<PAGE> 1
As filed with the Securities and Exchange Commission on March 22 , 1999
Registration No. 333-74119
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 6711 87-6118148
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classification Identification No.)
or organization) Internal Revenue
Code Number)
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
(801) 246-5976
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
BRAD D. HARDY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FIRST SECURITY CORPORATION
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
(801) 246-5976
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
COPIES TO:
A. ROBERT THORUP, ESQ. JOSEPH DRAIN, ESQ.
RAY, QUINNEY & NEBEKER GRADY & ASSOCIATES
79 SOUTH MAIN STREET 20800 CENTER RIDGE ROAD, SUITE 116
SALT LAKE CITY, UTAH 84111 ROCKY RIVER, OHIO 44116-4306
(801) 532-1500 (PHONE) (440) 356-7255
(FAX) (801) 532-7543 (FAX) (440) 356-7254
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effectiveness of this Registration Statement.
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN CONNECTION
WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH GENERAL
INSTRUCTION G, CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($1.25 par value) 3,426,313 shares(1),(3) $19.0625(2) $65,314,091.56(2) $18,157.32 (PAID)
============================================================================================================================
</TABLE>
(1) The maximum number of shares of Common Stock to be issued in connection
with the merger described herein .
(2) Calculated pursuant to Rule 457(f)(1) solely for the purpose of the
registration fee based on market value as of March , 1999.
(3) One Right to purchase Junior Series B Preferred Stock of First Security is
associated with each share of Common Stock. The Rights are not
transferable separately from the Common Stock except in limited
circumstances.
THIS REGISTRATION STATEMENT IS HEREBY AMENDED ON SUCH DATE OR DATES AS MAY
BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT WILL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT WILL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT WILL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
FIRST SECURITY CORPORATION COMSTOCK BANCORP
PROSPECTUS PROXY STATEMENT
TO THE STOCKHOLDERS OF COMSTOCK BANCORP:
Comstock Bancorp and First Security Corporation have agreed to merge
Comstockwith with and into First Security, subject to approval by Comstock's
stockholders. The merger cannot be completed unless the Comstock stockholders
approve the merger. Only if you hold your shares at the close of business on
March 19, 1999 will you be entitled to vote on the merger and to receive this
Prospectus/Proxy Statement. Comstock and First Security are sending you this
Prospectus/Proxy Statement to provide you with important information about these
proposed transactions. Comstock is calling a meeting of its stockholders on
April 28, 1999 to allow you to vote your Comstock shares on the proposal to
approve the merger, as well as on other business described in this
Prospectus/Proxy Statement.
THERE ARE RISKS INHERENT IN FIRST SECURITY SHARES. SEE "RISK FACTORS" ON
PAGE 9
Upon completion of the merger, in exchange for your Comstock shares and
options to purchase Comstock shares, you will receive between 0.521 and 0.670
shares of First Security common stock, depending on the market price of First
Security common stock during certain periods before the merger closes. First
Security shares are listed on the NASDAQ National Market System under the symbol
"FSCO."
The exchange of Comstock shares will be tax-free to you for federal income
tax purposes. If you choose to perfect your dissenter's rights under Nevada law,
you will receive the fair value of your Comstock shares in cash, and this would
be a taxable transaction for you.
The Comstock Board of Directors has determined that the merger and the
transactions associated with it are in your best interests and recommends that
you vote to approve the merger and the transactions associated with it by
completing the enclosed proxy voting form.
YOUR VOTE IS VERY IMPORTANT. PLEASE READ THIS ENTIRE DOCUMENT CAREFULLY.
You can get more information about Comstock Bancorp or First Security
Corporation, and about the merger, by writing or calling as follows:
First Security Corporation Comstock Bancorp/Comstock Bank
79 South Main Street, Second Floor P.O. Box 7610
Salt Lake City, Utah 84111 Reno, Nevada 89510-7610
Attention: Brad D. Hardy Attention: Robert N. Barone
(801) 246-5976. (775) 827-7477
Please see "Where You Can Find More Information" on page 66 for additional
information about First Security and about Comstock which is filed with the
Securities and Exchange Commission. Information about First Security and
Comstock may change from that contained in this Prospectus/Proxy Statement.
First Security and Comstock will send you additional information about
themselves before the Annual Stockholders Meeting if the new information would
be material to your decision on the merger.
FIRST SECURITY SHARES ARE NOT INSURED BANK DEPOSITS.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities agency
has approved the First Security shares or determined that this prospectus /
proxy statement is accurate or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
This Prospectus/Proxy Statement is dated March 24, 1999, and mailed to
Comstock's stockholders on March 26, 1999.
<PAGE> 3
YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/PROXY STATEMENT TO UNDERSTAND AND VOTE ON THE
MERGER AND THE TRANSACTIONS ASSOCIATED WITH IT. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT. BUT YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE SHOWN ON THE COVER PAGE, AND NEITHER THE MAILING OF THIS
PROSPECTUS/PROXY STATEMENT TO COMSTOCK STOCKHOLDERS NOR THE ISSUANCE OF FIRST
SECURITY COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER............................................................................ 1
SUMMARY .......................................................................................................... 4
Comstock's Annual Meeting Of Stockholders And Solicitation Of Proxies..................................... 5
The Merger (page 18)...................................................................................... 5
RISK FACTORS...................................................................................................... 9
Risks To Comstock Stockholders Resulting From The Exchange Ratio.......................................... 9
Volatility of Stock Prices................................................................................ 9
Attraction and Retention of Employees..................................................................... 9
Impact of Date Changes in 1999 and 2000................................................................... 10
Anti-Takeover Effect of Certain Charter and Bylaw Provisions.............................................. 10
SELECTED HISTORICAL FINANCIAL DATA FOR FIRST SECURITY AND BANCORP................................................. 10
Year 2000 ISSUES.......................................................................................... 14
COMPARATIVE PER SHARE DATA........................................................................................ 14
COMPARATIVE MARKET PRICE AND DIVIDENDS INFORMATION................................................................ 15
THE MERGER........................................................................................................ 18
General................................................................................................... 18
The Effective Time........................................................................................ 18
Management of Comstock Following with Merger.............................................................. 18
Background of and Reasons for the Merger; Recommendation of Comstock's Board of Directors................. 18
Opinion of Comstock's Financial Advisor................................................................... 21
Recommendation Of Comstock's Board Of Directors........................................................... 25
Interests Of Directors And Officers In The Merger That Differ From Your Interests......................... 25
Conversion of Shares; Exchange Ratio...................................................................... 27
Dissenting................................................................................................ 28
Exchange of Shares and Certificates....................................................................... 28
Fractional Shares......................................................................................... 28
Representations and Warranties............................................................................ 28
Certain Covenants......................................................................................... 28
Conditions to the Closing................................................................................. 29
Termination............................................................................................... 29
Survival of Representations and Warranties and Covenants.................................................. 29
Amendment, Modification and Waiver........................................................................ 30
Accounting Treatment of the Merger........................................................................ 30
The Effect of the Merger on Comstock Employee Benefit Plans............................................... 30
Regulatory Approvals...................................................................................... 30
FEDERAL INCOME TAX ASPECTS........................................................................................ 31
The Merger................................................................................................ 31
Treatment of First Security and................................................................................... 32
Exchange of Comstock shares for First Security Common Stock............................................... 32
Taxation of Option Holders................................................................................ 32
Cash in Lieu of Fractional Shares......................................................................... 32
Dissenting Comstock Stockholders.......................................................................... 32
RIGHTS OF DISSENTING Comstock STOCKHOLDERS........................................................................ 33
RESALE OF FIRST SECURITY SHARES RECEIVED IN THE MERGER............................................................ 35
INFORMATION ABOUT FIRST SECURITY.................................................................................. 36
General................................................................................................... 36
Competition............................................................................................... 36
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
Description of First Security's Capital Stock............................................................. 36
INFORMATION ABOUT................................................................................................. 39
General................................................................................................... 39
Supervision and Regulation................................................................................ 40
Regulation Of Bank Holding Companies...................................................................... 40
Federal Deposit Insurance................................................................................. 41
Interstate Banking And Branching.......................................................................... 42
Capital................................................................................................... 43
Limits On Dividends And Other Payments.................................................................... 44
Transactions With Affiliates.............................................................................. 45
Community Reinvestment Act................................................................................ 45
Federal Home Loan Banks................................................................................... 46
Nevada Bank Regulation.................................................................................... 46
Monetary Policy........................................................................................... 46
Bank Regulatory Developments.............................................................................. 46
COMPARATIVE RIGHTS OF STOCKHOLDERS................................................................................ 46
Certain Differences Between Nevada and Delaware Corporate Laws............................................ 47
Authorized Capital Stock.................................................................................. 47
Directors................................................................................................. 47
Repurchase and Redemption of Shares....................................................................... 49
Payment of Dividends to Stockholders...................................................................... 49
Assessments............................................................................................... 49
Preemptive Rights......................................................................................... 49
Amendments to Articles or Certificate of Incorporation.................................................... 50
Amendments to Bylaws...................................................................................... 50
Stockholder Approval of Mergers and Other Business Combinations........................................... 50
Rights of Dissenting Stockholders......................................................................... 51
Annual Meetings of Stockholders........................................................................... 51
Special Meetings of Stockholders.......................................................................... 51
Stockholder Consent to Action Without a Meeting........................................................... 52
Stockholder Inspection of Records......................................................................... 52
THE 1999 ANNUAL MEETING OF BANCORP STOCKHOLDERS................................................................... 53
Date, Time And Place...................................................................................... 53
Purpose................................................................................................... 53
Record Date; Shares Outstanding And Entitled To Vote...................................................... 53
Vote Required............................................................................................. 53
Voting And Revocation Of Proxies.......................................................................... 53
Quorum; Broker Non-Votes.................................................................................. 54
Voting Securities And Principal Holders Thereof........................................................... 54
Election Of Directors (Proposal 2)........................................................................ 57
Information With Respect To Nominees...................................................................... 58
Board Committees.......................................................................................... 59
Remuneration Of Directors................................................................................. 59
Executive Compensation.................................................................................... 60
Certain Relationships And Related Party Transactions...................................................... 65
Ratification Of Independent............................................................................... 65
Expenses; Solicitation Of Proxies......................................................................... 65
Other Matters............................................................................................. 66
Section 16(A) Beneficial Ownership Reporting Compliance................................................... 66
Stockholder Proposals For The 2000 Annual Meeting......................................................... 66
LEGAL MATTERS..................................................................................................... 66
EXPERTS .......................................................................................................... 66
WHERE YOU CAN FIND MORE INFORMATION............................................................................... 67
Incorporation of Documents by Reference................................................................... 67
</TABLE>
ii
<PAGE> 5
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION
APPENDIX B -- FAIRNESS OPINION OF HOVDE FINANCIAL, INC.
APPENDIX C -- PROVISIONS OF NEVADA LAW CONCERNING DISSENTING
BANCORP STOCKHOLDERS
APPENDIX D -- BANCORP SUMMARY ANNUAL REPORT TO SHAREHOLDERS
iii
<PAGE> 6
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
First Security and Comstock have each made forward-looking statements
in this Prospectus/Proxy Statement and in documents that are incorporated by
reference into this document. Forward-looking statements are subject to risks
and uncertainties. These forward-looking statements include information about
future results of Comstock's operations or the performance of First Security
after the merger is completed. When we use any of the words "believes,"
"expects," "anticipates," "estimates" or similar expressions, we are making
forward-looking statements. Many possible events or factors could affect the
future financial results and performance of Comstock and First Security,
including statements about First Security after the merger, and could cause
those results or performance to differ materially from those expressed in our
forward-looking statements. These possible events or factors include the
following:
- actual cost savings resulting from the merger are less than
expected because First Security is unable to realize those
cost savings as soon as expected or First Security incurs
additional or unexpected costs;
- revenues after the merger are lower than expected;
- competition among financial services companies increases;
- First Security is unable to integrate Comstock's businesses as
timely as expected;
- changes in the interest rate environment reduce interest
margins;
- general economic conditions change or are worse than we
expected;
- legislative or regulatory changes adversely affect our
businesses;
- personal or commercial customers' bankruptcies increase;
- technology-related changes, including "Year 2000" data systems
compliance, are more difficult to make or more expensive than
we expected; and
- changes occur in the securities markets.
All forward-looking statements attributable to First Security are
expressly qualified in their entirety by the factors which may cause actual
results to differ materially from expectations described in this document and in
First Security's reports filed with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for the year ended December 31, 1997
(as restated for the acquisition of California State Bank in a Current Report on
Form 8-K filed on October 1, 1998) and its quarterly reports on Form 10-Q for
the quarters ended June 30, 1998 and September 30, 1998. All forward-looking
statements attributable to Comstock are expressly qualified in their entirety by
the factors that may cause actual results to differ materially from expectations
described in this document.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS FIRST SECURITY PROPOSING TO ACQUIRE COMSTOCK? HOW WILL I
BENEFIT?
A: First Security desires to expand its presence in the Nevada banking
market, particularly in Northern Nevada. Comstock's sole business,
Comstock Bank, is a successful small bank in the Reno market area, and
it provides First Security with opportunities for growth in that
important Nevada market. Under the terms of the merger agreement, you
will become a stockholder in First Security, an institution whose
common stock is traded on the NASDAQ stock market. The Comstock Board
of Directors believes that the consideration you will receive in the
merger may deliver value to you that exceeds the value that could be
expected if Comstock had continued as an independent entity. To review
the reasons for the merger in greater detail, and related
uncertainties, see pages 9 through 34.
1
<PAGE> 7
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: In exchange for your Comstock shares of common stock, you will receive
shares of First Security common stock. The exact number of shares you
receive will be calculated according to a formula described in greater
detail in this Prospectus/Proxy Statement. We refer to this formula as
the "Exchange Ratio."
Q. HOW IS THE EXCHANGE RATIO CALCULATED?
A. The Exchange Ratio is calculated according to a relatively complex
formula that takes into account several factors, including:
- the number of Comstock shares that are outstanding at Closing;
- the number of Comstock Options;
- the average market price of First Security common stock.
As long as the market price of First Security common stock is between
$18.70 and $24.05 per share, the Exchange Ratio results in a constant
value of the merger consideration.
Q. HOW MANY SHARES OF FIRST SECURITY COMMON STOCK WILL I RECEIVE IN
EXCHANGE FOR MY COMSTOCK SHARES?
A. At the time of the merger, for each Comstock share that you own you
will receive between 0.521 and 0.670 shares of First Security common
stock. You will receive approximately 0.521 shares of First Security
common stock if the market price of First Security common stock is
equal to or greater than $24.05; and you will receive approximately
0.670 shares if the market price is equal to or less than $18.70.
Q. WHAT WILL HAPPEN TO MY COMSTOCK OPTIONS?
A. First Security will not assume any Comstock Options. Instead, all
Comstock Options that have been granted prior to the Closing will
accelerate and be converted into shares of First Security common stock
using the Exchange Ratio applied to the Comstock shares obtained
through a cashless exercise of the Options. Any Comstock Options that
are not exercised prior to closing of the merger will be cancelled.
Q. DO I NEED TO PAY THE EXERCISE PRICE OF MY OPTIONS IN CASH?
A. No. The options will be exercised pursuant to the cashless exercise
procedure described elsewhere in this Prospectus/Proxy Statement (see,
"The Merger -- Comstock Options").
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "RISK FACTORS" beginning on page 9.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The exchange of your shares for First Security shares of common stock
will be tax-free to you for federal income tax purposes. However, you
may have to pay taxes on cash received for fractional shares. In
addition, if you choose to vote against the merger and also perfect
your dissenter's rights under Nevada law, you will receive the fair
value of your Comstock shares in cash, which would be a taxable
transaction to you. To review the tax consequences to Comstock
stockholders in greater detail, see page 31. THE TAX CONSEQUENCES OF
THE MERGER TO YOU WILL DEPEND ON YOUR OWN SITUATION. YOU SHOULD CONSULT
YOUR TAX ADVISORS FOR A FULL UNDERSTANDING OF THESE TAX CONSEQUENCES.
Q: WHEN IS THE MERGER EXPECTED TO CLOSE?
A: We are working towards completing the merger as quickly as possible. In
addition to the approval of Comstock stockholders, we must also obtain
regulatory approvals and satisfy other conditions described in the
merger agreement. We hope to complete the merger before June 30, 1999.
2
<PAGE> 8
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this document, please fill out and sign your Proxy Voting Form. Then
mail your signed Proxy Voting Form in the enclosed return envelope as
soon as possible so that your shares may be counted in determining a
quorum at the Annual Meeting and in voting on the matters to come
before the meeting.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve the merger agreement and the
transactions associated with it. In the merger, Comstock would merge
with and into First Security, and Comstock Bank would merge with and
into First Security Bank of Nevada. You are also being invited to vote
on the election of a board of directors for Comstock to function if the
merger is not approved. You are also approving the selection of
independent certified accountants to audit Comstock's financial
statements for the coming year, if the merger does not close.
COMSTOCK'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE FOR THE MERGER AGREEMENT AND THE TRANSACTIONS
ASSOCIATED WITH IT.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: You can revoke your proxy any time prior to the time the vote is taken
on the merger. You may do this by sending a letter to the Secretary of
Comstock revoking your proxy prior to the Annual Stockholders Meeting,
by attending the Annual Stockholders Meeting and announcing your
revocation of your proxy, or by submitting a later dated proxy voting
another way prior to the Annual Stockholders Meeting. Once the vote is
taken, your vote becomes irrevocable. Comstock expects that sufficient
shares will be voted in favor of the merger and related transactions to
legally approve them because holders of a significant amount of the
outstanding voting power of Comstock stock have agreed to vote to
approve the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, First Security or The First Chicago
Trust Company of New York (the "Exchange Agent" for the merger) will
send written instructions to Comstock stockholders for exchanging their
stock certificates.
Q: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you would like additional copies of this Prospectus/Proxy Statement,
or if you have more questions about the merger, you should contact:
COMSTOCK BANCORP/COMSTOCK BANK
P.O. BOX 7610
RENO, NEVADA 89510-7610
ATTENTION: ROBERT N. BARONE
(775) 827-7477
3
<PAGE> 9
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE MERGER AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE PROPOSED MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AS
WELL AS THE ADDITIONAL DOCUMENTS WE REFER YOU TO. SEE "'WHERE YOU CAN FIND MORE
INFORMATION" (PAGE 66).
FIRST SECURITY CORPORATION
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
801-246-6000
First Security is a Delaware incorporated multi-bank holding company
headquartered in Salt Lake City, Utah. At December 31, 1998, First Security and
its subsidiaries had total consolidated assets, deposits, and stockholders'
equity of $21.7 billion, $12.7 billion and $1.6 billion, respectively.
First Security Bank, N.A., and First Security Bank of New Mexico, N.A.
are First Security's primary assets. Both national banks are top level
competitors in their main locations (Utah, Idaho and Albuquerque, New Mexico),
and provide a full range of banking services. First Security also owns First
Security Bank of Southern New Mexico, N.A. and First Security Bank of
California, N.A., both of which are smaller national banks serving smaller
markets, but with access to the full range of First Security system products and
services. First Security Bank of Nevada is a growing Nevada-chartered bank
headquartered in Las Vegas. In addition to its acquisition of Comstock, First
Security has recently announced the planned acquisition of Nevada Banking
Company in Stateline, Nevada to augment the Nevada bank's market areas.
First Security also owns and operates several nonbank subsidiaries.
Through its nonbank subsidiaries, First Security provides capital markets
advice, municipal underwriting services, treasury management, investment
management, insurance, leasing, data processing and securities brokerage
services. First Security recently acquired San Francisco-based Van Kasper &
Company, a securities broker-dealer and investment advisor. Van Kasper and First
Security's other securities subsidiaries are subject to regulation and
supervision by the Securities and Exchange Commission and applicable state
securities authorities. The insurance agency and credit life insurance company
are regulated by applicable state insurance regulators.
A substantial portion of First Security's cash flow is typically
derived from dividends and interest from its subsidiaries, and from the sale of
investment securities to finance its growth and operations. (See, "Information
About First Security.")
FIRST SECURITY BANK OF NEVADA
530 LAS VEGAS BLVD. SOUTH
LAS VEGAS, NEVADA 89101
702-251-1100
First Security Bank of Nevada is a wholly owned subsidiary of First
Security engaged in general retail and commercial banking and trust activities.
First Security Bank of Nevada is a state-chartered bank supervised by the State
of Nevada and the FDIC.
COMSTOCK BANCORP
6275 NEIL ROAD
RENO, NEVADA 89511
(775) 824-7100
Comstock is a Nevada corporation formed for the sole purpose of being a
bank holding company for Comstock Bank. Comstock has over 1000 stockholders,
counting both stockholders of record and stockholders owning through brokerage
accounts. Comstock shares are traded through the NASDAQ Small Cap Market, and
Comstock files regular quarterly and annual reports with the Securities and
Exchange Commission. Comstock had total assets of $225 million, deposits of $196
million and stockholders' equity of $22 million at December 31, 1998. Comstock's
operating subsidiary, Comstock Bank, operates 5 branches located in Reno, Sparks
and Carson City, Nevada.
4
<PAGE> 10
COMSTOCK'S ANNUAL MEETING OF STOCKHOLDERS AND SOLICITATION OF PROXIES
Comstock has called its Annual Meeting of Stockholders for April 28,
1999, and is inviting you to attend. Comstock is also asking you for your
written proxy instruction for voting at the Meeting. As a Comstock stockholder
as of March 19, 1999, which is the record date for the Annual Meeting, you are
entitled to receive notice of the Meeting and to vote for or against the merger.
PURPOSES
The purpose of the Meeting and Comstock's solicitation of proxies is to
approve the merger and the related transactions. You are also being asked to
vote on the election of a board of directors to govern Comstock in the event the
merger does not close. You are also being asked to approve the selection of
Kafoury, Armstrong & Company as Comstock's independent auditors of the 1999
financial statements, again assuming the merger does not close.
VOTES REQUIRED; RECORD DATE
In accordance with Comstock's Articles of Incorporation and Nevada law,
the merger may be approved and adopted at a meeting of Comstock stockholders. At
least 50.1% of the total outstanding common stock must vote in favor of the
merger for it to be approved legally by the Comstock stockholders. Your signed
Proxy (1) assures that your shares will be voted and (2) helps to assure that a
quorum will be present at the Stockholders Meeting.
A Comstock Proxy may be revoked, by written notice to the Secretary of
Comstock, at any time prior to the time the vote is taken at the Annual
Stockholders Meeting. You may also submit a later dated Proxy voting in a
different manner from an earlier Proxy.
The "Record Date" for determining stockholders entitled to vote on the
merger has been set at March 19, 1999 by the Comstock Board of Directors. At
that date there were 5,113,900 shares of Comstock common stock outstanding and
entitled to vote. Of this number, at least 2,556,951 shares must be present in
person or by Proxy to constitute a quorum at the Annual Stockholders Meeting,
and at least this same number of shares must be voted in favor of the merger for
it to be legally approved by the Comstock stockholders.
As of March 19, 1999, directors and executive officers of Comstock and
their affiliates were beneficial owners of an aggregate of 794,156 shares of
Comstock common stock exclusive of any shares issuable upon the exercise of
stock options remaining unexercised as of such date), or approximately 15.5% of
the 5,113,900 shares of Comstock common stock that were issued and outstanding
as of such date. (See, "The 1999 Annual Meeting Of Comstock Stockholders" (page
52.)
DISSENTERS' RIGHTS
Comstock stockholders who do not vote in favor of the merger are
entitled to dissenters' rights under Nevada law if they follow the required
steps. Dissenters' rights generally entitle the dissenting stockholders to the
fair market value of their Comstock shares in cash in a taxable transaction.
THE MERGER (PAGE 17)
First Security and Comstock have agreed to merge Comstock with and into
First Security, and to combine Comstock Bank with and into First Security Bank
of Nevada. The merger agreement is attached as Appendix A at the back of this
Prospectus/Proxy Statement. We encourage you to read the merger agreement. It is
the legal document that governs the proposed merger.
WHAT COMSTOCK STOCKHOLDERS WILL RECEIVE IN THE MERGER
As a result of the merger, Comstock stockholders will receive shares of
First Security common stock. The exact number of shares you receive will be
calculated according to a formula described in greater detail in this
Prospectus/Proxy Statement. Comstock stockholders will not receive fractional
shares. Instead, they will receive a check in payment for any fractional shares
based on the average market value of First Security common stock during a
specified period prior to the merger.
5
<PAGE> 11
Do not send in your Comstock stock certificates now. When the merger is
completed you will receive written instructions for exchanging your Comstock
stock certificates.
OWNERSHIP OF FIRST SECURITY FOLLOWING THE MERGER
The shares of First Security common stock issued to Comstock
stockholders in the merger will constitute less than 1.9% of the outstanding
stock of First Security after the merger, and the current stockholders of First
Security will hold the remaining 98.1% of the outstanding stock of First
Security after the merger.
CONDITIONS (PAGE 28)
The merger will not be completed unless certain conditions are met,
including the approval of the merger agreement and the transactions associated
with it by Comstock stockholders. Certain of the conditions may be waived by the
company entitled to assert the condition.
TERMINATION (PAGE 28)
First Security and Comstock may together agree to terminate the merger
agreement without completing the merger whether or not the Comstock stockholders
have approved the merger agreement.
The merger agreement may also be terminated by the Board of Directors
of either company in certain other circumstances including:
(1) if the merger is not completed on or before October 12, 1999,
except that neither First Security or Comstock may terminate
the merger agreement if its breach of the merger agreement is
the reason the merger has not been completed by that date;
(2) if the approval of the stockholders of Comstock is not
obtained; or
(3) if the other party has failed to perform certain of its
obligations under the merger agreement.
AMENDMENT (PAGE 29)
After the Comstock stockholders have approved the merger agreement, the
Boards of Directors of First Security and Comstock may only amend the merger
agreement in certain ways. The Boards may not change the Exchange Ratio, terms
that would change the tax consequences, or method of accounting for the merger.
VOTING AGREEMENTS (PAGE 53)
In connection with the merger, all of the directors of Comstock holding
in aggregate approximately 15.5% of the Comstock shares of common stock as of
March 19, 1999 have agreed to vote their shares in favor of the merger and the
transactions associated with it. These voting agreements terminate upon the
completion of the merger or upon termination of the merger agreement in
specified circumstances.
NO SOLICITATION OF TRANSACTIONS
Comstock has agreed in the merger agreement that neither it nor any of
its agents or employees, directly or indirectly, will initiate, solicit or
encourage any inquiries or the making of any proposal or offer for, furnish any
confidential information relating to, or engage in any negotiations or
discussions concerning, any acquisition or purchase of Comstock.
REGULATORY APPROVALS (PAGE 29)
First Security is required to make filings with or to obtain approvals
from certain regulatory authorities in connection with the merger. These
consents and approvals include the approval of the Federal Reserve Board and the
State of Nevada. A notice was filed with the Federal Reserve Board on March 12,
1999. All other necessary applications and notices have been filed or are in the
process of being filed. First Security cannot predict whether it will obtain all
required regulatory approvals, the timing of such approvals, whether any
approvals will include conditions that would be detrimental to First Security or
whether there will be litigation challenging the approvals.
6
<PAGE> 12
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 30)
The exchange of Comstock common stock for First Security common stock
(other than cash paid for fractional shares) generally will be tax free.
However, the exercise of any Comstock options you hold may be a taxable event
for federal income tax purposes.
Tax matters are very complicated and the tax consequences of the merger
to you will depend on your own circumstances. You are urged to consult your tax
advisors as to the specific tax consequences of the merger to you.
OPINION OF FINANCIAL ADVISOR (PAGE 20)
Hovde Financial, Inc. has delivered its written opinion to the Comstock
Board of Directors that the merger consideration is fair from a financial point
of view to the Comstock stockholders. The Hovde Financial, Inc. opinion is
attached to this document as Appendix B. You should read the opinion completely
to understand the assumptions made, matters considered and limitations of the
review undertaken by Hovde Financial, Inc.
If the merger is completed, Comstock will pay to Hovde Financial, Inc.
a total fee that depends in part on the value of the transaction, as measured by
the price per share of First Security common stock. This is in addition to the
$10,000 paid by Comstock to Hovde Financial, Inc. in September 1998, when
Comstock engaged Hovde Financial, Inc., but including an additional $35,000 paid
by Comstock in connection with Comstock's execution of the merger agreement and
Hovde Financial, Inc.'s delivery of its fairness opinion. Assuming a price per
share of First Security common stock of between $18.70 and $24.05, the total fee
payable to Hovde Financial, Inc. by Comstock on completion of the acquisition is
estimated to be $858,750.
We encourage you to read the Hovde Financial opinion.
COMPARATIVE RIGHTS OF STOCKHOLDERS (PAGE 45)
Comstock is a Nevada corporation, and you as a Comstock stockholder
have certain rights under Nevada law. After the merger you will be a First
Security stockholder and will have rights under Delaware law. If the merger is
completed, the rights of former Comstock stockholders who become First Security
stockholders will be determined by First Security's certificate of incorporation
and by-laws which differ in certain respects from Comstock's articles of
incorporation and by-laws.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS (PAGE 24)
Some of Comstock's directors and officers have interests in the merger
that differ from, or are in addition to, their interests as Comstock
stockholders, such as change-of-control agreements with Comstock and
contemplated employment agreements with First Security. The members of
Comstock's Board of Directors knew about these additional interests and
considered them when the Board of Directors approved the merger agreement and
the merger contemplated thereby.
RISK FACTORS
The success of the merger is subject to certain risks. A description of
these risks is found at "RISK FACTORS" starting on page 9 of this
Prospectus/Proxy Statement.
COMSTOCK'S REASONS FOR THE MERGER (PAGE 17)
Giving consideration to a number of factors affecting smaller banking
institutions, including shrinking profit margins, the need for product line
diversification, lower ROA (return on assets) and ROE (return on equity) than
stockholders expect, escalating concern in the financial institutions industry
about the Year 2000 computer problem, a Congress that continued to increase the
regulatory burden on commercial and community banks while exempting non-banks
from many of the onerous laws and regulations applicable to depository
institutions, and the need for a more significant commitment of resources to
technology, Comstock's management and Board of Directors concluded that their
desire for Comstock to remain independent might not be in the best interests of
stockholders. The Board and management concluded that if a sale were in the best
interests of stockholders, the interests of customers, employees and community
could also be best served if Comstock selected desirable acquisition candidates
and initiated discussions with them in an orderly manner, rather than passively
waiting for
7
<PAGE> 13
acquisition overtures to be made to Comstock and hoping the acquiror's goals
were consistent with the Board's and management's.
In connection with its decision to approve the merger and recommend the
transaction to Comstock's stockholders, and with the assistance of its financial
advisor, Hovde Financial, the Board of Directors reviewed the adequacy and
fairness of the consideration to be received by Comstock stockholders in the
merger. The Board concluded that the consideration offered by First Security was
fair, and that long-term returns to Comstock's stockholders would be enhanced by
the merger.
RECOMMENDATION TO COMSTOCK STOCKHOLDERS
The Comstock Board of Directors believes that the merger is in your
best interests and unanimously recommends that you vote FOR the proposal to
approve the merger.
STOCKHOLDER VOTES REQUIRED TO APPROVE THE MERGER
The affirmative vote of the holders of a majority of the outstanding
shares of Comstock common stock are required to approve the merger and the
transactions associated with it. As of March 19, 1999, directors and executive
officers of Comstock held approximately 15.5% of the outstanding shares of
Comstock common stock. Your failure to return a signed Proxy Card will have the
effect of a vote against the merger and the transactions associated with it,
although such action will not be enough to perfect dissenter's rights under
applicable Nevada law.
Under applicable law, the First Security stockholders are not entitled
to vote on the merger. First Security, as the sole stockholder of First Security
Bank of Nevada, has agreed to vote all of the shares of First Security Bank of
Nevada in favor of the bank merger.
[THIS SPACE LEFT BLANK INTENTIONALLY]
8
<PAGE> 14
RISK FACTORS
Certain risks are inherent in the merger and the business of First
Security. The material risks are highlighted below for the benefit of Comstock
stockholders:
RISKS TO COMSTOCK STOCKHOLDERS RESULTING FROM THE EXCHANGE RATIO
The Exchange Ratio operates such that if the market price of First
Security common stock falls below $18.70 per share during a specified ten-day
trading period, the value of the shares that you receive at the time of the
merger may be less than the value of those shares at the time you execute the
Proxy voting form.
VOLATILITY OF STOCK PRICES
The market for First Security common stock is potentially volatile. The
trading price of First Security common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements following acquisitions by First Security or its competitors,
changes in interest rates or prices of First Security's or its competitors'
financial products and services, changes in product mix, changes in revenue and
revenue growth rates for First Security as a whole or for geographic areas or
business units, and other events or factors. Statements or changes in opinions,
ratings or earnings estimates made by brokerage firms or industry analysts
relating to the markets in which First Security does business or relating to
First Security specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of First Security common stock.
