<PAGE>
As filed with the Securities and Exchange Commission on October 7, 1998
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)
<TABLE>
<S> <C> <C>
DELAWARE 6711 63-0593897
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
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. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
Title of each class Amount to Proposed Proposed Amount of
of securities be maximum offering maximum aggregate registration
to be registered registered (1) price per share offering price (3) fee
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Common Stock, $2.00 par value 4,350,000 (2) $66,468,000 $19,276
=========================================================================================================
</TABLE>
(1) Based upon the maximum number of shares anticipated to be issued pursuant
to an Agreement and Plan of Merger dated as of July 6, 1998, as amended,
between the Registrant and Arizona Bank.
(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 June 30, 1998 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>
ARIZONA BANK COMPASS BANCSHARES, INC.
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus is being furnished to the holders of common
stock of Arizona Bank, an Arizona chartered banking organization ("Arizona
Bank"), in connection with the solicitation of proxies by the Board of Directors
to be voted at the Special Meeting of shareholders of Arizona Bank to be held on
__________, November __, 1998, at _______, _______, at _____________, located at
120 North Stone Avenue, Tucson, Arizona. At the Special Meeting, the holders
of Arizona Bank common stock will consider and vote upon approval of the
following proposals:
. the Agreement and Plan of Merger dated as of July 6, 1998, as amended,
by and among Compass Bancshares, Inc., a Delaware corporation
("Compass"), Compass Bank, an Arizona corporation and wholly owned
subsidiary of Compass ("Compass Bank") and Arizona Bank, providing for,
among other things, the merger of Arizona Bank with and into Compass
Bank and, in connection therewith, the receipt by the holders of Arizona
Bank common stock and Arizona Bank Series E and Series F preferred stock
of shares of Compass common stock and Compass preferred stock,
respectively,
. the Employment Agreement between Compass Bank and David T. C. Wright,
Arizona Bank's President and Chief Executive Officer, to be executed in
connection with the merger, and
. the Confidentiality and Noncompetition Agreement between Compass Bank
and Mr. Wright to be executed in connection with the merger.
. such other business as may properly come before the Special Meeting or
any adjournments thereof.
Assuming (1) that there are 1,485,346 shares of Arizona Bank common stock
issued and outstanding immediately prior to the consummation of the merger and
(2) all of the conditions to closing have been satisfied, Compass will issue an
aggregate of 4,350,000 shares of its common stock, par value $2.00 per share, to
holders of Arizona Bank common stock in connection with the merger, with each
holder of Arizona Bank common stock (except for holders choosing to exercise
their dissenters' rights) receiving approximately 2.9286 shares of Compass
common stock for each share of Arizona Bank common stock held. In addition, each
holder of Arizona Bank Series E and Series F preferred stock will receive one
share of preferred stock of Compass having substantially similar rights and
preferences as the Arizona Bank Series E and Series F preferred stock,
respectively.
This Proxy Statement/Prospectus also is the prospectus of Compass with
respect to the shares of Compass common stock to be issued in connection with
the merger. Compass common stock is publicly traded in the over-the-counter
market and quoted on the Nasdaq National Market System under the symbol "CBSS."
No active public trading market exists for Arizona Bank common stock or
preferred stock.
______________________________________
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS EITHER APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THE DISCLOSURES IN THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_____________________________________________
OCTOBER ___, 1998
<PAGE>
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................ 1
Parties to the Merger............................................................ 1
The Meeting...................................................................... 2
The Merger....................................................................... 3
Additional Agreements............................................................ 5
SELECTED FINANCIAL DATA............................................................ 7
MARKET PRICES...................................................................... 9
RISK FACTORS....................................................................... 10
THE ARIZONA BANK SPECIAL MEETING................................................... 11
General.......................................................................... 11
Matters to be Considered......................................................... 11
Record Date; Shares Entitled to Vote; Quorum..................................... 11
Votes Required; Voting and Revocation of Proxies,
Effect of Abstention and Non-Votes............................................... 11
Solicitation of Proxies.......................................................... 11
THE MERGER......................................................................... 12
General.......................................................................... 12
Background and Reasons for the Merger............................................ 13
Opinion of Arizona Bank's Financial Advisor...................................... 14
Other Terms and Conditions....................................................... 17
Additional Agreements............................................................ 18
Business Pending Effective Time.................................................. 19
Amendment........................................................................ 20
Termination...................................................................... 20
Exchange of Shares............................................................... 21
Dissenters' Rights............................................................... 21
Federal Income Tax Consequences.................................................. 22
Regulatory Approvals............................................................. 24
Accounting Treatment............................................................. 24
Expenses......................................................................... 24
EMPLOYMENT AGREEMENT............................................................... 25
General.......................................................................... 25
Term; Position and Responsibilities.......................................... 25
Compensation................................................................. 25
Benefits..................................................................... 26
Confidentiality.............................................................. 26
Termination of Employment.................................................... 26
Shareholder Votes Required; Recommendation
of the Board of Directors...................................................... 26
CONFIDENTIALITY AND NONCOMPETITON
AGREEMENT......................................................................... 27
General.......................................................................... 27
Confidentiality.............................................................. 27
Noncompetition............................................................... 27
Shareholder Votes Required; Recommendation of
Board of Directors............................................................... 28
SUPERVISION AND REGULATION......................................................... 28
General.......................................................................... 28
Compass.......................................................................... 28
The Subsidiary Banks............................................................. 30
Other............................................................................ 31
DESCRIPTION OF COMPASS COMMON
AND PREFERRED STOCK............................................................... 27
Compass Common Stock............................................................. 32
Dividends................................................................... 32
Preemptive Rights........................................................... 32
Voting Rights............................................................... 32
Liquidation................................................................. 33
Compass Preferred Stock..................................................... 33
Compass Series E Preferred Stock............................................... 34
Dividends................................................................... 33
Redemption.................................................................. 33
Ranking..................................................................... 33
Liquidation Preference...................................................... 33
Conversion.................................................................. 33
Voting Rights............................................................... 33
Merger...................................................................... 34
Compass Series F Preferred Stock............................................... 34
Dividends................................................................... 34
Redemption.................................................................. 34
Ranking..................................................................... 34
Liquidation Preference...................................................... 34
Conversion.................................................................. 34
Voting Rights............................................................... 35
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF ARIZONA BANK AND COMPASS....................................................... 36
Charter and Bylaw Provisions Affecting
Compass Stock.................................................................. 36
Certain Differences Between the Corporation Laws of
Arizona and the Corporation Laws of Delaware
and Corresponding Charter and Bylaw Provisions................................. 36
Mergers...................................................................... 36
Appraisal Rights............................................................. 36
Special Meetings............................................................. 37
Actions Without a Meeting.................................................... 37
Election of Directors........................................................ 37
Voting on Other Matters...................................................... 38
Preemptive Rights............................................................ 38
Dividends.................................................................... 38
Liquidation Rights........................................................... 39
Limitation of Liability and Indemnification.................................. 39
Removal of Directors......................................................... 40
Inspection of Books and Records.............................................. 40
Antitakeover Provisions...................................................... 40
RESALE OF COMPASS STOCK............................................................ 40
INFORMATION ABOUT ARIZONA BANK..................................................... 41
Services, Employees and Properties............................................... 41
Competition...................................................................... 41
Legal Proceedings................................................................ 42
Market Price and Dividends....................................................... 42
Beneficial Ownership of Arizona Bank Common
Stock by Arizona Bank Management and
Principal Shareholders......................................................... 42
Additional Agreements............................................................ 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF ARIZONA BANK..................................................... 45
Results of Operations............................................................ 45
Net Income................................................................... 45
Net Interest Income.......................................................... 45
Provision for Loan and Lease Losses.......................................... 50
Non-Interest Income.......................................................... 51
Non-Interest Expense......................................................... 52
Provision for Income Taxes................................................... 54
Inflation and Changing Prices................................................ 54
Liquidity and Capital Resources.................................................. 54
Changes in Financial Condition................................................... 55
Loan Portfolio............................................................... 55
Investment Portfolio......................................................... 58
Deposits..................................................................... 62
Return on Equity and Assets...................................................... 65
Year 2000 Issues................................................................. 65
Market Risk...................................................................... 66
Asset Liability Management................................................... 67
Gap Analysis................................................................. 67
Trading Portfolio............................................................ 68
Credit Risk...................................................................... 69
AVAILABLE INFORMATION.............................................................. 70
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE......................................................................... 70
RELATIONSHIPS WITH INDEPENDENT
ACCOUNTANTS....................................................................... 71
EXPERTS............................................................................ 71
LEGAL OPINIONS..................................................................... 71
INDEMNIFICATION.................................................................... 72
OTHER MATTERS...................................................................... 72
</TABLE>
<PAGE>
SUMMARY
The following is a brief summary of information relating to the Merger that
is also contained in other sections of this Proxy Statement/Prospectus. This
summary does not describe all material information relating to the Merger and is
qualified by the more detailed information and financial statements contained in
other sections of this Proxy Statement/Prospectus, including the Appendices and
the documents referred to or incorporated by reference in this Proxy
Statement/Prospectus. Shareholders should carefully read the entire Proxy
Statement/Prospectus and the related documents.
<TABLE>
<CAPTION>
PARTIES TO THE MERGER
<S> <C>
COMPASS BANCSHARES, INC. ................ Compass Bancshares, Inc. ("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.
On June 30, 1998, Compass and its subsidiaries had consolidated assets of $14.6 billion,
consolidated deposits of $10.7 billion, and total shareholders' equity of $1.1 billion.
SEE "AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; AND
"SELECTED FINANCIAL DATA".
In order to effectuate the proposed transaction between Compass and Arizona Bank, Compass
formed Compass Bank, an Arizona corporation and wholly-owned subsidiary of Compass
("Compass Bank") which has filed an application to engage in the banking business with
the Superintendent of Banks of the State of Arizona (the "Superintendent").
Compass' principal executive offices are located at 15 South 20th Street, Birmingham,
Alabama 35233, and its telephone number is 205/933-3000.
ARIZONA BANK ............................ Arizona Bank is an Arizona state chartered banking organization incorporated in 1963.
Arizona Bank currently operates 29 branch locations in Pima, Yuma, Coconino, Yavapai,
Mohave, Cochise, Pinal and Maricopa Counties in Arizona. Arizona Bank also operates a
representative office in Orange County, California to facilitate loans and leases to
finance the purchase and lease of automobiles by California consumers. This operation
relies solely upon Arizona Bank personnel in Arizona for all loan and lease processing
and uses independent contractors in California for any repossessions.
On June 30, 1998, Arizona Bank had total assets of $758.8 million, total deposits of
$654.2 million, and total shareholders' equity of $54.6 million. SEE "SELECTED FINANCIAL
DATA"; "INFORMATION ABOUT ARIZONA BANK"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ARIZONA BANK"; AND FINANCIAL STATEMENTS
OF ARIZONA BANK.
Arizona Bank's principal executive offices are located at 120 North Stone Avenue, Tucson,
Arizona 85701, and its telephone number is 520/620-3268.
</TABLE>
-1-
<PAGE>
THE MEETING
<TABLE>
<CAPTION>
<S> <C>
TIME, DATE AND PLACE OF THE
SPECIAL MEETING ........................ The Special Meeting of the shareholders of Arizona Bank will be held on __________,
November ___, 1998, at _______, _______, at _____________, located at 120 North Stone
Avenue, Tucson, Arizona. SEE "THE ARIZONA BANK SPECIAL MEETING."
PURPOSE ................................. The purpose of the Special Meeting is to consider and vote upon the following proposals:
(1) the Agreement and Plan of Merger (the "Merger Agreement") dated as of July 6, 1998,
as amended, by and among Compass, Compass Bank and Arizona Bank, providing for,
among other things, the merger ("Merger") of Arizona Bank with and into Compass Bank
and, in connection therewith, the receipt by holders of Arizona Bank common stock
and Arizona Bank Series E and Series F preferred stock of shares of Compass common
stock and Compass preferred stock, respectively,
(2) the Employment Agreement between Compass Bank and Mr. David T. C. Wright, Arizona
Bank's President and Chief Executive Officer (the "Wright Employment Agreement"), to
be executed in connection with the Merger; and
(3) the Confidentiality and Noncompetition Agreement between Compass Bank and Mr. Wright
(the "Wright Noncompetition Agreement") to be executed in connection with the
Merger.
(4) such other business as may properly come before the Special Meeting or any
adjournments thereof.
VOTE REQUIRED ........................... The favorable vote of the holders of a majority of the outstanding shares of Arizona Bank
common stock is required to approve the Merger and the related Merger Agreement. The
holders of Arizona Bank preferred stock are not entitled to vote at the Special Meeting.
No approval by the Compass stockholders is required to approve the Merger. Consummation
of the Merger does not require approval of the Wright Employment Agreement or the Wright
Noncompetition Agreement; however, approval by holders of at least 75% of the outstanding
shares of Arizona Bank common stock will help to ensure favorable tax treatment by
Compass Bank in connection with the amounts payable under the Wright Employment Agreement
and the Wright Noncompetition Agreement. SEE "THE ARIZONA BANK SPECIAL MEETING."
RECORD DATE; SHARES ENTITLED
TO VOTE ................................ Only holders of record of Arizona Bank common stock at the close of business on
_________, 1998 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. On that date, there were 1,485,346 shares of Arizona Bank common stock
outstanding.
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
SECURITY OWNERSHIP OF
MANAGEMENT ............................. Certain directors of Arizona Bank owning or otherwise controlling the right to vote
1,291,522.50 shares of Arizona Bank common stock, which is approximately 86.95% of the
total shares of Arizona Bank common stock issued and outstanding as of the record date,
have agreed to vote such shares in favor of the Merger Agreement and the Merger, the
Wright Employment Agreement and the Wright Noncompetition Agreement. Therefore, it is
virtually assured that the Merger Agreement and the Merger, the Wright Employment
Agreement and the Wright Noncompetition Agreement will be approved and adopted at the
Special Meeting. SEE "SUMMARY--VOTE REQUIRED"; "THE MERGER--ADDITIONAL AGREEMENTS" AND
"INFORMATION ABOUT ARIZONA BANK--BENEFICIAL OWNERSHIP OF ARIZONA BANK COMMON STOCK BY
ARIZONA BANK MANAGEMENT AND PRINCIPAL SHAREHOLDERS."
THE MERGER
EFFECT OF THE MERGER .................... In the Merger, Arizona Bank will merge with and into Compass Bank with Compass Bank
continuing as the surviving entity in the Merger (the "Resulting Institution"). The name
of the Resulting Institution will be "Arizona Bank." The directors of Compass Bank
immediately prior to the effective time of the Merger (the "Effective Time") will be the
directors of the Resulting Institution and the officers of Arizona Bank immediately prior
to the Effective Time of the Merger will be the officers of the Resulting Institution.
SEE "THE MERGER--GENERAL."
CONVERSION OF ARIZONA BANK
STOCK .................................. Assuming (1) that there are 1,485,346 shares of Arizona Bank common stock issued and
outstanding immediately prior to the Effective Time of the Merger and (2) the
satisfaction of all conditions to closing, Compass will issue an aggregate of 4,350,000
shares of its common stock, par value $2.00 per share in connection with the Merger, with
each holder of Arizona Bank common stock (except for holders choosing to exercise their
dissenters' rights) receiving approximately 2.9286 shares of Compass common stock for
each share of Arizona Bank common stock held. SEE "THE MERGER--GENERAL."
In addition, each share of Arizona Bank Series E and Series F preferred stock will be
converted into one share of preferred stock of Compass having substantially similar
rights and preferences as the Arizona Bank Series E and Series F preferred stock,
respectively.
ARIZONA BANK'S REASONS FOR
THE MERGER ............................. Arizona Bank's Board of Directors believes the Merger, among other things, offers holders
of Arizona Bank common stock the opportunity to acquire an equity interest in a larger,
more diversified financial institution, the shares of which are more liquid and which is
not dependent primarily upon the economic conditions in the state of Arizona, in a
transaction that is nontaxable for federal income tax purposes. SEE "THE MERGER--
BACKGROUND AND REASONS FOR THE MERGER" AND "--FEDERAL INCOME TAX CONSEQUENCES."
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
RECOMMENDATION OF THE BOARD
OF DIRECTORS OF ARIZONA BANK. .......... The Arizona Bank Board believes the terms of the Merger are fair to and in the best
interests of Arizona Bank and its shareholders and has unanimously approved the Merger
Agreement and the Merger, the Wright Employment Agreement and the Wright Noncompetition
Agreement. THE ARIZONA BANK BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF ARIZONA BANK
COMMON STOCK VOTE FOR THE MERGER AGREEMENT AND THE MERGER, THE WRIGHT EMPLOYMENT
AGREEMENT AND THE WRIGHT NONCOMPETITION AGREEMENT. SEE "THE MERGER--BACKGROUND AND
REASONS FOR THE MERGER"; "EMPLOYMENT AGREEMENT--SHAREHOLDER VOTES REQUIRED;
RECOMMENDATION OF THE BOARD OF DIRECTORS"; AND "CONFIDENTIALITY AND NONCOMPETITION
AGREEMENT--SHAREHOLDER VOTES REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS."
OPINION OF FINANCIAL ADVISOR............. Arizona Bank has retained Hovde Financial, Inc. ("Hovde") as its financial advisor in
connection with the transactions contemplated by the Merger Agreement and to evaluate the
financial terms of the Merger. Hovde has delivered an opinion to the Arizona Bank Board
that, as of the date thereof, the consideration to be received by the Arizona Bank
shareholders in the Merger is fair from a financial point of view. A copy of the opinion
of Hovde is attached to this Proxy Statement/Prospectus as Appendix III and is
incorporated by reference herein. SEE "THE MERGER--OPINION OF ARIZONA BANK'S FINANCIAL
ADVISOR."
CONDITIONS TO THE MERGER ................ The obligations of Compass and Arizona Bank to consummate the Merger are subject to
certain conditions, including, but not limited to: (1) the approval by the shareholders
of Arizona Bank, (2) the favorable opinion of counsel to both Compass and Arizona Bank
that the Merger will qualify as a tax-free reorganization, (3) the favorable opinion of
Compass' independent auditors that the Merger will qualify for "pooling-of-interests"
accounting treatment, (4) approval of applicable regulatory authorities, and (5) other
conditions customary for transactions similar to the Merger. SEE "THE MERGER--OTHER TERMS
AND CONDITIONS." Consummation of the Merger does not require approval by the shareholders
of Arizona Bank of the Wright Employment Agreement and the Wright Noncompetition
Agreement.
REGULATORY MATTERS ...................... Consummation of the Merger is also subject to, and conditioned upon, receipt of required
regulatory approvals from the Superintendent, the Federal Reserve under the BHC Act and
the Federal Deposit Insurance Corporation ("FDIC").
TERMINATION ............................. The Merger Agreement may be terminated under certain circumstances, including:
(a) if the Boards of Directors of Arizona Bank and Compass mutually agree;
(b) by either Arizona Bank or Compass if:
(i) the other party breaches its representations or warranties or fails to
perform its covenants under the Merger Agreement and that breach or failure
cannot be cured within 30 days;
(ii) the Merger is not consummated by February 28, 1999 (except that such right
will not be available to any party that has not used its best efforts to
consummate the Merger);
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(iii) the parties have not received required regulatory approvals prior to
February 28, 1999; or
(iv) the shareholders of Arizona Bank fail to approve the Merger at the Special
Meeting;
(c) by Compass if:
(i) Arizona Bank's Board of Directors fails to recommend approval of the Merger
and the Merger Agreement to its shareholders, or has withdrawn or changed
such recommendation to the detriment of Compass; or
(ii) Compass' environmental inspections identify certain environmental liabilities
or conditions which require expenditures in excess of $6,000,000.
ANTICIPATED ACCOUNTING
TREATMENT .............................. The Merger is intended to qualify as a "pooling-of-interests" for accounting and
financial reporting purposes. SEE "THE MERGER--ACCOUNTING TREATMENT."
DISSENTERS' RIGHTS ...................... Under the provisions of the Arizona Business Corporation Act, holders of Arizona Bank
Common Stock will be entitled to exercise dissenters' rights with respect to the Merger.
SEE "THE MERGER--DISSENTERS' RIGHTS" AND APPENDIX II.
FEDERAL INCOME TAX
CONSEQUENCES ........................... As a condition to the consummation of the Merger, Compass and Arizona Bank will each
receive an opinion of their respective counsel to the effect that the Merger will be
treated for United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
SEE "THE MERGER--FEDERAL INCOME TAX CONSEQUENCES."
ADDITIONAL AGREEMENTS
EMPLOYMENT AGREEMENT .................... The Wright Employment Agreement provides that Compass Bank shall employ Mr. Wright to
serve as President and Chief Executive Officer of Compass Bank for a period of five (5)
years at an annual base salary of $200,000 per year. Mr. Wright shall also be entitled to
a retention bonus in the amount of $1,300,000 which shall be proportionately earned over
the 24-month period following the Effective Time and a grant of 15,000 shares of Compass
common stock, subject to certain transfer restrictions. Compass Bank shall also provide
Mr. Wright such benefits as are made generally available to employees of equal title and
base salary on the same basis as Compass makes such benefits available to Compass' other
such employees, including participation in the Compass retirement plan and Compass'
executive incentive program with the payment of the bonus for calendar year 1999 in the
amount of $100,000 being guaranteed. SEE "EMPLOYMENT AGREEMENT."
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONFIDENTIALITY AND
NONCOMPETITION AGREEMENT ............... The Wright Noncompetition Agreement provides that, in consideration of $2,000,000, Mr.
Wright will be restricted, from the date of the Wright Noncompetition Agreement and for a
period of four (4) years after Mr. Wright's employment is terminated, from engaging in
certain conduct which is deemed to be competitive with or detrimental to the business of
Compass Bank or its affiliates. In addition, the Wright Noncompetition Agreement provides
that Mr. Wright will not make use of, or disclose to any other person, any trade secret
or confidential information of Compass Bank, its affiliates or Arizona Bank. SEE
"CONFIDENTIALITY AND NONCOMPETITION AGREEMENT."
</TABLE>
-6-
<PAGE>
SELECTED FINANCIAL DATA
The following table summarizes, where indicated, certain pro forma
financial data for Compass, giving effect to the acquisition of Arizona Bank
assuming that the Merger had been effective at the beginning of 1993. The
historical data of Arizona Bank as of and for the years ended December 31, 1997,
1996, 1995, 1994, and 1993 is derived from the audited financial statements of
Arizona Bank. The historical data of Compass as of and for the years ended
December 31, 1997, 1996, 1995, 1994, and 1993 (i) is derived from the financial
statements of Compass, (ii) has been adjusted to reflect the three-for-two stock
split effected on April 1, 1997 (the "Stock Split") except as noted below, and
(iii) has not been restated to give effect to the acquisitions consummated by
Compass in 1998 accounted for under the pooling-of-interests method of
accounting due to immateriality. The historical data of Compass and Arizona Bank
as of and for the six months ended June 30, 1998, is derived from the unaudited
financial statements of Compass and Arizona Bank, respectively. In the opinion
of management of Compass and Arizona Bank, all adjustments considered necessary
for a fair presentation have been included in the unaudited interim data. The
pro forma income information is not necessarily indicative of the results of
operations had the proposed transaction occurred at the beginning of 1993, 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 FOR THE (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
SIX
MONTHS
ENDED AS OF AND FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
------------------- --------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------------- ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS
Compass $14,648,267 $13,459,555 $12,432,223 $11,252,438 $10,120,321 $8,229,027
Arizona Bank 758,752 721,948 625,859 535,983 409,727 273,196
TOTAL DEPOSITS
Compass 10,652,247 9,632,545 9,783,721 8,613,824 7,943,882 6,430,986
Arizona Bank 654,204 630,362 542,109 442,107 346,814 241,002
LONG-TERM DEBT
Compass 1,433,051 1,387,121 702,771 591,344 496,629 335,817
Arizona Bank 30,000 35,600 30,600 43,094 36,000 16,000
TOTAL SHAREHOLDERS' EQUITY
Compass 1,072,233 960,008 849,089 780,144 672,062 615,197
Arizona Bank 54,560 52,302 49,265 47,218 25,661 15,344
NET INTEREST INCOME
Compass 258,909 475,165 431,172 394,559 375,410 366,609
Arizona Bank 18,031 32,359 27,407 22,755 16,722 12,381
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS
Compass 87,582 155,563 132,444 119,750 110,614 102,182
Arizona Bank 3,922 5,849 5,808 4,812 2,942 2,628
NET INCOME (LOSS) PER
COMMON SHARE FROM
CONTINUING OPERATIONS(1)
Compass
Historical(3) 1.25 2.37 2.04 1.84 1.70 1.55
Pro Forma 1.21 2.26 1.96 1.77 1.63 1.49
Arizona Bank
Historical 1.74 2.12 2.19 2.50 1.72 1.74
Pro Forma (2) 3.54 6.62 5.74 5.18 4.77 4.36
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
SIX
MONTHS
ENDED AS OF AND FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
------------------- --------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------------- ------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH DIVIDENDS PER
COMMON SHARE
Compass
Historical(3) 0.525 0.947 0.853 0.747 0.613 0.507
Pro Forma 0.49 0.89 0.80 0.69 0.57 0.47
Arizona Bank
Historical -- -- -- -- -- --
Equivalent Pro Forma(2) 1.45 2.60 2.33 2.03 1.66 1.37
SHAREHOLDERS' EQUITY
(BOOK VALUE) PER
COMMON SHARE
Compass
Historical (3) 15.28 14.55 12.95 11.95 10.35 9.48
Pro Forma 14.72 13.97 12.42 11.45 9.87 9.05
Arizona Bank
Historical 19.02 17.50 15.46 14.08 10.37 10.07
Equivalent Pro Forma(2) 43.11 40.91 36.37 33.53 28.91 26.50
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING
Compass
Historical (3) 69,851 65,690 64,854 65,183 64,919 64,830
Pro Forma 74,201 70,040 69,204 69,533 69,269 69,180
Arizona Bank
Historical (4) 1,485 1,485 1,485 1,485 1,485 1,485
NUMBER OF COMMON
SHARES OUTSTANDING AT
END OF PERIOD
Compass
Historical 70,171 65,991 43,735 43,536 43,306 43,261
Pro Forma 74,521 70,341 46,635 46,436 46,206 46,161
Arizona Bank
Historical (4) 1,485 1,485 1,485 1,485 1,485 1,485
</TABLE>
____________________
(1) Net income per common share from continuing operations represents basic
earnings per share.
(2) Arizona Bank's Equivalent Pro Forma per share amounts are computed by
multiplying Compass' Pro Forma amounts by the exchange ratio of 2.9286.
(3) For comparative purposes, 1993-1996 data has been restated to reflect the
Stock Split.
(4) Reflects (i) conversion of the issued and outstanding shares of Arizona
Bank Series C Convertible Preferred Stock into 384,615 shares of Arizona
Bank common stock on September 29, 1998, and (ii) the exercise by Mr.
Wright of an option to purchase 70,731 shares of Arizona Bank common stock
on September 30, 1998.
-8-
<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
------ ---- ---
1996
----
<S> <C> <C>
First Quarter 23 1/8 20 1/2
Second Quarter 23 3/4 21 1/2
Third Quarter 23 1/8 20 3/4
Fourth Quarter 26 1/2 23
1997
----
First Quarter 32 1/8 26
Second Quarter 37 1/4 29 1/8
Third Quarter 39 3/4 34 1/2
Fourth Quarter 46 5/8 37 1/8
1998
----
First Quarter 53 1/4 41 1/2
Second Quarter 49 7/8 42
Third Quarter 47 1/2 33
Fourth Quarter 34 33 1/8
(through October 2, 1998))
</TABLE>
On July 2, 1998, the business day immediately preceding the announcement of
the execution of the Merger Agreement, the last reported sale price for Compass
common stock was $47.50. On October 2, 1998, the last reported sale price for
Compass common stock was $34.00. 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 Arizona Bank common stock,
which is traded infrequently in private transactions.
-9-
<PAGE>
RISK FACTORS
Arizona Bank shareholders currently control Arizona Bank through their
ability to elect the Board of Directors of Arizona Bank and vote on various
matters affecting Arizona Bank. The Merger will transfer control of Arizona
Bank from Arizona Bank's shareholders to Compass. As of the Effective Time,
the shareholders of Arizona Bank will become shareholders of Compass, a multi-
bank holding company. As a result of the Merger, the former shareholders of
Arizona Bank will no longer have the ability to control or influence the
management policies of Arizona Bank'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 ARIZONA BANK--COMPETITION".
In addition, general economic conditions impact the banking industry. The
credit quality of Compass' loan portfolio necessarily reflects, among other
matters, 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. Arizona Bank's Articles of Incorporation
and Bylaws do not contain similar restrictions, although under Arizona law
Arizona Bank's shareholders may take action without a meeting only by unanimous
written consent. SEE "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA BANK AND
COMPASS--CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK".
SEE "SUPERVISION AND REGULATION" for a description of the regulatory
considerations relating to the ownership of Compass common stock and Compass
preferred stock.
-10-
<PAGE>
THE ARIZONA BANK SPECIAL MEETING
GENERAL
Arizona Bank is sending you this Proxy Statement/Prospectus to provide you
with information concerning the Merger Agreement and the Merger and to solicit
your proxy for use at the Special Meeting to be held on November ___, 1998 at
the time and place set forth in the accompanying notice and at any adjournments
thereof.
MATTERS TO BE CONSIDERED
At the Special Meeting, the shareholders of Arizona Bank will consider and
vote upon (i) a proposal to approve and adopt the Merger Agreement and the
Merger, (ii) a proposal to approve and adopt the Wright Employment Agreement
and (iii) a proposal to approve and adopt the Wright Noncompetition Agreement.
THE ARIZONA BANK BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING, BUT NOT LIMITED TO, THE WRIGHT
EMPLOYMENT AGREEMENT AND THE WRIGHT NONCOMPETITION AGREEMENT) AND RECOMMENDS
THAT HOLDERS OF ARIZONA BANK COMMON STOCK VOTE FOR THE MERGER AGREEMENT AND THE
MERGER, THE WRIGHT EMPLOYMENT AGREEMENT AND THE WRIGHT NONCOMPETITION AGREEMENT.
SEE "THE MERGER"; "EMPLOYMENT AGREEMENT"; AND "CONFIDENTIALITY AND
NONCOMPETITION AGREEMENT."
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Arizona Bank Board has fixed the close of business on __________, 1998
as the Record Date for determining holders entitled to notice of and to vote at
the Special Meeting. As of the Record Date, there were 1,485,346 shares of
Arizona Bank common stock, no par value ("Arizona Bank Common Stock") issued
and outstanding, each of which entitled its holder to one vote. The presence,
either in person or by proxy, of the holders of a majority of the issued and
outstanding shares of Arizona Bank Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum for the transaction of business at
the Special Meeting.
VOTES REQUIRED; VOTING AND REVOCATION OF PROXIES, EFFECT OF ABSTENTION AND NON-
VOTES
Under Arizona law, the affirmative vote of the holders of a majority of the
outstanding shares of Arizona Bank Common Stock is required for approval of the
Merger and the Merger Agreement. Consummation of the Merger does not require
approval of the Wright Employment Agreement or the Wright Noncompetition
Agreement; however, approval by holders of at least 75% of the outstanding
shares of Arizona Bank Common Stock will help to ensure favorable tax treatment
by Compass Bank in connection with the amounts payable under the Wright
Employment Agreement and the Wright Noncompetition Agreement.
Votes cast by proxy or in person at the Special Meeting will be tabulated
by the election inspectors appointed for the meeting and will determine whether
or not a quorum is present. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the shareholders for a vote. The failure to submit a
proxy or to vote at the Special Meeting will have the same effect as a vote
against the Merger and the Merger Agreement, the Wright Employment Agreement and
the Wright Noncompetition Agreement.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF ARIZONA BANK. ACCORDINGLY, HOLDERS OF ARIZONA BANK COMMON
STOCK ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROXY STATEMENT, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION OF PROXIES
Proxies will be solicited by mail, and may also be solicited personally, by
telephone, facsimile transmission or other means by the directors, officers and
employees of Arizona Bank, 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 material to the beneficial owners of Arizona Bank Common Stock held
of record by such persons, and Arizona Bank may reimburse such custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses that they incur
-11-
<PAGE>
in that regard. 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.
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 Arizona Bank with and into
Compass Bank. Compass Bank will be the surviving entity in the Merger and the
separate corporate existence of Arizona Bank will cease. The Articles of
Incorporation and Bylaws of Compass Bank immediately prior to the Effective Time
shall be those of the Resulting Institution, subject to such Articles of
Incorporation being amended to change the name of Compass Bank to "Arizona
Bank." After the Effective Time, the directors of Compass Bank immediately
prior to the Effective Time shall be the directors of the Resulting Institution
and the officers of Arizona Bank immediately prior to the Effective Time shall
be the officers of the Resulting Institution. SEE "SUMMARY--CONDITIONS TO THE
MERGER"; "--REGULATORY MATTERS"; "THE MERGER--REGULATORY APPROVALS"
AND APPENDIX I.
The Merger Agreement provides that each share of Arizona Bank Common Stock
issued and outstanding immediately prior to the Effective Time ("Common Shares
Outstanding") 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
merger consideration in the form of shares of Compass common stock, par value
$2.00 per share ("Compass Common Stock") without interest thereon, upon
surrender of the certificate representing such share. Compass will issue to
holders of shares of Arizona Bank Common Stock an aggregate of 4,350,000 shares
of Compass Common Stock.
If the results of any environmental inspections identify any past or
present event, condition, or circumstance that, based on the estimates of
Compass' independent environmental professionals, may currently or in the future
require Environmental Expenditures (as defined by the Merger Agreement) by
Arizona Bank or its subsidiaries which individually or in the aggregate are
estimated to exceed $3,000,000 on a pre-tax basis, the number of shares of
Compass Common Stock to be issued to the holders of shares of Arizona Bank
Common Stock shall be reduced by the number of shares (the "Environmental Share
Reduction") which is equal to the quotient of the Environmental Expenditures in
excess of $3,000,000 but which are less than $6,000,000 divided by the average
closing sale price of the Compass Common Stock as reported by the NASDAQ for the
twenty days of trading preceding the tenth business day prior to the Effective
Time (the "Share Determination Market Value")
The Merger Agreement also provides that each share of Arizona Bank Series E
Preferred Stock shall be converted into one share of preferred stock of Compass
having substantially similar terms as the Arizona Bank Series E Preferred Stock
("Compass Series E Preferred Stock") and each share of Arizona Bank Series F
Preferred Stock shall be converted into one share of preferred stock of Compass
having substantially similar terms as the Arizona Bank Series F Preferred Stock
("Compass Series F Preferred Stock").
On ________ __, 1998, there were 1,485,346 shares of Arizona Bank Common
Stock, 460,000 shares of Arizona Bank Series E Preferred Stock and 690,000
shares of Arizona Bank Series F Preferred Stock issued and outstanding.
Compass will issue an aggregate of 4,350,000 shares of Compass Common Stock
to the holders of Arizona Bank Common Stock, and, assuming there are 1,485,346
shares of Arizona Bank Common Stock issued and outstanding immediately prior to
the Effective Time, each holder of Arizona Bank Common Stock will receive
approximately 2.9286 shares of Compass Common Stock for each share of Arizona
Bank Common Stock held. An aggregate of 460,000 shares of Compass Bank Series E
Preferred Stock and 690,000 shares of Compass Bank Series F Preferred Stock will
be issued to the holders of Arizona Bank Series E Preferred Stock and Arizona
Series F Preferred Stock, respectively. Notwithstanding the foregoing, the
number of shares of Compass Common Stock to be issued to holders or Arizona Bank
Common Stock in the Merger will be reduced by the number of shares that would
otherwise be issued to dissenting shareholders and by the Environmental Share
Reduction.
-12-
<PAGE>
Each share of Arizona Bank common or preferred stock held as treasury stock
immediately prior to the Effective Time shall be canceled and retired at the
Effective Time, and no consideration shall be issued in exchange therefor. Each
share of Compass Bank capital stock issued and outstanding immediately prior to
the Effective Time shall not be converted by virtue of the Merger and shall
remain outstanding as one share of capital stock of the Resulting Institution.
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 Share Determination
Market Value.
The Merger Agreement also provides that the ratio of the number of shares
of Compass Common Stock to be exchanged for each share of Arizona Bank Common
Stock shall be adjusted appropriately to reflect any dividends or distributions
payable in stock or splits with respect to Compass Common Stock, where the
record date or payment occurs prior to the Effective Time. SEE "SUMMARY--EFFECT
OF THE MERGER"; "--DISSENTERS' RIGHTS"; "THE MERGER--DISSENTERS' RIGHTS";
APPENDIX I AND APPENDIX II.
The Merger must be approved by the affirmative vote of the holders of a
majority of the outstanding shares of Arizona Bank Common Stock entitled to vote
at the Special Meeting. Certain directors of Arizona Bank owning or otherwise
controlling the right to vote 1,291,522.50 shares of Arizona Bank Common Stock,
comprising approximately 86.95% of the total shares of Arizona Bank Common Stock
issued and outstanding as of the Record Date, have agreed, pursuant to a voting
agreement and irrevocable proxy (the "Proxy"), to vote such shares in favor of
the Merger Agreement and the Merger, the Wright Employment Agreement and the
Wright Noncompetition Agreement. Therefore, it is virtually assured that the
Merger Agreement and the Merger, the Wright Employment Agreement and the Wright
Noncompetition Agreement will be approved and adopted at the Special Meeting.
SEE "SUMMARY--VOTE REQUIRED"; "THE MERGER--OTHER TERMS AND CONDITIONS" AND
APPENDIX I.
The Merger will be effective as soon as practicable following the
satisfaction of all conditions to the consummation of the Merger and upon the
occurrence of the filing of one or more certificates or articles of merger in
accordance with the corporate laws applicable to Arizona Bank and Compass Bank
("Corporate Laws") or such later date and time as may be set forth in such
certificates or articles of merger. At the Effective Time, holders of Arizona
Bank Stock shall cease to have any rights as stockholders of Arizona Bank,
except such rights, if any, as they may have pursuant to the Corporate Laws.
Each share of the Arizona Bank Common Stock and Arizona Bank Preferred Stock
shall, at the Effective Time, be converted into and represent the right to
receive the Merger Consideration payable as set forth above to the holder of
record thereof, upon surrender of the certificate representing such share. SEE
"SUMMARY--DISSENTERS' RIGHTS;" "THE MERGER--DISSENTERS' RIGHTS" AND APPENDIX II.
BACKGROUND AND REASONS FOR THE MERGER
During the normal course of its business, Arizona Bank has historically
received inquiries regarding its willingness to consider an acquisition by, or
affiliation with, larger financial institutions. Consistent with its fiduciary
obligations to its shareholders, Arizona Bank has considered such inquiries and
evaluated them with respect to the level and form of consideration proposed, and
the seriousness and specificity which has been conveyed to Arizona Bank in terms
of consideration, as well as the expected future operation of Arizona Bank, and
other considerations and factors deemed relevant by Arizona Bank, in formulating
its business plan with the intent to provide maximum value to its shareholders
by enhancing its franchise as the pre-eminent independent bank in Arizona. As
the nature of banking has become increasingly competitive, larger organizations
have demonstrated a willingness to pay for a premium franchise in a high-growth
market (such as Arizona Bank). In consideration of the foregoing market
conditions, Arizona Bank felt it was necessary to consult with a number of
investment banking firms experienced in the area of financial institution
mergers and acquisitions to evaluate the prospects of accomplishing a
transaction that would both maximize shareholder value and continue to provide
the Arizona market with the services of a locally-based institution.
In this regard, Arizona Bank and its representatives contacted a number of
financial institutions which it believed could meet its criteria. These
institutions were provided information (pursuant to a confidentiality agreement)
and various levels of discussions were held with each regarding the potential
for a suitable transaction between such institution and Arizona Bank.
Thereafter, certain of these institutions were asked to convey to Arizona Bank
their interest in pursuing a transaction with Arizona Bank. After receipt of
these indications of interest, and giving careful consideration to the entirety
of the proposals, including the consideration proposed to be paid in connection
with the transaction (and the form and characteristics thereof), Arizona Bank
determined that an affiliation with Compass was most likely to achieve its
overall objectives.
-13-
<PAGE>
As a result of this process, intensive negotiations between Compass and
Arizona Bank commenced in June 1998. In evaluating whether to affiliate with
Compass, Arizona Bank's management considered the value of Arizona Bank stock,
competitive conditions in the market served by Arizona Bank, the prospects for
trading Arizona Bank Common Stock, Arizona Bank's future growth prospects in
light of the Arizona economy, the fact that Compass Common Stock is publicly-
traded, thereby representing a more liquid investment than Arizona Bank Common
Stock, the appreciation in the price of Compass Common Stock over the past ten
years and Compass' history of paying dividends. In addition, Arizona Bank
believed that affiliating with Compass, a larger financial institution with
significantly greater resources and expertise, offered expansion opportunities,
financial products and services not otherwise available to Arizona Bank and its
customers, which would better enable Arizona Bank to compete. Arizona Bank and
its Board of Directors determined that Arizona Bank's competitive position and
the value of its stock could best be enhanced through affiliation with Compass.
SEE "SUMMARY--ARIZONA BANK'S REASONS FOR MERGER"; "--RECOMMENDATION OF THE BOARD
OF DIRECTORS OF ARIZONA BANK"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ARIZONA BANK--LIQUIDITY AND
CAPITAL RESOURCES" and "--CHANGES IN FINANCIAL CONDITION."
Following arm's length negotiations between representatives of Compass and
Arizona Bank, Compass and Arizona Bank entered into the Merger Agreement dated
as of July 6, 1998. Following additional negotiations, and in light of overall
market fluctuations in August and September of 1998, the merger consideration
was adjusted by an amendment to the Merger Agreement dated October 6, 1998. The
aggregate price to be paid to holders of Arizona Bank Common Stock resulted from
negotiations which considered the historical earnings and dividends of Compass
and Arizona Bank, the earnings potential and deposit base of Arizona Bank,
potential growth in Arizona Bank's market, Arizona Bank's asset quality and the
effect of the Merger on the shareholders, customers, and employees of Compass
and Arizona Bank. SEE "SUMMARY--ARIZONA BANK'S REASONS FOR THE MERGER."
OPINION OF ARIZONA BANK'S FINANCIAL ADVISOR
Arizona Bank retained Hovde to act as its financial advisor in considering
any potential business combination, including a merger or sale of Arizona Bank,
which may be advisable to consider or which was presented to Arizona Bank, such
as the Merger. In connection therewith, Hovde rendered its initial written
opinion dated July 6, 1998, as updated by its written opinion dated October 6,
1998 (the "Fairness Opinion"), to Arizona Bank's Board of Directors to the
effect that, based upon and subject to the factors and assumptions set forth in
the Fairness Opinion, and as of the date of the Fairness Opinion, the Merger
Consideration was fair, from a financial point of view, to the shareholders of
Arizona Bank. For purposes of the Fairness Opinion, "Merger Consideration"
includes the number of shares of Common Stock of Compass to be issued to holders
of Common Stock of Arizona Bank, as calculated pursuant to the Merger Agreement
as of the date of the Fairness Opinion, as well as the stated value of Arizona
Bank's Series E and Series F Preferred Stock (including any accrued but unpaid
dividends thereon), which will be converted upon consummation of the Merger into
a like amount of newly-issued Series E and Series F Preferred Stock of Compass,
having substantially similar terms and conditions as the previously existing
Series E and Series F Preferred Stock of Arizona Bank.
The full text of the Fairness Opinion, which sets forth, among other
things, assumptions made, matters considered and qualifications and limitations
on the review undertaken, is attached hereto as Appendix III and is incorporated
herein by reference. Arizona Bank shareholders are urged to read the Fairness
Opinion in its entirety. The Fairness Opinion, which was directed to Arizona
Bank's Board of Directors, addresses only the fairness to the shareholders of
Arizona Bank, from a financial point of view, of the Merger Consideration to be
received by them as set forth in the Merger Agreement, and does not constitute a
recommendation to any Arizona Bank shareholder as to how such shareholder should
vote with respect to the Merger. The Fairness Opinion was rendered to Arizona
Bank's Board of Directors for its consideration in determining whether to
approve the Merger Agreement. The following summary of the Fairness Opinion is
qualified in its entirety by reference to the full text of the Fairness Opinion.
No limitations were imposed by Arizona Bank on the scope of Hovde's
investigation or the procedures to be followed by Hovde in rendering the
Fairness Opinion. Hovde did not make any recommendation to Arizona Bank's Board
of Directors as to the form or amount of consideration to be paid by Compass to
Arizona Bank in connection with the Merger, both of which were determined
through arm's-length negotiations between the parties. In arriving at its
opinion, Hovde did not ascribe a specific range of value to Compass or Arizona
Bank, but rather made its determination as to the fairness, from a financial
point of view, of the Merger Consideration to be received by the shareholders of
Arizona Bank in connection with the Merger, on the basis of the financial and
comparative analyses described below. Hovde was not requested to opine as to,
and the Fairness Opinion does not address, Arizona Bank's underlying business
decision to proceed with or effect the Merger.
-14-
<PAGE>
During the course of the engagement, Hovde reviewed and analyzed material
bearing upon the financial and operating condition of Compass and Arizona Bank
and material prepared in connection with the Merger, including the following:
the Merger Agreement; certain publicly available information concerning Compass
and Arizona Bank, including, as applicable: Compass' and Arizona Bank's audited
consolidated financial statements for each of the three years ended December 31,
1997; documents filed with the SEC, FDIC, Federal Reserve Board and other state
or other regulatory agencies, as applicable and/or appropriate, for the
aforementioned three year period and for the quarterly periods ended March 31
and June 30, 1998, respectively; as applicable, recent internal reports and/or
financial projections regarding Compass and Arizona Bank; the nature and terms
of recent sale and merger transactions involving banks and bank holding
companies that Hovde considered relevant; and financial and other information
provided to Hovde by the management of Compass and Arizona Bank.
In rendering the Fairness Opinion, Hovde assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the management of Compass
and Arizona Bank that they were not aware of any facts or circumstances that
would make such information, provided by them, inaccurate or misleading. With
respect to financial statements and/or projections to the extent such were
provided by Compass and Arizona Bank, upon advice of Arizona Bank, Hovde assumed
that such financial statements and/or projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
respective management of Compass and Arizona Bank. Upon advice of Compass and
its accounting advisors, Hovde assumed that the Merger will be
accounted for using the pooling method of accounting. In rendering the Fairness
Opinion, Hovde did not conduct a physical inspection of the properties and
facilities of Compass or Arizona Bank and did not make or obtain any evaluations
or appraisals of the assets or liabilities of Compass or Arizona Bank. In
addition, Hovde noted that it is not expert in the evaluation of loan portfolios
or allowances for loan, lease or real estate owned losses and, upon advice of
Arizona Bank, it assumed that the allowances for loan, lease and real estate
owned losses (as currently stated or as adjusted for in connection with the
Merger or otherwise) provided to it by Arizona Bank and used by it in its
analysis and in rendering its Fairness Opinion were in the aggregate adequate to
cover all such losses. The Fairness Opinion, was based upon market, economic
and other conditions as they existed on, and could be evaluated as of, the date
of its letter.
The following is a summary of the analyses Hovde performed in rendering its
Fairness Opinion. In connection with the preparation and delivery of the
Fairness Opinion to the Board of Directors of Arizona Bank, Hovde performed a
variety of financial and comparative analyses, as described below. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial and comparative analysis and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Furthermore,
in arriving at its opinion, Hovde did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, Hovde
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, Hovde made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Arizona Bank or Compass. Any
estimates contained in these analyses were not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses did not purport to be appraisals or to reflect the
prices at which businesses may actually be sold.
Purchase Price Analysis. Hovde calculated the price-to-book, price-to-
tangible book, price to earnings multiple, and deposit premium paid (defined as
the Merger Consideration, less the tangible book value of Arizona Bank, divided
by Arizona Bank's total deposits), in the Merger using June 30, 1998 financial
data and the closing price for Compass Common Stock for the twenty trading days
ended October 5, 1998. This analysis yielded a price-to-tangible book value
multiple of 341.52%, a price to last twelve months' earnings multiple of 25.17x,
and a deposit premium of 20.97%.
Comparable Company Analysis - Compass. Using publicly available
information, Hovde compared the financial performance and stock market valuation
of Compass with the following selected banking institutions with assets between
$10 billion and $30 billion located in the southern and Rocky Mountain regions
of the United States (the "Comparable Bank Group") deemed relevant by Hovde:
AmSouth Bancorporation, Commerce Bancshares, Inc., First American Corp., First
Security Corp., First Tennessee National Corp., Hibernia Corp., Regions
Financial Corp., Union Planters Corp., and Zions Bancorp. Indications of such
financial performance and stock market valuation included profitability (median
return
-15-
<PAGE>
on average assets and return on average equity for the latest twelve month
period ended June 30, 1998, of 1.26% and 17.22%, respectively, for Compass and
medians of 1.31% and 16.41%, respectively, for the Comparable Bank Group); the
ratio of tangible equity to tangible assets (6.58% for Compass and a median of
6.95% for the Comparable Bank Group); the ratio of non-performing assets to
total assets (0.28% for Compass and a median of 0.261% for the Comparable Bank
Group); current stock price to earnings for the latest twelve month period ended
June 30, 1998 (13.01 times for Compass and a median of 16.61 times for the
Comparable Bank Group); current stock price to tangible book value as of
June 30, 1998 (234.95% for Compass and a median 263.48% for the Comparable Bank
Group).
Comparable Company Analysis - Arizona Bank. Using publicly available
information, Hovde compared the financial performance of Arizona Bank with the
following selected banking institutions with assets between $500 million and
$1.5 billion located in the states of Arizona, New Mexico, Nevada, Utah and the
southern portion of California (the "Comparable Bank Group") deemed relevant by
Hovde: Alpine Bank, CVB Financial Corp., Community Bank, Firstbank Holding
Company of Colorado, Inc., First Trust Corp., First Place Financial Corp., Mid-
State Bancshares and Pioneer Bancorporation. Indications of such financial
performance included profitability (return on average assets and return on
average equity for the latest twelve month period ended March 31, 1998, of 0.91%
and 12.60%, respectively, for Arizona Bank and medians of 1.46% and 17.60%,
respectively, for the Comparable Bank Group); the ratio of tangible equity to
tangible assets (7.02% for Arizona Bank and a median of 7.38% for the Comparable
Bank Group); the ratio of non-performing assets to total assets (0.14% for
Arizona Bank and a median of 0.20% for the Comparable Bank Group). These ratios
for the Comparable Bank Group are based on public financial statements as of
March 31, 1998, the latest information publicly available for all of the
Comparable Bank Group.
Because of the inherent differences in the businesses, operations,
financial conditions and prospects of Arizona Bank, Compass and the companies
included in the respective Comparable Bank Groups, Hovde believed that a purely
quantitative comparable company analysis would not be particularly meaningful in
the context of the Merger. Hovde believed that the appropriate use of a
comparable company analysis in this instance would involve qualitative judgments
concerning the differences between Arizona Bank and the companies included in
the Comparable Bank Group which would affect the trading values of the
comparable companies and Arizona Bank.
Comparable Transaction Analysis. Using publicly available information,
Hovde reviewed certain terms and financial characteristics, including
historical price-to-earnings ratio, the price-to-book ratio, the price-to-
tangible book ratio, and the deposit premium paid in prior banking institution
merger or acquisition transactions announced from January 1, 1998 through
September 30, 1998 (the "Comparable Bank Transactions Group") with the asset
size of the target institution greater than $500 million, and less than $1
billion. The median values for these transactions for the price-to-latest-
twelve-months-earnings ratio and price-to-tangible book ratio were 26.6x and
300.8%, respectively. These compared to the Merger Consideration provided for in
the Merger Agreement of 25.2x and 341.5%, respectively, based on the closing
price of Compass Common Stock for the twenty trading days ended October 5, 1998.
The range of deposit premiums paid in these transactions ranged from 15.3% to
39.0, with a median value of 27.4%, compared to a deposit premium of 21.0%
implied in the Merger Agreement.
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations, financial conditions and prospects of Arizona Bank,
Compass and the companies included in the Comparable Bank Transactions Group,
Hovde believed that a purely quantitative comparable transaction analysis would
not be particularly meaningful in the context of rendering the fairness opinion.
Hovde believed that the appropriate use of a comparable transaction analysis in
this instance would involve qualitative judgments concerning the differences
between the characteristics of these transactions and the Merger which would
affect the acquisition values of the acquired companies and Arizona Bank.
Pro Forma Merger Analysis. Hovde compared Arizona Bank's estimated
earnings attributable to its common shareholders for 1999 based on various
internal projections for 1999 earnings provided by Arizona Bank. Based upon the
average IBES analyst estimates for Compass for 1999, and without giving effect
to the impact of the Merger on such estimates, Hovde concluded that the Merger
Consideration would result in various levels of accretion to Arizona Bank's
common shareholders, depending upon a variety of assumptions, including market
trends, Arizona Bank's and Compass' operating performance, capital management
strategies, and other variables.
Hovde is a nationally recognized investment banking firm. Hovde, as part
of its investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations for corporate and other
purposes. Pursuant to a letter agreement dated April 27, 1998, between Arizona
Bank and Hovde (the "Hovde Agreement"), Arizona Bank agreed to pay an
-16-
<PAGE>
initial advisory fee, and a further fee in the event that Arizona Bank entered
into a binding agreement calling for the consummation of a business combination
or other similar transaction, such as the Merger. The total amount of fees that
Arizona Bank has paid Hovde as of the date of this Proxy Statement/Prospectus is
approximately $295,000. The total amount of fees payable to Hovde upon
consummation of the Merger varies based upon the value of the Merger
Consideration. As of the date of the signing of the Agreement, the total amount
of fees payable to Hovde upon consummation of the Merger would be approximately
$2.5 million. The Hovde Agreement also provides for Arizona Bank to provide
indemnification to Hovde and its affiliates against certain liabilities to which
it may become subject to as a result of its services to Arizona Bank under the
Hovde Agreement, including liabilities under securities laws, as well as other
specified conditions.
Subject to satisfaction of certain conditions contained in the Merger
Agreement, and based upon the fairness opinion received from Hovde, Arizona
Bank's Board of Directors believes the Merger to be fair and in the best
interest of Arizona Bank's shareholders. ARIZONA BANK'S BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF ARIZONA BANK COMMON STOCK VOTE FOR
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER and has authorized consummation
thereof, subject to approval of Arizona Bank's shareholders entitled to vote and
federal and state bank regulators and the satisfaction of certain other
conditions. SEE "SUMMARY--ARIZONA BANK'S REASONS FOR THE MERGER";
"--RECOMMENDATION OF BOARD OF DIRECTORS OF ARIZONA BANK" AND APPENDIX III.
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 Merger Agreement and the Merger shall have been duly
approved by the requisite vote of the stockholders of Arizona
Bank.
(ii) All regulatory approvals required to consummate the Merger
shall have been obtained and shall remain in full force and
effect and all statutory waiting periods in respect thereof
shall have expired and no such approvals shall contain (i) any
conditions, restrictions or requirements which the Compass
Board of Directors reasonably determines would either before
or after the Effective Time have a Material Adverse Effect (as
defined by the Merger Agreement) on Compass, or (ii) any
conditions, restrictions or requirements that are not
customary and usual for approvals of such type and which the
Compass Board of Directors reasonably determines would either
before or after the Effective Time be unduly burdensome.
(iii) No Governmental Authority (as defined by the Merger Agreement)
of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) which is in
effect and prohibits consummation of the Merger.
(iv) The Registration Statement shall have become effective under
the Securities Act of 1933, as amended (the "Securities Act")
and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or
threatened by the SEC.
(v) All permits and other authorizations under state securities
laws necessary to consummate the Merger and to issue the
shares of Compass Common Stock to be issued in the Merger
shall have been received and be in full force and effect.
(vi) The shares of Compass Common Stock to be issued in the Merger
shall have been approved for listing on the NASDAQ, subject to
official notice of issuance.
(vii) Each of Compass and Arizona Bank shall have obtained all
material permits, authorizations, consents, waivers and
approvals required for the lawful consummation of the Merger.
(viii) The representations and warranties of Compass and Arizona Bank
set forth in the Merger Agreement shall be true and correct in
all material respects, subject to specified limitations, as of
the date of the Merger Agreement and as of the Effective Date
as though made on and as of the Effective Date.
-17-
<PAGE>
(ix) Compass and its Subsidiaries and Arizona Bank and its
Subsidiaries shall have performed in all material respects all
obligations required to be performed by them under the Merger
Agreement at or prior to the Effective Time.
(x) Arizona Bank shall have received an opinion of Silver,
Freedman & Taff, L.L.P., special counsel to Arizona Bank,
dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such
opinion, (i) the Merger constitutes a "reorganization" within
the meaning of Section 368 of the Code and (ii) no gain or
loss will be recognized by stockholders of Arizona Bank who
receive shares of Compass Common Stock in exchange for shares
of Arizona Bank Common Stock, except that gain or loss may be
recognized as to cash received in lieu of fractional share
interests.
(xi) Compass shall have received an opinion of Liddell, Sapp,
Zivley, Hill & LaBoon, L.L.P., special counsel to Compass,
dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such
opinion, the Merger constitutes a reorganization under
Section 368 of the Code.
(xii) Compass shall have received from KPMG Peat Marwick LLP,
Compass' independent auditors, a letter, dated the Effective
Date, stating its opinion that the Merger shall qualify for
pooling-of-interests accounting treatment.
(xiii) There shall not have occurred a Material Adverse Effect with
respect to Compass and its Subsidiaries or Arizona Bank and
its Subsidiaries.
(xiv) The holders of no more than 5% of the Arizona Bank Common
Stock shall have demanded or be entitled to demand payment of
the fair value of their shares as dissenting shareholders.
