to take any and all action
that they deem necessary or appropriate in order to effect the
registration, qualification, or exemption from registration or
qualification of securities of the Corporation included in the Registration
Statement for issue, offer, sale, or trade under the "blue sky" or
securities laws of any of the states of the United States of America or the
securities laws of any jurisdiction or foreign country where such action
may be advisable or necessary, to effect the registration of securities of
the Corporation to be issued in connection with the Royall Acquisition, to
execute, acknowledge, verify, deliver, file or cause to be published any
application, surety bonds, reports, irrevocable consents to service of
process, appointment of attorneys for service of process, and any other
documents or instruments that may be required under such laws, and to take
any and all further action that they may deem necessary or advisable in
order to maintain any such registration, qualification, or exemption for so
long as they deem necessary as required by law; and further
RESOLVED, that the Corporation hereby consents to service of process
in any state or jurisdiction in which such consent is required under the
blue sky laws as a precondition to the offer and sale of securities of the
Corporation to be issued in the Royall Acquisition, and that Jerry W.
Powell, General Counsel and Secretary of the Corporation, is hereby
designated as agent for service of process in connection with the
Registration Statement and any consent to service of process that may be
required by the blue sky laws of any jurisdiction as a precondition to the
offer and sale of such securities; and further
RESOLVED, that the appropriate officers of the Corporation are hereby
authorized, empowered, and directed to do any and all other or further
acts, and to prepare, or cause to be prepared, and to execute, attest, and
deliver all other or further instruments, certificates, applications,
reports, and documents, including without limitation obtaining any
necessary or appropriate regulatory approvals, all on behalf of the
Corporation as they, in their discretion, may deem necessary or appropriate
to effectuate the purposes of these resolutions, and that all acts and
things undertaken and completed heretofore by the proper officers of the
Corporation in connection with the Royall Acquisition as contemplated by
these resolutions are hereby approved, ratified, and confirmed.
I further certify that the foregoing resolutions have not been modified,
amended, or rescinded and that said resolutions are in full force and effect as
of the date of this certificate.
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the
Corporation this the 21st day of May, 1996.
/s/ Daniel B. Graves
--------------------
Daniel B. Graves
Assistant Secretary
Compass Bancshares, Inc.
<PAGE>
ROYALL FINANCIAL CORPORATION
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
Notice is hereby given that a Special Meeting of Shareholders ("Meeting")
of Royall Financial Corporation ("Royall") will be held at ____________________
on ________, 1996, at ___ _.m. Palestine Time for the following purposes:
1. To approve, ratify, confirm and adopt an Agreement and Plan of
Merger dated as of December 14, 1995 ("Merger Agreement"), as amended,
providing for the merger ("Merger") of Compass Equitable Texas, Inc., a
Delaware corporation and a wholly-owned subsidiary of Compass Bancshares,
Inc., with and into Royall. The terms of the Merger Agreement are
described in the attached Proxy Statement/Prospectus, which the Board of
Directors of Royall encourages each Shareholder to review carefully; and
2. To consider and transact such other business as may properly
come before the Meeting or any adjournments thereof.
The Board of Directors of Royall has fixed ___________, 1996 as the record
date for the determination of the shareholders entitled to notice of and to vote
at the Meeting and any adjournment thereof. Only the holders of shares of
Royall's common stock of record at the close of business on ___________, 1996,
are entitled to notice of, and to vote at, the Meeting or any adjournments
thereof.
IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THE MEETING REGARDLESS OF
THE NUMBER OF SHARES YOU OWN, SINCE FAILURE TO VOTE BY PROXY OR IN PERSON AT THE
MEETING IS EQUIVALENT TO A VOTE AGAINST THE MERGER. EVEN IF YOU PLAN TO ATTEND
THE MEETING, AND CERTAINLY IF YOU DO NOT, PLEASE COMPLETE, SIGN AND MAIL THE
ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE PROMPTLY. SUCH PROXY CAN BE
REVOKED AT ANY TIME PRIOR TO ITS EXERCISE BY FILING A DULY EXECUTED PROXY
BEARING A LATER DATE, BY FILING A WRITTEN NOTICE OF REVOCATION, OR BY APPEARING
IN PERSON AT THE MEETING AND VOTING BY WRITTEN BALLOT.