Statements by financial or industry analysts regarding the impact on First
Security's net income per share resulting from the merger and the extent to
which such analysts expect potential business synergies to affect reported
results in future periods can be expected to contribute to volatility in the
market price of First Security common stock.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations which have particularly affected the market price
for the securities of many financial services companies and which often have
been unrelated to the operating performance of these companies. For example the
Dow Jones Industrial Average ("DJIA") fell from a high of 9,337.97, its close on
July 17, 1998, to 7,632.53, its close on October 1, 1998, a decline of 18.26%.
Furthermore, the DJIA experienced its second largest one-day decline, a loss of
512.61 on August 31, 1998, and its largest one-day increase, a gain of 380.53 on
September 8, 1998. Other market indicators have experienced similar volatility.
Since July 17, 1998, the closing price of a share of First Security common stock
has exhibited similar volatility, ranging from a high of $23.94 per share on
July 14, 1998 to a low of $15.50 per share on August 31, 1998. Market analysts
have attributed the volatility to a number of factors, including economic
conditions in Russia, Asia and Latin America. First Security has negligible
exposure to financial losses from turmoil in such foreign economies. However,
First Security cautions Comstock stockholders that such factors, as well as
others that First Security cannot predict, may cause an adverse impact on the
trading markets for equity securities, including shares of First Security common
stock.
ATTRACTION AND RETENTION OF EMPLOYEES
The continued growth and success of First Security depends
significantly on the continued service of highly skilled employees and managers.
In particular, First Security's success to date has depended to a significant
extent upon a number of key management employees, the loss of any of whom could
have a material adverse effect on First Security's business and results of
operations. Competition for these employees in today's marketplace, especially
in the financial services industries, is intense. First Security's ability to
attract and retain employees is dependent on a number of factors including its
continued ability to grant stock incentive awards. There can be no assurance
that First Security will be successful in continuing to recruit new personnel
and to retain existing personnel. The loss of one or more key employees or First
Security's inability to maintain existing employees, or to recruit new employees
could have a material adverse impact on First Security. In addition, First
Security may experience increased compensation costs to attract and retain
skilled personnel.
9
<PAGE> 15
IMPACT OF DATE CHANGES IN 1999 AND 2000
Some of the computer programs used by First Security in its internal
operations rely on time-sensitive software that was written using two digits
rather than four to identify the applicable year. These programs may recognize a
date using "00" as the year 1900 rather than the year 2000. These systems could
also recognize some combinations of "9" as calling for the end of the operation.
The use of 2000 as a leap year may also cause date change-related malfunctions
by computers. These date changes could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. First Security expects to successfully
implement its year 1999 and 2000 compliance program and does not believe that
the cost of such procedures will have a material effect on its results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in the completion of these procedures or that the cost
of such procedures will not exceed original estimates, either of which could
have a material adverse effect on future results of operations.
In addition to correcting the business and operating systems used by
First Security in the ordinary course of business as described above, First
Security is engaged in an assessment of its key product and service suppliers
and loan customers to determine their level of Year 2000 compliance. This
includes providers of key utility services such as electric power and telephone
services. There can be no assurance that First Security will not experience
serious disruptions in 2000 as a result of supplier problems and failures
notwithstanding the fact that First Security's own systems are Y2k compliant.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of First Security's Charter and Bylaws could delay
or frustrate the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving First Security, even if such
events could be beneficial to its stockholders. For example, each share of First
Security common stock, including the shares to be issued to Comstock
stockholders in the merger, has a right attached that entitles the stockholder
to acquire a series of preferred stock under certain circumstances associated
with a potential change in control of First Security, a feature commonly
referred to as a "poison pill". Also the First Security Bylaws restrict the
ability of a stockholder to nominate directors or to present matters before a
stockholders meeting. The First Security certificate of incorporation contains a
supermajority voting provision commonly known as a "fair price" provision that
will make certain staged take-overs difficult. (See, "Information About First
Security-Description of First Security's Capital Stock.")
SELECTED HISTORICAL FINANCIAL DATA FOR FIRST SECURITY AND COMSTOCK
The following tables present selected financial data of First Security and
Comstock, for the periods indicated. The historical financial data as of and for
the five fiscal years shown were derived from audited financial statements. The
data presented below should be read in conjunction with the financial
statements, related notes and other financial information of Comstock included
elsewhere in this Prospectus/Proxy Statement (see, Appendix D), and of First
Security which are incorporated by reference.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE FINANCIAL TABLES WHICH FOLLOW]
10
<PAGE> 16
FIRST SECURITY CORPORATION
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (1) 3/2/99
FIRST SECURITY CORPORATION
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 1,420,660 $ 1,213,378 $ 1,039,391 $ 1,974,015 $ 801,659
Interest Expense 716,961 587,439 485,328 469,812 322,035
Net Interest Income 703,699 625,939 554,063 504,203 479,624
Provision for Possible Loan Losses 71,923 63,386 41,300 22,682 1,545
Noninterest Income 474,390 357,157 306,444 270,638 202,043
Noninterest Expenses 723,088 588,904 531,219 555,192 455,322
Income Before Taxes 383,078 330,806 287,988 196,967 224,800
Applicable Income Taxes 135,398 115,532 103,516 72,336 81,098
Net Income 247,680 215,274 184,472 124,631 143,702
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 1.32 $ 1.18 $ 1.03 $ 0.71 $ 0.83
Earnings Per Share-Diluted 1.28 1.14 1.00 0.69 0.81
Cash Dividends Declared 0.52 0.44 0.38 0.33 0.31
Book Value per Common Share 8.54 7.59 6.72 6.13 5.36
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $14,013,417 $11,230,796 $69,697,351 $18,616,763 $8,442,282
Reserve for Possible Loan Losses 173,350 157,525 142,693 135,011 138,107
Total Assets 21,689,088 18,151,783 15,456,641 13,529,699 12,602,149
Deposits 12,658,574 11,417,634 10,103,009 8,202,844 8,442,035
Long-Term Debt 2,609,558 1,304,463 944,055 720,521 685,426
Shareholders' Equity 1,595,495 1,400,846 1,217,840 1,082,995 937,368
PROFITABILITY RATIOS:
Return on Average Assets 1.28% 1.35% 1.35% 0.98% 1.25%
Return on Average Stockholders'
Equity 16.21 16.60 16.23 12.02 15.69
Net Interest Margin, FTE (2) 4.15 4.47 4.59 4.48 4.69
Net Interest Spread, FTE (2) 3.53 3.75 3.85 3.73 4.08
Operating Expense Ratio (3) 60.84 59.27 61.18 70.89 66.03
Productivity Ratio (4) 3.75 3.68 3.87 4.37 3.95
CAPITAL RATIOS:
Shareholders' Equity to Assets 7.36% 7.72% 7.88% 8.00% 7.44%
Tangible Common Equity Ratio 5.57 6.24 6.74 6.95 6.16
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of
Period to:
Total Loans 1.24% 1.40% 1.47% 1.57% 1.64%
Nonaccruing and Renegotiated Loans 378.39 427.17 399.14 547.49 529.08
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.35 0.40 0.48 0.43 0.42
Total Assets 0.23 0.25 0.30 0.27 0.28
Total Equity 3.10 3.20 3.81 3.40 3.81
Total Equity + Loan Loss Reserve 2.79 2.88 3.41 3.03 3.32
Net Loans Charged Off to Average Loans 0.49 0.51 0.41 0.30 0.11
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.22x 2.41x 2.82x 2.23x 3.04x
Including Interest on Deposits 1.53x 1.56x 1.59x 1.42x 1.70x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect two
separate 3-for-2 common stock splits in the form of 50% stock dividends
paid in May 1997 and February 1998 and also for the May 1998
pooling-of-interests acquisition of California State Bank.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or
tax-favored loans, leases and securities with interest earned subject to
full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to combined
fixed charges and preferred stock dividends, earnings represent net
income plus income taxes and fixed charges. Fixed charges, including
interest on deposits, include interest expense, capitalized interest, an
amount equal to the pretax earnings required to meet applicable preferred
stock dividend requirements and the interest factor included in rents.
11
<PAGE> 17
FIRST SECURITY CORPORATION
(in thousands)
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
DEBT:
Deposits (1) $ 12,658,574
Federal funds purchased and securities sold under
agreements to repurchase 3,747,084
Other short-term borrowings 518,505
Long-term debt (2) 2,609,558
Notes offered hereby -
------------
Total Debt 19,533,721
------------
STOCKHOLDERS' EQUITY:
Series "A", $3.15 Cumulative Convertible Preferred Stock,
(9,208 shares issued) 484
Common Stock (par value $1.25, authorized 600,000,000
shares, 191,008,099 shares issued) (3) 238,760
Paid-in surplus 181,906
Retained earnings 1,233,264
Accumulated other comprehensive income (4) 30,377
Common treasury stock, at cost (4,295,975 shares) (89,296)
------------
Total stockholders' equity 1,595,495
------------
Total capitalization $ 21,129,216
============
</TABLE>
Notes:
(1) Including demand deposits of $2.8 billion and interest-bearing deposits of
$9.9 billion (including $1.5 billion of certificates of deposit over $100,000).
(2) Being, with respect to FSCO, (in thousands), $23,750 of Medium Term Notes
due 1998-2003, $98,962 of 7.875% Senior Notes due 1999, $150,000 of 6.875%
Senior Notes due 2006, $75,000 of 7.5% Subordinated Notes due 2002, $325,000 of
5.875% Senior Notes due 2003 and $125,000 of 7.0% Subordinated Notes due 2005.
With respect to FSCO's subsidiaries, $150,000 of 8.41% Subordinated Capital
Income Securities due 2026; and $2,143,203 of Bank Notes and Federal Home Loan
Bank borrowings (FHLB borrowings mature in 1998-2000) and $309 of Nonbank debt.
FSCO's subsidiaries obligations are direct obligations of such subsidiaries, and
as such constitute claims against such subsidiaries ranking prior to FSCO's
equity therein.
(3) Shares issued and outstanding excluded 9,458,411 shares reserved for
issuance upon exercise of outstanding employee stock options, 377,585 shares
reserved for issuance upon exercise of conversion rights of preferred stock,
804,953 shares reserved for issuance under the dividend reinvestment and stock
purchase plan, 2,025,528 shares reserved for issuance under FSCO's Comprehensive
Management Incentive Plan, and 1,449,000 shares reserved for issuance under
FSCO's Nonemployee Director Stock Option Plan.
(4) Accumulated other comprehensive income consists entirely of net
unrealized gains on securities available for sale, net of tax.
12
<PAGE> 18
COMSTOCK BANCORP
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (1) 3/2/99
COMSTOCK BANCORP
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 20,496 $ 15,517 $ 14,868 $ 12,814 $ 9,134
Interest Expense 7,320 5,623 4,434 3,811 2,296
Net Interest Income 13,176 9,894 10,434 9,003 6,838
Provision for Possible Loan Losses 620 270 250 270 105
Noninterest Income 868 541 414 278 407
Noninterest Expenses 9,219 7,653 7,603 6,637 5,724
Income Before Taxes 4,205 2,512 2,995 2,374 1,416
Applicable Income Taxes (254) 676 903 769 422
Net Income 4,459 1,836 2,092 1,605 994
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 0.99 $ 0.42 $ 0.49 $ 0.43 $ 0.29
Earnings Per Share-Diluted 0.91 0.39 0.46 0.38 0.26
Cash Dividends Declared -- -- -- -- 0.47
Book Value per Common Share 4.29 3.53 3.07 2.58 2.07
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $ 141,822 $ 136,181 $ 96,524 $ 86,743 $ 69,999
Reserve for Possible Loan Losses 1,598 1,076 857 665 428
Total Assets 225,147 194,698 144,980 122,805 103,073
Deposits 196,246 179,101 131,303 111,169 93,006
Long-Term Debt
Shareholders' Equity 21,589 15,598 13,009 10,884 7,531
PROFITABILITY RATIOS:
Return on Average Assets 2.13% 1.12% 1.56% 1.41% 1.14%
Return on Average Stockholders'
Equity 25.50 12.90 17.70 18.60 14.70
Net Interest Margin, FTE (2) 4.81 4.87 4.98 4.94 4.36
Net Interest Spread, FTE (2) 4.63 4.47 4.44 4.13 3.70
Operating Expense Ratio (3) 69.00 74.50 71.50 73.00 65.80
Productivity Ratio (4) 4.41 4.66 5.69 5.83 6.54
CAPITAL RATIOS:
Shareholders' Equity to Assets 9.59% 8.01% 8.97% 8.86% 7.31%
Tangible Common Equity Ratio 9.59% 8.01% 8.97% 8.86% 7.31%
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of Period to:
Total Loans 1.13% 0.79% 0.89% 0.77% 0.62%
Nonaccruing and Renegotiated Loans 264.57 41.61 26.92 325.98 251.76
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.01 0.02 0.04 0.00 0.01
Total Assets 0.00 0.01 0.02 0.00 0.01
Total Equity 0.03 0.17 0.28 0.01 0.10
Total Equity + Loan Loss Reserve 0.03 0.16 0.26 0.01 0.10
Net Loans Charged Off to Average Loans 0.00 0.00 0.00 0.00 0.00
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.27x 2.08x 1.98x 1.93x 1.65x
Including Interest on Deposits 1.48x 1.34x 1.40x 1.36x 1.25x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect a 10%
stock dividend in February 1995 and for a conversion to Comstock
Bancorp stock, two for one in June 1997.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or
tax-favored loans, leases and securities with interest earned subject
to full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to
combined fixed charges,earnings represent net income plus income taxes
and fixed charges. Fixed charges, including interest on deposits,
include interest expense.
13
<PAGE> 19
COMSTOCK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comstock has attached to this Prospectus/Proxy Statement as Appendix D
its Summary Annual Report to Shareholders which contains Management's Discussion
and Analysis of Financial Condition and Results of Operations. Please refer to
Appendix D.
YEAR 2000 ISSUES
Comstock utilizes software and related information technologies that
will be affected by the date changes in the years 1999 and 2000 (generically
referred to as the "Year 2000 Issue"). The Year 2000 Issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year, while other systems read some combinations of "9's" as an
order to end operations. When these date changes take place, certain
date-sensitive systems may not recognize the new dates as valid. This inability
to recognize or properly treat date change information may result in a systems
failure or cause systems to process critical financial and operational
information incorrectly. The Year 2000 issue affects non-information
technologies as well, including embedded chips in a number of machines and
processes that are date sensitive, and these machines and systems control
building operations and communications equipment, among other applications.
Finally, Comstock relies on third party customers and suppliers for the ongoing
maintenance and operations of Comstock. These third parties have their own Year
2000 problems, and the failure of these third party suppliers could have a
material adverse impact on Comstock's business.
Comstock is addressing the Year 2000 Issue through contingency planning
for its own systems, replacement or remediation of noncompliant systems, and
communication with key customers and suppliers to assure Year 2000 awareness and
remediation.
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
First Security and Comstock and combined per share data on an unaudited pro
forma basis after giving effect to the merger on a purchase basis assuming that
the market price for First Security common stock is $18.70 per share so that
approximately 0.670 shares of First Security common stock are issued in exchange
for each Comstock Share. This data should be read in conjunction with the
selected historical financial data set forth herein and the historical financial
statements of Comstock and the notes thereto that are incorporated herein by
reference. The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the combined financial position or results
of operations of future periods or the results that actually would have been
realized had the entities been a single entity during the periods presented.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31, 1998
-------------------
BASIC DILUTED
------- -------
<S> <C> <C>
FIRST SECURITY HISTORICAL PER COMMON SHARE:
Net income (loss) per common share-basic and diluted....... $1.32 $1.28
Book value................................................. $8.54
</TABLE>
[continued on next page]
14
<PAGE> 20
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31, 1998
-------------------
BASIC DILUTED
------- -------
<S> <C> <C>
COMSTOCK HISTORICAL PER COMMON SHARE:
Net income (loss) per common share-basic and diluted....... $0.99 $0.91
Book value................................................. $4.29 $4.31
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31, 1998
-------------------
BASIC DILUTED
------- -------
<S> <C> <C>
PRO FORMA COMBINED NET INCOME PER SHARE(1)
Per First Security common share-basic and diluted.......... $1.32 $1.28
Equivalent per Comstock share-basic and diluted............ $0.88 $0.86
PRO FORMA COMBINED BOOK VALUE PER SHARE(1)(2)
Per First Security share................................... $8.50
Equivalent per Comstock share.............................. $5.70
</TABLE>
(1) The unaudited equivalent Comstock pro forma share amounts are
calculated by multiplying the First Security combined pro forma per
share amounts by the Exchange Ratio.
(2) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end
of each period. Pro forma book value per share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares of
common stock outstanding at the end of each period.
COMPARATIVE MARKET PRICE AND DIVIDENDS INFORMATION
First Security common stock is quoted through the NASDAQ National
Market under the symbol "FSCO". The following table sets forth the high and low
sales price of First Security common stock. The cash dividends declared per
share for the calendar periods are also indicated. The information presented
below for First Security was obtained from the National Association of
Securities Dealers, Inc. ALL FIRST SECURITY NUMBERS OF SHARES AND PER SHARE
INFORMATION ARE ADJUSTED FOR A NUMBER OF FIRST SECURITY STOCK SPLITS TAKING
PLACE IN THE PERIOD 1993-1998, THE MOST RECENT HAVING BEEN PAID ON FEBRUARY 24,
1998. THIS INFORMATION HAS ALSO BEEN ADJUSTED FOR THE POOLING OF INTERESTS
MERGER INVOLVING FIRST SECURITY'S ACQUISITION OF CALIFORNIA STATE BANK ON MAY
30, 1998.
[SEE TABLE ON FOLLOWING PAGE]
15
<PAGE> 21
<TABLE>
<CAPTION>
DIVIDENDS
PRICE OF FIRST SECURITY COMMON STOCK DECLARED PER
------------------------------------ FIRST SECURITY
HIGH LOW COMMON SHARE
---- --- --------------
<S> <C> <C> <C>
1999
1/1/99-3/19/99 $23.81 $18.01 $0.14
1998
Fourth Quarter $23.31 $15.94 $0.13
Third Quarter 23.94 15.50 0.13
Second Quarter 24.79 21.00 0.13
First Quarter 26.17 21.83 0.13
1997
Fourth Quarter $27.92 $19.08 $0.11
Third Quarter 21.33 17.58 0.11
Second Quarter 19.00 14.45 0.11
First Quarter 16.56 14.22 0.10
1996
Fourth Quarter $15.17 $12.50 $0.10
Third Quarter 12.50 10.57 0.09
Second Quarter 12.28 10.17 0.09
First Quarter 12.33 10.30 0.09
1995
Fourth Quarter $11.26 $9.04 $0.08
Third Quarter 9.85 8.15 0.08
Second Quarter 8.48 6.81 0.08
First Quarter 7.60 6.52 0.08
1994
Fourth Quarter $8.44 $6.37 $0.08
Third Quarter 9.48 8.22 0.08
Second Quarter 9.19 8.08 0.08
First Quarter 8.59 7.63 0.08
</TABLE>
The closing price of First Security common stock as reported on the
NASDAQ National Market on January 12, 1999, the last trading day prior to the
public announcement of the merger agreement was $22.50 per share. On January 12,
1999, the last trading day before we announced the merger, Comstock common stock
closed at $10.375 per share.
On March 19, 1999, the last practicable date prior to mailing this
Prospectus/Proxy Statement, the closing price for First Security common stock
was $18.01 per share, and the closing price for Comstock common stock was $11.13
per share.
First Security has paid cash dividends on its common and preferred
stock without reduction in amount for over 60 consecutive years. Since 1983,
these dividends have been paid quarterly. Future dividends on First Security
common stock will be determined by First Security's Board of Directors in light
of circumstances existing at the time, including the earnings and financial
condition of First Security, and there is no assurance that dividends will
continue to be paid at current levels. No material restrictions have been
imposed on First Security's ability to pay dividends from its earned surplus by
bank regulations or applicable law. Payment of dividends on the First Security
common stock is also subject to the prior rights of First Security's outstanding
Preferred Stock.
16
<PAGE> 22
Comstock stockholders are advised to obtain current market quotations
for First Security common stock. No assurances can be given concerning the
market price of the First Security common stock before or after the date on
which the merger is consummated. The market price of First Security common stock
will fluctuate between the date of this Prospectus/Proxy Statement and the
Closing Date and thereafter. Because the Exchange Ratio is subject to the
adjustment mechanisms described earlier in this Prospectus/Proxy Statement, and
because the market price of First Security common stock is subject to
fluctuation, the value of the shares of First Security common stock that
Comstock stockholders will receive under the merger agreement may increase or
decrease prior to and following the Closing.
Comstock common stock is quoted through the NASDAQ Small Cap Market
under the symbol "LODE". The following table sets forth the high and low sales
price of Comstock common stock. Bancorp and its predecessor Comstock Bank have
not paid cash dividends since 1994.
The information presented below for Comstock was obtained from the
National Association of Securities Dealers, Inc. and reflects interdealer
prices, without retail markup, markdown or commissions, and may not represent
actual transactions.
As of March 19, 1999, Comstock had over 1,000 stockholders, including
stockholders of record and stockholders owning their shares through brokerage
accounts. The following table shows the high and low sales prices per share of
Comstock for the periods indicated. The stock price information has been
adjusted to reflect the two-for-one stock share exchange effected as part of
Comstock's holding company reorganization, which was consummated on June 16,
1997.
<TABLE>
<CAPTION>
DIVIDENDS
PRICE OF COMSTOCK COMMON STOCK DECLARED PER SHARE
------------------------------ OF COMSTOCK
HIGH LOW COMMON STOCK
------ ----- ------------------
1999
<S> <C> <C> <C>
First Quarter $13.00 $9.00 0
(through
March 19, 1999)
1998
Fourth Quarter $10.25 $7.25 0
Third Quarter 10.44 7.50 0
Second Quarter 11.00 9.50 0
First Quarter 11.00 7.50 0
1997
Fourth Quarter $9.63 $7.13 0
Third Quarter 7.50 6.25 0
Second Quarter 7.50 5.67 0
First Quarter 6.50 5.13 0
</TABLE>
Comstock has no plans to declare or pay cash dividends for the
foreseeable future. The Comstock Board of Directors has determined that Comstock
should retain the majority of its capital for future expansion and capital
investment. In January 1998, Comstock announced a stock repurchase program for
up to 5% of its outstanding stock, at the discretion of management. The Board of
Directors determined that a stock repurchase plan was preferable to paying cash
dividends, due to the taxation of dividends. Comstock derives its earnings from
and is dependent upon the earnings of and cash dividends paid by Comstock Bank.
Because dividends from Comstock Bank are Comstock's principal source of income,
dividends to stockholders of Comstock would depend upon receipt by Comstock of
dividends from Comstock Bank. The ability of Comstock Bank to pay dividends is
restricted by bank regulation. However, no restrictions have been placed on
Comstock's ability to pay dividends out of its earned surplus by bank
regulators. See, "Supervision and Regulation - Limits On Dividends And Other
Payments."
17
<PAGE> 23
THE MERGER
The following is a summary of certain provisions of the merger
agreement, a copy of which is attached hereto as Appendix A and incorporated
herein by reference. Such summary is qualified in its entirety by reference to
the full text of the merger agreement.
GENERAL
Subject to the terms and conditions of the merger agreement, Comstock
will merge with and into First Security, and Comstock's subsidiary, Comstock
Bank, will merge with and into First Security Bank of Nevada.
THE EFFECTIVE TIME
Promptly after all conditions to the merger agreement have been
satisfied or waived, the appropriate corporate filings pertaining to the merger
or such other documents as may be appropriate or necessary to effect the merger,
will be executed and filed in accordance with applicable Nevada law and
applicable Delaware law. At that time the merger will become effective.
MANAGEMENT OF COMSTOCK FOLLOWING THE MERGER
Comstock and Comstock Bank will cease to exist following the merger.
Offices of Comstock Bank will become branches of First Security Bank of Nevada.
All First Security Bank of Nevada offices are managed according to First
Security policies and procedures, and offer products and services authorized by
First Security.
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF COMSTOCK'S BOARD OF
DIRECTORS
1996 was a watershed year for Comstock. Management and the Board of
Directors determined then that changes had to be made if Comstock Bank was to
continue providing superior returns for stockholders, to continue providing
exceptional service to customers, and to remain an independent financial
institution beyond the turn of the century. Comstock Bank competes for customers
with larger institutions, some of which are among the largest banks in the
nation. These other institutions have the financial, staff and other resources
and organizational breadth that allows them to offer customers the broadest and
most current range of banking products and services and trust services, and a
diverse array of related products and services, including securities, insurance
and related products, investment advisory services and a variety of
non-traditional banking services. Accordingly, the Board of Directors and
management determined that Comstock Bank's technological capabilities had to be
enhanced to keep pace with technological changes sweeping the financial
institutions industry. In addition, Comstock Bank's business lines had to be
expanded to match customers' expectations concerning the kinds of services they
could expect from their financial institution.
A holding company for Comstock Bank was formed in 1997 to allow
Comstock Bank to pursue other financial lines of business, and plans were made
to bring Comstock Bank's technological platform in-house, which was accomplished
in October 1997. In the 1996 Annual Report's letter to stockholders, management
said:
"In 1996, the Bank, having determined that it wanted to remain
independent, began an ambitious expansion and capital investment
program to allow the Bank to effectively compete in the rapidly
changing financial services marketplace by completely overhauling and
significantly upgrading its technological capabilities. These capital
investments and structural changes do not come without cost. The
capital expenditures, themselves, have an implementation and start-up
period in which they are not contributing to earnings. Management
expects that during this period, the ROA and ROE could be lower than
the Bank's recent financial performances. In the end, management
believes that these projects will allow the Bank to remain independent
as we approach the new millennium and give it the tools it needs to
produce the growth and high level of returns that the stockholders have
come to expect."
18
<PAGE> 24
Notwithstanding the efforts to remain independent, Comstock Bank faced
increasing competitive pressures from other community banks, the most intense
competition from the larger banks now dominating Nevada's financial landscape,
and from large out-of-state banks and non-banks with local loan production
offices.
As a consequence, in 1998 management opened discussions with a local
community bank regarding a merger of equals, had discussions with a local
independent insurance agency, and held preliminary discussions with an
out-of-state bank that was comparable in size to, but slightly smaller than,
Comstock. The purpose of the discussion with the local community bank was to
consider the efficiencies and economies of scale of a larger operation. Those
discussions ended when that institution was sold to an out-of-state bank. The
discussions with the independent insurance agency were held to determine whether
Comstock could expand its product line into the insurance business. These
discussions ended when management determined that the profitability of the
products and services that the agency wished to extend to Comstock Bank's
customers was minimal.
The discussions with the out-of-state institution in the late spring
and summer were of particular interest to management because that company was
very aggressive in its pursuit of technology and had had some successes in
lucrative government-lending programs. The discussions did not proceed beyond
initial discussions because the out-of-state bank was not interested in a
merger-of-equals.
Management had also made some inquiries of other banks in the state to
determine whether they were interested in pursuing a merger-of-equals. In each
case, however, the other institutions were seeking a business combination with a
larger institution than Comstock Bank and one whose stock was more actively
traded and more liquid than that of Comstock.
While there were successes in the company's internal technological
efforts, management was faced with the reality that the company was still a long
way from competing with the larger institutions in the electronic banking
sector, and the reality that achieving this goal would require a significant
additional commitment of capital. A number of factors affecting smaller banking
institutions led management and the Board to conclude that their desire to
remain independent might not be in the best interests of stockholders, including
- shrinking profit margins,
- the need for product line diversification,
- prospective lower ROA and ROE than stockholders expect,
- escalating concern in the financial institutions industry
about the Year 2000 computer problem,
- a Congress that continued to increase the regulatory burden on
commercial and community banks while exempting non-banks from
many of the onerous laws and regulations applicable to
depository institutions, and
- the need for a more significant commitment of resources to
technology.
The Board and management concluded that if a sale were in the best
interests of stockholders, the interests of customers, employees and community
could also be best served if Comstock selected desirable acquisition candidates
and initiated discussions with them in an orderly manner, rather than passively
waiting for acquisition overtures to be made to Comstock and hoping the
acquiror's goals were consistent with the Board's and management's. Management
and the Board developed a set of parameters regarding the ideal characteristics
of potential buyers of Comstock. Chief among these parameters were:
- a community bank orientation with local decision making in the
lending function,
- a complete array of competitive products and services for the
rapidly changing financial services market,
- a reputation for high levels of customer service and treatment
of employees, and
- a business focus on serving western markets, rather than an
institution for which the Reno-area market would be a remote
outpost.
19
<PAGE> 25
In July 1998, Comstock received inquiries regarding its interest in a
possible acquisition transaction from two large bank holding companies, one of
which was First Security. Management had already had discussions with Hovde
Financial regarding the value of Comstock to a potential acquiror. In addition,
Compass Bancshares, Inc. of Birmingham, Alabama had just signed a definitive
agreement to purchase the largest independent bank headquartered in Arizona, and
Hovde's financial advisory services had resulted in a very attractive deal from
the Arizona bank's point of view. With management's recommendation, the Board
therefore authorized contact with Hovde. At the August, 1998 Board meeting, a
Hovde representative discussed pricing and market conditions specific to Nevada.
The Board discussed its duties regarding stockholder interests and concluded
that the Board should determine what the potential value of the company was to a
potential acquiror. The Board authorized management to pursue an agreement with
Hovde to help determine Comstock's value to a potential acquiror.
By the September, 1998 Board meeting, management had concluded an
agreement with Hovde, consistent with the Board's direction. Management had
responded to Hovde's requests for information, and management and Hovde together
had selected those institutions Hovde would contact that were generally in
conformity with the parameters the Board had established. By the October, 1998
Board meeting, Hovde had elicited expressions of interest from several banks.
The Board compared First Security's offer to those submitted by other interested
institutions and determined that First Security was the institution most closely
fitting Comstock's parameters. At the time, the securities markets were in the
midst of a severe sell-off, and valuations for financial institutions had been
severely affected. The Board authorized management to explore First Security's
continuing level of interest.
Comstock's management met with First Security's executive management on
November 4, 1998. At the initial meeting, it appeared that First Security's
philosophy regarding community banking and customer service was similar to
Comstock's. In addition, First Security had lines of business similar to those
in which Comstock Bank had expertise. First Security's proposal also provided
for an all stock, tax-free reorganization. Moreover, through negotiation,
management obtained a significant price increase from First Security's initial
response to Hovde's invitation for acquisition offers. Following discussions by
Hovde concerning the performance, lines of business and organizational structure
of First Security, at a special meeting of the Board on November 16, 1998,
Comstock's Board authorized management to negotiate and execute a letter of
intent with First Security. The letter of intent was signed on November 18,
1998. First Security performed its due diligence during the week of November 30,
1998. On January 12, 1999, Comstock's Board of Directors held a meeting at which
legal counsel reviewed the terms and conditions of the definitive agreement that
had been negotiated throughout December and early January. Legal counsel also
reviewed the fiduciary obligations of directors in mergers of financial
institutions. In addition, a representative of Hovde orally advised the Comstock
Board of Directors that the terms of the definitive agreement were fair to the
Comstock stockholders from a financial point of view. Following discussion and
review, the Board of Directors of Comstock Bancorp unanimously approved the
definitive agreement. The definitive Merger Agreement was entered into as of
January 12, 1999.
In connection with its decision to approve the merger and recommend the
transaction to Comstock's stockholders, and with the assistance of Hovde
Financial, the Board of Directors reviewed the adequacy and fairness of the
consideration to be received by the Comstock stockholders in the merger. The
consideration to be received for Comstock as a whole was valued at approximately
$65 million as of the date of the definitive agreement. That represents a
premium of more than $43 million over Comstock's book value as of December 31,
1998.
The Board considered that Comstock's stock trades infrequently and that
the liquidity for larger blocks of stock is virtually nonexistent. The Board
further considered the future prospects for Comstock and its business. Given
internal budget estimates of lower earnings in 1999 than in 1998, shrinking
profit margins, increased cost pressures, a hostile regulatory climate, and the
need to devote significant resources to technology, which would continue to
adversely affect both ROA and ROE, the Board concluded that the consideration
offered by First Security was fair, and that long-term returns to Comstock's
stockholders would be enhanced by the merger.
20
<PAGE> 26
In addition, the Board considered the potential social and economic
impact of the merger on Comstock Bank's employees, depositors, loan customers
and vendors, as well as the potential social and economic impact of the merger
on the community in which Comstock Bank operates. Of particular importance to
the Board was the fact that First Security Bank of Nevada had no existing
presence in northern Nevada and that First Security Bank of Nevada would have to
expand aggressively. This would increase the likelihood that First Security Bank
of Nevada would retain many existing employees. Further, it appeared likely that
First Security Bank of Nevada would build upon the community banking philosophy
that Comstock Bank had come to stand for and would continue local loan decision
making and high levels of customer service.