(xv) Compass shall have received the opinions of local counsel to
Arizona Bank acceptable to it as to certain matters set forth
in the Merger Agreement.
(xvi) David T. C. Wright shall have entered into an Employment
Agreement and Confidentiality and Noncompetition Agreement
with Compass Bank or one of its affiliates in the forms
attached to the Merger Agreement.
(xvii) Compass and Arizona Bank shall have received certificates of
the other as to certain items described above.
Any condition to the consummation of the Merger may be waived in writing by
the party to the Merger agreement entitled to the benefit of such condition.
SEE APPENDIX I.
ADDITIONAL AGREEMENTS
Voting Agreement and Irrevocable Proxy. Certain directors of Arizona Bank
owning or otherwise controlling the right to vote 1,291,522.50 shares of Arizona
Bank Common Stock, comprising approximately 86.95% of the total shares of
Arizona Bank Common Stock issued and outstanding as of the Record Date, have
agreed, pursuant to the Proxy, to vote such shares in favor of the Merger
Agreement and the Merger, the Wright Employment Agreement and the Wright
Noncompetition Agreement. Therefore, it is virtually assured that the Merger
Agreement and the Merger, the Wright Employment Agreement and the Wright
Noncompetition Agreement will be approved and adopted at the Special Meeting.
David T. C. Wright Employment Agreement. Concurrently with the
consummation of the Merger, David T. C. Wright and Compass Bank will enter into
the Wright Employment Agreement whereby Mr. Wright will act as President and
Chief Executive Officer of the Resulting Institution for a period of five years
after the Merger. Mr. Wright's base salary under the Wright Employment
Agreement will be $200,000 per year. Mr Wright will also be entitled to a
retention bonus (the "Retention Bonus") in the amount of $1,300,000 which shall
be proportionately earned over the 24-month period following the Effective Time
and a grant of 15,000 shares of Compass Common Stock, subject to certain
transfer restrictions, which will vest pro rata over a period of five years. In
addition, Mr. Wright will be entitled to such benefits as are made generally
available to employees of equal title and base salary on the same basis as
Compass makes such benefits available to Compass' other such employees,
including participation in the Compass retirement plan and
-18-
<PAGE>
Compass' executive incentive program with the payment of the bonus for calendar
year 1999 in the amount of $100,000 being guaranteed. SEE "EMPLOYMENT
AGREEMENT."
David T. C. Wright Confidentiality and Noncompetition Agreement.
Concurrently with the consummation of the Merger, David T. C. Wright and Compass
Bank will enter into the Wright Noncompetition Agreement whereby Mr. Wright
agrees that he will not, either while employed by Compass Bank or afterwards,
make any independent use of, or disclose to any other person, any trade secrets
or confidential information of Compass Bank or its affiliates or Arizona Bank.
Mr. Wright also agrees that from the date of the Wright Noncompetition Agreement
and for a period of four years after his employment with Compass Bank is
terminated he will not directly or indirectly (i) hire any past, present or
future employee of Arizona Bank without prior permission, (ii) compete for or
solicit banking, lending, deposit taking or other banking or trust services
business for or on behalf of any financial institution (excluding a finance
company) with a place of business in the State of Arizona or own, operate, or
otherwise have any interest in any bank or financial institution (excluding a
finance company) with a place of business outside the State of Arizona having an
office in Texas, Alabama, Florida or any other state in which Compass Bank or
any affiliate has a significant deposit office at the time of termination,
except owning publicly traded stock for investment purposes only in which Mr.
Wright owns less than 5%, (iii) compete for or solicit banking, lending, deposit
taking or any other banking or trust services business from any customer of
Compass Bank (or its successors by merger), or (iv) use in any competition,
solicitation or marketing effort in competition with Compass Bank or its
affiliates any proprietary list of or other proprietary information concerning
customers of Arizona Bank, Compass Bank or its affiliates developed by Arizona
Bank, Compass Bank or its affiliates. The consideration payable to Mr. Wright
pursuant to the Wright Noncompetition Agreement will be $2,000,000. SEE
"CONFIDENTIALITY AND NONCOMPETITION AGREEMENT."
Affiliate Agreements. Each of the directors, executive officers and
principal shareholders of Arizona Bank has entered into a Pooling Transfer
Restrictions Agreement with Compass and Arizona Bank pursuant to which they have
agreed, among other things, (i) not to transfer any of their respective shares
of Arizona Bank Common Stock within 30 days prior to 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 Arizona Bank 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 Securities Exchange Act of
1934, as amended (the "Exchange Act") and the respective rules and regulations
thereunder.
Employment Agreements. Certain executive officers of Arizona Bank will
enter into Employment Agreements with Compass Bank in connection with the
consummation of the Merger. Each Employment Agreement provides for an employment
term of three years. In addition to the annual base salary payable under the
Employment Agreement, each executive officer will also receive a retention
bonus, one-half of which is payable at the Effective Time and the remainder of
which is payable on the sixth-month anniversary of the Effective Time. Each
executive officer executing an Employment Agreement also will be entitled to
such benefits as are generally made available to employees of equal title and
base salary as Compass makes such benefits available to Compass' other such
employees, including participation in the Compass retirement plan and Compass'
executive incentive program. Each of the following executive officers of Arizona
Bank will execute an Employment Agreement with Compass Bank in connection with
the Merger incorporating the foregoing terms and conditions with the
corresponding annual base salary and retention bonus amounts: Fred Dawson,
salary - $150,000, retention bonus - $500,000; John C. Neil, Salary - $90,000,
retention bonus - $300,000; James M. Chandler, salary - $90,000, retention
bonus - $200,000; Florence Nanez, salary - $90,000, retention bonus - $300,000;
Stuart Cohen, salary - $90,000, retention bonus - $200,000; Donna R. Shelton,
salary - $90,000; retention bonus - $200,000; Sharon E. Lytle, salary - $90,000,
retention bonus - $200,000; and Todd Johnson, salary - $90,000, retention
bonus - $200,000.
Severance Payment. In connection with the consummation of the Merger,
Linda Saulisbury, an executive vice-president of Arizona Bank, will receive a
severance payment of $500,000.
BUSINESS PENDING EFFECTIVE TIME
The Merger Agreement imposes certain limitations on the conduct of Arizona
Bank's business pending consummation of the Merger. Among other things, Arizona
Bank must conduct its businesses only in the ordinary and usual course and in
accordance with prudent banking practices. SEE APPENDIX I.
-19-
<PAGE>
AMENDMENT
The Merger Agreement may be amended or modified at any time prior to the
Effective Time by an agreement in writing between the parties thereto, except
that after the Special Meeting, the consideration to be received by a holder of
the Arizona Bank Common Stock for each share of Arizona Bank Common Stock held
shall not thereby be decreased.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned,
notwithstanding approval by Arizona Bank shareholders, at any time before the
Effective Time by:
(i) Mutual consent of Compass and Arizona Bank, if the Board of
Directors of each so determines by vote of a majority of the
members of its entire Board.
(ii) Compass or Arizona Bank if its Board of Directors so
determines by vote of a majority of the members of its entire
Board, in the event of either: (i) a breach by the other party
of any representation or warranty contained in the Merger
Agreement, which breach cannot be or has not been cured within
30 days after the giving of written notice to the breaching
party of such breach; or (ii) a breach by the other party in
any material respect of any of the covenants or agreements
contained in the Merger Agreement, which breach cannot be or
has not been cured within 30 days after the giving of written
notice to the breaching party of such breach.
(iii) Compass or Arizona Bank if its Board of Directors so
determines by vote of a majority of the members of its entire
Board, in the event that the Merger is not consummated by
February 28, 1999, except to the extent that the failure of
the Merger then to be consummated arises out of or results
from the failure to use diligent, prudent, best efforts in
good faith to maximize the prospects of consummating the
Merger as promptly as practicable of the party seeking to
terminate.
(iv) Compass or Arizona Bank if its Board of Directors so
determines by a vote of a majority of the members of its
entire Board, in the event (i) the approvals required by
governmental authorities required for consummation of the
Merger shall not have been received by February 28, 1999, (ii)
the approval of any governmental authority required for
consummation of the Merger shall have been denied by final
nonappealable action of such governmental authority, or (iii)
the required stockholder approval is not obtained at the
Special Meeting.
(v) Compass at any time prior to the Special Meeting if the
Arizona Bank Board shall have failed to recommend approval of
the Merger Agreement and the Merger to the Arizona Bank
shareholders, or withdrawn such recommendation or modified or
changed such recommendation in a manner adverse in any respect
to the interests of Compass.
(vi) Compass if the results of any environmental inspections
identify any past or present event, condition or circumstance
that, based on the estimates of Compass' independent
environmental professionals, may currently or in the future
require Environmental Expenditures by Arizona Bank or its
subsidiaries in connection with (A) investigation, remediation
or monitoring of any condition in, on, or under or resulting
from any property, site, or facility currently or previously
owned or operated or currently leased (including eventual
removal of asbestos-containing material if currently damaged,
friable or at risk of releasing fibers, or if such materials
are not managed under an operations and maintenance program
prepared in accordance with Environmental Laws (as defined by
the Merger Agreement) and generally prevailing guidance
documents issued by, or on behalf of, regulatory authorities
regarding the preparation and implementation of such programs,
which condition, in the opinion of the environmental
professional, violates or has violated any Environmental Law
or which condition may be the subject of an actual or
potential release of Hazardous Substances (as defined by the
Merger Agreement), or of an actual or potential claim by any
person or governmental entity pursuant to Environmental Laws
or related to Hazardous Substances, (B) preparing and
obtaining approval by the appropriate environmental regulatory
authority of investigation, remediation and monitoring plans
with
-20-
<PAGE>
respect to such condition, or (C) any violations of
Environmental Laws, which Environmental Expenditures
individually or in the aggregate are estimated to exceed
$6,000,000 on a pre-tax basis.
EXCHANGE OF SHARES
Prior to the Effective Time, Compass shall advise Continental Stock
Transfer and Trust Company (the "Exchange Agent") to establish a reserve (the
"Exchange Fund") out of authorized but unissued shares of Compass Stock to
effect the exchange contemplated by the Merger Agreement, and deposit cash in an
aggregate amount estimated to be sufficient to make cash payments to holders of
Arizona Bank Common Stock in lieu of fractional shares of Compass Common Stock.
As promptly as practicable after the Effective Date, but in no event later
than five business days thereafter, Compass shall cause to be sent to each
former holder of record of shares of Arizona Bank Common Stock, Arizona Bank
Series E Preferred Stock and/or Arizona Bank Series F Preferred Stock
(collectively, "Arizona Bank Stock") immediately prior to the Effective Time
transmittal materials for use in exchanging such stockholder's Arizona Bank
Stock for shares of Compass Common Stock, Compass Series E Preferred Stock or
Compass Series F Preferred Stock (collectively, "Compass Stock"), as applicable.
The transmittal materials will contain information and instructions with respect
to the procedure for exchanging such certificates. Compass shall cause the
certificates into which shares of a stockholder's Arizona Bank Stock are
converted on the Effective Date and/or any check in respect of any fractional
share interests or dividends or distributions which such person shall be
entitled (in respect of Arizona Bank Common Stock) to receive to be delivered to
such stockholder upon delivery to the Exchange Agent of certificates
representing such shares of Arizona Bank Stock owned by such shareholder. No
interest will be paid on any such cash to be paid in lieu of fractional share
interests or in respect of dividends or distributions which any such person
shall be entitled to receive upon such delivery.
No dividends or other distributions with respect to Compass Stock with a
record date occurring on or after the Effective Time shall be paid to the holder
of any unsurrendered certificate representing shares of Arizona Bank Stock
converted in the Merger into the right to receive shares of such Compass Stock
until the holder thereof shall be entitled to receive new certificates in
exchange therefor in accordance with the procedures set forth in the Merger
Agreement, and, following 180 days after the Effective Date, no such shares of
Arizona Bank Stock shall be eligible to vote until the holder is entitled to
receive new certificates representing Compass Stock in accordance with the
procedures set forth in the Merger Agreement. After becoming so entitled, the
record holder thereof also shall be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Compass Stock such holder had the right to
receive upon surrender of the certificates representing Arizona Bank Stock.
Upon the Effective Time of the Merger, former Arizona Bank shareholders
will cease to have any rights as shareholders of Arizona Bank, and the Arizona
Bank 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 Arizona law. SEE "THE MERGER--DISSENTERS' RIGHTS".
Any portion of the Exchange Fund that remains unclaimed by the stockholders
of Arizona Bank for twelve months after the Effective Time shall be paid to
Compass. Any stockholders of Arizona Bank who have not theretofore exchanged
their certificates representing Arizona Bank Stock shall thereafter look only
to Compass for payment of the shares of Compass Stock, cash in lieu of any
fractional shares and unpaid dividends and distributions on Compass Stock
deliverable in respect of each share of Arizona Bank Stock such stockholder
holds as determined pursuant to the Merger Agreement, in each case, without any
interest thereon.
DISSENTERS' RIGHTS
By following the specific procedures set forth in the Arizona Business
Corporation Act (the "ABCA"), holders of Arizona Bank Common Stock have a
statutory right to dissent from the Merger. If the Merger is approved and
consummated, any holder of Arizona Bank Common Stock who properly perfects his
dissenters' rights will be entitled, upon consummation of the Merger, to receive
an amount in cash equal to the fair value of his shares of Arizona Bank 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 ABCA, which are reproduced in full in Appendix II
to this Proxy Statement/Prospectus.
-21-
<PAGE>
A shareholder must complete each step in the precise order prescribed by the
statute to perfect his dissenter's rights of appraisal.
Any holder of Arizona Bank Common Stock who desires to dissent from the
Merger shall (i) deliver to Arizona Bank before the vote is taken at the Special
Meeting written notice of the shareholder's intent to demand payment for the
shareholder's shares if the Merger is effectuated and (ii) not vote his shares
in favor of the Merger.
If the Merger is authorized at the Special Meeting, Compass Bank, as
survivor of the Merger, will be liable for discharging the rights of the
shareholders who dissented from the Merger ("Dissenting Shareholder") and shall,
no later than ten (10) days after the Effective Time, notify the Dissenting
Shareholders in writing of the location to where the Dissenting Shareholders'
demand for payment must be sent. The written notice must also set a date by
which Compass Bank must receive the payment demand (the "Notice Date"), which
date shall be at least thirty (30) but not more that sixty (60) days after the
date notice is provided to the Dissenting Shareholders. Each Dissenting
Shareholder so notified must demand payment, certify whether the shareholder
acquired beneficial ownership of the shares before the date of the first
announcement of the terms of the Merger and deposit his certificates
representing shares of Arizona Bank Common Stock in accordance with the terms of
the notice. A Dissenting Shareholder who does not demand payment or deposit his
certificates, if required, by the Notice Date is not entitled to payment for his
shares.
Upon receipt of a payment demand, Compass Bank shall pay each Dissenting
Shareholder the amount Compass Bank estimates to be the fair value of the
Dissenting Shareholder's shares plus accrued interest. The fair value of the
shares shall be the value thereof immediately before the Effective Time of the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger.
A Dissenting Shareholder may notify Compass Bank in writing of his own
estimate of the fair value of his shares and amount of interest due and either
demand payment of the Dissenting Shareholder's estimate, less any previous
payment, or reject Compass Bank's offer and demand payment of the fair value of
the Dissenting Shareholder's shares and interest due if either (i) the
Dissenting Shareholder believes that the amount paid by Compass Bank is less
than the fair value of his shares or that the interest due is incorrectly
calculated, (ii) Compass Bank fails to make payment within sixty (60) days after
the date set for demanding payment or (iii) Compass Bank, having failed to
effectuate the Merger, does not return the Dissenting Shareholder's deposited
certificates within sixty (60) days after the date set for demanding payment. A
Dissenting Shareholder waives the right to demand payment pursuant to his own
estimate of the fair value of his shares unless he notifies Compass Bank of his
demand in writing within thirty (30) days after Compass Bank made or offered
payment for the Dissenting Shareholder's shares. SEE "SUMMARY--DISSENTERS'
RIGHTS"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA BANK 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 Arizona Bank Common Stock shall
have demanded or be entitled to demand payment of the fair value of their shares
as dissenting shareholders. SEE "THE MERGER--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
The following sets forth the opinion of Liddell, Sapp, Zivley, Hill &
LaBoon, L.L.P., counsel to Compass, and Silver, Freedman & Taff, L.L.P., special
counsel to Arizona Bank, based upon current law, as to certain federal income
tax consequences of the Merger to Compass, Compass Bank, Arizona Bank and
holders of Arizona Bank Stock, assuming the Merger is consummated as
contemplated herein.
This discussion is based upon existing provisions of the Code, applicable
U.S. Treasury regulations promulgated or proposed thereunder, administrative
rulings by the Internal Revenue Service (the "IRS") and judicial authority as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Any such change could affect the continuing validity of this
discussion. This discussion assumes the holders of Arizona Bank Stock hold
their Arizona Bank Stock as capital assets within the meaning of Section 1221 of
the Code. This discussion is based upon certain assumptions discussed below
including that certain representations will be made by Compass, Arizona Bank,
certain Arizona Bank shareholders and others as appropriate. If any of these
representations cannot be made or are inaccurate, the tax consequence of the
Merger could differ from those described herein. This discussion does not
address all aspects of income taxation that may be relevant to any particular
holder of Arizona Bank Stock in light of such holder's specific circumstances or
to certain types of holders subject to special treatment under the U.S. federal
income tax laws (for
-22-
<PAGE>
example, foreign persons, dealers in securities, banks and other financial
institutions, insurance companies, tax-exempt organizations, holders who
acquired Arizona Bank Stock pursuant to the exercise of options or otherwise as
compensation or through a tax-qualified retirement plan and persons holding
Arizona Bank Stock as part of a straddle or conversion transaction), and it does
not discuss any aspect of state, local, foreign or other tax law. No ruling has
been (or will be) sought from the IRS as to the anticipated tax consequences of
the Merger.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS INCLUDED HEREIN FOR
GENERAL INFORMATION ONLY. HOLDERS OF ARIZONA BANK STOCK SHOULD CONSULT THEIR
OWN TAX ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.
Based upon the foregoing, the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
Compass, Compass Bank and Arizona Bank will each be a party to the
reorganization within the meaning of Section 368(b) of the Code and,
accordingly, the Merger will result in the following federal income tax
consequences:
1. Compass, Compass Bank and Arizona Bank will not recognize any gain or
loss as a result of the Merger;
2. No gain or loss will be recognized by holders of Arizona Bank Stock
who exchange their Arizona Bank Stock solely for Compass Stock;
3. Any cash received by a holder of Arizona Bank Common Stock in lieu of
a fractional share of Compass Common Stock in the Merger will be
treated as received in exchange for such fractional share and not as a
dividend. As a result, a holder of Arizona Bank Common Stock generally
will recognize a capital gain or loss with respect to the cash payment
received in lieu of a fractional share equal to the difference between
the cash received and the portion of the Arizona Bank shareholder's
basis in Arizona Bank Common Stock allocable to such fractional share,
unless such payment, under each such Arizona Bank shareholder's
particular facts and circumstances, is deemed to have the effect of a
dividend distribution and not a redemption treated as an exchange
under the principles of Section 302 of the Code. Such gain or loss
will be long-term capital gain or loss to the extent that the Arizona
Bank Common Stock allocable to such fractional share was held for more
than one year as of the Effective Time of the Merger;
4. Each holder's aggregate tax basis in the Compass Series E Preferred
Stock received in the Merger will equal his or her aggregate tax basis
in the Arizona Bank Series E Preferred Stock exchanged therefore, and
each holder's aggregate tax basis in the Compass Series F Preferred
Stock received in the Merger will equal his or her aggregate tax basis
in the Arizona Bank Series F Preferred Stock exchanged therefore;
5. Each holder's aggregate tax basis in the Compass Common Stock received
in the Merger will equal his or her aggregate tax basis in the Arizona
Bank Common Stock exchanged therefore, decreased by the amount of any
tax basis allocable to any fractional share interest for which cash is
received;
6. The holding period of the Compass Series E Preferred Stock, the
Compass Series F Preferred Stock and the Compass Common Stock,
respectively, received in the Merger, will include the holding period
of the Arizona Bank Series E Preferred Stock, the Arizona Bank
Series F Preferred Stock and the Arizona Bank Common Stock,
respectively, exchanged therefore; and
7. For a holder of Arizona Bank Common Stock who dissents from the Merger
and receives solely cash in exchange for his or her Arizona Bank
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.
In addition to the tax opinions described above, it is a condition to the
consummation of the Merger that Compass receive an opinion at the Effective Time
of the Merger of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., and that Arizona
Bank receive an opinion at the Effective Time of the Merger of its special
counsel, Silver, Freedman & Taff, L.L.P., that the Merger, pursuant to which
Arizona Bank shareholders, other than Arizona Bank shareholders who perfect
-23-
<PAGE>
and exercise dissenters' rights, will receive shares of Compass Stock in the
exchange for their shares of Arizona Bank Stock, will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code. These opinions will not bind the IRS or the courts, and there can be
no assurance that the IRS or the courts will not take a contrary position. The
opinions of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. and Silver, Freedman &
Taff, L.L.P. will be expressly based and conditioned upon customary limitations
set forth therein and upon the accuracy of certain assumptions and the receipt
of and the truth and accuracy of certain representations made at the Effective
Time of the Merger to such counsel by Compass, Arizona Bank, certain Arizona
Bank shareholders and others as appropriate. SEE "THE MERGER--OTHER TERMS AND
CONDITIONS."
REGULATORY APPROVALS
The Merger is subject to, and conditioned upon, receipt of approval from
the Superintendent, approval under the BHC Act by the Federal Reserve and
approval of the FDIC. Applications to the FDIC and the Superintendent were
submitted on September 21, 1998 and September 23, 1998, respectively, and
approvals are expected to be issued timely.
A request for approval under the BHC Act was filed with the Federal Reserve
on August 26, 1998, and the Merger may not be consummated for a period of 15 to
30 days after Federal Reserve approval. In addition, the 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 Arizona Bank nor Compass has any reason to believe that the Justice
Department will take any action to stay the approval of the Merger.
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, Arizona Bank'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 of Compass issued after consummation of
the Merger will be restated retroactively to reflect the consolidated operations
of Arizona Bank and Compass as if the Merger had taken place prior to the
periods covered by such financial statements. SEE "SUMMARY--ANTICIPATED
ACCOUNTING TREATMENT"; "SELECTED FINANCIAL DATA"; AND "THE MERGER--OTHER TERMS
AND CONDITIONS."
EXPENSES
Compass and Arizona Bank will each bear their respective expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby, except that Compass will bear printing expenses and SEC registration
fees in connection with this Proxy Statement/Prospectus.
-24-
<PAGE>
EMPLOYMENT AGREEMENT
GENERAL
As a condition to the obligations of Compass Bank under the Merger
Agreement, Compass Bank and David T. C. Wright, President and Chief Executive
Officer of Arizona Bank, shall have entered into the Wright Employment
Agreement. SEE "THE MERGER--ADDITIONAL AGREEMENTS".
The following information relating to the Wright Employment Agreement is
not intended to be a complete description 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 Employment
Agreement is included in Appendix I, and is incorporated herein by reference.
TERM; POSITION AND RESPONSIBILITIES
The Wright Employment Agreement provides that Compass Bank shall employ Mr.
Wright to serve as President and Chief Executive Officer of the Resulting
Institution for a period of five years (the "Term") commencing on the Effective
Date. During the Term, Mr. Wright will not serve as an officer or director of
any business enterprise (other than Compass Bank, the Federal Home Loan Bank
Board (San Francisco) and Southwest Gas Corporation) without prior approval.
COMPENSATION
Compass Bank will pay Mr. Wright an annual base salary of $200,000 per year
with merit increases in accordance with Compass Bank's salary administration
program. Mr. Wright will also be entitled to participate in the Compass
executive incentive program with the payment of the bonus for calendar year 1999
in the amount of $100,000 being guaranteed.
If Mr. Wright's employment under the Wright Employment Agreement is
terminated by Compass Bank for other than death or "good cause" (as defined
therein), or if Mr. Wright resigns for "good reason" (as defined therein),
Compass Bank will pay the lesser of (i) the compensation provided by the Wright
Employment Agreement for the remainder of the Term, or (ii) an amount equal to
twelve month's base salary of Mr. Wright. In the event of the termination of
Mr. Wright's employment under the Wright Employment Agreement because of Mr.
Wright's disability, any payments of disability benefits to Mr. Wright under any
disability insurance policy or disability benefit plan covering Mr. Wright
maintained by Compass Bank or its affiliates shall be treated as payments by
Compass Bank toward satisfaction of its obligations under the Wright Employment
Agreement (other than obligations to pay the Retention Bonus). If Mr. Wright
resigns for any reason other than "good reason" or is terminated for "good
cause", Compass Bank shall have no further obligation to Mr. Wright under the
Wright Employment Agreement or otherwise, except payment of the Retention Bonus
that has been earned, but is unpaid, as of the date of such termination or
resignation. If Mr. Wright dies, Compass Bank shall have no further obligation
to Mr. Wright under the Wright Employment Agreement or otherwise, except payment
of the Retention Bonus.
Mr. Wright shall be entitled to a Retention Bonus of $1,300,000 which shall
be deemed proportionately earned over the 24 months following the effective date
of the Wright Employment Agreement (the "Effective Date"). For any portion of a
month, the Retention Bonus deemed earned shall be prorated based on the number
of days worked in the month. The Retention Bonus shall be available to be paid
to Mr. Wright in equal semiannual installments of principal and earnings payable
over 24 months with the first installment being released and paid on the sixth-
month anniversary of the Effective Date.
In the event of the disability of Mr. Wright, the payment of the Retention
Bonus will be accelerated and Mr. Wright will be entitled to all remaining sums
due under the Retention Bonus. If Mr. Wright dies, the payment of the Retention
Bonus will be accelerated and all remaining sums due to Mr. Wright under the
Retention Bonus will be paid to the estate of Mr. Wright. If Mr. Wright is
terminated for any reason other than for "good cause" or Mr. Wright terminates
his employment for "good reason", Mr. Wright will be entitled to all remaining
sums due under the Retention Bonus. If Mr. Wright resigns without "good reason"
or is terminated for "good cause", Mr. Wright will forfeit all remaining
unearned sums due under the Retention Bonus.
-25-
<PAGE>
BENEFITS
During the Term, Compass Bank shall provide Mr. Wright such benefits as are
made generally available to employees of equal title and base salary on the same
basis as Compass makes such benefits available to Compass' other such employees,
including, without limitation, participation in the Compass retirement plan.
Compass Bank will provide Mr. Wright with the following additional
benefits:
(i) a stock grant of 15,000 shares of Compass Common Stock which
stock grant shall vest pro rata over a period of five years
and which shall be evidenced by a separate agreement;
(ii) the use of a company owned vehicle;
(iii) the payment of Mr. Wright's monthly dues in the Tucson Country
Club and the Mountain Oyster Club; and
(iv) the issuance of stock options as are issued to persons of
comparable position and responsibility.
CONFIDENTIALITY
Mr. Wright will not at any time, either while employed by Compass Bank or
afterwards, without prior written authorization, make any independent use of, or
disclose to any other person, any trade secrets or confidential information of
Compass Bank or its affiliates or Arizona Bank.
Mr. Wright agrees that all records, files, memoranda, reports, price lists,
customer lists, documents, and other information (together with all copies
thereof) which relate to Compass Bank, its affiliates, or Arizona Bank, and
which Mr. Wright, either prior to or during Mr. Wright's term of employment, has
obtained or obtains, uses, prepares, or comes in contact with shall remain the
sole property of Compass Bank and its affiliates. Upon the termination of Mr.
Wright's employment by Compass Bank, or upon the prior demand of Compass Bank,
all such materials and all copies thereof shall be returned to Compass Bank (or
its successors by merger) immediately.
TERMINATION OF EMPLOYMENT
Mr. Wright's employment with Compass Bank shall be terminated upon the
occurrence of any one or more of the following events: (i) Compass Bank gives
written notice of termination for good cause to Mr. Wright, (ii) the death of
Mr. Wright, (ii) the disability of Mr. Wright or (iv) the resignation of Mr.
Wright.
SHAREHOLDER VOTES REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Wright Employment Agreement is being submitted to the holders of
Arizona Bank Common Stock pursuant to the Merger Agreement. The Merger
Agreement provides that Arizona Bank shall submit for approval by the
shareholders of Arizona Bank entitled to vote at the Special Meeting the
payments to Mr. Wright under the Wright Employment Agreement. Consummation of
the Merger does not require approval of the Wright Employment Agreement;
however, approval by holders of at least 75% of the outstanding shares of
Arizona Bank Common Stock will help to ensure favorable tax treatment by Compass
Bank in connection with the amounts payable under the Wright Employment
Agreement. ARIZONA BANK'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE WRIGHT EMPLOYMENT AGREEMENT. SEE "SUMMARY--RECORD
DATE; SHARES ENTITLED TO VOTE"; "--VOTE REQUIRED"; "EMPLOYMENT AGREEMENT--
GENERAL" AND APPENDIX I.
-26-
<PAGE>
CONFIDENTIALITY AND NONCOMPETITON AGREEMENT
GENERAL
As a condition to the obligations of Compass Bank under the Merger
Agreement, Compass Bank and Mr. Wright shall have entered into the Wright
Noncompetition Agreement. SEE "THE MERGER--ADDITIONAL AGREEMENTS". The
consideration payable to Mr. Wright pursuant to the Wright Noncompetition
Agreement will be $2,000,000.
The following information relating to the Wright Noncompetition Agreement
is not intended to be a complete description 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 Wright
Noncompetition Agreement is included in Appendix I, and is incorporated herein
by reference.
CONFIDENTIALITY
The Wright Noncompetition Agreement contains confidentiality restrictions
on Mr. Wright similar to those set forth in the Wright Employment Agreement.
SEE "EMPLOYMENT AGREEMENT--CONFIDENTIALITY."
NONCOMPETITION
The Wright Noncompetition Agreement sets forth the following noncompetition
provisions:
(i) from the date of the Wright Noncompetition Agreement and for a period
of four years after Mr. Wright's employment is terminated for any reason, Mr.
Wright agrees not to and shall not directly or indirectly hire, employ or engage
any past, present or future employee of Arizona Bank, without appropriate prior
written permission.
(ii) from the date of the Wright Noncompetition Agreement and for a period
of four years after Mr. Wright's employment is terminated for any reason, Mr.
Wright agrees not to and shall not directly or indirectly compete for or solicit
banking, lending, deposit taking or any other banking or trust services business
for or on behalf of any bank or other financial institution (excluding any
finance company) with a place of business in the State of Arizona, or own,
operate, participate in, undertake any employment with or have any interest in
any bank or other financial institution (excluding a finance company) with a
place of business in the State of Arizona or a bank or financial institution
(excluding a finance company) with a place of business outside the State of
Arizona having an office in Texas, Alabama, Florida or any other state in which
Compass Bank or any affiliate has a significant deposit office at the time of
termination, except owning publicly traded stock for investment purposes only in
which Mr. Wright owns less than 5%.
(iii) from the date of the Wright Noncompetition Agreement and for a
period of four years after Mr. Wright's employment is terminated for any reason,
Mr. Wright agrees not to and shall not directly or indirectly compete for or
solicit banking, lending, deposit taking or any other banking or trust services
business from any customer of Compass Bank (or its successors by merger); or
(iv) from the date of the Wright Noncompetition Agreement and for a period
of four years after Mr. Wright's employment is terminated for any reason, Mr.
Wright agrees not to and shall not directly or indirectly use in any
competition, solicitation or marketing effort in competition with Compass Bank
or its affiliates any proprietary list of or other proprietary information
concerning customers of Arizona Bank, Compass Bank or its affiliates developed
by Arizona Bank, Compass Bank or its affiliates.
-27-
<PAGE>
SHAREHOLDER VOTES REQUIRED; RECOMMENDATION OF BOARD OF DIRECTORS
The Wright Noncompetition Agreement is being submitted to the holders of
Arizona Bank Common Stock pursuant to the Merger Agreement. The Merger
Agreement provides that Arizona Bank shall submit for approval by the
shareholders of Arizona Bank entitled to vote at the Special Meeting the
payments to Mr. Wright under the Wright Noncompetition Agreement. Consummation
of the Merger does not require approval of the Wright Noncompetition Agreement;
however, approval by holders of at least 75% of the outstanding shares of
Arizona Bank Common Stock will help to ensure favorable tax treatment by Compass
Bank in connection with the amounts payable under the Wright Noncompetition
Agreement. ARIZONA BANK'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE WRIGHT NONCOMPETITION AGREEMENT. SEE "SUMMARY--
RECORD DATE; SHARES ENTITLED TO VOTE"; "--VOTE REQUIRED"; "CONFIDENTIALITY AND
NONCOMPETITION AGREEMENT--GENERAL" AND APPENDIX I.
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are regulated extensively under both
federal and state law. Compass is subject to regulation by the Federal Reserve
and its bank subsidiaries (the "Subsidiary Banks") are subject to regulation by
the Federal Reserve and the FDIC and the appropriate state banking departments.
Compass owns Compass Bank ("Compass Bank-Alabama"), an Alabama state bank
headquartered in Birmingham, Alabama, Central Bank of the South, an Alabama
state bank headquartered in Anniston, Alabama and Compass Bank ("Compass Bank-
Texas"), a Texas state bank and wholly-owned indirect subsidiary of Compass
headquartered in Houston, Texas. Compass' wholly-owned commercial bank
subsidiaries conduct a general, full-service commercial and consumer banking
business in Alabama, Texas and Florida. Compass Bank-Alabama also is engaged in
the investment, trust and equipment leasing businesses, and other bank operating
activities. Central Bank of the South primarily serves as a controlled
disbursement facility for commercial deposit customers of Compass Bank-Alabama.
Compass has received approval to merge Compass Bank-Texas into Compass Bank-
Alabama and such merger is expected to be consummated during the fourth quarter
of 1998. The deposits of each of the Subsidiary Banks are insured by the FDIC.
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 CERTAIN DOCUMENTS BY REFERENCE."
COMPASS
Compass is a bank holding company within the meaning of the BHC Act and is
registered as such with the Federal Reserve. As a bank holding company, Compass
is 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 Federal Reserve may also make examinations of Compass 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 5% 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 5% 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).
-28-
<PAGE>
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 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). 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 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 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 June 30, 1998, 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 - Alabama.
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 that
pose a greater
-29-
<PAGE>
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 Deposit Insurance Funds Act of 1996 (the "Fund Act"), which became
effective October 8, 1996, required the FDIC to impose a special assessment on
institutions holding deposits subject to assessment by the Savings Association
Insurance Fund ("SAIF"). Although the Subsidiary Banks are members of BIF, they
hold deposits subject to assessment by SAIF as a result of acquisitions of SAIF
deposits or SAIF-insured institutions. Compass' deposit liability under the
Funds Act was $7.2 million based upon $1.1 billion of SAIF deposits, after
certain discounts and exemptions.
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-Alabama and Central Bank of the South are both organized under
the laws of the State of Alabama. Compass Bank-Alabama is a member of the
Federal Reserve System. Compass Bank-Alabama and Central Bank of the South
(collectively, the "Alabama Subsidiary Banks") are supervised, regulated and
regularly examined by the Alabama State Banking Department and Compass Bank-
Alabama is also regulated and examined by the Federal Reserve. Compass Bank-
Texas is organized under the laws of the State of Texas, is a member of the
Federal Reserve System, and is supervised, regulated and examined by the Texas
Department of Banking and the Federal Reserve. The Subsidiary Banks, as
participants in the BIF and the SAIF of the FDIC, are subject to the provisions
of the Federal Deposit Insurance Act and to examination by and regulations of
the FDIC.
The Alabama Subsidiary Banks are 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-Alabama has
surplus in excess of this amount. Compass Bank-Texas which is governed by the
laws of the State of Texas, is 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. As members of the Federal Reserve System, Compass Bank-Alabama and
Compass Bank-Texas are also subject to dividend limitations imposed by the
Federal Reserve that are similar to those applicable to national banks.
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.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
Federal Reserve 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.
-30-
<PAGE>
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, Arizona, 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 SEC, the United States
Department of the Treasury and the Federal Reserve. Compass Brokerage, Inc., a
wholly-owned subsidiary of Compass Bank-Alabama, offers discount brokerage
services and is registered with the SEC 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-Alabama, is a
licensed insurance agent or broker for various insurance companies. Such
insurance subsidiary and its licensed agents are subject to reporting and
licensing regulations of the Alabama Insurance Commission and various other
states.
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.
-31-
<PAGE>
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
proposed to be issued in the Merger. 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 70,170,834 shares were issued and outstanding on June 30,
1998. 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 the GCL, 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 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. SEE "COMPARISON OF
RIGHTS OF SHAREHOLDERS OF ARIZONA BANK AND COMPASS--DIVIDENDS" AND "SELECTED
FINANCIAL DATA."
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. The Alabama Subsidiary Banks are 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-Alabama has surplus in excess of this amount. Compass Bank-Texas, which is
governed by the laws of the State of Texas, is 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. As members of the Federal Reserve System, Compass Bank-
Alabama and Compass Bank-Texas are also subject to dividend limitations imposed
by the Federal Reserve that are similar to those applicable to national banks.
SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; "SUMMARY--RECOMMENDATION
OF BOARD OF DIRECTORS OF ARIZONA BANK"; "RISK FACTORS"; "SELECTED FINANCIAL
DATA"; "MARKET PRICES"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA BANK
AND COMPASS--DIVIDENDS."
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 Arizona Bank 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
-32-
<PAGE>
the voting power of minority shareholders. SEE "COMPARISON OF RIGHTS OF
SHAREHOLDERS OF ARIZONA BANK AND COMPASS--ELECTION OF 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; however, at the Effective Time,
each share of Arizona Bank Series E Preferred Stock and Arizona Bank Series F
Preferred Stock will be converted into one share of Compass Series E Preferred
Stock and Compass Series F Preferred Stock, respectively. SEE "THE MERGER";
"RISK FACTORS" AND "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA BANK AND
COMPASS--DIVIDENDS".
COMPASS SERIES E PREFERRED STOCK
Dividends. Dividends will be payable at an annual rate of $2.625 per
share, if, when and as declared by the Board. Dividends will not be cumulative
and will be payable quarterly in arrears on the fifteenth (15th) day of
February, May, August and November in each year, commencing on the first such
date occurring after the Effective Time. Dividends must be declared, paid or set
aside on Compass Series E Preferred Stock before dividends may be declared, paid
or set aside on Compass Common Stock or any junior stock. Holders of Compass
Series E Preferred Stock will not participate in dividends with the Compass
Common Stock or any junior stock.
Redemption. Compass Series E Preferred Stock will be redeemable upon
any dividend payment date commencing November 15, 1999, at the option of
Compass, in whole or in part, at a redemption price of $25.00 per share plus
declared and unpaid dividends for the then-current dividend period up to the
date fixed for redemption.
Ranking. Compass Series E Preferred Stock will rank senior to the
Compass Common Stock and will rank on a parity with Compass' Series F Preferred
Stock with respect to cash dividend rights and rights upon liquidation,
dissolution or winding up. Compass Series E Preferred Stock will be subject to
the creation of parity preferred stock and junior stock; provided, however, that
no cumulative parity preferred stock may be created or issued unless approved by
the holders of the Compass Series E Preferred Stock.
Liquidation Preference. Compass Series E Preferred Stock will have a
liquidation preference of $25.00 per share plus declared and unpaid dividends
for the current dividend period up to the date fixed for liquidation, before any
distribution to holders of Compass Common Stock or any junior stock. If the
amounts available for distribution with respect to the Compass Series E
Preferred Stock and any other parity preferred stock are not sufficient to
satisfy the full liquidation rights of the Compass Series E Preferred Stock and
such parity preferred stock, then the holders of each series of such stock will
share ratably in such distribution of assets in proportion to the full
respective preferential amounts to which they may be entitled. Upon any such
liquidation, but only after each holder of Series E Preferred Stock shall have
been paid in full the stated dividends and amounts payable to which each such
holder is entitled, the remaining assets of Compass may be distributed to the
holders of Compass Common Stock or junior stock.
Conversion. The holders of shares of Compass Series E Preferred Stock
will not have any right to convert such shares into shares of Compass Common
Stock.
Voting Rights. Except as described herein or as otherwise required by
applicable law, holders of Compass Series E Preferred Stock will not have any
voting rights.
So long as any shares of Compass Series E Preferred Stock are
outstanding, Compass may not, without the consent of a majority of the
outstanding shares of Compass Series E Preferred Stock (i) amend, alter or
repeal any of the terms of the Certificate of Designation, Preferences,
Privileges and Voting Powers of the Compass Series E Preferred Stock if such
amendment, authorization or repeal would materially and adversely affect the
rights, preferences,
-33-
<PAGE>
powers or privileges of the Compass Series E Preferred Stock; or (ii) create,
authorize or issue, or increase the authorized or issued amount of, any class or
series of any equity securities of Compass, or any warrants, options or other
rights convertible or exchangeable into any class or series of any equity
securities of Compass, ranking either prior to, or on parity with, the Compass
Series E Preferred Stock either as to cash dividend rights or rights on
liquidation, winding up or dissolution of Compass; provided, however, that the
consent of the holders of the Compass Series E Preferred Stock will not be
required in connection with the creation, authorization or issuance of parity
preferred stock unless such parity preferred stock has cumulative dividend
rights.
If Compass fails to pay quarterly dividends for any four (4)
consecutive or non-consecutive dividend periods, the holders of Compass Series E
Preferred Stock will be entitled to elect, voting as a class with any holders of
non-cumulative parity stock which by its terms provides for voting rights
similar to the shares of Compass Series E Preferred Stock, two additional
directors of Compass. The right of holders of shares of Compass Series E
Preferred Stock to elect directors will continue until dividends on the shares
of Compass Series E Preferred Stock have been paid in full or declared and set
apart for payment in full for four (4) consecutive dividend periods.
Merger. A consolidation, merger or sale of all or substantially all
of the assets of Compass will not be considered a liquidation, dissolution or
winding up of Compass for purposes of liquidation preferences; provided,
however, that if the aggregate amount of cash receivable by holders of Compass
Series E Preferred Stock in exchange for or upon conversion of Compass Series E
Preferred Stock in connection with a cash merger would be less than the stated
liquidation value of the outstanding Compass Series E Preferred Stock, then such
cash merger will be considered a liquidation, dissolution or winding up of
Compass.
COMPASS SERIES F PREFERRED STOCK
Dividends. Dividends will be payable at an annual rate of $2.28125
per share, if, when and as declared by the Board. Dividends will not be
cumulative and will be payable quarterly in arrears on the fifteenth (15th) day
of each February, May, August and November, commencing on the first such date
occurring after the Effective Time. Dividends must be declared, paid or set
aside on Compass Series F Preferred Stock before dividends may be declared, paid
or set aside on Compass Common Stock or any junior stock. Holders of Compass
Series F Preferred Stock will not participate in dividends, if any, declared and
paid on Compass Common Stock or any other junior stock.
Redemption. Compass Series F Preferred Stock may not be redeemed
prior to February 15, 1999. Thereafter, Compass Series F Preferred Stock may be
redeemed in whole or in part, at the option of Compass, on any dividend payment
date upon not less than thirty (30) days' prior written notice, at the following
per share redemption amounts, plus declared and unpaid dividends for the current
dividend period up to the date fixed for redemption, without interest: $25.75
if the redemption date is within the twelve (12) month period beginning February
15, 1999; $25.375 if such date is within the twelve (12) month period beginning
February 15, 2000; and $25.00 thereafter.
Ranking. Compass Series F Preferred Stock will rank senior to the
Compass Common Stock and will rank on parity with Compass Series E Preferred
Stock, with respect to both cash dividend rights and rights upon liquidation,
dissolution or winding up. Compass Series F Preferred Stock will be subject to
the creation of parity preferred stock and junior stock; provided, however, that
no cumulative parity preferred stock may be created or issued unless approved by
the holders of the Compass Series F Preferred Stock.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation of Compass, holders of Compass Series F Preferred Stock will be
entitled to be paid $25.00 per share, plus dividends declared and unpaid for the
current dividend period up to the date fixed for liquidation, before any
distribution to holders of Compass Common Stock or any junior stock. If the
amounts available for distribution with respect to the Compass Series F
Preferred Stock and any other parity preferred stock are not sufficient to
satisfy the full liquidation rights of the Compass Series F Preferred Stock and
such parity preferred stock, then the holders of each series of such stock will
share ratably in such distribution of assets in proportion to the full
respective preferential amounts to which they may be entitled. Upon any such
liquidation, but only after each holder of Series F Preferred Stock shall have
been paid in full the stated dividends and amounts payable to which each such
holder is entitled, the remaining assets of Compass may be distributed to the
holders of Compass Common Stock or junior stock.
Conversion. The holders of shares of Compass Series F Preferred Stock
will have no right to convert such shares into shares of Compass Common Stock or
any other class of capital stock of Compass.
-34-
<PAGE>
Voting Rights. Except as described herein or as otherwise required by
applicable law, holders of Compass Series F Preferred Stock will not have any
voting rights.
So long as any shares of Compass Series F Preferred Stock are
outstanding, Compass may not, without the consent of a majority of the
outstanding shares of Compass Series F Preferred Stock (i) amend, alter or
repeal any of the terms of the Certificate of Designation, Preferences,
Privileges and Voting Powers of the Compass Series F Preferred Stock if such
amendment, authorization or repeal would materially and adversely affect the
rights, preferences, powers or privileges of the Compass Series F Preferred
Stock; or (ii) create, authorize or issue, or increase the authorized or issued
amount of, any class or series of any equity securities of Compass, or any
warrants, options or other rights convertible or exchangeable into any class or
series of any equity securities of Compass, ranking either prior to, or on
parity with, the Compass Series F Preferred Stock either as to cash dividend
rights or rights on liquidation, winding up or dissolution of Compass; provided,
however, that the consent of the holders of the Compass Series F Preferred Stock
will not be required in connection with the creation, authorization or issuance
of parity preferred stock unless such parity preferred stock has cumulative
dividend rights.
If Compass fails to pay dividends on Compass Series F Preferred Stock
at the stated rate for any four (4) consecutive or non-consecutive dividend
periods, the holders of Compass Series F Preferred Stock will have the right to
elect, voting as a class with holders of Compass Series E Preferred Stock or any
other holders of any series of non-cumulative parity stock which by its terms
provides for voting rights with respect to the election of directors, two
additional directors of Compass. The right of holders of shares of Compass
Series F Preferred Stock to elect directors will continue until dividends on the
shares of Compass Series F Preferred Stock have been paid in full or declared
and set apart for payment in full for four (4) consecutive dividend periods.
-35-
<PAGE>
COMPARISON OF RIGHTS OF
SHAREHOLDERS OF ARIZONA BANK 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.
Arizona Bank's Articles of Incorporation, as amended, and Bylaws do not contain
similar restrictions, except that the ABCA requires that actions of shareholders
without a meeting be by unanimous written 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 Arizona Bank, which are available upon request from
Arizona Bank. SEE "AVAILABLE INFORMATION"; "INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE" AND "RISK FACTORS".
In addition to the foregoing differences between Arizona Bank's and
Compass' charters, as a result of the Merger, Arizona Bank shareholders, whose
rights are governed by the ABCA, 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 ARIZONA AND THE CORPORATION
LAWS OF DELAWARE AND CORRESPONDING CHARTER AND BYLAW PROVISIONS
Certain differences between the Delaware corporation laws and the Arizona
corporate laws, as well as a description of the corresponding provisions
contained in Compass' and Arizona Bank'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 ABCA and the GCL.
MERGERS
Both Arizona 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. In addition, the ABCA requires that
each shareholder of the surviving corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares with identical designations, preferences, limitations and relative rights
immediately after the effective date of the merger.
Where shareholder approval is required under Arizona law, a merger must be
approved by each voting group entitled to vote separately on the plan by a
majority of all the votes entitled to be cast by that voting group, unless the
articles of incorporation or board of directors provide otherwise. Arizona
Bank's Articles of Incorporation do not provide otherwise. 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 cases, as described above. SEE "RISK
FACTORS" AND "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA BANK AND COMPASS--
CHARTER AND BYLAW PROVISIONS AFFECTING COMPASS STOCK".
APPRAISAL RIGHTS
Shareholders of Arizona corporations are entitled to exercise certain
dissenters' rights in the event of a share exchange, sale or exchange of all, or
substantially all, of the property of the corporation (other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange), an amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares and, with the
exceptions
-36-
<PAGE>
discussed below, a merger or consolidation. Shareholders of a Delaware
corporation have rights of appraisal in connection with certain mergers or
consolidations only. 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 an
Arizona corporation are set forth in Appendix II. SEE "SUMMARY--DISSENTERS'
RIGHTS"; "THE MERGER--DISSENTERS' RIGHTS" AND APPENDIX II.
Except as described below, no appraisal rights are available under either
Arizona or Delaware law for the holders of any shares of a class or series of
stock of an Arizona corporation 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 Arizona and Delaware law provide 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 (in Delaware) or at least (in Arizona) 2,000
shareholders, unless any of the following exceptions concerning consideration
paid to the shareholder for his shares are met. Appraisal rights will, however,
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 depository receipts described in (a), (b) and (c) above.
SPECIAL MEETINGS
A special meeting of shareholders of an Arizona corporation may be called
by the corporation's board of directors or the persons authorized to do so by
its articles of incorporation or bylaws. 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.
Arizona Bank's By-Laws provide that special meetings of shareholders may be
called at any time by the Board of Directors, the President, or the holders of
not less than ten percent (10%) of the capital stock entitled to vote. Compass'
Certificate prohibits shareholders from calling special meetings.
ACTIONS WITHOUT A MEETING
Under Arizona law, the shareholders may act without a meeting if a consent
in writing to such action is signed by all shareholders entitled to vote on the
action and delivered to the corporation. 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 Arizona law, unless otherwise provided in the articles of
incorporation, directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. Arizona Bank's Articles of Incorporation, as amended, do not provide
otherwise. 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".
-37-
<PAGE>
VOTING ON OTHER MATTERS
Under Arizona law, an amendment to the articles of incorporation requires
the approval of both the holders of at least a majority of the votes entitled to
be cast on the amendment by any voting group with respect to which the amendment
would create dissenter's rights and the votes required by every other voting
group entitled to vote on the amendment, unless a different number is specified
in the articles of incorporation. The Articles of Incorporation, as amended, of
Arizona Bank 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 of all, or substantially
all, the property, with or without the goodwill, of an Arizona corporation, if
not made in the usual and regular course of its business, requires the approval
of the holders of at least a majority of the outstanding shares of the
corporation entitled to vote thereon, unless the articles of incorporation or
the board of directors require the vote of a different number. Arizona Bank's
Articles of Incorporation, as amended, do not provide for a different voting
requirement. 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.
Under Arizona law, the voluntary dissolution of a corporation requires the
approval of the holders of at least a majority of the votes entitled to be cast
thereon, unless a different amount, is specified in the articles of
incorporation or by the board of directors. The Articles of Incorporation, as
amended, of Arizona Bank do not provide for a different number of shares for
approval of dissolution. 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 Arizona law, shareholders do not possess preemptive rights to acquire
the corporation's unissued shares, unless the corporation's articles of
incorporation provide otherwise. Arizona Bank's Articles of Incorporation, as
amended, do not provide preemptive rights and, therefore, Arizona Bank's
shareholders do not have preemptive rights as to unissued shares. Shareholders
of Compass do not possess 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 no 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. An Arizona corporation may not make distributions
if, after giving effect, either the corporation is not able to pay its debts as
they become due in the ordinary course of business or the corporation's total
assets would be less than the sum of its total liabilities plus, unless the
articles of incorporation otherwise permit, the amount that would be needed to
satisfy the preferential rights on dissolution of shareholders whose
preferential rights are superior to those receiving the distribution.
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.
Arizona Bank's Articles of Incorporation, as amended, do not contain
restrictions as to the ability of the Arizona Bank Board of Directors to declare
dividends. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"; "SUMMARY--
PARTIES TO THE MERGER"; "SUMMARY--ARIZONA BANK'S REASONS FOR THE MERGER";
"--RECOMMENDATION OF BOARD OF DIRECTORS OF ARIZONA BANK"; "SELECTED FINANCIAL
DATA"; "MARKET PRICES"; "DESCRIPTION OF COMPASS COMMON AND PREFERRED STOCK" AND
"INFORMATION ABOUT ARIZONA BANK--MARKET PRICE AND DIVIDENDS".
-38-
<PAGE>
LIQUIDATION RIGHTS
Generally under Arizona and Delaware corporate law, shareholders are
entitled to share ratably in the distribution of assets upon the voluntary
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. Upon
liquidation, dissolution or winding up of the affairs of Arizona Bank, holders
of Arizona Bank Common Stock are entitled to receive their pro rata portion of
the remaining assets of Arizona Bank after the holders of Arizona Bank Preferred
Stock have been paid in full any sums to which they may be entitled. Arizona
Bank Series E Preferred Stock has a liquidation or value of $25.00 per share,
plus accrued and unpaid dividends. Arizona Bank Series F Preferred Stock has a
liquidation value of $25.00 per share, plus accrued and unpaid dividends.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Both Arizona and Delaware corporate law permit a corporation to set limits
on the extent of a director's liability. Both Arizona and Delaware corporate
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 Arizona or Delaware corporate 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".
Arizona Bank's Articles of Incorporation provide that each person who was
or is made a party or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding by reason of the fact that he or she
is or was a director, officer or employee of Arizona Bank or is or was serving
at the request of Arizona Bank as a director, officer, employee or agent of
another company, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by Arizona Bank to the fullest extent authorized
by the law of Arizona against all expense, liability and loss reasonably
incurred or suffered in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent. Arizona Bank shall indemnify a person in connection with a proceeding
initiated by such person only if such proceeding was authorized by the Board of
Directors of Arizona Bank. The right to indemnification is a contract right and
includes the right to be paid by Arizona Bank the expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however, that
if Arizona law requires, an advancement of expenses incurred by a person in his
or her capacity as a director, officer, or employee may be made only upon
delivery to Arizona Bank of an undertaking to repay all amounts so advanced if
it shall ultimately be determined that such person is not entitled to be
indemnified for such expenses. In any suit brought by a person to enforce an
indemnification right, or by Arizona Bank to recover an advancement of expenses,
the burden of proving that the person is not entitled to be indemnified or to
such advancement of expenses is on Arizona Bank. The rights to indemnification
and to the advancement of expenses conferred by the Articles of Incorporation
are not exclusive of any other right which any person may have or acquire. A
director of Arizona Bank shall not be personally liable to Arizona Bank or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except that such liability of the director shall not be eliminated or limited
for any breach of the directors' duty of loyalty to Arizona Bank or its
shareholders, acts or omissions which are not in good faith or involve
intentional misconduct or knowing violation of law, authorizing the unlawful
payment of a dividend or other distribution, any transaction from which the
director derived an improper personal benefit, or a violation of certain
provisions Arizona law. Notwithstanding the foregoing, Arizona Bank shall not
indemnify any person if indemnification is prohibited by any law, regulation or
order that may be applicable from time to time. In addition, no provision
limiting the personal
-39-
<PAGE>
liability of any person for monetary damages for breach of fiduciary duty as a
director shall be effective in any administrative proceeding or civil action.
REMOVAL OF DIRECTORS
The shareholders of an Arizona corporation may remove a director with or
without cause by a vote of the holders of not less than a majority of the shares
entitled to vote, unless otherwise provided in the articles of incorporation.
If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove that
director. Arizona Bank's Articles of Incorporation do not provide otherwise. 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 of Incorporation provides for a classified board, and any such
removal must be for cause after a supermajority vote (80%) of the shareholders.
INSPECTION OF BOOKS AND RECORDS
Under Arizona 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 ARIZONA BANK AND COMPASS--
CHARTER AND BY-LAW PROVISIONS AFFECTING COMPASS STOCK". Arizona has enacted
similar legislation. Pursuant to Arizona law, an issuing public corporation
shall not, directly or indirectly, purchase or agree to purchase any shares from
a beneficial owner of more than 5% of the voting power of the issuing public
corporation for more than the average market price of the shares if the shares
have been beneficially owned by the beneficial owner for less than three years,
unless either (i) the purchase or agreement to purchase is approved at a meeting
of shareholders by the affirmative vote of the holders of the majority of the
voting power of all shares excluding shares beneficially owned by the beneficial
owner or its affiliates or associates or by any officer or director of the
issuing public corporation or (ii) the issuing public corporation makes an
offer, of at least equal value per share, to all holders of shares of such class
or series and to all holders of any class or series into which the shares may be
converted. This Arizona antitakeover provision applies only to issuing public
corporations and to corporations which elect to be subject to such provisions.
Arizona Bank's Articles of Incorporation do not so elect.
Although certain of the specific differences between the voting and other
rights of Arizona Bank 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 Arizona and Delaware law, or the
rights of such persons under the respective charters and Bylaws of Compass and
Arizona Bank. 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
ABCA and the GCL, and the specific provisions of Compass' Certificate and
Bylaws, and Arizona Bank's Articles of Incorporation, as amended, and Bylaws.
RESALE OF COMPASS STOCK
The Compass Common Stock and Compass Preferred Stock to be issued to
holders of Arizona Bank Common Stock and Arizona Bank Preferred 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 Arizona Bank
within the meaning of Rule 144 or Rule 145 under the Securities Act. The
directors and executive officers of Arizona Bank, the beneficial owners of 10%
or more of Arizona Bank Common Stock and certain of their related interests may
be deemed to be affiliates of Arizona Bank. Such affiliates are not permitted
to transfer any Compass Common Stock or Compass Preferred 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 Arizona Bank Common Stock or Arizona Bank Preferred Stock within 30
days prior to the Effective Time, (ii) sell, pledge, transfer or otherwise
dispose of any shares of Compass Common Stock or Compass Preferred Stock until
the publication of financial results covering at least 30 days of post-Merger
combined operations of Arizona Bank and Compass, except
-40-
<PAGE>
for loans to any such affiliates secured by a pledge of all or part of such
Compass Common Stock or Compass Preferred 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 or Compass Preferred 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--
ANTICIPATED ACCOUNTING TREATMENT"; "THE MERGER--ACCOUNTING TREATMENT" AND
APPENDIX I.