By Order of the Board of Directors
of Royall Financial Corporation
_________________________________________
Terrence A. Welty, III
Chairman of the Board
Palestine, Texas
___________, 1996
<PAGE>
EXHIBIT 99(b)
PROXY ROYALL FINANCIAL CORPORATION PROXY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
________, 1996
The undersigned hereby appoints _________________________________________,
and each of them, with or without the other, proxies, with full power of
substitution, to vote all shares of common stock that the undersigned is
entitled to vote at the Special Meeting of the Shareholders of Royall Financial
Corporation to be held at ______________________________, on ________________,
1996 at ____ _.m. ___________, and at all adjournments thereof as follows:
(1) Approval, ratification, confirmation and adoption of the Agreement and
Plan of Merger, dated as of December 14, 1995, by and between Compass
Bancshares, Inc. and Royall Financial Corporation, as amended.
[_] For [_] Against [_] Abstain
(2) In their discretion, upon any other business which may properly come
before said meeting.
This Proxy will be voted as you specify above. If no specification is
made, the Proxy will be voted FOR proposal (1) above. Receipt of the Notice of
Special Meeting and the Proxy Statement/Prospectus dated ___________, 1996 is
hereby acknowledged.
THIS PROXY IS SOLICITED BY THE ROYALL FINANCIAL CORPORATION BOARD OF
DIRECTORS.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE PROXY CARD USING THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Please sign your name, exactly as it appears below. Joint owners must each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as it appears hereon. If held by a corporation, please
sign in full corporate name by the president or other authorized officer. If
held by a partnership, please sign in the partnership's name by an authorized
partner of officer.
Dated ______________________ , 1996
____________________________________
Signature
____________________________________
Signature, if held jointly, or office
or title held
<PAGE>
[Royall Financial Corporation Letterhead]
___________, 1996
Dear Shareholders:
A special meeting of shareholders (the "Meeting") of Royall Financial
Corporation ("Royall") will be held at __________ on __________, at
______________________. At the Meeting, Royall's shareholders will consider and
vote to approve, ratify, confirm and adopt an Agreement and Plan of Merger
pursuant to which it is proposed that Compass Equitable Texas, Inc. ("Compass
Texas"), a Delaware corporation and a wholly-owned subsidiary of Compass
Bancshares, Inc. ("Compass"), formed for the purpose of accomplishing the
proposed transaction, will merge (the "Merger") with and into Royall. The
enclosed Notice of Special Meeting of Shareholders outlines the business to be
transacted at the Meeting, and the enclosed Proxy Statement/Prospectus explains
the terms of the proposed Merger and provides other information concerning
Royall, Compass Texas and Compass. We urge you to read these materials
carefully.
Your Board of Directors believes that the affiliation of Royall with
Compass through the Merger will enable Royall to serve its customers and
communities better and to compete more effectively with other financial
institutions. After the Merger, Royall's shareholders will own publicly traded
stock in a much larger, more diversified financial institution with a history of
paying dividends on its common stock.
For the Merger to become effective, among other conditions described in the
Proxy Statement/Prospectus, the holders of at least two-thirds of the
outstanding shares of Royall's common stock must vote in favor of the Merger.
THE BOARD OF DIRECTORS OF ROYALL RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER.
---
You are cordially invited to attend the Meeting. Your Board of Directors
cannot stress strongly enough that the vote of every shareholder, regardless of
the number of shares owned, is important. FAILURE TO VOTE BY PROXY OR IN PERSON
AT THE MEETING IS EQUIVALENT TO A VOTE AGAINST THE MERGER. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. If you
need assistance in completing your Proxy, please call the undersigned at (903)
729-6944.
Very truly yours,
-----------------------
Terrence A. Welty,III
Chairman of the Board
H1995A\22658-19