OPINION OF COMSTOCK'S FINANCIAL ADVISOR
Comstock retained Hovde to act as its financial advisor in connection
with the merger. Hovde Financial rendered a written opinion to Comstock as of
January 12, 1999 and updated as of March 22, 1999, to the effect that, based
upon and subject to the factors and assumptions set forth in such opinion, and
as of that date, the merger consideration to be paid by First Security was fair
from a financial point of view to the stockholders of Comstock.
The full text of the Hovde opinion sets forth assumptions made, matters
considered and qualifications and limitations on the review undertaken, among
other things. The full text of the Hovde opinion is attached hereto as Appendix
B and is incorporated herein by reference. Comstock stockholders are urged to
read the Hovde opinion in its entirety. Directed to the Comstock Board, the
Hovde opinion addresses only the fairness to the holders of Comstock common
stock, from a financial point of view, of the consideration to be paid by First
Security for the Comstock common stock pursuant to the Agreement and Plan of
Reorganization. The Hovde opinion was rendered to the Comstock Board of
Directors for its consideration in determining whether to approve the merger
agreement. The Hovde opinion does not constitute a recommendation to any
Comstock stockholder as to how such stockholder should vote. The following
summary of the Hovde opinion is qualified in its entirety by reference to the
full text of the Hovde opinion.
No limitations were imposed by Comstock on the scope of Hovde's
investigation or the procedures to be followed by Hovde in rendering its
opinion. Hovde was not requested to and did not make any recommendation to the
Comstock Board of Directors as to the form or amount of consideration to be
offered by First Security to Comstock in the merger, which was determined
through arm's-length negotiations between the parties. In arriving at its
opinion, Hovde did not ascribe a specific range of value to First Security or
Comstock. Rather, Hovde made its determination as to the fairness, from a
financial point of view, of the consideration to be offered by First Security to
Comstock in the merger based upon the financial and comparative analyses
described below. Hovde was not requested to opine as to, and its opinion does
not address, Comstock's underlying business decision to proceed with or effect
the merger.
During the course of the engagement, Hovde reviewed and analyzed
material bearing on the financial and operating conditions of First Security and
Comstock and material prepared in connection with the proposed transaction,
including the following:
(1) the merger agreement,
(2) certain publicly available information concerning First
Security, Comstock, and their subsidiaries, including as
applicable, consolidated financial statements for each of the
three years ended December 31, 1997,
(3) documents filed with the Securities and Exchange Commission,
the Federal Reserve Board, the Office of the Comptroller of
the Currency and certain other state or regulatory agencies
filed by each of the foregoing entities (including
subsidiaries) for the aforementioned three year period and for
the quarterly periods ended March 31, June 30 and September
30, 1998, respectively,
(4) as applicable, recent internal reports for both companies and
financial projections for Comstock,
(5) the nature and terms of recent sale and merger transactions
involving banks and bank holding companies that Hovde
considered relevant, and
(6) financial and other information provided by the management of
Comstock and First Security.
21
<PAGE> 27
In arriving at its opinion, Hovde assumed and relied upon the accuracy
and completeness of the financial and other information used by it without
assuming any responsibility for independent verification of such information,
and further relied upon the assurances of the managements of First Security and
Comstock that they were not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to any financial
projections reviewed by Hovde, Hovde assumed that such projections were
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the managements of either First Security or Comstock. First
Security has indicated to Hovde Financial that the merger will be accounted for
using the purchase method of accounting, and Hovde has assumed that the merger
would generally be treated as a tax-free exchange of shares to Comstock
stockholders. In arriving at its opinion, Hovde did not conduct a physical
inspection of the properties and facilities of First Security or Comstock and
did not make or obtain any evaluations or appraisals of the assets or
liabilities of First Security or Comstock. In addition, Hovde noted that it is
not expert in the evaluation of loan portfolios or allowances for loan and real
estate owned losses and, on advice of Comstock, Hovde assumed that the
allowances for loan and real estate owned losses (as currently stated or as
adjusted in connection with the merger) provided to it by Comstock, which were
used by Hovde in its analysis and in arriving at its opinion, were in the
aggregate adequate to cover all such losses. Hovde's opinion necessarily was
based upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of Hovde's opinion.
The following is a summary of the analyses Hovde Financial performed in
arriving at its January 12, 1999 and March 22, 1999 opinion as to the fairness
of the merger consideration from a financial point of view to Comstock. In
connection with the preparation and delivery of its opinion to the Board of
Directors of Comstock, Hovde performed a variety of financial and comparative
analyses, as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to the
particular circumstances. Therefore, such an opinion is not readily susceptible
to summary description. Furthermore, in arriving at its opinion, Hovde did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Hovde believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the process underlying its opinion. In its analyses, Hovde
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Comstock. Any estimates contained in these analyses were not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth herein. In addition,
analyses relating to the value of businesses did not purport to be appraisals or
to reflect the prices at which businesses may actually be sold.
PURCHASE PRICE ANALYSIS
Hovde calculated the price-to-book, price-to-tangible book, price to
earnings multiple, and deposit premium paid, (defined as the transaction value,
minus the tangible book value, divided by total deposits), in the merger using
September 30, 1998 financial data and based upon an aggregate transaction value
of $65 million. For comparative purposes, Hovde used financial data as of and
for the twelve month period ended September 30, 1998 because this was the most
recent date for which information was publicly available for many of the
Comparable Bank Group companies. In addition, during the quarter ended December
31, 1998, Bancorp's capital increased significantly from the exercise of a
substantial number of outstanding options. This analysis yielded
- a price-to-book value multiple of 352.2%,
- a price-to-tangible book value multiple of 352.2%,
- a price-to-last twelve months' earnings multiple of
19.9x,
- a price-to-estimated 1998 earnings multiple of 20.7x,
and
- a deposit premium of 27.9%.
22
<PAGE> 28
COMPARABLE COMPANY ANALYSIS
Using publicly available information, Hovde compared the financial
performance of Comstock with all other independent commercial banks
headquartered in Nevada (the "Comparable Bank Group"). These banks included the
following:
<TABLE>
<S> <C>
Bank West of Nevada Mesquite State Bank
Community Bank of Nevada Nevada Bank & Trust Company
First National Bank Nevada Banking Company
Great Basin Bank of Nevada Pioneer Citizens Bank of Nevada
Heritage Bank of Nevada Silver State Bank
Las Vegas Business Bank
</TABLE>
Indications of such financial performance and stock market valuation included
profitability (return on average assets and return on average equity); the ratio
of tangible equity to tangible assets; and the ratio of nonperforming assets to
total assets:
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS COMPARABLE BANK
ENDED SEPTEMBER 30, 1998 COMSTOCK BANCORP GROUP MEDIAN
- ------------------------------------------ ---------------- --------------
<S> <C> <C>
Return on average assets.................. 1.67% 1.24%
Return on average equity.................. 20.51% 12.64%
Tangible equity to tangible assets........ 8.02% 9.43%
Nonperforming assets to total assets...... 1.33% 0.07%
</TABLE>
In addition, Hovde compared the financial performance of First Security
with the following publicly traded bank holding companies located in Southern
and Rocky Mountain states with total assets between $5 billion and $25 billion
(the "Comparable Bank Group"). These included
<TABLE>
<S> <C>
AmSouth Bancorporation First American Corporation
Colonial BancGroup, Inc. First Tennessee National Corporation
Commerce Bancshares, Inc. First Virginia Banks, Inc.
Community First Bankshares, Inc. Hibernia Corporation
Compass Bancshares, Inc. Zions Bancorporation
</TABLE>
Indications of such financial performance and stock market valuation included
profitability (return on average assets and return on average equity); the ratio
of tangible equity to tangible assets; and the ratio of nonperforming assets to
total assets:
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS COMPARABLE
ENDED SEPTEMBER 30, 1998 FIRST SECURITY BANK GROUP MEDIAN
- ------------------------------------------ -------------- -----------------
<S> <C> <C>
Return on average assets.................. 1.28% 1.36%
Return on average equity.................. 16.20% 14.78%
Tangible equity to tangible assets........ 7.12% 6.39%
Nonperforming assets to total assets...... 0.22% 0.30%
</TABLE>
Because of the inherent differences in the businesses, operations,
financial conditions and prospects of Comstock, First Security and the companies
included in the Comparable Bank Group, Hovde believed that a purely quantitative
comparable company analysis would not be particularly meaningful in the context
of the merger. Hovde believed that the appropriate use of a comparable company
analysis in this instance would involve qualitative judgments concerning the
differences among First Security, Comstock and the companies included in the
Comparable Bank Group which would affect the trading values of the comparable
companies, First Security and Comstock.
23
<PAGE> 29
COMPARABLE TRANSACTION ANALYSIS
Using publicly available information, Hovde reviewed certain terms and
financial characteristics, including historical price-to-earnings ratio, the
price-to-book ratio, the price-to-tangible book ratio, and the deposit premium
paid at the time of transaction announcement, of commercial banking institution
merger or acquisition transactions in Arizona, Colorado, Nevada, New Mexico and
Utah that were announced from February 1, 1998 to December 30, 1998 (the
"Comparable Bank Transactions Group"):
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS FIRST SECURITY/ COMPARABLE BANK TRANSACTIONS
ENDED SEPTEMBER 30, 1998 COMSTOCK BANCORP * GROUP AVERAGE
- ------------------------------------------ ------------------ ----------------------------
<S> <C> <C>
Price-to-latest twelve months' earnings... 19.9x 16.8x
Price-to-book value....................... 352.2% 337.9%
Price-to-tangible book value.............. 352.2% 349.3%
Deposit premiums paid..................... 27.9% 23.2%**
</TABLE>
- ----------
* Based on the $22.50 closing price of First Security common
stock on January 12, 1999.
** (range of 12.1% to 35.7%)
Because the reasons for and circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the businesses, operations and financial conditions and prospects of Comstock,
First Security and the companies included in the Comparable Bank Transactions
Group, Hovde believed that a purely quantitative comparable transaction analysis
would not be particularly meaningful in the context of the evaluation of the
fairness of the merger consideration. Hovde believed that the appropriate use of
a comparable transaction analysis in this instance would involve qualitative
judgments concerning the differences between the characteristics of these
transactions and the merger which would affect the acquisition values of the
acquired companies and Comstock.
DISCOUNTED TERMINAL VALUE ANALYSIS
Hovde estimated the present value per share of the Comstock common
stock by assuming a range of discount rates from 10% to 15% and a 15% annual
growth rate in earnings through 2003, starting with aggregate earnings of $2.8
million in 1999. In addition, Hovde used a range of P/E multiples
(price-to-earnings) from 18 to 22 in calculating the net present value per
share. This analysis and its underlying assumptions yielded a range of value for
Comstock's shares of approximately $8.45 to $12.33. This compares to a per share
transaction value of $12.53. In arriving at the value of Comstock's book value
at December 31, 2003, Hovde assumed 100% earnings retention from September 30,
1998 through December 31, 2003. These rates and values were chosen to reflect
different assumptions regarding the required rates of return of holders or
prospective buyers of Comstock common stock.
PRO FORMA MERGER ANALYSIS
Hovde analyzed the impact of the merger on Comstock's estimated
earnings per share based on the most recent estimates for 1999 earnings of First
Security published by IBES. In calculating the earnings accretion, Hovde assumed
Comstock's internally estimated 1999 earnings of $2.8 million, resulting in
earnings per fully diluted share of $0.54. Hovde also assumed a range of share
prices from $18.70 on the low end to $24.05 on the high end. Based upon
information provided by the management of Comstock and upon analysts' estimates
for First Security, Hovde then concluded that the merger consideration would
result in accretion on an earnings basis between 48.25% and 80.99% to Comstock's
earnings per share in 1999.
Hovde is a nationally recognized investment banking firm. As part of
its investment banking business, Hovde is continuously engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations for corporate and other
purposes. The Comstock Board of Directors retained Hovde based upon Hovde's
experience and expertise and its familiarity with Comstock and First Security.
Hovde is acting as financial advisor to Comstock in connection with the merger.
Pursuant to a letter agreement with Hovde executed by Comstock on September 15,
1998, Comstock has agreed to pay Hovde a fee equal to 1.375% of the aggregate
consideration payable in connection with the merger, $35,000 of
24
<PAGE> 30
which has been paid to Hovde. The letter agreement with Hovde also provides that
Comstock will reimburse Hovde for its reasonable out-of-pocket expenses incurred
in connection with the merger (up to a maximum of $20,000) and indemnify Hovde
and certain related persons and entities against certain liabilities, including
liabilities under securities laws, incurred in connection with its services
thereunder.
RECOMMENDATION OF COMSTOCK'S BOARD OF DIRECTORS
The Comstock Board of Directors has unanimously adopted and approved
the Agreement and Plan of Reorganization and the transactions contemplated
thereby. The Comstock Board of Directors has unanimously determined that the
merger is fair to and in the best interests of Comstock, its stockholders and
holders of options. THE COMSTOCK BOARD OF DIRECTORS THEREFORE RECOMMENDS A VOTE
FOR ADOPTION AND APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION AND THE
MERGER CONTEMPLATED THEREBY.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS
Some of Comstock's directors and officers have interests in the
acquisition that differ from, or are in addition to, their interests as
stockholders of Comstock. The members of Comstock's Board of Directors knew
about these additional interests and considered them when the Board of Directors
approved the Agreement and Plan of Reorganization and the merger contemplated
thereby.
CHANGE-IN-CONTROL SEVERANCE AND OTHER BENEFITS
Mr. Robert N. Barone, Comstock's Chairman, Chief Executive Officer and
Treasurer, and Mr. Larry Platz, Comstock's President and Secretary, anticipate
receiving substantial change-in-control severance and other benefits as a result
of the merger. See, "The 1999 Annual Meeting of Comstock Stockholders -
Executive Compensation."
EMPLOYMENT AGREEMENTS
After the merger, Messrs. Barone and Platz anticipate serving as
Executive Vice Presidents of First Security Bank of Nevada pursuant to
Employment Agreements having initial terms of six months. These Employment
Agreements provide for monthly base compensation of $17,500 for each of them.
Messrs. Barone and Platz will also be entitled to participate in all fringe
benefit, medical and life insurance, bonus, compensation, retirement, stock
option, pension and other plans sponsored for all employees of First Security,
with credit given for vesting and eligibility purposes for service with Comstock
Bank (but without prior service credit for purposes of accrual of benefits under
First Security's retirement plan). The Employment Agreements also provide that
Messrs. Barone and Platz will not be obligated to repay premiums paid by
Comstock Bank on their split-dollar life insurance policies until October 2009.
See, "The 1999 Annual Meeting of Comstock Stockholders - Executive
Compensation."
The Employment Agreements with First Security Bank of Nevada also
contain noncompete provisions. At the end of the Employment Agreements'
six-month terms, each of Messrs. Barone and Platz will be prohibited for a
period of 18 months thereafter from competing with First Security Bank of Nevada
in any commercial or mortgage banking business. Under the Employment Agreements,
a business is considered to be in competition with First Security Bank of Nevada
if it is engaged in the commercial or mortgage banking business in Washoe
County, Nevada. Each of Messrs. Barone and Platz will receive $4,000 monthly for
the 18-month term of the noncompetition provisions of the Employment Agreements.
25
<PAGE> 31
CONTINUED SERVICE AS A DIRECTOR
The merger agreement provides in Section 6.17 that Mr. Barone will be
elected to serve as a director of First Security Bank of Nevada for a term of
one year from the effective date of the merger.
Although Comstock Bank is a member of the Federal Home Loan Bank of San
Francisco ("FHLBSF"), First Security Bank of Nevada is not. Mr. Barone currently
serves as a director and Vice Chairman of the FHLBSF, and in that capacity
receives annual compensation of approximately $25,600. The merger agreement
provides in Section 6.18 that First Security Bank of Nevada will establish and
maintain membership in the FHLBSF for one year from the effective date of the
merger. Mr. Barone is expected to continue to serve as a director of the FHLBSF
for that period and to receive compensation therefor.
INDEMNIFICATION
The merger agreement provides in Section 6.13 that indemnification
currently available to directors, officers and employees of Comstock and
Comstock Bank under the Articles of Incorporation, Bylaws or other instruments
of Comstock or Comstock Bank will be continued by First Security for a period of
three years after completion of the merger. The Board of Directors of each of
Comstock and Comstock Bank has adopted resolutions indemnifying directors
individually in the maximum amount of $5 million in the aggregate. Additionally,
the merger agreement provides that First Security will use commercially
reasonable efforts to cause the persons serving as directors and officers of
Comstock and Comstock Bank to be covered for a period of three years after
completion of the merger by Comstock Bank's directors' and officers' liability
insurance for acts and omissions occurring prior to completion of the merger.
SUBSTANTIAL PERSONAL INVESTMENTS
Directors and executive officers of Comstock own or have the right to
acquire more than 16% of Comstock's common stock. A substantial portion of their
net worth consists of investment in Comstock common stock. Comstock's Chairman,
Chief Executive Officer and Treasurer, Mr. Robert N. Barone, and the other
directors expect to achieve greater diversification of their personal investment
portfolios following the merger. Many of these individuals have dedicated more
than ten years to building Comstock Bank and Comstock into the company that it
is today. Mr. Robert N. Barone, Comstock and Comstock Bank's Chairman and Chief
Executive Officer, and Mr. Larry A. Platz, Comstock and Comstock Bank's
President, have been with Comstock Bank since 1984, when total assets were less
than $10 million.
On December 28, 1998, each of Messrs. Barone and Platz exercised all
of the stock options they held on that date. Mr. Barone acquired 271,700 shares
for an aggregate option exercise price of approximately $646,985. Mr. Platz
acquired 233,200 shares for an aggregate option exercise price of approximately
$563,235. Funds for payment by Mr. Barone of the exercise price and associated
taxes were obtained from personal funds and from borrowings from one or more
individuals or firms, including Mr. Umberto Fedeli and Resource Management,
Inc., owners of more than 5% of Comstock's common stock, or from one or more
securities firms including Prudential Securities and the Pershing Division of
Donaldson, Lufkin & Jenrette. Funds for payment of the exercise price by Mr.
Platz were obtained by him from personal funds and borrowings from Mr. Barone.
Mr. Barone's borrowings from Mr. Fedeli have been retired by subsequent
borrowings, including margin debt held by one or more securities firms and
financing provided by First Security Bank of Nevada. Hovde Acquisition, L.L.C.,
an entity controlled by the principals of Hovde Financial, Inc., which is acting
as financial advisor to Comstock, also provided financing to Mr. Barone in the
approximate amount of $500,000. Effective March 16, 1999, First Security Bank of
Nevada provided a stock-secured loan to Mr. Barone and his spouse in the amount
of $2.1 million, the proceeds of which were used to pay off Pershing, Prudential
Securities, Hovde Acquisition, L.L.C. and Umberto Fedeli. The First Security
Bank of Nevada loan is a variable rate demand note payable in full no later than
June 5, 1999.
26
<PAGE> 32
CONVERSION OF SHARES; EXCHANGE RATIO
In accordance with the merger agreement, each issued and outstanding
share of Comstock common stock will be converted into the right to receive the
merger consideration (as defined below). Each Comstock stockholder will cease to
have any rights as a Comstock stockholder, except the right to receive the
merger consideration upon the terms and subject to the conditions set forth in
the merger agreement.
CERTAIN DEFINITIONS
The merger agreement provides for the conversion of the Comstock shares
into shares of First Security common stock under an Exchange Ratio that is
somewhat complex. To understand the details of the Exchange Ratio, the following
definitions are provided:
"Average First Security Share Price" means the average of the
closing last sales prices per share of First Security common stock on the NASDAQ
National Market for the ten (10) consecutive trading days prior to the Closing
Date (such period referred to herein as the "Closing Calculation Period").
"Comstock Share Price" means the quotient of (A) the sum of
$65 million divided by (B) the sum of, (1) the total number of issued and
outstanding Comstock shares and (2) the total number of Comstock shares subject
to all vested Comstock Options.
"Exchange Ratio" means (in each case, rounded to the nearest
one one-hundred thousandth of a share and in each case, as adjusted to reflect
any split, combination, dividend or other distribution made prior to the
effective time of the merger),
(i) if the Average First Security Share Price is greater
than or equal to $24.05, the number determined by
dividing the Comstock Share Price by $24.05;
(ii) if the Average First Security Share Price is less
than or equal to $18.70, the number determined by
dividing Comstock Share Price by $18.70; and
(iii) if the Average First Security Share Price is greater
than $18.70 and less than $24.05, the number
determined by dividing the Comstock Share Price by
Average First Security Share Price.
COMSTOCK OPTIONS
Each outstanding option to purchase Comstock shares (a "Comstock
Option") issued under each stock option plan, program, agreement or arrangement
of Comstock (each a "Comstock Stock Plan") that has previously vested or will
have vested upon consummation of the merger (a "Vested Comstock Option") will be
exercised pursuant to a cashless exercise procedure whereby each holder of a
Vested Comstock Option will be entitled to receive on a net basis that number of
Comstock shares equal to X in the following formula:
X = A(B - C)
--------
B
where A equals the number of Comstock shares subject to such Vested Comstock
Option, B equals Comstock Share Price and C equals the strike price of such
Vested Comstock Option; provided, that X will be rounded, in the case of any
Vested Comstock Option other than an "incentive stock option" (within the
meaning of section 422 of the Internal Revenue Code), up and, in the case of any
incentive stock option, down to the nearest whole share, as necessary. The
aggregate number of shares so issuable with respect to all Vested Comstock
Options will be referred to herein as the "Comstock Option Shares." Each
Comstock Option Share will be converted into shares of First Security common
stock pursuant to the merger agreement for the account of the holder of such
Vested Comstock Option.
27
<PAGE> 33
DISSENTING SHARES
Dissenting Shares will not be converted into or represent a right to
receive the merger consideration. A dissenting Comstock stockholder will be
entitled to only such rights as are granted by applicable Nevada law.
(See, "Rights of Dissenting Comstock Stockholders.")
EXCHANGE OF SHARES AND CERTIFICATES
First Security will deposit with the Exchange Agent for the benefit of
the Comstock stockholders, for exchange through the Exchange Agent, (i) cash in
an amount sufficient to pay cash in lieu of fractional shares, and (ii)
certificates representing the shares of First Security common stock.
As soon as reasonably practicable, the Exchange Agent will mail to each
holder of record of a certificate or certificates which represented outstanding
Comstock shares (the "Certificates") whose shares were converted into the right
to receive shares of First Security common stock pursuant to the merger
agreement, (i) a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent and will be in such form and
have such other provisions as First Security may reasonably specify), and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of First Security common stock, and cash in
lieu of fractional shares of First Security common stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by First Security, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate will be entitled
to receive in exchange therefor (i) a certificate representing that whole number
of First Security shares which such holder has the right to receive pursuant to
the provisions of Article III of the merger agreement and (ii) cash in lieu of
any fractional number of First Security shares. Until surrendered each
Certificate will be deemed to represent only the right to receive upon such
surrender the merger consideration and cash in lieu of any fractional shares of
First Security common stock. No interest will be paid or accrue on any cash
payable in lieu of any fractional shares of First Security common stock.
COMSTOCK STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
HAVE RECEIVED TRANSMITTAL LETTERS. COMSTOCK STOCKHOLDERS SHOULD NOT RETURN SHARE
CERTIFICATES WITH THEIR COMSTOCK PROXY VOTING FORMS.
FRACTIONAL SHARES
No certificates representing fractional shares of First Security
common stock will be issued upon the surrender for exchange of Certificates.
Each Comstock stockholder who would otherwise have been entitled to
receive a fraction of a share of First Security common stock in connection with
the merger will receive, in lieu thereof, cash (without interest) in an amount
equal to such fraction multiplied by the Average First Security Share Price.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties of Comstock and Comstock Bank and similar customary representations
and warranties of First Security and First Security Bank of Nevada.
(See, Appendix A)
CERTAIN COVENANTS
Pursuant to the merger agreement, Comstock has made various customary
covenants, including that, during the period from January 12, 1999 until the
effective time of the merger, it and Comstock Bank will: (a) conduct operations
and business in the usual and ordinary course of business; (b) permit First
Security to make such additional investigation of the business and properties of
Comstock as First Security deems reasonably necessary or advisable; (c) use best
efforts to assist First Security in obtaining needed regulatory approvals and
(d) obtain a Phase I environmental report with respect to certain real property
owned by Comstock Bank.
First Security and First Security Bank of Nevada will: (a) use their
best efforts to achieve regulatory approval of the merger; (b) provide directors
and officers of Comstock indemnification against losses suffered as a
28
<PAGE> 34
result of such persons service as a director or officer of Comstock; and (c)
file with the NASDAQ National Market a notification for listing covering shares
issuable in the merger. In addition, First Security will elect Robert N. Barone
as a member of the board of directors of First Security Bank of Nevada, and will
maintain membership of First Security Bank of Nevada in the San Francisco Home
Loan Bank unless there is a compelling business reason not to do so.
CONDITIONS TO THE CLOSING
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY
The respective obligation of each party to effect the Closing is
subject to the satisfaction or waiver at or prior to the Closing of certain
conditions including: (a) the absence of any governmental prohibition or
restriction on the Closing; (b) the absence of any suit, action, investigation,
inquiry or other proceeding seeking to prevent consummation of the merger, if
such suit may reasonably succeed; (c) the effectiveness of all required consents
and approvals from any governmental entities; (d) the receipt by Comstock and
First Security of an opinion of counsel, substantially to the effect that the
merger will constitute a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code; and (e) there shall have been no "excess parachute
payments" under Section 280G of the Internal Revenue Code.
CONDITIONS TO THE OBLIGATIONS OF FIRST SECURITY
The obligation of First Security and First Security Bank of Nevada to
effect the Closing is further subject to the satisfaction (or waiver by First
Security) at or prior to the Closing Date of the certain conditions including:
the absence of any developments or events having a material adverse effect on
the business of Comstock, Comstock maintaining a net worth of at least
$16,658,575, subject to certain adjustments, the approval of the merger by
Comstock stockholders, and the execution and delivery of employment agreements
with Messrs. Barone and Platz. In addition, all options and warrants on Comstock
common stock must be exercised or cancelled.
TERMINATION
The merger agreement may be terminated at any time prior to the
Closing:
(a) by the mutual consent of First Security and Comstock;
(b) by either party under certain conditions if the Closing
has not taken place on or before October 12, 1999;
(c) by First Security upon written notice to Comstock if a
majority of the Comstock common stock does not approve the merger
agreement, or if the merger agreement is disapproved by a regulatory
agency whose approval is legally necessary.
(d) by either party upon certain breaches by the other party
of any representation, warranty, covenant or agreement set forth in the
merger agreement. In the event of the termination of the merger
agreement, all of the obligations and liabilities of the parties under
the merger agreement shall terminate.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS
Subject to certain exceptions set forth in the merger agreement, none
of the representations and warranties and covenants of Comstock and First
Security contained in the merger agreement shall survive the Closing
29
<PAGE> 35
AMENDMENT, MODIFICATION AND WAIVER
The merger agreement may not be amended, modified or waived except by
an instrument or instruments in writing signed and delivered on behalf of each
of the parties to the merger agreement.
ACCOUNTING TREATMENT OF THE MERGER
First Security expects that the merger will be accounted for as a
"purchase" under generally accepted accounting principles. Purchase accounting
calls for First Security to recognize any premium it is paying for Comstock as
"goodwill" which will affect some financial ratios of importance to regulators
and the investment community. Purchase accounting also allows First Security to
step up its basis in the assets of Comstock for income tax purposes.
THE EFFECT OF THE MERGER ON COMSTOCK EMPLOYEE BENEFIT PLANS
All retirement and health insurance plans maintained by Comstock or
Comstock Bank for the benefit of employees will remain in effect without
substantive change until the merger takes place, except as may be required by
applicable law in connection with the intended termination of these plans as
part of the merger. Comstock and First Security will determine whether it is in
the best interests of the parties and the employees of Comstock to terminate
Comstock's 401(k) Plan or to merge such plan into a First Security benefit plan;
provided, however, that no accounts will be permitted to roll-over to First
Security's 401(k) plan without the express written consent of the trustee and
sponsor of First Security's 401(k) plan to such roll-over, which approval will
not be given in any event without receipt of such documentation from Comstock as
may be requested by First Security, including, without limitation, an Internal
Revenue Service ruling obtained by Comstock approving the roll-over and ensuring
the qualification of the First Security 401(k) plan if it accepts such
roll-overs.
The current Comstock health insurance plan likely will terminate when
the merger takes place. Subject to applicable law, all Comstock employees
retained after the merger will be eligible to participate in the First Security
health insurance plan now in effect, in accordance with its terms.
REGULATORY APPROVALS
Consummation of the merger is conditioned on the receipt of all
requisite regulatory approvals, including prior approval of the Federal Reserve
Board of the merger and of the specific ability of First Security to own and
operate Comstock under current federal banking regulatory parameters.
The Federal Reserve Board must approve the merger. It is still
reviewing the merger agreement transactions and their effects as of the date of
this Prospectus/Proxy Statement. First Security does not know of any reason why
the Federal Reserve Board will not approve the transactions contemplated in the
merger agreement in a timely fashion, although there can be no assurance that
such approvals will be obtained, and, if obtained, there can be no assurance as
to the date of any such approvals or the absence of any litigation challenging
such approvals.
The Federal Reserve Board and the State of Nevada also must approve the
merger, with a particular emphasis on the combination of Comstock Bank with and
into First Security Bank of Nevada. These agencies are still reviewing the
merger agreement transactions and their effects as of the date of this
Prospectus/Proxy Statement. First Security does not know of any reason why the
Federal Reserve Board or the State of Nevada will not approve the transactions
contemplated in the merger agreement in a timely fashion, although there can be
no assurance that such approvals will be obtained, and, if obtained, there can
be no assurance as to the date of any such approvals or the absence of any
litigation challenging such approvals.
The U.S. Department of Justice will receive a copy of the application
filed with the Federal Reserve Board and will have 30 days within which to
challenge the merger agreement on antitrust grounds.
First Security, as an acquiring bank holding company, is required to
file a notice with the Federal Reserve Board that describes the proposed Merger
and the proposed activities of First Security Bank of Nevada following the
merger, including the effect of First Security's ownership of Comstock Bank on
competition among entities that engage in such activities, the identity of the
parties involved in the transaction, a description of the public benefits that
may be expected from the proposal, a description of the terms of the
transaction, the sources of funds for the transaction and
30
<PAGE> 36
other financial and managerial information. The information included in the
notice and other requests for information will allow the Federal Reserve Board,
when considering approval of the merger, to take into consideration the
financial and managerial resources and prospects of the existing and combined
institutions and the benefits that may be expected from the merger. The Federal
Reserve Board will, among other things, evaluate the adequacy of the capital and
management levels of the acquiring bank holding company both before and
following the proposed transaction.
First Security filed its notice with the Federal Reserve Board on March
12, 1999.
The Federal Reserve Board may deny a request for approval of an
acquisition by a bank holding company if it determines that the transaction
would result in a monopoly or be in furtherance of any combination or conspiracy
to monopolize or to attempt to monopolize a given business activity in any part
of the United States, or if its effect in any section of the country would be
substantially to lessen competition or to tend to create a monopoly, or if it
would in any other manner result in a restraint of trade, unless the Federal
Reserve Board finds that the anticompetitive effects of a transaction are
clearly outweighed by the probable effects of the transaction in providing
benefits to the public.
Applicable federal law provides for the publication of notice and
public comment on notice applications filed with the Federal Reserve Board. The
merger may not be consummated until after Federal Reserve Board approval is
obtained.
THERE IS NO ASSURANCE THAT THESE REGULATORY APPROVALS WILL BE RECEIVED
TIMELY OR AT ALL.
AN APPROVAL BY THE FEDERAL RESERVE BOARD OR THE NEVADA DIVISION OF
FINANCIAL INSTITUTIONS REFLECTS ONLY THE VIEW THAT THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT DO NOT CONTRAVENE APPLICABLE COMPETITIVE
STANDARDS IMPOSED BY LAW, AND THAT SUCH TRANSACTIONS ARE CONSISTENT WITH
REGULATORY POLICIES RELATING TO SAFETY AND SOUNDNESS. AN APPROVAL BY THE
FEDERAL RESERVE BOARD OR THE NEVADA DIVISION OF FINANCIAL INSTITUTIONS IS NOT
AN OPINION BY THE FEDERAL RESERVE BOARD OR THE NEVADA DIVISION OF FINANCIAL
INSTITUTIONS THAT THE MERGER TRANSACTIONS ARE FAVORABLE TO THE COMSTOCK
STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW OR THAT THE FEDERAL RESERVE BOARD
OR THE NEVADA DIVISION OF FINANCIAL INSTITUTIONS HAS CONSIDERED THE ADEQUACY OF
THE TERMS OF THE TRANSACTIONS; AND AN APPROVAL BY THE FEDERAL RESERVE BOARD OR
THE NEVADA DIVISION OF FINANCIAL INSTITUTIONS IS NOT AN ENDORSEMENT OR
RECOMMENDATION OF THE MERGER AGREEMENT.