Holders of shares of Arizona Bank 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 Stock received in the Merger in a transaction the
consideration for which is to be provided by Compass or a party related to
Compass. See "The Merger--Other Terms and Conditions".
INFORMATION ABOUT ARIZONA BANK
SERVICES, EMPLOYEES AND PROPERTIES
Arizona Bank is a state chartered banking organization incorporated in
1963. Arizona Bank's main office is located at 120 North Stone Avenue, Tucson,
Arizona 85701. Arizona Bank currently operates 29 branch locations in Pima,
Yuma, Coconino, Yavapai, Mohave, Cochise, Pinal and Maricopa Counties in
Arizona. Arizona Bank also operates a representative office in Orange County,
California to facilitate loans and leases to finance the purchase and lease of
automobiles by California consumers. This operation relies solely upon Arizona
Bank personnel in Arizona for all loan and lease processing and uses independent
contractors in California for any repossessions.
Arizona Bank has four wholly-owned subsidiaries: (1) Arizona Financial
Products, Inc., formed for the purpose of acting as an agent to sell life
insurance and other non-deposit investment products not insured by the FDIC, (2)
Arizona Kachina Holdings, Inc., originally formed for the purpose of acquiring
real property to be used in Arizona Bank's operations, (3) Tucson Athletic Club,
which is currently inactive and in the process of liquidation, and (4) Arizona
Bank & Trust, which is also currently inactive.
On June 30, 1998, Arizona Bank had 138 officers, 10 directors, 307 full-
time employees and 32 part-time employees. Directors of Arizona Bank are
compensated for their services.
COMPETITION
The banking business is highly competitive. Arizona Bank competes for
deposits and loans principally with major commercial banks, other independent
banks, savings and loan associations, credit unions, mortgage companies,
insurance companies, and other lending institutions and specialty finance
companies. With respect to deposits, additional significant competition arises
from corporate and governmental debt securities, as well as money market mutual
funds. As of December 31, 1997, Arizona Bank was the sixth largest bank in
Arizona in terms of total assets. Arizona Bank's competitors include several
Arizona affiliates of large regional or national banks, each of which have
significantly greater financial resources than Arizona Bank. Among the
advantages enjoyed by these larger institutions is their ability to make larger
loans, finance extensive advertising campaigns, invest in new technology, access
international money markets, and allocate their investment assets to regions of
highest yield and demand. In addition, some of Arizona Bank's competitors have
supermarket banking operations which are directly competitive with the
supermarket branches opened or planned to be opened by Arizona Bank.
Under federal and Arizona legislation, interstate banking is now permitted
through the acquisition or formation of banks in Arizona, subject to certain
limitations. Existing Arizona banks having operations in other states are now
able to operate as branches without an Arizona banking charter, which may offer
significant cost reductions and possibly competitive advantages over community-
owned banks in attracting deposits, among other things. This legislation may
also lead to greater concentration of banking services in Arizona Bank's service
area.
In commercial loan transactions, Arizona Bank competes primarily for the
credit needs of individuals and small- to medium-sized businesses. Arizona
Bank's promotional activities emphasize the advantages of dealing with an
independently owned and locally based institution attuned to the particular
needs of the community. In competing with other banks, Arizona Bank seeks to
provide highly personalized services through its officers' and directors'
knowledge of Arizona Bank's primary service area and prompt responses on loan
requests, and by understanding fully the financial situation of relatively small
borrowers. The size of such borrowers, in the opinion of Arizona Bank's
management, often inhibits close attention to their needs by the larger national
and regional institutions.
-41-
<PAGE>
Although savings and loan associations have provided significant
competition to banks in the past, such competition has diminished significantly
due to the failure of most such institutions in Arizona. Nevertheless,
commercial banks are experiencing competition from nontraditional sources.
Industrial and retail organizations, through their financial services units, and
securities firms, through various new products and services, are providing
strong competition in traditional banking activities. These services and
products mirror financial services and products offered by retail and commercial
banks, yet these competitors are not governed by the same regulatory agencies as
retail and commercial banks and therefore are not required to comply with the
same types of regulations as banks.
LEGAL PROCEEDINGS
In the normal course of their businesses, Arizona Bank from time to time is
involved in legal proceedings. Other than such proceedings incidental to its
business, Arizona Bank's management is not aware of any pending or threatened
legal proceedings which, upon resolution, would have a material adverse effect
upon Arizona Bank'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 Arizona Bank Common Stock.
As of September 30, 1998, Arizona Bank Common Stock was held by 203 holders of
record. Arizona Bank has no recent history of paying dividends on its common
stock. SEE "MARKET PRICES"; "COMPARISON OF RIGHTS OF SHAREHOLDERS OF ARIZONA
BANK AND COMPASS--DIVIDENDS"; "INFORMATION ABOUT ARIZONA BANK--BENEFICIAL
OWNERSHIP OF ARIZONA BANK COMMON STOCK BY ARIZONA BANK MANAGEMENT AND PRINCIPAL
SHAREHOLDERS."
BENEFICIAL OWNERSHIP OF ARIZONA BANK COMMON STOCK BY ARIZONA BANK MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
The following table shows as of September 30, 1998, the number of shares of
Arizona Bank Stock, beneficially owned by each director and executive officer of
Arizona Bank, and information for all Arizona Bank directors and executive
officers as a group. The table also sets forth the name and address for each
person known by Arizona Bank to be the beneficial owner of more than 5% of the
outstanding shares of Arizona Bank Stock.
-42-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of
Names of Directors and Stock Beneficially Percent of Total
Title of Class Executive Officers Owned Outstanding Shares
- -------------------- ---------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
Common Stock James H. Click, Jr. 645,761.25(1) 43.48%
1301 S. Wilmot
Tucson, Arizona 85732
Common Stock Robert H. Tuttle 645,761.25(2) 43.48%
9601 Wilshire Blvd., Suite 605
Beverly Hills, California 90210
Common Stock David T. C. Wright 70,731 4.76%
Common Stock David M. Lovitt, Sr. 11,600 (3) *
Common Stock Frank L. McClure 200 *
Common Stock Lewis C. Murphy 200 *
Common Stock John C. Neil 76 *
Common Stock James M. Chandler 31 *
Common Stock Directors and Officers as a Group 1,374,360.50 92.53%
(8 persons)
Series E Preferred Stock Fred Dawson, Jr. 100 *
Series E Preferred Stock Florence G. Nanez 75 *
Series E Preferred Stock Frank L. McClure 2,000 *
Series E Preferred Stock Linda Saulisbury 300 *
Series E Preferred Stock Directors and Officers as a Group 2,475 *
(4 persons)
</TABLE>
- ------------------------
* Less than 1%
(1) Shares are held by James H. Click, Jr. and Vicki Click, as Trustees of The
James H. Click, Jr. Family Trust Dated November 25, 1991.
(2) Includes shares held by Robert H. Tuttle, as Trustee Under Declaration of
Trust for the Robert H. Tuttle Family Trust Dated October 31, 1984, as
Trustee for the Robert Tuttle '93 Children's Trust Dated December 31, 1993,
and by R.H. Tuttle and Maria Hummer, as community property.
(3) Shares are held by The David and Cornelia Lovitt Trust Dated November 2,
1992.
The persons listed above will receive the same Merger Consideration
described in "THE MERGER--GENERAL" as the other Arizona Bank shareholders for
each share of Arizona Bank Stock held at the Effective Time.
The directors and officers of Arizona Bank control, with the power to vote,
an aggregate of 1,374,360.50 shares of Arizona Bank Common Stock, representing
approximately 92.53% of the total shares of Arizona Bank Common Stock issued and
outstanding. SEE "SUMMARY--VOTE REQUIRED" AND "THE MERGER--GENERAL".
Directors of Arizona Bank owning or otherwise controlling 1,291,522.50
shares of Arizona Bank Common Stock, comprising approximately 86.95% of the
total shares of Arizona Bank 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 Agreement and the Merger, the Wright Employment Agreement and the
Wright Noncompetition Agreement. Therefore, it is virtually assured that the
Merger Agreement and the Merger, the Wright Employment Agreement and the Wright
Noncompetition Agreement will be approved at the Special Meeting.
ADDITIONAL AGREEMENTS
David T. C. Wright Employment Agreement. Concurrently with the
consummation of the Merger, David T. C. Wright and Compass Bank will enter into
the Wright Employment Agreement whereby Mr. Wright will act as President and
Chief Executive Officer of the Resulting Institution for a period of five years
after the Merger. Mr. Wright's base salary under the Wright Employment
Agreement will be $200,000 per year. Mr Wright will also be entitled to a
Retention Bonus in the amount of $1,300,000 which shall be proportionately
earned over the 24-month period following the Effective Time and a grant of
15,000 shares of Compass Common Stock, subject to certain transfer restrictions,
which will vest pro rata over a period of five years. In addition, Mr. Wright
will be entitled to such benefits as are made generally available to employees
of equal title and base salary on the same basis as Compass makes such benefits
available to Compass' other such employees, including participation in the
Compass retirement plan and Compass'
-43-
<PAGE>
executive incentive program with the payment of the bonus for calendar year 1999
in the amount of $100,000 being guaranteed. SEE "EMPLOYMENT AGREEMENT."
David T. C. Wright Confidentiality and Noncompetition Agreement.
Concurrently with the consummation of the Merger, David T. C. Wright and Compass
Bank will enter into the Wright Noncompetition Agreement whereby Mr. Wright
agrees that he will not, either while employed by Compass Bank or afterwards,
make any independent use of, or disclose to any other person, any trade secrets
or confidential information of Compass Bank or its affiliates or Arizona Bank.
Mr. Wright also agrees that from the date of the Wright Noncompetition Agreement
for a period of four years after his employment with Compass Bank is terminated
he will not directly or indirectly (i) hire any past, present or future employee
of Arizona Bank without prior permission, (ii) compete for or solicit banking,
lending, deposit taking or other banking or trust services business for or on
behalf of any financial institution with a place of business in the State of
Arizona or own, operate, or otherwise have any interest in any bank or financial
institution with a place of business outside the State of Arizona having an
office in Texas, Alabama, Florida or any other state in which Compass Bank or
any affiliate has a significant deposit office at the time of termination,
except owning publicly traded stock for investment purposes only in which Mr.
Wright owns less than 5%, (iii) compete for or solicit banking, lending, deposit
taking or any other banking or trust services business from any customer of
Compass Bank (or its successors by merger), or (iv) use in any competition,
solicitation or marketing effort in competition with Compass Bank or its
affiliates any proprietary list of or other proprietary information concerning
customers of Arizona Bank, Compass Bank or its affiliates developed by Arizona
Bank, Compass Bank or its affiliates. The consideration payable to Mr. Wright
pursuant to the Wright Noncompetition Agreement will be $2,000,000. SEE
"CONFIDENTIALITY AND NONCOMPETITION AGREEMENT."
Wright Employment Agreement-Arizona Bank. Mr. Wright's current employment
agreement with Arizona Bank provides that upon a sale, merger or consolidation
of Arizona Bank, Arizona Bank shall pay to Mr. Wright a single lump sum payment
in the amount of $100,000 within 30 days after consummation of such merger, sale
or consolidation. In addition, if within the 30-day period following the
consummation of such sale, merger or consolidation Mr. Wright is not employed in
an executive or managerial position comparable to his position at the time of
such transaction by Arizona Bank's successor or some other enterprise owned or
controlled by Mr. Tuttle or Mr. Click, Arizona Bank shall be obligated to pay
Mr. Wright $5,000 per month for the lesser of 24 months or such number of months
until he obtains employment in such capacity. In lieu of such payments, Arizona
Bank may pay a single lump sum to Mr. Wright in the amount of $100,000 within 30
days after such consummation date.
Employment Agreements. Certain executive officers of Arizona Bank will
enter into Employment Agreements with Compass Bank in connection with the
consummation of the Merger. Each Employment Agreement provides for an employment
term of three years. In addition to the annual base salary payable under the
Employment Agreement, each executive officer will also receive a retention
bonus, one-half of which is payable at the Effective Time and the remainder of
which is payable on the sixth-month anniversary of the Effective Time. Each
executive officer executing an Employment Agreement also will be entitled to
such benefits as are generally made available to employees of equal title and
base salary as Compass makes such benefits available to Compass' other
such employees, including participation in the Compass retirement plan and
Compass' executive incentive program. Each of the following executive officers
of Arizona Bank will execute an Employment Agreement in connection with the
Merger incorporating the foregoing terms and conditions with the corresponding
annual base salary and retention bonus amounts: Fred Dawson, salary - $150,000,
retention bonus - $500,000; John C. Neil, Salary - $90,000, retention bonus -
$300,000; James M. Chandler, salary - $90,000, retention bonus - $200,000;
Florence Nanez, salary - $90,000, retention bonus - $300,000; Stuart Cohen,
salary - $90,000, retention bonus - $200,000; Donna R. Shelton, salary -$90,000;
retention bonus - $200,000; Sharon E. Lytle, salary - $90,000, retention bonus -
$200,000; and Todd Johnson, salary - $90,000, retention bonus -$200,000.
Severance Payment. In connection with the consummation of the Merger,
Linda Saulisbury, an executive vice-president of Arizona Bank, will receive a
severance payment of $500,000.
-44-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ARIZONA BANK
The following discussion provides certain information regarding the
financial condition and results of operations of Arizona Bank. This discussion
should be read in conjunction with Arizona Bank's Consolidated Financial
Statements and Notes to Consolidated Financial Statements presented elsewhere in
this Proxy Statement/Prospectus. SEE "INDEX TO ARIZONA BANK CONSOLIDATED
FINANCIAL STATEMENTS".
RESULTS OF OPERATIONS
NET INCOME
Arizona Bank derives its net income from two principal sources: (1) net
interest income, which is the difference between the interest income Arizona
Bank earns on interest-earning assets and the interest expense it pays on
interest-bearing liabilities; and (2) non-interest income from retail banking
operations.
Net income for the six months ended June 30, 1998 was $3.9 million, as
compared to $2.4 million for the same period in 1997, an increase of $1.5
million, or 63%. The primary reasons for the increase were (i) increases in
interest-earning assets, (ii) increases in non-interest income and (iii)
depressed earnings in 1997 due to increases in the allowance for loan losses
during that year.
Net income for the year ended December 31, 1997 was $5.8 million, compared
to $5.8 million for the year ended December 31, 1996 and $4.8 million for the
year ended December 31, 1995. Net income for 1997 remained constant with that
for 1996, while net income for 1996 increased 21% over 1995. The primary
reasons net income did not increase in 1997 were (i) increased operational
expenses associated with the opening of 13 additional branches during the fourth
quarter of 1996 and all of 1997 and (ii) the increase in the allowance for loan
and lease losses described below.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS 130 does not require a specific format for the
financial statement in which comprehensive income is reported, but does require
that an amount representing total comprehensive income be reported in that
statement. Management has complied with SFAS 130, which is effective for
periods beginning after December 15, 1997.
NET INTEREST INCOME
Net interest income is the amount by which interest earned on interest-
earning assets exceeds the interest paid on interest-bearing liabilities.
Arizona Bank's net interest income is affected by changes in the amount and the
relative proportions (mix) of interest-earning assets and interest-bearing
liabilities, as well as by changes in yields earned on interest-earning assets
and interest rates paid on interest-bearing deposits and other borrowed funds.
The following table sets forth, for the periods and as of the dates
indicated, information regarding Arizona Bank's average balance sheet. Ratio,
yield and rate information are based on average daily balances during the six
months ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996
and 1995. Non-accrual loans are included in the average balances for loans
receivable, net, for the periods indicated.
-45-
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997
-------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES INTEREST RATE BALANCES INTEREST RATE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans receivable, net $556,736 $26,923 9.75% $498,613 $24,237 9.80%
Investment securities and
other interest-earning
assets(1) 126,060 4,001 6.40 126,697 3,863 6.15
-------- ------- -------- -------
Total interest-earning assets 682,796 30,924 9.13 625,310 28,100 9.06
Non-interest-earning assets 66,282 54,958
-------- --------
Total assets $749,078 $680,268
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $559,042 $11,719 4.23% $524,638 $11,586 4.45%
Other borrowings 10,247 519 10.20 10,370 518 10.07
FHLB advances and
repurchase agreements
and other borrowed
funds 21,731 655 6.08 13,330 391 5.92
-------- ------- -------- -------
Total interest-bearing
liabilities 591,030 12,893 4.40 548,338 12,495 4.60
Non-interest-bearing
liabilities 104,021 81,967
-------- --------
Total liabilities 695,051 630,305
Stockholders' equity 54,027 49,963
-------- --------
Total liabilities and
stockholders' equity $749,078 $680,268
======== ========
Net interest income;
interest rate spread $18,031 4.73% $15,605 4.46%
======= =======
Net interest yield on
interest-earning assets 5.33% 5.03%
Net interest margin
of average total assets 4.85% 4.63%
</TABLE>
- ------------------------
(1) Calculated on an annualized basis.
-46-
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCES INTEREST RATE BALANCES INTEREST RATE BALANCES INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans receivable, net $516,164 $50,433 9.77% $430,867 $42,739 9.92% $312,924 $33,016 10.55%
Investment securities and
other interest-earning
assets(1) 116,747 7,220 6.18 105,191 6,525 6.20 130,490 8,731 6.69
-------- ------- -------- ------- -------- -------
Total interest-earning assets 632,911 57,653 9.11 536,058 49,264 9.19 443,414 41,747 9.42
Non-interest-earning assets 58,914 44,168 39,097
-------- -------- --------
Total assets $691,825 $580,226 $482,511
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $527,872 $23,178 4.39% $417,192 $18,513 4.44% $348,743 $15,734 4.51%
Other borrowings 10,339 1,016 9.83 10,347 1,016 9.82 10,380 1,023 9.86
FHLB advances and
repurchase agreements and
other borrowed funds 17,040 1,100 6.45 39,273 2,328 5.93 38,392 2,235 5.82
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 555,251 25,294 4.56 466,813 21,857 4.68 397,515 18,992 4.78
Non-interest-bearing
liabilities 85,784 65,443 55,661
-------- -------- --------
Total liabilities 641,035 532,256 453,176
Stockholders' equity 50,790 47,970 29,335
-------- -------- --------
Total liabilities and
stockholders' equity $691,825 $580,226 $482,511
======== ======== ========
Net interest income;
interest rate spread $32,359 4.55% $27,407 4.51% $22,755 4.64%
======= ======= =======
Net interest yield on
interest-earning assets 5.11% 5.11% 5.13%
Net interest margin
of average total assets 4.68% 4.72% 4.72%
</TABLE>
- ------------------------
(1) Calculated on an annualized basis.
-47-
<PAGE>
The following table sets forth the changes in net interest income by volume
and rate and the total thereof for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 V. 1997 1997 V. 1996 1996 V. 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN CHANGE IN
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------ ------- ------- ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-earning assets:
Loans receivable, net $2,825 $(140) $2,685 $8,461 $(767) $7,694 $12,444 $(2,721) $9,723
Investment securities and
other Interest-earning
assets (19) 157 138 717 (22) 695 (1,693) (514) (2,207)
------ ----- ------ ------ ----- ------ ------- ------- ------
Total interest-earning
assets $2,806 $ 17 $2,823 $9,178 $(789) $8,389 $10,751 $(3,235) $7,516
====== ===== ====== ====== ===== ====== ======= ======= ======
Interest-bearing liabilities:
Savings deposits $ 760 $(627) $ 133 $4,912 $(246) $4,666 $ 3,088 $ (309) $2,779
Other borrowings (6) 6 0 (1) 0 (1) (3) (4) (7)
FHLB advances and
repurchase agreements 246 18 264 (1,318) 90 (1,228) 52 42 94
------ ----- ------ ------ ----- ------ ------- ------- ------
Total interest-bearing
liabilities $1,000 $(603) $ 397 $3,593 $(156) $3,437 $ 3,137 $ (271) $2,866
====== ===== ====== ====== ===== ====== ======= ======= ======
Change in net interest income $1,806 $ 620 $2,426 $5,585 $(633) $4,952 $ 7,614 $(2,964) $4,650
====== ===== ====== ====== ===== ====== ======= ======= ======
</TABLE>
Net interest income before provision for loan and lease losses was $18.0
million for the six months ended June 30, 1998, an increase of $2.4 million or
15% over the same period in 1997. This increase is attributable primarily to
the continued growth in the volume of Arizona Bank's interest-earning assets and
an increase in interest rates.
Net interest income before provision for loan and lease losses was $32.4
million for the year ended December 31, 1997, an increase of $5.0 million or 18%
over 1996. This increase is attributable primarily to the continued growth in
the volume of Arizona Bank's interest-earning assets, offset somewhat by
negative interest rate changes.
Net interest income before provision for loan and lease losses was $27.4
million for 1996, a $4.7 million or 20% increase over 1995. The increase was
principally due to growth in the volume of Arizona Bank's balance sheet and
favorable changes in the mix of interest-earning assets and interest-bearing
liabilities, offset by less favorable interest rate changes.
-48-
<PAGE>
Total Interest Income and Interest Expense. The following table sets forth
interest income and interest expense for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $26,923 $24,237 $50,433 $42,739 $33,016
Interest on investment securities:
U.S. Treasury securities 538 252 414 756 1,057
Federal agency obligations 2,367 1,675 3,620 2,530 4,339
Mortgage-backed securities 314 553 923 1,008 1,321
State and municipal obligations 244 747 1,145 1,136 678
Other 121 80 172 296 274
Interest on deposits in other
banks 0 0 0 0 375
Interest on federal funds sold 417 556 946 799 687
------- ------- ------- ------- -------
Total interest income $30,924 $28,100 $57,653 $49,264 $41,747
======= ======= ======= ======= =======
Interest Expense:
Interest on deposits $11,719 $11,586 $23,178 $18,513 $15,734
Interest on FHLB advances and
repurchase agreements
and other borrowed funds 666 401 1,100 2,328 2,235
Interest on Subordinated
Debentures 508 508 1,016 1,016 1,023
------- ------- ------- ------- -------
Total interest expense $12,893 $12,495 $25,294 $21,857 $18,992
======= ======= ======= ======= =======
Net interest income $18,031 $15,605 $32,359 $27,407 $22,755
======= ======= ======= ======= =======
Interest rate spread(1)(2) 4.73% 4.46% 4.55% 4.51% 4.64%
Net interest yield(1)(3) 5.33 5.03 5.11 5.11 5.13
Net interest margin(1)(4)(5) 4.85 4.63 4.68 4.72 4.72
</TABLE>
- ------------------------
(1) Based on average daily balances.
(2) Interest rate spread has been calculated by subtracting the average rate of
interest-bearing liabilities from the average rate of interest-earning
assets.
(3) Net interest yield has been calculated by dividing net interest income by
average interest-earning assets.
(4) Net interest margin has been calculated by dividing net interest income by
average total assets.
(5) Net interest margin on a tax equivalent basis was 4.88% and 4.73% for the
six months ended June 30, 1998 and 1997, respectively. Net interest margin
on a tax equivalent basis was 4.75%, 4.81% and 4.79% for the years ended
December 31, 1997, 1996 and 1995, respectively.
Total interest income for the six months ended June 30, 1998 increased to
$30.9 million from $28.1 million for the same period in 1997, an increase of
10%. The net increase was primarily due to an increase in interest earned on
loans receivable, net, of $2.7 million. Changes in volume were the dominant
cause of this increase, contributing 99% of the increase in total interest
income, based on a change in average balances of interest-earning assets from
$625.3 million as of June 30, 1997 to $682.8 million as of June 30, 1998. The
increase in volume was the result of continued internal growth in loans
receivable, net.
-49-
<PAGE>
Total interest income for the year ended December 31, 1997 increased to
$57.7 million from $49.3 million in 1996, an increase of 17%. The net increase
was due to a $7.7 million increase in interest earned on loans receivable, net,
as well as a $695,000 increase in investment securities and other interest-
earning assets. Changes in volume were the dominant cause of these increases,
contributing 109% of the increase in total interest income, based on a change in
average balances of interest-earning assets from $536.1 million in 1996 to
$632.9 million in 1997. The increases in volume were primarily the result of
Arizona Bank's continued expansion of its loans receivable, net. Changes in
interest rates had a minor negative impact on total interest income of 9%. The
average yield on loans receivable, net, decreased 15 basis points and the
average yield on investment securities and other interest-earning assets
decreased 2 basis points, contributing to an overall decrease of 8 basis points
in the average yield on total interest-earning assets. These changes reflect
the generally lower interest rates attainable by Arizona Bank during 1997 than
in 1996.
Total interest income was $49.3 million in 1996, a $7.6 million or 18%
increase from 1995. The increase resulted from an increase of $9.7 million in
interest earned on loans receivable, net, offset by a $2.2 million decrease in
investment securities and other interest-earning assets, from 1995 to 1996.
Changes in volume were the dominant cause of these increases, accounting for
143% of the increase in total interest income. Higher average balances of
interest-earning assets, $536.1 million in 1996 as compared to $443.4 million in
1995, were caused by strong growth in Arizona Bank's loans receivable, net.
However, changes in market interest rates slowed interest income growth
somewhat. The average yield of loans receivable, net, decreased by 63 basis
points and the average yield of investment securities and other interest-earning
assets decreased by 49 basis points. These lower yields, which together
represent a 23 basis point decrease in the average yield on total interest-
earning assets, were attributable to the falling market interest rates which
characterized most of 1996.
Total interest expense was $12.9 million for the six months ended June 30,
1998, as compared to $12.5 million for the same period in 1997, an increase of
$398,000 or 3%. The increase in interest expense was the result of volume
increases in average interest-bearing liabilities, from $548.3 million as of
June 30, 1997 to $591.0 million as of June 30, 1998. The average cost of
interest-bearing liabilities decreased from 4.60% as of June 30, 1997 to 4.40%
as of June 30, 1998. Continued increases in core deposits were the primary
reasons for the decrease in Arizona Bank's cost of funds.
Total interest expense was $25.3 million for the year ended December 31,
1997, as compared to $21.9 million for 1996, an increase of $3.4 million or 16%.
The increase in interest expense was the result of volume increases in average
interest-bearing liabilities, from $466.8 million in 1996 to $555.3 million in
1997. The average cost of interest-bearing liabilities decreased from 4.68% in
1996 to 4.56% in 1997. An increase in core deposits was the primary contributor
to the decrease in Arizona Bank's cost of funds.
Total interest expense was $21.9 million in 1996, an increase of $2.9
million or 15% from 1995. The increase in interest expense was the result of
volume increases in average interest-bearing liabilities, from $397.5 million in
1995 to $466.8 million in 1996. The average cost of interest-bearing
liabilities decreased from 4.78% in 1995 to 4.68% in 1996. Increases in core
deposits and the repayment of FHLB advances were the primary contributors to the
decrease in Arizona Bank's cost of funds.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is an amount charged to expense to
provide for estimated losses on existing loans and leases that may occur in the
future. In order to determine the amount of the provision, Arizona Bank
conducts a monthly review of the loan and lease portfolios. This evaluation
takes into consideration current economic market conditions, loan and lease
portfolio growth, monthly loan and lease losses and recoveries, changes in non-
performing loans and leases, the capability of specific borrowers to repay
specific loan or lease obligations, and current loan collateral values.
The provision for loan and lease losses was $2.4 million for the six months
ended June 30, 1998, compared to $4.0 million for the same period in 1997. The
decrease was attributable to (i) slower growth in loan balances, (ii) a decrease
in consumer loan net charge-offs and (iii) lower reserves in the allowance for
loan and lease losses due primarily to Arizona Bank's strategy of selling
mortgage loans. Additionally, in 1997, Arizona Bank began increasing the
allowance for loan and lease losses from 1.21% of total loans to 1.38%. This
increase attributed to a higher provision for 1997.
-50-
<PAGE>
The provision for loan and lease losses was $7.7 million for the year ended
December 31, 1997, compared to $5.7 million for the year ended December 31, 1996
and $4.5 million for the year ended December 31, 1995. The increases in 1997
were attributable to the continued growth in Arizona Bank's loan portfolio and
the decision to increase the allowance for loan and lease losses from 1.21% of
total loans to 1.38%, based on management's evaluation of the loan portfolio.
The increase in 1996 was due primarily to the growth in Arizona Bank's loan
portfolio during such time period and the resulting increase in net loan losses,
largely within the consumer loan portfolio. Arizona Bank's ratio of net charge-
offs to average loans outstanding was 1.12% as of December 31, 1997, as compared
to 1.05% at year-end 1996 and 0.98% at year-end 1995. Management believes that
Arizona Bank's current allowance for loan and lease losses is adequate, based
upon the current level of nonperforming assets and loss experience. Management
will continue to review Arizona Bank's loan and lease portfolios, including
consumer loan portfolio trends, to determine the extent, if any, to which
further provisions are necessary in the future.
NON-INTEREST INCOME
Non-interest income consists of service charges on deposit accounts, gains
on sales of securities, mortgage banking fee income, and other fee income
including commissions on annuity sales, income from the sale of official checks,
travelers checks, and customer personalized checks, safe deposit box income, and
other banking product charges not categorized as interest income.
The following table provides a summary of non-interest income, by category
of income, for the six months ended June 30, 1998 and 1997 and years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31,
------------------ ------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(in thousands)
Non-Interest Income:
Service fees on deposit accounts $1,175 $ 922 $2,075 $1,284 $1,225
Gains on sales of securities 198 16 789 239 395
Net trading account gain 103 -- 81 -- --
Mortgage banking fee income 186 85 157 203 383
Other fee income 876 749 1,378 923 902
------ ------ ------ ------ ------
Total $2,538 $1,772 $4,480 $2,649 $2,905
====== ====== ====== ====== ======
</TABLE>
Total non-interest income was $2.5 million for the six months ended
June 30, 1998 or 0.68% of average assets on an annualized basis, as compared to
$1.8 million or 0.53% of average assets on an annualized basis for the same
period in 1997. The increase in 1998 was attributable to (i) gains on sales of
securities in both the available-for-sale portfolio and trading portfolio, (ii)
an increase in service fees on deposits generated by higher service charge fees
as well as increases in the volume of such transactions, and (iii) higher
recoveries of loans previously written off by Arizona Bank, which are included
in other fee income.
Total non-interest income was $4.5 million for the year ended December 31,
1997 or 0.65% of average assets, as compared to $2.6 million or 0.46% of average
assets for the year ended December 31, 1996. The increase in 1997 was
attributable to gains on sales of securities in both the available-for-sale
portfolio and trading portfolio, in addition to an increase in service fees on
deposits generated by higher service charge fees as well as increases in the
volume of such transactions.
Total non-interest income for the year ended December 31, 1996 was $2.6
million or 0.46% of average assets. This compares to $2.9 million or 0.60% of
average assets for the same period in 1995. The decrease in 1996 was
attributable to the continued decrease in mortgage banking fee income resulting
from Arizona Bank's strategic decision to sell fewer loans in the secondary
market, relatively smaller growth in other fee income due to Arizona Bank's
decision
-51-
<PAGE>
to stop selling annuities, and relatively smaller gains recognized on
the sale of investment securities in the available-for-sale portfolio.
NON-INTEREST EXPENSE
The following table provides a summary of non-interest expense, by
category of expense, for the six months ended June 30, 1998 and 1997 and the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- -----------------------------
1998 1997 1997 1996 1995
------ -------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-Interest Expense:
Salaries and employee benefits $ 5,993 $5,084 $10,123 $ 7,969 $ 7,148
Occupancy expense, net 1,061 744 1,908 1,352 1,145
Depreciation 1,061 864 1,641 1,078 961
Other real estate owned loss provision and
expense 49 74 169 27 50
Repossessions 352 272 687 448 308
FDIC insurance 38 32 69 2 381
Advertising 435 397 709 574 795
Supplies 367 271 542 393 351
Legal 209 158 343 325 317
Postage 274 212 440 354 294
Telephone 267 197 451 262 189
Consulting 129 131 351 172 209
Business promotion 55 83 199 65 52
Charitable contributions 22 95 128 206 173
Check printing 187 187 378 172 148
Other 1,250 801 1,922 1,870 1,465
------- ------ ------- ------- -------
Total $11,749 $9,602 $20,060 $15,269 $13,986
======= ====== ======= ======= =======
</TABLE>
Total non-interest expense for the six months ended June 30, 1998 was $11.7
million or 3.16% of average assets on an annualized basis, compared to $9.6
million or 2.85% of average assets on an annualized basis for the six months
ended June 30, 1997.
Salaries and employee benefits represent the largest component of
non-interest expense. Salaries and employee benefits for the six months ended
June 30, 1998 increased to $6.0 million compared to $5.1 million for the six
months ended June 30, 1997. The increase was primarily due to increased staffing
needs to support Arizona Bank's continued growth throughout the State of
Arizona. The dollar volume of salaries and benefits continued to grow at a
faster rate than average assets for the six months ended June 30, 1998, as
compared to the same period in 1997, resulting in an increase in the ratio of
salaries and benefits to total average assets. This was primarily due to
staffing new positions for the new branch locations throughout the state.
Salaries and benefits as a percentage of average assets were 1.61% on an
annualized basis for the six months ended June 30, 1998, as compared to 1.51% on
an annualized basis for the six months ended June 30, 1997.
Occupancy expense, net, and depreciation for the six months ended June 30,
1998, were $2.1 million in the aggregate or 0.57% of average assets on an
annualized basis, compared to $1.6 million or 0.48% of average assets on an
annualized basis for the six months ended June 30, 1997. The increase in the
aggregate expense is attributable to additional equipment purchases and new
branch locations.
Other real estate owned loss provision and expense for the six months ended
June 30, 1998 was $49,000, as compared to $74,000 for the six months ended
June 30, 1997. This decrease was due to management's tightening of its lending
policies which led to minimal expenses attributable to the ORE (foreclosed real
estate) portfolio.
-52-
<PAGE>
Repossession expense for the six months ended June 30, 1998 was $352,000,
as compared to $272,000 for the same period in 1997. The increase in
repossession expense was the result of the continued growth in the consumer loan
portfolio and the resulting increases in the number of repossessed vehicles, as
well as higher repossession costs, including higher costs associated with the
auction of the repossessed vehicles by an independent third party. Net
repossessions for automobile loans for the six months ended June 30, 1998 were
411, or an average of 69 per month, a ratio of 2.5 repossessions per 1,000
outstanding consumer loans and an average loss per charged-off loan of $5,428.
Net repossessions for automobile loans for the six months ended June 30,
1997 were 415, or an average of 69 per month, a ratio of 2.6 repossessions per
1,000 outstanding consumer loans and an average loss per charged-off loan at
$5,488.
Other non-interest expenses of Arizona Bank include, among others, the cost
of FDIC insurance and advertising, supplies, legal, postage, data processing,
check printing and other expenses. These expenses have generally increased
commensurate with the overall growth of the Bank.
Total non-interest expense for the year ended December 31, 1997 was $20.1
million or 2.90% of average assets, compared to $15.3 million or 2.65% of
average assets for the year ended December 31, 1996 and $14.0 million or 2.92%
of average assets for the year ended December 31, 1995.
Salaries and employee benefits for the year ended December 31, 1997
increased to $10.1 million, compared to $8.0 million for the year ended
December 31, 1996 and $7.1 million for the year ended December 31, 1995. The
increases in 1997 and 1996 were the result of the growth in the number of
employees of Arizona Bank due to the continued expansion of Arizona Bank,
primarily from the opening of new supermarket banking facilities. The dollar
volume of salaries and benefits grew at a faster rate than average assets in the
prior year, resulting in an increase in the ratio of salaries and benefits to
total average assets. This was primarily due to new hires necessary to staff
the expanding network of branches throughout the state. Salaries and benefits
as a percentage of average assets were 1.46% for the year ended December 31,
1997, 1.37% for the year ended December 31, 1996, and 1.49% for the year ended
December 31, 1995.
Occupancy expense, net, and depreciation for the year ended December 31,
1997, were $3.5 million in the aggregate or 0.51% of average assets, compared to
$2.4 million or 0.42% of average assets for the year ended December 31, 1996 and
$2.1 million or 0.44% of average assets for the year ended December 31, 1995.
The increases in the aggregate expenses in both years were attributable to the
opening of new banking facilities during those periods.
Other real estate owned loss provision and expense for the year ended
December 31, 1997 was $169,000, as compared to $27,000 for the year ended
December 31, 1996. This increase was attributable to the growth in loan
balances and a somewhat weaker local economy in 1997. Other real estate owned
loss provision and expense was $50,000 for the year ended December 31, 1995.
The decrease from 1995 to 1996 was due to the continued reduction of Arizona
Bank's portfolio of ORE during 1995 and 1996 due to the strengthening economy.
Repossession expense for the year ended December 31, 1997 was $687,000, as
compared to $448,000 for the year ended December 31, 1996, and $308,000 for the
year ended December 31, 1995. The increases in repossession expense were the
result of the continued growth in the consumer loan portfolio and the resulting
increases in the number of repossessed vehicles, as well as higher repossession
costs. Net repossessions for automobile loans for the year ended December 31,
1997 were 899, or an average of 75 per month, a ratio of 2.7 repossessions per
1,000 outstanding consumer loans and an average loss per charged-off loan of
$5,538. For the year ended December 31, 1996, net automobile loan repossessions
were 870, or an average of 73 per month, a ratio of 3.4 repossessions per 1,000
outstanding consumer loans and an average loss per charged-off loan of $4,925.
For 1995, net repossessions were 816, or an average of 68 per month, a ratio of
3.8 repossessions per 1,000 outstanding consumer loans and an average loss per
charged-off loan of $2,961.
Among other non-interest expenses, FDIC insurance expense for the year
ended December 31, 1997 was $69,000, compared to $2,000 in 1996 and $381,000 in
1995. The increase in 1997 was the result of the Deposit Insurance Act of 1996,
which requires the payment of a premium to the FDIC based upon the new
"Financing Corporation Quarterly Payment Computation". The decrease in 1996 is
attributable to premium reductions approved by the FDIC in November 1995. Under
the new rate structure, the minimum rate of $2,000 was assessed to the highest
-53-
<PAGE>
rated institutions, including Arizona Bank. Advertising expense was $709,000
for the year ended December 31, 1997, compared to $574,000 for the year ended
December 31, 1996 and $795,000 for the year ended December 31, 1995. The
increase in 1997 was due to additional advertising expenses necessary to promote
new supermarket branches in their locales. The 1996 decrease in advertising
expense was due to the implementation of in-house marketing programs. Supplies
expense, legal fees, postage, telephone, consulting, business promotion, check
printing and charitable contributions expense, as well as other non-interest
expenses, have increased consistently with Arizona Bank's growth and expansion
since 1995.
PROVISION FOR INCOME TAXES
Arizona Bank's taxable income for the six months ended June 30, 1998 was
$6.5 million, as compared to $3.7 million for the same period in 1997. Based
upon an effective tax rate of 38%, Arizona Bank accrued $2.5 million for income
taxes for the first six months of 1998. For the first six months of 1997,
Arizona Bank accrued $1.3 million for income taxes based on an effective tax
rate of 36%. The increase in the effective tax rate in 1998 was due to a
decrease in Arizona Bank's investments in tax-exempt securities.
For the year ended December 31, 1997, Arizona Bank's taxable income was
$9.1 million, the same as in 1996. Based upon an effective tax rate of 36%,
Arizona Bank accrued $3.3 million for income taxes for each of those years. For
the year ended December 31, 1995, Arizona Bank generated $7.2 million in taxable
income and, based upon an effective tax rate of 33%, paid $2.4 million in taxes
for 1995. Arizona Bank's effective tax rate increased in 1996 because there was
no release of the deferred tax asset valuation allowance as there had been in
1995.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of Arizona Bank are
monetary in nature. As a result, interest rates have a more significant impact
on Arizona Bank's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Arizona Bank discloses the
estimated fair market value of its financial instruments in accordance with
Financial Accounting Standard No. 107.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity defines the ability of Arizona Bank to generate funds to support
asset growth, satisfy other disbursement needs, meet deposit withdrawals and
other funding reductions, maintain reserve requirements, and otherwise operate
on an ongoing basis. The immediate liquidity needs of Arizona Bank have been
met primarily by federal funds sold, short-term investments, deposits in other
banks, and the generally predictable cash flow of Arizona Bank's assets, in
particular its consumer loan portfolio (primarily from prepayments).
Intermediate term liquidity is provided for by an investment portfolio
consisting mostly of U.S. Treasury securities and obligations of U.S. government
agencies. Strategic injections of capital in recent years have been made
through the issuance of $17.25 million of Arizona Bank Series F Preferred Stock,
$11.5 million of Arizona Bank Series E Preferred Stock and $10.0 million of
Subordinated Debentures. Arizona Bank also maintains a credit facility with the
Federal Home Loan Bank ("FHLB") under which Arizona Bank is eligible for short
or longer-term advances secured by real estate loans or qualified securities
investments. These borrowings are designed primarily to complement Arizona
Bank's asset liability management practices with respect to Arizona Bank's home
mortgage programs, including its commitment to CRA related lending.
Arizona Bank actively monitors compliance with regulatory capital
requirements, focusing primarily on risk-based capital and core leverage capital
guidelines. The elements of capital adequacy standards include strict
definitions of core capital and total assets which consider risk and include
off-balance sheet items such as commitments to extend credit. Under the risk-
based capital method of capital measurement, the ratio computed is dependent on
the amount and composition of assets recorded on the balance sheet and the
amount and composition of off-balance sheet items, in addition to the level of
capital. Historically, Arizona Bank has increased its core capital through the
retention of earnings and through the issuance of noncumulative perpetual
preferred stock and its Tier 2 capital through the issuance of term
-54-
<PAGE>
subordinated debt and increases in the allowance for loan and lease losses (up
to the maximum allowable amount). It has not been the practice of Arizona Bank
to issue additional common stock or to pay dividends on common stock.
CHANGES IN FINANCIAL CONDITION
LOAN PORTFOLIO
The principal asset of Arizona Bank is its loan portfolio. The following
table summarizes the loan portfolio of Arizona Bank by loan category, based on
Arizona Bank's internal classifications, as of June 30, 1998 and December 31,
1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Consumer $320,406 $312,680 $271,196 $230,402 $159,386 $111,864
Home 52,550 74,635 80,415 65,710 35,042 27,114
Commercial 71,078 57,650 37,290 29,619 24,006 25,564
Real estate 112,552 106,031 82,619 44,199 36,816 34,774
-------- -------- -------- -------- -------- --------
Total gross loans 556,586 550,996 471,520 369,930 255,250 199,316
Unamortized net loan origination
and commitment fees and costs 6,588 6,977 7,379 7,635 5,443 3,270
Allowance for loan and lease
losses (7,814) (7,715) (5,818) (4,627) (3,191) (2,701)
-------- -------- -------- -------- -------- --------
Total loans, net $555,360 $550,258 $473,081 $372,938 $257,502 $199,885
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents selected loan categories as of June 30, 1998
and December 31, 1997 by repricing either through variable rate loan terms,
maturity, amortization, or expended prepayments. Data are derived from gap
analysis calculations. In calculating the amounts set forth in the table,
amortization flows are based on contractual characteristics of Arizona Bank's
loans and other assets, as well as anticipated prepayment characteristics.
Prepayment rates for mortgages and mortgage-related investments reflect
expectations based on national assumptions, and prepayments on consumer loans
reflect Arizona Bank's historical experience. Decisions on repricing are also
dependent on asset liability management, which is monitored by Arizona Bank.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------------------- -------------------------------------------
REPRICES REPRICES
REPRICES BETWEEN REPRICES REPRICES BETWEEN REPRICES
WITHIN 1 AND 5 AFTER WITHIN 1 AND 5 AFTER
1 YEAR YEARS 5 YEARS TOTAL 1 YEAR YEARS 5 YEARS TOTAL
-------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Consumer $146,996 $167,061 $ 6,349 $320,406 $147,373 $157,918 $ 7,389 $312,680
Home mortgage 18,169 32,608 1,773 52,550 17,240 43,611 13,784 74,635
Commercial and
real estate 92,670 70,643 20,317 183,630 76,143 31,250 56,288 163,681
-------- -------- ------- -------- -------- -------- ------- --------
Total $257,835 $270,312 $28,439 $556,586 $240,756 $232,779 $77,461 $550,996
======== ======== ======= ======== ======== ======== ======= ========
Fixed rate loans $167,391 $257,476 $28,439 $453,306 $153,487 $219,610 $70,136 $443,233
Adjustable rate
loans 14,904 12,836 -- 27,740 19,576 13,169 7,325 40,070
Variable rate
loans 75,540 -- -- 75,540 67,693 -- -- 67,693
-------- -------- ------- -------- -------- -------- ------- --------
Total $257,835 $270,312 $28,439 $556,586 $240,756 $232,779 $77,461 $550,996
======== ======== ======= ======== ======== ======== ======= ========
</TABLE>
Policies and Procedures Relating to the Accrual of Interest Income.
Interest income is accrued as earned on a simple interest basis. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions which may affect the borrower's ability to
repay and collection efforts, that the
-55-
<PAGE>
borrower's financial condition is such that collection of interest is doubtful,
or when the terms of a loan have been renegotiated to less than market interest
rates due to a serious weakening of the borrower's financial condition. Loans
may be placed in non-accrual status only if, in management's opinion, the loan
is well secured and in the process of collection. Otherwise, any expected loss
related to such loans is immediately charged to the allowance for loan and lease
losses. Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $373,633 as of June 30, 1998. At the time the accrual
of interest was discontinued on the loans, $1,043 in interest had accrued. There
were no commitments to lend additional funds to borrowers whose loans were
classified as non-accrual as of June 30, 1998.
Nonperforming Assets. Historically, Arizona Bank has employed an
aggressive policy of charging off, or placing into non-accrual status, loans
which are more than 90 days past due. Nonperforming assets consist of certain
nonperforming loans and real estate and other loan collateral, including
vehicles, that have been repossessed. Loans are considered to be nonperforming
if they are on a non-accrual basis or are contractually past due 90 days or
more. Loans secured by real property, where the collateral has been foreclosed
upon, are classified on Arizona Bank's financial statements as ORE. Loans
secured by vehicles or other personal property, where the collateral has been
repossessed, are classified on Arizona Bank's financial statements as "other
assets." All such secured loans are valued on the balance sheet at the lesser of
the fair value of the underlying collateral or the outstanding amount of the
loan. The amount by which the outstanding amount of the loan exceeds the fair
value of the property is charged to the allowance for loan and lease losses at
the time of foreclosure or repossession. The following table presents the
principal amounts of nonperforming assets as of June 30, 1998 and December 31,
1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------------------
1998 1997 1996 1995 1994 1993
------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Delinquent and non-accruing
loans $ 374 $ 935 $ 261 $ 599 $ 124 $ 220
Loans 90 days past due, still
accruing 298 130 0 0 0 0
------ ------ ----- ------ ------ ------
Total nonperforming loans 672 1,065 261 599 124 220
Other real estate owned 323 232 0 173 784 2,224
Other nonperforming assets 631 656 675 562 232 0
------ ------ ----- ------ ------ ------
Total nonperforming assets $1,626 $1,953 $ 936 $1,334 $1,140 $2,444
====== ====== ===== ====== ====== ======
Nonperforming loans/period-
end total loans 0.12% 0.19% 0.05% 0.16% 0.04% 0.11%
Nonperforming assets/period-
end total assets 0.21% 0.27% 0.15% 0.25% 0.28% 0.89%
</TABLE>
-56-
<PAGE>
Summary of Loan and Lease Loss Experience. The following table summarizes
the allowance for loan and lease losses for Arizona Bank for the periods shown:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------------
1998 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period $7,715 $5,818 $4,627 $3,191 $2,701 $2,000
Provision 2,352 7,678 5,711 4,508 2,091 1,496
Charge offs:
Consumer 3,132 6,929 5,573 3,912 1,576 1,080
Home 15 60 0 0 13 0
Commercial 75 259 193 149 395 312
Real estate 0 0 0 11 224 9
------ ------ ------ ------ ------ ------
Total charge offs $3,222 $7,248 $5,766 $4,072 $2,208 $1,401
====== ====== ====== ====== ====== ======
Recoveries:
Consumer $ 939 $1,372 $1,135 $ 956 $ 522 $ 432
Home 0 1 0 0 0 0
Commercial 30 94 111 44 85 150
Real estate 0 0 0 0 0 24
------ ------ ------ ------ ------ ------
Total recoveries $ 969 $1,467 $1,246 $1,000 $ 607 $ 606
====== ====== ====== ====== ====== ======
Net charge offs:
Consumer $2,193 $5,557 $4,438 $2,956 $1,054 $ 648
Home 15 59 0 0 13 0
Commercial 45 165 82 105 310 162
Real estate 0 0 0 11 224 (15)
------ ------ ------ ------ ------ ------
Total net charge offs $2,253 $5,781 $4,520 $3,072 $1,601 $ 795
====== ====== ====== ====== ====== ======
Balance at end of period $7,814 $7,715 $5,818 $4,627 $3,191 $2,701
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net charge offs/average loans
outstanding (1) 0.81% 1.12% 1.05% 0.98% 0.73% 0.43%
Allowance for loan and lease
losses/period-end total loans 1.38 1.38 1.21 1.23 1.22 1.33
Nonperforming loans/period-
end total loans 0.12 0.19 0.05 0.16 0.04 0.11
Allowance for loan and lease
losses/period-end
nonperforming loans 11.63x 7.24x 22.29x 7.72x 25.73x 12.26x
</TABLE>
- ------------------------
(1) Calculations are based on average daily balances.
The allowance for loan and lease losses is established through a provision
for loan and lease losses charged to expense. Loans are charged against the
allowance for loan and lease losses when management believes that the collection
of loan principal is unlikely. The allowance for loan and lease losses is
maintained at an amount that management believes will be adequate to absorb
possible losses on existing loans and leases that may become uncollectible,
based upon evaluations of the collectibility of loans and prior loan and lease
loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, management's intention
with respect to identified problem loans, estimated or appraised collateral
values, overall portfolio quality, loan delinquency levels or trends, review of
specific problem loans, and current local or regional economic conditions which
may affect the borrower's ability to repay.
-57-
<PAGE>
On January 1, 1995, Arizona Bank adopted Financial Accounting Standard
No. 114, as amended by Standard No. 118 (collectively, "FAS 114"). FAS 114, as
amended, requires that impaired loans be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate or measured
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Residential mortgage loans and consumer loans are
excluded from impaired loan disclosures unless these loans are restructured.
The adoption of FAS 114 did not result in additional provisions for credit
losses primarily because the majority of impaired loan valuations continue to be
based on the fair value of collateral.
INVESTMENT PORTFOLIO
Arizona Bank maintains a portfolio of investments for immediate liquidity
purposes, as an intermediate term source of liquidity, and as a strategic
complement to its lending activities. Federal funds, U.S. Treasury securities,
U.S. government agency obligations, mortgage-backed securities and municipal
bonds make up most of Arizona Bank's investments. Arizona Bank generally avoids
investing in derivative products or other investments whose repricing and/or
maturity characteristics are strongly influenced by changes in interest rate
relationships or prepayments.
Financial Accounting Standard No. 115 ("FAS 115") requires that investments
in debt and equity securities be classified as either: (i) held-to-maturity
(debt securities that Arizona Bank has the ability and positive intent to hold
to maturity), (ii) trading (debt and equity securities that are bought and held
principally for the purpose of selling in the near term to generate profits on
short-term differences in price), or (iii) available-for-sale (debt and equity
securities not classified as either held-to-maturity or trading). Arizona Bank's
available-for-sale portfolio contains securities purchased to provide Arizona
Bank with needed liquidity and to manage interest rate risk, changes in
availability of and yield on alternative investments, and changes in funding
sources and terms. Arizona Bank's intent in purchasing securities for the
trading portfolio is to make gains on short-term price movements. Arizona Bank
did not maintain a trading portfolio until the fourth quarter of 1997.
In 1995 Arizona Bank reviewed and repositioned its investment portfolio.
The strategy was designed to obtain higher performance should interest rates
remain static or decline. This decision was made in conjunction with Arizona
Bank's asset liability management strategy. Arizona Bank's strategy in 1996 was
to decrease its investment portfolio by taking advantage of significant loan
demand and thus replace investment securities yields with higher loan yields.
This was achieved through sales of investment securities and the exercise of
imbedded options. As a result, the duration of the investment portfolio was
extended to 4.7 years as of December 31, 1996 from 3.3 years as of December 31,
1995. The weighted average yield decreased slightly to 7.12% as of December 31,
1996 from 7.14% as of December 31, 1995. In keeping with its pro-active
management role, in 1997 Arizona Bank's asset liability management strategy was
to reclassify its held-to-maturity portfolio as available-for-sale securities.
The amortized cost and fair value of the securities transferred were $54.8
million and $54.9 million, respectively. The unrealized holding gain of $87,000
was recognized as a separate component of stockholder's equity. The securities
in the portfolio were recorded at fair value. The reclassification provided two
distinct advantages: (i) it provided liquidity to fund loans; and (ii) it
reduced the duration of the investment portfolio from 5.8 years to 5.2 years
while maintaining the same book yield. In addition to the repositioning,
Arizona Bank established a trading portfolio to complement its investment
strategy. As of June 30, 1998, the investment portfolio had a duration of 7.0
years.
Arizona Bank had no investment securities classified as trading as of
June 30, 1998.
-58-
<PAGE>
The following table provides a summary of investment securities classified
as available-for-sale as of June 30, 1998, and December 31, 1997, including
unrealized gains and losses:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
-------------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
------------ ---------- -------- ------------ ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities of
U.S. government
corporations and agencies $ 92,133,195 $ 76,946 $282,417 $ 91,927,724 $56,968,128 $210,527 $25,500 $57,153,155
Mortgage-backed securities
of GNMA and other U.S.
government agencies 24,112,239 63,164 43,573 24,131,830 12,905,877 13,743 26,436 12,893,184
Obligations of local
governments 16,454,065 237,396 17,828 16,673,633 6,914,023 78,487 1,261 6,991,249
------------ -------- -------- ------------ ----------- -------- ------- -----------
Total debt securities 132,699,499 377,506 343,818 132,733,187 76,788,028 302,757 53,197 77,037,588
Other securities 4,541,800 0 0 4,541,800 4,425,700 0 0 4,425,700
------------ -------- -------- ------------ ----------- -------- ------- -----------
Total $137,241,299 $377,506 $343,818 $137,274,987 $81,213,728 $302,757 $53,197 $81,463,288
============ ======== ======== ============ =========== ======== ======= ===========
</TABLE>
The following table provides a summary of investment securities classified
as trading as of December 31, 1997, including unrealized gains and losses:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities of U.S.
government corporations and
agencies $7,495,718 $78,042 $0 $7,573,760
---------- ------- -- ----------
Total $7,495,718 $78,042 $0 $7,573,760
========== ======= == ==========
</TABLE>
The following table provides a summary of investment securities classified
as available-for-sale as of December 31, 1996, including unrealized gains and
losses:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities of U.S.
government corporations and
agencies $25,360,865 $ 8,041 $480,469 $24,888,437
Mortgage-backed securities of
GNMA and other U.S.
government agencies 22,705,192 107,173 327,371 22,484,994
Obligations of local governments 24,606,659 589,817 71,139 25,125,337
----------- -------- -------- -----------
Total debt securities 72,672,716 705,031 878,979 72,498,768
Other securities 2,322,300 0 0 2,322,300
----------- -------- -------- -----------
Total $74,995,016 $705,031 $878,979 $74,821,068
=========== ======== ======== ===========
</TABLE>
-59-
<PAGE>
The following table provides a summary of investment securities classified
as available-for-sale as of December 31, 1995, including unrealized gains and
losses:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- -------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities of U.S.
government corporations and
agencies $ 53,398,493 $ 510,532 $ 72,722 $ 53,836,303
Mortgage-backed securities of
GNMA and other U.S. government
agencies 27,861,282 307,175 209,596 27,958,861
Obligations of local governments 16,688,923 708,950 23,643 17,374,230
------------ ---------- -------- ------------
Total debt securities 97,948,698 1,526,657 305,961 99,169,394
Other securities 3,642,019 0 0 3,642,019
------------ ---------- -------- ------------
Total $101,590,717 $1,526,657 $305,961 $102,811,413
============ ========== ======== ============
</TABLE>
-60-
<PAGE>
The following schedule reflects the amortized cost, market value and
contractual maturity distribution of Arizona Bank's available-for-sale
investment portfolio and the average yield of such securities as of June 30,
1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
----------------------------------------- ------------------------------------------
AMORTIZED MARKET AVERAGE AMORTIZED MARKET AVERAGE
COST VALUE YIELD COST VALUE YIELD
------------ ------------ ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities:
Due within 1 year $ 0 $ 0 -- $ 0 $ 0 --
Due after 1 through 5 years 998,316 1,003,750 6.00% 997,709 1,003,440 6.85%
Due after 5 through 10 years 0 0 -- 0 0 --
Due after 10 years 2,145,435 2,133,760 5.62 0 0 --
------------ ------------ ----------- -----------
Total $ 3,143,751 $ 3,137,510 5.74 $ 997,709 $ 1,003,440 6.85
============ ============ =========== ===========
Obligations of U.S.
government agencies:
Due within 1 year $ 0 $ 0 -- $ 0 $ 0 --
Due after 1 through 5 years 2,992,688 2,989,520 5.95% 10,000,000 10,009,400 7.00%
Due after 5 through 10 years 52,960,167 52,903,190 6.68 45,970,419 46,140,315 7.07
Due after 10 years 33,036,589 32,897,504 7.02 0 0 --
------------ ------------ ----------- -----------
Total $ 88,989,444 $ 88,790,214 6.78 $55,970,419 $56,149,715 7.06
============ ============ =========== ===========
Mortgage-backed securities:
Due within 1 year $ 2,040,612 $ 2,037,480 6.08% $ 2,172,195 $ 2,175,693 5.71%
Due after 1 through 5 years 4,386,117 4,396,881 5.76 7,481,027 7,461,750 5.88
Due after 5 through 10 years 2,792,864 2,804,375 6.32 3,252,655 3,255,741 6.58
Due after 10 years 14,892,646 14,893,094 6.62 0 0 --
------------ ------------ ----------- -----------
Total $ 24,112,239 $ 24,131,830 6.38 $12,905,877 $12,893,184 6.03
============ ============ =========== ===========
Obligations of states and
political subdivisions:(1)
Due within 1 year $ 110,149 $ 110,353 8.98% $ 45,030 $ 45,303 7.97%
Due after 1 through 5 years 372,007 373,427 7.18 340,264 340,604 7.33
Due after 5 through 10 years 5,712,970 5,747,476 7.39 3,085,940 3,094,969 7.36
Due after 10 years 10,258,939 10,442,377 7.82 3,442,789 3,510,373 7.89
------------ ------------ ----------- -----------
Total $ 16,454,065 $ 16,673,633 7.66 $ 6,914,023 $ 6,991,249 7.63
============ ============ =========== ===========
Totals:
Due within 1 year $ 2,150,761 $ 2,147,833 6.06% $ 2,217,225 $ 2,220,996 5.76%
Due after 1 through 5 years 8,749,128 8,763,578 5.80 18,819,000 18,815,194 6.56
Due after 5 through 10 years 61,466,001 61,455,041 6.47 52,309,014 52,491,025 7.05
Due after 10 years 60,333,609 60,366,735 6.49 3,442,789 3,510,373 7.89
------------ ------------ ----------- -----------
Total $132,699,499(2) $132,733,187(2) 6.43 $76,788,028(3) $77,037,588(3) 6.91
============ ============ =========== ===========
</TABLE>
- ------------------------
(1) Municipal bond yields at June 30, 1998 and December 31, 1997 have been
computed on a tax-adjusted basis assuming effective tax rates of 38% and
36%, respectively.
(2) Does not include $4.5 million of FHLB stock, $1.2 million of federal funds
sold and $37,500 of Arizona Multibank securities.
(3) Does not include $4.4 million of FHLB stock, $10.0 million of federal funds
sold and $37,500 of Arizona Multibank securities.
-61-
<PAGE>
The following schedule reflects the amortized cost, market value and
contractual maturity distribution of Arizona Bank's trading investment portfolio
and the average yield of such securities as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
AMORTIZED COST MARKET VALUE AVERAGE YIELD
-------------- ------------ -------------
U.S. government securities:
<S> <C> <C> <C>
Due within 1 year $ 0 $ 0 --
Due after 1 through 5 years 4,980,668 5,005,010 5.83%
Due after 5 through 10 years 0 0 --
Due after 10 year 2,515,050 2,568,750 6.08
---------- ----------
Total $7,495,718 $7,573,760 5.91
========== ==========
</TABLE>
DEPOSITS
Arizona Bank's primary liability is its customer deposits. Arizona Bank
emphasizes developing relationships with individuals and business customers in
order to increase its core deposit base. Arizona Bank has numerous deposit
products, including checking accounts, several types of money market accounts,
NOW (interest-bearing checking) accounts, savings accounts, and certificates of
deposit, including individual retirement accounts, designed to meet the
individual needs of its customers. The following table sets forth the
distribution of Arizona Bank's deposits by type as of June 30, 1998 and
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand (non-interest-bearing checking) $101,876 $ 93,305 $ 72,511 $ 60,322
NOW (interest-bearing checking) 118,637 116,440 80,209 69,843
Savings and money market 198,998 179,112 138,291 95,957
Time:
Certificates of deposit under $100,000 206,826 210,616 228,012 198,406
Certificates of deposit over $100,000 27,867 30,889 23,086 17,928
-------- -------- -------- --------
Total $654,204 $630,362 $542,109 $442,456
======== ======== ======== ========
</TABLE>
One of the primary components of sound growth and profitability is core
deposit accumulation and retention. Core deposits consist of all deposits except
funds from public entities and certificates of deposit in excess of $100,000. As
of June 30, 1998, Arizona Bank's core deposits were $623.7 million and total
deposits were $654.2 million. Core deposits represented 95.3% of total deposits
as of June 30, 1998. As of December 31, 1997, total deposits were $630.4
million. Core deposits represented 94.7% of total deposits as of December 31,
1997, as compared to 95.7% as of December 31, 1996 and 95.9% as of December 31,
1995. Certificates of deposit in excess of $100,000 are excluded by definition
from core deposits. Because Arizona Bank believes that such certificates of
deposit are less likely to be renewed at maturity than other deposits, Arizona
Bank does not encourage such certificates of deposit. Certificates of deposit
in excess of $100,000, as a percentage of total deposits, were 4.3% as of
June 30, 1998, 4.9% as of December 31, 1997, 4.3% as of December 31, 1996 and
4.0% as of December 31, 1995.
-62-
<PAGE>
The following table shows the remaining maturities of total certificates of
deposit and certificates of deposit of $100,000 or more as of June 30, 1998, and
as of December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------------
CD'S IN EXCESS CD'S IN EXCESS
TOTAL CD'S OF $100,000 TOTAL CD'S OF $100,000
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Up to 3 months $ 49,636 $ 6,955 $ 37,168 $ 8,619
3 to 6 months 62,647 7,736 36,183 3,035
6 to 12 months 64,616 6,867 85,269 10,566
Over 12 months 57,794 6,309 82,885 8,669
-------- ------- -------- -------
Total $234,693 $27,867 $241,505 $30,889
======== ======= ======== =======
</TABLE>
-63-
<PAGE>
The average balance of and average rates paid on deposits are presented
below for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997
---------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- -------- ------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand (non-interest-
bearing checking) $ 98,389 -- $ 78,022 --
NOW (interest-bearing
checking) 126,518 2.08% 97,800 2.02%
Savings and money
market 194,968 4.06 167,220 4.03
Time 237,566 5.51 259,618 5.65
-------- --------
Total $657,441 3.59 $602,660 3.88
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
BALANCE AVERAGE BALANCE AVERAGE BALANCE AVERAGE
RATE RATE RATE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand (non-interest-
bearing checking) $ 81,797 -- $ 62,433 -- $ 53,609 --
NOW (interest-bearing
checking) 103,568 2.02% 75,827 1.98% 61,879 2.20%
Savings and money
market 172,322 4.03 109,910 3.58 84,827 3.16
Time 251,982 5.61 231,455 5.65 202,036 5.78
-------- -------- --------
Total $609,669 3.80 $479,625 3.86 $402,351 4.51
======== ======== ========
</TABLE>
SHORT-TERM BORROWINGS
Arizona Bank also employs short-term borrowing for liquidity purposes. The
following table reflects the contractual maturity distribution of Arizona Bank's
short-term borrowings and the weighted average interest rate thereof as of June
30, 1998 and December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------ ------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------- -------------------
TOTAL TOTAL TOTAL TOTAL
FHLB FHLB FHLB FHLB
ADVANCES/ WEIGHTED ADVANCES/ WEIGHTED ADVANCES/ WEIGHTED ADVANCES/ WEIGHTED
REPUR. AVERAGE REPUR. AVERAGE REPUR. AVERAGE REPUR. AVERAGE
AGRMTS. RATE AGRMTS. RATE AGRMTS. RATE AGRMTS. RATE
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Due within 1 year $20,000 5.80% $10,600 6.00% $ 3,000 5.27% $13,094 5.96%
Due after 1 through 5 years 15,000 6.00 15,000 6.00 18,600 5.95 20,000 6.11
Due after 5 years 0 -- 0 -- 0 -- 0 --
--------- --------- ---------
Total $35,000 5.89 $25,600 6.00 $21,600 5.85 $33,094 6.05
========= ========= =========
</TABLE>
During the first six months of 1998, Arizona Bank's maximum FHLB
borrowings were $35.0 million, of which $20.0 million were short-term
borrowings. During 1997, Arizona Bank's maximum FHLB borrowings were $32.3
million, of which $17.3 million were short-term borrowings. During 1996, the
maximum FHLB borrowings were $51.3 million, of which $32.3 million were short-
term borrowings. During 1995, the maximum FHLB borrowings were $54.4 million,
of which $34.4 million were short-term borrowings.
-64-
<PAGE>
RETURN ON EQUITY AND ASSETS
Arizona Bank's return on equity and return on assets for the periods
shown below are as follows:
<TABLE>
<CAPTION>
SIX YEAR ENDED
MONTHS ENDED DECEMBER 31,
JUNE 30, ----------------------
1998(1) 1997 1996 1995
------------ ---- ---- ----
<S> <C> <C> <C> <C>
(dollars in thousands)
Return on Average Assets 1.06% 0.85% 1.00% 1.00%
Return on Average Equity 19.84% 11.52% 12.11% 16.40%
Average Equity to Average Assets Ratio 5.34% 7.34% 8.27% 6.08%
Dividend Payout Ratio -- -- -- --
</TABLE>
- ----------------------------
(1) Annualized for 1998
YEAR 2000 ISSUES
The use of computer programs written using two digits rather than four
to define the applicable year gives rise to what is commonly referred to as the
Year 2000 problem. Any of Arizona Bank's computer programs that employ date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in other normal
business activities.
Arizona Bank has created a Year 2000 Review Team to assess the impact
of the Year 2000 computer program issue on its computer related systems.
Based on a recent assessment, Arizona Bank has determined that minimal software
modifications and capital outlays will be necessary in order to properly utilize
dates beyond December 31, 1999. Arizona Bank believes that with minor
modifications to existing software and/or converting to new software, the Year
2000 issue can be substantially mitigated. However, if such modifications
and/or conversions are not made, or are not completed timely, the Year 2000
issue could have a material impact on the operations of Arizona Bank.
Arizona Bank has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which
Arizona Bank is vulnerable to those third parties' failure to remediate their
own Year 2000 issues. Arizona Bank's total Year 2000 project costs and
estimates to complete include the estimated costs and time associated with the
impact of a third party's Year 2000 issues, and are based on presently available
information. However, there can be no guarantee that the systems of other
companies on which Arizona Bank's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with Arizona Bank's systems, would not have material adverse effect on Arizona
Bank. Arizona Bank has determined it has no exposure to contingencies related
to the Year 2000 issue for services it provides. Arizona Bank has established
December 31, 1998 as the target date to complete the assessment and validation
and testing.
Arizona Bank will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications.
Arizona Bank anticipates the total cost to be under $1 million; any additional
equipment and software to be purchased will be capitalized. Arizona Bank does
not foresee any material effect on the results of operations. Arizona Bank
projects expenses of approximately $200,000 during 1998 in connection with the
Year 2000 project. The costs of the project and the date on which Arizona Bank
plans to complete the Year 2000 modifications are based on management's best
estimates, which are derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific
-65-
<PAGE>
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates (interest rate risk). As a financial
institution that engages in transactions involving an array of financial
products, Arizona Bank's primary risk exposure is interest rate risk.
Financial instruments currently offered or held by Arizona Bank that expose
Arizona Bank to market risk include securities, loans, deposits, long-term debt,
and subordinated capital notes.
The table below summarizes for the time periods indicated the
contractual and repricing behavior of Arizona Bank's market risk sensitive
instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
-------- ------- ------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Fixed rate loans $153,487 $52,432 $38,111 $18,298 $10,769 $69,028 $442,125 $444,441
Average rate 10.16% 10.09% 9.42% 8.70% 8.86% 9.29% 9.86%
Adjustable rate loans 19,576 4,339 3,727 2,880 2,223 7,325 40,070 40,730
Average rate 8.69% 7.61% 7.61% 7.61% 7.61% 7.61% 8.14%
Variable rate loans 67,693 -- -- -- -- -- 67,693 68,283
Average rate 10.26% -- -- -- -- -- 10.26%
Fixed rate investments 29,436 5,362 2,402 650 284 53,080 91,214 91,463
Average rate 6.25% 6.35% 5.92% 5.69% 6.29% 6.76% 6.53%
Fixed rate trading
investments -- -- -- -- 4,981 2,515 7,496 7,574
Average rate -- -- -- -- 5.84% 6.08% 5.92%
LIABILITIES:
Fixed rate deposits $158,520 $54,053 $14,387 $ 2,818 $ 6,297 $ 5,329 $241,504 $241,570
Average rate 5.47% 5.90% 5.97% 5.65% 6.17% 6.08% 5.63%
Adjustable rate deposits 122,089 98,709 -- 39,824 -- 34,932 295,553 295,487
Average rate 2.98% 3.29% 1.93% -- 2.02% 3.24%
Fixed other borrowings 11,000 5,000 -- -- 10,000 -- 26,000 26,004
Average rate 5.84% 5.87% -- -- 6.06% -- 5.93%
Fixed long term debt -- -- -- -- -- 10,000 10,000 10,482
Average rate -- -- -- -- -- 9.28% 9.38%
</TABLE>
-66-
<PAGE>
As discussed below, the asset/liability committee of Arizona Bank ("ALCO") has
the overall responsibility for Arizona Bank's market risk management policies.
It also determines market risk limits, subject to ratification and approval by
the Board of Directors. The members of ALCO are senior division managers and
corporate officers who are responsible for interest rate risk, asset liability
management, liquidity and credit policy.
ASSET LIABILITY MANAGEMENT
Asset liability management seeks to control the variability of Arizona
Bank's performance over time as it is influenced by changes in interest rates.
This is accomplished by managing the repricing timing of interest rate sensitive
interest-earning assets and interest-bearing liabilities. An interest rate
sensitive balance sheet item is one that is able to reprice within a specified
time horizon, through maturity or otherwise. Management of Arizona Bank's
balance sheet in this manner controls Arizona Bank's interest rate risk
position, both with respect to income and the market value of Arizona Bank's
portfolio equity (the difference between the market value of Arizona Bank's
assets and the market value of its liabilities). ALCO is responsible for
formulating and monitoring interest rate risk management practices. ALCO
addresses Arizona Bank's cumulative gap calculations and interest rate risk
stress tests regularly. Interest rate risk tests are performed via simulation
analysis. The simulation process is conducted using several rate regimes that
provide estimates of Arizona Bank's interest rate risk. Interest rate risk tests
includes rate shocks as well as yield curve rotations that present various
interest rate cycles.
GAP ANALYSIS
A traditional indicator of interest rate risk is gap analysis. Gap
analysis focuses on the difference (or gap) between available repricing
opportunities for assets and liabilities within defined time periods. If the
dollar amount of interest rate sensitive assets is closely matched with the
dollar amount of interest rate sensitive liabilities in a given period, then
changes in interest income and interest expense over this time frame should be
closely matched also. This close matching will normally result in little change
in net interest income should interest rates change. A mismatched gap position,
either positive or negative, will normally result in imbalanced changes in
interest income and interest expense as interest rates change. This will cause
variation in net interest income performance over time.
Arizona Bank's general objective is to maintain a balance in the repricing
opportunities between its interest rate sensitive assets and interest rate
sensitive liabilities in order to limit its potential interest rate risk.
Arizona Bank will, however, narrow or widen its gap position within prudent
bounds depending on the current interest rate environment, management's
perception of interest rate movements, Arizona Bank's current balance sheet, and
the goals and needs of Arizona Bank's business plan.
The table below summarizes for the time periods indicated the gap analysis
of Arizona Bank's interest rate sensitive interest-earning assets and interest-
bearing liabilities as of June 30, 1998. In calculating the gap values,
amortization flows are based on contractual characteristics of Arizona Bank's
loans and other assets, as well as anticipated prepayment characteristics.
Prepayment rates for mortgages and mortgage-related investments reflect
expectations based on national assumptions, and prepayments on consumer loans
reflect Arizona Bank's historical experience. Non-maturity deposit balances are
positioned based on expected repricing and maturity behavior given historical
experience and management's expectations.
-67-
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------------
Up to 1 Year 1 TO 5 YEARS OVER 5 YEARS TOTAL
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
(dollars in thousands)
Risk sensitive assets:
Loans $257,835 $270,312 $ 28,439 $556,686
Investments 11,522 13,739 113,141 138,402
-------- -------- -------- --------
Total $289,357 $284,050 $141,580 $694,988
======== ======== ======== ========
Risk sensitive liabilities:
Interest-bearing demand deposits $134,736 $147,308 $ 35,591 $317,635
Time deposits 176,899 54,001 3,793 234,693
Other borrowings 20,400 15,000 10,000 45,400
-------- -------- -------- --------
Total $332,035 $216,309 $ 49,384 $597,726
======== ======== ======== ========
Periodic gap $(62,678) $ 67,741 $ 92,197
======== ======== ========
Cumulative gap $(62,678) $ 5,063 $ 97,260
======== ======== ========
Gap/assets ratio (8.26)% 8.93% 12.15%
Cumulative gap/assets ratio (8.26)% 0.67% 12.82%
</TABLE>
The negative cumulative gap value indicated for the one year time horizon
means that over this period the assets of Arizona Bank will reprice slightly
more slowly than will Arizona Bank's liabilities. This means that, in a rising
interest rate environment, net interest income can be expected to decrease
somewhat and that, in a declining interest rate environment, net interest income
can be expected to increase somewhat. Arizona Bank has thus positioned itself
to benefit to a limited extent from anticipated near-term reductions in interest
rates. In the one to five-year period, however, Arizona Bank's gap position is
slightly positive. Beyond that, Arizona Bank's gap position is more positive.
Gap analysis attempts to capture interest rate risk which is attributable
to the mismatching of interest rate sensitive assets and liabilities. However,
varying interest rate environments often create unexpected changes in interest
rate sensitivity, for example, due to changing loan prepayments, interest rate
caps or floors, and other influences. These factors are not captured very well
in most gap analyses and, as a result, a gap report may not provide a complete
assessment of Arizona Bank's interest rate risk. In response to possible
unexpected changes in interest rate sensitivity, Arizona Bank initiated a
program of simulation-based modeling of its net interest income and market value
of portfolio equity. Simulation analysis takes into account all facets of
Arizona Bank's balance sheet and external influences in calculating estimates of
interest rate risk.
TRADING PORTFOLIO
Arizona Bank's trading activities are limited at present to trading of
U.S. government securities. These trading activities expose Arizona Bank to
one primary type of market risk - interest rate risk. Arizona Bank manages its
exposure to market risk in a variety of ways. Primarily, ALCO establishes and
the Board of Directors ratifies and approves various limits on trading
activities. ALCO is also responsible for monitoring these limits. These limits
include product volume and profit and loss limits. Product volume limits
establish maximum aggregate amounts of securities that can be traded. Profit
and loss limits measure the potential loss in securities as a result of specific
and adverse scenarios.
On a day-to-day basis, Arizona Bank reduces the market risk to which it is
exposed by settling positions each day. However, Arizona Bank may also
temporarily retain open positions in an effort to generate revenue by correctly
anticipating future market conditions and by taking advantage of price
differentials in the market in which it operates. Documented trading policies
and procedures define acceptable boundaries within which the trader (investment
officer) can execute transactions.
Arizona Bank performs stress tests on each security it purchases for its
trading portfolio. These tests (or rate shocks) assess the potential market
risk inherent in its trading activities. Additionally, as part of Arizona
Bank's asset liability management procedures as discussed above, Arizona Bank
performs various stress tests on all of Arizona Bank's segments subject to
market risk.
Arizona Bank's trading portfolio at June 30, 1998 consisted solely of U.S.
Treasury securities.
-68-
<PAGE>
CREDIT RISK
An additional area of exposure for Arizona Bank is credit risk.
Arizona Bank attempts to minimize credit risk through its underwriting and
credit review policies. The Directors and senior management are responsible for
monitoring credit risk for Arizona Bank as a whole. Arizona Bank evaluates
credit risks and places emphasis on the appropriate pricing of risk. The
objectives of Arizona Bank's risk review policy include obtaining proper levels
of approval of loans, providing credit information that supports the loan
relationship, following prudent and clear underwriting practices, and rating
loans for risk according to Arizona Bank's risk rating policy.
Risk review includes assessments of loan quality, adequacy of loan
documentation, and compliance with bank policy and FDIC and other regulatory
guidelines, verification that loan officers are identifying and reporting
potential problem loans in a timely manner to ensure that adequate corrective
measures can be implemented.
-69-
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement/Prospectus does not contain all of the information set
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 and Arizona Bank are subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, file reports, proxy statements and other information with the
Commission and the FDIC, respectively. With respect to Compass, 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. Such material may be accessed electronically by means
of the Commission's home page on the Internet at http://www.sec.gov. With
respect to Arizona Bank, such reports and other information can be inspected and
copied at the Registration and Disclosure Section of the FDIC at Room 5-518, 550
Seventeenth Street, N.W., Washington, D.C. 20429.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT INCLUDED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS CONCERNING
IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT COMPASS (OTHER THAN CERTAIN
EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE TO EACH BENEFICIAL OWNER OF ARIZONA
BANK COMMON STOCK OR ARIZONA BANK PREFERRED STOCK, WITHOUT CHARGE AND, UPON
REQUEST, FROM TIMOTHY R. JOURNY 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 _______________.
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,
1997 (File No. 0-6032);
(ii) Compass' Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 (File No. 0-6032);
(iii) Compass' Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (File No. 0-6032);
(iv) Compass' Proxy Statement dated March 20, 1998, relating to its
annual meeting of shareholders held on April 20, 1998 (File No.
0-6032); and
(v) 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.
-70-
<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 Bank, Arizona Bank 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
Bank, Arizona Bank or their respective affiliates since the date of this Proxy
Statement/Prospectus.
RELATIONSHIPS WITH INDEPENDENT ACCOUNTANTS
Compass' Board of Directors appointed KPMG Peat Marwick LLP as independent
auditors for Compass for the year ending December 31, 1997. KPMG Peat Marwick
LLP has served as Compass' independent auditors continuously since 1971.
Arizona Bank's Board of Directors appointed PricewaterhouseCoopers L.L.P.
as independent auditors for Arizona Bank for the year ending December 31, 1997.
PricewaterhouseCoopers L.L.P. has served as Arizona Bank's independent auditors
continuously since 1987.
Compass has been advised by KPMG Peat Marwick LLP that KPMG Peat Marwick
LLP has no direct financial interest or any material indirect financial interest
in Compass other than arising from that firm's employment as auditor for
Compass.
Arizona Bank has been advised by PricewaterhouseCoopers L.L.P. that
PricewaterhouseCoopers L.L.P. has no direct financial interest or any material
indirect financial interest in Arizona Bank other than arising from that firm's
employment as auditor for Arizona Bank.
EXPERTS
The consolidated financial statements of Compass as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997 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 balance sheets of Arizona Bank as of December 31, 1997 and
1996 and the consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997,
included in this prospectus, have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
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 August 31, 1998, Mr. Powell was the beneficial owner of an aggregate of
approximately 99,528 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. Silver,
Freedman & Taff, L.L.P. and Liddell, Sapp are also expected to render legal
opinions as to certain matters acceptable to Arizona Bank and Compass,
respectively.
-71-
<PAGE>
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 ARIZONA BANK AND COMPASS--CERTAIN DIFFERENCES BETWEEN THE
CORPORATION LAWS OF ARIZONA AND THE CORPORATION LAWS OF 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
Arizona Bank'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 Arizona Bank's
Board of Directors unless "Authority Withheld" is indicated in the appropriate
box on the proxy.
-72-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF
ARIZONA BANK
Page
----
1. Auditors' Report regarding the December 31, 1997, 1996 and 1995
Consolidated Financial Statements F-2
2. Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
3. Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-4
4. Consolidated Statements of Changes in Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 F-5
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
6. Notes to Consolidated Financial Statements F-7
7. Consolidated Balance Sheets (unaudited) as of June 30, 1998 and
December 31, 1997 F-29
8. Consolidated Statements of Income (unaudited) for the Six Months
Ended June 30, 1998 and 1997 F-30
9. Consolidated Statements of Changes in Stockholders' Equity
(unaudited) for the Six Months Ended June 30, 1998 and 1997 F-31
10. Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended June 30, 1998 and 1997 F-32
11. Notes to Consolidated Financial Statements (unaudited) F-33
F-1
<PAGE>
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND A PROFESSIONAL SERVICES FIRM
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Arizona Bank and Subsidiaries
We have audited the accompanying consolidated balance sheets of Arizona Bank and
Subsidiaries (the "Bank") as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arizona Bank and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Bank restated its
financial statements to reflect a change in classification of its investment
securities.
/s/ Coopers & Lybrand L.L.P.
Phoenix, Arizona
February 13, 1998, except for Note 18
as to which the date is September 30, 1998
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1996
ASSETS 1997 RESTATED
<S> <C> <C>
Cash and due from banks $ 47,892,158 $ 29,629,853
Federal funds sold 10,000,000 30,000,000
------------ ------------
Total cash and cash equivalents 57,892,158 59,629,853
------------ ------------
Trading securities, at market (Note 2) 7,573,760
Securities available-for-sale, at market (Note 2) 81,463,288 74,821,068
Loans and leases (Note 3) 557,972,791 478,899,134
Allowance for loan and lease losses (Note 3) (7,714,648) (5,818,492)
------------ ------------
Net loans 550,258,143 473,080,642
------------ ------------
Accrued interest receivable 4,733,048 4,301,463
Premises and equipment, net (Note 4) 16,482,652 11,452,493
Debt issuance costs, net 551,654 630,165
Other assets 2,993,642 1,943,240
------------ ------------
Total assets $721,948,345 $625,858,924
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 93,304,521 $ 72,510,553
Interest-bearing:
Demand, savings, and time less than $100,000 506,168,392 446,511,903
Time, $100,000 and over 30,889,261 23,086,419
------------ ------------
630,362,174 542,108,875
Accrued interest payable 1,644,895 1,492,956
Accounts payable and other liabilities 1,639,547 947,937
Federal Home Loan Bank advances (Note 5) 25,600,000 20,600,000
Other borrowed funds (Note 6) 400,000 1,443,949
Senior subordinated debentures (Note 7) 10,000,000 10,000,000
------------ ------------
Total liabilities 669,646,616 576,593,717
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity (Note 8):
Series C 9.5% noncumulative nonparticipating convertible perpetual
preferred stock 3,000,000 3,000,000
Series E 10.5% noncumulative nonparticipating perpetual preferred stock 10,579,346 10,579,346
Series F 9.125% noncumulative nonparticipating perpetual preferred stock 16,043,333 16,043,333
Common stock; no par value; 80,000,000 shares authorized 1,030,000 shares
issued and outstanding 3,150,000 3,150,000
Additional paid-in capital 1,650,000 1,650,000
Retained earnings 17,729,315 14,946,897
Net unrealized holding (losses) gains on securities available for sale,
net of tax of $99,825 and ($69,579), respectively 149,735 (104,369)
------------ ------------
Total stockholders' equity 52,301,729 49,265,207
------------ ------------
Total liabilities and stockholders' equity $721,948,345 $625,858,924
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
</TABLE>
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $50,432,897 $42,739,414 $33,016,268
Interest on federal funds sold 945,868 798,843 686,795
Interest on investment securities:
U.S. Government obligations 4,033,198 3,286,333 5,395,727
Other securities 1,095,608 1,303,384 1,970,368
Tax exempt securities 1,145,364 1,136,242 678,433
----------- ----------- -----------
Total interest income 57,652,935 49,264,216 41,747,591
Interest expense:
Interest on demand, savings, and time less than $100,000 21,611,807 17,399,229 14,808,478
Interest on time, $100,000 and over 1,566,534 1,114,100 925,885
Interest on borrowed funds 1,099,827 2,327,481 2,234,345
Interest on senior subordinated debentures 1,016,009 1,016,358 1,023,399
----------- ----------- -----------
Total interest expense 25,294,177 21,857,168 18,992,107
----------- ----------- -----------
Net interest income before provisions for loan and
lease Losses 32,358,758 27,407,048 22,755,484
Provision for loan losses (Note 3) 7,677,484 5,711,700 4,508,196
----------- ----------- -----------
Net interest income after provision for loan and
lease losses 24,681,274 21,695,348 18,247,288
----------- ----------- -----------
Noninterest income:
Service charges on deposits 2,074,774 1,283,739 1,224,992
Other service charges, fees and commissions 1,535,306 1,126,007 1,285,122
Gain on sale of investment securities 789,420 239,033 395,022
Net trading account profit 80,521
----------- ----------- -----------
Total noninterest income 4,480,021 2,648,779 2,905,136
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 10,122,502 7,968,894 7,148,326
Occupancy expense 3,549,221 2,429,790 2,105,716
Other expense 5,406,568 4,117,699 4,069,671
Supplies and postage 981,604 746,851 645,519
Loss on sale of investment securities 5,346 16,548
----------- ----------- -----------
Total noninterest expense 20,059,895 15,268,580 13,985,780
----------- ----------- -----------
Operating income before income taxes 9,101,400 9,075,547 7,166,644
----------- ----------- -----------
Income tax expense (benefit) (Note 9):
Current 4,044,430 3,298,017 1,636,701
Deferred (792,104) (30,002) 717,844
----------- ----------- -----------
3,252,326 3,268,015 2,354,545
----------- ----------- -----------
Net income $ 5,849,074 $ 5,807,532 $ 4,812,099
=========== =========== ===========
Net income per common share, basic $ 2.70 $ 2.80 $ 3.22
=========== =========== ===========
Net income per common share, diluted $ 2.12 $ 2.19 $ 2.50
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
</TABLE>
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Series C Series E Series F
Preferred Stock Preferred Stock Preferred Stock
------------------------- --------------------------- ---------------------------
Number Number Number
of Shares of Shares of Shares
Outstanding Amount Outstanding Amount Outstanding Amount
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994,
as restated (See Note 2) 120,000 $ 3,000,000 460,000 $ 10,579,346 $
Net proceeds from preferred stock issued 690,000 16,043,333
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E)
Net income
Net changes in unrealized holding gain
on securities available for sale,
net of taxes of $1,462,817
--------- ------------ --------- ------------- --------- -------------
Balances as of December 31, 1995,
as restated (See Note 2) 120,000 3,000,000 460,000 10,579,346 690,000 16,043,333
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E, $2.28
per share-F)
Net income
Net changes in unrealized holding gain
(loss) on securities available for sale,
net of taxes of ($557,858)
--------- ------------ --------- ------------- --------- -------------
Balances as of December 31, 1996,
as restated (See Note 2) 120,000 3,000,000 460,000 10,579,346 690,000 16,043,333
--------- ------------ --------- ------------- --------- -------------
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E, $2.28
per share-F)
Net income
Net changes in unrealized holding gain
(loss) on securities available for sale,
net of taxes of $169,403
--------- ------------ --------- ------------- --------- -------------
Balances as of December 31, 1997 120,000 $ 3,000,000 460,000 $ 10,579,346 690,000 $ 16,043,333
========= ============ ========= ============= ========= =============
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Common Stock Appreciation
------------------------- (Depreciation)
Number Additional on Available- Total
of Shares Paid-In Retained for-sale Stockholders'
Outstanding Amount Capital Earnings Securities Equity
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1994,
as restated (See Note 2) 1,030,000 $ 3,150,000 $ 1,650,000 $ 8,743,123 $(1,461,808) $ 25,660,661
Net proceeds from preferred stock issued 16,043,333
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E) (1,492,592) (1,492,592)
Net income 4,812,099 4,812,099
Net changes in unrealized holding gain
on securities available for sale,
net of taxes of $1,462,817 2,194,226 2,194,226
--------- ------------ ----------- ------------- ----------- ------------
Balances as of December 31, 1995,
as restated (See Note 2) 1,030,000 3,150,000 1,650,000 12,062,630 732,418 47,217,727
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E, $2.28
per share-F) (2,923,265) (2,923,265)
Net income 5,807,532 5,807,532
Net changes in unrealized holding gain
(loss) on securities available for sale,
net of taxes of ($557,858) (836,787) (836,787)
--------- ------------ ----------- ------------- ----------- ------------
Balances as of December 31, 1996,
as restated (See Note 2) 1,030,000 3,150,000 1,650,000 14,946,897 (104,369) 49,265,207
--------- ------------ ----------- ------------- ----------- ------------
Preferred stock dividends ($2.375 per
share-C, $2.625 per share-E, $2.28
per share-F) (3,066,656) (3,066,656)
Net income 5,849,074 5,849,074
Net changes in unrealized holding gain
(loss) on securities available for sale,
net of taxes of $169,403 254,104 254,104
--------- ------------ ----------- ------------- ----------- ------------
Balances as of December 31, 1997 1,030,000 $ 3,150,000 $ 1,650,000 $ 17,729,315 $ 149,735 $ 52,301,729
========= ============ =========== ============= =========== ============
Note There was no Series A, Series B or Series D Preferred Stock issued and outstanding as of December 31, 1997
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 5,849,074 $ 5,807,532 $ 4,812,099
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,640,931 1,077,548 961,200
Provision for loan losses 7,677,484 5,711,700 4,508,196
Provision for losses on other real estate owned 91,750 11,547
Amortization of net premium (discount) on investment securities (128,511) 679,154 (201,261)
Net losses on sale of other real estate owned 42,630 11,477 30,864
Loss on sale of premises and equipment 830 262,735 21,030
Gain on sale of loans 19,023
Net realized gains on available-for-sale securities (789,420) (233,687) (378,474)
Net increase in trading account securities (7,573,760)
(Increase) decrease in accrued interest receivable (431,585) 16,967 (1,556,756)
(Increase) decrease in other assets and debt issuance cost (739,891) (514,347) 516,744
Increase (decrease) in accrued interest payable 151,939 (275,268) 830,391
Increase (decrease) in accounts payable and other liabilities 691,610 (310,466) 823,170
------------- ------------- -------------
Total adjustment 634,007 6,444,836 5,566,651
------------- ------------- -------------
Net cash provided by operating activities 6,483,081 12,252,368 10,378,750
------------- ------------- -------------
Cash flows from investing activities:
Net cash flows from loans (95,029,720) (113,601,837) (120,116,837)
Purchases of certificates of deposit (3,000,000)
Purchases of securities available-for-sale (220,955,209) (22,889,247) (112,642,888)
Purchases of premises and equipment (6,719,760) (2,040,260) (2,147,023)
Proceeds from sale of premises and equipment 47,840 825,986 46,955
Proceeds from sale of loans 9,329,176 7,361,800
Proceeds from sale of other real estate owned 479,179 527,817 741,980
Proceeds from maturity of certificates of deposit 32,599,000
Proceeds from maturity of securities available-for-sale 158,592,028 22,884,373 50,771,509
Proceeds from sale of securities available-for-sale 56,892,996 26,524,699 16,949,487
------------- ------------- -------------
Net cash used in investing activities (97,363,470) (80,406,669) (136,797,817)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from preferred stock offering 17,250,000
Stock issue costs (1,206,667)
Preferred stock dividends paid (3,066,656) (2,923,265) (1,492,592)
Net cash flows from deposits 88,253,299 100,001,556 95,693,199
Maturities of Federal Home Loan Bank advances (34,800,000) (18,094,000) (33,000,000)
Prepayment of Federal Home Loan Bank advances (25,000,000)
Federal Home Loan Bank advances 64,800,000 5,600,000 40,094,000
Net (decrease) increase in other borrowed funds (1,043,949) 1,095,217 (51,268)
------------- ------------- -------------
Net cash provided by financing activities 89,142,694 85,679,508 117,286,672
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,737,695) 17,525,207 (9,132,395)
Cash and cash equivalents, beginning of year 59,629,853 42,104,646 51,237,041
------------- ------------- -------------
Cash and cash equivalents, end of year $ 57,892,158 $ 59,629,853 $ 42,104,646
============= ============= =============
Supplemental disclosure of cash flow Information:
Cash paid during the year for:
Interest paid $ 25,142,238 $ 22,053,576 $ 18,254,995
Income taxes paid 3,123,398 3,254,000 1,350,000
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS:
NATURE OF OPERATIONS
Arizona Bank, a state-chartered banking organization headquartered in Tucson,
Arizona, operates ten branch locations and twelve Kachina banking centers
throughout Arizona. The Kachina banking centers are full service branches
located in local supermarket stores. Arizona Bank offers retail and
commercial banking services to consumers and small- and medium-sized
companies in its service area.
The accounting and reporting policies of Arizona Bank and Subsidiaries (the
"Bank") are in accordance with generally accepted accounting principles and
conform to practices within the banking industry. The following is a summary
of the significant accounting and reporting policies of the Bank.
PRINCIPLES OF CONSOLIDATION
Arizona Financial Products, Inc. is a wholly-owned subsidiary formed for the
purpose of acting as an agent to sell life insurance and other non-deposit
investment products not insured by the FDIC. The financial statements
include the accounts of Arizona Financial Products, Inc. All material
intercompany transactions and balances have been eliminated in consolidation.
Arizona Kachina Holdings, Inc. is a wholly-owned subsidiary formed for the
purpose of acquiring real property to be used in the Bank's operations. The
financial statements include the accounts of Arizona Kachina Holdings, Inc.
All material intercompany transactions and balances have been eliminated in
consolidation.
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 income and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold, and cash utilized to
meet the Federal Reserve Requirements, which amounts to $9,600,000,
$5,700,000 and $6,250,000 at December 31, 1997, 1996 and 1995, respectively.
F-7
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVESTMENT SECURITIES
Securities classified as held-to-maturity are those debt securities that the
Bank has both the ability and positive intent to hold to maturity regardless
of changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts which are recognized as
an adjustment to interest income.
Securities classified as trading are those debt and equity securities that
are bought and held principally for the purpose of selling in the near term
to generate profits on short-term differences in price. These securities are
recorded at their fair values. Unrealized gains and losses on trading
account securities are included immediately in noninterest income. These
securities are accounted for on a trade date basis.
Securities classified as available-for-sale are those debt and equity
securities that the Bank intends to hold for an indefinite period of time,
but not necessarily to maturity. These securities are recorded at fair value
with any unrealized gains and losses being reflected, net of tax as a
separate component of stockholders' equity.
Gains and losses on the sale of securities available-for-sale are determined
using the specific-identification method.
It is management's intention to determine the classification of securities at
the time of purchase.
LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans are stated at the amount of unpaid principal. Interest is calculated
by using the simple interest method on daily balances of the principal amount
outstanding. 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, which generally occurs after a loan becomes 90 days
delinquent. Interest on those loans is recognized on a cash basis.
The leasing operations consist of the leasing of automobiles under leases
classified as direct financing leases. Interest, net of initial direct
costs, is deferred and reported as income in decreasing amounts over the term
of the lease so as to provide a constant yield on the outstanding principal
balance.
The allowance for loan and lease losses is established through a provision
for losses charged to expense. Loans and leases are charged against the
allowance for loan and lease 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 and leases that may become uncollectible, based on evaluations of the
collectibility of loans and leases and prior loan and lease loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan and lease portfolio, management's intention with
respect to problem loans and leases, estimated collateral values, overall
portfolio quality, review of specific problem loans and leases, and current
economic conditions that may affect the borrowers' ability to pay.
F-8
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES (CONTINUED)
Impaired loans are measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or measured at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan is impaired when it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms
of the loan agreement. Residential mortgage loans and consumer loans and
leases are excluded from impaired loan disclosures unless these loans are
restructured.
NONREFUNDABLE LOAN ORIGINATION AND COMMITMENT FEES
Nonrefundable loan origination and commitment fees, and incremental direct
costs, are deferred and amortized to income based on the interest method over
the contractual life of the loan, inclusive of anticipated prepayments.
PREMISES AND EQUIPMENT
Premises and equipment are depreciated using the straight-line method over
the estimated useful life of the respective asset. Leasehold improvements
are amortized over the shorter of the useful life of the improvements or the
remaining term of the lease. The estimated useful lives for building,
leasehold improvements, and furniture and equipment are as follows:
<TABLE>
<S> <C>
Buildings 20-40
Leasehold improvements 5-15
Furniture and equipment 5-10
</TABLE>
Premises and equipment are recorded at cost and include expenditures which
substantially extend their useful lives. Expenditures for maintenance and
repairs are charged to expense as incurred. The gain or loss on disposal of
assets is reflected in earnings, and the cost and related accumulated
depreciation are removed from the accounts.
OTHER REAL ESTATE OWNED
Other real estate owned ("ORE"), which represents real estate acquired
through foreclosure, is stated at the lower of the carrying value of the loan
or the estimated fair market value, less estimated disposal costs of the
related real estate. Loan balances in excess of the fair market value, less
estimated disposal costs of the real estate at the date of acquisition are
charged against the allowance for loan losses. Any subsequent operating
expense or income, reductions in estimated values, and gains or losses on
disposition of such properties are charged to expense when incurred or
received.
INCOME TAXES
The Bank accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109
provides that deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
F-9
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Effective January 1, 1997, the Bank adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 125 requires that after a transfer of financial
assets, an entity must recognize the financial and servicing assets
controlled and liabilities incurred and derecognize financial assets and
liabilities in which control is surrendered or when debt is extinguished.
The impact on the Bank's financial position and results of operations was not
material.
In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125. SFAS No. 127 deferred
the effective date of SFAS No. 125 related to transfers of financial assets
occurring after December 31, 1997, specifically, such transfers involving
repurchase agreements, dollar-rolls, securities lending and similar
transactions. The Bank will adopt SFAS No. 127 as required. The adoption of
SFAS No. 127 is not expected to have a material impact on the Bank's
statement of position or results of operations.
2. INVESTMENT SECURITIES:
The carrying amounts of investment securities as shown in the consolidated
balance sheets of the Bank and their approximate fair values were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $56,968,128 $210,527 $25,500 $57,153,155
Mortgage-backed securities of GNMA
and other U.S. government agencies 12,905,877 13,743 26,436 12,893,184
Obligations of local governments 6,914,023 78,487 1,261 6,991,249
----------- -------- ------- -----------
Total debt securities 76,788,028 302,757 53,197 77,037,588
FHLB stock 4,388,200 4,388,200
Other securities 37,500 37,500
----------- -------- ------- -----------
$81,213,728 $302,757 $53,197 $81,463,288
=========== ======== ======= ===========
</TABLE>
F-10
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $25,360,865 $ 8,041 $480,469 $24,888,437
Mortgage-backed securities of GNMA
and other U.S. government agencies 22,705,192 107,173 327,371 22,484,994
Obligations of local governments 24,606,659 589,817 71,139 25,125,337
----------- -------- -------- -----------
Total debt securities 72,672,716 705,031 878,979 72,498,768
FHLB stock 2,297,300 2,297,300
Other securities 25,000 25,000
----------- -------- -------- -----------
$74,995,016 $705,031 $878,979 $74,821,068
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated fair value of debt securities, excluding
mortgage-backed securities, at December 31, 1997, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 45,030 $ 45,303
Due in one year to five years 11,337,973 11,353,444
Due in five years to ten years 49,056,359 49,235,284
Due after ten years 3,442,789 3,510,373
----------- -----------
63,882,151 64,144,404
Mortgage backed securities 12,905,877 12,893,184
----------- -----------
Total securities $76,788,028 $77,037,588
=========== ===========
</TABLE>
F-11
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES: (CONTINUED)
The cost and approximate fair values of trading securities at December 31,
1997 were as follows:
AMORTIZED FAIR
COST VALUE
U.S. Treasury Securities $7,495,718 $7,573,760
On August 13, 1997, as a result of a restructuring of the portfolio, the Bank
reclassified its held-to-maturity portfolio as securities available-for-sale
and recorded the portfolio at fair value. Such change reflects a change in
management's intentions with respect to how the investment portfolio is
expected to be managed. The amortized cost and fair value of the securities
transferred on August 13, 1997 were $54,811,318 and $54,956,591,
respectively. The unrealized holding gain, net of taxes, of $87,163 at the
date of the transfer was recognized as a separate component of stockholders'
equity. Additionally, the Bank has restated its financial statements for the
years ended December 31, 1996, December 31, 1995 and December 31, 1994 to
reflect the change in classification of the held-to-maturity portfolio to
available-for-sale. The impact on net unrealized holding gains (losses) on
securities available for sale, net of taxes, which is included in
stockholders' equity was $181,250, $463,650 and ($1,142,749) (this is not
indicative of realized losses because as can be seen on the consolidated
statements of income for 1995 through 1997, the Bank realized gains on the
sale of investment securities), respectively. There was no impact on the
consolidated statements of income as a result of this reclassification.
Proceeds from sales of available-for-sale debt securities during 1997 and
1996 were $56,890,383 and $21,805,498, respectively. Gross gains of $803,388
and $239,033 and gross losses of $11,488 and $5,346 were realized on 1997 and
1996 sales, respectively. There have been no realized losses included in
earnings related to write-downs of securities due to permanent declines in
the fair value of securities.
Investment securities with a carrying value of $5,972,281 and $1,996,134 were
available to secure public deposits with $4,417,905 and $1,430,125 actually
pledged at December 31, 1997 and 1996, respectively.
F-12
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES:
The Bank's loan portfolio consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Installment consumer loans $297,256,037 $269,144,121
Real estate and construction loans 106,031,230 82,618,842
Commercial loans 57,650,474 37,290,358
Home mortgage loans 74,635,052 80,414,841
Auto leases (net of unearned income of
$2,465,492 and $0, respectively) 12,491,284
Other loans 2,931,685 2,052,131
------------ ------------
550,995,762 471,520,293
Unamortized net loan origination and
commitment fees and costs 6,977,029 7,378,841
------------ ------------
557,972,791 478,899,134
Allowance for loan losses (7,714,648) (5,818,492)
------------ ------------
Net loans $550,258,143 $473,080,642
============ ============
</TABLE>
The Bank grants loans to customers located primarily in Arizona. No
concentration of loans to any single industry within any of the above
categories exceeded 10% of total loans at year end.
The following is a summary of the transactions in the allowance for loan and
lease losses at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $ 5,818,492 $ 4,626,814 $ 3,191,426
Provision charged to expense 7,677,484 5,711,700 4,508,196
Loans charged off (7,245,871) (5,766,392) (4,072,854)
Recoveries 1,464,543 1,246,370 1,000,046
----------- ----------- -----------
Balance, end of year $ 7,714,648 $ 5,818,492 $ 4,626,814
=========== =========== ===========
</TABLE>
The balance of nonaccrual loans at December 31, 1997 and 1996 was
approximately $935,013 and $261,269 which represents 0.17% and 0.05% of the
total gross loan portfolio, respectively. Impaired loans, which consist of
nonaccrual real estate, construction, and commercial loans at December 31,
1997 and 1996 were $168,335 and $202,379, respectively. Although considered
in developing the general allowance, there was no specific allowance for loan
losses related to these loans at December 31, 1997 and 1996.
The average balance of impaired loans outstanding during 1997 and 1996 were
$283,633 and $362,841, respectively. Interest income of $40,088 and $39,990
was recognized on impaired loans during 1997 and 1996, respectively, for cash
payments received.
At December 31, 1997 and 1996, the Bank serviced approximately $9,423,943 and
$787,408, respectively, of loans for third parties which are not included in
the accompanying balance sheets.
F-13
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PREMISES AND EQUIPMENT:
Premises and equipment consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land and land improvements $ 2,191,665 $ 1,823,705
Buildings 5,594,674 5,121,936
Leasehold improvements 4,592,227 2,111,210
Furniture and equipment 11,979,821 8,708,292
----------- -----------
24,358,387 17,765,143
Accumulated depreciation and amortization (7,875,735) (6,312,650)
----------- -----------
Premises and equipment, net $16,482,652 $11,452,493
=========== ===========
</TABLE>
5. FEDERAL HOME LOAN BANK ADVANCES:
The Bank has established an Advances and Security Agreement with the Federal
Home Loan Bank of San Francisco. The Bank is eligible to obtain credit of up
to 25 percent of the Bank's assets. Advances can be collateralized by home
mortgage loans, other mortgage assets, investment securities and Federal Home
Loan Bank stock. As required under the agreement, current advances are
collateralized by the Bank's investment in Federal Home Loan Bank stock, and
certain investment securities of the Bank.
At December 31, 1997 and 1996, outstanding advances under the agreement
consisted of $25,600,000 and $20,600,000 in fixed rate advances with monthly
interest payments at rates ranging from 5.87% to 6.13% and 5.43% to 6.19%,
respectively.
The outstanding principal balance matures as follows:
1998 $10,600,000
1999 5,000,000
2002 10,000,000
-----------
$25,600,000
===========
F-14
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER BORROWED FUNDS:
Other borrowed funds consist of securities sold under agreements to
repurchase and treasury tax and loan deposits. At December 31, 1996
securities sold under agreements to repurchase were $1,000,000 and were
repaid within fifteen days of the transaction date. There were no repurchase
agreements at December 31, 1997.
7. SENIOR SUBORDINATED DEBENTURES:
In March 1994, the Bank issued an aggregate of $10,000,000 in Senior
Subordinated Debentures due January 15, 2005. Interest is payable
semiannually, on January 15 and July 15 at 9.375%. Commencing on January 15,
1999, the debentures may be redeemed by the Bank at par plus a redemption
premium. The debentures are subordinate to the claims of depositors and
other creditors and are uncollateralized and uninsured.
The Bank is subject to certain covenants under terms of the Senior
Subordinated Debentures. The most restrictive of these covenants limits the
issuance of capital obligations such that the Bank's ratio of earnings to
fixed charges must equal or exceed three to one for the fiscal year ended
immediately prior to the date of issuance and the Bank's ratio of earnings to
fixed charges, including interest on the proposed capital obligations, would
be at least two and one-half to one. Additionally, the covenants limit the
payment of dividends to the holders of the Bank's common stock. The Bank may
not make any distribution or declare and pay any dividend in cash or other
assets with respect to its common stock if payment of these dividends would
cause the Bank to become less than adequately capitalized within the meaning
of FDICIA. These dividends are further subject to a calculated maximum. The
maximum amount under terms of the debentures is calculated as the sum of (a)
$1,500,000, plus (b) 75% of the Bank's net income for each fiscal year, or
portion thereof, after the closing date, less (c) 100% of the Bank's net loss
for each fiscal year, or portion thereof, after the closing date, plus (d)
100% of the net proceeds received by the Bank with respect to any qualifying
capital issued after the closing date.
F-15
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY:
CAPITAL STOCK
On September 26, 1994, the Bank's stockholders approved increases in the
Bank's authorized common stock from 20 million shares to 80 million shares
and authorized preferred stock from 1 million shares to 20 million shares.
Also approved was a one-for-two reverse stock split of the Bank's outstanding
preferred stock and a change in the par value of all preferred stock to $25
per share. The Bank's preferred shares are specifically authorized and
outstanding as follows:
Series A 10% cumulative nonparticipating convertible preferred stock; $25
par value; none issued and outstanding;
Series B 5.5% cumulative nonparticipating preferred stock; $25 par value;
none issued and outstanding;
Series C 9.5% noncumulative nonparticipating convertible preferred stock;
$25 par value; 120,000 shares authorized, issued and outstanding
($3,000,000);
Series D 12% noncumulative nonparticipating preferred stock; $25 par
value; 80,000 shares authorized, none issued and outstanding;
Series E 10.5% noncumulative nonparticipating preferred stock; $25 par
value; 535,000 shares authorized, 460,000 shares issued and outstanding
($11,500,000);
Series F 9.125% noncumulative nonparticipating preferred stock; $25 par
value; 750,000 shares authorized, 690,000 shares issued and outstanding
($17,250,000);
The remaining 18,515,000 shares are not specifically designated for any
series.
The Series C preferred stock is convertible, at the option of the holder,
into fully paid and nonassessable common stock of the Bank, at $7.80 per
share of common stock. In addition, the Bank has the option to pay
dividends in cash or common stock of the Bank with the common stock dividend
valued at 1.5 times its book value on a fully diluted basis as of the last
day of the Bank's previous fiscal year.
Upon the prior express written approval of all applicable state and federal
regulatory agencies, shares of the Series C stock may be redeemed, as a whole
or in part, at the option of the Bank, by resolution of its Board of
Directors on any dividend payment date, at a price of $25 per share, plus any
dividends declared and unpaid from the dividend payment date immediately
preceding the date fixed for redemption. The right of conversion terminates
at the close of business on the fifth full business day prior to the date
fixed for redemption unless default is made in the payment of the redemption
price.
F-16
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
CAPITAL STOCK (CONTINUED)
Shares of the Series E stock may be redeemed, in whole or in part, at the
option of the Bank, on any dividend payment date, out of funds legally
available on or after November 15, 1999, at a price of $25 per share, plus
dividends declared and unpaid from the dividend payment date immediately
preceding the date fixed for redemption.
Shares of the Series F stock may be redeemed, in whole or in part, at the
option of the Bank, on any dividend payment date, out of funds legally
available on or after February 15, 1999 at the following redemption prices
per share, plus any dividends declared and unpaid from the dividend payment
date immediately preceding the date fixed for redemption: $25.75 if such
date is within the 12-month period beginning February 15, 1999, $25.375 if
such date is within the 12-month period beginning February 15, 2000, and
$25.00 thereafter.
STOCK OPTION
On September 28, 1988, the Bank granted the President an option to purchase
51,500 shares of common stock at an exercise price of $4.46 per share, with
an expiration date of October 1, 1998. At December 31, 1997, none of these
options had been exercised. In connection with the stock option agreement,
the Bank shall be obligated to terminate the unexercised options by making
payment to the President equal to the difference between 150% of the Bank's
book value of common shares and the exercise price if the President's
employment is terminated by the Bank for acts other than fraud.
In the event of any change in the common shares or any other change in the
corporate structure or common shares of the Bank, appropriate adjustments
shall be made by the Board of Directors in the number and kind of stock of
the Bank and the option price. Upon a determination by the Board of
Directors of any adjustment in the number of options or the option price, the
stock option agreement shall be amended in accordance with the action of the
Board of Directors.
F-17
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The provision for income taxes for the years ended December 31 is comprised
of the following amounts:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $3,227,501 $2,599,892 $1,363,088
State 816,929 698,125 273,613
---------- ---------- ----------
4,044,430 3,298,017 1,636,701
Deferred:
Federal (627,236) (23,721) 568,789
State (164,868) (6,281) 149,055
---------- ---------- ----------
(792,104) (30,002) 717,844
---------- ---------- ----------
Total tax provision $3,252,326 $3,268,015 $2,354,545
========== ========== ==========
</TABLE>
The Bank's tax expense differs from the expense calculated using the
statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax provision at statutory rate $3,094,476 $3,085,686 $2,437,571
Tax exempt investments (320,521) (307,053) (194,228)
State taxes, net of federal benefit 416,872 489,382 297,756
Release of valuation allowance (186,554)
Other 61,499
---------- ---------- ----------
Total income tax expense $3,252,326 $3,268,015 $2,354,545
========== ========== ==========
</TABLE>
F-18
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES: (CONTINUED)
The Bank has recorded a net deferred tax asset (liability) of $390,021 and
($232,679) as of December 31, 1997 and 1996, respectively, which is included
in the balance sheet line item entitled "Other Assets" and "Other
Liabilities", respectively. The components of the net deferred tax asset
liability are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax asset:
Nonaccrual interest $ 15,751 $ 1,576
Loan loss reserve 2,301,023 1,056,153
Unrealized holding loss on securities available-for-sale 69,579
Other 1,997
------------ ------------
Total deferred asset 2,318,771 1,127,308
------------ ------------
Deferred tax liability:
Difference between financial and tax reporting of premises
and equipment (688,003) (442,980)
Accrued property tax (52,576)
Deferred fee income (1,140,922) (864,011)
Unrealized holding gain on securities available-for-sale (99,825)
Other (420)
------------ ------------
Total deferred liability (1,928,750) (1,359,987)
------------ ------------
Net deferred tax asset (liability) $ 390,021 $ (232,679)
=========== ============
</TABLE>
The Bank believes it is more likely than not that the net deferred tax asset
will be realized and accordingly, no valuation allowance has been provided.
F-19
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Bank has granted loans to certain
directors and executive officers and their related companies. The
outstanding balance of all such loans approximated $303,417 and $138,853 at
December 31, 1997 and 1996, respectively. During 1997, 1996 and 1995,
approximately $11,622, $14,183 and $13,298 in interest income related to
these loans was earned.
Deposits made by directors and officers and their related companies amounted
to approximately $942,704 and $1,142,273 at December 31, 1997 and 1996,
respectively. During 1997, 1996 and 1995, approximately $17,258, $15,206 and
$31,264 in interest expense related to these deposits was incurred.
During the years ended December 31, 1997, 1996 and 1995, the Bank made loans
to individual borrowers by acquiring approximately $94,441,335, $92,545,981
and $104,787,850, respectively, of conditional automobile optional
(installment) sales contracts from automobile dealerships which are
controlled by majority stockholders of the Bank. These loans are made by the
Bank to individual borrowers on the basis of an evaluation of the credit of
the individual borrower, are secured by the purchased vehicles, and are not
obligations of the automobile dealerships controlled by majority
stockholders of the Bank. The Bank has a variety of agreements with related
and unrelated automobile dealerships, whereby the Bank may advance the
difference, if any, between the total interest payable by the consumer to
the Bank based on the contract interest rate and the total interest payable
on such loan based on the interest rate at which the Bank agrees to make the
loan in connection with its acquisition of the contract from the dealership.
The Bank then records this amount as loan origination cost and amortizes the
amount as interest is earned. As of December 31, 1997 and 1996, there was
approximately $3,186,591 and $4,198,162, respectively, of loan origination
cost paid to automobile dealerships which are controlled by the majority
stockholders of the Bank and which is included in unamortized net loan
origination and commitment fees and costs. In addition, the Bank has entered
into employment and consulting agreements with certain of its directors and
officers (see Note 12).
The Bank's President and Chief Executive Officer is a member of the Board of
Directors of the Federal Home Loan Bank. As disclosed in Note 5, the Bank
has established an Advances and Security Agreement with the Federal Home
Loan Bank.