FEDERAL INCOME TAX ASPECTS
THE MERGER
The following is a summary of certain Federal income tax consequences
of the merger to the Comstock stockholders that exchange such stock for First
Security common stock pursuant to the merger. This summary addresses only such
stockholders who hold First Security common stock received in exchange therefor
as a capital asset. This does not address all Federal income tax considerations
that may be relevant to particular stockholders in light of their individual
circumstances or to stockholders that are subject to special rules, such as
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, foreign stockholders, Comstock stockholders who hold their
Comstock shares as part of a straddle, hedging or conversion transaction, and
stockholders who acquired their Comstock shares pursuant to the exercise of
employee stock options or otherwise as compensation. The following summary is
based upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), applicable Treasury Regulations thereunder, judicial
decisions and current administrative rulings, as of the date hereof, all of
which are subject to change, possibly on a retroactive basis. Tax consequences
under state, local, foreign, and other laws are not addressed herein. Each
stockholder is advised to consult his or her tax advisor as to the particular
facts and circumstances which may be unique to such stockholder and also as to
any estate, gift, state, local or foreign tax considerations arising out of the
merger.
No rulings have been or will be requested from the Internal Revenue
Service with respect to any matters discussed herein. There can be no assurances
that future legislation, regulations, administrative rulings or court decisions
would not alter the tax consequences set forth below. The obligation of each of
First Security and Comstock to consummate the merger is conditioned on its
receipt of an opinion from Ray, Quinney & Nebeker, based on such facts,
representations, and assumptions as counsel may reasonably deem relevant
(including certain representations regarding the recognition of gains or losses
by Comstock Stockholders), to the effect that the merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the
31
<PAGE> 37
Internal Revenue Code. The following summary assumes that the merger will be
consummated as described in the Agreement and Plan of Merger and this Proxy
Statement/Prospectus/Consent Solicitation.
TREATMENT OF FIRST SECURITY AND COMSTOCK
No gain or loss will be recognized by First Security or Comstock as a
result of the merger.
EXCHANGE OF COMSTOCK SHARES FOR FIRST SECURITY COMMON STOCK
Subject to the discussion of the Taxation of the Option Holders below,
(i) a holder of Comstock shares whose Comstock shares are exchanged in the
merger into First Security common stock will not recognize gain or loss, except
to the extent of cash, if any, received in lieu of fractional shares (see,
"--Cash in Lieu of Fractional Shares" below), (ii) the aggregate tax basis of
the First Security common stock received by such holder will be equal to the
aggregate tax basis of the Comstock shares exchanged therefor (excluding any
portion of the holder's basis allocated to fractional shares), and (iii) the
holding period of First Security common stock received will include the holding
period of the Comstock shares exchanged therefor.
TAXATION OF OPTION HOLDERS
As described in "The Merger--Conversion of Shares-Exchange Ratio" and
"The Merger--Comstock Options," (i) each Vested Comstock Option will be
exercised pursuant to a cashless exercise procedure, and (ii) the net number of
Comstock shares issuable upon such exercise will be converted into First
Security common stock pursuant to the Exchange Ratio. In connection with such
exercise, each holder of Vested Comstock Options, who has received such options
for the performance of services, may recognize ordinary income in an amount
equal to the fair market value of the net number of Comstock shares issuable
pursuant to the cashless exercise procedure. Such income will be subject to
income tax withholding requirements at the statutory rates. In addition, to the
extent certain stockholder approval requirements have not been satisfied, such
income may be subject to the excise tax provisions of Section 280G of the
Internal Revenue Code, applicable to "excess parachute payments".
CASH IN LIEU OF FRACTIONAL SHARES
A holder of Comstock shares who receives cash in lieu of fractional
shares of First Security common stock will be treated as having received such
fractional shares pursuant to the merger, and then as having exchanged such
fractional shares for cash in a redemption by First Security. The amount of such
gain or loss will be equal to the difference between the ratable portion of the
tax basis of the Comstock shares exchanged in the merger that is allocated to
such fractional shares and the cash received in lieu thereof. Any such capital
gain or loss will constitute long term capital gain or loss if such Comstock
shares have been held by the holder for more than one year at the time of the
consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to tax at a rate not to
exceed 20%.
DISSENTING COMSTOCK STOCKHOLDERS
A Comstock stockholder who receives solely cash in exchange for
Comstock common stock in the merger pursuant to the exercise of dissenter's
rights under applicable Nevada law will recognize capital gain or loss at the
time of the consummation of the merger equal to the difference between the tax
basis of the Comstock shares surrendered and the amount of the cash received
therefor. Such capital gain or loss will constitute long-term capital gain or
loss if such Comstock shares have been held for more than one year at the time
of the consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to a tax at a rate not to
exceed 20%.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT
APPLY TO ALL COMSTOCK STOCKHOLDERS. COMSTOCK STOCKHOLDERS ARE URGED TO CONSULT
THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER.
RIGHTS OF DISSENTING COMSTOCK STOCKHOLDERS
32
<PAGE> 38
Holders of Comstock common stock are entitled to exercise dissenters'
rights under Chapter 92A, Sections 92A.300 through 92A.500 of the Nevada Revised
Statutes. Option holders are not entitled in their capacities as option holders
to exercise dissenters' rights. A stockholder of Comstock will be entitled to
relief as a dissenting stockholder if and only if he or she complies strictly
with all of the procedural and other requirements of Sections 92A.300 through
92A.500 of the Nevada Revised Statutes. A copy of Sections 92A.300 through
92A.500 is attached hereto as Appendix C. The following summary does not purport
to be a complete statement of the method of compliance with Sections 92A.300
through 92A.500. The following summary is qualified in its entirety by reference
to the copy of Sections 92A.300 through 92A.500 attached hereto as Appendix C.
NEVADA REVISED STATUTES SECTION 92A.380
Stockholders of a Nevada corporation have the right to dissent from
certain corporate actions in certain circumstances. According to Nevada Revised
Statutes Section 92A.380.1(a)(1), these circumstances include consummation of a
merger requiring approval of the corporation's stockholders. Stockholders who
are entitled to dissent are also entitled to demand payment in the amount of the
fair value of their shares.
NEVADA REVISED STATUTES SECTION 92A.410 AND SECTION 92A.420
According to Nevada Revised Statutes Section 92A.420.1, stockholders of
Comstock who wish to assert dissenters' rights:
- must deliver to Comstock BEFORE the vote is taken at the
Annual Meeting written notice of their intent to demand
payment for their Comstock common stock if the merger is
completed, and
- must not vote their shares in favor of the Agreement and Plan
of Reorganization.
Stockholders failing to satisfy these requirements will not be entitled to
dissenters' rights under Chapter 92A of the Nevada Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.430
A written dissenter's notice (a "DISSENTER'S NOTICE") will thereafter
be sent by the "SUBJECT Corporation" to all stockholders of Comstock who
satisfied these two requirements (written notice of intent to demand payment and
not voting in favor of the merger). Nevada Revised Statutes Section 92A.430.1.
The written dissenters' notice is required to be sent within 10 days after we
complete the merger. According to Section 92A.335 of the Dissenters' Rights
Statute, Comstock is deemed to be the "SUBJECT CORPORATION" before the merger
occurs, but First Security will be the "SUBJECT CORPORATION" after the merger
occurs. The Dissenter's Notice to be sent by First Security must include:
- a statement of where the demand for payment is to be sent and
where and when certificates for Comstock common stock are to
be deposited;
- a statement informing the holders of Comstock common stock not
represented by certificates to what extent the transfer of
such shares will be restricted after the demand for payment is
received;
- a form for demanding payment. This form will require
stockholders asserting dissenters' rights to certify whether
they acquired beneficial ownership of the shares before the
date when the terms of the merger were announced to the news
media or the stockholders (the "ANNOUNCEMENT DATE," which was
January 13, 1999);
- a date by which the Subject Corporation must receive the
demand for payment, which may not be fewer than 30 or more
than 60 days after the date the Dissenter's Notice was
delivered; and
- a copy of Section 92A.300 through Section 92A.500 of the
Nevada Revised Statutes.
33
<PAGE> 39
NEVADA REVISED STATUTES SECTION 92A.440
Comstock stockholders exercising dissenters' rights must thereafter
- demand payment;
- certify whether they acquired beneficial ownership of Comstock
common stock before the January 13, 1999 Announcement Date;
and
- deposit their certificates in accordance with the terms of the
Dissenter's Notice.
Nevada Revised Statutes Section 92A.440.3 provides that stockholders of
Comstock who fail to demand payment or deposit their certificates where required
by the dates set forth in the Dissenters' Notice will not be entitled to payment
for the shares as provided under Chapter 92A of the Nevada Revised Statutes. A
stockholder who desires to exercise dissenters' rights but who fails to follow
the foregoing procedures will not be entitled to demand payment of and receive
the fair value of his shares of Comstock pursuant to the Dissenters' Rights
Statute included herewith as Appendix C. Instead, that stockholder would receive
the same merger consideration per share stockholders of Comstock who do not
exercise dissenters' rights will receive.
NEVADA REVISED STATUTES SECTION 92A.460
First Security will be required under Nevada Revised Statutes Section
92A.460.1 to pay each dissenter who complied with Section 92A.440 (demand for
payment; certification that he acquired the shares before the January 13, 1999
Announcement Date; and deposit of share certificates) the amount First Security
estimates to be the fair value of the dissenter's shares of Comstock common
stock, plus accrued interest. The payment must be made by First Security within
30 days after First Security receives the dissenter's demand for payment. The
payment must be accompanied by
- a copy of First Security's financial statements for the year
ended December 31, 1998 as well as First Security's most
current interim financial statements;
- a statement of First Security's estimate of the fair value of
the dissenter's shares of Comstock common stock;
- an explanation of how interest was calculated;
- a statement of the dissenter's rights to demand payment under
Section 92A.480 of the Nevada Revised Statutes of the
dissenter's estimate of the value of the Comstock common stock
(discussed below); and
- a copy of Section 92A.300 through Section 92A.500 of the
Nevada Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.470
However, First Security may withhold payment from dissenters who became
the beneficial owners of shares of Comstock common stock on or after the January
13, 1999 Announcement Date. Nevada Revised Statutes Section 92A.470.1. If
payment is withheld in this fashion by First Security, it must estimate the fair
value of the dissenter's shares of Comstock common stock (plus accrued interest)
and offer to pay this amount to each dissenter in full satisfaction of his
demand. First Security would have to send this offer to all dissenters with a
statement of First Security's estimate of the fair value of the shares of
Comstock common stock, an explanation of how interest was calculated and a
statement of the dissenters' rights to demand payment under Section 92A.480 of
the Nevada Revised Statutes.
NEVADA REVISED STATUTES SECTION 92A.480
Nevada Revised Statutes Section 92A.480 provides that a dissenter who
believes that the amount paid under Section 92A.460 or offered under Section
92A.470 is less than the full value of his shares of Comstock common stock or
that the interest due is incorrectly calculated, may, within 30 days after First
Security made or offered payment for the shares, either (i) notify First
Security in writing of his own estimate of the fair value of the shares of
Comstock
34
<PAGE> 40
common stock and the amount of interest due and demand payment of this estimate
(less any payments made under Section 92A.460 of the Nevada Revised Statutes),
or (ii) reject the offer for payment made by First Security under Section
92A.470 and demand payment of the fair value of his shares and interest due.
NEVADA REVISED STATUTES SECTION 92A.490
If a demand for payment remains unsettled, First Security must commence
a court proceeding within 60 days after receiving a demand, petitioning the
court to determine the fair value of the shares of Comstock common stock and
accrued interest. All dissenters whose demands remain unsettled would be made a
party to such proceeding, which would be conducted in the district court of
Washoe County, Nevada. If First Security fails to do so, it would be required
under Section 92A.490 to pay the amount demanded to each dissenter whose demand
remains unsettled. Dissenters would be entitled to a judgment
- for the amount determined by the district court to represent
the fair value of their shares, plus accrued interest, less
any amount paid pursuant to Section 92A.460 of the Nevada
Revised Statutes; or
- for the amount determined by the district court to represent
the fair value of shares acquired on or after the January 13,
1999 Announcement Date, plus accrued interest, if and to the
extent First Security withheld payment for those shares under
Section 92A.470.
NEVADA REVISED STATUTES SECTION 92A.500
The district court would assess the costs of the proceedings against
First Security, unless the court finds that all or some of the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment. The court
may also assess against First Security or the dissenters the fees and expenses
of counsel and experts for the respective parties, in the amount the court finds
equitable.
THE REQUIRED DISSENTERS RIGHTS' PROCEDURE MUST BE FOLLOWED EXACTLY OR ANY
DISSENTERS' RIGHTS MAY BE LOST.
RESALE OF FIRST SECURITY SHARES RECEIVED IN THE MERGER
The shares of First Security common stock to be issued to Comstock
stockholders in connection with the merger will be registered with the
Securities and Exchange Commission under the provisions of the Securities Act of
1933 ("the Securities Act").
Resales of the First Security common stock received in connection with
the merger agreement will need to be in compliance with applicable state
securities laws and regulations, and this compliance will be the responsibility
of the selling or transferring stockholder. For most Comstock stockholders, the
First Security shares received in the merger will be freely transferable.
First Security shares received by persons who are deemed to be
"affiliates" of Comstock for purposes of Rule 145 under the Securities Act, may
be resold by them only in transactions permitted by such Rule, or as otherwise
permitted under the Securities Act. Rule 145 applies certain of the requirements
and provisions of Rule 144 (applicable to unregistered shares) to registered
shares received by an affiliate of a party to a merger transaction. Rule 144, in
turn, applies certain restrictions on method and amount of securities sales. As
a condition to the Closing on the merger agreement, each person who is so
identified is required to deliver to First Security at or prior to Closing a
written agreement satisfactory to counsel for First Security that such person
and his or her "associates" (as defined for purposes of Rule 145) will not offer
to sell or otherwise dispose of any shares of First Security common stock issued
to such person or his or her associates pursuant to the merger agreement in
violation of the Securities Act or the regulations thereunder.
35
<PAGE> 41
INFORMATION ABOUT FIRST SECURITY
GENERAL
First Security is a Delaware incorporated multi-bank holding company
headquartered in Salt Lake City, Utah. At December 31, 1998, First Security and
its subsidiaries had total consolidated assets, deposits, and stockholders'
equity of $21.7 billion, $12.7 billion and $1.6 billion, respectively. Its main
executive offices are located at 79 South Main Street, Salt Lake City, Utah
84111, telephone 801-246-6000.
The principal assets of First Security are all of the capital stock of
First Security Bank, N.A. and First Security Bank of New Mexico, N.A., both of
which provide a broad range of banking, fiduciary, and other financial services.
Based on assets of approximately $15.0 billion at June 30, 1998, First Security
Bank, N.A. was ranked the 52nd largest commercial bank in the United States, and
is the largest bank in the State of Utah and the second largest bank in the
State of Idaho. First Security Bank of New Mexico, N.A. also has offices in
Oregon and Wyoming. At December 31, 1998 First Security Bank, N.A. had 244
branches. Based on deposits of $1.1 billion at December 31, 1997, First Security
Bank of New Mexico, N.A. was ranked the 3rd largest bank in the State of New
Mexico, and the second largest in the Albuquerque market. It currently has 34
branches.
First Security also owns 100% of the outstanding capital stock of First
Security Bank of Nevada, a Nevada state bank, 100% of the shares of First
Security Bank of Southern New Mexico, N.A., a national bank headquartered in Las
Cruces, New Mexico, and 100% of the outstanding shares of First Security Bank of
California, N.A., a national bank headquartered in Irvine, California. (All of
First Security's banking subsidiaries will be referred to hereafter as "the
First Security Banks".) Along with these banking organizations, First Security
also directly or indirectly owns the stock of various nonbank companies engaged
in businesses related to banking and finance, including management services,
securities brokerage, equipment leasing, insurance and investment management,
mutual funds, and a small business investment company.
In addition to its equity investment in subsidiaries, First Security
directly or indirectly raises funds principally to finance the operations of its
nonbank subsidiaries. A substantial portion of First Security's annual income is
typically derived from dividends directly from its bank and nonbank
subsidiaries, and from interest on loans to First Security's nonbank
subsidiaries.
COMPETITION
As noted above, First Security Bank, N.A. is the largest bank in Utah,
the second largest bank in Idaho, the 6th largest bank in Oregon, and the 5th
largest bank in Wyoming. As also noted, First Security Bank of New Mexico, N.A.
is the third largest bank in New Mexico (second largest in Albuquerque). In
California, Nevada, and Southern New Mexico, First Security's banks are smaller,
more localized competitors, with competition coming from a variety of larger
banks and credit unions.
First Security's banks compete with other banking organizations in the
states in which they operate on the basis of price, service and convenience.
Other types of financial institutions, such as savings banks, savings and loan
associations, and credit unions offer a wide range of deposit and loan services
(including commercial loans) and, in some instances, fiduciary services. The
First Security Banks also compete with brokerage firms and mutual funds, which
provide the substantial equivalent of checking accounts, credit cards and
similar devices that strongly resemble deposit products. Major retailers compete
for loans by offering credit cards and retail installment contracts. It is
anticipated that competition from nonbank organizations will continue to grow.
DESCRIPTION OF FIRST SECURITY'S CAPITAL STOCK
The following statements are brief summaries of the material provisions
relating to First Security's preferred stock and First Security common stock and
are qualified in their entirety by the provisions of First Security's
Certificate of Incorporation, which has been filed with the Securities and
Exchange Commission. See, "Comparative Rights of Stockholders."
36
<PAGE> 42
PREFERRED STOCK
The Certificate of Incorporation authorizes the issuance of 400,000
shares of preferred stock with no par value ("Preferred Stock"). On December 31,
1998, there were 9,208 shares of $3.15 Cumulative Convertible Preferred Stock,
Series "A" (the "Series A Preferred Stock") outstanding. Holders of Series A
Preferred Stock have the right to receive semi-annual dividends at the annual
rate of $3.15 per share. Such right is cumulative and such dividends are payable
before dividends may be paid on the First Security common stock. The Series A
Preferred Stock is convertible into the First Security common stock at a ratio
of 41.00625 shares of First Security common stock for each share of Series A
Preferred Stock. This conversion right is subject to adjustment in certain
events to protect against dilution of the conversion rights attached to the
Series A Preferred Stock. In the event of a liquidation, dissolution or winding
up of First Security, the holders of Series A Preferred Stock are entitled to
receive cash value of $52.50 per share plus unpaid accumulated preferred
dividends before any distribution is made to holders of the First Security
common stock. First Security may, at the option of the Board of Directors,
redeem the whole or any part of the outstanding Series A Preferred Stock at the
redemption price of $52.50 per share plus unpaid accumulated preferred
dividends.
Holders of First Security's Series A Preferred Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders. Voting
for the election of directors is not cumulative. If at any time four or more
semi-annual dividends on the Series A Preferred Stock are in default, in whole
or in part, the holders of the Series A Preferred Stock as a class will be
entitled to elect four directors and the holders of the First Security common
stock will be entitled to elect the remaining directors. Holders of any
additional Preferred Stock hereafter issued may have such full or limited voting
rights as are provided by the Board of Directors.
The Board of Directors of First Security is authorized by the
Certificate of Incorporation to provide, without further stockholder action, for
the issuance of one or more series of preferred stock. The Board of Directors
has the power to fix various terms with respect to each series, including voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations, restrictions and redemption,
conversion or exchangeability provisions. Holders of preferred stock have no
pre-emptive rights. The Series A Preferred Stock is not publicly traded.
COMMON STOCK
First Security is authorized to issue 600,000,000 shares of First
Security common stock with a par value of $1.25 per share. As of December 31,
1998, there were outstanding 186,712,124 (net of Treasury Stock) shares of First
Security common stock. (See, "First Security Corporation Selected Financial
Data, at page 11) Payment of dividends on the First Security common stock is
also subject to the prior rights of First Security's outstanding Series A
Preferred Stock.
The holders of First Security common stock are entitled to voting
rights for the election of directors and for other purposes, subject to the
voting rights of the holders of Preferred Stock conferred by law and to the
specific voting rights granted to each series of Preferred Stock and to voting
rights which may in the future be granted to subsequently created series of
Preferred Stock.
Holders of First Security common stock are entitled to receive
dividends when and if declared by the Board of Directors of First Security out
of any funds legally available therefor, and are entitled upon liquidation,
after claims of creditors and preferences of First Security's Series A Preferred
Stock and any other series of Preferred Stock hereafter authorized, to receive
pro rata the net assets of First Security. First Security common stock has no
pre-emptive or conversion rights.
STOCKHOLDER RIGHTS PLAN
As of August 28, 1989, the Company adopted a Stockholder Rights
Agreement ("the Plan") and the Board of Directors of the Company on that date
(a) declared a dividend of one "Right" for each share of Common Stock held of
record as of the close of business on September 8, 1989, and (b) authorized the
issuance of one Right to attach to each share of Common Stock issued after
September 8, 1989, and prior to the occurrence of certain events described in
the Plan. The Rights are attached to all Common Stock certificates that were
outstanding on September 8, 1989, or have been issued since that date (including
the shares of First Security common stock to be issued to Comstock
stockholders), and no separate Rights Certificates have been or will be
distributed until the occurrence of certain events described in the Rights
Agreement. Until such separation, no Right may be exercised or traded separately
from the Common Stock certificate to which it is attached. Following separation,
the Rights may,
37
<PAGE> 43
depending upon the occurrence of certain events described in the Rights
Agreement, entitle the holders thereof to either purchase or receive additional
shares of Common Stock. Technical amendments were made to the Plan twice between
1989 and October 28, 1998. The Rights will expire at the close of business on
August 28, 1999, unless earlier redeemed by the Company in accordance with the
terms of the Plan.
On October 26, 1998, the Company amended the price at which a
registered holder would be entitled to purchase from the Company one
one-thousandth of a share of the Company's Junior Series B Preferred Stock,
without par value. The Exercise Price had formerly been set at $100 per right
(before adjustment for the Company's 1991, 1992, 1996, 1997 and 1998 3-for-2
stock splits, or $13.17 after split adjustments), and has been amended to so as
to be set at $85 per right (after adjustment for such stock splits).
The Board also adopted a new plan with legal and technical innovations
over the Plan (the "Successor Rights Plan") in its action on October 26, 1998.
The Successor Rights Plan will take effect upon the expiration of the existing
rights on August 28, 1999. There is no material difference between the Plan, as
now amended, and the Successor Rights Plan that will be effective upon the
expiration of the Plan. In connection with the Successor Rights Plan, the Board
declared a dividend of one right (a "Successor Right") for each outstanding
share of common stock payable on August 28, 1999 to the stockholders of record
as of that date.
First Security's rights plans are designed to protect First Security's
stockholders' interests in the event of an unsolicited attempt to acquire First
Security, including a gradual accumulation of shares in the open market. First
Security believes that these plans provide protection against a partial or
two-tier tender offer that does not treat all stockholders equally and against
other coercive takeover tactics which could impair First Security's Board of
Directors' ability to represent First Security's stockholders fully. Management
believes that the Rights should also deter any attempt by a controlling
stockholder to take advantage of First Security through self-dealing
transactions. First Security's rights plans are not intended to prevent a
takeover of First Security. Issuing the Rights has no dilutive effect, does not
affect reported earnings per share, and does not change the way in which First
Security's shares are traded. However, the exercise of Rights by some but not
all of First Security's stockholders would have a dilutive effect on
nonexercising stockholders. Moreover, some may argue that the Plan has the
potential for "entrenching" current management by allowing current voting
stockholders to increase their voting shares, thus making a tender offer more
difficult and costly.
Shares of First Security common stock do not have cumulative voting
rights.
First Security common stock is not subject to redemption by either
First Security or a stockholder, but there is no restriction on the repurchase
by First Security of shares of First Security common stock except for certain
regulatory limits.
First Security's Certificate of Incorporation provides that, in
general, an affirmative vote of not less than 80% of the outstanding shares of
First Security common stock is required to approve or authorize certain major
corporate transactions involving First Security and holders of more than 10% of
the First Security common stock (including certain mergers, substantial
dispositions of assets, liquidation or dissolution, or recapitalization). The
80% vote is not required in some such circumstances, including certain
transactions which have been approved in advance by a majority of the Board of
Directors, or where holders of First Security common stock receive a price per
share that satisfies the fairness criteria set forth in the Certificate of
Incorporation.
[THIS SPACE LEFT BLANK INTENTIONALLY]
38
<PAGE> 44
INFORMATION ABOUT COMSTOCK
GENERAL
Incorporated in Nevada, Comstock is a bank holding company registered
under the Bank Holding Company Act. Comstock's sole operating subsidiary is
Comstock Bank, a commercial bank chartered by the State of Nevada. Comstock has
no significant operations independent of Comstock Bank. Comstock Bank conducts a
general banking business, including the acceptance of demand, savings, and time
deposits and the making of commercial, real estate, installment and other term
loans. Comstock Bank's deposit accounts are insured up to the maximum legal
limits by the FDIC. Comstock Bank offers checking and savings accounts,
certificates of deposit, money market and NOW accounts, and commercial real
estate, residential real estate, residential construction, commercial and
installment loans. Comstock Bank operates five ATM machines, one at each of its
full-service branches, and offers its customers night depository services,
bank-by-mail, and Visa cards.
Comstock Bank provides its lending and deposit services primarily to
businesses and individuals in the northern Nevada area. Deposits are gathered
primarily from the Reno, Sparks and Carson City areas. However, Comstock Bank's
lending area extends throughout all parts of northern Nevada, including Reno,
Sparks, Carson City, Minden/Gardnerville, Dayton, Incline Village and other
communities at Lake Tahoe.
Comstock Bank's primary lending business is real estate construction
and development loans, as well as first mortgages on existing single family
homes. The majority of Comstock Bank's lending is to the real estate industry
(both individual homeowners and developers), primarily in northern Nevada.
Beginning in 1995, Comstock Bank began to focus on commercial lending, including
commercial real estate development, and on more traditional commercial lending
to the area's small businesses. In 1998, Comstock Bank's commercial loan
originations totaled $110 million. Construction and development loans are higher
in risk than first mortgage loans to purchasers of single family homes, because
underwriting decisions on construction and development loans require reliance
upon projected data and because loan repayment is dependent on the full and
satisfactory completion of a construction or development project. Corresponding
to the greater lending risk are generally higher interest rates, additional fee
income and shorter note lives when compared to lending such as first mortgage
lending.
First mortgage lending on single family homes has been a mainstay for
Comstock Bank since the mid-1980s. Typically, Comstock Bank does not retain
these mortgages in its portfolio, because the long-term nature of mortgages
would not match the shorter-term nature of the deposit liabilities that provide
Comstock Bank with funds for lending. Because of that maturity mismatch,
Comstock Bank is, like other financial institutions, subject to the risk of
changes in interest rates. Comstock Bank attempts to manage interest rate risk
by a number of means, including sale of mortgages and mortgage servicing rights
in the secondary market. In addition to promoting interest rate risk management,
sales of loans in the secondary market represent an opportunity for Comstock
Bank to realize a profit on sale and obtain funds for additional lending.
Comstock is a legal entity separate and distinct from its subsidiary.
Accordingly, the right of Comstock, and thus the right of Comstock's creditors,
to participate in any distribution of the assets or earnings of any subsidiary,
other than in its capacity as a creditor of such subsidiary, is subject to the
prior payment of claims of creditors of such subsidiary. The principal sources
of Comstock's revenues are dividends and fees from its subsidiary. See,
"Regulation And Supervision -- Limits On Dividends And Other Payments" for a
discussion of the restrictions on Comstock Bank's ability to pay dividends to
Comstock.
At December 31, 1998, Comstock's total assets were $225.15 million, its
total deposits were $196.25 million, and its total stockholders' equity was
$21.59 million. In 1998, Comstock Bank originated $303.15 million of loans, of
which $162.81 million (53.7%) were 1-to-4 family mortgage loans sold in the
secondary market, which exceeded Comstock Bank's total average assets in 1998 of
$209.44 million.
Comstock's executive offices are located at 6275 Neil Road, Reno,
Nevada 89511, and its telephone number is (775) 824-7100. Comstock common stock
is traded on the Nasdaq SmallCap Market under the symbol "LODE". As of March 19,
1999, there were approximately 5,113,900 shares outstanding.
39
<PAGE> 45
SUPERVISION AND REGULATION
The following discussion of federal and state laws governing banks and
bank holding companies is a summary only and does not purport to be complete.
The following discussion is qualified in its entirety by reference to the
particular statutory and regulatory provisions discussed. Changes in applicable
law or in the policies of various regulatory authorities could have a material
effect on the business and prospects of First Security, First Security Bank of
Nevada, Comstock and Comstock Bank.
Each of First Security and Comstock is a bank holding company within
the meaning of the Bank Holding Company Act of 1956. As such, they are subject
to regulation, supervision and examination by the Board of Governors of the
Federal Reserve System, acting primarily through the Federal Reserve Bank of San
Francisco. First Security and Comstock are required to file annual reports with
the Federal Reserve Board and to provide the Federal Reserve Board such
additional information as the Federal Reserve Board may require. Comstock Bank
is a Nevada-chartered commercial bank, and each of First Security's subsidiary
banks is a state-chartered or nationally chartered bank. As FDIC member
institutions, the deposits of First Security's subsidiary banks and Comstock
Bank are insured to a maximum of $100,000 per depositor through the Bank
Insurance Fund administered by the FDIC. As a Nevada-chartered, non-member bank,
Comstock Bank is primarily regulated by the FDIC and the Nevada Division of
Financial Institutions. First Security's subsidiary banks are regulated by the
Federal Reserve Board or the Comptroller of the Currency and, in the case of
state-chartered institutions, by the state banking regulator under the law of
the state of their organization.
First Security and its subsidiary banks, Comstock and Comstock Bank are
subject to federal and state banking laws. These federal and state laws are
intended to protect depositors, not stockholders. Federal and state laws
applicable to financial institution holding companies and their financial
institution subsidiaries regulate the range of permissible business activities,
investments, reserves against deposits, capital levels, lending activities and
practices, the nature and amount of collateral for loans, establishment of
branches, mergers, dividends and a variety of other important matters.
First Security's subsidiary banks and Comstock Bank are subject to
detailed, complex and sometimes overlapping federal and state statutes and
regulations in their routine banking operations. These statutes and regulations
include but are not limited to state usury and consumer credit laws, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act and
the Community Reinvestment Act.
First Security's subsidiary banks and Comstock Bank are subject to
Federal Reserve Board regulations that require depository institutions to
maintain reserves against their transaction accounts (principally NOW and
regular checking accounts). Because required reserves are commonly maintained in
the form of vault cash or in a noninterest-bearing account (or pass-through
account) at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce an institution's earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
expanded significantly the authority of federal agencies to regulate the
activities of federally chartered and state-chartered financial institutions and
their holding companies. The Federal Reserve Board and the FDIC have extensive
authority to prevent and to remedy unsafe and unsound practices and violations
of applicable laws and regulations by institutions and their holding companies.
The agencies may assess civil money penalties, issue cease and desist or removal
orders, seek injunctions, and publicly disclose such actions. In addition, the
Superintendent of the Nevada Division of Financial Institutions possesses
enforcement powers in order to address violations of Nevada banking law by
Nevada-chartered banks.
REGULATION OF BANK HOLDING COMPANIES
Bank holding companies and their activities are subject to extensive
regulation by the Federal Reserve Board. The Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before (i) directly or indirectly acquiring ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, the acquiring company would own or control more than 5% of the
shares of the other bank or bank holding company (unless the acquiring company
already owns or controls a majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve Board will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless
40
<PAGE> 46
the anticompetitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve Board also considers capital
adequacy and other financial and managerial factors in its review of
acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits a
bank holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions
involve certain non-bank activities that, by statute or by Federal Reserve Board
regulation or order, have been determined to be activities so closely related to
the business of banking or of managing or controlling banks as to be a proper
incident thereto. In making this determination, the Federal Reserve Board
considers whether the performance of such activities by a bank holding company
can be expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency in resources, that will outweigh
the risks of possible adverse effects such as decreased or unfair competition,
conflicts of interest or unsound banking practices.