During 1997, the Bank sold home mortgage loans in the amount of $9,329,176
to another financial institution under an agreement whereby the Bank
continues to service the loans. A Director of the Bank is an officer and
stockholder of this financial institution. In addition, the spouse of
another Director of the Bank is on the Board of Directors of the financial
institution. As of December 31, 1997, the Bank was servicing $8,147,553 in
home mortgage loans for this financial institution.
F-20
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SAVINGS AND PROFIT SHARING PLAN:
The Bank has a savings and profit sharing plan (the "Plan") for employees
meeting certain service requirements. This Plan qualifies under Section
401(k) of the Internal Revenue Code. The Plan allows employees to contribute
up to 15% of each employee's annual compensation. The Bank makes a 50%
matching contribution up to 2% of each participating employee's annual
compensation. At the discretion of the Board of Directors, the Bank may also
make additional contributions, dependent on profits. During the years ended
December 31, 1997, 1996 and 1995, the Bank contributed $205,226, $209,887
and $185,400, respectively, to the Plan.
12. COMMITMENTS AND CONTINGENCIES:
LEASES
At December 31, 1997, four buildings were occupied under noncancelable
operating lease agreements. One of these buildings has an option to renew
for five five-year periods, one agreement contains an extension option of
three consecutive ten-year periods, and one agreement contains scheduled
rent increases equal to the Consumer Price Index every three years. In
addition, the Bank leases space in twelve buildings for Kachina Banking
Centers for initial periods of five years and has options to renew for two
five-year periods. The Bank also leases land, automobiles and equipment. The
leases require the Bank to pay property taxes, insurance, and normal
maintenance repair costs.
Future minimum lease payments under these leases are as follows:
YEAR ENDING
DECEMBER 31,
1998 $ 648,980
1999 622,581
2000 623,729
2001 564,779
2002 337,122
Thereafter 221,520
----------
$3,018,711
==========
For the years ended December 31, 1997, 1996 and 1995, rent expense included
in the accompanying statements of income amounted to $565,338, $341,768 and
$299,889, respectively.
CONSULTING AGREEMENT
During 1996, the Bank entered into a five-year consulting and licensing
agreement with National Commerce Bank Services, Inc. ("NCBS"). NCBS is a
consulting company which specializes in helping banks establish a program to
design, construct, and install financial service facilities offering banking
services at retail grocery stores. Under this agreement, NCBS is providing
consulting services to the Bank in connection with the establishment and
operation of the Kachina Banking Centers. At December 31, 1997, the Bank is
committed to pay $785,000 over the remaining term of the agreement.
F-21
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
OFF BALANCE SHEET COMMITMENTS
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 risk in excess of the amount recognized in the balance sheet. The
contract amounts of these instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and standby letters of credit
written is represented by the contractual 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.
<TABLE>
<CAPTION>
CONTRACT AMOUNT
--------------------------------
1997 1996
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend expiring in one year or less $50,255,889 $33,961,699
Commitments to extend expiring after one year 9,802,034 7,233,975
Standby letters of credit 1,457,282 2,773,934
</TABLE>
The estimated fair value for fees related to commitments to extend credit
and standby letters of credit is $805,241 and $575,562 at December 31, 1997
and 1996, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include accounts receivable, marketable
securities, inventory, property, plant, and equipment, and income-producing
commercial properties and residential properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Bank
holds various types of collateral (primarily certificates of deposit) to
support those commitments for which collateral is deemed necessary. Most of
the letters of credit expire within twelve months.
F-22
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
EMPLOYMENT AGREEMENTS
The Bank has an employment agreement, with no specific term, with its
President and Chief Executive Officer (the "President") which provides for a
base salary of $180,000 per year plus bonuses at the discretion of the
Board. The agreement further provides for the payment of $100,000 in the
event of termination or demotion for reasons other than fraud. An additional
$100,000 is payable in the event of a sale, merger, or consolidation of the
Bank, whether or not the President is terminated.
The Bank has an employment agreement with an officer of the Bank which
expires June 13, 1998, subject to the right of the Bank to terminate the
agreement at any time for cause upon 30 days' notice. The agreement provides
for a base salary of $80,000 per year plus bonuses at the discretion of the
Board. In the event of a sale, merger, or consolidation of the Bank, the
Bank is required to pay a one-time lump sum payment of $200,000, whether or
not the officer is terminated. The agreement also requires the Bank to pay
premiums for a life insurance policy in the face amount of $250,000.
The Bank has an employment agreement with the Chairman of the board of
directors which provides for a base salary of $115,000 per year. The term of
the agreement is for one year, expiring June 30, 1998, subject to successive
options exercisable by the Bank to renew for one-year periods. The agreement
may be terminated by the Bank for cause with the approval of the board of
directors or without cause, upon payment of six months' salary.
The Bank has a consulting agreement with a director of the Bank which
provides for a fee of $1,600 per day for services rendered to the Bank; to
be paid for 2.0 days per month. The director must submit quarterly written
reports to the Bank setting forth time expended, a narrative of the services
rendered, and the expenses incurred pursuant to this agreement. The term of
the agreement is for one year, with renewal options for one-year periods.
The agreement may be terminated by the Bank at any time, with or without
cause, upon payment of any unpaid fees.
PURCHASE OF SECURITIES
In December 1997, the Bank committed to purchase three U.S. Agency
securities at a total price of $25,109,099. These securities were purchased
in January 1998.
F-23
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, requires the Bank to disclose the estimated fair value of its
financial instruments. The majority of the Bank's assets and liabilities are
considered financial instruments as defined in SFAS No. 107. Many of the
Bank's financial instruments lack an available trading market as
characterized by a willing buyer and a willing seller engaging in an
exchange transaction. As a result, significant estimations and present value
calculations were used by the Bank for purposes of this disclosure.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instruments. For those financial instruments, which mature or
reprice within 90 days or which reprice at the discretion of the Bank's
management, the recorded book values approximate fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
CASH AND DUE FROM BANKS
For cash and due from banks, the carrying amount is a reasonable estimate of
fair value.
FEDERAL FUNDS SOLD
All federal funds sold have short-term maturities; accordingly, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES
For all securities held as investments, the fair value is estimated using
the quoted market prices for each security.
LOANS RECEIVABLE
For variable rate loans that reprice frequently with no significant change
in credit risk, the carrying value is a reasonable estimate of fair value.
For certain homogeneous categories of loans, such as installment consumer
loans, real estate and construction loans, commercial loans and home
mortgage loans, fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and similar maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and money market
accounts is the amount payable upon demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of
similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of fixed rate advances is estimated by discounting the future
cash flows using the rate currently offered by the Federal Home Loan Bank
for similar advances.
SENIOR SUBORDINATED DEBENTURES
The fair value of the debentures is estimated by discounting the future cash
flows using the quoted current market rate for similar debentures.
F-24
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
COMMITMENTS
The fair value of commitments to extend credit and standby letters of credit
is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties.
The estimated fair values of the Bank's financial instruments as of December
31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------------
CARRYING FAIR CARRYING FAIR
ASSETS AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Cash and due from banks $ 47,892 $ 47,892 $ 29,630 $ 29,630
Federal funds sold 10,000 10,000 30,000 30,000
Trading securities 7,574 7,574
Securities available-for-sale 81,463 81,463 74,821 74,821
-------- -------- -------- --------
146,929 146,929 134,451 134,451
-------- -------- -------- --------
Loans:
Installment consumer loans and auto leases 309,747 308,307 269,144 268,730
Commercial, real estate and construction loans 163,682 165,868 119,909 119,200
Home mortgage loans 74,635 76,354 80,415 80,873
Other loans 2,932 2,925 2,052 2,051
-------- -------- -------- --------
550,996 553,454 471,520 470,854
-------- -------- -------- --------
Total financial instrument assets $697,925 $700,383 $605,971 $605,305
======== ======== ======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 93,305 $ 93,305 $ 72,511 $ 72,511
Demand and savings 295,487 295,487 218,500 218,500
Time (less than $100,000) 210,681 211,488 228,012 228,662
Time ($100,000 and over) 30,889 31,005 23,086 24,117
Federal Home Loan Bank advances 25,600 25,604 20,600 19,852
Senior subordinated debentures 10,000 10,482 10,000 9,709
Other borrowed funds 400 400 1,444 1,444
-------- --------- --------- --------
Total financial instrument liabilities $666,362 $667,771 $574,153 $574,795
======== ======== ======== ========
</TABLE>
F-25
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INCOME PER COMMON SHARE:
The Bank has adopted the provisions of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128") effective December
31, 1997. SFAS No. 128 requires the presentation of basic and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon exercise of stock options and
conversion of preferred stock. All prior period earnings per share amounts
have been restated to comply with this pronouncement.
In accordance with the requirements of SFAS No. 128, earnings per share is
computed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net income per common share, basic:
Income:
Net income $5,849,074 $5,807,532 $4,812,099
Less: Dividends on non-convertible and
convertible preferred stock 3,066,656 2,923,265 1,492,592
---------- ---------- ----------
Adjusted net income $2,782,418 $2,884,267 $3,319,507
========== ========== ==========
Weighted average number of shares outstanding 1,030,000 1,030,000 1,030,000
========== ========== ==========
Net income per common share, basic $ 2.70 $ 2.80 $ 3.22
========== ========== ==========
Net income per common share, diluted:
Income:
Net income $5,849,074 $5,807,532 $4,812,099
Less: dividends on non-convertible preferred
stock 2,781,656 2,638,265 1,207,592
---------- ---------- ----------
Adjusted net income $3,067,418 $3,169,267 $3,604,507
========== ========== ==========
Weighted average number of shares outstanding 1,030,000 1,030,000 1,030,000
Net effect of dilutive stock options based on the
treasury stock method using the average market
price during the period of common 33,247 31,850 29,881
Assuming conversion of Series C preferred stock 384,615 384,615 384,615
---------- ---------- ----------
Common stock and common stock equivalents 1,447,862 1,446,465 1,444,496
========== ========== ==========
Net income per common share, diluted $ 2.12 $ 2.19 $ 2.50
========== ========== ==========
</TABLE>
F-26
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory- and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table
(dollars in thousands):
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) $ 69,600 11.68% $ 47,669* 8.0%*
Tier I Capital (to Risk Weighted Assets) 52,152 8.75% 23,835* 4.0%*
Tier I Capital (to Average Assets) 52,152 7.54% 27,673* 4.0%*
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) 65,187 13.56% 38,471* 8.0%*
Tier I Capital (to Risk Weighted Assets) 49,369 10.27% 19,235* 4.0%*
Tier I Capital (to Average Assets) 49,369 8.51% 23,209* 4.0%*
</TABLE>
* Greater than or equal to.
F-27
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS
No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement.
Management intends to comply with this statement which is effective for
periods beginning after December 15, 1997 and is currently evaluating the
format for the financial statement in which comprehensive income will be
reported.
17. CHANGE IN ACCOUNTING PRINCIPLE:
In January 1997, the Bank changed its method of amortizing deferred
financing costs and fees associated with loan origination from the aggregate
method to the loan by loan method for installment loans. The cumulative
effect of this change in accounting principle of $212,812, which is
immaterial to operating income before income taxes and net income, is
included in other charges, fees and commissions in the consolidated
statements of income.
18. SUBSEQUENT EVENTS
On July 6, 1998 Arizona Bank entered into an Agreement and Plan of Merger
with Compass Bancshares, Inc. The definitive Agreement calls for the
exchange of shares of Compass Bancshares common stock for all of the
outstanding common stock of Arizona Bank. The transaction, which will be
accounted for as a pooling of interests, is subject to shareholder and
regulatory approval.
On September 29, 1998 the holders of Arizona Bank Series C preferred stock,
under the terms of the Statement of Designation relating to the Series C
preferred stock, converted their 120,000 shares of Series C preferred stock
into 384,615 shares of common stock. Effective September 29, 1998, pursuant
to the anti-dilutive provisions of the President of the Bank's stock option
agreement as discussed in Note 8, the number of shares subject to the stock
option agreement increased automatically by 19,231 upon conversion of the
Series C Preferred Stock into common stock. As a result, the Bank incurred
compensation expense of approximately $1.9 million. On September 30, 1998
the President exercised his option to purchase 70,731 shares of common stock
at the exercise price of $4.46 per share.
F-28
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
(UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 38,513,139 $ 47,892,158
Federal funds sold 1,200,000 10,000,000
------------- -------------
Total cash and cash equivalents 39,713,139 57,892,158
------------- -------------
Trading securities, at fair value 0 7,573,760
Securities available for sale, at fair value 137,274,987 81,463,288
Loans 563,173,845 557,972,791
Allowance for loan losses (7,814,374) (7,714,648)
------------ ------------
Net loans 555,359,471 550,258,143
------------ ------------
Accrued interest receivable 5,522,542 4,733,048
Premises and equipment, net 17,254,493 16,482,652
Debt issuance costs, net 512,290 551,654
Other assets 3,114,651 2,993,642
------------ ------------
Total assets $758,751,573 $721,948,345
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $101,875,633 $ 93,304,521
Interest bearing:
Demand, savings and time (less than) $100,000 524,461,398 506,168,392
Time , $100,000 and over 27,866,581 30,889,261
------------ ------------
654,203,612 630,362,174
Accrued interest and other liabilities 4,587,491 3,284,442
Federal Home Loan Bank advances 35,000,000 25,600,000
Other borrowed funds 400,000 400,000
Senior subordinated debentures 10,000,000 10,000,000
------------ ------------
Total liabilites 704,191,103 669,646,616
------------ ------------
Stockholders' equity:
Series C 9.5% noncumulative nonparticipating convertible perpetual
preferred stock 3,000,000 3,000,000
Series E 10.5% noncumulative nonparticipating perpetual preferred
stock 10,579,346 10,579,346
Series F 9.125% noncumulative nonparticipating perpetual
preferred stock 16,043,333 16,043,333
Common stock; no par value; 80,000,000 shares authorized; 1,030,000
shares issued and outstanding 3,150,000 3,150,000
Additional paid-in capital 1,650,000 1,650,000
Retained earnings 20,117,578 17,729,315
Accumulated other comprehensive income - unrealized gains on
securities available for sale, net of tax of $13,475 and $99,825 20,213 149,735
------------ ------------
Total stockholders' equity 54,560,470 52,301,729
------------ ------------
Total liabilities and stockholders' equity $758,751,573 $721,948,345
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-29
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30,1998 and 1997 (unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest income:
Interest and fees on loans $26,923,209 $24,237,392
Interest on federal funds sold 416,489 556,494
Interest on investment securities:
U.S. Government obligations 2,905,473 1,926,732
Other securities 434,945 632,453
Tax exempt securities 243,870 747,295
----------- -----------
Total interest income 30,923,986 28,100,366
Interest expense:
Interest on demand, savings,
and time deposits less than $100,000 10,945,064 10,857,051
Interest on time deposits, $100,000 and over 774,300 728,966
Interest on borrowed funds 665,718 401,010
Interest on senior subordinated debentures 508,113 508,114
----------- -----------
Total interest expense 12,893,195 12,495,141
----------- -----------
Net interest income before provision
for loan losses 18,030,791 15,605,225
Provision for loan losses 2,352,000 4,042,484
----------- -----------
Net interest income after provision for loan losses 15,678,791 11,562,741
Noninterest income:
Service charges on deposits 1,174,480 922,048
Other charges, fees and commissions 1,062,491 834,075
Net trading account profit 103,284 0
Gain on sale of investment securities 197,929 15,886
----------- -----------
Total noninterest income 2,538,184 1,772,009
Noninterest expense:
Salaries and employee benefits 5,993,337 5,084,095
Occupancy expense 2,121,973 1,607,815
Other expense 3,633,035 2,909,745
----------- -----------
Total noninterest expense 11,748,345 9,601,655
----------- -----------
Operating income before income taxes 6,468,630 3,733,095
Income tax expense 2,547,000 1,344,000
----------- -----------
Net income $ 3,921,630 $ 2,389,095
=========== ===========
Net income per common share, basic $ 2.32 $ 0.83
=========== ===========
Net income per common share, diluted $ 1.74 $ 0.69
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
for the six months ended June 30, 1998 and 1997 (unaudited)
<TABLE>
<CAPTION>
SERIES C SERIES E SERIES F
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- -------------------- ------------------- --------------------
NUMBER NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES OF SHARES
OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT
----------- ------ ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 120,000 $3,000,000 460,000 $10,579,346 690,000 $16,043,333 1,030,000 $3,150,000
Net income
Change in unrealized gains (losses)
on securities available for sale,
net of taxes of $86,348
Total comprehensive income
Preferred stock dividends ($1.188 per
share-C, $1.313 per share-E, $1.711
per share-F)
------- ---------- ------- ----------- -------- ----------- --------- ----------
Balances as of June 30, 1998 120,000 $3,000,000 460,000 $10,579,346 690,000 $16,043,333 1,030,000 $3,150,000
======= ========== ======= =========== ======== =========== ========= ==========
Balances as of
December 31, 1996, Restated 120,000 $3,000,000 460,000 $10,579,346 690,000 $16,043,333 1,030,000 $3,150,000
Net income
Change in unrealized gains (losses)
on securities available for sale,
net of taxes of $213,682
Total comprehensive income
Preferred stock dividends ($1.188 per
share-C, $1.313 per share-E, $1.711
per share-F)
------- ---------- ------- ----------- -------- ----------- --------- ----------
Balances as of
June 30, 1997, Restated 120,000 $3,000,000 460,000 $10,579,346 690,000 $16,043,333 1,030,000 $3,150,000
======= ========== ======= =========== ======== =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
ADDITIONAL UNREALIZED TOTAL
PAID-IN RETAINED GAINS STOCKHOLDERS'
CAPITAL EARNINGS (LOSSES) EQUITY
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 $1,650,000 $17,729,315 $ 149,735 $52,301,729
Net income 3,921,630 3,921,630
Change in unrealized gains (losses)
on securities available for sale,
net of taxes of $86,348 (129,522) (129,522)
----------- ---------- ------------
Total comprehensive income 3,921,630 (129,522) 3,792,108
Preferred stock dividends ($1.188 per
share-C, $1.313 per share-E, $1.711
per share-F) (1,533,367) (1,533,367)
---------- ----------- --------- -----------
Balances as of June 30, 1998 $1,650,000 $20,117,578 $ 20,213 $54,560,470
========== =========== ========= ===========
Balances as of
December 31, 1996, Restated $1,650,000 $14,946,897 ($104,369) $49,265,207
Net income 2,389,095 $ 2,389,095
Change in unrealized gains
(losses) on securities
available for sale,
net of taxes of $213,682 320,524 $ 320,524
----------- --------- -----------
Total comprehensive income 2,389,095 320,524 2,709,619
Preferred stock dividends ($1.188 per
share-C, $1.313 per share-E, $1.711
per share-F) (1,533,329) (1,533,329)
---------- ----------- --------- -----------
Balances as of
June 30, 1997, Restated $1,650,000 $15,802,663 $ 216,155 $50,441,497
========== =========== ========= ===========
</TABLE>
Note: There was no Series A, Series B, or Series D Preferred Stock issued and
outstanding as of June 30, 1998 or 1997
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997 (unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,921,630 $ 2,389,095
------------- -------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation & amortization 1,060,548 743,928
Provision for loan losses 2,352,000 4,042,484
Provision for losses on other real estate owned (31,750) 0
Amortization of premium on investment securities 115,711 (284,441)
Gain on sale of loans (107,804) 0
Gain on sale of premises and equipment 9,834 343
Net realized gains on available-for-sale securities (197,929) (15,886)
Decrease in trading account securities 7,573,760 0
Increase in accrued interest receivable (789,494) (486,345)
Increase in other assets 9,667 (433,271)
Increase (decrease) in accrued interest and other liabilities 1,303,049 (183,611)
------------- -------------
Total adjustment 11,297,592 3,383,201
------------- -------------
Cash flows from investing activities:
Net cash flows from loans (22,695,813) (44,129,917)
Purchases of securities available-for-sale (129,065,466) (167,689,579)
Purchases of premises and equipment (1,930,468) (4,670,311)
Proceeds from sale of loans 15,290,727 0
Proceeds from sale of securities available-for-sale 67,486,547 16,511,875
Proceeds from sale of premises and equipment 88,245 27,699
Proceeds from maturity of securities available for sale 5,719,916 123,594,203
------------- -------------
Net cash used in investing activities (65,106,312) (76,356,030)
------------- -------------
Cash flows from financing activities:
Net increase in deposits 23,841,438 56,607,833
Preferred stock dividends paid (1,533,367) (1,533,329)
Decrease in other borrowed funds 0 (43,949)
Maturities of repurchase agreements 0 (2,195,000)
Repurchase agreements 0 1,195,000
Maturities and repayment of Federal Home Loan Bank advances (5,600,000) (15,000,000)
Federal Home Loan Bank advances 15,000,000 15,000,000
------------- -------------
Net cash used in financing activities 31,708,071 54,030,555
------------- -------------
Net decrease in cash and cash equivalents (18,179,019) (16,553,179)
Cash and cash equivalents, beginning of period 57,892,158 59,629,853
------------- -------------
Cash and cash equivalents, end of period $ 39,713,139 $ 43,076,674
------------- -------------
Cash flow Information
Cash paid during the period for:
Interest paid $ 12,989,465 $ 11,586,017
Income taxes paid 1,741,917 1,200,000
------------- -------------
$ 14,731,382 $ 12,786,017
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements of Arizona Bank and
Subsidiaries (the "Bank") are unaudited. However, in the opinion of
management, they reflect all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position and results of
operations of the Bank. These financial statements should be read in
conjunction with the consolidated financial statements of the Bank for the
year ended December 31, 1997. Interim results are not necessarily indicative
of results to be expected for the entire year.
2. INVESTMENT SECURITIES:
The carrying amounts of investment securities as shown in the consolidated
balance sheets of the Bank and their approximate fair values were as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSS VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 92,133,195 $ 76,946 $282,417 $ 91,927,724
Mortgage-backed securities of
U.S. government agencies 24,112,239 63,164 43,573 24,131,830
Obligations of local government 16,454,065 237,396 17,828 16,673,633
------------ -------- -------- ------------
Total debt securities $132,699,499 $377,506 $343,818 $132,733,187
Other securities 4,541,800 4,541,800
------------ -------- -------- ------------
$137,241,299 $377,506 $343,818 $137,274,987
============ ======== ======== ============
</TABLE>
Proceeds from sale of investments in debt securities during the second
quarter of 1998 were $37,239,141, resulting in a gross gain of $96,360 and a
gross loss of $0. There were no realized losses included in earnings related
to write-downs of securities due to permanent declines in the fair value of
securities.
F-33
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
The Bank's loan portfolio consisted of the following at June 30, 1998:
Installment consumer loans $ 298,599,954
Real estate and construction loans 112,552,241
Commercial loans 71,078,070
Home mortgage loans 52,550,309
Auto leases (net of unearned income of $3,571,175) 18,958,910
Other loans 2,846,639
-------------
556,586,123
Unamortized net loan origination and commitment
fees and costs 6,587,722
-------------
563,173,845
Allowance for loan losses (7,814,374)
-------------
Net loans $ 555,359,471
=============
The Bank grants loans to customers located primarily in southern Arizona.
There was no concentration of loans in any single industry within any of the
above categories that exceeded 10% of total loans at June 30, 1998.
The following is a summary of transactions in the allowance for loan losses
for the six months ended June 30, 1998 and 1997:
1998 1997
Balance, beginning of year $ 7,714,648 $ 5,818,492
Provision charged to expense 2,352,000 4,042,484
Loans charged off (3,222,334) (3,325,037)
Recoveries 970,060 748,403
----------- -----------
Balance, end of second quarter $ 7,814,374 $ 7,284,342
=========== ===========
The balance of nonaccrual loans at June 30, 1998 was $373,633, which
represented 0.07% of the gross total loan portfolio.
F-34
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS AND ALLOWANCE FOR LOAN LOSSES: (CONTINUED)
Impaired loans, which consist of nonaccrual real estate, construction and
commercial loans, at June 30, 1998 were as follows:
ALLOWANCE FOR
POSSIBLE LOAN
TOTAL RECORDED LOSSES ALLOCATED
INVESTMENT IN TO IMPAIRED
IMPAIRED LOANS LOANS
Impaired loans with specific reserves $ - $ -
Impaired loans without specific reserves - -
------------- -------------
Total $ - $ -
============= =============
The average amount of impaired loans outstanding through the second quarter
of 1998 was $104,818 and interest income of $1,043 was recognized during
1998. The Bank recognizes interest income on impaired loans generally on a
cash basis.
F-35
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INCOME PER COMMON SHARE
The Bank has adopted the provisions of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS No. 128") effective December 31,
1997. SFAS No. 128 requires the presentation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing income available
to common stockholders (net income less preferred dividends) by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon exercise of stock
options and conversion of preferred stock. Prior period earnings per share
amounts have been restated to comply with this pronouncement.
In accordance with the requirements of SFAS No. 128, earnings per share is
computed as follows:
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
NET INCOME PER COMMON SHARE, BASIC:
Income:
Net income $3,921,630 $2,389,095
Less: Dividends on non-convertible and
convertible preferred stock 1,533,367 1,533,329
---------- ----------
Adjusted net income $2,388,263 $ 855,766
========== ==========
Weighted average number of shares outstanding 1,030,000 1,030,000
========== ==========
Net income per common share, basic $ 2.32 $ 0.83
========== ==========
NET INCOME PER COMMON SHARE, DILUTED:
Income:
Net income $3,921,630 $2,389,095
Less: Dividends on non-convertible preferred
stock 1,390,867 1,390,829
---------- ----------
Adjusted net income $2,530,763 $ 998,266
========== ==========
Weighted average number of shares outstanding 1,030,000 1,030,000
Net effect of dilutive stock options based
on the treasury stock method using the average
market price during the period of common 40,785 32,747
Assuming conversion of Series C preferred stock 384,615 384,615
---------- ----------
Common stock and common stock
equivalents 1,455,400 1,447,362
========== ==========
Net income per common share, diluted $ 1.74 $ 0.69
========== ==========
F-36
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibily additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier l capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of June 30, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier l risk-
based, and Tier l leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions's category.
The Bank's actual capital amounts and ratios are also presented in the
table:
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------ ---------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1998:
Total Capital (to Risk Weighted Assets) $72,005,237 12.06% (greater than or equal to)$47,775,871 (greater than or equal to)8.0%
Tier l Capital (to Risk Weighted Assets) $54,540,257 9.13% (greater than or equal to)$23,887,936 (greater than or equal to)4.0%
Tier l Capital (to Average Assets) $54,540,257 7.28% (greater than or equal to)$29,963,128 (greater than or equal to)4.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets) $69,600,289 11.68% (greater than or equal to)$47,669,082 (greater than or equal to)8.0%
Tier l Capital (to Risk Weighted Assets) $52,151,995 8.75% (greater than or equal to)$23,834,541 (greater than or equal to)4.0%
Tier l Capital (to Average Assets) $52,151,995 7.54% (greater than or equal to)$27,672,995 (greater than or equal to)4.0%
</TABLE>
F-37
<PAGE>
ARIZONA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, Reporting Comprehensive Income, which requires
that all components of comprehensive income and total comprehensive income be
reported on one of the following: its statement of operations, the statement
of stockholders' equity, or a separate statement of comprehensive income. The
Bank is disclosing this information on its statement of stockholders' equity.
Comprehensive income is comprised of net income and all changes in
stockholders' equity, except those due to investments by owners (changes in
paid in capital) and distributions to owners (dividends). This statement did
not change the current accounting treatment for components of comprehensive
income (i.e. changes in unrealized gains or losses on securities).
7. SUBSEQUENT EVENTS
On July 6, 1998 Arizona Bank entered into an Agreement and Plan of Merger
with Compass Bancshares, Inc. The definitive Agreement calls for the exchange
of shares of Compass Bancshares common stock for all of the outstanding
common stock of Arizona Bank. The transaction, which will be accounted for as
a pooling of interests, is subject to shareholder and regulatory approval.
On September 29, 1998, the holders of Arizona Bank Series C preferred stock,
under the terms of the Statement of Designation relating to the Series C
preferred stock, converted their 120,000 shares of Series C preferred stock
into 384,615 shares of common stock. Effective September 29, 1998, pursuant
to the anti-dilutive provisions of the President of the Bank's stock option
agreement as discussed in Note 8 to the consolidated financial statements of
the Bank for the year ended December 31, 1997, the number of shares subject
to the stock option agreement increased automatically by 19,231 upon
conversion of the Series C Preferred Stock into common stock. As a result,
the Bank incurred compensation expense of approximately $1.9 million. On
September 30, 1998 the President exercised his option to purchase 70,731
shares of common stock at the exercise price of $4.46 per share.
F-38
<PAGE>
APPENDIX I
MERGER AGREEMENT
<PAGE>
FOURTH AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Fourth Amendment to Agreement and Plan of Merger (this "Amendment")
dated as of October 6, 1998 is entered into by and among Compass Bancshares,
Inc., a Delaware corporation ("Compass"), Compass Bank, an Arizona corporation
("CB"), and Arizona Bank, an Arizona banking corporation ("Arizona Bank").
WHEREAS, Compass and Arizona Bank entered into an Agreement and Plan of
Merger dated as of July 6, 1998, as amended by that certain Amendment to
Agreement and Plan of Merger dated as of July 20, 1998, as further amended by
that certain Second Amendment to Agreement and Plan of Merger dated as of August
4, 1998, and as further amended by that certain Third Amendment to Agreement and
Plan of Merger dated as of September 9, 1998 (as amended, the "Merger
Agreement");
WHEREAS, the parties desire to further amend the Merger 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. The definition of "Material Adverse Effect" contained in Section
1.01 of the Merger Agreement is hereby amended by redesignating subsection (e)
as subsection (f) and by adding a new subsection (e) after subsection (d) which
shall read in full as follows:
(e) changes in the sale prices of Compass Common Stock after the
date hereof and changes in the value of Arizona Bank Common Stock
resulting from general equity price changes in financial markets,
3. The definition of "Share Determination Market Value" contained in
Section 1.01 of the Merger Agreement is hereby amended to read in full as
follows:
"Share Determination Market Value" means the average closing sale
price of Compass Common Stock as reported by the NASDAQ for the
twenty days of trading preceding the tenth business day prior to
the Effective Time.
4. Section 1.01 of the Merger Agreement is amended to remove the
definitions of "Pricing Termination Option", "Termination Rejection" and "New
Shares".
5. The definition of "Environmental Expenditures" contained in
Section 1.01 of the Merger Agreement is hereby amended by substituting the
phrase "Section 3.01(a)(vii)" with the phrase "Section 3.01(a)(iii)".
6. Section 3.01(a) of the Merger Agreement is hereby amended to read
in full as follows:
(a) Conversion of Shares; Arizona Bank Common Stock. (i) Each
share of the Arizona Bank Common Stock, issued and outstanding
immediately prior to the Effective Time ("Common Shares
Outstanding"), 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 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 of
Arizona Bank Common Stock 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.
Immediately prior to the Effective Time, Arizona Bank shall
calculate and certify to Compass the Common Shares Outstanding.
(ii) Subject to subsections (iii) and (iv) below, each holder of
Arizona Bank Common Stock shall receive Merger Consideration
equal to that number of shares of Compass Common Stock equal to
the quotient of 4,350,000 divided by the number of Common Shares
Outstanding for each share of Arizona Bank Common Stock so held.
In no event, however, shall Compass be obligated to issue any
more than 4,350,000 shares of Compass Common Stock in exchange
for all Common Shares Outstanding.
(iii) If the results of any environmental inspections identify
any past or present event, condition, or circumstance that, based
on the estimates of Compass' independent environmental
professionals may currently or in the future require expenditures
by Arizona Bank or its Subsidiaries, in connection with (A)
investigation, remediation or monitoring of any condition in, on,
under or resulting from any property, site, or facility currently
or previously owned or operated or currently leased (including
eventual removal of asbestos-containing material if currently
damaged, friable, or at risk of releasing fibers, or if such
materials are not managed under an operation and maintenance
program prepared in accordance with Environmental Laws and
generally prevailing guidance documents issued by, or on behalf
of, regulatory authorities regarding the preparation and
implementation of such programs) which condition, in the opinion
of the environmental professional, violates or has violated any
Environmental Law, or which condition may be the subject of an
actual or potential release of Hazardous Substances, or of an
actual or potential claim by any Person or governmental entity
pursuant to Environmental Laws or related to Hazardous
Substances, (B) preparing and obtaining approval by the
appropriate environmental regulatory authority of investigation,
remediation and monitoring plans with respect to such condition,
or (C) any violations of Environmental Laws, which expenditures
("Environmental Expenditures") individually or in the aggregate
are estimated to exceed $3,000,000 on a pre-tax basis, the number
of shares of Compass Common stock to be issued to the holders of
shares of Arizona Bank Common Stock shall be reduced by the
number of shares which is equal to the quotient of the
Environmental Expenditures in excess of $3,000,000 but which are
less than $6,000,000 divided by the Share Determination Market
Value.
(iv) The ratio of the number of shares of Compass Common Stock
to be exchanged for each share, respectively, and the share
figures set forth in subsection (iii) above shall be adjusted
appropriately to reflect any dividends or distributions payable
in stock or splits with respect to Compass Common Stock, where
the record date or payment occurs prior to the Effective Time.
7. The Merger Agreement is hereby amended by removing therefrom all
references to Exhibit E.
8. The execution of this Amendment shall not relieve Compass of its
obligations under the Merger Agreement.
9. Except as herein provided, the terms of the Merger Agreement
shall remain in full force and effect.
10. 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.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment as of the date
first written above.
COMPASS BANCSHARES, INC.
/s/ Garrett R. Hegel
By: _____________________________
Chief Financial Officer
Its:_________________________
COMPASS BANK
/s/ Garrett R. Hegel
By:_____________________________
Chief Financial Officer
Its:_______________________
ARIZONA BANK
/s/ David Wright
By:_____________________________
President
Its:_______________________
<PAGE>
THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Third Amendment to Agreement and Plan of Merger (this "Amendment")
dated as of September 9, 1998 is entered into by and between Compass Bancshares,
Inc., a Delaware corporation ("Compass"), Compass Bank, an Arizona corporation
("CB"), and Arizona Bank, an Arizona banking corporation ("Arizona Bank").
WHEREAS, Compass and Arizona Bank entered into an Agreement and Plan of
Merger dated as of July 6, 1998, as amended by that certain Amendment to
Agreement and Plan of Merger dated as of July 20, 1998 and as further amended by
that certain Second Amendment to Agreement and Plan of Merger dated as of August
4, 1998 (as amended, the "Merger Agreement");
WHEREAS, the parties desire to further amend the Merger Agreement for the
purpose of adding CB as a party thereto;
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:
i. Capitalized terms used herein and not defined herein shall have
the meanings set forth in the Merger Agreement.
ii. Upon execution of this Amendment, CB shall become a party to
the Merger Agreement, shall be deemed to be Compass Bank as
defined in the Merger Agreement, and shall succeed to the rights
and become subject to the obligations of Compass Bank as provided
in the Merger Agreement.
3. Section 3.01(e) of the Merger Agreement is hereby amended to read
in full as follows:
(e) Compass Bank Capital Stock. Each share of Compass Bank capital
stock issued and outstanding immediately prior to the Effective Time
shall not be converted but shall remain outstanding as one share of
capital stock of the Resulting Institution.
4. The execution of this Amendment shall not relieve Compass of its
obligations under the Merger Agreement.
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.
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment as of the date
first written above.
COMPASS BANCSHARES, INC.
By: /s/ Garrett R. Hegel
--------------------
Its: Chief Financial Officer
COMPASS BANK
By: /s/ Garrett R. Hegel
--------------------
Its: Chief Financial Officer
ARIZONA BANK
By: /s/ David Wright
----------------
Its: President
3
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Second Amendment to Agreement and Plan of Merger (this "Amendment")
dated as of August 4, 1998 is entered into by and between Compass Bancshares,
Inc. ("Compass") and Arizona Bank ("Arizona Bank").
WHEREAS, Compass and Arizona Bank entered into an Agreement and Plan of
Merger dated as of July 6, 1998, as amended by that certain Amendment to
Agreement and Plan of Merger dated as of July 20, 1998 (as amended, the "Merger
Agreement");
WHEREAS, the parties desire to further amend the Merger 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:
iii. Capitalized terms used herein and not defined herein shall have
the meanings set forth in the Merger Agreement.
iv. The first sentence of Section 5.01 of the Merger Agreement is
hereby amended by substituting the phrase "August 4, 1998" with
the phrase "August 6, 1998."
3. Section 8.01(g) of the Merger Agreement is hereby amended by
substituting the phrase "August 4, 1998" with the phrase "August 6, 1998".
4. Except as herein provided, the terms of the Merger Agreement
shall remain in full force and effect.
5. 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.
[SIGNATURE PAGE FOLLOWS]
1
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment as of the date
first written above.
COMPASS BANCSHARES, INC.
By: /s/ Daniel B. Graves
--------------------
Its: Associate General Counsel
and Assistant Secretary
ARIZONA BANK
By: /s/ David Wright
----------------
Its: President
2
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Amendment to Agreement and Plan of Merger (this "Amendment") dated as
of July 20, 1998 is entered into by and between Compass Bancshares, Inc.
("Compass") and Arizona Bank ("Arizona Bank").
WHEREAS, Compass and Arizona Bank entered into an Agreement and Plan of
Merger dated as of July 6, 1998 (the "Merger Agreement");
WHEREAS, the parties desire to amend the Merger 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:
v. Capitalized terms used herein and not defined herein shall have
the meanings set forth in the Merger Agreement.
vi. The first sentence of Section 5.01 of the Merger Agreement is
hereby amended by substituting the phrase "within ten business
days after the date hereof" with the phrase "on or before August
4, 1998."
3. Section 8.01(g) of the Merger Agreement is hereby amended in its
entirety to read in full as follows:
(g) Disclosure Schedule. By Compass on or before August 4, 1998,
if the Arizona Bank Disclosure Schedule is not accepted by
Compass.
4. Except as herein provided, the terms of the Merger Agreement
shall remain in full force and effect.
5. 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.
[SIGNATURE PAGE FOLLOWS]
1
<PAGE>
IN WITNESS WHEREOF the parties have executed this Amendment as of the date
first written above.
COMPASS BANCSHARES, INC.
By: /s/ Garrett R. Hegel
--------------------
Its: Chief Financial Officer
ARIZONA BANK
By: /s/ David Wright
----------------
Its: President
2
<PAGE>
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
dated as of July 6, 1998
by and between
COMPASS BANCSHARES, INC.
and
ARIZONA BANK
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
CERTAIN DEFINITIONS....................................................... 1
1.01 Certain Definitions............................................... 1
ARTICLE II
THE MERGER................................................................ 8
2.01 The Merger........................................................ 8
2.02 Effective Date and Effective Time................................. 9
2.03 Reservation of Right to Revise Structure.......................... 9
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES........................................ 9
3.01 Merger Consideration.............................................. 9
3.02 Rights as Stockholders; Stock Transfers........................... 12
3.03 Fractional Shares................................................. 12
3.04 Exchange Procedures............................................... 13
3.05 Anti-Dilution Provisions.......................................... 14
3.06 Conversion of Arizona Bank Series C Convertible Preferred Stock
and Exercise of Arizona Bank Option............................... 14
ARTICLE IV
ACTIONS PENDING THE MERGER................................................ 14
4.01 Forbearances of Arizona Bank...................................... 15
4.02 Forbearances of Compass........................................... 18
ARTICLE V
REPRESENTATIONS AND WARRANTIES............................................ 19
5.01 Disclosure Schedules.............................................. 19
5.02 Standard.......................................................... 19
5.03 Representations and Warranties of Arizona Bank.................... 20
5.04 Representations and Warranties of Compass......................... 31
i
<PAGE>
ARTICLE VI
COVENANTS................................................................. 35
6.01 Reasonable Best Efforts........................................... 35
6.02 Arizona Bank Stockholder Approval................................. 36
6.03 Registration Statement............................................ 36
6.04 Press Releases.................................................... 37
6.05 Access; Information............................................... 37
6.06 Acquisition Proposal.............................................. 38
6.07 Affiliate Agreements.............................................. 38
6.08 Takeover Laws..................................................... 39
6.09 Certain Policies.................................................. 39
6.10 NASDAQ Listing.................................................... 39
6.11 Regulatory Applications........................................... 39
6.12 Indemnification................................................... 40
6.13 Benefit Plans..................................................... 41
6.14 Notification of Certain Matters................................... 42
6.15 Publication of 30 Days of Post Combination Results................ 43
6.16 Registration Rights of Principal Stockholders..................... 50
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER.................................. 50
7.01 Conditions to Each Party's Obligation to Effect the Merger........ 50
7.02 Conditions to Obligation of Arizona Bank.......................... 51
7.03 Conditions to Obligation of Compass............................... 52
ARTICLE VIII
TERMINATION............................................................... 54
8.01 Termination....................................................... 54
8.02 Effect of Termination and Abandonment; Enforcement of this
Agreement......................................................... 55
ARTICLE IX
MISCELLANEOUS............................................................. 56
9.01 Survival.......................................................... 56
9.02 Waiver; Amendment................................................. 56
9.03 Counterparts...................................................... 56
9.04 Governing Law..................................................... 56
9.05 Expenses.......................................................... 56
9.06 Notices........................................................... 56
ii
<PAGE>
9.07 Entire Understanding; Third Party Beneficiaries................... 58
9.08 Interpretation; Effect............................................ 58
EXHIBIT A Arizona Bank Affiliate Agreement
EXHIBIT B List of Certain Directors and Executive Officers of Arizona Bank and
its Subsidiaries
EXHIBIT C Voting Agreement
EXHIBIT D Local Counsel Opinion
EXHIBIT E Illustration of Merger Consideration
EXHIBIT F Employment Agreement
EXHIBIT G Confidentiality and Noncompetition Agreement
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of July 6, 1998 (this "Agreement"),
by and between Arizona Bank ("Arizona Bank") and Compass Bancshares, Inc.
("Compass").
RECITALS
A. Arizona Bank. Arizona Bank is an Arizona chartered banking
organization, having its principal place of business in Tucson, Arizona.
B. Compass. Compass is a Delaware corporation, having its principal place
of business in Birmingham, Alabama.
C. Compass Bank. Compass Bank will be an Arizona chartered banking
organization, having its principal place of business in Tucson, Arizona.
D. Voting Agreements. As an inducement to the willingness of Compass to
enter into this Agreement, certain members of the Arizona Bank Board (as
hereinafter defined) and the Principal Stockholders (as hereinafter defined)
have executed an agreement in the form of Exhibit C pursuant to which such
member of the Arizona Bank Board or such Principal Stockholder has agreed to
vote all the shares of his or her Target Common Stock in favor of this
Agreement.
E. Intentions of the Parties. It is the intention of the parties to this
Agreement that the combination of Arizona Bank and Compass Bank be accounted for
under the "pooling-of-interests" accounting method and as a "reorganization"
under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
F. Board Action. The respective Boards of Directors of each of Compass and
Arizona Bank have determined that it is in the best interests of their
respective companies and their stockholders for Compass to acquire Arizona Bank
by the merger of Compass Bank with and into Arizona Bank.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01 Certain Definitions. The following terms are used in this Agreement
with the meanings set forth below:
"Acquisition Proposal" means any tender or exchange offer, proposal for a
merger, consolidation or other business combination or similar transaction
involving Arizona Bank or any proposal or offer to purchase or acquire in any
manner all or a majority of the voting ownership,
<PAGE>
beneficial ownership, or right to vote securities in, or a majority of the
assets or deposits of, Arizona Bank, other than the transaction contemplated by
this Agreement.
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 9.02.
"Arizona Bank" has the meaning set forth in the preamble to this Agreement.
"Arizona Bank Affiliate" has the meaning set forth in Section 6.07(a).
"Arizona Bank Articles" means the Articles of Incorporation, as amended, of
Arizona Bank as in effect on the date of this Agreement.
"Arizona Bank Board" means the Board of Directors of Arizona Bank.
"Arizona Bank By-Laws" means the Bylaws of Arizona Bank as in effect on the
date of this Agreement.
"Arizona Bank Common Stock" means the common stock, no par value per share,
of Arizona Bank.
"Arizona Bank Meeting" has the meaning set forth in Section 6.02.
"Arizona Bank Option" means the option of David T. C. Wright, Arizona
Bank's Chief Executive Officer, to acquire 70,731 shares of Arizona Bank Common
Stock, after giving effect to the conversion of the Arizona Bank Series C
Convertible Preferred Stock, for an exercise price of $4.46 per share.
"Arizona Bank Series C Convertible Preferred Stock" means the 120,000
outstanding shares of Series C 9.5% noncumulative nonparticipating convertible
perpetual preferred stock of Arizona Bank, convertible at the option of the
holders into an aggregate of 384,615 shares of Arizona Bank Common Stock.
"Arizona Bank Series E Preferred Stock" means the Series E 10.5%
noncumulative nonparticipating perpetual preferred stock of Arizona Bank,
redeemable on any dividend payment date on or after November 15, 1999 at $25 per
share plus unpaid dividends.
"Arizona Bank Series F Preferred Stock" means the Series F 9.125%
noncumulative nonparticipating perpetual preferred stock of Arizona Bank,
redeemable at $25.75 per share plus unpaid dividends after February 15, 1999,
$25.375 plus unpaid dividends after February 15, 2000 and $25 per share plus
unpaid dividends after February 15, 2001.
2
<PAGE>
"Arizona Bank Preferred Stock" means, collectively, the Arizona Bank
Series C Convertible Preferred Stock, Arizona Bank Series E Preferred Stock and
Arizona Bank Series F Preferred Stock.
"Arizona Bank Stock" means, collectively, the Arizona Bank Common Stock and
the Arizona Bank Preferred Stock.
"Arizona Bank Subordinated Debentures" means the senior subordinated
debentures issued by Arizona Bank in March 1994 in the aggregate amount of
$10 million due January 15, 2005 that are subordinate to the claims of
depositors and other creditors and are uncollateralized and uninsured; interest
payable semiannually on January 15 and July 15 at 9.375% per annum; redeemable
commencing January 15, 1999 at par plus a redemption premium;
"Code" has the meaning set forth in the Recitals to this Agreement.
"Common Shares Outstanding" has the meaning set forth in Section 3.01(a).
"Compass" has the meaning set forth in the preamble to this Agreement.
"Compass Affiliate" has the meaning set forth in Section 6.07(a).
"Compass Bank" has the meaning set forth in the preamble to this Agreement.
"Compass Bank Board" means the Board of Directors of Compass Bank.
"Compass Board" means the Board of Directors of Compass.
"Compass Common Stock" means the common stock, par value $2.00 per share,
of Compass.
"Compass Indemnitees" has the meaning set forth in Section 6.16(d)(ii).
"Compass Series E Preferred Stock" has the meaning set forth in
Section 3.01(b).
"Compass Series F Preferred Stock" has the meaning set forth in
Section 3.01(b).
"Compass Stock" means, collectively, the Compass Common Stock, the Compass
Series E Preferred Stock and the Compass Series F Preferred Stock.
"Compensation and Benefit Plans" has the meaning set forth in
Section 5.03(m).
"Corporate Laws" shall have the meaning set forth in Section 2.01(b) of the
Agreement.
"Costs" has the meaning set forth in Section 6.12(a).
3
<PAGE>
"Delay Notice" has the meaning set forth in Section 6.16(c)(iii).
"Disadvantageous Condition" has the meaning set forth in
Section 6.16(c)(iii).
"Disclosure Schedule" has the meaning set forth in Section 5.01.
"Dissenting Shares" has the meaning set forth in Section 3.01(d).
"DOL" means the Department of Labor.
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" means the effective time of the Merger as provided for in
Section 2.02.
"Environmental Expenditures" has the meaning set forth in
Section 3.01(a)(vii).
"Environmental Laws" means all applicable local, state and federal
environmental, health and safety laws, regulations, statutes, ordinances, rules,
directives, and orders, including, without limitation, the Resource Conservation
and Recovery Act, the Comprehensive Environmental Response, Compensation, and
Liability Act, the Clean Water Act, the Clean Air Act, and the Occupational
Safety and Health Act, each as amended, regulations promulgated thereunder, and
state counterparts of any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(m).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.04(a).
"Exchange Fund" has the meaning set forth in Section 3.04(a).
"FDIC" means the Federal Deposit Insurance Corporation
"Governmental Authority" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality, including but not limited to, any Regulatory Authority.
"Hazardous Substances" has the meaning set forth in Section 5.03(p).
"Indemnified Party" has the meaning set forth in Section 6.12(a).
4
<PAGE>
"Insurance Amount" has the meaning set forth in Section 6.12(b).
"IRS" means the Internal Revenue Service.
"Knowledge", 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 normal course of performing his duties. 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 as a director or officer (or in any
similar capacity) of the corporation or bank who has been Previously Disclosed,
has, or at any time had, knowledge of such fact or other matter.
"Lien" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
"Material Adverse Effect" means, with respect to Compass or Arizona Bank,
any effect that (i) is material and adverse to the financial position, results
of operations or business of Compass and its Subsidiaries taken as a whole or
Arizona Bank and its Subsidiaries taken as a whole, respectively, or (ii) would
materially impair the ability of Compass, Compass Bank or Arizona Bank to
perform its obligations under this Agreement or otherwise materially threaten or
materially impede the consummation of the Merger ; provided, however, that
Material Adverse Effect shall not be deemed to include the impact of (a) changes
in banking and similar laws of general applicability or interpretations thereof
by courts or Governmental Authorities, or other changes affecting depository
institutions generally, (b) changes in generally accepted accounting principles
or regulatory accounting requirements applicable to banks and/or their holding
companies generally, (c) any modifications or changes to valuation policies and
practices in connection with the Merger or restructuring charges taken in
connection with the Merger, in each case in accordance with generally accepted
accounting principles, (d) changes resulting from expenses (such as legal,
accounting and investment bankers' fees) incurred in connection with this
Agreement and the transactions contemplated by this Agreement which have been
Previously Disclosed, and (e) actions or omissions of Compass or Arizona Bank
taken with the prior written consent of Arizona Bank or Compass, as applicable,
in contemplation of the transactions contemplated hereby.
"Merger" has the meaning set forth in Section 2.01(a).
"Merger Consideration" has the meaning set forth in Section 2.03.
"NASDAQ" means The Nasdaq Stock Market, Inc.'s National Market System.
"New Certificates" has the meaning set forth in Section 3.04(a).
"New Shares" has the meaning set forth in Section 3.01(a)(v).
5
<PAGE>
"Old Certificates" has the meaning set forth in Section 3.04(a).
"Pension Plan" has the meaning set forth in Section 5.03(m).
"Person" means any individual, bank, corporation, partnership, limited
liability company, association, joint-stock company, business trust or
unincorporated organization.
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Pricing Termination Option" has the meaning set forth in
Section 3.01(a)(v).
"Principal Stockholder Indemnitees" has the meaning set forth in
Section 6.16(d)(i).
"Principal Stockholders" means James H. Click, Jr., and Vicki Click, as
Trustees of the James H. Click, Jr. Family Trust dated November 25, 1991, Robert
H. Tuttle, Individually and as Trustee under Declaration of Trust for the Robert
H. Tuttle Family Trust dated October 31, 1984 and as Trustee of Trusts dated
December 27, 1978, and Maria Hummer, and their respective estates and heirs.
"Proxy Statement" has the meaning set forth in Section 6.03.
"Registrable Shares" has the meaning set forth in Section 6.16(a)(iii).
"Registration Period" has the meaning set forth in Section 6.16(a)(iii).
"Registration Statement" has the meaning set forth in Section 6.03.
"Regulatory Authority" has the meaning set forth in Section 5.03(i).
"Representatives" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Resulting Institution" shall have the meaning set forth in Section 2.01(a)
of the Agreement.
"Rights" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such Person.
"SEC" means the Securities and Exchange Commission.
6
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"SEC Documents" has the meaning set forth in Section 5.04(g).
"Securities Documents" has the meaning set forth in Section 5.03(g).
"Share Determination Market Value" has the meaning set forth in
Section 3.01(a)(ii).
"Shares" has the meaning set forth in Section 6.16(a)(i).
"Specified Representations" has the meaning set forth in Section 5.02.
"Subsidiary" has the meanings ascribed to them in Rule 1-02 of
Regulation S-X of the SEC.
"Takeover Laws" has the meaning set forth in Section 5.03 (o).
"Tax" and "Taxes" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts, sales,
use, ad valorem, goods and services, capital, production, transfer, franchise,
windfall profits, license, withholding, payroll, employment, disability,
employer health, excise, estimated, severance, stamp, occupation, property,
environmental, unemployment or other taxes, custom duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority arising
before the Effective Date.
"Tax Returns" means any return, amended return or other report (including
elections, declarations, disclosures, schedules, estimates and information
returns) required to be filed with respect to any Tax.
"Termination Rejection" has the meaning set forth in Section 3.01(a)(v).
"Treasury Stock" shall mean shares of Arizona Bank Common Stock held by
Arizona Bank or any of its Subsidiaries or by Compass or any of its
Subsidiaries, in each case other than in a fiduciary capacity or as a result of
debts previously contracted in good faith.
"Wright Agreements" shall have the meaning set forth in Section 7.03(j).
"Year 2000 Budget" shall have the meaning set forth in Section 5.03(bb).
7
<PAGE>
ARTICLE II
THE MERGER
2.01 The Merger.
(a) Merger. At the Effective Time, Arizona Bank shall merge with and
into Compass Bank (the "Merger"), the separate corporate existence of
Arizona Bank shall cease and Compass Bank shall survive and continue to
exist as an Arizona banking organization (and as the resulting entity in
the Merger referred to herein as either "Compass Bank" or the "Resulting
Institution").
(b) Corporate Law Filings. Subject to the satisfaction or waiver of
the conditions set forth in Article VII, the Merger shall become effective
upon the occurrence of the filing of one or more certificates or articles
of merger in accordance with the corporate laws applicable to Arizona Bank
and Compass Bank ("Corporate Laws") or such later date and time as may be
set forth in such certificates of merger.
(c) Effects of Merger. The Merger shall have the effects prescribed in
the Corporate Laws, including but not limited to, Compass Bank, as the
Resulting Institution, thereupon and thereafter possessing all of the
rights, privileges, immunities and franchises, of a public as well as of a
private nature, of each of the corporations so merged and Compass Bank, as
the Resulting Institution, becoming responsible and liable for all the
liabilities, obligations and penalties of each of the corporations so
merged. All rights of creditors and obligors and all liens on the property
of each of Compass Bank and Arizona Bank shall be preserved unimpaired.
(d) Articles of Incorporation and By-Laws of Resulting Institution.
The Articles of Incorporation and Bylaws of Compass Bank as the Resulting
Institution immediately after the Merger shall be those of Compass Bank as
in effect immediately prior to the Effective Time, subject to such Articles
of Incorporation being amended to change the name of Compass Bank to
"Arizona Bank". In no event, however, shall Compass or Compass Bank be
required to maintain the name "Arizona Bank" indefinitely.
(e) Directors and Officers of the Resulting Institution. The directors
of Compass Bank as the Resulting Institution immediately after the Merger
shall be the directors of Compass Bank immediately prior to the Effective
Time, until such time as their successors shall be duly elected and
qualified. The officers of Arizona Bank immediately prior to the Effective
Time shall be officers of the Resulting Institution immediately after the
Merger.
8
<PAGE>
(f) Plan of Merger. Arizona Bank, Compass and Compass Bank shall enter
into a separate plan of merger reflecting the terms of the Merger for
purposes of any state law filing requirement.
2.02 Effective Date and Effective Time. Subject to the satisfaction or
waiver of the conditions set forth in Article VII and the provisions of
Section 4.02(c), the parties shall cause the effective date of the Merger (the
"Effective Date") to occur on (i) the fifth business day to occur after the last
of the conditions set forth in Article VII shall have been satisfied or waived
in accordance with the terms of this Agreement or (ii) such other date to which
the parties may agree in writing. The time on the Effective Date when the Merger
shall become effective is referred to as the "Effective Time."
2.03 Reservation of Right to Revise Structure. Compass may at any time
prior to the Effective Time, with the prior consent of Arizona Bank (such
consent not to be unreasonably withheld or delayed), change the method of
effecting the Merger if and to the extent it deems such change to be necessary,
appropriate or desirable; provided, however, that no such change shall (i) alter
or change the amount or kind of consideration to be issued to holders of Arizona
Bank Stock as provided for in this Agreement (the "Merger Consideration"), (ii)
adversely affect the tax treatment of Arizona Bank's stockholders as a result of
receiving the Merger Consideration or the Merger qualifying for "pooling-of-
interests" accounting treatment, (iii) adversely affect the rights, privileges
and preferences of the Arizona Bank Subordinated Debentures, (iv) materially
impede or delay consummation of the Merger, (v) result in any representation or
warranty of any party set forth in this Agreement becoming incorrect in any
material respect, or (vi) diminish the benefits to be received by the directors,
officers or employees of Arizona Bank and its Subsidiaries as set forth in this
Agreement or in any other agreement between the parties made in connection with
this Agreement.
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES
3.01 Merger Consideration. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any Person:
(a) Conversion of Shares; Arizona Bank Common Stock. (i) Each share of
the Arizona Bank Common Stock, issued and outstanding immediately prior to
the Effective Time ("Common Shares Outstanding"), 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 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 of Arizona Bank Common Stock
issued and outstanding, the number of shares issued and outstanding shall
be increased by the number and class of
9
<PAGE>
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. Immediately prior to the Effective Time, Arizona Bank shall
calculate and certify to Compass the Common Shares Outstanding.
(ii) Subject to subsections (iii), (iv), (v), (vi) and (vii)
below, Compass will issue to the holders of the shares of Arizona Bank
Common Stock an aggregate number of shares of its Compass Common Stock,
which is equal to $170,000,000 divided by the average closing sale price of
the Compass Common Stock as reported by the NASDAQ for the twenty days of
trading preceding the tenth business day prior to the Effective Time (the
"Share Determination Market Value").
(iii) Subject to subsection (vii) below, in the event that the
Share Determination Market Value would result in the number of shares of
Compass Common Stock to be issued to be greater than 4,250,000, Compass
will issue to the holders of the shares of Arizona Bank Common Stock an
aggregate number of shares of Compass Common Stock equal to 4,250,000.
(iv) Subject to subsection (vii) below, in the event the Share
Determination Market Value would result in the number of shares of Compass
Common Stock to be issued to be less than 3,541,667, Compass will issue to
the holders of the shares of Arizona Bank Common Stock an aggregate number
of shares of Compass Common Stock equal to 3,541,667.
(v) Subject to subsection (vii) below, in the event Compass
enters into definitive written agreement to be acquired (by merger or
otherwise) prior to the Effective Time Compass will issue to the holders of
Arizona Bank Common Stock an aggregate number of shares of Compass Common
Stock pursuant to subsections (i), (ii) and (iii) above, as applicable, but
in no event less than 3,863,636 shares.
(vi) In the event the Share Determination Market Value is less
than $37.00 per share, Arizona Bank may terminate this Agreement (the
"Pricing Termination Option") by written notice to Compass within five
business days from the date upon which the Share Determination Market Value
less than $37.00 per share is capable of being determined. In the event
Arizona Bank exercises its Pricing Termination Option, Compass shall have
the right to reject such termination of the Agreement by Arizona Bank ( the
"Termination Rejection") by agreeing to issue an aggregate number of shares
equal to the quotient of $157,250,000 divided by the Share Determination
Market Value ("New Shares") in which event each holder of Arizona Bank
Common Stock shall receive for each share so held Merger Consideration
equal to the quotient of the New Shares divided by the Common Shares
Outstanding. Such Termination Rejection shall be exercised by notice to
Arizona Bank within three business days following the date on which Compass
receives notice of
10
<PAGE>
Arizona Bank's exercise of the Pricing Termination Option. In the event
Compass fails to notify Arizona Bank of its election to reinstate this
Agreement within such three business day period, this Agreement shall then
be terminated.
(vii) If the results of any environmental inspections identify
any past or present event, condition, or circumstance that, based on the
estimates of Compass' independent environmental professionals may currently
or in the future require expenditures by Arizona Bank or its Subsidiaries,
in connection with (A) investigation, remediation or monitoring of any any
condition in, on, under or resulting from any property, site, or facility
currently or previously owned or operated or currently leased (including
eventual removal of asbestos-containing material if currently damaged,
friable, or at risk of releasing fibers, or if such materials are not
managed under an operation and maintenance program prepared in accordance
with Environmental Laws and generally prevailing guidance documents issued
by, or on behalf of, regulatory authorities regarding the preparation and
implementation of such programs) which condition, in the opinion of the
environmental professional, violates or has violated any Environmental Law,
or which condition may be the subject of an actual or potential release of
Hazardous Substances, or of an actual or potential claim by any Person or
governmental entity pursuant to Environmental Laws or related to Hazardous
Substances, (B) preparing and obtaining approval by the appropriate
environmental regulatory authority of investigation, remediation and
monitoring plans with respect to such condition, or (C) any violations of
Environmental Laws, which expenditures ("Environmental Expenditures")
individually or in the aggregate are estimated to exceed $3,000,000 on a
pre-tax basis, the number of shares of Compass Common stock to be issued to
the holders of shares of Arizona Bank Common Stock shall be reduced by the
number of shares which is equal to the quotient of the Environmental
Expenditures in excess of $3,000,000 but which are less than $6,000,000
divided by the Share Determination Market Value.
(viii) The ratio of the number of shares of Compass Common Stock
to be exchanged for each share, respectively, and the share figures set
forth in subsections (iii), (iv), (v), (vi), and (vii) above shall be
adjusted appropriately to reflect any dividends or distributions payable in
stock or splits with respect to Compass Common Stock, where the record date
or payment occurs prior to the Effective Time.
(ix) Set forth on Exhibit E is an illustration of the merger
consideration payable to holders of Arizona Bank Common Stock. In the event
of any conflict between Exhibit E and the foregoing provisions of this
Section 3(a), the foregoing provisions of this Section 3(a) shall control.
(b) Conversion of Shares; Arizona Bank Series E and F Preferred Stock.
Each share of Arizona Bank Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted in shares of
Preferred Stock of Compass, par value $0.10 per share, as follows:
11
<PAGE>
(i) Each such share of Arizona Bank Series E Preferred Stock
shall be converted into one share of preferred stock of Compass having the
same terms as the Arizona Bank Series E Preferred Stock ("Compass Series E
Preferred Stock").
(ii) Each such share of Arizona Bank Series F Preferred Stock
shall be converted into one share of preferred stock of Compass having the
same terms as the Arizona Bank Series F Preferred Stock ("Compass Series F
Preferred Stock").
(c) Treasury Shares. Each share of Arizona Bank Stock held as Treasury
Stock immediately prior to the Effective Time shall be canceled and retired
at the Effective Time, and no consideration shall be issued in exchange
therefor.
(d) Dissenting Shares. Any shares of Arizona Bank Common Stock held by
a holder who dissents from the Merger in accordance with the Corporate Laws
shall be herein called "Dissenting Shares". Notwithstanding any other
provision of this Agreement, any Dissenting Shares shall not, after the
Effective Time, be entitled to vote for any purpose or receive any
dividends or other distributions and shall be entitled only to such rights
as are afforded in respect of Dissenting Shares pursuant to the Corporate
Laws.
(e) Compass Bank Common Stock. Each share of Compass Bank common stock
issued and outstanding immediately prior to the Effective Time shall not be
converted by virtue of the Merger and shall remain outstanding as one share
of capital stock of the Resulting Institution.
(f) Outstanding Compass Common Stock. Each share of Compass Common
Stock issued and outstanding or held in treasury immediately prior to the
Effective Time shall remain issued and outstanding or held in treasury and
shall be unaffected by the Merger.
3.02 Rights as Stockholders; Stock Transfers. At the Effective Time,
holders of Arizona Bank Stock shall cease to have any rights as stockholders of
Arizona Bank, except such rights, if any, as they may have pursuant to the
Corporate Laws. After the Effective Time, there shall be no transfers on the
stock transfer books of Arizona Bank as the Resulting Institution of shares of
Arizona Bank Stock.
3.03 Fractional Shares. Notwithstanding any other provision hereof, no
fractional shares of Compass Common Stock and no certificates or scrip therefor,
or other evidence of ownership thereof, will be issued in the Merger; instead,
Compass shall pay to each holder of Arizona Bank Common Stock who would
otherwise be entitled to a fractional share of Compass Common Stock (after
taking into account all Old Certificates delivered by such holder) an amount in
cash based on the Share Determination Market Value.
12
<PAGE>
3.04 Exchange Procedures.
(a) Deposit of New Certificates, Etc. At or prior to the Effective
Time, Compass shall advise Continental Stock Transfer and Trust Company
(the "Exchange Agent") to establish a reserve out of the authorized but
unissued shares of Compass Stock to effect the exchange of Compass Stock
("New Certificates") in accordance with this Article III for certificates
formerly representing shares of Arizona Bank Stock ("Old Certificates"),and
an estimated amount of cash (such cash and New Certificates, together with
any dividends or distributions with a record date occurring on or after the
Effective Date with respect thereto (without any interest on any such cash,
dividends or distributions), being hereinafter referred to as the "Exchange
Fund") to be paid pursuant to this Article III in exchange for outstanding
shares of Arizona Bank Stock.
(b) Transmittal and Deliveries. As promptly as practicable after the
Effective Date, but in no event later than five business days thereafter,
Compass shall cause to be sent to each former holder of record of shares of
Arizona Bank Stock immediately prior to the Effective Time transmittal
materials (which shall specify that risk of loss and title to Old
Certificates shall pass only upon acceptance of such Old Certificates by
Compass or the Exchange Agent) for use in exchanging such stockholder's Old
Certificates for the consideration set forth in this Article III. Compass
shall cause the New Certificates into which shares of a stockholder's
Arizona Bank Stock are converted on the Effective Date and/or any check in
respect of any fractional share interests or dividends or distributions
which such person shall be entitled (in respect of Arizona Bank Common
Stock) to receive to be delivered to such stockholder upon delivery to the
Exchange Agent of Old Certificates representing such shares of Arizona Bank
Stock (or indemnity reasonably satisfactory to Compass and the Exchange
Agent, if any of such certificates are lost, stolen or destroyed) owned by
such stockholder. No interest will be paid on any such cash to be paid in
lieu of fractional share interests or in respect of dividends or
distributions which any such person shall be entitled to receive pursuant
to this Article III upon such delivery. Compass and the Exchange Agent
shall be entitled to rely upon the stock transfer books of Arizona Bank to
establish the identity of those persons entitled to receive consideration
specified in this Agreement, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership of stock
represented by any Old Certificate, Compass or the Exchange Agent shall be
entitled to deposit any consideration in respect thereof in escrow with an
independent third party and thereafter be relieved with respect to any
claims thereto.
(c) Escheat. Notwithstanding the foregoing, neither the Exchange Agent
nor any party hereto shall be liable to any former holder of Arizona Bank
Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
13
<PAGE>
(d) Restrictions on the Payment of Dividends and Voting. No dividends
or other distributions with respect to Compass Stock with a record date
occurring on or after the Effective Time shall be paid to the holder of any
unsurrendered Old Certificate representing shares of Arizona Bank Stock
converted in the Merger into the right to receive shares of such Compass
Stock until the holder thereof shall be entitled to receive New
Certificates in exchange therefor in accordance with the procedures set
forth in this Section 3.04, and, following 180 days after the Effective
Date, no such shares of Arizona Bank Stock shall be eligible to vote until
the holder of Old Certificates is entitled to receive New Certificates in
accordance with the procedures set forth in this Section 3.04. After
becoming so entitled in accordance with this Section 3.04, the record
holder thereof also shall be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had
become payable with respect to shares of Compass Stock such holder had the
right to receive upon surrender of the Old Certificates.
(e) Return of Exchange Fund to Compass. Any portion of the Exchange
Fund that remains unclaimed by the stockholders of Arizona Bank for twelve
months after the Effective Time shall be paid to Compass. Any stockholders
of Arizona Bank who have not theretofore complied with this Article III
shall thereafter look only to Compass for payment of the shares of Compass
Stock, cash in lieu of any fractional shares and unpaid dividends and
distributions on Compass Stock deliverable in respect of each share of
Arizona Bank Stock such stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.
(f) Payment for Dissenting Shares. Any payment to be made for
Dissenting Shares shall be paid solely from funds of Compass.
3.05 Anti-Dilution Provisions. In the event Compass changes (or establishes
a record date for changing) the number of shares of Compass Common Stock issued
and outstanding prior to the Effective Date as a result of a stock split, stock
dividend, recapitalization or similar transaction with respect to the
outstanding Compass Common Stock and the record date therefor shall be prior to
the Effective Date, the Exchange Ratio shall be proportionately adjusted.
3.06 Conversion of Arizona Bank Series C Convertible Preferred Stock
and Exercise of Arizona Bank Option. Prior to the Effective Time, all of the
issued and outstanding shares of Arizona Bank Series C Convertible Preferred
Stock shall be converted into 384,615 shares of Arizona Bank Common Stock and
the Arizona Bank Option will be exercised in full for 70,731 shares of Arizona
Bank Common Stock, in each case in accordance with the terms of the underlying
instruments relating thereto as in existence on the date of this Agreement.
14
<PAGE>
ARTICLE IV
ACTIONS PENDING THE MERGER
4.01 Forbearances of Arizona Bank. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of Compass, Arizona Bank will not, and will cause each of its
Subsidiaries not to:
(a) Ordinary Course. Conduct the business of Arizona Bank and its
Subsidiaries other than in the ordinary and usual course and in accordance
with prudent banking practices or fail to use reasonable efforts to (i)
preserve intact their business organizations and assets and (ii) maintain
their material rights, franchises and existing relations with material
customers, suppliers, employees and business associates, or take any action
reasonably likely to materially impair Arizona Bank's ability to perform
any of its obligations under this Agreement.
(b) Arizona Bank Stock. Other than pursuant to Section 3.06 (i) issue,
sell or otherwise permit to become outstanding, or authorize the creation
of, any additional shares of Arizona Bank Stock or any Rights, (ii) enter
into any agreement with respect to the foregoing, or (iii) permit any
additional shares of Arizona Bank Stock to become subject to new grants of
employee or director stock options, other Rights or similar stock-based
employee rights.
(c) Other Securities. Issue any other capital securities, capital
stock of any Subsidiary, debentures or subordinated notes.
(d) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any dividend on Arizona Bank Common Stock or (ii) directly or indirectly
adjust, split, combine, redeem, reclassify, purchase or otherwise acquire,
any shares of its capital stock or Rights.
(e) Compensation; Employment Agreements, Etc. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of Arizona Bank or its
Subsidiaries, or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments) except (i) oral at will
employment agreements, (ii) for normal individual increases in annual
compensation to employees in the ordinary course of business consistent
with past practice, (iii) for other changes that are required by applicable
law and as reflected in Arizona Bank's 1998 budget as Previously Disclosed,
(iv) to satisfy contractual obligations and planned programs existing as of
the date hereof that are Previously Disclosed, or (v) as provided in a
separate written document executed by Arizona Bank and Compass on the date
hereof.
15
<PAGE>
(f) Benefit Plans. Except as provided in a separate written document
executed by Arizona Bank and Compass on the date hereof or as permitted by
Section 6.13(iii) and (iv), enter into, establish, adopt or amend (except
as may be required by existing contractual obligation which has been
Previously Disclosed or applicable law or as may be deemed appropriate by
Arizona Bank to change providers or obtain better coverage of industry-
standard employee benefits in the ordinary course of business) any pension,
profit sharing, employee stock ownership, retirement, stock option, stock
appreciation, phantom stock, stock purchase, savings, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
(or similar arrangement) related thereto, in respect of any director,
officer or employee of Arizona Bank or its Subsidiaries, or take any action
to accelerate the vesting or exercisability of stock options, restricted
stock or other compensation or benefits payable thereunder.
(g) Dispositions. Except as Previously Disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its
assets, deposits, business or properties except in the ordinary course of
business and consistent with prudent banking practices.
(h) Acquisitions. Except as Previously Disclosed, acquire (other than
by way of foreclosures or acquisitions of control in a bona fide fiduciary
capacity or in satisfaction of debts previously contracted in good faith,
in each case in the ordinary and usual course of business consistent with
past practice and prudent banking practices) all or any portion of, the
assets, business, deposits or properties of any other entity.
(i) Governing Documents. Except as Previously Disclosed, amend the
Arizona Bank Articles, Arizona Bank By-Laws or the certificate or articles
of incorporation, charter or by-laws (or similar governing documents) of
any of Arizona Bank's Subsidiaries.
(j) Accounting Methods. Implement or adopt any voluntary change in its
accounting principles, practices or methods.
(k) Contracts. Except to maintain normal and customary operations in
the ordinary course of business, enter into or terminate any material
contract (as defined in Section 5.03(k)) or amend or modify in any material
respect or renew any of its existing material contracts.
(l) Claims. Except in the ordinary course of business consistent with
past practice and prudent banking practices, settle any claim, action or
proceeding, and further excepting any claim, action or proceeding which
does not involve precedent for other material claims, actions or
proceedings and which involves solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material to Arizona Bank and its Subsidiaries, taken as a whole.
16
<PAGE>
(m) Foreclose. Foreclose upon or otherwise take title to or possession
or control of any real property without first obtaining a phase one
environmental report thereon; provided, however, that Arizona Bank and its
Subsidiaries shall not be required to obtain such a report with respect to
one-to four-family, non-agricultural residential property of five acres or
less to be foreclosed upon unless it has reason to believe that such
property might be in violation of or require remediation under
Environmental Laws.
(n) Deposit Taking and Branch Activities. (i) Voluntarily make any
material changes in or to its deposit mix; (ii) increase or decrease the
rate of interest paid on time deposits or on certificates of deposit,
except in a manner and pursuant to policies consistent with past practice
and prudent banking practices; (iii) open any new branch or deposit taking
facility, except to satisfy contractual obligations and planned programs
existing as of the date hereof that are Previously Disclosed; (iv) close or
relocate any existing branch; or (v) incur any liability or obligation
relating to retail banking and branch merchandising, marketing and
advertising activities and initiatives materially in excess of the amounts
budgeted in its 1998 or 1999 business plans, as amended, as Previously
Disclosed.
(o) Investments. Enter into any securities transaction for its own
account or purchase or otherwise acquire any investment security for its
own account except purchases and sales of securities consistent with past
practice and prudent banking practices in order to maintain investment
portfolios at Arizona Bank and its Subsidiaries that have risk and asset
mix characteristics substantially similar to those of the respective
investment portfolios as of the date hereof.
(p) Capital Expenditures. Purchase or lease any fixed asset where the
amount paid or committed thereof is in excess of $100,000 individually or
$500,000 in the aggregate, except amounts budgeted in its 1998 or 1999
business plans, as amended, as Previously Disclosed.
(q) Lending. (i) Make any material changes in its policies concerning
loan underwriting or which persons may approve loans or fail to comply with
such policies; or (ii) except for renewals of existing facilities and
Internal Guidance Lines of Credit previously approved for lending officers
to serve customer needs, make or commit to make any new loan or letter of
credit, or any new or additional discretionary advance under any existing
loan or line of credit, or restructure any existing loan or line of credit
equal to or in excess of $2,500,000, without the prior written consent of
Compass acting through its Chief Executive Officer or delegate of the Chief
Executive Officer in a written notice to Arizona Bank, which approval or
rejection shall be given within five business days after delivery by
Arizona Bank to such officer of Compass of the complete loan package;
provided, that for loans or lines of credit greater than $2,500,000, but
less than $5,000,000 such consent shall not be unreasonably withheld.
Arizona Bank will provide Compass written notice of any new loan or letter
of credit, or any new or additional discretionary advance under any
17
<PAGE>
existing loan or line of credit, or restructure of any existing loan or
line of credit where the outstanding credit would be equal to or greater
than $500,000, but less than $2,500,000.
(r) Adverse Actions. (i) Take any action or fail to take any action
while knowing that such action or inaction would, or is reasonably likely
to, prevent or impede (A) the Merger from qualifying for "pooling-of-
interests" accounting treatment or (B) the Merger from qualifying as
reorganization within the meaning of Section 368 of the Code; or (ii)
knowingly take any action or fail to take any action that is intended or is
reasonably likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming untrue at any time
at or prior to the Effective Time, (B) any of the conditions to the Merger
set forth in Article VII not being satisfied or (C) a violation of any
provision of this Agreement except, in each case, as may be required by
applicable law or regulation.
(s) Risk Management. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate
and other risk management policies, procedures or practices; (ii) fail to
follow its existing policies or practices with respect to managing its
exposure to interest rate and other risk; or (iii) fail to use commercially
reasonable means to avoid any material increase in its aggregate exposure
to interest rate risk.
(t) Indebtedness. Incur any indebtedness for borrowed money other than
in the ordinary course of business and with a term of one year or less.
(u) Commitments. Agree or commit to do any of the foregoing.
4.02 Forbearances of Compass. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of Arizona Bank, Compass will not, and will cause each of its
Subsidiaries not to:
(a) Preservation. Fail to use reasonable efforts to (i) preserve
intact in any material respect their business organizations and assets and
(ii) maintain their material rights, franchises and existing relations with
material customers, suppliers, employees and business associates, or take
any action reasonably likely to materially impair the ability of Compass or
Compass Bank to perform any of its obligations under this Agreement.
(b) Consummation of Merger Prior to Record Date for Quarterly
Dividend. If all required approvals from Regulatory Authorities have been
obtained prior to Compass' normal record date for its quarterly dividend,
Compass shall use its best efforts to cause the Effective Date to occur
prior to such record date.
(c) Adverse Actions. (i) Take any action or fail to take any action
while knowing that such action or inaction would, or is reasonably likely
to, prevent or impede (A) the
18
<PAGE>
Merger from qualifying for "pooling-of-interests" accounting treatment or
(B) the Merger from qualifying as reorganization within the meaning of
Section 368 of the Code; or (ii) knowingly take any action or fail to take
any action that is intended or is reasonably likely to result in (A) any of
its representations and warranties set forth in this Agreement being or
becoming untrue at any time at or prior to the Effective Time, (B) any of
the conditions to the Merger set forth in Article VII not being satisfied
or (C) a violation of any provision of this Agreement except, in each case,
as may be required by applicable law or regulation.
(d) Accounting Methods. Implement or adopt any material change in its
accounting principles, practices or methods, other than as may be required
by generally accepted accounting principles.
(e) Commitments. Agree or commit to do any of the foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Disclosure Schedules. On or prior to the date hereof, Compass has
delivered to Arizona Bank a schedule and on or before the third business day
after the date hereof, Arizona Bank will deliver to Compass a schedule (which
schedule shall be subject to review and approval by Compass in its sole
discretion within ten business days after the date hereof) (respectively, its
"Disclosure Schedule") setting forth, among other things, items the disclosure
of which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in Section 5.03 or 5.04 or to one or
more of its covenants contained in Article IV; provided, that (a) no such item
is required to be set forth in a Disclosure Schedule as an exception to a
Specified Representation (other than Section 5.03(j) and Section 5.04(i)) if its
absence would not be reasonably likely to result in the Specified Representation
being deemed untrue or incorrect under the standard established by Section 5.02,
and (b) the mere inclusion of an item in a Disclosure Schedule as an exception
to a Specified Representation shall not be deemed an admission by a party that
such item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect on the
party making the representation. Arizona Bank's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached as a result of effects arising solely from actions taken in compliance
with a written request of Compass.
5.02 Standard. No representation or warranty of Arizona Bank or Compass
contained in Section 5.03(a)(ii), (c)(iii), (f)(i) and (j), or 5.04(a)(ii), (c),
f(i) and (i) (collectively, the "Specified Representations") shall be deemed
untrue or incorrect, and no party hereto shall be deemed to have breached a
Specified Representation, as a consequence of the existence of any fact, event
or circumstance unless such fact, event or circumstance, individually or taken
together with all other
19
<PAGE>
facts, events or circumstances inconsistent with any Specified Representation
has had or is reasonably likely to have a Material Adverse Effect.
5.03 Representations and Warranties of Arizona Bank. Subject to
Sections 5.01 and 5.02 and except as Previously Disclosed in a paragraph of its
Disclosure Schedule corresponding to the relevant paragraph below, Arizona Bank
hereby represents and warrants to Compass:
(a) Organization, Standing and Authority. (i) Arizona Bank is a
banking organization duly organized, validly existing and in good standing
under the laws of the Arizona; and (ii) Arizona Bank is duly qualified to
do business and is in good standing in the states of the United States and
any foreign jurisdictions where its ownership or leasing of property or
assets or the conduct of its business requires it to be so qualified.
(b) Arizona Bank Stock. The authorized capital stock of Arizona Bank
consists solely of (i) 80,000,000 shares of Arizona Bank Common Stock, of
which 1,030,000 shares were outstanding as of the date hereof, and
(ii) 20,000,000 shares of Arizona Bank Preferred Stock, of which
(x) 120,000 shares of Arizona Bank Series C Convertible Preferred Stock
convertible into 384,615 shares of Arizona Bank Common Stock, (y) 460,000
shares of Arizona Bank Series E Preferred Stock and (z) 690,000 shares of
Arizona Bank Series F Preferred Stock, are issued and outstanding on the
date hereof. The outstanding shares of Arizona Bank Stock have been duly
authorized and are validly issued and outstanding, fully paid and
nonassessable (except as mandated by Arizona law), and subject to no
preemptive rights (and were not issued in violation of any preemptive
rights). Except for the Arizona Bank Options and except to satisfy the
Rights set forth in Section 3.06, there are no shares of Arizona Bank Stock
authorized and reserved for issuance, Arizona Bank does not have any Rights
issued or outstanding with respect to Arizona Bank Stock, and Arizona Bank
does not have any commitment to authorize, issue or sell any Arizona Bank
Stock or Rights, other than pursuant to this Agreement. Immediately prior
to the Effective Time and after giving effect to the conversion of all
issued and outstanding Arizona Bank Series C Convertible Preferred Stock to
384,615 shares of Arizona Bank Common Stock and after the exercise of the
Arizona Bank Option for 70,731 shares of Arizona Bank Common Stock, there
will be 1,485,346 shares of Arizona Bank Common Stock issued and
outstanding.
(c) Subsidiaries. (i)(A) Arizona Bank has Previously Disclosed a list
of all of its Subsidiaries together with the jurisdiction of organization
of each such Subsidiary, (B) it owns, directly or indirectly, all the
issued and outstanding equity securities of each of its Subsidiaries, (C)
no equity securities of any of its Subsidiaries are or may become required
to be issued (other than to it or its wholly-owned Subsidiaries) by reason
of any Right or otherwise, (D) there are no contracts, commitments,
understandings or arrangements by which any of such Subsidiaries is or may
be bound to sell or otherwise transfer any equity securities of any such
Subsidiaries (other than to it or its wholly-owned Subsidiaries), (E) there
are no contracts, commitments, understandings, or arrangements relating to
its
20
<PAGE>
rights to vote or to dispose of such securities and (F) all the equity
securities of each Subsidiary held by Arizona Bank or its Subsidiaries are
fully paid and nonassessable and are owned by Arizona Bank or its
Subsidiaries free and clear of any Liens.
(ii) Neither Arizona Bank nor any Arizona Bank Subsidiary owns
beneficially any equity securities or similar interests of any Person
other than a Arizona Bank Subsidiary, Federal Home Loan Bank stock,
MultiBank, a consortium of banks formed to support community
investments, readily marketable securities and as otherwise Previously
Disclosed.
(iii) Each of Arizona Bank's Subsidiaries has been duly organized
and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business
and in good standing in the jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be
so qualified.
(d) Corporate Power. Each of Arizona Bank and its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and Arizona Bank has
the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the Merger contemplated
hereby.
(e) Corporate Authority. Subject in the case of this Agreement to
receipt of the approval of this Agreement by the requisite vote of holders
of a majority of the outstanding shares of Arizona Bank Stock entitled to
vote thereon, this Agreement and the Merger contemplated hereby have been
authorized by all necessary corporate action of Arizona Bank and the
Arizona Bank Board on or prior to the date hereof. This Agreement is a
valid and legally binding obligation of Arizona Bank, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, receivership, conservatorship,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
equity principles).
(f) Regulatory Filings; No Defaults. (i) No consents or approvals of,
or filings or registrations with, any Governmental Authority or with any
third party are required to be made or obtained by Arizona Bank or any of
its Subsidiaries in connection with the execution, delivery or performance
by Arizona Bank of this Agreement or to consummate the Merger except for
(A) filings of applications or notices with federal and state banking
authorities, (B) filings with the SEC and state securities authorities, and
(C) the filing of (and endorsement of, if required) certificates or
articles of merger with Governmental Authorities pursuant to the Corporate
Laws. As of the date hereof, Arizona Bank is not aware of any reason why
the approvals set forth in Section 7.01(b) will not be received in a timely
manner
21
<PAGE>
without the imposition of a condition, restriction or requirement of the
type described in Section 7.01(b).
(ii) Subject to receipt of the regulatory approvals referred to
in the preceding paragraph, and expiration of related waiting periods,
and required filings under federal and state securities laws, the
execution, delivery and performance of this Agreement and the
consummation of the Merger contemplated hereby do not and will not (A)
constitute a material breach or violation of, or a material default
under, or give rise to any Lien, any acceleration of remedies or any
right of termination under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or material
agreement, indenture or instrument of Arizona Bank or of any of its
Subsidiaries or to which Arizona Bank or any of its Subsidiaries or
properties is subject or bound, (B) subject to the receipt of the
shareholder approval referred to in Section 5.03(e), constitute a
breach or violation of, or a default under, the Arizona Bank Articles
or the Arizona Bank By-Laws, or (C) require any consent or approval
under any such law, rule, regulation, judgment, decree, order,
governmental permit or license, material agreement, indenture or
instrument.
(g) Financial Reports and Securities Documents. (i) Arizona Bank's
Annual Reports on Form F-2 or Form 10-K for the fiscal years ended
December 31, 1995, 1996 and 1997, and all other reports, registration
statements, definitive proxy statements or information statements filed or
to be filed by it or any of its Subsidiaries subsequent to December 31,
1995 under the Securities Act, or under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, in the form filed or to be filed (collectively,
"Securities Documents") with the FDIC, as of the date filed, (A) complied
or will comply in all material respects with the applicable requirements
under the Securities Act or the Exchange Act, as the case may be, as
applied by the FDIC and (B) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; and each of
the balance sheets or statements of condition contained in or incorporated
by reference into any such Securities Document (including the related notes
and schedules thereto) fairly presents, or will fairly present, the
financial position of Arizona Bank and its Subsidiaries as of its date, and
each of the statements of income and changes in stockholders' equity and
cash flows or equivalent statements in such Securities Documents (including
any related notes and schedules thereto) fairly presents, or will fairly
present, in all material respects, the results of operations, changes in
stockholders' equity and cash flows, as the case may be, of Arizona Bank
and its Subsidiaries for the periods to which they relate, in each case in
accordance with generally accepted accounting principles consistently
applied during the periods involved, except in each case as may be noted
therein, subject to normal year-end audit adjustments and the absence of
footnotes in the case of unaudited statements.
22
<PAGE>
(ii) Since December 31, 1997, Arizona Bank and its Subsidiaries
have not incurred any material liability other than in the ordinary
course of business consistent with past practice and prudent banking
practices, except relating to this Agreement and the Merger
contemplated hereby.
(iii) Except for liabilities incurred in connection with
negotiation of and compliance with this Agreement and otherwise in
connection with the Merger contemplated hereby, since December 31,
1997, (A) Arizona Bank and its Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with
past practice and prudent banking practices (excluding matters related
to this Agreement and the Merger contemplated hereby) and (B) no event
has occurred or circumstance arisen that, individually or taken
together with all other facts, circumstances and events (described in
any paragraph of Section 5.03 or otherwise), is reasonably likely to
have a Material Adverse Effect with respect to Arizona Bank.
(h) Litigation. Except as set forth in the Securities Documents, no
material litigation, claim or other proceeding before any Governmental
Authority is pending against Arizona Bank or any of its Subsidiaries and,
to Arizona Bank's knowledge, no such litigation, claim or other proceeding
has been threatened.
(i) Regulatory Matters. (i) Other than routine compliance
statements contained in examinations conducted in the ordinary course,
(i) neither Arizona Bank nor any of its Subsidiaries or properties is
a party to or is subject to any order, decree, agreement, or
memorandum of understanding with, or a commitment letter or similar
submission to, or extraordinary supervisory letter from, any federal
or state governmental agency or authority charged with the supervision
or regulation of financial institutions (or their holding companies)
or issuers of securities or engaged in the insurance of deposits or
the supervision or regulation of it or any of its Subsidiaries
(collectively, the "Regulatory Authorities").
(ii) Neither it nor any of its Subsidiaries has been advised by
any Regulatory Authority that such Regulatory Authority is
contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree,
agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission.
23
<PAGE>
(j) Compliance with Laws. Each of Arizona Bank and its Subsidiaries:
(i) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable thereto or to the employees conducting such businesses or
their respective facilities, properties, and assets, including,
without limitation, Environmental Laws, the Equal Credit Opportunity
Act, the Fair Housing Act, the Community Reinvestment Act of 1977, the
Home Mortgage Disclosure Act and all applicable fair lending laws and
laws relating to discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications, renewals,
submittals, and registrations with, all Governmental Authorities that
are required in order to permit them to own or lease their properties
and to conduct their businesses as presently conducted in each case in
compliance in all material respects with applicable legal
requirements, including Environmental Laws; all such permits,
licenses, certificates of authority, orders, authorizations, and
approvals are in full force and effect and, to Arizona Bank's
knowledge, no suspension, modification, or cancellation of any of them
is pending or threatened or will result from the consummation of the
transactions contemplated by this Agreement; and
(iii) has received, since December 31, 1993, no notification or
communication from any Governmental Authority (A) asserting that
Arizona Bank or any of its Subsidiaries is not in compliance in all
material respects with any of the statutes, regulations, or ordinances
(including without limitation Environmental Laws) which such
Governmental Authority enforces (other than routine compliance
statements contained in examinations conducted in the ordinary
course), or (B) threatening to revoke, suspend, or modify any material
license, franchise, permit, or governmental authorization (nor, to
Arizona Bank's knowledge, do any grounds for any of the foregoing
exist).
(k) Material Contracts; Defaults. Except for this Agreement, and those
agreements and other documents filed as exhibits to its Securities
Documents, neither it nor any of its Subsidiaries is a party to, bound by
or subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) (i) with a major vendor, or
involving the lease of real or personal property with an annual rental in
excess of $100,000, or maintenance contracts involving annual expenditures
in excess of $50,000 or any other material contract ("material contract"),
or (ii) that restricts or limits in any way the conduct of business by it
or any of its Subsidiaries (including without limitation a non-compete or
similar provision); provided, neither a deposit account nor a loan shall be
deemed a material contract. Neither it nor any of its Subsidiaries is in
default in any material respect under any material contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to
which it is a party, by which its respective assets, business, or
24
<PAGE>
operations may be bound or affected, or under which it or its respective
assets, business, or operations receive benefits, and there has not
occurred any event that, with the lapse of time or the giving of notice or
both, would constitute such a default.
(l) Brokers. No action has been taken by Arizona Bank that would give
rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding a Previously
Disclosed fee to be paid to Hovde Financial, Inc.
(m) Employee Benefit Plans. (i) Section 5.03(m)(i) of Arizona Bank's
Disclosure Schedule contains a complete and accurate list of all existing
and any terminated within the last three years employee benefit plans and
programs, and bonus, incentive, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock, stock option, stock appreciation, phantom
stock, severance, welfare and fringe benefit plans, contracts, employment,
collective bargaining, or severance agreements written and unwritten and
all similar practices, policies and arrangements in which Arizona Bank or
its Subsidiaries has any liability, obligation to, or which is maintained
or contributed to by Arizona Bank or its Subsidiaries or which covers any
employees, or former employees, consultants or former consultants, officers
or former officers, directors or former directors, or any other person of
Arizona Bank or its Subsidiaries (the "Compensation and Benefit Plans").
There is no commitment to create any additional Compensation and Benefit
Plan or to modify or change any existing Compensation and Benefit Plan.
(ii) Each Compensation and Benefit Plan is in compliance in all
material respects, in form and in administration, with the plan documents
and all applicable laws, including, the extent applicable, ERISA, the Code,
the Securities Act, the Exchange Act, the Age Discrimination in Employment
Act, or any regulations or rules promulgated thereunder, and all material
filings, disclosures and notices required by ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment Act
and any other applicable law have been timely made. Each Compensation and
Benefit Plan which is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA (a "Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter (including a determination that the related trust
under such Compensation and Benefit Plan is exempt from tax under
Section 501(a) of the Code in accordance with the Tax Reform Act of 1986
and all subsequent required legislative changes for which a plan amendment
is required on the date hereof) from the IRS, and to Arizona Bank's
knowledge, no circumstances which could result in revocation of any such
favorable determination letter exist. There is no pending or, to the
knowledge of Arizona Bank, threatened legal action, suit or claim relating
to the Compensation and Benefit Plans. No transaction or omission with
respect to any Compensation and Benefit Plan exists that would be a
violation of Section 4975 of the Code or Section 502 of ERISA that is not
exempt under Code Section 4975 or ERISA Section 502.
25
<PAGE>
(iii) Neither Arizona Bank nor any entity which is a member of a
controlled group or affiliated service group with Arizona Bank or its
Subsidiaries under ERISA Section 4001 or Section 414 of the Code ("ERISA
Affiliate") maintains or has ever maintained or contributed to a Pension
Plan subject to title IV of ERISA or Section 412 of the Code. No notice of
a "reportable event", within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to
be filed for any Compensation and Benefit Plan or any plan of an ERISA
Affiliate within the 12-month period ending on the date hereof, and no such
notice will be required to be filed as a result of the transactions
contemplated by this Agreement. There is no pending investigation or
enforcement action by the DOL or IRS or any other Governmental Authority
with respect to any Compensation and Benefit Plan.
(iv) All contributions or insurance premiums required to be made
under the terms of any Compensation and Benefit Plan or any employee
benefit arrangements under any collective bargaining agreement to which
Arizona Bank or an ERISA Affiliate is a party have been timely made or will
be timely made prior to the Effective Time.
(v) Neither Arizona Bank nor any Subsidiary has any obligations to
provide retiree health and life insurance or other retiree death benefits
under any Compensation and Benefit Plan, other than benefits mandated by
Section 4980B of the Code and Sections 601-609 of ERISA. There has been no
written or oral communication to employees that promises or guarantees such
employees retiree health or life insurance or other retiree death benefits
on a permanent basis. Except as Previously Disclosed, Arizona Bank or an
ERISA Affiliate may terminate or amend any Compensation and Benefit Plan in
which Arizona Bank's or its Subsidiaries' employees or former employees
participate at any time without incurring any liability thereunder. Except
as Previously Disclosed, the plan administrator of each Compensation and
Benefit Plan in which Arizona Bank's or its Subsidiaries' employees or
former employees participate has the sole discretion to construe and
interpret the terms of the plan.
(vi) Neither Arizona Bank nor its Subsidiaries maintains any
Compensation and Benefit Plans covering foreign employees.
(vii) With respect to each Compensation and Benefit Plan, if
applicable, Arizona Bank has provided or made available to Compass, true
and complete copies of: (A) Compensation and Benefit Plan documents and all
amendments thereto; (B) trust instruments and insurance contracts; (C)
Forms 5500 filed with the IRS for the last 3 plan years; (D) most recent
financial statement; (E) the most recent summary plan description and any
other communication to employees regarding such benefits including employee
booklets; (F) most recent determination letter issued by the IRS; (G) any
Form 5310 filed with the IRS; and (H) most recent nondiscrimination tests
performed under ERISA and the Code (including 401(k) and 401(m) tests).
26
<PAGE>
(viii) The consummation of the Merger contemplated by this Agreement
would not, directly or indirectly (including, without limitation, as a
result of any termination of employment prior to or following the Effective
Time) reasonably be expected to (A) result in the vesting or acceleration
of the payment of any benefits under any Compensation and Benefit Plan,
except as contemplated by the termination of Arizona Bank's 401(k) Plan,
(B) result in any increase in benefits payable or compensation payable to a
participant or service provider under any Compensation and Benefit Plan,
(C) result in the payment of any severance separation benefit, or (D)
result in a breach or violation of any Compensation and Benefit Plan.
(ix) Neither Arizona Bank nor any ERISA Affiliate maintains any
compensation plans, programs or arrangements in which Arizona Bank's or its
Subsidiaries' employees or former employees participate the payments under
which would not reasonably be expected to be deductible as a result of the
limitations under Section 162(m) of the Code and the regulations issued
thereunder.
(x) As a result, directly or indirectly, of the Merger
contemplated by this Agreement (including, without limitation, as a result
of any termination of employment prior to or following the Effective Time),
none of Compass, Arizona Bank, an ERISA Affiliate (with respect to
compensation plans, programs or arrangements which Arizona Bank's or its
Subsidiaries' employees or former employees participate) or any of their
respective Subsidiaries will be obligated to make a payment that would be
characterized as an "excess parachute payment" to an individual who is a
"disqualified individual" (as such terms are defined in Section 280G of the
Code), without regard to whether such payment is reasonable compensation
for personal services performed or to be performed in the future.
(xi) Neither Arizona Bank nor any ERISA Affiliate is a party to, or
has made any contribution to or otherwise incurred or could incur any
obligation under any "multiemployer plan", as defined in Section 3(37) of
ERISA.
(xii) There has been no written or oral communication or amendment
to a Compensation and Benefit Plan by Arizona Bank or an ERISA Affiliate
since January 1, 1998 relating to or changing the participation or coverage
under any such plan in which Arizona Bank's or its Subsidiaries' employees
or former employees participate which would increase the expense of
maintaining such plan above the level of expense incurred with respect to
that plan for the most recent fiscal year included in the Arizona Bank's
financial statements.
(xiii) There are no voluntary employee benefit associations of
Arizona Bank related to any Compensation and Benefit Plan under
Section 501(c)(9) of the Code.
(xiv) Each of the guaranteed investment contracts and other funding
contracts with any insurance company that are held by a Compensation and
Benefit Plan and any annuity
27
<PAGE>
contracts purchased by such plan was issued by an insurance company which
carried the highest rating from each of D & P, S&P, Best and Moody's
Investor Service, Inc. as of such date the contract was issued, the date
hereof and the Effective Time.
(n) Labor Matters. Neither Arizona Bank nor any of its Subsidiaries is
a party to or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization,
nor is Arizona Bank or any of its Subsidiaries the subject of a proceeding
asserting that it or any such Subsidiary has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or
seeking to compel Arizona Bank or any such Subsidiary to bargain with any
labor organization as to wages or conditions of employment, nor is there
any strike or other labor dispute involving it or any of its Subsidiaries
pending or, to Arizona Bank's knowledge, threatened, nor is Arizona Bank
aware of any activity involving its or any of its Subsidiaries' employees
seeking to certify a collective bargaining unit or engaging in other
organizational activity.
(o) Takeover Laws. Subject to the continuing accuracy of Compass'
representation in Section 5.04(k), this Agreement and the Merger
contemplated hereby are not subject to the requirements of any
"moratorium," "control share", "fair price", "affiliate transactions",
"business combination" or other antitakeover laws and regulations of any
state, ("Takeover Laws") applicable to Arizona Bank or any Arizona Bank
Subsidiary.
(p) Environmental Matters. To Arizona Bank's knowledge, neither the
conduct nor operation of Arizona Bank or its Subsidiaries nor any condition
of any property, site, or facility currently or previously owned or
operated, or currently leased by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them
holds a Lien, violates or has violated in any material respect any
Environmental Laws which violation is reasonably likely to result in a
material liability and, to Arizona Bank's knowledge, no condition has
existed or event has occurred with respect to any of them or any such
property, site, or facility that, with notice or the passage of time, or
both, is reasonably likely to result in any material liability to Arizona
Bank or any Arizona Bank Subsidiary under Environmental Laws or related to
the release or presence of, or exposure to, Hazardous Substances (as
hereinafter defined). Neither Arizona Bank nor any of its Subsidiaries has
received any notice or is subject to any claim, demand, or action, from any
person or entity that Arizona Bank or its Subsidiaries or the operation or
condition of any property, site, or facility ever owned, leased, operated,
or held as collateral or in a fiduciary capacity by any of them are or were
in material violation of or otherwise are alleged to have material
liability under any Environmental Law or related to the release or presence
of, or exposure to, Hazardous Substances, including, but not limited to,
responsibility (or potential responsibility) for the cleanup or other
remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials (as those terms are defined under
28
<PAGE>
Environmental Laws) (collectively, "Hazardous Substances") at, on, beneath,
or originating from any such property, site, or facility.
(q) Tax Matters. (i) All Tax Returns that are required to be filed by
or with respect to Arizona Bank and its Subsidiaries have been duly filed,
or requests for extensions have been timely filed and any such extension
has been granted and has not been rescinded, (ii) all Taxes shown to be due
on Tax Returns referred to in clause (i), if filed, and all Taxes required
to be shown on the Tax Returns for which extensions have been granted have
been paid in full or adequate provision has been made for such Taxes on
Arizona Bank's most recent balance sheet, (iii) the Tax Returns referred to
in clause (i) that have been filed have been examined by the IRS or the
appropriate state, local or foreign taxing authority or the period for
assessment of the Taxes in respect of which such Tax Returns were required
to be filed has expired, (iv) all deficiencies asserted or assessments made
as a result of such examinations have been paid in full or non-material
amounts are being contested in good faith, (v) no material issues that have
been raised by the relevant taxing authority in connection with the
examination of any of the Tax Returns referred to in clause (i) are
currently pending, and (vi) no waivers of statutes of limitation have been
given by or requested with respect to any Taxes of Arizona Bank or its
Subsidiaries. Arizona Bank has made available to Compass true and correct
copies of the United States federal income Tax Returns filed by Arizona
Bank and its Subsidiaries for each of the three most recent fiscal years
ended on or before December 31, 1997. Neither Arizona Bank nor any of its
Subsidiaries has any material liability with respect to income, franchise
or similar Taxes that accrued on or before the end of the most recent
period covered by the Securities Documents filed prior to the date hereof
in excess of the amounts accrued with respect thereto that are reflected in
the financial statements included in the Securities Documents filed on or
prior to the date hereof. As of the date hereof, neither Arizona Bank nor
any of its Subsidiaries has any reason to believe that any conditions exist
that might prevent or impede the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
(ii) No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transfer contemplated by this Agreement.
(r) Risk Management Instruments. All material interest rate swaps,
caps, floors, option agreements, futures and forward contracts and other
similar risk management arrangements, whether entered into for Arizona
Bank's own account, or for the account of one or more of Arizona Bank's
Subsidiaries or their customers (all of which are Previously Disclosed),
were entered into (i) in accordance with prudent business practices and in
all material respects in compliance with all applicable laws, rules,
regulations and regulatory policies and (ii with counterparties believed to
be financially responsible at the time; and each of them constitutes the
valid and legally binding obligation of Arizona Bank or one of its
Subsidiaries, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
29
<PAGE>
equity principles), and is in full force and effect. Neither Arizona Bank
nor its Subsidiaries, nor to Arizona Bank's knowledge any other party
thereto, is in breach of any of its obligations under any such agreement or
arrangement.
(s) Books and Records. The books and records of Arizona Bank and its
Subsidiaries have been fully, properly and accurately maintained in all
material respects, and there are no material inaccuracies or discrepancies
of any kind contained or reflected therein and they fairly reflect the
substance of events and transactions included therein.
(t) Insurance. Arizona Bank's Disclosure Schedule sets forth all of
the material insurance policies, binders, or bonds maintained by Arizona
Bank or its Subsidiaries. Arizona Bank and its Subsidiaries are insured
with reputable insurers against such risks and in such amounts as the
management of Arizona Bank reasonably has determined to be prudent in
accordance with industry practices and in accordance in all material
respects with all contractual obligations. All such insurance policies are
in full force and effect; Arizona Bank and its Subsidiaries are not in
material default thereunder; and all material claims thereunder have been
filed in due and timely fashion.
(u) Accounting Treatment. As of the date hereof, Arizona Bank is aware
of no reason why the Merger will fail to qualify for "pooling-of-interests"
accounting treatment.
(v) Governmental Reviews. Since June 1, 1998, no investigation or
review by any Governmental Authority with respect to Arizona Bank or any
Arizona Bank Subsidiary is pending or, to the knowledge of Arizona Bank,
threatened, nor has any Governmental Authority indicated to Arizona Bank or
any Arizona Bank Subsidiary an intention to conduct the same, other than
normal or routine regulatory examinations.
(w) Fairness Opinion. On the date of this Agreement, Hovde Financial,
Inc. has provided to the Arizona Bank Board a written fairness opinion to
the effect that the Exchange Ratio is fair to the stockholders of Arizona
Bank from a financial point of view.
(x) Disclosure. The representations and warranties contained in this
Section 5.03 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 5.03 not misleading.
(y) Loans. The loans reflected assets in the financial statements
contained in or incorporated by reference into the Securities Documents are
the legal, valid and binding obligations of the obligors of the loans,
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; provided that no representation or warranty is made as to the
collectibility of such loans.
30
<PAGE>
(z) Title to Properties. Except as Previously Disclosed, for monetary
Liens reflected in its financial statements contained in or incorporated by
reference in its Securities Documents, and for non-monetary Liens,
easements and restrictions which do not adversely affect the use or value
of the property, Arizona Bank and each of its Subsidiaries has
unencumbered, good, legal and indefeasible title to all its properties and
assets owned by them, real and personal, including all the properties and
assets reflected as owned by them in the financial statements contained in
or incorporated by reference into the Securities Documents, except for
those properties and assets disposed of for fair market value in the
ordinary course of business and consistent with prudent banking practices
since the date of such financial statements. Arizona Bank and its
Subsidiaries 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.
(aa) Fiduciary or Similar Responsibilities. Arizona Bank and its
Subsidiaries have performed in all material respects all of their
respective duties as trustee, custodian, guardian, or as escrow agent in a
manner which complies in all material respects with all applicable laws,
regulations, orders, agreements, instruments and common law standards.
(bb) Year 2000 Representation. Neither Arizona Bank nor any of its
Subsidiaries has reason to believe that it will receive a rating of less
than "satisfactory" on any Year 2000 Report of Examination of any
Regulatory Authority. Arizona Bank has delivered to Compass a complete and
accurate copy of its plan, including a good faith preliminary estimate of
the anticipated associated costs ("Year 2000 Budget"), for addressing the
issues set forth in the statements of the Federal Financial Institutions
Examination Council ("FFIEC") dated May 5, 1997, entitled Year 2000 Project
Management Awareness," and December 17, 1997, entitled "Safety and
Soundness Guidelines Concerning the Year 2000 Business Risk," as such
issues affect it and its Subsidiaries, and such plan is in material
compliance with the schedule set forth in the FFIEC statements. Arizona
Bank is in compliance in all material respects with the Interagency
Statements dated June, 1996, May 5, 1997, December 17, 1997, March 17,
1998, April 10, 1998 and May 13, 1998 issued by the FFIEC. Arizona Bank has
delivered to Compass complete and accurate lists of its vendors and
automated systems material to its operations, including, software,
firmware, hardware, embedded chips and other processing devices. The
Year 2000 Budget is reasonable in all material respects.
5.04 Representations and Warranties of Compass. Subject to Sections 5.01
and 5.02 and except as Previously Disclosed in a paragraph of its Disclosure
Schedule corresponding to the relevant paragraph below, Compass hereby
represents and warrants to Arizona Bank as follows:
(a) Organization, Standing and Authority. (i) Compass is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and (ii) Compass is duly qualified to do business and is
in good standing in the states of the
31
<PAGE>
United States and foreign jurisdictions where its ownership or leasing of
property or assets or the conduct of its business requires it to be so
qualified.
(b) Compass Stock. (i) As of the date hereof, the authorized capital
stock of Compass consists solely of (i) 100,000,000 shares of Compass
Common Stock, of which no more than 70,099,325 shares were outstanding as
of April 30, 1998 and (ii) 25,000,000 shares of preferred stock, $0.10 par
value per share, of which none were issued and outstanding on the date
hereof. Except as Previously Disclosed or as contained in its SEC
Documents, as of the date hereof, Compass does not have any Rights issued
or outstanding with respect to Compass Common Stock and Compass does not
have any commitment to authorize, issue or sell any Compass Common Stock or
Rights, other than pursuant to (i) this Agreement, (ii) outstanding stock
options (and any mandatory future awards under stock option plans), and
(iii) its dividend reinvestment plan. The outstanding shares of Compass
Common Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive
rights (and were not issued in violation of any preemptive rights).
(ii) The shares of Compass Common Stock to be issued in exchange
for shares of Arizona Bank Common Stock in the Merger, when issued in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and subject to no preemptive
rights.
(c) Subsidiaries. Each of Compass' Subsidiaries has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business and
is in good standing in the jurisdictions where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and
Compass owns, directly or indirectly, all the issued and outstanding equity
securities of each of its Subsidiaries.
(d) Corporate Power. Each of Compass and its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and Compass has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the Merger contemplated
hereby.
(e) Corporate Authority. This Agreement and the Merger contemplated
hereby have been authorized and approved by the Compass Board, and no other
corporate or stockholder action is required on the part of Compass relating
to this Agreement or the consummation of the Merger contemplated hereby.
This Agreement is a valid and legally binding agreement of Compass,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to
or affecting creditors' rights or by general equity principles).
32
<PAGE>
(f) Regulatory Approvals; No Defaults. (i) No consents or approvals
of, or filings or registrations with, any Governmental Authority or with
any third party are required to be made or obtained by Compass or any of
its Subsidiaries in connection with the execution, delivery or performance
by Compass or Compass Bank of this Agreement or to consummate the Merger
except for (A) the filings referred to in Section 5.03(f)(i); (B) such
filings as are required to be made or approvals as are required to be
obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of Compass Common Stock in the Merger; and (C)
receipt of the approvals set forth in Section 7.01(b). As of the date
hereof, Compass is not aware of any reason why the approvals set forth in
Section 7.01(b) will not be received in a timely manner without the
imposition of a condition, restriction or requirement of the type described
in Section 7.01(b).
(ii) Subject to the satisfaction of the requirements referred to in
the preceding paragraph and expiration of the related waiting periods, and
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
Merger contemplated hereby do not and will not (A) constitute a material
breach or violation of, or a material default under, or give rise to any
Lien, any acceleration of remedies or any right of termination under, any
law, rule or regulation or any judgment, decree, order, governmental permit
or license, or material agreement, indenture or instrument of Compass or of
any of its Subsidiaries or to which Compass or any of its Subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of, or
a default under, the certificate or articles of incorporation or by-laws
(or similar governing documents) of Compass or any of its Subsidiaries, or
(C) require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, material
agreement, indenture or instrument.
(g) Financial Reports and SEC Documents; Material Adverse Effect. (i)
Compass' Annual Reports on Form 10-K for the fiscal years ended
December 31, 1995, 1996 and 1997, and all other reports, registration
statements, definitive proxy statements or information statements filed or
to be filed by it or any of its Subsidiaries subsequent to December 31,
1995 under the Securities Act, or under Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, in the form filed or to be filed (collectively, "SEC
Documents") with the SEC, as of the date filed, (A) complied or will comply
in all material respects with the applicable requirements under the
Securities Act or the Exchange Act, as the case may be, and (B) did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and each of the balance sheets or statements of
condition contained in or incorporated by reference into any such SEC
Document (including the related notes and schedules thereto) fairly
presents, or will fairly present, the financial position of Compass and its
Subsidiaries as of its date, and each of the statements of income and
changes in stockholders' equity and cash flows or equivalent statements in
such SEC Documents (including any related notes and schedules thereto)
fairly presents, or will fairly present, in all material respects, the
results of
33
<PAGE>
operations, changes in stockholders' equity and cash flows, as the case may
be, of Compass and its Subsidiaries for the periods to which they relate,
in each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except in each case as
may be noted therein, subject to normal year-end audit adjustments and the
absence of footnotes in the case of unaudited statements.
(ii) Since December 31, 1997, no event has occurred or circumstance
arisen that, individually or taken together with all other facts,
circumstances and events (described in any paragraph of Section 5.04 or
otherwise), is reasonably likely to have a Material Adverse Effect with
respect to Compass.
(h) Litigation; Regulatory Action. Except as set forth in Compass' SEC
Documents (i) no material litigation, claim or other proceeding before any
Governmental Authority is pending against Compass or any of its
Subsidiaries and, to Compass' knowledge, no such litigation, claim or other
proceeding has been threatened.
(ii) Other than routine compliance statements contained in
examinations conducted in the ordinary course, neither Compass nor any of
its Subsidiaries or properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with,
or a commitment letter or similar submission to, or extraordinary
supervisory letter from a Regulatory Authority, nor has Compass or any of
its Subsidiaries been advised by a Regulatory Authority that such agency is
contemplating issuing or requesting (or is considering the appropriateness
of issuing or requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter, supervisory letter or similar submission.
(i) Compliance with Laws. Each of Compass and its Subsidiaries:
(i) is in compliance in all material respects with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the
Fair Housing Act, the Community Reinvestment Act of 1977, the Home
Mortgage Disclosure Act and all other applicable fair lending laws and
other laws relating to discriminatory business practices; and
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to
permit them to conduct their businesses substantially as presently
conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and, to the best of
its knowledge, no suspension or cancellation of any of them is
threatened or will result from the consummation of the transactions
contemplated by this Agreement; and
34
<PAGE>
(iii) has received, since December 31, 1996, no notification or
communication from any Governmental Authority (A) asserting that
Compass or any of its Subsidiaries is not in compliance in any
material respect with any of the statutes, regulations, or ordinances
which such Governmental Authority enforces or (B) threatening to
revoke any material license, franchise, permit, or governmental
authorization (nor, to Compass' knowledge, do any grounds for any of
the foregoing exist).
(j) Brokers. No action has been taken by Compass that would give rise
to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions
contemplated by this Agreement.
(k) Takeover Laws. Subject to the continuing accuracy of Arizona
Bank's representations in Section 5.03(o), Compass has taken all action
required to be taken by it in order to exempt this Agreement and the Merger
contemplated hereby from, and this Agreement and the Merger contemplated
hereby are exempt from, the requirements of any Takeover Laws applicable to
Compass or Compass Bank or their Subsidiaries.
(l) Accounting Treatment. As of the date hereof, Compass is aware of
no reason why the Merger will fail to qualify for "pooling-of-interests"
accounting treatment.
(m) Compass Ownership of Arizona Bank Stock. Neither Compass nor any
of its Subsidiaries either beneficially owns any shares of Arizona Bank
Common Stock or, other than as contemplated by this Agreement, has any
right of any kind to acquire the beneficial ownership of any shares of
Arizona Bank Common Stock.
(n) Disclosure. The representations and warranties contained in this
Section 5.04 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 5.04 not misleading.
ARTICLE VI
COVENANTS
6.01 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of Arizona Bank, Compass and Compass Bank agrees to use its
reasonable best efforts with prudence, diligence and good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
maximize the prospects for consummation of the Merger as promptly as practicable
and shall cooperate fully with the other party hereto to that end.
35
<PAGE>
6.02 Arizona Bank Stockholder Approval. Arizona Bank agrees to take in
accordance with the Corporate Laws, the Arizona Bank Articles and the Arizona
Bank By-Laws, all action necessary to convene an appropriate meeting of its
stockholders to consider and vote upon the approval of this Agreement and the
Merger, and any other matter required to be approved by such stockholders for
consummation of the Merger (including any adjournment or postponement, the
"Arizona Bank Meeting"), as promptly as practicable after the Registration
Statement is declared effective. The Arizona Bank Board shall recommend
stockholder approval and shall take all reasonable, lawful action to solicit
such approval by the Arizona Bank stockholders.