Some of the activities determined by Federal Reserve Board regulation
to be incidental to the business of banking are: making or servicing loans or
certain types of leases; engaging in certain insurance and discount brokerage
activities; performing certain data processing services; providing securities
brokerage services; acting in certain circumstances as a fiduciary or investment
or financial advisor; and making investments in certain corporations or projects
designed primarily to promote community welfare. The Federal Reserve Board has
approved applications by bank holding companies to engage, through nonbank
subsidiaries, in certain securities-related activities (underwriting of
municipal revenue bonds, commercial paper, consumer-receivable-related
securities and one-to-four family mortgage-backed securities), provided that the
affiliates would not be "principally engaged" in such activities for purposes of
Section 20 of the Glass-Steagall Act. In limited situations, holding companies
have been permitted to underwrite and deal in corporate debt and equity
securities through such subsidiaries.
It is Federal Reserve Board policy that bank holding companies serve as
a source of strength for their subsidiary banking institutions. The Federal
Reserve Board considers the adequacy of a bank holding company's capital on
essentially the same risk-adjusted basis as capital adequacy is determined by
the FDIC at the bank subsidiary level. In the case of a bank holding company
with less than $150 million in total consolidated assets, the Federal Reserve
Board's regulations provide that the capital adequacy requirements will
generally be applied on a bank-only basis (rather than on a consolidated basis).
In general, bank holding companies are required to maintain a minimum ratio of
total capital to risk-weighted assets of 8% and Tier 1 capital (consisting
principally of stockholders' equity) of at least 4%. Bank holding companies are
also subject to a leverage ratio requirement. The minimum required leverage
ratio for the highest rated companies is 3%. The minimum required leverage ratio
for all other bank holding companies is 4% or higher. See, " - Capital."
Subsidiary banks of a bank holding company are subject to restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities and on the use
of their securities as collateral for loans to any borrower. These regulations
and restrictions could limit a bank holding company's ability to obtain funds
from a subsidiary bank for the bank holding company's cash needs, including
funds for payment of dividends, interest and operating expenses. Furthermore,
under the Bank Holding Company Act and regulations of the Federal Reserve Board,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, neither First Security
Bank of Nevada nor Comstock Bank generally may require a customer to obtain
other services from the bank or its holding company as a condition to an
extension of credit to the customer, and may not require that customer to
promise not to obtain other services from a competitor.
FEDERAL DEPOSIT INSURANCE
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in FDIC member institutions are insured to a maximum of
$100,000 per depositor. Banks are required to pay semiannual deposit insurance
premium assessments to the FDIC. In general terms, each institution is assessed
insurance premiums according to how much risk to the insurance fund the
institution represents. Well-
41
<PAGE> 47
capitalized institutions with few supervisory concerns are assessed lower
premiums than other institutions. Currently, insurance fund assessments range
from zero for well-capitalized institutions to 0.27% of deposits for
institutions that are not well capitalized (with a statutory minimum of $2,000
paid by all institutions). Comstock Bank's current assessment rate is .003%
annually, including payments by Comstock Bank for interest on the FICO Bonds
discussed below.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
enacted on September 30, 1996 provides that, beginning with semi-annual periods
after December 31, 1996, Bank Insurance Fund deposits will also be assessed to
pay interest on the bonds issued in the late 1980s by the Financing Corporation
("FICO BONDS"). The FICO Bonds were issued for the purpose of recapitalizing the
now defunct Federal Savings and Loan Insurance Corporation, which had been the
principal insurer of savings association deposits. For purposes of the
assessments to pay interest on the FICO Bonds, Bank Insurance Fund deposits will
be assessed at a rate of 20% of the assessment rate applicable to Savings
Association Insurance Fund deposits until December 31, 1999. After the earlier
of December 31, 1999 or the date on which the last savings association ceases to
exist, full pro rata sharing of FICO assessments will begin. The assessments to
pay interest on the FICO Bonds are not expected by First Security or Comstock to
have a material effect on First Security or Comstock or their subsidiary banks.
INTERSTATE BANKING AND BRANCHING
The Reigle-Neal Interstate Banking and Branching Efficiency Act was
enacted in 1994 to ease restrictions on interstate banking. The Reigle-Neal Act
allows the Federal Reserve Board to approve an application by an adequately
capitalized and adequately managed bank holding company to acquire a bank
located in a state other than the acquiring company's home state without regard
to whether the transaction is prohibited by the laws of any state. The Federal
Reserve Board may not approve the acquisition of a bank that has not been in
existence for the minimum time period (up to five years) specified by the
statutory law of the acquired, or "target," bank's state. The Reigle-Neal Act
also prohibits the Federal Reserve Board from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state that may
be held or controlled by a bank or bank holding company if the limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit contained
in the Riegle-Neal Act. Nevada Revised Statutes Sections 666.305 et seq. allow
interstate bank merger transactions involving Nevada-chartered banks, subject to
approval by the State of Nevada.
Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity. Branching
may also be accomplished by establishing de novo branches or acquiring branches
in another state. A branch of an out-of-state bank operating in another state,
or "host state," is subject to the law of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and
establishment of branches.
The Riegle-Neal Act authorizes the FDIC to approve interstate branching
de novo by state-chartered banks solely in states that specifically allow for
such branching. The FDIC recently adopted regulations under the Riegle-Neal Act
to prohibit an out-of-state bank from using the new interstate branching
authority primarily for the purpose of deposit production. These regulations
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities served by the out-of-state bank.
42
<PAGE> 48
CAPITAL
The Federal Reserve Board and the FDIC employ similar risk-based
capital guidelines in their examination and regulation of bank holding companies
and financial institutions. If capital falls below the minimum levels
established by the guidelines, the bank holding company, bank or savings bank
may be denied approval to acquire or establish additional banks or non-bank
businesses or to open new facilities. Failure to satisfy applicable capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal regulatory authorities, including the termination of deposit
insurance by the FDIC and a prohibition on the acceptance of "brokered
deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury,
which have a 0% risk-weight. Off-balance sheet items are also taken into account
in the calculation of risk-based capital, with each class of off-balance sheet
item being converted to a balance sheet equivalent according to established
"conversion factors." From these computations, the total of risk-weighted assets
is derived. Risk-based capital ratios therefore state capital as a percentage of
total risk-weighted assets and off-balance sheet items. The ratios established
by guideline are minimums only.
Current risk-based capital guidelines require all bank holding
companies and banks to maintain a minimum risk-based total capital ratio equal
to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily
marketable mortgage servicing rights are generally deducted from capital. Tier 1
capital includes common stockholders' equity, qualifying perpetual preferred
stock (within limits and subject to certain conditions, particularly if the
preferred stock is cumulative preferred stock), and minority interests in equity
accounts of consolidated subsidiaries, less intangibles. Tier 2 capital
includes: (i) the allowance for loan losses up to 1.25% of risk-weighted assets;
(ii) any qualifying perpetual preferred stock exceeding the amount that may be
included in Tier 1 capital; (iii) hybrid capital instruments; (iv) perpetual
debt; (v) mandatory convertible securities and (vi) subordinated debt and
intermediate term preferred stock of up to 50% of Tier 1 capital. Total capital
is the sum of Tier 1 and Tier 2 capital, less reciprocal holdings of other
banking organizations, capital instruments and investments in unconsolidated
subsidiaries.
The FDIC has added a market risk component to the capital requirements
of nonmember banks and savings banks. The market risk component could require
additional capital for general or specific market risk of trading portfolios of
debt and equity securities and other investments or assets. The FDIC's
evaluation of an institution's capital adequacy takes account of a variety of
other factors as well, including interest rate risks to which the institution is
subject, the level and quality of an institution's earnings, loan and investment
portfolio characteristics and risks, risks arising from the conduct of
nontraditional activities and a variety of other factors. Accordingly, the
FDIC's final supervisory judgment concerning an institution's capital adequacy
could differ significantly from the conclusions that might be drawn from the
absolute level of an institution's risk-based capital ratios. Therefore,
institutions generally are expected to maintain risk-based capital ratios that
exceed the minimum ratios discussed above. This is particularly true for
institutions contemplating significant expansion plans and institutions that are
subject to high or inordinate levels of risk. Moreover, although the FDIC does
not impose explicit capital requirements on holding companies of institutions
regulated by the FDIC, the FDIC can take account of the degree of leverage and
risks at the holding company level. If the FDIC determines that the holding
company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may
require the subsidiary institution(s) to maintain additional capital or the FDIC
may impose limitations on the subsidiary institution's ability to support its
weaker affiliates or holding company.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles. At
December 31, 1998, First Security, First Security Bank of Nevada, Comstock and
Comstock Bank were in compliance with all regulatory capital requirements.
In order to resolve the problems of undercapitalized institutions and
to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established
43
<PAGE> 49
a system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. For example, an institution that is not
"well capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized institution must
guarantee, in part, certain aspects of the institution's capital plan. Financial
institution regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit Insurance Corporation Improvement Act of
1991 also authorizes the regulatory agencies to reclassify an institution from
one category into a lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. Undercapitalized
institutions are required to take certain specified actions in order to increase
their capital or otherwise decrease the risks to the federal deposit insurance
funds.
The following table illustrates the capital and prompt corrective
action guidelines applicable to First Security and its banking subsidiaries and
to Comstock and Comstock Bank, as well as their total risk-based capital ratios,
Tier 1 capital ratios and leverage ratios as of December 31, 1998.
<TABLE>
<CAPTION>
MINIMUM MINIMUM NECESSARY TO
AT NECESSARY TO BE BE
DECEMBER 31, 1998 WELL CAPITALIZED ADEQUATELY CAPITALIZED
----------------- ---------------- ----------------------
FIRST SECURITY CORPORATION
AND SUBSIDIARIES:
<S> <C> <C> <C> <C>
Total Risk-Based Capital Ratio 11.31% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio 9.10% 6.00% 4.00%
Leverage Ratio 6.90% 5.00% 3.00%
COMSTOCK AND COMSTOCK
BANK:
COMSTOCK
BANK COMSTOCK
-------- --------
Total Risk-Based Capital Ratio 13.50% 14.78% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio 12.44% 13.76% 6.00% 4.00%
Leverage Ratio 8.49% 9.72% 5.00% 3.00%
</TABLE>
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is dependent on the amount of
dividends that may be declared by its subsidiary banks. A state-chartered bank's
ability to pay dividends may be affected both by state banking laws and federal
banking agencies' capital adequacy guidelines. Moreover, regulatory authorities
are authorized to prohibit banks and bank holding companies from paying
dividends if payment of dividends would constitute an unsafe and unsound banking
practice. Comstock is not subject directly to the Nevada banking statutes that
regulate the payment of dividends. However, because the ultimate source of
dividends to stockholders of Comstock is dividends received from Comstock Bank,
dividends payable to stockholders of Comstock depend on the earnings of Comstock
Bank, Comstock Bank's financial condition, Comstock Bank's need for funds and
applicable government policies and regulations.
In general, the directors of a Nevada-chartered bank may declare out of
net profits a dividend or distribution in an amount the directors judge
expedient, provided that (i) at least 10% of net profit from the prior fiscal
year is transferred to surplus and (ii) the bank's surplus equals or exceeds the
bank's initial stockholders' equity. A Nevada-chartered bank is prohibited from
paying a dividend in excess of its undivided profits unless the bank's
stockholders' equity is at least equal to 6% of the bank's total deposit
liabilities. Under the general corporation law provisions of the Nevada Revised
Statutes (to which both Comstock and Comstock Bank are subject), in no event may
a corporation pay dividends if, after giving effect to payment of the dividend,
the
44
<PAGE> 50
corporation would be unable to pay its debts as they become due or the
corporation's assets would be less than the sum of its total liabilities plus
the amount that would be needed to satisfy the preferential rights (if any) upon
dissolution of stockholders whose preferential rights are superior to those
receiving the dividend distribution.
Under the Federal Deposit Insurance Act and prompt corrective action
regulations of the FDIC, Comstock Bank would be prohibited from making any
capital distributions if, after the distribution, Comstock Bank would have (i) a
total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
Comstock Bank currently satisfies all of its regulatory capital requirements.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that a bank holding company should not pay cash dividends on
common stock unless (i) the organization's net income for the past year is
sufficient to fully fund the dividends and (ii) the prospective rate of earnings
retention appears consistent with the organization's capital needs, asset
quality and overall financial condition. For small bank holding companies (those
with less than $150 million in assets), the Federal Reserve Board's position is
that such companies should not pay dividends so long as they have a
debt-to-equity ratio of 1:1 or greater.
TRANSACTIONS WITH AFFILIATES
Although Comstock Bank is not a member bank of the Federal Reserve
System, under the Federal Deposit Insurance Act it is required to comply with
Sections 23A and 23B of the Federal Reserve Act (pertaining to transactions with
affiliates) in the same manner and to the same extent as member banks. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. Generally, Sections 23A and 23B of the
Federal Reserve Act (i) limit the extent to which a bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus, and (ii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes making loans, purchasing
assets, issuing a guarantee and other similar types of transactions.
First Security's subsidiary banks' and Comstock Bank's authority to
extend credit to executive officers, directors and greater than 10%
stockholders, as well as entities such persons control, is subject to Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal
Reserve Board. Among other things, these laws require insider loans to be made
on terms substantially similar to those offered to unaffiliated individuals,
place limits on the amount of loans a bank may make to such persons based, in
part, on the bank's capital position, and require certain approval procedures to
be followed. Under Section 22(h), loans to an executive officer, director, or
greater than 10% stockholder (a "principal stockholder") of a bank, and certain
affiliated entities of either, together with all other outstanding loans to such
persons and affiliated entities, may not exceed the bank's loans-to-one-borrower
limit, which in general terms is 15% of tangible capital but can be higher in
certain circumstances. Section 22(h) also prohibits loans in excess of the
greater of 5% of capital or $25,000 to directors, executive officers and
principal stockholders, and their respective affiliates, unless the loans are
approved in advance by a majority of the board of directors, with any
"interested" director not participating in the voting. A violation of these
restrictions could result in the assessment of substantial civil monetary
penalties, the imposition of a cease-and-desist order or other regulatory
sanctions.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977 (the "CRA") and
implementing regulations of the banking agencies, a financial institution has a
continuing and affirmative obligation (consistent with safe and sound operation)
to meet the credit needs of its entire community, including low- and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public. CRA performance evaluations
are based on a four-tiered rating system:
Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance.
At the most recent CRA examination of Comstock Bank, dated November 4,
1996, Comstock Bank received a CRA performance rating of "Satisfactory."
Although CRA examinations occur on a regular basis, CRA performance evaluations
are used principally in the evaluation of regulatory applications submitted by
an institution.
45
<PAGE> 51
CRA performance evaluations are considered in evaluating applications for such
things as mergers, acquisitions and applications to open branches. Over the
twenty years that the CRA has existed, and particularly in the last decade,
institutions have faced increasingly difficult regulatory obstacles and public
interest group objections in connection with their regulatory applications,
including institutions that have received the highest possible CRA ratings.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks serve as credit sources for their members.
As a member of the FHLB of San Francisco, Comstock Bank is required to maintain
an investment in the capital stock of the FHLB of San Francisco in an amount
calculated by reference to the member institution's assets and the amount of
loans, or "advances," from the FHLB. Comstock Bank is in compliance, with an
investment in FHLB of San Francisco stock of $843,200 at December 31, 1998.
Comstock Bank obtains funds on a secured basis from the FHLB of San Francisco
pursuant to an "Advances and Security Agreement."
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
NEVADA BANK REGULATION
Nevada law prescribes the permissible investments and activities of
Nevada banks, including the types of loans and investments such institutions may
make. The ability of Nevada-chartered banks to engage in state-authorized
activities is also subject to oversight and approval by the FDIC. The State of
Nevada also has approval authority over establishment of branches and mergers
involving or acquisitions of control of Nevada banks, and Nevada may also
initiate supervisory or enforcement actions against a Nevada bank. If any of the
grounds set forth in Nevada law exists for doing so, the State of Nevada may
place a Nevada bank in conservatorship or receivership.
MONETARY POLICY
The earnings of financial institutions are affected by the policies of
regulatory authorities, including monetary policy of the Federal Reserve Board.
An important function of the Federal Reserve System is regulation of aggregate
national credit and money supply. The Federal Reserve Board accomplishes these
goals with measures such as open market dealings in securities, establishment of
the discount rate on bank borrowings and changes in reserve requirements against
bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of financial institutions' loans, investments
and deposits, and they also affect interest rates charged on loans or paid on
deposits. Monetary policy is influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government. Federal Reserve
Board monetary policy has had a significant effect on the operating results of
financial institutions in the past, and it can be expected to influence
operating results in the future.
BANK REGULATORY DEVELOPMENTS
The laws and regulations affecting banks and bank holding companies
have changed significantly over recent years. Additional changes can be expected
in the future. Like administrations before it, the current administration has
considered consolidation of bank regulatory responsibilities now administered by
four separate banking agencies. Over the same time period, Congress has proposed
additional restrictions on the powers of bank holding companies, thrift holding
companies and their affiliates, as well as expanded powers for bank holding
companies, thrift holding companies and their affiliates, including securities-
and insurance-related powers.
COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the merger, the Comstock stockholders will become
stockholders of First Security whose rights will (i) cease to be defined and
governed by Nevada law and will be defined and governed by applicable Delaware
law and (ii) cease to be defined and governed by the articles of incorporation
and bylaws of Comstock and will be defined and governed by the First Security
Certificate of Incorporation and the First Security Bylaws. Certain provisions
of the First Security Certificate of Incorporation and the First Security Bylaws
alter the rights of stockholders from those that Comstock stockholders presently
have and also alter certain powers of
46
<PAGE> 52
management. These provisions are summarized below. This summary is qualified in
its entirety by reference to the First Security Certificate of Incorporation,
the First Security Bylaws, the Restated Articles of Incorporation of Comstock
(the "Comstock Articles"), the Bylaws of Comstock (the "Comstock Bylaws") and
applicable law. In addition, First Security could implement certain other
changes by amending the First Security Certificate of Incorporation or the First
Security Bylaws.
CERTAIN DIFFERENCES BETWEEN NEVADA AND DELAWARE CORPORATE LAWS
Applicable Delaware law governs the rights of First Security
stockholders and will govern the rights of Comstock stockholders who become
stockholders of First Security. The Nevada corporate laws and applicable
Delaware law differ in many respects. Certain of the significant differences
that could materially affect the rights of Comstock stockholders are discussed
below.
AUTHORIZED CAPITAL STOCK
COMSTOCK
Under Comstock's Articles of Incorporation, the aggregate number of
shares which it is authorized to issue is 15,000,000 shares of Common Stock,
$.01 par value. All shares of Comstock common stock are identical in rights and
have one vote. The holders of Comstock common stock are entitled to such
dividends as may be declared from time to time by the Comstock Board of
Directors from funds available therefor, subject to certain restrictions, and
upon liquidation are entitled to receive pro rata all assets of Comstock
available for distribution to such holders after provision for liabilities.
FIRST SECURITY
Under First Security's Certificate of Incorporation, First Security is
authorized to issue 600,000,000 shares of common stock and 400,000 shares of
preferred stock. All shares of First Security common stock are identical in
rights and have one vote. All shares of preferred stock also have one vote.
The First Security common stock to be issued in the merger will be
newly issued from authorized and unissued First Security common stock. The First
Security common stock, when delivered pursuant to the merger agreement, will be
duly authorized and validly issued, fully paid and non-assessable, which status
will be supported by an opinion of First Security's counsel.
First Security's Certificate of Incorporation provides that its Board
of Directors can issue preferred stock in one or more series and with such terms
and at such times and for such consideration as the First Security Board of
Directors may determine. The authority of the First Security Board of Directors
includes the determination or fixing of the following with respect to shares of
any series thereof: (a) the number of shares and designation or title thereof;
(b) rights as to dividends; (c) whether and upon what terms the shares are to be
redeemable; (d) rights and preferences of the holders upon the liquidation,
dissolution or winding up of First Security; (e) whether the shares are to be
subject to a retirement or sinking fund; (f) whether and upon what terms the
shares are convertible; (g) the voting rights, if any; (h) whether the issuance
of any additional shares of a series shall be subject to restrictions as to
issuance or as to the powers, preferences or rights of any other series; and (i)
any other preferences, privileges, powers or relative rights specified by the
Board of Directors.
On August 28, 1989, First Security's Board of Directors adopted a
Stockholder Rights Plan whereby each First Security stockholder is issued rights
to acquire a new class of junior preferred stock, which rights could also be
expanded by the First Security Board of Directors to allow the purchase of
additional shares of First Security under certain circumstances involving the
acquisition of certain amounts of First Security stock by a third party. (See,
"Information About First Security--Description of First Security's Capital
Stock--Common Stock.").
DIRECTORS
NUMBER
Comstock's Bylaws provide that the number of its directors shall be not
less than 5 nor more than 20, with the exact number to be set from time to time
by the Board of Directors. Currently, Comstock has 9 directors. First Security's
Bylaws provide that the number of its directors shall be not less than six nor
more than thirty, with the exact
47
<PAGE> 53
number to be established from time to time by resolution of the Board of
Directors. Currently, First Security has 20 directors.
ELECTION
Both applicable Nevada law and applicable Delaware law provide that
members of the board of directors are elected by a plurality vote of the
stockholders, with each share being entitled to one vote, unless the articles or
certificate of incorporation provide otherwise.
REMOVAL
Applicable Nevada law provides that one or more directors of a
corporation may be removed with or without cause, by the vote of stockholders
representing not less than two-thirds of the voting power of the issued and
outstanding stock entitled to vote, subject to certain conditions. These
conditions include certain voting requirements applicable to corporations having
cumulative voting rights and to the removal of a member of a board who is
elected by a single class. The Comstock Board of Directors is not classified.
Comstock stockholders may not cumulate votes for directors.
Under applicable Delaware law any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares entitled to vote at an election of directors. Applicable Delaware law
also provides additional requirements for the removal of a member of a board
which is classified as to term or elected by a single class or elected by
classes possessing cumulative voting rights. However, these additional
requirements do not apply to First Security, as the Board of Directors of First
Security is not classified and none of First Security's shares of capital stock
possesses any cumulative voting rights.
INDEMNIFICATION
Both the Nevada and applicable Delaware laws provide that a director,
employee, officer or agent of a corporation may be indemnified against liability
(other than in an action by or in the right of the corporation) and other costs
incurred by such person in connection with such proceeding, provided such person
acted in good faith and in a manner such person reasonably believed to be in,
and not opposed to, the best interests of the corporation, and, with respect to
any criminal proceeding, had no reason to believe the conduct was unlawful. For
actions or suits brought by or in the name of the corporation, both the Nevada
and applicable Delaware laws provide that a director, employee, officer or agent
of a corporation may be indemnified against expenses incurred by such person in
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in, or at least not opposed to, the
best interests of the corporation, except that if such person is adjudged to be
liable to the corporation, such person can be indemnified if and only to the
extent that a court determines that despite the adjudication of liability, in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. On the
other hand, if he/she prevails, indemnification is mandatory. See the following
subsection captioned "Directors' and Officer's Liability" for a discussion of
the differences in the standards of liability for Comstock directors compared to
First Security directors.
Both applicable Delaware law and applicable Nevada law provide that the
determination of whether an officer or director is entitled to indemnification
(that is, whether or not the person has met the statutory standard of conduct
required for indemnification) is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who are not parties to the
action, suit or proceeding in question, or (2) if such a quorum is not
obtainable or if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
First Security's Articles of Incorporation, as amended, provide for
indemnification of such persons to the full extent allowed by applicable law.
Comstock has similar broad indemnification provisions.
DIRECTOR'S AND OFFICER'S LIABILITY
The Nevada and Delaware Statutes both allow a corporation to include,
in its articles or certificate of incorporation, a provision that limits or
eliminates the personal liability of an officer (Nevada only) or a director to
the corporation and its stockholders for monetary damages for such person's
breach of fiduciary duty, provided that such provision may not so limit a
director's liability (i) for a breach of his or her duty of loyalty to the
corporation (Delaware only); (ii) for acts or omissions not in good faith or
involving fraud (Nevada only), intentional misconduct or a knowing violation of
law; (iii) for unlawful payments of dividends, certain stock repurchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit (Delaware only).
48
<PAGE> 54
These provisions have the effect of protecting a corporation's
directors against personal liability from breaches of their duty of care. First
Security, with the approval of its stockholders, amended its Certificate of
Incorporation to include such provisions in 1989. Comstock's Articles of
Incorporation contain a similar provision.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING PERSONS OF
FIRST SECURITY, FIRST SECURITY HAS BEEN ADVISED THAT IN THE OPINION OF THE
SECURITIES AND EXCHANGE COMMISSION SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY
AS EXPRESSED IN THE SECURITIES ACT OF 1933 AND IS, THEREFORE, UNENFORCEABLE. IN
THE EVENT THAT A CLAIM FOR INDEMNIFICATION AGAINST SUCH LIABILITIES (OTHER THAN
THE PAYMENT BY FIRST SECURITY OF EXPENSES INCURRED OR PAID BY A DIRECTOR,
OFFICER OR CONTROLLING PERSON OF THE REGISTRANT IN A SUCCESSFUL DEFENSE OF ANY
ACTION, SUIT OR PROCEEDING) IS ASSERTED BY SUCH DIRECTOR, OFFICER OR CONTROLLING
PERSON IN CONNECTION WITH THE SECURITIES BEING REGISTERED, FIRST SECURITY WILL,
UNLESS IN THE OPINION OF ITS COUNSEL THE MATTER HAS BEEN SETTLED BY CONTROLLING
PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE JURISDICTION THE QUESTION OF WHETHER
SUCH INDEMNIFICATION BY IT IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE
SECURITIES ACT OF 1933 AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH
ISSUE.
TRANSACTIONS INVOLVING INTERESTED DIRECTORS
Applicable Delaware law states that a transaction involving an
interested director of a Delaware corporation is not void or voidable if (a) the
director's interest in the transaction is disclosed to the board and a majority
of the disinterested directors approve it, (b) the interest is disclosed to the
stockholders and the transaction is approved by a majority of the stockholders,
or (c) the transaction is fair to the corporation. Applicable Nevada law
contains a similar provision, except that the board of directors may approve the
transaction only if the vote is sufficient without counting the vote of the
interested directors.
REPURCHASE AND REDEMPTION OF SHARES
Applicable Delaware law permits a corporation to redeem or repurchase
any of its shares for cash, other property or a promissory note except when the
capital of the corporation is impaired, or when such repurchase or redemption
would impair any capital of the corporation. Applicable Nevada law is silent on
this point.
PAYMENT OF DIVIDENDS TO STOCKHOLDERS
Holders of Comstock common stock are entitled to share ratably in such
cash dividends as may be declared from time to time by Comstock's Board of
Directors out of funds legally available therefor, subject to certain
restrictions. Under applicable Nevada law, Comstock may only declare dividends
on its capital stock if the corporation would not be rendered insolvent.
Applicable Delaware law allows a corporation, subject to any
restrictions in its certificate of incorporation, to declare and pay dividends
upon its shares of capital stock either out of its surplus (as determined under
the statute) or, in the event there is no such surplus, out of its net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. Further restrictions on dividends apply in the event a corporation
has issued shares possessing a preference upon the distribution of assets. The
ability of a Delaware corporation to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis. First Security's
restated Certificate of Incorporation grants to the Board of Directors the power
to declare dividends on its Common Stock, subject to any dividend or sinking
fund requirements pertaining to its Preferred Stock. First Security is also
subject to restrictions on its dividend paying ability under banking laws.
ASSESSMENTS
All outstanding shares of Comstock and First Security are fully paid
and nonassessable.
PREEMPTIVE RIGHTS
Comstock stockholders do not have a preemptive right to acquire
unissued shares, treasury shares or securities convertible into such shares
unless provided otherwise in the Articles of Incorporation. Delaware law does
not provide for preemptive rights unless expressly provided in the Certificate
of Incorporation. First Security's Certificate does not provide for preemptive
rights.
49
<PAGE> 55
AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
Applicable Delaware law permits the board of directors of a Delaware
corporation to adopt a resolution of its own volition setting forth a proposed
amendment to the corporation's certificate of incorporation and directing that
such proposed amendments be submitted to a vote at a meeting of stockholders.
Upon the written request of the holders of not less than 10% of the shares
entitled to vote upon a proposed amendment, the board of directors is required
to adopt a resolution setting forth the requested amendment and directing that
the amendment be submitted to a vote at a meeting of stockholders.
Applicable Nevada law similarly permits the board of directors of a
Nevada corporation to adopt a resolution proposing changes to the corporation's
articles of incorporation and directing that such proposed amendments be
submitted to a vote at a stockholders meeting.
The voting requirements for stockholder approval of proposed amendments
under applicable Nevada law and applicable Delaware law both generally require a
majority vote of the shares entitled to vote on such amendments.
AMENDMENTS TO BYLAWS
Applicable Nevada law provides that, unless the power to amend a
corporation's bylaws is reserved to its stockholders by its articles of
incorporation, the bylaws may be amended by the Board of Directors. Comstock has
made no such reservation.
Applicable Delaware law provides that stockholders may amend the bylaws
of a corporation, provided that the corporation may, in its articles of
incorporation, also confer such power upon the board of directors. First
Security's Certificate of Incorporation expressly authorizes its Board of
Directors to amend its Bylaws.
STOCKHOLDER APPROVAL OF MERGERS AND OTHER BUSINESS COMBINATIONS
Applicable Nevada law requires that any proposed exchange, merger or
consolidation of a corporation must be approved by the holders of a majority of
the outstanding shares entitled to vote.
Applicable Delaware law provides that a merger, consolidation, sale,
lease or exchange of all or substantially all of its assets may be effected upon
a vote of the holders of a majority of a corporation's outstanding shares.
Delaware law does not require a stockholder vote of the surviving corporation in
a merger if (a) the merger does not amend the existing certificate of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged or becomes a treasury share of the surviving
corporation, and (c) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to such issuance.
In February 1988, applicable Delaware law was amended to prohibit
certain business combinations (generally mergers, consolidations and sales of
10% or more of a corporation's assets) between Delaware corporations and
"Interested Stockholders." As defined under applicable Delaware law, Interested
Stockholders are persons who alone, or together with their affiliates,
beneficially own 15% or more of the outstanding stock of a corporation.
Applicable Delaware law bars business combinations between an Interested
Stockholder and the corporation for a period of three years after any such
person or group has become an Interested Stockholder. Applicable Delaware law
contains exceptions to the prohibition which allows such combinations if, as a
result of the transaction which causes a person to become an Interested
Stockholder, such person owns 85% or more of the outstanding voting stock (with
certain exceptions). Another provision exempts from the coverage of applicable
Delaware law any transaction approved by the corporation's board of directors
and two-thirds of the outstanding voting stock not held by the Interested
Stockholder. First Security's Certificate of Incorporation provides for
super-majority voting requirements in certain cases of non-consensual merger
votes.
Applicable Nevada law similarly prohibits such business combinations
between Nevada corporations and interested stockholders for a period of 3 years
after the interested stockholder's date of acquiring shares unless the
combination or the purchase of the shares, made by the interested stockholder is
approved by the board of directors. Applicable Nevada law also prohibits such
business combinations after the expiration of 3 years after the interested
stockholder's date of acquiring shares unless the combination meets the
requirements specified in Section 78.439 for director and stockholder approvals
or Sections 78.441 to 78.444 inclusive with respect to the consideration to be
received in the combination by all stockholders other than the interested
stockholder. Applicable Nevada law defines interested
50
<PAGE> 56
stockholders to include persons who, alone or together with affiliates,
beneficially own 10% of the outstanding stock of the corporation. A Nevada
corporation may opt-out of the application of these provisions under certain
circumstances. Comstock's Articles of Incorporation provide that the Nevada
statute governing combinations with interested stockholders shall apply to
Comstock.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt-out of the application of these provisions under
certain circumstances. Comstock has not opted out of the application of this
statute. Applicable Delaware law contains no such provision.
Nevada law does not require a stockholder vote of the surviving
corporation in a merger if (a) the merger does not amend the existing articles
of incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to such issuance.
RIGHTS OF DISSENTING STOCKHOLDERS
Sections 92A.300 to 92A.500 of applicable Nevada law provide statutory
appraisal rights to certain stockholders who may dissent from certain corporate
reorganizations such as mergers or sales of all or substantially all of the
institution's assets. Under applicable Nevada law, stockholders are not entitled
to dissenters' rights in the event of a merger if, on the Record Date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting at which the plan of merger is to be acted on, the shares are listed on
a national securities exchange, included in the NASDAQ National Market System,
or are held by at least 2,000 stockholders of record, unless an exception
applies.