6.03 Registration Statement. (a) Compass agrees to prepare a registration
statement on Form S-4 (the "Registration Statement") to be filed by Compass with
the SEC in connection with the issuance of Compass Common Stock in the Merger
(including the proxy statement and prospectus and other proxy solicitation
materials of Arizona Bank constituting a part thereof (the "Proxy Statement")
and all related documents). Arizona Bank agrees to cooperate, and to cause its
Subsidiaries to cooperate, with Compass, its counsel and its accountants, in the
preparation of the Registration Statement and the Proxy Statement; and provided
that Arizona Bank and its Subsidiaries have cooperated as required above,
Compass agrees to file the Registration Statement with the SEC as promptly as
reasonably practicable and shall use reasonable efforts to cause such filing to
occur within 50 days after execution of this Agreement, subject to the receipt
of all necessary information on the part of Arizona Bank for inclusion in the
Registration Statement and Proxy Statement. Each of Arizona Bank and Compass
agrees to use all reasonable efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as reasonably
practicable after filing thereof. Compass also agrees to use all reasonable
efforts to obtain, prior to the effective date of the Registration Statement,
all necessary state securities law or "Blue Sky" permits and approvals required
to carry out the Merger contemplated by this Agreement. Arizona Bank agrees to
furnish to Compass all information concerning Arizona Bank, its Subsidiaries,
officers, directors and stockholders as may be reasonably requested in
connection with the foregoing.
(b) Each of Arizona Bank and Compass agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (ii the
Proxy Statement and any amendment or supplement thereto will, at the date of
mailing to the Arizona Bank stockholders and at the time of the Arizona Bank
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or any statement which, in the light of the circumstances
under which such statement is made, will be false or misleading with respect to
any material fact, or which will omit to state any material fact necessary in
order to make the statements therein not false or misleading or necessary to
correct any statement in any earlier statement in the Proxy Statement or any
amendment or supplement thereto. Each of Arizona Bank and Compass further agrees
that if it shall become aware prior to the Effective
36
<PAGE>
Date of any information furnished by it that would cause any of the statements
in the Proxy Statement to be false or misleading with respect to any material
fact, or to omit to state any material fact necessary to make the statements
therein not false or misleading, to promptly inform the other party thereof and
to take the necessary steps to correct the Proxy Statement.
(c) Compass agrees to advise Arizona Bank, promptly after Compass receives
notice thereof, of the time when the Registration Statement has become effective
or any supplement or amendment has been filed, of the issuance of any stop order
or the suspension of the qualification of Compass Common Stock for offering or
sale in any jurisdiction, of the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information.
6.04 Press Releases. Each of Arizona Bank and Compass agrees that it will
not, directly or indirectly, without the prior approval of the other party,
issue any press release or written statement for general circulation relating to
the Merger contemplated hereby, except as otherwise required by applicable law
or regulation or NASDAQ rules, and then only after making reasonable efforts to
first consult with the other party.
6.05 Access; Information. (a) Each of Arizona Bank and Compass agrees that
upon reasonable notice and subject to applicable laws relating to the exchange
of information, it shall afford the other party and the other party's
Representatives, such access during normal business hours throughout the period
prior to the Effective Time to the books, records (including, without
limitation, Tax Returns and work papers of independent auditors), properties,
personnel and to such other information as any party may reasonably request and,
during such period, it shall furnish promptly to such other party (i) a copy of
each material report, schedule and other document filed by it pursuant to the
requirements of federal or state securities or banking laws, and (ii) all other
information concerning the business, properties and personnel of it as the other
may reasonably request. Without limiting the foregoing, Arizona Bank grants to
Compass and its agents, contractors, and representatives, access to Arizona
Bank's properties, facilities, and assets (including those held as collateral or
in a fiduciary capacity) for the purpose of conducting such environmental
inspections (including, without limitation, of soil, air, groundwater, or other
media) as Compass may consider appropriate.
(b) Each of Arizona Bank and Compass agrees that it will not, and will
cause its Representatives not to, use any information obtained pursuant to this
Section 6.05 (as well as any other information obtained prior to the date hereof
in connection with the entering into of this Agreement) for any purpose
unrelated to the consummation of the Merger contemplated by this Agreement.
Subject to the requirements of law, each party will keep confidential, and will
cause its Representatives to keep confidential, all information and documents
obtained pursuant to this Section 6.05 (as well as any other information
obtained prior to the date hereof in connection with the entering into of this
Agreement) unless such information (i) was already known to such party, (ii)
becomes available to such party from other sources not known by such party to be
bound by a confidentiality obligation, (iii) is disclosed with the prior written
approval of the party to which such
37
<PAGE>
information pertains or (iv) is or becomes readily ascertainable from published
information or trade sources. In the event that this Agreement is terminated or
the Merger contemplated by this Agreement shall otherwise fail to be
consummated, each party shall upon request promptly cause all copies of
documents, extracts thereof or notes, analyses, compilations, studies or other
documents containing information and data as to another party hereto to be
returned to the party which furnished the same or to be destroyed. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant or
agreement in this Agreement, or the conditions to either party's obligation to
consummate the Merger contemplated by this Agreement.
(c) During the period from the date of this Agreement to the Effective
Time, Arizona Bank shall promptly furnish Compass with copies of all monthly and
other interim financial statements produced in the ordinary course of business
as the same shall become available. During the period from the date of this
Agreement to the Effective Time, Compass shall promptly furnish Arizona Bank
with copies of its SEC Documents filed after the date hereof.
6.06 Acquisition Proposal. Arizona Bank agrees that it shall not, and shall
cause its Subsidiaries and its and its Subsidiaries' officers, directors,
agents, advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal. It shall immediately cease and cause to
be terminated any activities, discussions or negotiations conducted prior to the
date of this Agreement with any parties other than Compass with respect to any
of the foregoing and shall use its reasonable best efforts to enforce any
confidentiality or similar agreement relating to an Acquisition Proposal in
existence on the date hereof. Arizona Bank shall promptly (within 24 hours)
advise Compass following the receipt by Arizona Bank of any Acquisition Proposal
and the substance thereof (including the identity of the person making such
Acquisition Proposal), and advise Compass of any material developments with
respect to such Acquisition Proposal immediately upon the occurrence thereof.
6.07 Affiliate Agreements. (a) Not later than the 15th day prior to the
mailing of the Proxy Statement, Arizona Bank shall deliver to Compass a schedule
of each person that, to the best of its knowledge, is or is reasonably likely to
be, as of the date of the Arizona Bank Meeting, deemed to be an "affiliate" of
Arizona Bank (each, a "Arizona Bank Affiliate") as that term is used in Rule 145
under the Securities Act or SEC Accounting Series Releases 130 and 135.
(b) Arizona Bank shall use its respective reasonable best efforts to cause
each person who may be deemed to be a Arizona Bank Affiliate, as the case may
be, to execute and deliver to Arizona Bank on or before the date of mailing of
the Proxy Statement an agreement in the form attached hereto as Exhibit A.
Provided, however, each director and executive officer of Arizona Bank and its
Subsidiaries listed on Exhibit B hereto shall execute such agreement on or
before the thirteenth business day after the date of this Agreement and it shall
be delivered by Arizona Bank to Compass.
38
<PAGE>
(c) Compass shall use its reasonable best efforts to prevent each person
who may be deemed to be an "affiliate" of Compass as that term is used in the
SEC Accounting Series Releases 130 and 135, from selling, transferring or
otherwise disposing of, or reducing such person's risk relative to, any shares
of Compass Common Stock beneficially owned by such person (whether or not
acquired in the Merger) during the period commencing 30 days prior to the
Effective Date and ending at such time as Compass has published financial
results covering at least 30 days of combined operations of Compass and Arizona
Bank after the Merger.
6.08 Takeover Laws. No party hereto shall take any action that would cause
the Merger contemplated by this Agreement to be subject to requirements imposed
by any Takeover Law and each of them shall take all necessary steps within its
control to exempt (or ensure the continued exemption of) the Merger contemplated
by this Agreement from, or if necessary challenge the validity or applicability
of, any applicable Takeover Law, as now or hereafter in effect.
6.09 Certain Policies. Prior to the Effective Date, Arizona Bank shall, and
shall cause its Subsidiaries, but only to the extent consistent with generally
accepted accounting principles and on a basis mutually satisfactory to it and
Compass, modify and change its loan, litigation and real estate valuation
policies and practices (including loan classifications and levels of reserves)
so as to be applied on a basis that is consistent with that of Compass;
provided, however, that Arizona Bank shall not be obligated to take any such
action pursuant to this Section 6.09 unless and until Compass acknowledges that
all conditions to its obligation to consummate the Merger have been satisfied
and certifies to Arizona Bank that Compass' representations and warranties,
subject to Section 5.02, are true and correct as of such date and that Compass
is otherwise in material compliance with this Agreement.
6.10 NASDAQ Listing. Compass agrees to use its best efforts to list, prior
to the Effective Time, on the NASDAQ, subject to official notice of issuance,
the shares of Compass Common Stock to be issued to the holders of Arizona Bank
Common Stock in the Merger.
6.11 Regulatory Applications. (a) Compass and Arizona Bank and their
respective Subsidiaries shall cooperate and use their respective reasonable best
efforts to prepare all documentation, to effect all filings and to obtain all
permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary to consummate the Merger contemplated by this
Agreement. Each of Compass and Arizona Bank shall have the right to review in
advance, and to the extent practicable each will consult with the other, in each
case subject to applicable laws relating to the exchange of information, with
respect to, all material written information submitted to any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto agrees
to act reasonably and as promptly as practicable. Each party hereto agrees that
it will consult with the other party hereto with respect to the obtaining of all
material permits, consents, approvals and authorizations of all third parties
and Governmental Authorities necessary or advisable to consummate the Merger
contemplated by this Agreement and each party will keep the other party
39
<PAGE>
apprised of the status of material matters relating to completion of the
transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
6.12 Indemnification. (a) Following the Effective Date and for a period of
six years thereafter, Compass shall indemnify, defend and hold harmless the
present and former directors, officers and employees of Arizona Bank and its
Subsidiaries (each, an "Indemnified Party") against all costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of actions or omissions occurring
at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement) to the fullest extent that Arizona
Bank is permitted to indemnify (and advance expenses to) its directors, officers
and employees under the laws of the State of Arizona, the Arizona Bank Articles,
the Arizona Bank By-Laws, and indemnification agreements between Arizona Bank
and its directors and officers, as in effect on the date hereof; provided that
any determination required to be made with respect to whether an officer's,
director's or employee's conduct complies with the standards set forth under
Arizona law, the Arizona Bank Articles, the Arizona Bank By-Laws, and
indemnification agreements between Arizona Bank and its directors and officers,
shall be made by independent counsel (which shall not be counsel that provides
material services to Compass) selected by Compass and reasonably acceptable to
such officer or director.
(b) Compass agrees that Arizona Bank may obtain extended reporting period
coverage (otherwise known as "tail coverage") under Arizona Bank's existing
director's and officer's liability policy or other similar coverage for six
years; provided, however, that the premium expense for such coverage shall not
exceed $76,461 in the aggregate over such six year period.
(c) Any Indemnified Party wishing to claim indemnification under
Section 6.12(a), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify Compass thereof; provided
that the failure so to notify shall not affect the obligations of Compass under
Section 6.12(a) unless and to the extent that Compass is actually prejudiced as
a result of such failure.
(d) If Compass or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of Compass shall assume the
obligations set forth in this Section 6.12.
40
<PAGE>
6.13 Benefit Plans. Compass presently intends that, after the Merger,
Compass, Arizona Bank and its Subsidiaries will not make additional
contributions to the employee benefit plans that were sponsored by Arizona Bank,
its Subsidiaries or ERISA Affiliates immediately prior to the Merger or in which
Arizona Bank employees or former employees participated. Except as provided in
subparagraph (ii) below with respect to any qualified defined benefit pension
plan, Compass agrees that the employees of Arizona Bank and its Subsidiaries who
continue as employees of Compass or any of its Subsidiaries will be entitled to
participate as of the Effective Time in the employee benefit plans and programs
maintained for similarly situated employees of Compass and its Subsidiaries
subject to the terms and condition of said plans, and Compass shall take all
actions necessary or appropriate to facilitate coverage of Arizona Bank's and
its Subsidiaries' employees in such plans and programs on the Effective Time,
subject to the following;
(i) Employee Welfare and Benefit Plans and Programs: Each full
time employee of Arizona Bank and its Subsidiaries will be entitled to
credit for prior service with Arizona Bank and its Subsidiaries for
all purposes under the employee welfare benefit plans and other
employee benefit plans and programs (other than any qualified defined
benefit pension plan as described in subparagraph (ii) below and any
stock option plans) sponsored by Compass or any of its Subsidiaries
for similarly situated employees. Any waiting period or preexisting
condition exclusion applicable to such plans or programs shall be
waived with respect to any Arizona Bank or Arizona Bank Subsidiary
employee. For purposes of determining each Arizona Bank or Arizona
Bank Subsidiary employee's benefit for the year in which the Merger
occurs under the Compass vacation program, any vacation taken by an
Arizona Bank or Arizona Bank Subsidiary employee preceding the
Effective Time for the year in which the Merger occurs will be
deducted from the total Compass vacation benefit available to such
employee for such year. Compass agrees that for purposes of
determining the number of vacation days available with respect to each
employee of Arizona Bank and its Subsidiaries for the year in which
the Merger occurs, that the number of vacation days for such year
shall be determined under the Arizona Bank or its Subsidiaries
vacation policies in effect as of January 1, 1998.
(ii) Employee Pension Benefit Plans: Each Arizona Bank and
Arizona Bank Subsidiary employee shall be entitled to credit for past
service with Arizona Bank and its Subsidiaries for the purpose of
satisfying any eligibility or vesting periods applicable to the
employee pension benefit plans of Compass and its Subsidiaries 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
for any purpose to employees of Arizona Bank and its Subsidiaries with
respect to any qualified defined benefit pension plan sponsored (or
contributed to) by Compass or its Subsidiaries; instead, Arizona Bank
and Arizona Bank Subsidiary employees shall be treated as newly hired
employees of Compass or a Compass Subsidiary as of the date following
41
<PAGE>
the Effective Time for purposes of determining eligibility, vesting
and benefit accruals thereunder.
(iii) Arizona Bank 401(k) Plan: On or before, but effective as
of the Effective Time, Arizona Bank and its Subsidiaries shall take
such actions as may be necessary to cause its 401(k) plan to be
terminated as of the Effective Time with each individual employed by
Arizona Bank and its Subsidiaries 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 as of the Effective
Time. The account balances of employees will be distributed as soon
as practicable after the plan receives a favorable determination
letter from the Internal Revenue Service after its termination. After
termination, each participant shall be afforded the opportunity for
rollover of his or her benefits to an eligible individual retirement
account or to another qualified plan of Compass, as elected by each
such employee.
(iv) Deferred Compensation Plan: Prior to the Effective Time,
Arizona Bank shall amend the Arizona Bank Deferred Compensation Plan
to provide the transactions contemplated by this Agreement shall not
constitute a change in control for purposes of the plan and the plan
shall be frozen as of the Effective Time and no further participant or
employer contributions shall be made to the plan.
(v) Employment Agreement: At the Effective Time, Compass Bank
agrees to enter into an employment agreement with each of David T. C.
Wright and other Previously Disclosed executive officers of Arizona
Bank, each employment agreement to be in the form Previously Disclosed
by Compass to Arizona Bank.
6.14 Notification of Certain Matters. Each of Arizona Bank and Compass
shall give prompt notice to the other of any fact, event or circumstance known
to it that (i) is reasonably likely, individually or taken together with all
other facts, events and circumstances known to it, to result in any Material
Adverse Effect with respect to it, (ii) would cause or constitute a breach of
any of its representations, warranties, covenants or agreements contained herein
as of the date of this Agreement or (iii) would require any material amendment
to any information Previously Disclosed arising from events or circumstances
after the date of this Agreement or otherwise would cause a material breach of
any of its representations, warranties, covenants or agreements contained herein
6.15 Publication of 30 Days of Post Combination Results. For the benefit of
Arizona Bank Affiliates, Compass shall publish at the earliest opportunity
Compass and Arizona Bank combined financial results covering the first 30 days
after the Effective Time so as to permit Arizona Bank Affiliates and Compass
Affiliates to sell immediately after such publication shares of Compass Stock
under the rules applicable to "pooling of interests" accounting treatment;
provided, however, that Compass shall not be required to so publish financial
results in the fourth quarter of 1998 or if the Effective Time occurs in the
second month of any calendar quarter other than its regular quarterly press
release.
42
<PAGE>
6.16 Registration Rights of Principal Stockholders.
(a) Registration Provisions in General.
(i) Demand Rights. During the period commencing after Compass
publishes at least 30 days of combined operations of Compass and
Arizona Bank, the Principal Stockholders collectively shall have the
right on two occasions to request Compass in writing to register under
the Securities Act a minimum of 20% of the aggregate Shares of Compass
Common Stock that they received in the Merger for resale on a delayed
or continuous basis other than in an underwritten offering, unless
Compass requires that the resale be effected in a firm commitment
underwritten public offering with an underwriter selected by Compass
(the term "Shares" for purposes of this Section 6.16 shall mean the
Compass Common Stock received by the Principal Stockholders in the
Merger and any Compass Common Stock issued as stock dividends or as
stock splits thereon). As soon as reasonably practicable following
Compass' receipt of a written request from a Principal Stockholder and
the information referred to in Section 6.16(c), Compass shall use its
reasonable best efforts (x) to prepare and cause to be filed with the
SEC a registration statement on Form S-3 (or any successor form or, if
Form S-3 or a successor form is not available, on any other
appropriate form as may then be available to Compass under the
Securities Act relating to the resale of all or a portion of the
Registrable Shares (as defined herein), but in any event all of such
Shares covered by a Principal Stockholder request, (y) to cause such
registration statement to be declared effective by the SEC as soon as
reasonably practicable after the filing of such registration
statement, and (z) to maintain the effectiveness of such registration
statement (and maintain the current status of the prospectus or
prospectuses contained therein) for the duration of the applicable
Registration Period (as defined herein). Compass shall not be
prohibited from adding shares of Compass Common Stock of Compass or
other Compass stockholders to such registration statement so long as
the addition of such shares does not significantly delay the
preparation, filing or effectiveness of the registration statement or,
in the good faith judgment of the Principal Stockholder(s) whose
Shares are being registered, will not materially and adversely affect
the marketability or sales price of the Shares covered by a Principal
Stockholder's request. Compass will pay all registration,
qualification and filing fees, all fees and expenses of legal counsel,
accountants and other persons retained by Compass, and all other
expenses incurred by Compass in connection with Compass' performance
of or compliance with the provisions of this Section 6.16 (excluding
underwriting discounts and fees, selling commissions and transfer
taxes applicable to the sale of Registrable Shares and excluding the
cost of any separate legal counsel or other advisors retained by the
Principal Stockholder(s) or any affiliate of a Principal Stockholder).
43
<PAGE>
(ii) Defined Terms. The term "Registrable Shares" shall mean the
Shares; provided, that the term "Registrable Shares" shall not include
any Shares which (i) have been sold or otherwise transferred by a
Principal Stockholder other than to his family members, trusts solely
for the benefit of his family members or his estate or (ii) have been
issued and shall have ceased to be outstanding. The term "Registration
Period" with respect to a registration statement filed pursuant to
this Section 6.16 shall mean a period which shall run from the date on
which such registration statement has been declared effective by the
SEC and shall expire on the earlier of (x) the first date on which the
Principal Stockholders are permitted to sell the Registrable Shares
covered by such registration statement within any 90-day period
pursuant to the provisions of Rule 144 promulgated under the
Securities Act, (y) the date upon which there shall cease to be any
Registrable Shares covered by such registration statement, or (z) the
second anniversary of the Effective Time.
(b) Registration Procedure. Upon the terms and subject to the
conditions of this Section 6.16, Compass shall, in effecting any
registration of Registrable Shares pursuant to this Section 6.16:
(i) Pre-Filing Draft of Registration Statement. Prior to the
initial filing of a registration statement with the SEC, furnish to
one law firm selected by the Principal Stockholder(s) copies of all
such documents proposed to be filed (other than the exhibits to the
registration statement), and such counsel shall be given the
reasonable opportunity to communicate any comments it may have on such
documents (which comments will be primarily limited to information
concerning the Principal Stockholder(s) and his or their plans of
distribution and other issues reasonably related to a Principal
Stockholder as a selling stockholder);
(ii) Filing of Amendments. Use its reasonable best efforts to
prepare and file with the SEC such amendments and supplements to the
registration statement, and the prospectus used in connection with the
registration statement, as may be reasonably necessary to keep the
registration statement effective for the applicable Registration
Period;
(iii) Furnishing Copies of Filings. Furnish to the Principal
Stockholder(s) copies of the registration statement, each amendment
and supplement thereto and the prospectus included in the registration
statement (including each preliminary prospectus) as Principal
Stockholder(s) shall reasonably request;
(iv) Blue Sky Filings. Register or qualify the Registrable
Shares under such other securities or blue sky laws of such U.S.
jurisdictions as shall be reasonably requested by the Principal
Stockholder(s) and do any and all other acts and things which may be
reasonably necessary and advisable to enable the Principal
44
<PAGE>
Stockholder(s) to consummate the disposition in such jurisdictions of
the Registrable Shares owned by the Principal Stockholder(s); provided
that Compass shall not be required in connection therewith or as a
condition thereto to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but
for this Section 6.16(b)(iv), (ii) subject itself to taxation in any
such jurisdiction, or (iii) file a general consent to service of
process in any such jurisdiction;
(v) Changes to Registration Statement, Etc. Notify the
Principal Stockholder(s) whose Shares are being registered, at any
time when a prospectus relating to the registration statement is
required to be delivered under the Securities Act, as soon as
reasonably practicable after such time as Compass discovers any facts
or circumstances which cause the prospectus included in the
registration statement to contain an untrue statement of a material
fact or to omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of circumstances then existing; after the date of such
notification to the Principal Stockholder(s), Compass will use its
reasonable best efforts (subject to the provisions of
Section 6.16(c)(iii) below) to prepare and furnish to the Principal
Stockholder(s), within five business days, a supplement or amendment
to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of circumstances then existing;
(vi) Inspection of Documents. Subject to such confidentiality
requirements as Compass may reasonably impose, make available for
inspection by the Principal Stockholder(s) whose Shares are being
registered and any attorney, accountant or other agent retained by
such Principal Stockholder(s), during the normal business hours of
Compass, all financial and business records of Compass as shall be
reasonably necessary to enable them to exercise any due diligence
responsibility, and cause Compass' officers, and employees to supply
all financial and business information reasonably requested by any of
them in connection with such registration statement;
(vii) Underwriting Agreement. In connection with any underwritten
offering required by Compass, enter into an appropriate underwriting
agreement containing terms and provisions (including provisions as to
opinions of counsel, comfort letters, indemnification and
contribution) customary for such an agreement; and
(viii) Stop Orders. Notify the Principal Stockholder(s) of any
stop order issued or threatened by the SEC and take all reasonable
actions required to prevent the entry of such stop order or to remove
it if entered.
45
<PAGE>
(c) Certain Additional Covenants of Compass and the Principal
Stockholder(s).
(i) Furnishing Information of Compass. The Principal
Stockholder(s) whose Shares are being registered shall furnish to
Compass such information regarding the Principal Stockholder(s), the
distribution by the Principal Stockholder(s) of the Registrable Shares
and such other matters as Compass may from time to time reasonably
request. The Principal Stockholder(s) and their representatives shall
cooperate with Compass and its representatives to the extent
reasonably required, and shall take such other actions as may be
reasonably necessary or appropriate or as may be reasonably requested
by Compass, in connection with the performance by Compass of its
obligations under this Section 6.16. The Principal Stockholder(s)
shall notify Compass, as soon as reasonably practicable after such
time as the Principal Stockholder(s) obtain actual knowledge of any
facts or circumstances which cause the prospectus included in a
registration statement to contain an untrue statement of a material
fact or to omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of circumstances then existing; as soon as reasonably
practicable after the date of such notification to Compass, Compass
will prepare and furnish to the Principal Stockholder(s) whose Shares
are being registered, a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable
Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of circumstances then existing.
(ii) Discontinuing Sales Until Prospectus is Corrected. The
Principal Stockholders agrees that, upon receipt of any notice from
Compass of the happening of any event of the kind described in
Section 6.16(b)(v) above or upon the delivery of a similar notice to
Compass by a Principal Stockholder pursuant to Section 6.16(c)(i)
above, the Principal Stockholders will forthwith discontinue
disposition of Registrable Shares pursuant to the registration
statement covering such Registrable Shares until receipt by the
Principal Stockholders of the copies of the supplemented or amended
prospectus contemplated by such Sections 6.16(b)(v) and 6.16(c)(i)
above, and, if so directed by Compass, the Principal Stockholders will
deliver to Compass all copies, other than permanent file copies then
in the Principal Stockholders' possession, of the prospectus covering
such Registrable Shares current at the time of receipt of such notice.
(iii) Discontinuing Sales Due to Disadvantageous Condition.
With respect to any registration statement filed or to be filed
pursuant to this Section 6.16, if Compass determines that, in its good
faith judgment, it would (because of the existence of, or in
anticipation of, (A) any acquisition or disposition transaction
46
<PAGE>
which is proposed or entered into involving Compass or any subsidiary
of Compass, (B) any financing activity involving Compass or any
Subsidiary of Compass, or (C) any other event or condition of material
significance to Compass or any subsidiary of Compass) be significantly
disadvantageous (any of the events described in clauses (A) through
(C) above, hereinafter referred to as a "Disadvantageous Condition")
to Compass or any of its Subsidiaries for such registration statement
to become effective or to be maintained effective or for sales of
Registrable Shares to continue pursuant to such registration
statement, Compass shall, notwithstanding any other provisions of this
Agreement, be entitled, upon the giving of a written notice (a "Delay
Notice") to such effect to the Principal Stockholders, (x) to cause
offers and sales of Registrable Shares by the Principal Stockholders
pursuant to such registration statement to cease, or (y) in the event
no such registration statement has yet been filed, to delay filing any
such registration statement, until, in the good faith judgment of
Compass, such Disadvantageous Condition no longer exists, but in no
event shall any such Delay Notice be effective for a period of more
than 60 days. Compass may not give more than two Delay Notices in any
twelve-month period.
(iv) Underwriting Agreement. In connection with any underwritten
offering required by Compass, enter into an appropriate underwriting
agreement containing terms and provisions (including provisions as to
opinions of counsel, indemnification and contribution) customary for
such an agreement.
(d) Indemnification.
(i) Indemnification by Compass. In connection with the
registration of the Registrable Shares under the Securities Act
pursuant to this Agreement, Compass will, and it hereby does,
indemnify and hold harmless, to the fullest extent permitted by law,
the Principal Stockholders and each other person who acts on behalf of
or assists a Principal Stockholder in the offering or sale of such
securities (collectively, the "Principal Stockholder Indemnitees"),
against any and all losses, claims, damages or liability, joint or
several, and expenses (including any amounts paid in any settlement
effected with Compass' prior consent (which may not be unreasonably
withheld) and reasonable attorneys fees and disbursements) to which
such Principal Stockholder Indemnitees may become subject under the
Securities Act, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) or expenses arise out of or are based upon (A) any untrue
statement or alleged untrue statement of any material fact contained
in any registration statement, any preliminary, final or summary
prospectus contained therein, or any amendment or supplement thereto,
or (B) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and Compass will reimburse such Principal
Stockholder Indemnitees for any legal or any other expense reasonably
47
<PAGE>
incurred by them in connection with investigating or defending such
loss, claim, liability, action or proceeding as they are incurred;
provided that Compass shall not be liable in any such case to any
Principal Stockholder Indemnitee or group of Principal Stockholder
Indemnitees to the extent that any such loss, claim, damage, liability
(or action or proceeding in respect thereof) or expenses arose out of
or was based upon any untrue statement or alleged untrue statement or
omission or alleged omission which was made or done in any such
registration statement, any such preliminary, final or summary
prospectus contained therein or any amendment or supplement thereto,
in reliance upon and conformity with information furnished to Compass
or its representatives in writing specifically for use therein by or
on behalf of any Principal Stockholder Indemnitee or group of
Principal Stockholder Indemnitees or by any of their respective
representatives; provided further that Compass will not be liable to
any such Principal Stockholder Indemnitees with respect to any
preliminary prospectus as then amended or supplemented, as the case
may be, to the extent that any such loss, claim, damage or liability
of such Principal Stockholder Indemnitees results from the fact that
such Principal Stockholder Indemnitees sold Registrable Shares to a
person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the final prospectus (including
any documents incorporated by reference therein), as then amended or
supplemented, if Compass has previously furnished copies thereof to
such Principal Stockholder Indemnitees and such final prospectus, as
then amended and supplemented, has corrected any such misstatement or
omission. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of any Principal
Stockholder Indemnitee and shall survive the transfer of the
Registrable Shares by the Principal Stockholders.
(ii) Indemnification by the Principal Stockholders. In
connection with the registration of the Registrable Shares under the
Securities Act pursuant to this Section 6.16, each Principal
Stockholder whose Shares are being registered hereby agrees that he
will indemnify and hold harmless, to the fullest extent permitted by
law, Compass, each director, officer, controlling person (within the
meaning of the Securities Act) and affiliate of Compass and each other
person who acts on Compass' behalf in the offering or sale of such
securities (collectively, the "Compass Indemnitees"), against any and
all losses, claims, damages or liabilities, and expenses (including
any amounts paid in any settlement effected with such Principal
Stockholder's prior consent (which may not be unreasonably withheld)
and reasonable attorneys fees and disbursements) to which Compass or
any Compass Indemnitee may become subject under the Securities Act,
common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) or expenses
arise out of or are based upon (A) any untrue statement or alleged
untrue statement of any material fact contained in any registration
statement, any preliminary, final or summary prospectus contained
therein, or any
48
<PAGE>
amendment or supplement thereto, or (B) any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
(but only to the extent that such misstatements or omissions referred
to in clauses (A) and (B) above were made, done or omitted in any such
registration statement, any such preliminary, final or summary
prospectus or any amendment or supplement thereto in reliance upon and
in conformity with information furnished to Compass or its
representatives in writing specifically for use therein by or on
behalf of such Principal Stockholder or any of his representatives).
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of Compass or any Compass
Indemnitee and shall survive the transfer of the Registrable Shares by
the Principal Stockholder.
(iii) Notices of Claims, Etc. Promptly after receipt by an
indemnified party hereunder of written notice of the commencement of
any action or proceeding with respect to which a claim for
indemnification may be made pursuant to this Section 6.16, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, promptly give written notice to the
latter of the commencement of such action; provided that the failure
of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subsections of this Section 6.16, except to the extent that the
indemnifying party is prejudiced by such failure to give notice. In
case any action is brought against an indemnified party, the
indemnifying party will be entitled to participate in and to assume
the defense thereof, jointly with any other indemnifying parties
similarly notified to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party. After notice from
the indemnifying party to such indemnified party of its election so to
assume the defense of any such action, the indemnifying party will not
be liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense
thereof (unless in such indemnified party's reasonable judgment any
meaningful conflict of interest between such indemnified and
indemnifying parties arises in respect of such claim after the
assumption of the defense thereof, in which event the indemnifying
party shall be liable for the reasonable legal fees and expenses of
only one legal firm representing the indemnified parties) plus one
firm of local counsel and the indemnifying party will not be subject
to any liability for any settlement made without its consent (which
consent shall not be unreasonably withheld). No indemnifying party
will consent to entry of judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. An indemnifying
party who elects not to assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel plus
one firm of local counsel for all parties indemnified by such
indemnifying party with respect to
49
<PAGE>
such claim, unless in the reasonable judgment of any indemnified party
a meaningful conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay
the fees and expenses of only one additional counsel plus one firm of
local counsel.
(iv) Other Indemnification. Indemnification similar to that
specified in the preceding subsections of this Section 6.16 (with
appropriate modifications) shall be given by Compass and the Principal
Stockholder(s), jointly and severally, with respect to any required
registration or other qualification of Registrable Shares under any
federal or state law or regulation of governmental authority other
than the Securities Act.
(v) Contribution. If the indemnification provided for in this
Section 6.16(d) from the indemnifying party is unavailable to an
indemnified party for any loss, claim, damage, liability or expense
covered thereby, then the indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, claim, damage,
liability or expense. The contribution of such indemnifying party
shall be limited to the proportionate share of the amount paid or
payable that reflects the relative fault of the indemnifying party
with respect to such loss, claim, damage, liability, or expense. The
relative fault shall be determined by reference to, among other
things, whether any untrue or alleged untrue statement of material
fact or any omission or alleged omission of a material fact was made
by or relates to information supplied by the indemnifying party and
the intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission of the indemnifying
party. The indemnifying and indemnified parties agree that it would
not be just and equitable to determine contribution under this Section
by pro rata allocation or by any other method which does not take into
account the equitable considerations referred to above.
6.17 Shareholder Approval of Wright Agreements. Arizona Bank shall submit
for approval by the stockholders of Arizona Bank entitled to vote the payments
to David T.C. Wright under the Wright Agreements.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of Compass, Arizona Bank and their respective
Subsidiaries to consummate the
50
<PAGE>
Merger is subject to the fulfillment or written waiver by Compass and Arizona
Bank prior to the Effective Time of each of the following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been duly approved by the requisite vote of the stockholders of Arizona
Bank under the Corporate Laws.
(b) Regulatory Approvals. All regulatory approvals required to
consummate the Merger shall have been obtained and shall remain in full
force and effect and all statutory waiting periods in respect thereof shall
have expired and no such approvals shall contain (i) any conditions,
restrictions or requirements which the Compass Board reasonably determines
would either before or after the Effective Time have a Material Adverse
Effect on Compass, or (ii) any conditions, restrictions or requirements
that are not customary and usual for approvals of such type and which the
Compass Board reasonably determines would either before or after the
Effective Time be unduly burdensome.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute,
rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits
consummation of the Merger.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) Blue Sky Approvals. All permits and other authorizations under
state securities laws necessary to consummate the Merger and to issue the
shares of Compass Common Stock to be issued in the Merger shall have been
received and be in full force and effect.
(f) Listing. The shares of Compass Common Stock to be issued in the
Merger shall have been approved for listing on the NASDAQ, subject to
official notice of issuance.
(g) Permits, Authorizations. Each of Compass and Arizona Bank shall
have obtained all material permits, authorizations, consents, waivers and
approvals required for the lawful consummation of the Merger.
7.02 Conditions to Obligation of Arizona Bank. The obligation of Arizona
Bank and its Subsidiaries to consummate the Merger is also subject to the
fulfillment or written waiver by Arizona Bank prior to the Effective Time of
each of the following conditions:
51
<PAGE>
(a) Representations and Warranties. The representations and warranties
of Compass set forth in this Agreement shall be true and correct in all
material respects, subject in the case of Specified Representations to the
standard set forth in Section 5.02, as of the date of this Agreement and as
of the Effective Date as though made on and as of the Effective Date
(except that representations and warranties that by their terms speak as of
the date of this Agreement or some other date shall be true and correct as
of such date), and Arizona Bank shall have received a certificate, dated
the Effective Date, signed on behalf of Compass by the Chief Executive
Officer and the Chief Financial Officer of Compass to such effect.
(b) Performance of Obligations of Compass. Compass and its
Subsidiaries shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the
Effective Time, and Arizona Bank shall have received a certificate, dated
the Effective Date, signed on behalf of Compass by the Chief Executive
Officer and the Chief Financial Officer of Compass to such effect.
(c) Opinion of Arizona Bank's Counsel. Arizona Bank shall have
received an opinion of, Silver, Freedman & Taff, L.L.P., special counsel to
Arizona Bank, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, (i) the
Merger constitutes a "reorganization" within the meaning of Section 368 of
the Code and (ii) no gain or loss will be recognized by stockholders of
Arizona Bank who receive shares of Compass Common Stock in exchange for
shares of Arizona Bank Common Stock, except that gain or loss may be
recognized as to cash received in lieu of fractional share interests. In
rendering its opinion, Silver, Freedman & Taff, L.L.P. may require and rely
upon representations contained in letters from Arizona Bank, Compass, and
others.
(d) Comfort Letter. Arizona Bank shall have received from KPMG Peat
Marwick LLP, Compass' auditors, a comfort letter at least five days prior
to the expiration date of the Arizona Bank Option, stating that such firm
is not aware of any matters that would prevent the Merger from qualifying
for pooling-of-interests accounting treatment.
(e) Material Adverse Effect. There shall not have occurred a Material
Adverse Effect with respect to Compass and its Subsidiaries
7.03 Conditions to Obligation of Compass. The obligation of Compass and its
Subsidiaries to consummate the Merger is also subject to the fulfillment or
written waiver by Compass prior to the Effective Time of each of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of Arizona Bank set forth in this Agreement shall be true and correct in
all material respects, subject in the case of Specified Representations to
the standard set forth in Section 5.02, as of the date of this Agreement
and as of the Effective Date as though made on and as of the
52
<PAGE>
Effective Date (except that representations and warranties that by their
terms speak as of the date of this Agreement or some other date shall be
true and correct as of such date) and Compass shall have received a
certificate, dated the Effective Date, signed on behalf of Arizona Bank by
the Chief Executive Officer and the Chief Financial Officer of Arizona Bank
to such effect.
(b) Performance of Obligations of Arizona Bank. Arizona Bank and its
Subsidiaries shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the
Effective Time, and Compass shall have received a certificate, dated the
Effective Date, signed on behalf of Arizona Bank by the Chief Executive
Officer and the Chief Financial Officer of Arizona Bank to such effect.
(c) Opinion of Compass' Counsel. Compass shall have received an
opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to
Compass, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, the
Merger constitutes a reorganization under Section 368 of the Code. In
rendering its opinion, Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. may
require and rely upon representations contained in letters from Arizona
Bank, Compass and others.
(d) Accounting Treatment. Compass shall have received from KPMG Peat
Marwick LLP, Compass' independent auditors, letters, dated the date of or
shortly prior to each of the mailing date of the Proxy Statement and the
Effective Date, stating its opinion that the Merger shall qualify for
pooling-of-interests accounting treatment.
(e) Material Adverse Effect. There shall not have occurred a Material
Adverse Effect with respect to Arizona Bank and its Subsidiaries.
(f) Dissenting Shareholders. The holders of no more than 5% of the
Arizona Bank Common Stock shall have demanded or be entitled to demand
payment of the fair value of their shares as dissenting shareholders.
(g) Opinion of Arizona Bank Counsel. Compass shall have received the
opinions of local counsel to Arizona Bank acceptable to it as to the
matters set forth on Exhibit D attached hereto.
(h) Conversion of Series C Convertible Preferred Stock and Exercise of
Arizona Bank Option. All of the issued and outstanding Shares of Arizona
Bank Series C Convertible Preferred Stock shall have been converted and the
Arizona Bank Option shall have been exercised in full.
(i) Employment Agreement and Confidentiality and Noncompetition
Agreement. David T. C. Wright shall have entered into an Employment
Agreement and Confidentiality
53
<PAGE>
and Noncompetition Agreement with Compass Bank or one of its affiliates in
the forms attached as Exhibits F and G ("Wright Agreements").
(j) Affiliate Agreements. Each director and executive officer of
Arizona Bank and its Subsidiaries listed on Exhibit B hereto shall have
executed and delivered to Compass an agreement in the form attached hereto
as Exhibit A on or before the thirteenth business day after the date of
this Agreement.
ARTICLE VII
TERMINATION
8.01 Termination. This Agreement may be terminated, and the Merger may be
abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of Compass and Arizona Bank, if the Board of Directors of
each so determines by vote of a majority of the members of its entire
Board.
(b) Breach. At any time prior to the Effective Time, by Compass or
Arizona Bank, if its Board of Directors so determines by vote of a majority
of the members of its entire Board, in the event of either: (i) a breach by
the other party of any representation or warranty contained herein (subject
in the case of Specified Representations to the standard set forth in
Section 5.02), which breach cannot be or has not been cured within 30 days
after the giving of written notice to the breaching party of such breach;
or (ii) a breach by the other party in any material respect of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach.
(c) Delay. At any time prior to the Effective Time, by Compass or
Arizona Bank, if its Board of Directors so determines by vote of a majority
of the members of its entire Board, in the event that the Merger is not
consummated by February 28, 1999, except to the extent that the failure of
the Merger then to be consummated arises out of or results from the failure
to use diligent, prudent, best efforts in good faith to maximize the
prospects of consummating the Merger as promptly as practicable of the
party seeking to terminate pursuant to this Section 8.01(c).
(d) No Approval. By Arizona Bank or Compass, if its Board of Directors
so determines by a vote of a majority of the members of its entire Board,
in the event (i) the approvals required by Governmental Authorities
required for consummation of the Merger shall not have been received by
February 28, 1999, (ii) the approval of any Governmental Authority required
for consummation of the Merger shall have been denied by final
nonappealable action of such Governmental Authority, or (iii) the
stockholder approval required by Section 7.01(a) herein is not obtained at
the Arizona Bank Meeting.
54
<PAGE>
(e) Failure to Recommend, Etc. At any time prior to the Arizona Bank
Meeting, by Compass if the Arizona Bank Board shall have failed to
recommend approval of this Agreement and the Merger to the Arizona Bank
stockholders, or withdrawn such recommendation or modified or changed such
recommendation in a manner adverse in any respect to the interests of
Compass.
(f) Environmental Costs. At any time prior to the Effective Time, by
Compass if the results of any environmental inspections identify any past
or present event, condition, or circumstance that, based on the estimates
of Compass' independent environmental professionals may currently or in the
future require Environmental Expenditures by Arizona Bank or its
Subsidiaries, in connection with (A) investigation, remediation or
monitoring of any condition in, on, or under or resulting from any
property, site, or facility currently or previously owned or operated or
currently leased (including eventual removal of asbestos-containing
material if currently damaged, friable or at risk of realising fibers, or
if such materials are not managed under an operations and maintenance
program prepared in accordance with Environmental Laws and generally
prevailing guidance documents issued by, or on behalf of, regulatory
authorities regarding the preparation and implementation of such programs)
which condition, in the opinion of the environmental professional, violates
or has violated any Environmental Law or which condition may be the subject
of an actual or potential release of Hazardous Substances, or of an actual
or potential claim by any Person or governmental entity pursuant to
Environmental Laws or related to Hazardous Substances, (B) preparing and
obtaining approval by the appropriate environmental regulatory authority of
investigation, remediation and monitoring plans with respect to such
condition, or (C) any violations of Environmental Laws, which Environmental
Expenditures individually or in the aggregate are estimated to exceed
$6,000,000 on a pre-tax basis.
(g) Disclosure Schedule. By Compass on or before the tenth business
day after the date hereof, if the Arizona Bank Disclosure Schedule is not
accepted by Compass.
8.02 Effect of Termination and Abandonment; Enforcement of this Agreement.
In the event of termination of this Agreement and the abandonment of the Merger
pursuant to this Article VIII, no party to this Agreement shall have any
liability or further obligation to any other party hereunder except (i) as set
forth in Section 9.01 and (ii) that termination will not relieve a breaching
party from liability for any willful breach of this Agreement giving rise to
such termination. Notwithstanding anything contained herein to the contrary, the
parties hereto agree that irreparable damage will occur in the event that a
party breaches any of its obligations, duties, covenants and agreements
contained herein. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches or threatened breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement in any court of the United States or any state having jurisdiction,
this being in addition to any other remedy to which they are entitled by law or
in equity.
55
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.01 Survival. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
Section 6.12, 6.13, 6.15, 6.16 and this Article IX which shall survive the
Effective Time) or the termination of this Agreement if this Agreement is
terminated prior to the Effective Time (other than Sections 6.04, 6.05(b), 8.02
and this Article IX which shall survive such termination).
9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be (i) waived by the party benefitted by the provision, or (ii)
amended or modified at any time, by an agreement in writing between the parties
hereto executed in the same manner as this Agreement, except that after the
Arizona Bank Meeting, the consideration to be received by the Arizona Bank
stockholders for each share of Arizona Bank Common Stock shall not thereby be
decreased. The parties hereto agree to enter into an amendment of this Agreement
for the purpose of adding Compass Bank as a party hereto.
9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Arizona applicable to contracts made
and to be performed entirely within such State (except to the extent that
mandatory provisions of Federal law are applicable).
9.05 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that printing expenses and SEC fees for the Registration Statement shall be paid
by Compass.
9.06 Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to Arizona Bank, to:
Mr. David T. C. Wright
Arizona Bank
120 North Stone Avenue
Tucson, Arizona 85701
Telecopy No.: (520) 620-3252
56
<PAGE>
With a copy to:
Mr. Scott DeWald
Lewis & Roca
40 North Central Avenue
Suite 1800
Phoenix, Arizona 85004
Telecopy No.: (602) 262-5747
and
Mr. Barry Taff
Silver Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
7th Floor
Washington, D.C. 20005-3934
Telecopy No.: (202) 682-0354
If to Compass or Compass Bank, to:
Mr. D. Paul Jones, Jr.
Chairman and Chief Executive Officer
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
Mr. Charles E. McMahen
Chairman and Chief Executive Officer
Compass Banks of Texas, Inc.
24 Greenway Plaza
Houston, Texas 77046
Telecopy No.: (713) 993-8500
With a copy to:
Mr. Daniel B. Graves
Associate General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
57
<PAGE>
and
Ms. Annette L. Tripp
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
3400 Chase Tower, 600 Travis
Houston, Texas 77002
Telecopy No.: (713) 223-3717
9.07 Entire Understanding; Third Party Beneficiaries. This Agreement and
any Supplemental Letter entered into by the parties on the date hereof represent
the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and this Agreement supersedes any
and all other oral or written agreements heretofore made (other than any
Supplemental Letter). Except for Section 6.12, 6.13, 6.15 and 6.16, nothing in
this Agreement expressed or implied, is intended to confer upon any person,
other than the parties hereto or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
9.08 Interpretation; Effect. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." No provision of this Agreement shall
be construed to require Arizona Bank, Compass or any of their respective
Subsidiaries, affiliates or directors to take any action which would violate
applicable law (whether statutory or common law), rule or regulation.
58
<PAGE>
* * *
The parties hereto have caused this Agreement to be executed in
counterparts by their duly authorized officers, all as of the day and year first
above written.
ARIZONA BANK
By: /s/ David T.C. Wright
-------------------------------------
Name: David T.C. Wright
Title: President
COMPASS BANCSHARES, INC.
By: /s/ Garrett R. Hegel
-------------------------------------
Name: Garrett R. Hegel
Title: Chief Financial Officer
Acknowledgment
- --------------
The Principal Stockholders have executed this Agreement on the date hereof
for the limited purpose of agreeing to be bound by the terms and provisions of
Sections 3.06, 6.16 and 7.03(h) of this Agreement.
/s/ James H. Click
--------------------------------------------------
James H. Click, Jr. as Trustee of the
James H. Click, Jr. Family Trust
/s/ Vicki Click
--------------------------------------------------
Vicki Click, as Trustee of the
James H. Click, Jr. Family Trust
/s/ Robert H. Tuttle
--------------------------------------------------
Robert H. Tuttle, Individually and as
Trustee of the Robert H. Tuttle Family Trust
and as Trustee of Trusts Dated December 27,
1978
/s/ Maria Hummer
--------------------------------------------------
Maria Hummer
<PAGE>
EXHIBIT A
AFFILIATE AGREEMENT
This Affiliate Agreement (this "Agreement") is executed and delivered this
____ day of July, 1998 by and between Compass Bancshares, Inc. ("Compass"),
Arizona Bank (the "Bank"), and the undersigned shareholder of the Bank (the
"Shareholder").
WHEREAS, Compass and the Bank entered into an Agreement and Plan of Merger
dated July ___, 1998 ("Merger Agreement") pursuant to which the Bank 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 Bank and the Shareholder and each other affiliate of the Bank
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 Bank's common stock, no par value, the
Bank's Series C Preferred Stock par value $25.00 per share, the Bank's Series E
Preferred Stock, par value $25.00 per share and the Bank's Series F Preferred
Stock, par value $25.00 per share (collectively, "Bank 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 Bank and
Compass, he will not sell, pledge, transfer or otherwise dispose of any shares
of the Compass Common Stock or Compass Preferred Stock (as each are defined in
the Merger Agreement) 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 or
Compass Preferred Stock acquired in the Merger to secure loans, provided the
lender accepts any pledge of such Compass Common Stock or Compass Preferred
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 or Compass Preferred 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
<PAGE>
to transfer any Compass Common Stock or Compass Preferred Stock received by him
in the Merger 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 or
Compass Preferred 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 _______ __, 1998 which restricts any
sale or other transfer of such shares prior to the earlier to occur of (i)
public release by Compass Bancshares, Inc. of 30 days of post-merger
combined operations of Arizona Bank and Compass Bancshares, Inc., or (ii)
[insert due date of next Quarterly Report on Form 10-Q or Annual Report on
Form 10-K that will contain required 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 Affiliate 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 Bank agrees and the Shareholder acknowledges and agrees that the
Bank will not permit the transfer of any shares of Bank Stock by the Shareholder
or any other Bank 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:_______________________________
ARIZONA BANK
By:__________________________________
Name:________________________________
Title:_______________________________
_____________________________________
Signature of Shareholder
_____________________________________
Printed Name of Shareholder
3
<PAGE>
EXHIBIT B
James H. Click, Jr. Chair of Board, Director
Robert H. Tuttle, Chair of Executive Committee, Director
David T.C. Wright, President and C.E.O., Director
David M. Lovitt, Sr., Director
Frank L. McClure, Director
Lewis C. Murphy, Director
John C. Neil, Executive Vice President, Commercial Lending
James M. Chandler, Executive Vice President, Consumer Lending
John Shepard, Senior Vice President, Audit Officer
Linda Saulisbury, Executive Vice President
<PAGE>
EXHIBIT C
VOTING AGREEMENT AND IRREVOCABLE PROXY
This Voting Agreement and Irrevocable Proxy (this "Agreement") dated
as of July __, 1998 is executed by and among Arizona Bank, an Arizona banking
corporation (the "Bank"), 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 Bank and Compass intend to execute that certain Agreement
and Plan of Merger dated as of July ____, 1998 (the "Merger Agreement") whereby
the Bank will merge with an existing or to-be-formed wholly-owned subsidiary of
Compass (the "Merger"); and
WHEREAS, Compass and the Bank are relying on the irrevocable proxies
in incurring expense in reviewing the Bank's business, in entering into the
Merger Agreement, 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 Bank that they are the registered holders of and have the exclusive right to
vote the shares of capital stock ("Stock") of the Bank set forth below his name
on the signature pages hereto. Each Shareholder hereby agrees to vote at the
shareholders' meeting referred to in Section 6.02 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, the approval of the payments made under the Wright
Agreements, as defined in 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, the approval of the payments made under the
Wright Agreements, and the other agreements and transactions contemplated
thereby, with such modifications to the Merger Agreement, the Wright Agreements,
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
<PAGE>
of the Merger Agreement, the approval of the payments made under the Wright
Agreements, 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 Bank are relying on
this Agreement in incurring expense in reviewing the Bank's business in entering
into the Merger Agreement 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, without limitation, Sections 10-722 and
10-731 of the Arizona Business Corporation Act. The Shareholders and the Bank
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 or
preferred stock 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 Bank
agrees to recognize the 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 and the payments to be made under the Wright Agreements
as set forth in Section 1 hereof.
2
<PAGE>
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 Bank, 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 Arizona.
[SIGNATURE PAGES FOLLOW]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
above written.
ARIZONA BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
Address:
120 North Stone Avenue
Tucson, Arizona 85701
Attention: Mr. David T. C. Wright
President and Chief Executive Officer
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 D
OPINIONS REQUIRED FROM COUNSEL
TO THE BANK
(i) the Bank is a banking corporation, duly organized, validly existing
and in good standing under the laws of Arizona. The Subsidiaries are Arizona
corporations, and are duly organized, validly existing and in good standing
under the laws of the State of Arizona. The Bank and its Subsidiaries have all
requisite corporate power and authority to carry on their business as we know
them to be conducted and to own, lease and operate their properties and assets
as now owned, leased or operated;
(ii) the Bank 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 Bank 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 Bank enforceable against the Bank 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 Bank consists solely of
____________ shares of Bank Common Stock of which _________ shares are issued
and outstanding (__________ of which are held in the treasury), __________
shares of Series E Preferred Stock of which __________ shares are issued and
outstanding (__________ of which are held in treasury), and __________ shares of
Series F Preferred Stock of which __________ shares are issued and outstanding
(__________ of which are held in treasury); the Bank is the record holder of all
of the issued and outstanding capital stock of the Bank's Subsidiaries; all of
the outstanding shares of the Bank Common Stock and Bank Preferred Stock are
validly issued, fully paid and nonassessable and all of the capital stock of the
Bank's Subsidiaries 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 Previously Disclosed,
there are no outstanding subscriptions, options, rights, warrants, calls,
convertible securities, irrevocable proxies, or other agreements or commitments
obligating the Bank or its Subsidiaries 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 Bank 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 bylaws of the Bank or its Subsidiaries, (b) to the best of our
knowledge and except as disclosed in the Agreement, any material 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 material restriction of any kind or character known to us to which
the Bank or any of its Subsidiaries is a party or by which the Bank or any of
its Subsidiaries 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 Bank
or any of its Subsidiaries, 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, 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 Bank of the Agreement;
(vii) except as Previously Disclosed, to the best of our knowledge,
there is no material litigation, claim or other proceeding pending against the
Bank or any of its Subsidiaries, nor to the best of our knowledge, is any
material litigation, claim or other proceeding threatened against or affecting
the Bank or any of its Subsidiaries, which by the terms of the Agreement would
be required to be disclosed;
(viii) to the best of our knowledge and except as Previously Disclosed,
neither the Bank nor any of its Subsidiaries is in material default under any
law or regulation, or under any order of any court, commission, board, bureau,
agency or instrumentality wherever located; 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 Arizona Corporation Commission and the
[Superintendent of the Arizona State Banking Department] the Merger will have
been legally consummated in accordance with the laws of the State of Arizona
with the consequences specified in Article 10-1106 of the Arizona Business
Corporation Act and Section 6-216 of the title 6 of the Arizona Revised
Statutes.
2
<PAGE>
EXHIBIT E
Illustration of Consideration of Payable to Holders of Arizona Bank Common Stock
Current Anticipated Deal Price: $170,000,000
- --------------------------------------------------------------------------------
Share Determination Market Value Shares Issued /(d)(e)/
("SDVM")
- --------------------------------------------------------------------------------
56.000 and above 3,541,667
55.000 3,541,667
54.000 3,541,667
53.000 3,541,667
52.000 3,541,667
51.000 3,541,667
50.000 3,541,667
49.000 3,541,667
48.000/(a)/ 3,541,667
47.000 3,617,021
46.000 3,695,652
45.000 3,777,778
44.000/(d)/ 3,863,636
43.000 3,953,488
42.000 4,047,619
41.000 4,146,341
40.000/(b)/ 4,250,000
39.000 4,250,000
38.000 4,250,000
37.000/(c)/ 4,250,000
36.000/(c)/ 4,250,000 or 4,368,056
35.000/(c)/ 4,250,000 or 4,492,857
34.000/(c)/ 4,250,000 or 4,625,000
33.000/(c)/ 4,250,000 or 4,765,152
32.000/(c)/ 4,250,000 or 4,914,063
31.000/(c)/ 4,250,000 or 5,072.581
30.000/(c)/ 4,250,000 or 5,241,667
29.000/(c)/ 4,250,000 or 5,422,414
Below 29.00 the formula continues/(c)/
(a) At any SDVM $48.00 and above per share, Compass would issue 3,541,667 shares
of Common Stock.
(b) At any SDVM $40.00 and below per share Compass would issue 4,250,000 shares
of Common Stock.
(c) At a price below $37.00 per share Arizona Bank has the right to terminate
unless Compass elects to issue a number of shares of Compass Common Stock
equal to $157,250,000 divided by the SDVM. If Arizona Bank does not
terminate Compass would issue 4,250,000 shares of Common Stock.
(d) If Compass enters into a written definitive agreement to be acquired prior
to the date of consummation of the merger, then the protocol would be
followed, but Compass would issue not less than 3,863,636 shares of Common
Stock.
(e) Number shares issued may be reduced by estimated environmental expenditures
in certain events.
3
<PAGE>
EXHIBIT F
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is made and entered into as of __________, 1998,
effective as of the date set forth hereinafter, by and between Compass Bank, an
Arizona banking corporation ("Compass"), and David T. C. Wright ("Officer").
WHEREAS, Officer has been the Chief Executive Officer of Arizona Bank
which will be acquired by Compass Bancshares, Inc. and its affiliates (the
"Merger") pursuant to an Agreement and Plan of Merger dated as of
______________, 1998 ("Merger Agreement"), and Officer acknowledges that (i)
Arizona Bank has been engaged for a number of years in the business of banking,
lending, deposit taking, and related banking services (the "Business") in the
State of Arizona; (ii) Officer is one of a limited number of persons
instrumental in the development of the Business of Arizona Bank; and (iii) that
Compass would not employ Officer or enter into the Merger, and Officer would not
accept employment with Compass, except for such covenants and agreements
contained herein and in the Confidentiality and Noncompetition Agreement of even
date herewith between Compass and Officer ("Noncompetition Agreement").
NOW, THEREFORE, in consideration of the agreements contained herein and
in the Noncompetition Agreement, the receipt and sufficiency of which are hereby
acknowledged, Compass and Officer hereby agree, effective as of the date of the
consummation of the Merger, as follows:
1. Employment. Commencing on the effective date of the Merger
("Commencement Date") and for a period of five years thereafter ("Term"),
Compass shall employ Officer and Officer shall act as President and Chief
Executive Officer of Compass. Officer hereby accepts such employment on the
terms and conditions set forth in this Agreement.