Applicable Delaware law provides appraisal rights only in the case of a
statutory merger, consolidation or sale of substantially all the assets of a
corporation, except that such rights are not available in cases in which the
corporation is to be the surviving corporation and no vote of its stockholders
is required for such transaction or, unless otherwise provided in the
certificate of incorporation, in cases in which the consideration for such
transaction is shares of stock listed on a national securities exchange or held
of record by more than 2,000 stockholders, unless such stockholders are required
by the terms of the merger, consolidation or sale to accept anything other than
shares of stock of the surviving corporation, shares of stock of another
corporation which are all listed or held by such number of record holders, cash
in lieu of fractional shares of such stock, or any combination thereof. The
Certificate of Incorporation of First Security does not provide for greater
appraisal rights than those set forth in applicable Delaware law.
First Security stockholders are not entitled to dissent from or vote on
the merger.
ANNUAL MEETINGS OF STOCKHOLDERS
Applicable Delaware law authorizes the Delaware Chancery Court to order
a Delaware corporation to hold an election of directors upon an application by
any stockholder or director if an annual meeting of the stockholders has not
been held for 13 months. Applicable Nevada law authorizes a Nevada Court to
similarly order the election of directors of a Nevada corporation upon
application by a stockholder who holds not less than 15% of the voting power if
an annual meeting of stockholders has not been held for 18 months.
SPECIAL MEETINGS OF STOCKHOLDERS
Applicable Nevada law provides that special meetings of a corporation's
stockholders may be called by the board of directors, the holders of at least
one-tenth of all the votes entitled to be cast on the subject matter of the
meeting, or by such other persons as are designated in the corporation's
articles of incorporation or bylaws. Comstock's Bylaws authorize the Chairman
and the President to call a special meeting.
Under applicable Delaware law, special meetings of stockholders of a
corporation may be called by the board of directors or by such persons as are
authorized by the corporation's certificate of incorporation or bylaws. First
Security's Bylaws provide that such meetings may also be called by the
President, and shall be called by the President or the Secretary at the written
request of stockholders owning not less than a majority of all shares issued and
outstanding and entitled to vote on any proposal to be submitted to the meeting.
Applicable Nevada law is similar to applicable Delaware law concerning meetings
of stockholders in general, although applicable Nevada law is silent as to any
distinction between regular and special meetings of stockholders.
51
<PAGE> 57
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
Under applicable Nevada law, any action which may be taken at any
meeting of stockholders may be taken without a meeting and a vote if a written
consent stating the action is signed by a majority of the stockholders entitled
to vote with respect to the subject matter thereof, unless the corporation's
articles of incorporation provide otherwise. Comstock's articles of
incorporation do not restrict this right.
Applicable Delaware law provides that, unless otherwise provided in the
certificate of incorporation, any action which may be taken at any meeting of
stockholders may be taken without a meeting, prior notice or a vote, if written
consents setting forth the action taken are signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to take such action if the action were taken at a meeting. First Security's
Certificate of Incorporation does not prohibit such actions by written consent.
STOCKHOLDER INSPECTION OF RECORDS
Applicable Delaware law grants every stockholder the right to inspect a
Delaware corporation's stockholder register and other books and records.
Applicable Nevada law states that any stockholder who holds at least 5% of the
outstanding stock or a person who has been a stockholder of record for at least
six months immediately preceding his demand is entitled to inspect the
corporation's articles of incorporation, bylaws and stock ledger.
[This Space Left Blank Intentionally]
52
<PAGE> 58
THE 1999 ANNUAL MEETING OF COMSTOCK STOCKHOLDERS
DATE, TIME AND PLACE
This Prospectus/Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of Comstock for use at the
1999 Annual Meeting of Comstock stockholders. The Annual Meeting will be held on
Wednesday, April 28, 1999, at 4:00 p.m. Pacific Time in the Conference Center on
the second floor of Comstock Bank's Administrative Headquarters, 6275 Neil Road,
Reno, Nevada.
PURPOSE
At the Annual Meeting, holders of Comstock common stock, par value $.01
per share, will be asked to vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of January 12, 1999 by and between
First Security, its subsidiary First Security Bank of Nevada, Comstock and its
subsidiary Comstock Bank. The Agreement and Plan of Reorganization provides that
Comstock will merge with and into First Security, a Delaware corporation, and
that First Security will be the surviving corporation.
Stockholders will also be asked to consider and vote upon election of
directors to serve until the 2000 Annual Meeting of Stockholders or until the
merger of Comstock with and into First Security is completed. Lastly,
stockholders of Comstock will be asked to consider and vote upon ratification of
the Board of Directors' appointment of Kafoury, Armstrong & Company to serve as
independent auditors of Comstock for the year ending December 31, 1999, or until
the merger is completed.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Record Date for the determination of Comstock stockholders entitled
to notice of and to vote at the Annual Meeting has been fixed by the Board of
Directors as the close of business on March 19, 1999. As of the Record Date,
there were approximately 5,113,900 shares of Comstock common stock issued and
outstanding. The Comstock common stock was held on that date by approximately
437 stockholders of record. Holders of Comstock common stock on the March 19,
1999 record date are entitled to one vote per share on each matter to be acted
upon at the Annual Meeting. Comstock stockholders are not entitled to vote
cumulatively in the election or removal of directors or otherwise. Holders of
Comstock common stock on the March 19, 1999 record date are entitled to exercise
dissenters' rights on the proposal to approve and adopt the merger agreement.
See, "Rights Of Dissenting Stockholders."
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of
Comstock common stock is required to adopt the merger agreement. Accordingly,
the affirmative vote of approximately 2,556,451 shares of Comstock common stock
is required to adopt the merger agreement. Failure to vote is equivalent to
voting against the merger agreement. Of the 5,113,900 shares of Comstock common
stock issued and outstanding on the March 19, 1999 record date, directors and
executive officers are entitled to vote 794,156 shares, representing
approximately 15.5% of the Comstock common stock. See, " - Voting Securities and
Principal Holders Thereof."
Directors of Comstock are elected by plurality vote, meaning the
nominees receiving the greatest number of votes are elected. Therefore,
abstentions will have no effect on the election of directors.
VOTING AND REVOCATION OF PROXIES
Comstock stockholders are requested to complete, date and sign the
accompanying proxy and return it promptly in the accompanying postage-prepaid
envelope.
53
<PAGE> 59
Shares represented by valid proxies will be voted at the Annual Meeting
in accordance with the instructions noted thereon. If no instructions are given,
proxies will be voted FOR adoption of the merger agreement, FOR election of
nominees identified herein to serve as directors and FOR ratification of the
Board of Directors' appointment of Kafoury, Armstrong & Company to serve as
independent auditors. Proxies solicited hereby may be used at the Annual Meeting
only and will not be used for any other meeting.
Unless revoked, the shares represented by proxies will be voted at the
Annual Meeting. Stockholders who execute proxies retain the right to revoke them
at any time before completion of the meeting, but revocation will not affect a
vote previously taken. The presence of a stockholder at the meeting will not
automatically revoke such stockholder's proxy. A stockholder may revoke a proxy
at any time prior to its exercise by
- delivering to the Secretary of Comstock a written notice of
revocation prior to the meeting;
- delivering to the Secretary prior to the meeting a duly
executed proxy bearing a later date; or
- attending the meeting and filing a written notice of
revocation with the Secretary.
Any written notice revoking a proxy should be delivered to Mr. Larry A. Platz,
President and Secretary of Comstock, P.O. Box 7610, Reno, Nevada 89510-7610 (by
mail, or to Mr. Platz at Comstock, 6275 Neil Road, Reno, Nevada 89511 if by
overnight courier).
QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the meeting is a
majority of the shares of Comstock common stock issued and outstanding on the
March 19, 1999 Record Date and entitled to vote, whether represented in person
or by proxy. If a quorum is not obtained, or if fewer shares of Comstock common
stock than the number required are voted in favor of the merger agreement, the
Annual Meeting may be postponed or adjourned to permit additional time for
soliciting and obtaining additional proxies or votes. At any subsequent
reconvening of the meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the Annual Meeting,
except for any proxies that have been effectively revoked or withdrawn.
Abstentions and broker non-votes will be counted as present for
purposes of determining whether there is a quorum at the Annual Meeting, but
will not be voted. Because adoption of the merger agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
Comstock common stock, abstentions and broker non-votes will have the same
effect as votes against adoption of the merger agreement. Directors of Comstock
are elected by plurality vote. Therefore, abstentions will have no effect on the
election of directors.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
On the date the merger agreement was executed, each of the directors of
Comstock entered into a Stockholder Voting Agreement with First Security as an
inducement for First Security to enter into the merger agreement. The
Stockholder Voting Agreement provides that each of the directors executing the
Stockholder Voting Agreement:
- is required to vote his Comstock common stock in favor of the
merger;
- may not sell, agree to sell or grant a proxy to vote any
Comstock common stock owned by him or thereafter acquired by
him, except for a proxy in favor of First Security or in favor
of the merger; and
- may not solicit or encourage a competing acquisition proposal
or furnish information to or cooperate with a competing bidder
for Comstock.
However, the Stockholder Voting Agreement provides that the directors executing
the Stockholder Voting Agreement are not required to take any action that would,
in the reasonable opinion of their legal counsel, violate any duties imposed by
law. The obligations represented by the Stockholder Voting Agreement terminate
on the earlier to occur of termination of the merger agreement or consummation
of the merger contemplated thereby.
Together, the directors who executed the Stockholder Voting Agreement
own or exercise voting power over approximately 794,156 shares of Comstock
common stock outstanding on the March 19, 1999 record date, or 15.5% of the
voting power.
The following tables indicate the beneficial ownership of common stock
as of February 28, 1999 (i) by directors and executive officers of Comstock,
(ii) by each person who is known by Comstock to own beneficially more than 5% of
the outstanding shares of Comstock common stock (showing the owner's address as
well), and (iii)
54
<PAGE> 60
by all directors and executive officers of Comstock as a group. Information
concerning the number of shares of common stock beneficially owned by the
persons identified in the table under the caption "Certain Stockholders" is
derived from Schedules 13D filed by such persons with the Securities and
Exchange Commission for the purpose of reporting their beneficial ownership of
common stock. For purposes of the following tables, a person is considered to
"beneficially own" any shares with respect to which he exercises sole or shared
voting or investment power or of which he has the right to acquire such
beneficial ownership within 60 days.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
CERTAIN STOCKHOLDERS COMMON STOCK CLASS
- -------------------- ------------ ----------
<S> <C> <C>
Lee Deitrich 400,000 7.83%
7090 Morley Road
Painesville, Ohio 44077
Umberto Fedeli 420,000 8.22%
5005 Rockside Road, 5th Floor
Independence, Ohio 44131
Lawrence G. Loxterman 370,460 7.25%
270 Barrington Ridge Road
Painesville, Ohio 44077
William H. Loxterman 348,460 6.82%
10100 Hoose Road
Mentor, Ohio 44060
Resource Management, Inc. 385,000(1) 7.54%
Dba Gelfand/Maxus Asset Management
1301 East Ninth Street, Suite 3600
Cleveland, Ohio 44114
</TABLE>
[See also the table on the following page]
55
<PAGE> 61
<TABLE>
<CAPTION>
SHARES
ACQUIRABLE
WITHIN 60
DIRECTORS, NOMINEES SHARES OF DAYS UPON PERCENT
AND COMMON EXERCISE OF OF
EXECUTIVE OFFICERS STOCK OPTIONS CLASS
------------------ ---------- ------------ --------
<S> <C> <C> <C>
Edward E. Allison .............................. 4,730 12,400 (2)
Robert N. Barone ............................... 400,068(3) 0 7.83%
6275 Neil Road
Reno, Nevada 89511
Stephen C. Benna ............................... 400 4,600 (2)
John A. Coombs ................................. 24,598 0 (2)
Michael W. Dyer ................................ 65,374 0 1.28%
Mervyn J. Matorian ............................. 20,642 0 (2)
(2)
Samuel P. McMullen ............................. 590 11,000
Larry A. Platz ................................. 277,254 0 5.43%
6275 Neil Road
Reno, Nevada 89511
Ronald R. Zideck ............................... 500 0 (2)
Directors (inc. nominees)and Executive
Officers as a group (9 persons)................. 794,156 28,000 16.01%
</TABLE>
NOTES TO PREVIOUS TABLES:
(1) Mr. Richard A. Barone is the controlling stockholder and President of
Resource Management, Inc. doing business under the name "Gelfand/Maxus Asset
Management." Resource Management, Inc. is a privately owned money management
firm headquartered in Cleveland, Ohio. Mr. Richard A. Barone may be deemed to
own beneficially the shares owned by Resource Management, Inc. Richard A. Barone
is the brother of Robert N. Barone. Mr. Robert N. Barone owns a 15% minority
interest in Resource Management, Inc.
(2) Less than one percent(1%).
(3) All of Mr. Barone's shares are held by The Barone Family 1988 Trust, of
which Mr. Barone and his spouse are trustees. Mr. Barone also owns a 15%
minority interest in Resource Management, Inc., which owns 385,000 shares of
Comstock common stock (approximately 7.54%). See Note (1). On December 28, 1998,
Mr. Barone exercised all of the stock options he held on that date. Mr. Barone
acquired 271,700 shares for an aggregate option exercise price of approximately
$646,985. Funds for payment by Mr. Barone of the exercise price and associated
taxes were obtained by him from personal funds and from borrowings from one or
more individuals or firms, including Mr. Umberto Fedeli and Resource Management,
Inc., owners of more than 5% of Comstock's common stock, or from one or more
securities firms including Prudential Securities and the Pershing Division of
Donaldson, Lufkin & Jenrette. Mr. Barone's borrowings from Mr. Fedeli have been
retired by subsequent borrowings, including margin debt held by one or more
securities firms and financing provided by First Security Bank of Nevada. Hovde
Acquisition, L.L.C., an entity controlled by the principals of Hovde Financial,
Inc., which is acting as financial advisor to Comstock, also provided financing
to Mr. Barone in the approximate amount of $500,000. Effective March 16, 1999,
First Security Bank of Nevada provided a stock-secured loan to Mr. Barone and
his spouse in the amount of $2.1 million, the proceeds of which were used to pay
off Pershing, Prudential Securities, Hovde Acquisition, L.L.C. and Umberto
Fedeli. The First Security Bank of Nevada loan is a variable rate demand note
payable in full no later than June 5, 1999.
Unless otherwise indicated, voting power and investment power are
exercised solely by the person named in the table or shared with members of his
household. For the purpose of determining beneficial ownership with respect to
the named persons, common stock includes all issued and outstanding common
stock, as well as common stock acquirable through the exercise or conversion of
any option, warrant or security within 60 days. Under the 1992 Incentive Plan
and 1992 Non-Employee Directors' Stock Option Plan, options to acquire
approximately 72,000 shares of common stock are outstanding and are currently
exercisable.
56
<PAGE> 62
Under Section 3.3 of the merger agreement, Comstock and First Security
have agreed that all outstanding vested options shall be exercised immediately
before completion of the merger. The exercise will take the form of a "cashless
exercise," meaning option holders will not have to pay the option exercise price
in cash. Instead, option holders will be deemed to have received a number of
shares of Comstock common stock with an aggregate value equal to (i) the
difference between the per share value of Comstock common stock and the option
exercise price per share, (ii) multiplied by the number of shares acquirable
upon exercise of the option. Option holders will not have to take any action to
accomplish the cashless exercise.
The 1992 Non-Employee Directors' Stock Option Plan was adopted in 1992
and assumed by Comstock in connection with the 1997 holding company
reorganization of Comstock Bank. At the meeting of the Board of Directors
immediately following each annual meeting of stockholders, each non-employee
director has received automatically a grant on the following terms:
(1) from the shares reserved for issuance under the 1992
Non-Employee Directors' Stock Option Plan, each non-employee
director is granted the right to purchase up to 5,500 shares
at the fair market value on that date, which right may be
exercised by the director by delivering a written notice of
exercise at the Board of Directors' meeting at which the right
is granted;
(2) without further action by the Board of Directors or the
Options Committee, each non-employee director is granted on
such date a ten-year option to purchase 2,200 shares at fair
market value on the date of grant; and
(3) for each share a director purchases under paragraph (1) above,
he is granted on the same date an additional ten-year option
to purchase an equal number of shares at the same price.
To be eligible for this grant, a director (i) must have been a director for at
least three full months during the preceding fiscal year, (ii) must not have
been an employee or officer of Comstock or any of its affiliates during the 12
months preceding such date and (iii) must not have been eligible during the
preceding twelve months to receive any award of stock, options or stock
appreciation rights under any other benefit plan of Comstock or affiliates. No
director may be granted rights to purchase shares and options to purchase shares
in the aggregate of more than 110,000 shares under the 1992 Non-Employee
Directors' Stock Option Plan. The aggregate number of shares of common stock
reserved for issuance under the 1992 Non-Employee Directors' Stock Option Plan
is 270,000 shares. The 1992 Non-Employee Directors' Stock Option Plan has a term
of ten years, but termination of the 1992 Non-Employee Directors' Stock Option
Plan would not affect any outstanding options granted under the 1992
Non-Employee Directors' Stock Option Plan. Options granted under the 1992
Non-Employee Directors' Stock Option Plan may be exercised at any time from the
date of grant and for a period of ten years thereafter.
In connection with the merger, Comstock has agreed that it will not
issue any additional options under the 1992 Non-Employee Directors' Stock Option
Plan. No options or other benefits will be granted to directors under the 1992
Non-Employee Directors' Stock Option Plan following the Annual Meeting or
thereafter.
ELECTION OF DIRECTORS (PROPOSAL 2)
Under Comstock's Bylaws, the Board of Directors may consist of no fewer
than five and no more than 20 directors, the precise number being fixed within
that range by resolution adopted by the Board of Directors or by stockholders at
an annual meeting. The Board of Directors has fixed the number of directors at
nine. Under the Bylaws, a majority of the directors may fill vacancies and newly
created directorships resulting from any increase in the authorized number of
directors. All directors of Comstock are elected annually and hold office until
the following annual meeting or until their successors are elected and
qualified. The Board of Directors of Comstock and the Board of Directors of
Comstock Bank are comprised of the same individuals, serving identical terms as
directors of Comstock and Comstock Bank. If elected by stockholders at the
Annual Meeting, the individuals identified herein as nominees will serve as
directors until the merger is consummated. If the merger is not consummated, the
nominees will serve as directors until the 2000 Annual Meeting of Stockholders
or until their successors are elected and qualified. The proxies solicited
hereby cannot be voted for a greater number of persons than the number of
nominees identified herein.
57
<PAGE> 63
INFORMATION WITH RESPECT TO NOMINEES
For each nominee as director, the table below sets forth his name, age
and period of service as a director. The holding company reorganization approved
by stockholders at Comstock Bank's 1997 Annual Meeting became effective in June
1997. As a result of the holding company reorganization, stockholders of
Comstock Bank became stockholders of Comstock, and Comstock Bank became a wholly
owned subsidiary of Comstock. In connection with the holding company
reorganization, the individuals serving as directors of Comstock Bank served
also as the initial Board of Directors of Comstock, and they have continued to
serve as members of the Board of Directors of each of Comstock and Comstock Bank
since that time. Except for Mr. Zideck, the individuals identified in the table
above have served as directors of Comstock since its inception. Accordingly, the
table below indicates the period of service of these individuals as directors of
Comstock Bank.
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING
NOMINEES AGE DIRECTOR SINCE TITLE PAST 5 YEARS
-------- --- -------------- ----- ---------------------------
<S> <C> <C> <C> <C>
Edward E. Allison 59 November 1993 Director Self-employed government relations and
investment consultant
Robert N. Barone 54 March 1984 Chairman, Chief Chairman, Chief Executive Officer and
Executive Officer, Treasurer of Comstock and Comstock
Treasurer and Bank; also a director of the Federal
Director Home Loan Bank of San Francisco since
1996, serving as Vice Chairman since
February 1998
Stephen C. Benna 46 June 1996 Director President, Chief Executive Officer and
General Manager of CB Concrete
Company, and General Manager of
Capitol City Concrete Company,
concrete manufacturing
John A. Coombs 53 April 1982 Director Orthodontist; private practice
Michael W. Dyer 51 December 1984 Director and Partner in law firm of Dyer, Lawrence,
General Counsel Cooney & Penrose, Carson City
Mervyn J. Matorian 54 March 1983 Director State Farm insurance agent
Samuel P. McMullen 49 September 1993 Director President of The McMullen Strategic
Group, a governmental and public
relations and political strategy
consulting and communications firm;
Partner in law firm of Avansino,
Melarkey, Knobel, McMullen & Mulligan,
Reno
Larry A. Platz 60 March 1984 President, President and Secretary of Comstock
Secretary and and Comstock Bank
Director
Ronald R. Zideck 61 December 1997 Director Retired Managing Partner of Reno
office of Grant Thornton, LLP,
international accounting and
consulting firm; also a Director of
Harveys Casino Resorts
</TABLE>
Except as may be noted herein, there are no family relationships among
any of the directors or executive officers. None of such persons was selected or
serves as director pursuant to any arrangement or understanding with
58
<PAGE> 64
any other person. Directors are elected at each annual meeting of the
stockholders of Comstock. Each officer serves at the discretion of the Board of
Directors. Except as may be disclosed herein, none of the directors and
executive officers of Comstock serves as a director of any company that has a
class of securities registered under, or which is subject to the periodic
reporting requirements of, the Securities Exchange Act of 1934 or any investment
company registered under the Investment Company Act of 1940. None of the
directors or executive officers of Comstock has been involved in any legal
proceedings concerning bankruptcy, either individually or in respect of any
businesses with which they have been involved, nor have any of such persons been
convicted of any crime, excluding traffic violations and similar minor offenses.
BOARD COMMITTEES
The Board of Directors, which is responsible for the overall affairs of
Comstock, conducts its business through meetings of the Board. The Board of
Directors held 12 regular meetings and one special meeting in 1998. Comstock has
no Board committees other than the Options Committee. The Board of Directors of
Comstock Bank held twelve (12) regular and no special meetings in 1998.
Committees of the Board of Directors of Comstock Bank include, among others, a
CRA/Audit/Compliance Committee and a Personnel/Compensation Committee. The
entire Board of Directors of Comstock acts as a nominating committee for
selecting nominees for election as directors.
CRA/AUDIT/COMPLIANCE COMMITTEE (COMSTOCK BANK)
This committee met twice in 1998. The CRA/Audit/Compliance Committee
consists solely of directors who are not also executive officers of Comstock or
Comstock Bank. It currently consists of four members: Messrs. Allison, Benna,
Dyer and Zideck. The Community Reinvestment Act ("CRA") function of the
Committee is to consider Comstock Bank's CRA efforts, performance and areas of
improvement. The CRA/Audit/Compliance Committee receives reports from Comstock
Bank's CRA Officer about Comstock Bank's CRA efforts and Comstock Bank's
opportunities to offer products and services that are responsive to the needs of
Comstock Bank's community. The audit function of the CRA/Audit/Compliance
Committee is to review the findings of the outside auditor and any internal
control findings. The compliance function of the CRA/Audit/Compliance Committee
is to review the findings of any regulatory examination involving compliance.
PERSONNEL/COMPENSATION COMMITTEE (COMSTOCK BANK)
This committee met once in 1998. Its function is to review the
compensation of Comstock Bank's senior executives and all vice presidents. It
has five members: Messrs. Allison, Barone, Benna, Matorian and Platz.
OPTIONS COMMITTEE (COMSTOCK)
The Options Committee is the only committee of the Board of Directors
of Comstock. It met twice in 1998. The Option Committee's function is to
administer the stock option plans, including but not limited to review of
officer and employee performance for the purpose of making awards of stock,
options or other benefits under the 1992 Incentive Plan (adopted by Comstock
Bank in 1992 and assumed by Comstock in connection with the 1997 holding company
reorganization of Comstock Bank). The Option Committee consists of five members:
Messrs. Allison, Benna, Coombs, McMullen and Zideck.
In 1998, no director attended fewer than 75% of the aggregate number of
meetings of Comstock Bank's Board of Directors and committee(s) on which he
served. Likewise, in 1998 no director attended fewer than 75% of the aggregate
number of meetings of Comstock's Board of Directors and committee on which he
served.
REMUNERATION OF DIRECTORS
Directors do not receive separate cash compensation for their service
as Comstock directors in addition to compensation they receive for their service
as Comstock Bank directors. In 1998, directors received the sum of $700 for each
regular meeting of the Board of Directors of Comstock Bank attended. In
addition, each committee meeting attended entitled the non-employee director to
compensation of $100, except the Loan Committee, which set compensation of $250
for attending non-employee directors.
Consistent with the terms of the 1992 Non-Employee Directors' Stock
Option Plan discussed in " - Voting Securities and Principal Holders Thereof,"
following the 1998 Annual Meeting of Stockholders six eligible non-employee
directors received automatically options to acquire 2,200 shares of common
stock,
59
<PAGE> 65
exercisable for a ten-year period at the fair market value of the common stock
on such date ($10.00 per share). Mr. Zideck was not eligible because he did not
serve on the Board for three months in fiscal 1997. In addition, Messrs.
Allison, Benna, Coombs and Dyer exercised the right under the 1992 Non-Employee
Directors' Stock Option Plan to acquire shares of common stock at the fair
market value on such date, receiving for each share so acquired a companion
option to acquire a share of common stock, exercisable for the same period, at
the same price and on the same terms as the automatic grant of options to
acquire 2,200 shares. The number of shares acquired by these non-employee
directors (and the number of shares acquirable upon exercise of accompanying
options received as a result thereof) following the 1998 Annual Meeting of
Stockholders was as follows: Mr. Allison, 200 shares; Dr. Coombs, 500 shares;
Mr. Dyer, 500 shares; and Mr. Matorian, 500 shares.
In connection with the merger, Comstock has agreed that it will not
issue any additional options under the 1992 Non-Employee Directors' Stock Option
Plan. No options or other benefits will be granted to directors under the 1992
Non-Employee Directors' Stock Option Plan following the Annual Meeting or
thereafter.
Comstock Bank has implemented a deferred fee arrangement for directors.
Upon execution of a Deferred Fee Agreement, each director is eligible to defer
part or all of the fees to which he is entitled for service as a director. As of
the date hereof, all directors other than Directors Barone, Matorian, McMullen
and Zideck have entered into Deferred Fee Agreements. Under the Deferred Fee
Agreements, deferred director fees are retained by Comstock Bank, which makes a
matching contribution of up to 25% of the first $12,000 in compensation deferred
by a director. Each director earns interest on deferred fees and matching
contributions at a rate established annually by the Board of Directors, which
rate may not exceed the prime lending rate of Comstock Bank plus 2%. Upon
retirement, disability or death, deferred director fees, matching contributions
and interest thereon will be paid in cash to the director or his or her
beneficiary(ies) in equal monthly installments over a 13-year period (or in a
lump sum if the director has previously elected a lump sum distribution). If a
director's service is terminated in connection with a change in control,
however, the benefits payable under the Deferred Fee Agreements would be payable
in a lump sum within 90 days. Because of the proposed merger with First
Security, each director who is a party to a Deferred Fee Agreement will receive
a lump sum payment of his deferred benefits within 90 days after completion of
the merger.
Director Platz has entered into a Deferred Fee Agreement relating to
his compensation as a director, and a separate Key Employee Deferred
Compensation Agreement relating to his compensation as an executive officer.
See, " - Executive Compensation."
EXECUTIVE COMPENSATION
Since the formation of Comstock and completion of the holding company
reorganization of Comstock Bank in June 1997, Comstock's executive officers have
received remuneration from Comstock. Comstock's two executive officers no longer
receive compensation from Comstock Bank, although Comstock does have an
agreement with Comstock Bank whereby Comstock Bank reimburses Comstock for a
portion of the executives' time spent on Comstock Bank matters. The following
table shows the annual compensation for services in all capacities to Comstock
Bank (and Comstock during the latter half of 1997) for the fiscal years ended
December 31, 1998, 1997 and 1996 for the Chief Executive Officer and the
President of Comstock Bank and Comstock. No other executive officer received
compensation in excess of $100,000 during 1998.
[See table on following page]
60
<PAGE> 66
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------- ---------------------- -------
($) (#)
($) RESTRICTED SECURITIES ($) ($)
NAME AND ($) ($) OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
------------------ ---- --------- ------- ------------ --------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert N. Barone, 1998 198,000 290,164 (2) 0 0 0 25,137 (3)
Chairman of the 1997 186,000 125,526 (2) 0 0 0 36,913 (3)
Board of Directors, 1996 174,000 96,308 (2) 0 0 0 17,487 (3)
Chief Executive
Officer and
Treasurer
Larry A. Platz, 1998 198,000 260,164 (2) 0 0 0 24,992 (4)
President and 1997 186,000 95,526 (2) 0 0 0 47,297 (4)
Secretary 1996 174,000 116,308 (2) 0 0 0 17,885 (4)
</TABLE>
FOOTNOTES TO PREVIOUS TABLE:
(1) Includes amounts deferred at the election of the named executive officers
pursuant to the 401(k) Plan of Comstock Bank and pursuant to the Key Employee
Deferred Compensation Agreements. See, "Key Employee Deferred Compensation
Agreements" hereinafter.
(2) Perquisites and other personal benefits did not exceed the lesser of $50,000
or 10% of total salary and bonus.
(3) Includes (i) the dollar amount of contributions by Comstock Bank to vested
and unvested 401(k) Plan account(s) of Mr. Barone, (ii) the dollar amount of
matching contributions to the Key Employee Deferred Compensation Agreement
account of Mr. Barone, together with interest thereon calculated at the rate
provided for in the Key Employee Deferred Compensation Agreement, (iii) the
dollar value of the benefit realized or realizable by Mr. Barone by reason of
Comstock Bank's payment of the premiums on split-dollar life insurance and a
supplemental retirement insurance annuity, (iv) board fees and (v) premiums paid
on Mr. Barone's custom disability plan ($2,738 in each of 1998, 1997 and 1996).
See, " Employment Agreements." The dollar value of the split-dollar premium
benefit is calculated on an actuarial basis for the period between payment of
the premium by Comstock Bank and the anticipated date of repayment to Comstock
Bank of premiums previously paid for the split-dollar life insurance. Matching
contributions to the 401(k) Plan account(s) of Mr. Barone were $5,000 in 1998,
$4,750 in 1997 and $4,500 in 1996. Matching contributions to the Key Employee
Deferred Compensation Agreement account of Mr. Barone totaled $4,050 in 1998,
with interest of $333, and $2,000 in 1997, with interest of $53. The Key
Employee Deferred Compensation Agreements were approved by Comstock Bank in
December 1996, but no matching contributions were made prior to 1997.
(4) Includes (i) the dollar amount of contributions by Comstock Bank to vested
and unvested 401(k) Plan account(s) of Mr. Platz, (ii) the dollar amount of
matching contributions to the Key Employee Deferred Compensation Agreement
account of Mr. Platz, together with interest thereon calculated at the rate
provided for in the Key Employee Deferred Compensation Agreement, (iii) the
dollar value of the benefit realized or realizable by Mr. Platz by reason of
Comstock Bank's payment of the premiums on split-dollar life insurance and a
supplemental retirement insurance annuity, (iv) board fees (including deferred
board fees, board fee matching contributions and interest thereon) and (v)
premiums paid on Mr. Platz's custom disability plan ($3,238 in each of 1998 and
1997 and $3,136 in 1996). See, " - Employment Agreements." The dollar value of
the split-dollar premium benefit is calculated on an actuarial basis for the
period between payment of the premium by Comstock Bank and the anticipated date
of repayment to Comstock Bank of premiums previously paid for the split-dollar
life insurance. Matching contributions to the 401(k) Plan account(s) of Mr.
Platz were $5,000 in 1998, $4,750 in 1997 and $4,500 in 1996. Matching
contributions to the Key Employee Deferred Compensation Agreement account and
the (Director) Deferred Fee Agreement account (see, "Remuneration of Directors")
of Mr. Platz aggregated $3,000 in 1998, with interest of $296, and $2,000 in
1997, with interest of $54. The Key Employee Deferred Compensation Agreements
and (Director) Deferred Fee Agreements were approved by Comstock Bank in
December 1996, but no matching contributions were made prior to 1997.
In 1998, neither Mr. Barone nor Mr. Platz received any grants of stock
options or other awards under the Company's 1992 Incentive Plan or otherwise. In
1998 both Mr. Barone and Mr. Platz exercised all previously granted stock
options.
The following table shows the number of shares of Common Stock
acquirable upon exercise of options by the individuals named in the Summary
Compensation Table above. The table also indicates the extent to which such
options were exercisable at December 31, 1998, as well as the approximate value
of such options based on the fair market value of the Common Stock at December
31, 1998.
[See table on following page]
61
<PAGE> 67
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS
SHARES YEAR END(#) AT FISCAL YEAR END($)
ACQUIRED ON ------------------------------ ----------------------------
NAME EXERCISE(#) VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Barone 271,700 $1,934,021 0 0 $0 $0
Larry A. Platz 271,700 $1,942,966 0 0 $0 $0
</TABLE>
EMPLOYMENT AGREEMENTS
Comstock Bank entered into substantially similar employment agreements
dated as of December 14, 1992 with each of Messrs. Robert Barone and Larry Platz
(the "Employment Agreements"). In connection with the holding company
reorganization of Comstock Bank, Comstock succeeded to those contracts on June
16, 1997. The initial term of the Employment Agreements is for a period ending
October 30, 2009, unless terminated for cause (as defined therein). The term of
each Employment Agreement is automatically extended for one additional year on
each anniversary date of the Employment Agreement, unless the Board of Directors
gives 30 days' prior written notice that the term will not be extended.
The Employment Agreements provide that each of Messrs. Barone and Platz
is entitled to an annual base salary of $132,000, plus an annual bonus of 6% of
after-tax profits, unless economic conditions or the financial condition of
Comstock Bank dictate that the bonus be suspended. The annual base salary is
subject to renegotiation every six months, but changes, if any, may result only
in an increase in the annual base salary, not a decrease. The Employment
Agreements also provide that Mr. Barone and Mr. Platz are entitled to
participate in all benefit plans and programs available to executives and
salaried employees.
Each Employment Agreement provides that, following a change of control,
Comstock may terminate the Employment Agreement. If the Employment Agreement is
terminated following a change in control, Comstock would nevertheless continue
to be obligated for a period of four years from the date of termination to pay
Mr. Barone or Mr. Platz, as the case may be, his then current annual base
salary.
The merger will constitute a change in control for purposes of Messrs.
Barone's and Platz's Employment Agreements. In connection with the proposed
merger, Messrs. Barone and Platz have entered into Agreements for
Change-in-Control Severance Benefits with Comstock and Comstock Bank. The
Agreements for Change-in-Control Severance Benefits provide to Messrs. Barone
and Platz severance benefits in amounts consistent with the benefits that would
have been payable under the severance provisions of their Employment Agreements,
which are superseded by the Agreements for Change-in-Control Severance Benefits
to that extent. Under the Agreements for Change-in-Control Severance Benefits,
Messrs. Barone and Platz will each be entitled to a severance payment of
$760,000 as a result of the merger. Messrs. Barone and Platz will also receive
cash compensation in connection with the merger for accrued but unused vacation.
The payment for accrued but unused vacation will be approximately $70,000 for
Mr. Barone and approximately $28,000 for Mr. Platz.
SALARY CONTINUATION AGREEMENTS
Each of Messrs. Barone and Platz entered into a Salary Continuation
Agreement with Comstock Bank effective April 30, 1997, which agreements were
assumed by Comstock following the holding company reorganization in June 1997.
The Salary Continuation Agreements are intended to supplement the income of
Messrs. Barone and Platz following their retirement, death, disability or
termination following a change in control.
62
<PAGE> 68
Comstock is obligated to continue to pay Mr. Barone or his designated
beneficiary(ies) for a period of 15 years following Mr. Barone's retirement,
death or disability or following a change in control of Comstock.
The salary continuation benefit for Mr. Barone would be
- NORMAL RETIREMENT (AGE 65): $66,900 annually upon Mr. Barone's
retirement on or after reaching age 65 or upon his death;
- EARLY RETIREMENT: an annual amount ranging from a low of
$7,753 annually, had Mr. Barone retired in the plan year
ending April 30, 1999, or $14,947 annually for early
retirement in the third plan year (ending April 30, 2000), to
a high of $66,900 for early retirement at age 64, at the end
of the final plan year 2010. This early retirement benefit
would be payable to Mr. Barone after he reaches normal
retirement age of 65. Alternatively, the Salary Continuation
Agreement provides that the Board of Directors may elect to
pay (1) an immediate annual benefit ranging from $3,161, had
Mr. Barone retired in the plan year ending April 30, 1999, to
$66,900 had he retired in the final plan year or (2) a lump
sum payment for the years credited at the time of his
retirement, ranging from a lump sum of $28,414 for retirement
in the plan year ending April 30, 1999, or $59,034 for early
retirement in the plan year beginning May 1, 1999, to $601,394
for retirement in the final plan year;
- DISABILITY: an amount equal to the immediate annual benefit
for early retirement if Mr. Barone is terminated due to
disability; or
- CHANGE IN CONTROL: an amount equal to the early retirement
lump sum benefit if a change in control of Comstock occurs.
Comstock is obligated to continue to pay Mr. Platz or his designated
beneficiary(ies) for a period of 15 years following Mr. Platz's retirement,
death or disability or following a change in control of Comstock. The salary
continuation benefit for Mr. Platz would be
- NORMAL RETIREMENT (AGE 65): $44,700 annually upon Mr. Platz's
retirement on or after reaching age 65 or upon his death;
- EARLY RETIREMENT: an annual amount ranging from a low of
$7,903 annually, had Mr. Platz retired in the plan year ended
April 30, 1999, $15,236 annually for early retirement in the
third plan year (ending April 30, 2000), to a high of $44,700
for early retirement at age 64, at the end of the seventh plan
year. This early retirement benefit would be payable to Mr.
Platz after he reaches normal retirement age of 65.
Alternatively, the Salary Continuation Agreement provides that
the Board of Directors may elect to pay (1) an immediate
annual benefit ranging from $5,046, had Mr. Platz retired in
the plan year ending April 30, 1999, to $44,700 had he retired
after the seventh plan year or (2) a lump sum payment for the
years credited at the time of his retirement, ranging from a
lump sum of $45,361 for retirement in the plan year ending
April 30, 1999, or $94,244 for early retirement in the plan
year beginning May 1, 1999, to $401,829 for retirement after
the seventh plan year;
- DISABILITY: an amount equal to the immediate annual benefit
for early retirement if Mr. Platz is terminated due to
disability; or
- CHANGE IN CONTROL: an amount equal to the lump sum payment for
early retirement if a change in control of Comstock occurs.
Neither Comstock nor Comstock Bank would be obligated under the Salary
Continuation Agreement to pay any benefit to Messrs. Barone or Platz or his
beneficiary(ies) if he is terminated for cause.
The merger agreement provides in Section 11.1 that the change in
control of Comstock shall be deemed to have occurred in the plan year beginning
May 1, 1999, entitling Messrs. Barone and Platz to the lump sum
change-in-control benefits calculated under the Salary Continuation Agreements
for the plan year ending April 30, 1999. As a consequence of the proposed
merger, Mr. Barone expects to receive approximately $59,634 as a lump-sum
payment
63
<PAGE> 69
under his Salary Continuation Agreement, and Mr. Platz expects to receive
approximately $94,244 as a lump-sum payment under his Salary Continuation
Agreement.
SPLIT-DOLLAR LIFE INSURANCE
The Employment Agreements also provide for a split-dollar life
insurance arrangement. Comstock Bank pays the premiums for two $2,300,000
split-dollar life insurance policies insuring the lives of Larry Platz and
Robert Barone (individually, a "Policy" and, together, the "Policies"). One
Policy is owned by Mr. Platz and the other is owned by Mr. Barone. Annual
premiums of approximately $163,000 for each Policy were paid by Comstock Bank
for a period of five years from October 1992, with nominal annual premium
payments for a period of two years thereafter. The total amount of premiums paid
by Comstock Bank for each Policy are $845,565 for Mr. Barone and $841,730 for
Mr. Platz. Comstock Bank will be entitled to repayment of premium payments made
on each Policy no later than (i) the death of Mr. Barone or the death of Mr.
Platz, or (ii) the seventeenth anniversary date of the Policies. Moreover,
Comstock Bank will be entitled to early repayment (i) if the split-dollar
insurance agreement is terminated by written notice from Mr. Barone or Mr.
Platz, as the case may be, or by mutual consent of the parties or (ii) if Mr.
Barone or Mr. Platz, as the case may be, terminates employment under certain
specified circumstances. The amount of any early repayment would not exceed the
cash surrender value of the relevant Policy at such time. The Policies have been
assigned to Comstock Bank as collateral security for repayment of the premiums
paid by Comstock Bank.
The Employment Agreements entered into by Messrs. Barone and Platz with
First Security Bank of Nevada provide that Messrs. Barone and Platz will not be
obligated to repay premiums paid by Comstock Bank on their split-dollar life
insurance policies until October 2009. See, "Terms Of The Merger - Interests of
Directors and Officers in the merger that Differ From Your Interests."
KEY EMPLOYEE DEFERRED COMPENSATION AGREEMENTS
Similar to the Deferred Fee Agreement described in "Remuneration of
Directors" above, on April 30, 1997 Comstock Bank entered into Key Employee
Deferred Compensation Agreements with Messrs. Barone and Platz. Pursuant to the
Key Employee Deferred Compensation Agreements, Messrs. Barone and Platz have
elected to defer part of their annual base salary. Comstock Bank makes a
matching contribution of up to 25% of the first $12,000 of compensation deferred
by Mr. Barone and by Mr. Platz. Matching contributions made are subject to
potential reduction or elimination in certain events, as described hereinafter.
The amount of salary deferred may be modified annually with approval of the
Board of Directors. Each of Messrs. Barone and Platz earns interest on deferred
compensation and matching contributions at a rate established annually by the
Board of Directors, which rate may not exceed the prime lending rate of Comstock
Bank plus 2%. The Key Employee Deferred Compensation Agreements with Messrs.
Barone and Platz and the obligations of Comstock Bank thereunder were assumed by
Comstock in connection with the holding company reorganization of Comstock Bank.
Upon their retirement, disability or death or upon a change in control
of Comstock, deferred compensation, matching contributions and interest thereon
will be paid in cash to Messrs. Barone and Platz or their designated
beneficiary(ies) in equal monthly installments over a 13-year period (or in a
lump sum to the extent that a lump sum distribution has previously been
elected). Upon termination of employment in connection with a change in control,
however, the benefits payable under the Key Employee Deferred Compensation
Agreements would be payable in a lump sum within 90 days. As a result of the
proposed merger between Comstock and First Security, Mr. Barone expects as of
January 31, 1999 to receive approximately $34,062 as a lump-sum payment under
his Key Employee Deferred Compensation Agreement. Mr. Platz expects as of
January 31, 1999 to receive approximately $9,751 as a lump-sum payment under his
Key Employee Deferred Compensation Agreement, and $18,407 under his (Director)
Deferred Fee Agreement.
Mr. Platz has entered into a similar deferred director fee arrangement
with respect to fees to which he is entitled in his capacity as director. See, "
- - Remuneration of Directors."
64
<PAGE> 70
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Some of the directors and officers of Comstock, as well as their
affiliates, are and have been customers of Comstock Bank and as such have had
banking transactions with Comstock Bank in 1998. Loan transactions with these
persons were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, prevailing at the time for
comparable transactions with others, and did not present more than a normal risk
of collectability or other unfavorable features.
In 1998 Comstock Bank paid to the law firm of Dyer, Lawrence, Cooney &
Penrose, a firm in which Mr. Dyer, a director of Comstock Bank and Comstock, is
a partner, the sum of $85,760 for legal services rendered. In 1998 Comstock Bank
paid State Farm Insurance the sum of $340 for insurance. Mr. Matorian, a
director, is the State Farm agent through whom the insurance was placed.
Beginning in 1997, Resource Management, Inc., which owns 385,000 shares
(7.62%) of Comstock's common stock, has provided investor relations services to
Comstock for a monthly fee of $3,500. Mr. Richard A. Barone, the brother of
Comstock's Chairman and Chief Executive Officer, is the controlling stockholder
and President of Resource Management, Inc. Chairman and Chief Executive Officer
Robert N. Barone owns a 15% minority interest in Resource Management, Inc.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ELECTION
OF EACH OF THE NOMINEES NAMED HEREIN.
RATIFICATION OF INDEPENDENT AUDITOR (PROPOSAL 3)
Comstock's independent auditor for the fiscal year ended December 31,
1998 was Kafoury, Armstrong & Company. The Board of Directors has selected
Kafoury, Armstrong & Company to be its independent auditor for the fiscal year
ending December 31, 1999. This appointment is being presented to the
stockholders for ratification.
One or more members of the firm of Kafoury, Armstrong & Company are
expected to be present at the Annual Meeting. The representative(s) of the
independent auditor will have the opportunity to make a statement if desired,
and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF THE APPOINTMENT OF KAFOURY, ARMSTRONG & COMPANY AS
INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
EXPENSES; SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by Comstock. In
addition to solicitation by mail, directors, officers and employees of Comstock
and Comstock Bank may solicit proxies for the Annual Meeting personally or by
telephone without additional remuneration therefor. Brokerage houses, nominees,
fiduciaries and other custodians are requested to forward soliciting materials
to beneficial owners. Comstock will reimburse brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy material to the beneficial owners of Comstock common stock.
Stockholders may authorize another person or persons to act for them as
proxy by transmitting or authorizing the transmission of a telegram, cablegram
or other means of electronic transmission to the Secretary of Comstock, provided
that any such telegram, cablegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder.
65
<PAGE> 71
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Annual Meeting other than those matters described above in this Prospectus/Proxy
Statement. However, if any other matters should properly come before the
meeting, it is intended that proxies in the accompanying form will be voted in
respect thereof in accordance with the judgment of the person or persons voting
the proxies, including matters relating to the conduct of the meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Due to administrative oversight, Director Coombs was late in filing a Form 4
reporting his purchase of Comstock stock.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
If the merger agreement is not approved or the acquisition contemplated
thereby is not consummated before the 2000 Annual Meeting, Comstock plans to
hold its 2000 Annual Meeting of Stockholders on May 31, 2000. In order for a
stockholder proposal to be included in next year's proxy statement, it must be
received by the Secretary at Comstock's office at 6275 Neil Road, Reno, Nevada
89511 (mailing address P.O. Box 7610, Reno, NV 80510-7610) by November 29, 1999.
If a stockholder intends to present a proposal at the 2000 Annual
Meeting of Stockholders without seeking to include the proposal in Comstock's
proxy materials for that meeting (assuming the merger is not completed by that
time and, therefore, that Comstock holds an annual meeting in the year 2000),
Comstock's management proxies will be entitled to use the discretionary voting
authority that will be contained in the proxies for the 2000 Annual Meeting of
Stockholders to vote on the stockholder's proposal at the 2000 Annual Meeting of
Stockholders, unless prior notice of the proposal is given to Comstock. Prior
notice must be given to Comstock at least 45 days before the anticipated April
20, 2000 proxy mailing date for the 2000 Annual Meeting of Stockholders.
Accordingly, a stockholder who desires to present a proposal at the 2000 Annual
Meeting of Stockholders without seeking to include the proposal in Comstock's
proxy materials for that meeting should provide notice of the proposal to
Comstock no later than March 6, 2000. If the stockholder fails to do so,
Comstock's management proxies for the 2000 Annual Meeting of Stockholders will
be entitled to use their discretionary voting authority on that proposal,
without any discussion of the matter in Comstock's proxy materials.
LEGAL MATTERS
Ray, Quinney & Nebeker, P.C, Salt Lake City, Utah, will pass upon
certain other matters with respect to the merger for First Security and First
Security Bank of Nevada, including the legality of the First Security common
stock to be issued in the merger. As of March 19, 1999, attorneys at Ray,
Quinney & Nebeker, as a group, were beneficial owners of no more than 4% of the
total outstanding First Security common stock and held no Comstock shares. A
stockholder of Ray, Quinney & Nebeker is the daughter of the Chairman and Chief
Executive Officer of First Security. Another stockholder acts as Assistant
Secretary of First Security.
The law firm of Grady & Associates, Cleveland, Ohio, will pass upon
certain matters in connection with the merger for Comstock.
EXPERTS
The consolidated financial statements of First Security incorporated in
this Prospectus/Proxy Statement by reference from the First Security Current
Report on Form 8-K dated October 1, 1998, have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report (which report
expressed an unqualified opinion and included explanatory language describing
the restatement of the financial statements to give effect to the California
State Bank acquisition, which was accounted for as a pooling of interests),
which is incorporated herein by reference, and have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
66
<PAGE> 72
The consolidated financial statements of Comstock as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998 incorporated in this Prospectus/Proxy Statement by reference from
Comstock's Annual Report on Form 10-KSB have been audited by Kafoury, Armstrong
& Company, independent auditors, as set forth in their report thereon. Such
consolidated financial statements are included herein in reliance upon such
report given upon the authority of such firm as experts in auditing and
accounting.
Representatives of Kafoury, Armstrong & Company are expected to be
present at the Comstock Annual Meeting of Stockholders. Such representatives
will have the opportunity to make a statement if they desire to do so and are
expected to be available to respond to appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
First Security has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 under the Securities Act of 1933. The Form
S-4 Registration Statement registers the distribution of First Security
securities to be issued to Comstock stockholders in the merger. The Form S-4
Registration Statement, including attached exhibits and schedules, contains
additional relevant information about First Security common stock. The rules and
regulations of the Securities and Exchange Commission allow us to omit certain
information included in the Form S-4 Registration Statement from this
Prospectus/Proxy Statement.
In addition, First Security and Comstock file reports, proxy statements
and other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. You may read and copy that information at the
following locations of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy and proxy statements and other
information regarding issuers that, like First Security and Comstock, file
electronically with the Securities and Exchange Commission. The address of that
site is http://www.sec.gov.
The Securities and Exchange Commission allows First Security and
Comstock to "incorporate by reference" information into this Prospectus/Proxy
Statement. This means that we can disclose important information to you by
referring you to another document filed separately with the Securities and
Exchange Commission. The information incorporated by reference is considered to
be a part of this Prospectus/Proxy Statement, except for any information that is
superseded by information that is included directly in this document.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus/Proxy Statement incorporates by reference the documents
listed below that First Security and Comstock have previously filed with the
Securities and Exchange Commission. These documents contain important
information about our companies and their financial affairs.
FIRST SECURITY (Securities and Exchange Commission File No. 1-6906):
(a) Annual Report on Form 10-K for the year ended December 31,
1997;
(b) Proxy Statement dated March 15, 1999;
(c) Current Reports on Form 8-K dated October 1, 1998, November 2,
1998, November 18, 1998, January 22, 1999, January 29, 1999
and February 9, 1999; and
(d) Description of First Security Common Stock, included in First
Security's Registration Statement on Form S-3, filed with the
Commission on September 13, 1991 (Commission File Number
33-42784).
67
<PAGE> 73
COMSTOCK (Securities and Exchange Commission File No. 000-22391):
(a) Annual Report on Form 10-KSB for the year ended December 31,
1998;
(b) Current Report on Form 8-K dated January 15, 1999; and
(c) Description of Comstock common stock, included in Comstock's
Registration Statement on Form S-4, filed with the Commission
on March 25, 1997 (Commission File Number 333-23923), under
the captions "Description of the Reorganization" and
"Description of Comstock Capital Stock."
All documents filed by First Security and Comstock under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date
of this Prospectus/Proxy Statement and prior to the date of the Comstock Annual
Meeting shall be deemed to be incorporated by reference in this Prospectus/Proxy
Statement and to be a part hereof from the date of filing such documents. These
documents include periodic reports, such as Annual Reports on Forms 10-K or
10-KSB, Quarterly Reports on Forms 10-Q or 10-QSB and Current Reports on Form
8-K, as well as proxy statements.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus/Proxy Statement to the extent that a
statement contained herein or in any other subsequently filed document which is
also incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement, as so modified or superseded,
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus/Proxy Statement. The information relating to First Security
and Comstock contained in this Prospectus/Proxy Statement should be read
together with the information in the documents incorporated by reference.
Copies of any First Security documents, other than exhibits to such
documents, that are incorporated by reference but not presented herein or
delivered herewith are available without charge to any person to whom this
Prospectus/Proxy Statement is delivered upon written or oral request to First
Security, Attention: Brad D. Hardy, Executive Vice President and Chief Financial
Officer, Suite 200, 79 South Main Street, Salt Lake City, Utah 84111, telephone
number (801) 246-6000. In order to ensure timely delivery of such documents
prior to the Annual Meeting of Comstock, any request should be received on or
before April 14, 1999. Copies of such documents will also be available upon
request thereafter until the effective time of the merger.
Copies of any Comstock documents, other than exhibits to such
documents, that are incorporated by reference but not presented herein or
delivered herewith are available without charge to any person to whom this
Prospectus/Proxy Statement is delivered upon written or oral request to
Comstock, Attention: Mr. Larry A. Platz, President and Secretary, P.O. Box 7610,
Reno, Nevada 89510-7610 (by mail, or to Mr. Platz at Comstock, 6275 Neil Road,
Reno, Nevada 89511 if by overnight courier), telephone number (775) 824-7100. To
ensure timely delivery of such documents prior to the Annual Meeting of
Comstock, any request should be received on or before April 20, 1999. Copies of
such documents will also be available upon request thereafter until the
effective time of the merger.
A copy of Comstock's Summary Annual Report to Shareholders is attached
as Appendix D to this Prospectus/Proxy Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST SECURITY OR COMSTOCK. THIS PROSPECTUS/PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT OR THE SOLICITATION OF
A PROXY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER,
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT, NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED
PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF FIRST SECURITY OR COMSTOCK OR ANY OF THEIR
RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS PROSPECTUS/PROXY STATEMENT.
68
<PAGE> 74
ALL INFORMATION CONTAINED OR INCORPORATED IN THIS PROSPECTUS/PROXY
STATEMENT WITH RESPECT TO FIRST SECURITY WAS SUPPLIED BY FIRST SECURITY. ALL
INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT WITH RESPECT TO
COMSTOCK WAS SUPPLIED BY COMSTOCK. ALTHOUGH NEITHER FIRST SECURITY NOR COMSTOCK
KNOWS OF ANY INFORMATION INDICATING THAT ANY STATEMENTS OR INFORMATION HEREIN
RELATING TO THE OTHER PARTY ARE INACCURATE OR INCOMPLETE, NEITHER FIRST SECURITY
NOR COMSTOCK CAN WARRANT THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS OR
INFORMATION AS THEY RELATE TO THE OTHER PARTY.
69
<PAGE> 75
APPENDIX A
MERGER AGREEMENT
<PAGE> 76
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE 12TH DAY OF JANUARY,
1999 (THIS "AGREEMENT"), IS MADE AND ENTERED INTO BY AND AMONG FIRST SECURITY
CORPORATION, A DELAWARE CORPORATION ("FSC"), FIRST SECURITY BANK OF NEVADA, A
BANK ORGANIZED UNDER THE LAWS OF NEVADA ("FSB"), COMSTOCK BANCORP, A NEVADA
CORPORATION ("COMSTOCK"), AND COMSTOCK BANK, A BANK ORGANIZED UNDER THE LAWS OF
NEVADA ("BANK").
R E C I T A L S:
A. FSC is a corporation duly organized and existing under the laws
of the State of Delaware, with its principal place of business located in
Salt Lake City, Utah. FSC is authorized by its Articles of Incorporation,
as amended, to issue (i) 400,000 shares of preferred stock, each of no par
value ("FSC Preferred Stock"), 18,052 of which are designated as Class A
Preferred Stock, of which 9,361 were issued and outstanding on November
30, 1998, and (ii) 600,000,000 shares of common stock, each of $1.25 par
value ("FSC Common Stock"), of which as of November 30, 1998, there were
188,440,989 (net of Treasury) shares issued and outstanding ("Basic
Shares").
B. FSB is a bank duly organized under the laws of the State of
Nevada, with its principal place of business located in Las Vegas, Nevada.
FSB is authorized by its Articles of Incorporation to issue 5,000,000
shares of common stock, each of $1.00 par value ("FSB Common Stock"), of
which as of the date of this Agreement there were 4,329,161 shares issued
and outstanding. FSC owns beneficially and of record all of the issued and
outstanding shares of FSB Common Stock.
C. Comstock is a corporation duly organized and existing under the
laws of the State of Nevada, with its principal place of business located
in Reno, Nevada. Comstock is authorized by its Articles of Incorporation
to issue 15,000,000 shares of common stock, $.01 par value ("Comstock
Common Stock"), of which, as of November 30, 1998, there were (i)
4,481,368 shares issued and outstanding, (ii) options outstanding for
651,732 shares as of such date (the "Options") and (iii) warrants
outstanding for 52,800 shares (the "Warrants").
D. Bank is a bank incorporated under the laws of the State of
Nevada, having its principal place of business located in Reno, Nevada.
Bank is authorized by its Articles of Incorporation to issue 6,000,000
shares of common stock, each of $.50 par value ("Bank Common Stock"), of
which as of the date of this Agreement there were 2,210,834 shares issued
and outstanding. Comstock owns beneficially and of record all of the
issued and outstanding shares of Bank Common Stock.
E. The parties hereto desire that Comstock be merged with and into
FSC (the "Merger") pursuant to this Agreement and that certain Certificate
of Merger in the form attached hereto as Exhibit A (the "Certificate of
Merger") and that immediately after the Merger, Bank be merged with and
into FSB (the "Bank Merger") pursuant to this Agreement and those certain
Articles of Merger attached hereto as Exhibit B (the "Bank Articles of
Merger").
A G R E E M E N T:
NOW, THEREFORE, in consideration of foregoing and the respective
representations, warranties, covenants, agreements and conditions set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, covenant and agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
(a) Pursuant to the laws of the States of Delaware and Nevada, and
subject to the terms and conditions of this Agreement, at the effective time of
the Certificate of Merger (the "Effective Time"), FSC and Comstock (sometimes
referred to herein as the "Merging Entities") shall consummate the Merger
pursuant to which (a) Comstock shall be merged with and into FSC, and the
separate corporate existence of Comstock shall thereupon cease; (b) FSC shall be
the successor or surviving corporation in the Merger and shall continue to be
governed by
A-1
<PAGE> 77
the laws of the State of Delaware (the "Surviving Corporation"); and (c) the
separate corporate existence of FSC with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger, except as set
forth in this Article I. FSC, as the Surviving Corporation, shall thereupon and
thereafter possess all the rights, privileges, powers and franchises, of a
public as well as a private nature, and shall be subject to all restrictions,
disabilities and duties of the Merging Entities; and all property, real,
personal and mixed and all debts due to the Merging Entities on whatever
account, including subscriptions for shares and all other things in action or
belonging to the Merging Entities shall be taken and deemed to be vested in FSC
without further act or deed. FSC shall thenceforth be responsible for all the
debts, liabilities and duties of each of the Merging Entities and may be
prosecuted to judgment as if the Merger had not taken place, or FSC may be
substituted in place of the Merging Entities and neither the rights of creditors
nor any liens upon any property of either shall be impaired by the Merger.
(b) As of the Effective Time, the certificate of incorporation of
FSC as in effect immediately prior to the Merger shall be the certificate of
incorporation of the Surviving Corporation until thereafter amended as provided
by law and such certificate of incorporation. As of the Effective Time, the
bylaws of FSC as in effect immediately prior to the Effective Time shall be the
bylaws of the Surviving Corporation until thereafter amended as provided by law
and such bylaws of the Surviving Corporation.
1.2 Directors and Officers of the Surviving Corporation. The directors and
officers of the Surviving Corporation at the Effective Time shall be the
directors and officers of FSC as of immediately prior to the Effective Time, and
shall serve in their respective positions until their successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the certificate of incorporation and
the bylaws of the Surviving Corporation.
1.3 Subsequent Actions. If, at any time after the Merger, FSC shall
consider or be advised that any deeds, bills of sale, assignments, assurances,
or any other actions or things are necessary or desirable to vest, perfect, or
confirm of record or otherwise in FSC its right, title, or interest in, to, or
under any of the rights, properties, or assets of Comstock acquired or to be
acquired by FSC as a result of or in connection with the Merger, or otherwise to
carry out this Agreement, the officers and directors of FSC shall be authorized
to execute and deliver, in the name and on behalf of Comstock or otherwise, all
such deeds, bills of sale, assignments, and assurances, and to make and do, in
the name and on behalf of Comstock or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect, or confirm any right,
title, and interest in, to, and under such rights, properties, or assets in FSC
or otherwise to carry out this Agreement.
ARTICLE II
THE BANK MERGER
2.1 The Bank Merger.
(a) Immediately after but essentially concurrently with the Merger,
and pursuant to the laws of the State of Nevada, and subject to the terms and
conditions of this Agreement, at the time that the Bank Articles of Merger
become effective, FSB and Bank (sometimes collectively referred to herein as the
"Merging Banks") shall consummate the Bank Merger pursuant to which (a) the Bank
shall be merged with and into FSB, immediately after but essentially
concurrently with the Merger, and the separate corporate existence of Bank shall
thereupon cease; (b) FSB shall be the successor or surviving bank in the Merger
and shall continue to be governed by the laws of the State of Nevada (sometimes
referred to herein as the "Surviving Bank"); and (c) the separate corporate
existence of FSB with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Bank Merger, except as set forth in
this Article II. FSB, as the Surviving Bank, shall thereupon and thereafter
possess all the rights, privileges, powers and franchises, of a public as well
as a private nature, and shall be subject to all restrictions, disabilities and
duties of the Merging Banks, and all property, real, personal and mixed and all
debts due to the Merging Banks on whatever account, including subscriptions for
shares and all other things in action or belonging to the Merging Banks shall be
taken and deemed to be vested in FSB without further act or deed. FSB shall
thenceforth be responsible for all the debts, liabilities and duties of each of
the Merging Banks and may be prosecuted to judgment as if the Bank Merger had
not taken place, or FSB may be substituted in place of the Merging Banks and
neither the rights of creditors nor any liens upon any property of either shall
be impaired by the Bank Merger.
(b) As of the effective time of the Bank Merger, the articles of
incorporation of FSB as in effect immediately prior to the Bank Merger shall be
the articles of incorporation of the Surviving Bank without amendment until
thereafter amended as provided by law and such articles of incorporation. As of
the effective time
A-2
<PAGE> 78
of the Bank Merger, the bylaws of FSB as in effect immediately prior to the Bank
Merger shall be the bylaws of the Surviving Bank without amendment until
thereafter amended as provided by law and such bylaws.
2.2 Directors and Officers of the Surviving Bank. The directors of the
Surviving Bank shall be as set forth on Schedule 2.2 attached hereto and such
individuals shall serve for a twelve month period from and after the Closing
Date or until their successors are duly elected and qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and the bylaws of the Surviving Bank. The officers of the
Surviving Bank at the effective time of the Bank Merger shall be the officers of
FSB as of immediately prior to the Bank Merger and shall serve in their
respective positions until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the articles of incorporation and the bylaws of the Surviving
Bank.
2.3 Subsequent Actions. If, at any time after the Bank Merger, FSB shall
consider or be advised that any deeds, bills of sale, assignments, assurances,
or any other actions or things are necessary or desirable to vest, perfect, or
confirm of record or otherwise in FSB its right, title, or interest in, to, or
under any of the rights, properties, or assets of Bank acquired or to be
acquired by FSB as a result of or in connection with the Bank Merger, or
otherwise to carry out this Agreement, the officers and directors of FSB shall
be authorized to execute and deliver, in the name and on behalf of Bank or
otherwise, all such deeds, bills of sale, assignments, and assurances, and to
make and do, in the name and on behalf of Bank or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect, or confirm
any right, title, and interest in, to, and under such rights, properties, or
assets in FSB or otherwise to carry out this Agreement.
2.4 Conversion of Shares. The manner and basis of converting the shares of
the Merging Banks shall be as set forth in Article III, below.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Conversion of Common Stock of Merging Entities.
(a) Conversion of Comstock Common Stock. In accordance with this
Agreement, as of the Effective Time, by virtue of the Merger and without any
further action on the part of the holders of any shares of Comstock Common
Stock, each issued and outstanding share of Comstock Common Stock (of which
there shall be no more than 5,185,900 shares fully diluted and assuming all
Options and Warrants shall have been exercised or terminated) other than shares
as to which dissenters' rights are perfected ("Dissenting Shares"), and all
rights in respect thereof, shall be converted, ipso facto, into the right to
receive the Merger Consideration.
AS OF THE EFFECTIVE TIME, ALL SUCH SHARES OF COMSTOCK COMMON STOCK,
INCLUDING ALL OPTION AND WARRANT SHARES, SHALL NO LONGER BE OUTSTANDING AND
SHALL AUTOMATICALLY BE CANCELED AND RETIRED AND SHALL CEASE TO EXIST. EACH
HOLDER OF A CERTIFICATE REPRESENTING ANY SHARES OF COMSTOCK COMMON STOCK SHALL
CEASE TO HAVE ANY RIGHTS WITH RESPECT THERETO, EXCEPT THE RIGHT TO RECEIVE, UPON
THE SURRENDER OF ANY SUCH CERTIFICATES, THE MERGER CONSIDERATION UPON THE TERMS
AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN.
(b) Certain Definitions
"Average FSC Share Price" shall mean the average of the last sales
prices per share of FSC Common Stock on the Nasdaq National Market
for the ten (10) consecutive trading days preceding the Closing Date
(such period referred to herein as the "Closing Calculation
Period"); subject to the following:
(i) if the Average FSC Share Price is greater than or
equal to $24.05, the Average FSC Share Price shall be $24.05;
and
(ii) if the Average FSC Share Price is less than or
equal to $18.70, the Average FSC Share Price shall be $18.70.