2. Position and Responsibilities. Officer will be engaged by Compass
or its affiliates as the highest-ranking corporate officer in the Arizona
banking operations of Compass Bancshares, Inc. and in said capacity will provide
such services as are appropriate for such office and will be resident in Tucson,
Arizona (unless otherwise mutually agreed) and shall report directly to Charles
E. McMahen ("McMahen"), or his successor and the Compass Board of Directors in
accordance with the rules of Compass as adopted orally or in writing by the
Board of Directors of Compass. During the Term, Officer shall devote his full
business time and efforts to the performance of his duties hereunder. It is,
however, understood and agreed that the preceding sentence shall not prohibit
Officer from spending a reasonable amount of time managing his personal
investments and discharging his civic responsibilities as long as such
activities do not interfere with the discharge of his duties hereunder. During
the Term, Officer will not serve as an officer or director of any business
enterprise (other than Compass, the Federal Home Loan Bank Board (San Francisco)
and Southwest Gas Corporation) without the prior approval of McMahen or his
successor.
3. Compensation. (a) Base Salary. Compass shall pay Officer for all
services and agreements of Officer pursuant to this Agreement, and any other
duties assigned to him by Compass, an annual base salary of $200,000 per year
with merit increases in accordance with Compass' salary administration program
based upon performance, which shall be payable in accordance with
<PAGE>
Compass' customary payroll practices with respect to time and manner of payment.
Officer shall also be entitled to participate, up to 50% of Officer's annual
base salary, in the Compass Bancshares, Inc. executive incentive program with
the payment of the bonus for calendar year 1999 in the amount of $100,000 being
guaranteed.
(b) Certain Benefits in Event of Termination. If Officer's employment
under this Agreement is terminated by Compass for other than death or "good
cause", as defined in Section 6 hereof or if Officer resigns for "good reason"
as defined in Section 3(c)(iii) hereof, Compass will pay (or cause to be paid)
the lesser of (i) the compensation provided by this Agreement for the remainder
of the Term, or (ii) an amount equal to twelve month's base salary of Officer.
In the event of the termination of Officer's employment under this Agreement
because of Officer's disability, as defined in Section 6 hereof, any payments of
disability benefits to Officer under any disability insurance policy or
disability benefit plan covering Officer maintained by Compass or its
affiliates, as it may exist from time to time, shall be treated as payments by
Compass toward satisfaction of its obligations under this Agreement (other than
its obligations to pay the Retention Bonus under Section 3(c)(ii)). Such
payments shall be paid in accordance with Compass' customary payroll practices
with respect to the time and manner of payment. Payments received under medical
insurance policies are not counted toward this obligation. If Officer resigns
for any reason other than "good reason" or is terminated for "good cause",
Compass shall have no further obligation to Officer under this Agreement or
otherwise, except payment of the Retention Bonus that has been earned, but is
unpaid, as of the date of such termination or resignation. If Officer dies,
Compass shall have no further obligation to Officer under this Agreement or
otherwise, except payment of the Retention Bonus under Section 3(c)(ii).
(c) Retention Bonus. (i) Officer shall be entitled to a retention
bonus ("Retention Bonus") of $1,300,000 payable as follows. At the Commencement
Date, the Retention Bonus shall be paid into a grantor trust ("Trust"), (which,
if Compass does not have a taxable event with respect to the earnings on the
Trust and Compass is not required to distribute all of the earnings under the
Trust prior to the second anniversary of the Commencement Date, may be a "Rabbi
trust"), with Compass Bank, Birmingham, as trustee, for the benefit of Officer.
Officer shall have the right to direct the investment of the funds in the Trust
into investments eligible for investment in the [Compass Bank __________________
Plan]. The Retention Bonus shall be deemed proportionately earned over the 24
months following the Commencement Date. For any portion of a month, the
Retention Bonus deemed earned shall be prorated based on the number of days
worked in the month. The Retention Bonus shall be available to be released from
the Trust and paid to Officer in equal semiannual installments of principal and
earnings payable over 24 months with the first installment being released and
paid on the sixth-month anniversary of the Commencement Date. Officer
acknowledges that the Retention Bonus shall be subject to applicable payroll tax
withholding.
(ii) In the event of the disability of Officer, the payment of the
Retention Bonus will be accelerated and Officer will be entitled to the release
to Officer of all remaining sums due under the Retention Bonus. If Officer dies
the payment of the Retention Bonus will be accelerated and all remaining sums
due to Officer under the Retention Bonus shall be released from the Trust
2
<PAGE>
and paid to the estate of Officer. If Officer is terminated for any reason other
than for "good cause" as defined below or Officer terminates his employment for
"good reason" as defined by subsection (iii) below, Officer shall be entitled to
all remaining sums due under the Retention Bonus. If Officer resigns without
"good reason" or is terminated for "good cause", Officer shall forfeit all
remaining unearned sums due under the Retention Bonus.
(iii) For purposes of subsection (c) only and not for any other
purpose under this Agreement, "good reason" shall mean:
(A) Officer is assigned any responsibilities or duties
materially and adversely inconsistent with his position, duties,
responsibilities and status with Compass as the highest-ranking corporate
officer in the Arizona banking operations of Compass Bancshares, Inc.;
(B) there is a reduction in Officer's annual base salary
payable to Officer pursuant to Section 3(a) hereof;
(C) failure by Compass or any successor to Compass or its
assets to continue to provide to Officer any material benefit, bonus, profit
sharing, incentive, remuneration or compensation plan, stock ownership or
purchase plan, stock option plan, life insurance, disability plan, pension plan
or retirement plan in which Officer was entitled to participate in as at the
date of this Agreement or subsequent thereto, or the taking by Compass of any
action that materially and adversely affects Officer's participation in or
materially reduces his rights or benefits under or pursuant to any such plan or
the failure by Compass to increase or improve such rights or benefits on a basis
consistent with practices in effect prior to the date of this Agreement or with
practices implemented and subsequent to the date of this Agreement with respect
to employees of Compass generally, but excluding such action that is required by
law;
(D) without Officer's consent, Compass requires Officer to
relocate to any city or community other than Tucson, Arizona, except for
required travel on Compass' business to an extent substantially consistent with
Officer's business obligations under this Agreement; or
(E) there is any material breach by Compass of any
provision of this Agreement.
4. Benefits. (a) During the Term, Compass shall provide Officer
such benefits as are made generally available to employees of equal title and
base salary on the same basis as Compass Bancshares, Inc. makes such benefits
available to Compass Bancshares, Inc.'s other such employees, including, without
limitation, participation in the Compass Bancshares, Inc. retirement plan.
(b) Compass shall provide Officer with the following additional
benefits:
3
<PAGE>
(i) a stock grant of 15,000 shares of the common stock,
par value $2.00 per share, of Compass Bancshares,
Inc. which stock grant shall vest pro rata over a
period of five years and which shall be evidenced by
a separate agreement;
(ii) the use of a company owned vehicle;
(iii) the payment of Officer's monthly dues in the Tucson
Country Club and the Mountain Oyster Club; and
(iv) the issuance of stock options as are issued to
persons of comparable position and responsibility.
5. Confidentiality; Nonsolicitation; Noncompetition.
(a) Officer recognizes and acknowledges that he has and will have access
to confidential information of a special and unique value concerning Compass and
its affiliates and he has had access to and will continue to have access to
confidential information of special and unique value concerning Arizona Bank and
acquired by Compass Bancshares, Inc. which may include, without limitation,
books and records relating to operations, customer names and addresses, customer
service requirements, customer financial statements and other financial,
business and personal information relating to Compass and its affiliates, their
customers, markets, officers and employees, cost of providing service and
equipment, operating and maintenance costs, and pricing criteria. Officer also
recognizes that a portion of the business of Compass and its affiliates is
dependent upon trade secrets, including techniques, methods, systems, processes,
data and other confidential information. The protection of these trade secrets
and confidential information against unauthorized disclosure or use is of
critical importance to Compass. Officer therefore agrees that, without prior
written authorization from McMahen or his successor, he will not at any time,
either while employed by Compass or afterwards, make any independent use of, or
disclose to any other person, any trade secrets or confidential information of
Compass or its affiliates or Arizona Bank. The agreements contained in this
Section 5(a) shall survive the termination of this Agreement.
(b) All records, files, memoranda, reports, price lists, customer
lists, documents, and other information (together with all copies thereof) which
relate to Compass, its affiliates, or Arizona Bank, and which Officer, either
prior to or during the Term, has obtained or obtains, uses, prepares, or comes
in contact with shall remain the sole property of Compass and its affiliates.
Upon the termination of Officer's employment by Compass, or upon the prior
demand of Compass, all such materials and all copies thereof shall be returned
to Compass (or its successors by merger) immediately.
(c) Officer acknowledges and agrees that the agreements and covenants
contained in this Agreement are essential to protect the Business and goodwill
of Arizona Bank
4
<PAGE>
being acquired by Compass Bancshares, Inc. and the business and goodwill of
Compass and its affiliates. In the event of a breach or threatened breach by
Officer of the provisions of this Section 5, Compass shall be entitled to
temporary or permanent injunctions and other appropriate relief restraining
Officer from using or disclosing, in whole or in part, trade secrets and
confidential information or violating the other provisions hereof. Officer
hereby waives any requirement that Compass post any bond in connection with
obtaining any such relief. Nothing herein shall be construed as prohibiting
Compass from pursuing any other remedies available to it.
6. Termination of Employment. Officer's employment with Compass
shall be terminated upon the occurrence of any one or more of the following
events:
(a) Compass gives written notice of termination for good cause to
Officer. For the purposes of this Agreement, "good cause" shall mean (i) fraud
against Compass or any affiliate, (ii) a felony, (iii) a willful and material
violation of banking laws and regulations, or (iv) any breach of Sections 2
(other than failure attributable to reasons of health) or 5 of this Agreement,
which breach cannot be or has not been cured within 60 days after the giving of
written notice to Officer. Mere failure to perform duties to the satisfaction
of McMahen or his successor or to Compass and its affiliates will not constitute
"good cause".
(b) Death.
(c) The disability of Officer. For purposes of this Agreement,
"disability" shall mean a mental or physical condition resulting from an injury
or illness which shall render Officer incapable of performing the essential
functions of his position with reasonable accommodations from Compass.
(d) Resignation of Officer who agrees to provide not less than 60 days
prior written notice of his resignation to Compass.
7. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing mailed or delivered as follows:
If to Officer:
David T. C. Wright
____________________
____________________
5
<PAGE>
If to Compass:
Charles E. McMahen
Compass Bank
24 Greenway Plaza
Suite 1401
Houston, Texas 77046
8. Entire Agreement. This Agreement and the Noncompetition Agreement
contain the entire agreement of the parties regarding the employment of Officer
by Compass and supersedes any prior agreement, arrangement or understanding,
whether oral or written, between Compass and Officer concerning Officer's
employment hereunder.
9. Choice of Law. This Agreement shall be governed by, and enforced
according to, the laws of the State of Arizona. The invalidity of any provision
shall be automatically reformed to the extent permitted by applicable law and
shall not affect the enforceability of the remaining provisions hereof.
10. Assignment. This Agreement is for the personal service of Officer
and may not be assigned by Officer but may be assigned by Compass to any
affiliate or successor in interest to Compass' business. In the event Compass
makes such an assignment, Officer shall continue to perform, on behalf of such
affiliate or successor, the services required of Officer by this Agreement and
the provisions of this Agreement shall be binding upon, and inure to the benefit
of, such successor or affiliate. This Agreement shall be binding upon and inure
to the benefit of Officer, his heirs, representatives and estate.
11. Modification; Termination. This Agreement may be modified only by
written agreement signed by Officer and by a duly authorized officer of Compass.
The failure to insist upon compliance with any provision hereof shall not be
deemed a waiver of such provision or any other provision hereof. This Agreement
shall terminate if the Merger Agreement shall be terminated, provided however,
Officer agrees that if this Agreement is terminated he will keep confidential
any confidential information received from Compass or its affiliates prior to
such termination.
12. Counterparts. This Agreement may be executed in several identical
counterparts, and by the parties hereto on separate counterparts, and each
counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts shall constitute but one and the
same instrument.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties as of the
day and year first above written, but shall not become effective until the
consummation of the Merger.
COMPASS BANK
By:____________________________
Name:__________________________
Title:_________________________
_______________________________
David T. C. Wright
7
<PAGE>
EXHIBIT G
CONFIDENTIALITY AND NONCOMPETITION AGREEMENT
THIS CONFIDENTIALITY AND NONCOMPETITION AGREEMENT (this "Agreement"), is
made and entered into as of __________, 1998, effective as of the date set forth
hereinafter, by and between Compass Bank, an Arizona banking corporation
("Compass"), and David T. C. Wright ("Officer").
WHEREAS, Officer has been the Chief Executive Officer of Arizona Bank
which will be acquired by Compass Bancshares, Inc. and its affiliates (the
"Merger") pursuant to an Agreement and Plan of Merger dated as of
______________, 1998 ("Merger Agreement"), and Officer acknowledges that (i)
Arizona Bank has been engaged for a number of years in the business of banking,
lending, deposit taking, and related banking services (the "Business") in the
State of Arizona; (ii) Officer is one of a limited number of persons
instrumental in the development of the Business of Arizona Bank; (iii) that
Officer has executed an Employment Agreement of even date herewith ("Employment
Agreement"); and (iv) that Compass would not employ Officer or enter into the
Merger, and Officer would not accept employment with Compass, except for such
covenants and agreements contained herein and in the Employment Agreement.
NOW, THEREFORE, in consideration of $2,000,000 and of the agreements
contained herein and in the Employment Agreement, the receipt and sufficiency of
which are hereby acknowledged, Compass and Officer hereby agree, effective as of
the date of the consummation of the Merger, as follows:
1. Confidentiality.
(a) Officer recognizes and acknowledges that he has and will have access
to confidential information of a special and unique value concerning Compass and
its affiliates and he has had access to and will continue to have access to
confidential information of special and unique value concerning Arizona Bank and
acquired by Compass Bancshares, Inc. which may include, without limitation,
books and records relating to operations, customer names and addresses, customer
service requirements, customer financial statements and other financial,
business and personal information relating to Compass and its affiliates, their
customers, markets, officers and employees, cost of providing service and
equipment, operating and maintenance costs, and pricing criteria. Officer also
recognizes that a portion of the business of Compass and its affiliates is
dependent upon trade secrets, including techniques, methods, systems, processes,
data and other confidential information. The protection of these trade secrets
and confidential information against unauthorized disclosure or use is of
critical importance to Compass. Officer therefore agrees that, without prior
written authorization from Charles E. McMahen ("McMahen") or his successor, he
will not at any time, either while employed by Compass or afterwards, make any
independent use of, or disclose to any other person, any trade secrets or
confidential information of Compass or its affiliates
<PAGE>
or Arizona Bank. The agreements contained in this Section 5(a) shall survive the
termination of this Agreement.
(b) All records, files, memoranda, reports, price lists, customer
lists, documents, and other information (together with all copies thereof) which
relate to Compass, its affiliates, or Arizona Bank, and which Officer, either
prior to or during the Term, has obtained or obtains, uses, prepares, or comes
in contact with shall remain the sole property of Compass and its affiliates.
Upon the termination of Officer's employment by Compass, or upon the prior
demand of Compass, all such materials and all copies thereof shall be returned
to Compass (or its successors by merger) immediately.
2. Noncompetition.
(a) From the date hereof and for a period of four years after
Officer's employment under the Employment Agreement with Compass is terminated
for any reason, Officer agrees not to and shall not directly or indirectly hire,
employ or engage any past, present or future employee of Arizona Bank, without
the prior written permission of McMahen or his successor;
(b) From the date hereof and for a period of four years after
Officer's employment under the Employment Agreement with Compass is terminated
for any reason, Officer agrees not to and shall not directly or indirectly
compete for or solicit banking, lending, deposit taking or any other banking or
trust services business for or on behalf of any bank or other financial
institution (excluding any finance company) with a place of business in the
State of Arizona, or own, operate, participate in, undertake any employment with
or have any interest in any bank or other financial institution (excluding a
finance company) with a place of business in the State of Arizona or a bank or
financial institution (excluding a finance company) with a place of business
outside the State of Arizona having an office in Texas, Alabama, Florida or any
other state in which Compass or any affiliate has a significant deposit office
at the time of termination, except owning publicly traded stock for investment
purposes only in which Officer owns less than 5%;
(c) From the date hereof and for a period of four years after
Officer's employment under the Employment Agreement with Compass is terminated
for any reason, Officer agrees not to and shall not directly or indirectly
compete for or solicit banking, lending, deposit taking or any other banking or
trust services business from any customer of Compass (or its successors by
merger); or
(d) From the date hereof and for a period of four years after
Officer's employment under the Employment Agreement with Compass is terminated
for any reason, Officer agrees not to and shall not directly or indirectly use
in any competition, solicitation or marketing effort in competition with Compass
or its affiliates any proprietary list of or other proprietary information
concerning customers of Arizona Bank, Compass or its affiliates developed by
Arizona Bank, Compass or its affiliates.
2
<PAGE>
(e) The restrictions against competition set forth above are
considered by the parties to be reasonable for the purposes of protecting the
value intended to be received by Compass in connection with the transactions
contemplated by the Merger Agreement. If any such restriction is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too broad a range of activities or over too large
a geographic area, such restriction shall be interpreted and reformed to extend
only over the maximum period of time, range of activities or geographic area as
to which it may be enforceable.
3. Remedies. Officer acknowledges and agrees that the agreements and
covenants contained in this Agreement are essential to protect the Business and
goodwill of Arizona Bank being acquired by Compass Bancshares, Inc. and the
business and goodwill of Compass and its affiliates. In the event of a breach
or threatened breach by Officer of the provisions of this Agreement, Compass
shall be entitled to temporary or permanent injunctions and other appropriate
relief restraining Officer from violating the provisions hereof. Officer hereby
waives any requirement that Compass post any bond in connection with obtaining
any such relief. In the event Officer breaches any of the covenants contained
in Section 2(b) or (d) in any material respect and Compass chooses not to seek
injunctive relief or injunctive relief is not granted by any court, Officer
agrees to refund to Compass $500,000 for each year (or a pro rata payment for
any portion thereof) remaining under the time periods set forth in Section 2(b)
and (d); provided, however, that any claim brought by Compass under this
sentence shall be made within 90 days of the discovery by Compass of any such
breach. Notwithstanding any other provision of this Agreement, nothing herein
shall be construed as prohibiting Compass from pursuing any other remedies
available to it.
4. Notices. Any request, claim, demand or notice required or desired
to be given under this Agreement shall be deemed given if in writing mailed or
delivered as follows:
If to Officer:
David T. C. Wright
____________________
____________________
If to Compass:
Charles E. McMahen
Compass Bank
24 Greenway Plaza
Suite 1401
Houston, Texas 77046
3
<PAGE>
5. Entire Agreement. This Agreement and the Employment Agreement
contain the entire agreement of the parties regarding the employment of Officer
by Compass and supersedes any prior agreement, arrangement or understanding,
whether oral or written, between Compass and Officer concerning Officer's
employment hereunder and thereunder.
6. Choice of Law. This Agreement shall be governed by, and enforced
according to, the laws of the State of Arizona. The invalidity of any provision
shall be automatically reformed to the extent permitted by applicable law and
shall not affect the enforceability of the remaining provisions hereof.
7. Assignment. This Agreement may be assigned by Compass to any
affiliate or successor in interest to Compass' business and shall be binding
upon, and inure to the benefit of such successor or affiliate. This Agreement
shall be binding upon and inure to the benefit of Officer, his heirs,
representatives and estate.
8. Modification; Termination. This Agreement may be modified only by
written agreement signed by Officer and by a duly authorized officer of Compass.
The failure to insist upon compliance with any provision hereof shall not be
deemed a waiver of such provision or any other provision hereof.
9. Severability. In the event that any one or more of the provisions
contained in this Agreement shall be declared invalid, void or unenforceable,
the remainder of the provisions of this Agreement shall remain in full force and
effect, and such invalid, void or unenforceable provision shall be interpreted
as closely as possible to the manner in which it was written.
10. Counterparts. This Agreement may be executed in several identical
counterparts, and by the parties hereto on separate counterparts, and each
counterpart, when so executed and delivered, shall constitute an original
instrument, and all such separate counterparts shall constitute but one and the
same instrument.
4
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the parties as of
the day and year first above written, but shall not become effective until the
consummation of the Merger.
COMPASS BANK
By:_____________________________
Name:___________________________
Title:__________________________
________________________________
David T. C. Wright
5
<PAGE>
APPENDIX II
DISSENTERS' RIGHTS OF APPRAISAL
<PAGE>
PROVISIONS OF THE ARIZONA BUSINESS CORPORATION ACT
RELATING TO RIGHTS OF DISSENTING SHAREHOLDERS
ARTICLE 1.
DISSENT AND PAYMENT FOR SHARES
10-1301 DEFINITIONS.
In this article, unless the context otherwise requires:
A. "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
B. "Corporation" means the issuer of the shares held by a dissenter before
the corporate action or the surviving or acquiring corporation by merger or
share exchange of that issuer.
C. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under (S)10-1302 and who exercises that right when and in the
manner required by article 2 of this chapter.
D. "Fair value" with respect to a dissenter's shares means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion is inequitable.
E. "Interest" means interest from the effective date of the corporate
action until the date of payment at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under the circumstances.
F. "Record shareholder" means the person in whose names shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
G. "Shareholder" means the record shareholder or the beneficial
shareholder.
10-1302 RIGHT TO DISSENT.
1. A shareholder is entitled to dissent from and obtain payment of the fair
value of the shareholder's shares in the event of any of the following
corporate actions:
a. Consummation of a plan of merger to which the corporation is a party
if either:
i. Shareholder approval is required for the merger by (S)10-1103 or
the articles of incorporation and if the shareholder is entitled
to vote on the merger.
ii. The corporation is a subsidiary that is merged with its parent
under (S)10-1104.
b. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
c. Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to a court order or a sale for cash pursuant to a plan by
which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of
sale.
<PAGE>
d. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it
either:
i. Alters or abolishes a preferential right of the shares.
ii. Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the
redemption or repurchase, of the shares.
iii Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
iv. Excludes or limits the right of the shares to vote on any matter
or to cumulate votes other than a limitation by dilution through
issuance of shares or other securities with similar voting
rights.
v. Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under (S)10-604.
e. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, the bylaws or a resolution of
the board of directors provides that voting or nonvoting shareholders
are entitled to dissent and obtain payment for their shares.
2. A shareholder entitled to dissent and obtain payment for his shares under
this chapter may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
3. This section does not apply to the holders of shares of any class or series
if the shares of the class or series are redeemable securities issued by a
registered investment company as defined pursuant to the investment company
act of 1940 (15 United States Code (S)80a-1 through 80a-64).
4. Unless the articles of incorporation of the corporation provide otherwise,
this section does not apply to the holders of shares of a class or series
if the shares of a class or series were registered on a national securities
exchange, were listed on the national market systems of the national
association of securities dealers automated quotation system or were held
of record by at least two thousand shareholders on the date fixed to
determine the shareholders entitled to vote on the proposed corporate
action.
10-1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
1. A record shareholder may assert dissenters' rights as to fewer than all of
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any
one person and notifies the corporation in writing of the name and address
of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which the record shareholder dissents and
the record shareholder's other shares were registered in the names of
different shareholders.
2. A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if both:
a. The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights.
b. The beneficial shareholder does so with respect to all shares of which
the beneficial shareholder is the beneficial shareholder or over which
the beneficial shareholder has power to direct the vote.
<PAGE>
ARTICLE 2.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
10-1320 NOTICE OF DISSENTERS' RIGHTS.
1. If proposed corporate action creating dissenters' rights under (S) 10-1302
is submitted to a vote at a shareholders' meeting, the meeting notice shall
state that shareholders are or may be entitled to assert dissenters' rights
under this article and shall be accompanied by a copy of this article.
2. If corporate action creating dissenters' rights under (S) 10-1302 is taken
without a vote of shareholders, the corporation shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was
taken and shall send them the dissenters' notice described in (S) 10-1322.
10-1321 NOTICE OF INTENT TO DEMAND PAYMENT.
1. If proposed corporate action creating dissenters' rights under (S)10-1302
is submitted to a vote at a shareholders' meeting, a shareholder who wishes
to assert dissenters' rights shall both:
a. Deliver to the corporation before the vote is taken written notice of
the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated.
b. Not vote the shares in favor of the proposed action.
2. A shareholder who does not satisfy the requirements of subsection A of this
section is not entitled to payment for the shares under this article.
10-1322 DISSENTERS' NOTICE.
1. If proposed corporate action creating dissenters' rights under (S) 10-1302
is authorized at a shareholder's meeting, the corporation shall deliver a
written dissenters' notice to all shareholders who satisfied the
requirements of (S) 10-1321.
2. The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:
a. State where the payment demand must be sent and where and when
certificates for certificated shares shall be deposited.
b. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received.
c. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and that requires that the person
asserting dissenters' rights certify whether or not the person
acquired beneficial ownership of the shares before that date.
d. Set a date by which the corporation must receive the payment demand,
which date shall be at least thirty but not more than sixty days after
the date the notice provided by subsection A of this section is
delivered.
e. Be accompanied by a copy of this article.
10-1323 NOTICE OF INTENT TO DEMAND PAYMENT.
1. A shareholder sent a dissenters' notice described in (S)10-1322 shall
demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters'
<PAGE>
notice pursuant to (S)10-1322, subsection B, paragraph 3 and deposit the
shareholder's certificates in accordance with the terms of the notice.
2. A shareholder who demands payment and deposits the shareholder's
certificates under subsection A of this section retains all other rights of
a shareholder until these rights are canceled or modified by the taking of
the proposed corporate action.
3. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this article.
10-1324 SHARE RESTRICTIONS.
1. The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under (S)10-1326.
2. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
10-1325 PAYMENT.
1. Except as provided in (S)10-1327, as soon as the proposed corporate action
is taken, or if such action is taken without a shareholder vote, on receipt
of a payment demand, the corporation shall pay each dissenter who complied
with (S)10-1323 the amount the corporation estimates to be the fair value
of the dissenter's shares plus accrued interest.
2. The payment shall be accompanied by all of the following:
a. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders'
equity for that year and the latest available interim financial
statements, if any.
b. A statement of the corporation's estimate of the fair value of the
shares.
c. An explanation of how the interest was calculated.
d. A statement of the dissenter's right to demand payment under (S)10-
1328.
e. A copy of this article.
10-1326 FAILURE TO TAKE ACTION.
1. If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
2. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a
new dissenters' notice under (S)10-1322 and shall repeat the payment demand
procedure.
10-1327 AFTER-ACQUIRED SHARES.
1. A corporation may elect to withhold payment required by (S)10-1325 from a
dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action.
<PAGE>
2. To the extent the corporation elects to withhold payment under subsection A
of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of
its estimate of the fair value of the shares, an explanation of how the
interest was calculated and a statement of the dissenters' right to demand
payment under (S)10-1328.
10-1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
1. A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due and either demand payment of the dissenter's estimate, less any payment
under (S)10-1325, or reject the corporation's offer under (S)10-1327 and
demand payment of the fair value of the dissenter's shares and interest
due, if either:
a. The dissenter believes that the amount paid under (S)10-1325 or
offered under (S)10-1327 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated.
b. The corporation fails to make payment under (S)10-1325 within sixty
days after the date set for demanding payment.
c. The corporation, having failed to take the proposed action, does not
return the deposited certificates or does not release the transfer
restrictions imposed on uncertificated shares within sixty days after
the date set for demanding payment.
2. A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection A of this section within thirty days after the corporation
made or offered payment for the dissenter's shares.
<PAGE>
APPENDIX III
OPINION OF FINANCIAL ADVISOR
<PAGE>
October 6, 1998
Board of Directors
Arizona Bank
120 North Stone Avenue
Tucson, AZ 87501
Members of the Board:
We have reviewed the Agreement and Plan of Merger dated as of July 6, 1998,
as amended on July 20, 1998; August 4, 1998; September 9, 1998; and further
amended as of the date hereof (the "Merger Agreement"), as well as documents
incorporated by reference, by and between between Compass Bancshares, Inc.
("Compass") and Arizona Bank, pursuant to which among other things Arizona Bank
will be merged into Compass Bank ("Compass Bank"), which will be a newly formed
Arizona-chartered banking organization, and a wholly-owned subsidiary of
Compass. As is set forth in the Merger Agreement, the aggregate number of
shares of common stock of Compass ("Compass Common Stock") to be exchanged for
all of the issued and outstanding shares of Arizona Bank's shares of common
stock, or equivalents thereof, ("Arizona Common Stock") shall be equal to Four
Million Three Hundred Fifty Thousand (4,350,000), subject to possible adjustment
as provided for in the Merger Agreement. We have also taken into account, among
other things, Compass' commitment, pursuant to the Merger Agreement, to assume,
among other things, various existing obligations of Arizona Bank; including
those pursuant to Arizona Bank's outstanding Series E and F Preferred Stock
("Preferred Stock"), which will be accomplished through the issuance of like
instruments by Compass containing terms and conditions no less favorable than
those under the Preferred Stock.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
Pursuant to a Consulting Agreement dated April 21, 1998 between Arizona Bank and
Hovde, Hovde was engaged to assist Arizona Bank in exploring a potential sale or
merger of Arizona Bank with another financial institution. Therefore, we are
familiar with Arizona Bank, having acted as its financial advisor in connection
with the proposed transaction, and having participated in the negotiations
leading to the Merger Agreement.
<PAGE>
Board of Directors
Arizona Bank
October 6, 1998
Page Two
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Arizona Bank and Compass,
and material prepared in connection with the proposed transaction, including the
following: the Merger Agreement; certain publicly available information
concerning Arizona Bank and Compass; including consolidated financial statements
for each of the three years ended December 31, 1997, respectively; the results
of operations for Arizona Bank and Compass for the quarters ended March 31 and
June 30, 1998; the nature and terms of recent sale and merger transactions
involving banks and bank holding companies that we consider relevant; historical
and current market data for the common stock of Arizona Bank and Compass; and
financial and other information provided to us by the managements of Arizona
Bank and Compass.
In addition, we have met and/or discussed with members of the senior
managements of Arizona Bank and Compass for the purpose of reviewing the future
prospects of both companies. We also took into account our assessment of general
economic, market and financial conditions and our experience in other similar
transactions as well as our overall knowledge of the banking industry and our
general experience in securities valuations.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the materials provided to us by
Arizona Bank and Compass, and in the discussions with the managements of each of
the foregoing entities.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the consideration to be received by the
shareholders of Arizona Bank, as described in the Merger Agreement, is fair from
a financial point of view.
Sincerely,
/s/ HOVDE FINANCIAL, INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20:
Section 17 of Article V of Compass' Bylaws 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, Section 102(b)(7) of the
GCL.
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 Securities 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
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-1
<PAGE>
Item 21: Exhibits and Financial Statement Schedules.
An index to Exhibits appears at pages II-4 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 October 7, 1998.
COMPASS BANCSHARES, INC.
By: *
------------------------------------
D. Paul Jones, Jr.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director, Chairman and Chief October 7, 1998
- ----------------------------- Executive Officer
D. Paul Jones, Jr.
* Chief Financial Officer October 7, 1998
- ----------------------------- (Principal Financial Officer)
Garrett R. Hegel
* Executive Vice President October 7, 1998
- ----------------------------- and Controller
Timothy R. Journy (Principal Accounting Officer)
* Director October 7, 1998
- -----------------------------
Charles W. Daniel
* Director October 7, 1998
- -----------------------------
W. Eugene Davenport
* Director October 7, 1998
- -----------------------------
Jack C. Demetree, Jr.
* Director October 7, 1998
- -----------------------------
Marshall Durbin, Jr.
* Director October 7, 1998
- -----------------------------
Tranum Fitzpatrick
* Director October 7, 1998
- -----------------------------
Carl J. Gessler, Jr., M.D.
* Director October 7, 1998
- -----------------------------
John S. Stein
* Director October 7, 1998
- -----------------------------
Robert J. Wright
*By: /s/ Daniel B. Graves
-------------------------
Daniel B. Graves,
Attorney-in-fact
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- ------------------------
2 Agreement and Plan of Merger dated as of July 6, 1998 by and
between Compass Bancshares, Inc. and Arizona Bank, 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, 1997, 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) Certificate of Amendment, dated June 2, 1998, to Restated
Certificate of Incorporation of the Registrant (filed as
Exhibit 4.6 to Registration Statement on Form S-3
Registration No. 333-60725 and incorporated herein by
reference) (File No. 0-6032)
*3(g) 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(a) Opinion and consent of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P., regarding certain tax matters
8(b) Opinion and consent of Silver, Freedman & Taff, L.L.P.,
regarding certain 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 July 15, 1983, with
the Commission)
II-4
<PAGE>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- ------------------------
*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) Compass Bancshares, Inc. 1996 Long Term Incentive Plan
(filed as Exhibit 4(g) to Registration Statement on Form S-8
Registration No. 333-15117 filed October 30, 1996, with the
Commission 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)
*10(i) Employment Agreement dated December 14, 1994, between
Compass Bancshares, Inc. and G. Ray Stone (filed as Exhibit
10(i) to the Registration Statement on Form S-4 Registration
No. 333-15373 filed November 1, 1996 with the Commission and
incorporated herein by reference) (File No. 0-6032)
*10(j) Compass Bancshares, Inc., Employee Stock Ownership Benefit
Restoration Plan, dated as of May 1, 1997 (filed as Exhibit
10(j) to the December 31, 1997 Form 10-K of the Registrant
and incorporated herein by reference)(File No. 0-6032)
*10(k) Compass Bancshares, Inc., Supplemental Retirement Plan,
dated as of May 1, 1997 (filed as Exhibit 10(k) to the
December 31, 1997 Form 10-K of the Registrant and
incorporated herein by reference)(File No. 0-6032)
II-5
<PAGE>
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- ------------------------
*10(l) Deferred Compensation Plan for Compass Bancshares, Inc.,
dated as of February 1, 1996 (filed as Exhibit 10(l) to the
December 31, 1997 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,
1997 (File No. 0-6032)
*13(b) The Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (File No. 0-6032)
*13(c) The Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (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 PricewaterhouseCoopers LLP, Independent
Certified Public Accountants--Arizona Bank
23(c) Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
(included in the opinion in Exhibit 8 (a))
23(d) Consent of Silver, Freedman & Taff, L.L.P. (included in the
opinion in Exhibit 8 (b))
24(a) Power of Attorney
24(b) Compass Board of Directors Resolutions
99(a) Notice of Special Meeting of Shareholders of Arizona Bank
99(b) Form of Proxy for Special Meeting of Shareholders of
Arizona Bank
99(c) Letter to Arizona Bank's Shareholders
__________________________
* Incorporated by reference
II-6
<PAGE>
Exhibit 5
October 7, 1998
Board of Directors
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Re: Compass Bancshares, Inc. -- Registration of 4,350,000 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 4,350,000 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, when issued, 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
<PAGE>
EXHIBIT 8(a)
[LETTERHEAD OF LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.]
October 7, 1998
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Gentlemen:
We have acted as counsel to Compass Bancshares, Inc., a Delaware
corporation ("Compass"), in connection with (i) the planned merger (the
"Merger") of Arizona Bank, an Arizona chartered banking organization, with and
into Compass Bank, an Arizona chartered banking organization and a wholly-owned
first-tier subsidiary ("Compass Bank") of Compass, pursuant to an Agreement and
Plan of Merger, dated as of July 6, 1998, as amended, by and among Compass,
Compass Bank and Arizona Bank (the "Merger Agreement"), pursuant to which the
shareholders of Arizona Bank will receive solely Compass Bank Stock in exchange
for their Arizona Bank Stock, and (ii) the Registration Statement on Form S-4 of
Compass, to which this opinion letter is filed as an exhibit (the "Registration
Statement"). All capitalized terms, unless otherwise specified, have the meaning
assigned to them in the Merger Agreement.
For purposes of the opinion set forth below, we have reviewed and relied
upon (i) the Merger Agreement, (ii) the Proxy Statement/Prospectus included in
the Registration Statement (the "Proxy Statement/Prospectus") and (iii) such
other documents, records and instruments as we have deemed necessary or
appropriate in order to enable us to render our opinion. Our opinion is based
and conditioned upon certain statements and representations that will be made by
Compass, Compass Bank, Arizona Bank, certain shareholders of Arizona Bank and
others as appropriate in connection with the Merger, which we will neither
investigate nor verify. We have assumed that all such statements and
representations will be true, correct, complete and not breached, and that no
actions that are or would be inconsistent with such statements and
representations have been or will be taken. We have also assumed that all
representations made "to the knowledge of" any person or entity will be true,
correct and complete as if made without such qualification.
In addition, we have assumed that (i) the Merger will be consummated in
accordance with the Merger Agreement (including satisfaction of all covenants
and conditions to the obligations of the parties without amendment or waiver
thereof), (ii) the Merger will qualify as a merger under the
<PAGE>
Compass Bancshares, Inc.
October 7, 1998
Page 2
applicable laws of the State of Arizona and (iii) the Merger Agreement and all
of the documents and instruments referred to therein are valid and binding in
accordance with their terms. Any inaccuracy in, or breach of, any of the
aforementioned statements, representations and assumptions could adversely
affect our opinion.
Our opinion is based upon existing provisions of the Code, Treasury
Regulations promulgated or proposed thereunder, and interpretations thereof by
the Internal Revenue Service ("IRS") 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.
Based upon and subject to the foregoing as well as the limitations set
forth below, it is our opinion that the statements contained in numbered
paragraphs 1. through 7. of the section of the Proxy Statement/Prospectus
entitled "The Merger -- Federal Income Tax Consequences", insofar as such
statements constitute legal conclusions or summaries of legal matters, are
accurate.
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether federal, state, local or foreign, of the Merger or of any
transactions related to the Merger or contemplated by the Merger Agreement.
Furthermore, our opinion is based on current federal income tax law and
administrative practice, and we do not undertake to advise you as to any changes
after the Effective Time of the Merger in federal income tax law or
administrative practice that may affect our opinion.
This opinion is for use in connection with the Registration Statement. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the captions "The Merger -- Federal
Income Tax Consequences" and "The Merger -- Other Terms and Conditions" in the
Registration Statement and the Proxy Statement/Prospectus which is a part
thereof. 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 Securities
Act and the rules and regulations thereunder.
Very truly yours,
/s/ LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P.
<PAGE>
EXHIBIT 8(b)
[LETTERHEAD OF
SILVER, FREEDMAN & TAFF, L.L.P.
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS]
OCTOBER 6, 1998
Board of Directors
Arizona Bank
120 North Stone Avenue
Tucson, AZ 85701
RE: FEDERAL INCOME TAX CONSEQUENCES ARISING FROM THE MERGER CONTEMPLATED BY
THAT CERTAIN AGREEMENT AND PLAN OF MERGER BY AND BETWEEN ARIZONA BANK, COMPASS
BANCSHARES, INC. AND COMPASS BANK DATED JULY 6, 1998, AS AMENDED (THE
"AGREEMENT")
Gentlemen:
In connection with filings to be made by Arizona Bank with the SEC and
other Governmental Authorities, set forth hereinbelow is this firm's opinion
relating to certain federal income tax consequences applicable to the proposed
Merger contemplated by the Agreement. Capitalized terms used herein which are
not expressly defined herein shall have the meaning assigned to them in the
Agreement.
FACTS
Arizona Bank is a stock banking organization organized and existing under
the laws of the State of Arizona. Arizona Bank's principal business consists of
lending and deposit taking activities.
Compass is a stock corporation organized and existing under the laws of the
State of Delaware. Compass's principal business consists of lending and deposit
taking activities through its financial institution subsidiaries.
Compass Bank is a newly formed stock banking organization organized and
existing under the laws of the State of Arizona and is a wholly owned subsidiary
of Compass. Compass Bank's principal business will consist of lending and
deposit taking activities as the successor to Arizona Bank in the Merger.
Pursuant to the Agreement, it is proposed that the Merger will be
implemented through the merger of Arizona Bank with and into Compass Bank. In
the Merger (i) all of the outstanding Arizona Bank Common Stock will be
surrendered and exchanged solely for Compass Common Stock or cash in lieu of
fractional share interests (other than Dissenting Shares) and (ii) all of the
Arizona Bank Series E Preferred Stock and Arizona Bank Series F Preferred Stock,
respectively, will be surrendered and exchanged solely for an identical number
of shares of Compass Series E Preferred Stock and Compass Series F Preferred
Stock, respectively, containing the same terms and conditions of the shares to
be surrendered and exchanged (other than changes required by state law, none of
which is material or affects fair market value).
<PAGE>
ASSUMPTIONS
A. The Merger will be implemented strictly in accordance with the terms
of the Agreement.
B. All conditions precedent contained in the Agreement shall be performed
or waived prior to the Effective Time.
C. The representations of Arizona Bank and Compass made in their
respective tax representation letters to counsel shall be true and correct as of
the Effective Time.
D. All of the stockholders of Arizona Bank are citizens or residents of
the United States of America ("U.S. Holders"). For purposes hereof, U.S.
Holders do not include certain classes of taxpayers including but not limited
to foreign persons, insurance companies, tax-exempt organizations, financial
institutions, dealers in securities, persons who acquired or acquire Arizona
Bank Common Stock, Arizona Bank Series E Preferred Stock or Arizona Bank Series
F Preferred Stock pursuant to the exercise of employee stock options or
otherwise as compensation and persons who hold shares of Arizona Bank Common
Stock, Arizona Bank Series E Preferred Stock or Arizona Bank Series F Preferred
Stock in a hedging transaction or as part of a straddle or conversion
transaction.
OPINIONS
Subject to the foregoing and to the conditions and limitations expressed
elsewhere herein, we are of the opinion that for federal income tax purposes:
1. the Merger will constitute a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code by virtue of Section 368(a)(2)(D) of
the Code and Arizona Bank, Compass and Compass Bank will each be a party to the
reorganization;
2. no gain or loss will be recognized by Arizona Bank, Compass or Compass
Bank solely as a result of the Merger;
3. except as provided in paragraph 6 below, no gain or loss will be
recognized by any U.S. Holder in the Merger upon the surrender and exchange of
all such U.S. Holder's (a) Arizona Bank Common Stock solely for Compass Common
Stock, (b) Arizona Bank Series E Preferred Stock solely for Compass Series E
Preferred Stock, and (c) Arizona Bank Series F Preferred Stock solely for
Compass Series F Preferred Stock;
4. the aggregate adjusted tax basis of shares of Compass Common Stock
(including a fractional share interest in Compass Common Stock deemed received
and redeemed as described below) received by a U.S. Holder will be the same as
the aggregate adjusted tax basis of the shares of the Arizona Bank Common Stock
surrendered and exchanged therefor; the aggregate adjusted tax basis of shares
of Compass Series E Preferred Stock received by a U.S. Holder will be the same
as the aggregate
<PAGE>
adjusted tax basis of the shares of the Arizona Bank Series E Preferred Stock
surrendered and exchanged therefor; and the aggregate adjusted tax basis of the
shares of Compass Series F Preferred Stock received by a U.S. Holder will be the
same as the aggregate adjusted tax basis of the shares of the Arizona Bank
Series F Preferred Stock surrendered and exchanged therefor;
5. the holding period of the Compass Common Stock, Compass Series E
Preferred Stock and Compass Series F Preferred Stock, respectively, received by
a U.S. Holder in the Merger will include the holding period of the Arizona Bank
Common Stock, Arizona Bank Series E Preferred Stock and Arizona Bank Series F
Preferred Stock, respectively, surrendered and exchanged therefor, provided that
such shares were held as a capital asset by such U.S. Holder at the Effective
Time; and
6. a U.S. Holder who receives cash in lieu of a fractional share interest
in Compass Common Stock in the Merger will be treated as having received such
fractional share interest and then as having received the cash in redemption of
such fractional share interest. Under Section 302 of the Code, if such deemed
distribution was "substantially disproportionate" with respect to the U.S.
Holder or was "not essentially equivalent to a dividend" after giving effect to
the constructive ownership rules of the Code, the U.S. Holder would generally
recognize capital gain or loss equal to the difference between the amount of
cash received and the U.S. Holder's adjusted tax basis in the fractional share
interest (determined as described in paragraph 4 above). Such capital gain or
loss would be long-term capital gain or loss if the U.S. Holder's holding period
in a fractional share interest (determined as described in paragraph 5 above) is
more than one year. Long-term capital gain of a non-corporate U.S. Holder is
generally subject to a maximum tax rate of 20% if the holding period exceeds one
year.
7. A U.S. Holder who dissents from the Merger and receives solely cash in
exchange for Dissenting Shares will be treated as having received such cash in
redemption of such Dissenting Shares, subject to the provisions and limitations
of Section 302 of the Code after giving effect to the constructive ownership
rules of the Code.
The foregoing opinion reflects our legal judgment based upon the facts and
assumptions presented herein. This opinion has no official status or binding
effect of any kind. Accordingly, we cannot assure you that the IRS or any court
of competent jurisdiction will agree with this opinion.
We hereby consent to the filing of this letter with the SEC as an exhibit
to the Registration Statement and to all references made to this letter in the
Registration Statement.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE>
Exhibit 21
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 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 Arizona
Compass Banks of Texas, Inc. Delaware
Compass Bancorporation of Texas, Inc. Delaware
Compass Mortgage Corporation Delaware
Compass Texas Acquisition Corp. Delaware
Compass Texas Management, Inc. Texas
River Oaks Trust Corporation Texas
Compass Bank Texas
River Oaks Bank Building, Inc. Texas
River Oaks Securities, Inc. Texas
P.I. Holdings No. 1, Inc. Texas
P.I. Console, Inc. Texas
P.I. Holdings No. 2, Inc. Texas
<PAGE>
Exhibit 23(a)
ACCOUNTANTS' CONSENT
The 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.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
October 7, 1998
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report, dated February 13, 1998, except for Note 18 as to which the date is
September 30, 1998, on our audit of the consolidated financial statements of
Arizona Bank and Subsidiaries. We also consent to the reference to our firm
under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
October 7, 1998
<PAGE>
Exhibit 24 (a)
POWER OF ATTORNEY
WHEREAS, Compass Bancshares, Inc. (the "Company") has agreed to file a
registration statement 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 Arizona Bank,
Tucson, Arizona;
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 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 17th day of August, 1998.
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
<PAGE>
/s/ Timothy R. Journy
------------------------
Timothy R. Journy
/s/ Jack C. Demetree
------------------------
Jack C. Demetree
/s/ Charles W. Daniel
------------------------
Charles W. Daniel
/s/ W. Eugene Davenport
------------------------
W. Eugene Davenport
/s/ Marshall Durbin, Jr.
------------------------
Marshall Durbin, Jr.
/s/ Tranum Fitzpatrick
------------------------
Tranum Fitzpatrick
/s/ Carl J. Gessler, Jr.
------------------------
Carl J. Gessler, Jr.
/s/ John S. Stein
------------------------
John S. Stein
/s/ Robert J. Wright
------------------------
Robert J. Wright
2
<PAGE>
Exhibit 24(b)
WAIVER OF NOTICE AND ACTION BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF COMPASS BANCSHARES, INC.
REGARDING PROPOSED ACQUISITION
OF ARIZONA BANK, TUCSON, ARIZONA
THE UNDERSIGNED, constituting all of the members of the Board of Directors
of Compass Bancshares, Inc., a Delaware corporation (the "Corporation"), hereby
waive notice of a meeting and, acting by unanimous written consent without a
meeting pursuant to and with the effect provided in Section 141 of the Delaware
General Corporation Law, hereby approve and adopt the following resolutions of
said Board of Directors as of the date hereinafter set forth:
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 "Arizona Bank Acquisition") Arizona Bank (the "Bank"), the
principal offices of which are located in Tucson, Arizona, 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
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 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 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 Arizona Bank 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 appropriate
for the effectuation of the acquisition of the Bank; and further
<PAGE>
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 Arizona Bank 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 Arizona Bank Acquisition
or the Agreement, and the Board of Directors of the Corporation hereby
approves, authorizes, and ratifies the Arizona Bank 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
Arizona Bank 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 Arizona State Banking
Department, the Alabama State Banking Department, and any other appropriate
bank and bank holding company regulatory authorities with respect to the
Arizona Bank Acquisition; and further
RESOLVED, that, in the event that the Agreement shall contemplate that
the Corporation shall issue as consideration in connection with the Arizona
Bank 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, S-3, 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 Arizona Bank 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 Arizona
Bank 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
2
<PAGE>
Statement (whether on behalf of the Corporation or as an officer or
director 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 issued in connection with the Arizona Bank 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 Arizona Bank 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 Arizona Bank Acquisition as contemplated
by these resolutions are hereby approved, ratified, and confirmed.
3
<PAGE>
DONE as of this the 25th day of June, 1998.
/s/ Charles W. Daniel
__________________________________________
Charles W. Daniel
/s/ William Eugene Davenport
__________________________________________
William Eugene Davenport
/s/ Jack C. Demetree
__________________________________________
Jack C. Demetree
/s/ Marshall Durbin, Jr.
__________________________________________
Marshall Durbin, Jr.
/s/ Tranum Fitzpatrick
__________________________________________
Tranum Fitzpatrick
/s/ Carl J. Gessler, Jr., M.D.
__________________________________________
Carl J. Gessler, Jr., M.D.
/s/ D. Paul Jones, Jr.
__________________________________________
D. Paul Jones, Jr.
/s/ John S. Stein
__________________________________________
John S. Stein
/s/ Robert S. Wright
__________________________________________
Robert S. Wright
4
<PAGE>
EXHIBIT 99(a)
ARIZONA BANK
120 NORTH STONE AVENUE
TUCSON, ARIZONA 85701
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER __, 1998
To the Shareholders of Arizona Bank:
A special meeting (the "Special Meeting") of the holders of common stock of
Arizona Bank, an Arizona chartered banking organization ("Arizona Bank"), will
be held at _______ a.m. local time, on ________________, November ___, 1998 at
_______________________________, located at 120 North Stone Avenue, Tucson,
Arizona. At the Special Meeting, the holders of Arizona Bank common stock will
consider and vote upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement") dated as of July 6, 1998, as amended, by and among Compass
Bancshares, Inc., a Delaware corporation ("Compass"), Compass Bank, an Arizona
corporation and wholly owned subsidiary of Compass ("Compass Bank"), and
Arizona Bank, providing for, among other things, the merger ("Merger") of
Arizona Bank with and into Compass Bank and, in connection therewith, the
receipt by the holders of Arizona Bank common stock and Arizona Bank Series E
and Series F preferred stock of shares of Compass common stock and Compass
preferred stock, respectively;
2. A proposal to approve and adopt the proposed Employment Agreement between
Compass Bank and David T. C. Wright, Arizona Bank's President and Chief
Executive Officer, to be executed in connection with the consummation of the
Merger (the "Wright Employment Agreement");
3. A proposal to approve and adopt the proposed Confidentiality and
Noncompetition Agreement between Compass Bank and Mr. Wright to be executed in
connection with the consummation of the merger (the "Wright Noncompetition
Agreement"); and
4. Such other business as may properly come before the Special Meeting or any
adjournments thereof.
The Board of Directors of Arizona Bank has fixed the close of business on
__________________________, 1998 as the record date for determining which
shareholders are entitled to notice of, and to vote at, the Special Meeting or
any adjournments thereof. Complete lists of such shareholders will be available
for examination at the offices of Arizona Bank during normal business hours by
any holder of Arizona Bank Common Stock, for any purpose relevant to the Special
Meeting, for a period of ten days prior to the Special Meeting.
THE BOARD OF DIRECTORS OF ARIZONA BANK RECOMMENDS THAT YOU VOTE "FOR" THE
APPROVAL AND ADOPTION OF THE MERGER AND THE RELATED MERGER AGREEMENT, THE WRIGHT
EMPLOYMENT AGREEMENT AND THE WRIGHT NONCOMPETITION AGREEMENT. The affirmative
vote of the holders of a majority of the outstanding shares of Arizona Bank
common stock entitled to vote thereon is required to approve the Merger and the
related Merger Agreement. Consummation of the Merger does not require approval
of the Wright Employment Agreement or the Wright Noncompetition Agreement;
however, approval by holders of at least 75% of the outstanding shares of
Arizona Bank common stock will help to ensure favorable tax treatment by Compass
Bank in connection with the amounts payable under the Wright Employment
Agreement and the Wright Noncompetition Agreement. IF YOU DO NOT SEND IN YOUR
PROXY OR VOTE AT THE SPECIAL MEETING, IT WILL HAVE THE SAME EFFECT AS IF YOU
VOTED AGAINST THE MERGER AND THE RELATED MERGER AGREEMENT, THE WRIGHT EMPLOYMENT
AGREEMENT AND THE WRIGHT NONCOMPETITION AGREEMENT.
Holders of Arizona Bank Common Stock, even if they expect to be present at the
Special Meeting, are requested to sign, vote and date the enclosed proxy and
return it promptly in the enclosed envelope. Any stockholder giving a proxy has
the power to revoke it at any time prior to the Special Meeting. Stockholders
who are present at the Special Meeting may withdraw their proxies and vote in
person.
By order of the Board of Directors,
Eileen Jackson
Corporate Secretary
Tucson, Arizona
______________, 1998.
<PAGE>
Exhibit 99(b)
PROXY ARIZONA BANK PROXY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
________________, 1998
The undersigned hereby appoints __________ and ____________, 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 Arizona Bank, to be held on ___________, November __,
1998, at ___________ a.m. local time at ________________ located at 120 North
Stone Avenue, Tucson, Arizona, and at all adjournments thereof as follows:
(1) Approval and adoption of the Agreement and Plan of Merger, dated as of
July 6, 1998, as amended, by and among Compass Bancshares, Inc., Compass
Bank and Arizona Bank.
[ ] For [ ] Against [ ] Abstain
(2) Approval and adoption of the Employment Agreement between Compass Bank
and Mr. David T. C. Wright
[ ] For [ ] Against [ ] Abstain
(3) Approval and adoption of the Confidentiality and Noncompetition
Agreement between Compass Bank and Mr. David T. C. Wright
[ ] For [ ] Against [ ] Abstain
(4) In their discretion, upon any other business which may properly come
before said meeting.
[ ] Authority Withheld
This Proxy will be voted as you specify above. If no specification is
made, the Proxy will be voted FOR proposals (1), (2) and (3) above. Receipt of
the Notice of Special Meeting of Shareholders and the Proxy Statement/Prospectus
dated _______ __, 1998 is hereby acknowledged.
THIS PROXY IS SOLICITED BY THE ARIZONA BANK 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 or
officer.
Dated , 1998
------------------------------
-----------------------------------------
Signature
-----------------------------------------
Signature, if held jointly, or office or
title held
<PAGE>
Exhibit 99(c)
ARIZONA BANK
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Arizona Bank has approved a merger of Arizona Bank
with and into Compass Bank, a wholly owned subsidiary of Compass Bancshares,
Inc. ("Compass"). The Board of Directors of Arizona Bank has determined that
the merger is in the best interests of Arizona Bank and its shareholders and has
adopted a resolution approving the agreement and plan of merger dated as of
September 16, 1998.
If the merger is completed, Compass will issue a total of 4,350,000 shares of
its common stock and each outstanding share of Arizona Bank's common stock will
be exchanged for shares of Compass common stock. Assuming that there are
1,485,346 shares of Arizona Bank common stock issued and outstanding immediately
prior to the merger, each holder of Arizona Bank common stock will be entitled
to receive approximately 2.9286 shares of Compass common stock for each share of
Arizona Bank common stock held. In addition, holders of Arizona Bank Series E
and Series F preferred stock will receive an equal number of shares of Compass
preferred stock with substantially similar rights and preferences.
This Proxy Statement/Prospectus provides you with detailed information about the
proposed merger. In addition, you may obtain information about Compass from
documents filed with the Securities and Exchange Commission. We encourage you
to read this entire document carefully before you decide how you wish to vote.
Arizona Bank's Board of Directors has called a special meeting of shareholders
to vote on (i) the proposed merger and the related merger agreement, (ii) an
employment agreement between Compass Bank and David T. C. Wright, Arizona
Bank's President and Chief Executive Officer, to be executed in connection with
the merger and (iii) a confidentiality and noncompetition agreement between
Compass Bank and Mr. Wright to be executed in connection with the merger. The
affirmative vote of the holders of a majority of the outstanding shares of
Arizona Bank common stock entitled to vote thereon is required to approve and
adopt the merger and the related merger agreement. Shareholders of Compass are
not required to approve the merger. Consummation of the merger does not require
approval by the shareholders of Arizona Bank of the employment agreement or the
confidentiality and noncompetition agreement; however, approval by holders of at
least 75% of the outstanding shares of Arizona Bank common Stock will help to
ensure favorable tax treatment by Compass Bank in connection with the amounts
payable under both such agreements.
The date, time and place of the special meeting are as follows:
November __, 1998
______ [Time]
______________
______________
Whether or not you plan to attend the special meeting, please complete and mail
the enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you wish to vote, your proxy will be counted as a vote in favor
of the merger and the related merger agreement, the employment agreement and the
confidentiality and noncompetition agreement. If you fail to return your card,
the effect will be a vote against the foregoing matters. YOUR VOTE IS VERY
IMPORTANT.
On behalf of the Board of Directors, I thank you for your support and urge you
to vote "for" approval and adoption of the merger and the related merger
agreement, the employment agreement and the confidentiality and noncompetition
agreement.
Very truly yours,
James H. Click, Jr.
Chairperson of the Board
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED THE COMPASS COMMON STOCK TO BE ISSUED IN
THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMPASS COMMON STOCK OFFERED BY THIS PROXY STATEMENT/PROSPECTUS
ARE NOT SAVINGS ACCOUNTS OR BANK DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED
BY ANY BANKING OR NON-BANKING AFFILIATE OF COMPASS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
Proxy Statement/Prospectus dated ___________, 1998 and first mailed to
shareholders on _____________, 1998.