"Comstock Share Price" shall mean, subject to adjustment pursuant to
Section 8.2(g) below, $65,000,000 divided by (i) the total number of
issued and outstanding shares of Comstock
A-3
<PAGE> 79
Common Stock, plus (ii) the total number of shares of Comstock
Common Stock subject to all Vested Options, plus (iii) the total
number of shares of Comstock Common Stock subject to all Warrants.
"Exchange Ratio" shall mean (in each case, rounded to four digits to
the right of the decimal point) that number of shares of FSC Common
Stock (rounded to the nearest one thousandth) determined as follows:
Comstock Share Price
--------------------
Average FSC Share Price
"Merger Consideration" for each share of Comstock Common Stock being
converted into shares of FSC Common Stock shall mean that number of
duly authorized, validly issued, fully paid and nonassessable shares
of FSC Common Stock equal to the Exchange Ratio; provided, however,
if, prior to the Effective Time, FSC should split, reclassify or
combine the FSC Common Stock, or pay a stock dividend or other stock
distribution in FSC Common Stock, as of a record date prior to the
Effective Time, appropriate adjustment or adjustments (rounded to
four digits to the right of the decimal point) will be made to the
Exchange Ratio and the total number of shares of FSC Common Stock to
be issued in the transaction so as to maintain the proportional
interest in FSC Common Stock which the shareholders of Comstock
would otherwise have received.
(c) FSC Stock. All shares of FSC Common Stock which are outstanding
immediately prior to the Merger shall continue to be outstanding after the
Merger.
3.2 The Merging Banks.
(a) FSB Common Stock. All shares of FSB Common Stock which are
outstanding immediately prior to the Bank Merger shall continue to be
outstanding immediately after the Bank Merger
(b) Bank Common Stock. As of the Effective Time, each issued and
outstanding share of Bank Common Stock and all rights in respect thereof shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and no FSB Common Stock or FSC Common Stock shall be
delivered in exchange therefore.
3.3 Options Immediately prior to the Effective Time, each then
outstanding Option issued under each stock option plan, program, agreement or
arrangement of Comstock (each a "Comstock Stock Plan") that has previously
vested prior to the Merger (a "Vested Option") shall be exercised pursuant to a
cashless exercise procedure whereby each holder of a Vested Option shall be
entitled to receive on a net basis that number of shares of Comstock Common
Stock equal to X in the following formula:
X = A(B - C)
------------
B
Where A equals the number of shares of Comstock Common Stock subject to such
Vested Option, B equals the Comstock Share Price and C equals the strike price
of such Vested Option. The aggregate number of shares so issuable with respect
to all Vested Options shall be referred to herein as the "Comstock Option
Shares." At the Effective Time, each Comstock Option Share shall be converted
into shares of FSC Common Stock pursuant to Sections 3.1 and 3.5 for the account
of the holder of such Vested Option.
3.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
Dissenting Shares shall not be converted into or represent a right to receive
the Merger Consideration pursuant to Section 3.1 hereof, but the holder thereof
shall be entitled to only such rights as are granted by the NGCL.
(b) Notwithstanding the provisions of Section 3.4. (a) above, if any
holder of shares of Comstock Common Stock who demands appraisal of such holder's
shares of Comstock Common Stock under the NGCL effectively withdraws or loses
(through failure to perfect or otherwise) his or her right to appraisal, then as
of the
A-4
<PAGE> 80
Effective Time or the occurrence of such event, whichever later occurs, such
holder's shares of Comstock Common Stock shall automatically be converted into
and represent only the right to receive the Merger Consideration as provided in
Section 3.1. hereof, without interest, upon surrender of the certificate or
certificates representing such shares of Comstock Common Stock pursuant to
Section 3.5 hereof.
(c) Comstock shall give FSC (i) prompt notice of any written demands
for appraisal or payment of the fair value of any shares of Comstock Common
Stock, withdrawals of such demands, and any other instruments served on the
Comstock pursuant to the NGCL. Except with the prior written consent to FSC,
Comstock shall not voluntarily make any payment with respect to any demands for
appraisal, settle or offer to settle any such demands.
3.5 Exchange of Shares and Certificates.
(a) Exchange Agent. As of the Effective Time, FSC shall deposit with
First Chicago Trust Company of New York or such other bank or trust company as
may be designated by FSC (the "Exchange Agent"), for the benefit of the holders
of shares of Comstock Common Stock, for exchange in accordance with this Article
III, through the Exchange Agent, (i) cash in an amount sufficient to pay cash in
lieu of fractional shares, and (ii) certificates representing the shares of FSC
Common Stock issuable pursuant to Section 3.1. hereof in exchange for
outstanding shares of Comstock Common Stock (the "Exchange Fund").
(b) Exchange Procedures; Transfer of Shares. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Comstock Common Stock (the
"Certificates") whose shares were converted into the right to receive shares of
FSC Common Stock pursuant to Section 3.1. hereof (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as FSC
may reasonably specify and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of FSC
Common Stock, and cash in lieu of fractional shares of FSC Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by FSC, together with documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor (i) a certificate representing
that whole number of shares which such holder has the right to receive pursuant
to the provisions of this Article III and (ii) cash in lieu of any fractional
number of shares as contemplated by this Section 3.5, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of Comstock Common Stock which is not registered in the transfer records of
Comstock, a certificate representing the proper number of shares of FSC Common
Stock may be issued to a person other than the person in whose name the
Certificate so surrendered is registered, if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and the person requesting
such payment shall pay any transfer or the taxes required by reason of the
issuance of shares of FSC Common Stock to a person other than the registered
holder of such Certificate or establish to the satisfaction of FSC that such tax
has been paid or is not applicable. Until surrendered as contemplated by this
Section 3.5, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration and cash in lieu of any fractional shares of FSC Common Stock as
contemplated by this Section 3.5. No interest shall be paid or accrue on any
cash payable in lieu of any fractional shares of FSC Common Stock.
(c) Distributions with Respect to Unexchanged Shares. No dividends
or other distributions with respect to FSC Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of FSC Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 3.5(e) hereof, until the surrender of such Certificate in accordance
with this Article III. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be applied to the holder of the
certificate representing whole shares of FSC Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of any
cash payable in lieu of a fractional share of FSC Common Stock to which such
holder is entitled pursuant to Section 3.5(e) and the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of FSC Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
FSC Common Stock.
A-5
<PAGE> 81
(d) No Further Ownership Rights in Comstock Common Stock; No
Transfer Following the Closing Date. All shares of FSC Common Stock issued upon
the surrender for exchange of Certificates in accordance with the terms of this
Article III (including any cash paid pursuant to Section 3.5(e) hereof) shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to the shares of Comstock Common Stock theretofore represented by
such Certificates, and there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of Comstock
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article III, except as otherwise provided by law.
(e) Fractional Shares.
(i) No certificates representing fractional shares of
FSC Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests
shall not entitle the owner thereof to vote or to any other
rights of a stockholder of FSC.
(ii) Notwithstanding any other provision of this
Agreement, each holder of shares of Comstock Common Stock
converted pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of FSC Common Stock
(after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to (A) such fraction multiplied
by (B) the Average FSC Share Price.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to FSC, upon demand, and any holders
of the Certificates who have not theretofore complied with this Article III
shall thereafter look only to FSC for payment of their Comstock Common Stock,
any cash in lieu of fractional shares of FSC Common Stock and any dividends or
distributions with respect to FSC Common Stock.
(g) No Liability. None of FSC, FSB, Comstock, Bank or the Exchange
Agent shall be liable to any person in respect of any shares of FSC Common Stock
(or dividends or distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Certificates shall not have been
surrendered prior to seven years after the Effective Time, or immediately prior
to such earlier date on which any shares of FSC Common Stock, any cash in lieu
of fractional shares of FSC Common Stock, or any dividends or distributions with
respect to FSC Common Stock in respect of such Certificate would otherwise
escheat to or become the property of any Governmental Entity, any such shares,
cash, dividends or distributions in respect of such Certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation free and clear of all claims or interest of any person previously
entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by FSC, on a daily basis. Any
interest and other income resulting from such investments shall be paid to FSC.
ARTICLE IV
COVENANTS OF BANCORP AND BANK
4.1 Conduct of Business Pending the Closing. Except as otherwise
contemplated hereby, between the date hereof and the Effective Time, or the time
when this Agreement terminates as provided herein, each of Comstock and Bank
shall conduct its respective operations and business in the usual and ordinary
course of business and consistent with past practice and use their commercially
reasonable efforts to retain for the benefit of FSC and FSB the continuing
services of the present officers and employees of Bank and Comstock, to preserve
the goodwill of customers and others having business relations with Bank and
Comstock, to preserve the deposit levels of Bank, to preserve the benefits of
all contractual relationships with others and to keep in force at least at their
present limits all policies of insurance currently in effect. Without limiting
the generality of the foregoing, and except as otherwise specifically permitted
by this Agreement, during the period from the date hereof to the Effective Time,
neither Bank nor Comstock shall, without the prior written authorization of the
Chairman, President or Chief Financial Officer of FSC:
A-6
<PAGE> 82
(a) Change in Capital Stock; Issuance of Shares. Make any change in
their authorized capital stock, or issue, agree to issue or permit Bank or
Comstock to become obligated to issue any shares of their capital stock, or
securities convertible into their capital stock, except that Comstock may issue
shares of Comstock Common Stock upon the exercise of outstanding Options or
Warrants described in Schedule 5.3;
(b) Options, Warrants, and Rights. Grant or issue any options,
warrants or other rights, including stock appreciation rights, of any kind
relating to the purchase of shares of their capital stock, or securities
convertible into their capital stock (except for the Options and Warrants
outstanding as of the date hereof described in Schedule 5.3, Comstock and Bank
hereby represent and warrant that no options, warrants, stock appreciation
rights or other rights to purchase shares of their capital stock are outstanding
on the date hereof);
(c) Dividends. Declare or pay any dividends or other distributions
on any shares of their capital stock; provided, however, that Bank may declare
dividends to Comstock in accordance with normal practices and to cover expenses
associated with the transactions hereunder in an amount not to exceed $3,530,278
(see lines 11 and 20 on Schedule 8.2(g) attached hereto);
(d) Purchase of Shares. Purchase or otherwise acquire, or agree to
acquire, any shares of their stock, other than in a fiduciary capacity;
(e) Benefit Plans. Except as required by law, or, with the consent
of FSC, to terminate the employee benefit plans identified in Section 5.16
incident to the integration of Bank's employees into the employee benefit plans
offered by FSC or FSB, enter into or amend any pension, retirement, stock
option, stock appreciation, profit sharing, deferred compensation, consultant,
bonus, group insurance or similar benefit plan (other than the cafeteria plan
identified in Schedule 5.16) in respect of any of their directors, officers or
other employees;
(f) Conduct of Business. Except as contemplated by this Agreement,
take or omit to take any action which (i) causes Comstock or Bank not to conduct
their respective businesses in a manner consistent with normal business
practices, including with respect to the securities or asset portfolios of Bank,
(ii) has a Material Adverse Effect on the financial condition (present or
prospective), businesses, properties, assets or operations of Comstock and Bank
(the parties hereto recognize that the operation of Comstock and Bank until the
Effective Time is the responsibility of Comstock and Bank and their respective
Boards of Directors and officers; nevertheless, Comstock and Bank shall keep FSC
advised of all important changes in the financial condition (present or
prospective), business, properties, assets or operations of Comstock and Bank);
(g) Acquisitions and Mergers. Acquire or merge with any other
company or acquire any branch or other significant part of the assets of any
other company;
(h) Liens; Indebtedness; Increase in Compensation, etc. Except in
the ordinary course of business, (i) mortgage, pledge or subject to a lien or
any other encumbrance any of their respective assets, dispose of any of their
respective assets, incur or cancel any indebtedness or claims, purchase or lease
any assets having a purchase price or lease cost, in the aggregate, of more than
$20,000.00, other than the pending property purchase and the parking lot
renovation at 6275 Neil Road, Reno, Nevada identified in Schedule 5.14 or (ii)
except for the two Agreements for Change-in-Control Severance Benefits set forth
in Schedule 5.16 hereto, increase any compensation or benefits payable to their
respective officers or employees, except to pay routine merit increases in
accordance with past practices and costs associated with the transactions
contemplated under this Agreement (the parties hereto recognize that Bank has in
the ordinary course of business routinely pledged up to $45,000,000 of mortgage
loan assets and U.S. government and agency securities as collateral for
borrowings from the Federal Home Loan Bank of San Francisco and that Bank may
continue to pledge residential mortgage loans and U.S. government and agency
securities to the Federal Home Loan Bank of San Francisco to secure borrowings
in an aggregate amount up to $35,000,000 through the Closing Date).
Notwithstanding the restrictions contained in this section, Comstock or Bank may
grant individual annual increases to officers and employees for 1999 in
accordance with past practices up to a maximum aggregate total of 6% of the
total annual compensation of all officers and employees, which amount shall not
in any event exceed $378,902, and continue during 1999 incentive compensation
arrangements in accordance with past practices.
(i) Amendments to Charter, etc. Amend their respective Articles of
Incorporation or make any material amendments to their respective Bylaws which
would interfere in any manner with the transactions contemplated by this
Agreement.
A-7
<PAGE> 83
4.2 Investigation; Access. Each of Comstock and Bank shall diligently
endeavor to (i) take or cause to be taken all action required under this
Agreement on its part to be taken as promptly as practicable so as to permit the
consummation of the transactions contemplated by this Agreement at the earliest
possible date and cooperate fully with FSC and FSB to that end, including,
without limitation, providing to FSC and FSB, and their respective employees,
accountants and counsel, access to Comstock's and Bank's books, records,
reports, tax returns and facilities and to its employees, accountants, and
counsel; provided, however, that such investigation to be conducted by FSC and
FSB shall be performed in such a manner which will not unreasonably interfere
with the normal operations, or customer or employee relations, of Comstock and
Bank and shall be in accordance with procedures established by the parties
having due regard for the foregoing, and (ii) furnish all necessary information
for inclusion in any applications relating to the consents, approvals and
permissions of regulatory authorities referred to in Article VIII.
Comstock and Bank have delivered to FSC, as Schedule 4.2, (i) a list
setting forth all of the classified, criticized and non-performing assets of
Bank ("Classified Assets") as identified by Bank or by the most recent
examination by Bank's federal or state bank examiner, along with an explanation
of management's response for dealing with such assets, (ii) a list of all loans
which are more than thirty (30) days past due ("Past Due Loans"), and (iii) Bank
management's analysis of expected losses to be incurred with respect to the
loans (assets) identified in items (i) and (ii).
From execution of the Agreement until Closing, Comstock and Bank shall
deliver to FSC (i) monthly reports which summarize the loan and lease and the
deposit activity of Bank for the previous month, and (ii) a report detailing any
changes to the Classified Assets or Past Due Loans.
FSC covenants and agrees that FSC and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning Comstock and Bank received from any of them (except
to the extent that such documents or information are a matter of public record
or require disclosure in the Proxy Statement/Prospectus, the Registration
Statement on Form S-4 to be filed by FSC pursuant to Section 6.10, or any of the
public information of any applications required to be filed with any
governmental or regulatory agency to obtain the approvals and consents required
to effect the transactions contemplated hereby), and if the transactions
contemplated herein are not consummated, such confidence shall be maintained and
all such documents shall be returned to Comstock.
4.3 Regulatory Approvals. Comstock and Bank shall (i) use their best
efforts in good faith to assist FSC in obtaining all necessary regulatory
approvals and taking or causing to be taken all other action required under this
Agreement on its or their part to be taken as promptly as practicable so as to
permit the consummation of the transactions contemplated by this Agreement at
the earliest possible date, and cooperate fully with FSC and FSB to that end,
and (ii) furnish all necessary information for inclusion in any applications
relating to the consents, approvals, and permissions of regulatory authorities
referred to in Article VIII. Comstock and Bank shall have the right to review
all applications to such regulatory authorities before the filing thereof and to
comment upon the form of such applications and the information contained
therein. Comstock and Bank know of no reasons why the transactions contemplated
by this Agreement should not be approved by the regulatory authorities.
4.4 Termination of Employee Benefit Plans. On or before the Effective
Time, Comstock and FSC shall determine whether it is in the best interests of
the parties hereto and the employees of Comstock and Bank to terminate the
employee benefit plans (as described in Section 5.16) or to merge such plans
into an appropriate FSC benefit plan. FSC will cooperate in such determination
to either freeze the Plans or transfer such benefits under the Plans (in a
plan-to-plan transfer) into an existing benefit plan maintained by FSC as to
which such benefits may be transferred without necessity of material amendment
to, or adverse effect on qualification of, such FSC plan and provided further
that FSC incurs no expense or other adverse result in allowing such rollover of
benefits.
4.5 Information for Proxy Statement. Upon request by FSC, Comstock and
Bank shall timely prepare and deliver to FSC, in such form required by rules and
regulations of the United States Securities and Exchange Commission (the "SEC"),
all information, descriptions, accounting reports and schedules (including
audited financial statements in the form required by Regulation S-X of the SEC,
as may be required) and other materials required for preparation and filing of
the Registration Statement contemplated by Section 6.10 of this Agreement.
4.6 Environmental Reports. Within twenty (20) days of execution of this
Agreement, Comstock and Bank shall cause to be prepared, by firms reasonably
acceptable to FSC, Phase I Environmental Reports with respect to real property
owned by Comstock and Bank, including Bank's branch facilities. In the event a
Phase I report indicates that Comstock or Bank may be a potentially liable party
for remedial action under any environmental laws
A-8
<PAGE> 84
(as such term is defined in Section 5.7 below), then Comstock and Bank shall
cause Phase II Environmental Reports to be prepared detailing any possible
exposure under such laws. The cost of said Phases I and II Environmental Reports
and the cost of any remedial action determined to be necessary by such reports
shall be borne by Comstock and Bank. Bank shall make available to FSC any Phase
I Environmental Reports which it has obtained on real property-secured loans.
4.7 Notification of Actions. Comstock and Bank covenant and agree to
immediately notify FSC and FSB in the event of any action which materially
affects any of the covenants set forth in this Article IV.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANCORP AND BANK
As an inducement to FSC and FSB to enter into this Agreement, and in
addition to any representations and warranties made elsewhere in this Agreement,
Comstock and Bank jointly and severally represent and warrant to and agree with
FSC and FSB as of the date of this Agreement and as of the Closing Date as
follows:
5.1 Organization, Conduct of Business, etc. Each of Comstock and Bank (i)
is duly organized and validly existing and in good standing under the laws of
the State of Nevada, (ii) has all requisite power and authority (corporate and
other) to own its properties and conduct its business as now being conducted,
(iii) is duly qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where failure to so qualify would not have a Material Adverse
Effect, as defined in Section 11.17, below, on Comstock or Bank or their
respective businesses, operations, properties, assets or condition (financial or
otherwise), and (iv) is not transacting business, or operating any properties
owned or leased by it in violation of any provision of federal or state law or
any rule or regulation promulgated thereunder, which violation would have a
Material Adverse Effect on Comstock or Bank or their respective businesses,
operations, properties, assets or condition (financial or otherwise). Other than
Comstock's ownership of Bank and except as set forth in Schedule 5.1, neither
Comstock nor Bank owns any equity interest in any other business organization
and neither Comstock nor Bank is a party to any joint venture or similar
enterprise.
5.2 Capitalization. The authorized capital stock of Bank consists solely
of 6,000,000 shares of Bank Common Stock. As of the date hereof, there are
2,210,834 shares of Bank Common Stock issued and outstanding. Comstock owns,
beneficially and of record, all of the issued and outstanding shares of Bank
Stock. The authorized capital stock of Comstock consists solely of 15,000,000
shares of Comstock Common Stock. As of the date hereof, there are 5,035,500
shares of Comstock Common Stock issued and outstanding, net of 8,000 shares of
treasury stock. The outstanding shares of Comstock Common Stock and the holders
of record thereof are identified on Schedule 5.2 hereto. All of the outstanding
shares of capital stock of each of Bank and Comstock have been duly authorized
and are validly issued, fully paid and nonassessable.
5.3 Options, SARs, Warrants, etc. Schedule 5.3 identifies (i) the holders
of each of the Options, the number of Options held by each holder of Options and
the Option exercise price with respect thereto and (ii) the holders of each of
the Warrants, the number of Warrants held by each holder of Warrants and the
Warrant exercise price with respect thereto. Except for the Options and the
Warrants, there are no outstanding stock appreciation rights or options,
warrants, calls, units or commitments of any kind relating to the issuance,
sale, purchase or redemption of, or securities convertible into, capital stock
of Bank or Comstock. Except for the stock option plans disclosed on Schedule
5.16, neither Comstock nor Bank maintain a plan relating to the issuance, sale,
purchase or redemption of capital stock of Comstock or Bank.
5.4 Authorization; Validity of Agreement. Each of Comstock and Bank has
the corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Board of Directors of
Comstock and Bank, has been duly executed and delivered on behalf of Comstock
and Bank, and, subject to approval by the shareholders of Comstock, constitutes
a valid and binding agreement of Comstock and Bank, enforceable against each in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, liquidation, receivership, conservatorship, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles.
5.5 Comstock and Bank Reports. Since January 1, 1995, each of Comstock and
Bank has filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"),
A-9
<PAGE> 85
Federal Deposit Insurance Corporation (the "FDIC") and the Nevada Financial
Institutions Division (the "Division"). All such reports and statements filed by
Comstock or Bank with the Federal Reserve Board, the FDIC, the Division and
other applicable state securities or banking authorities are collectively
referred to herein as the "Bank Reports." As of their respective dates, the Bank
Reports complied in all material respects with all the statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed and did not and as of the date hereof do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. Except as set forth
on Schedule 5.5, since January 1, 1995, no regulatory agency, including the
Federal Reserve Board, the FDIC and the Division, has criticized, in any
significant manner, the management or operation of Comstock or Bank, cited
Comstock or Bank for a violation of law, or imposed any mandatory action by
Comstock or Bank to bring such party in compliance with applicable rules and
regulations.
5.6 Comstock and Bank Financial Statements; No Undisclosed Liabilities.
Comstock's audited Balance Sheets as of December 31, 1996 and December 31, 1997,
and its audited Statements of Income and Statements of Cash Flow for the years
ended December 31, 1996 and December 31, 1997, and Comstock's unaudited interim
Balance Sheet for the period ended September 30, 1998, heretofore delivered to
FSC (hereinafter the "Financial Statements"), were prepared in accordance with
generally accepted accounting principles consistently applied (except for such
interim statement which requires year-end adjustments) and present fairly
Comstock's and Bank's financial condition, results of operations and changes in
cash flow as of such dates.
Comstock and Bank will provide to FSC on a monthly basis prior to the
Effective Time all interim financial statements relating to Comstock and Bank
customarily prepared by Comstock or Bank.
Except as and to the extent stated in the Financial Statements delivered
or to be delivered pursuant to this Section 5.6 and in Schedule 5.6, and except
for those liabilities incurred in the normal course of Comstock's or Bank's
business or as contemplated by this Agreement, neither Comstock nor Bank has any
material liabilities or obligations, secured or unsecured (whether accrued,
absolute, contingent or otherwise), and whether due or to become due, including
but not limited to liabilities on account of taxes, other governmental charges
or lawsuits subsequently brought. Except as set forth on Schedule 5.6, there are
no suits, actions or proceedings pending or, to the knowledge of Comstock or
Bank or any of their directors or officers, threatened, or any contingent
liability which would give rise to any right of indemnification on the part of
any director or officer of Comstock or Bank or his or her heirs, executors or
administrators, as against Comstock or Bank or any successor to the business of
Comstock or Bank.
5.7 Environmental Matters. For purposes of this Section 5.7, the term
"environmental laws" shall include all state and federal laws designed to
protect human health or the environment, as amended from time to time, and all
regulations promulgated thereunder, including, without limitation, the Clean Air
Act, 42 U.S.C.A. Sections 7401, et seq., the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C.A. Sections 9601, et seq.,
the Federal Water Pollution Control Act, 33 U.S.C.A. Sections 1251, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C.A. Sections 6901, et seq., and
the Toxic Substances Control Act, 15 U.S.C.A. Sections 2601, et seq. "Hazardous
substance" shall include all petroleum products as well as any toxic or
hazardous material, hazardous waste or other hazardous or regulated substance
defined in or regulated by any environmental law, provided that hazardous
substance shall not include commercially available consumer products reasonably
appropriate for use in or for routine maintenance or upkeep of an office of a
financial institution as long as such products are used in accordance with label
instructions.
Except as set forth in Schedule 5.7, to the best knowledge of Comstock and
Bank after due inquiry, neither Comstock or Bank, nor any property of Comstock
or Bank, is subject to any pending or potential claim, liability or obligation
to any person arising under any environmental law. With respect to the real
property owned or leased by Comstock and Bank (including other real estate), to
the best knowledge of Comstock and Bank after due inquiry:
(a) No such property is presently contaminated by, and no such
property has ever been used or is presently being used by any person to
generate, manufacture, refine, transport, treat, store, handle or dispose of,
any hazardous substance in any regulated form or quantity.
(b) No such property has ever contained or presently contains, or
has been used or is being used by any person for storage of, asbestos,
ureaformaldehyde foam insulation, PCB's, dioxins, mercury, lead or uranium (or
other heavy metal) products or tailings, or any other hazardous substance in any
regulated form or quantity, whether contained in construction or fill materials
or used or stored thereon or therein.
A-10
<PAGE> 86
(c) Neither Comstock, Bank nor any other tenant or occupant of any
such property has received a summons, citation, directive, letter, notice of
violation, request for information or other communication, written or oral, from
any local, state or federal agency concerning any possible intentional or
unintentional action or omission on the part of any person which has resulted in
the possible release of any hazardous substance affecting such property or
concerning any other possible violation of any environmental law affecting the
property.
(d) To the extent any permit, approval or registration is or has
been required to be obtained or maintained under any environmental law with
respect to any such property, any improvement of or on any such property or any
activity occurring on any such property, each such permit, approval or
registration has been obtained and is in good standing. In addition, all such
permits, approvals and registrations have been disclosed to FSC in writing.
(e) No such property contains or has ever contained any storage tank
used or intended for use to store any hazardous substance.
5.8 Loan Loss Reserves. The reserves for possible loan losses and net loan
charge-offs of Bank as established from time to time by Bank are adequate under
generally accepted accounting principles. Such reserves comply in all material
respects with all loan loss requirements or guidelines applied to Bank by any
governmental authorities having jurisdiction with respect thereto.
5.9 Title to Properties. Except as reflected in the Financial Statements
delivered or to be delivered pursuant to Section 5.6, and except as set forth on
Schedule 5.9, Comstock and Bank own, free and clear of any liens, claims,
charges, options, or other encumbrances, all of the property, real, personal or
mixed, reflected in the Financial Statements and all property acquired since
such date. Except as set forth in Schedule 5.9, neither Comstock nor Bank has
received any notice of violation of any applicable zoning regulation, ordinance
or other law, order, regulation or requirement relating to its operations or its
properties. To Bank's knowledge, there are no such violations of material nature
and all buildings and structures used by Comstock and Bank substantially conform
with all applicable ordinances, codes and regulations. Except as set forth in
Schedule 5.9 hereto, in Comstock's and Bank's opinion, all such properties which
are material to the business or operations of Comstock and Bank are in a good
state of maintenance and repair and are adequate for its current uses and
purposes. During each of the past three calendar years, Comstock and Bank and
their properties have been insured for customary risks with customary limits,
deductibles, and exclusions, including but not limited to Bankers Blanket Bond,
and such insurance protection continues in effect as of the date hereof.
Comstock and Bank have delivered to FSC true and correct copies of all deeds,
title insurance policies and surveys each has with respect to the real property
owned by them and copies of all leases with respect to real property leased by
them.
5.10 Absence of Defaults. The execution of this Agreement and the Bank
Articles of Merger does not and performance of the transactions contemplated by
them will not (assuming Comstock shareholder approval and applicable regulatory
approval) (a) violate the provisions of the Articles of Incorporation or Bylaws
of either Comstock or Bank, or (b), except as set forth in Schedule 5.10,
violate the provisions of or place either Comstock or Bank in default under any
agreement, indenture, mortgage, lien, lease, contract, instrument, order,
judgment, decree, ordinance, statute, or regulation to which either Comstock or
Bank is subject, to which any property of either Comstock or Bank is subject, or
to which either Comstock or Bank is a party, which violations or defaults would
in the aggregate have a Material Adverse Effect on the business, operations,
properties, assets, or condition (financial or otherwise) of either Comstock or
Bank.
5.11 Absence of Material Adverse Changes. Except as set forth on Schedule
5.11, since December 31, 1997, there has been no change, and no development
involving a reasonably foreseeable prospective change, in or affecting the
financial condition (present or prospective), businesses, properties, assets or
operations (present or prospective) of Comstock and Bank that either
individually or in the aggregate has had or is likely to have a Material Adverse
Effect on Comstock or Bank. Since December 31, 1997, Comstock and Bank have
conducted their respective businesses only in the ordinary course and consistent
with past banking standards.
5.12 Actions, Proceedings and Investigations. Set forth in Schedule 5.12
hereto is a complete and accurate listing of all litigation, administrative or
other proceeding to which Comstock or Bank is a party, except for such
proceedings in which Bank is seeking to collect on a loan or lease transaction
and no counterclaim or similar claim has been filed against Bank. There are no
actions, proceedings or investigations pending, or, to the knowledge of the
executive officers of Bank and Comstock, threatened or contemplated against or
relating to Comstock or Bank or any of their respective properties or assets
(and said officers are not aware of any facts that would give rise to any
A-11
<PAGE> 87
such claim), which would have a Material Adverse Effect on the financial
condition (present or prospective), businesses, properties, assets or operations
(present or prospective) of Comstock or Bank, or the ability of Comstock or Bank
to consummate the Merger and Bank Merger contemplated hereby.
5.13 Absence of Brokerage Commissions, etc. Except for Comstock's
agreement with Hovde Financial, Inc., the details of which have been disclosed
to FSC in Schedule 5.13, all negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by Comstock and Bank
directly with FSC and FSB without the participation or intervention of any other
person, firm or corporation employed or engaged by or on behalf of Comstock and
Bank in such a manner as to give rise to any valid claim against Comstock or
Bank, or FSC or FSB, for a brokerage commission, finder's fee or like payment.
5.14 Material Contracts Except for those documents listed on Schedule 5.14
hereto, copies of which documents have been provided by Comstock and Bank to
FSC, each of Comstock and Bank is not a party to or bound by any commitment,
agreement or other instrument which (i) is material to the business, operations,
properties, assets or financial condition of Comstock or Bank; (ii) limits the
freedom of Comstock or Bank to compete in any line of business or with any
person; or (iii) requires Bank to transfer funds (other than in the ordinary
course of business) to, make an investment in or guarantee the debt of any
entity. Except as set forth in Schedule 5.14, neither Comstock or Bank is a
party to any contract or agreement, including but not limited to any lease,
service contract or employment agreement which (i) provides for a remaining term
in excess of two (2) years from and after the date hereof, and (ii) provides for
a total payment thereunder in excess of $20,000.00. Neither Comstock or Bank is
in default, and there has not occurred any event that with the lapse of time or
giving of notice or both would constitute such a default, in any respect which
has or may have a Material Adverse Effect on the business, operations,
properties, assets or financial condition of Comstock or Bank under any of the
agreements or other instruments referred to in this Section 5.14.
5.15 Compliance With Laws; Documentation.
(a) Except as set forth on Schedule 5.15, to the best knowledge of
Comstock and Bank, after due inquiry: the conduct by Comstock and Bank of their
respective businesses does not violate or infringe any domestic or foreign laws,
statutes, ordinances, rules or regulations, the enforcement of which,
individually or in the aggregate, would have a Material Adverse Effect on the
business, operations, properties, assets or condition (financial or otherwise)
of Comstock or Bank; and Comstock and Bank each has complied in all material
respects with every local, state or federal law or ordinance, and every
regulation or order issued thereunder, now in effect and applicable to Comstock
and Bank governing or pertaining to fair housing, anti-redlining, equal credit
opportunity, truth-in-lending, real estate settlement procedures, fair credit
reporting and every other prohibition against unlawful discrimination in
residential lending, or governing consumer credit, including, but not limited
to, the Consumer Credit Protection Act, Truth-in-Lending Law, and in particular
Regulation Z promulgated by the Federal Reserve Board, and the Real Estate
Settlement Procedures Act of 1974.
(b) All loans, leases, contracts and accounts receivable (billed and
unbilled), security agreements, guarantees and recourse agreements of Bank as
held in its portfolio, or as sold into the secondary market, represent and are
valid and binding obligations of their respective parties and debtors,
enforceable in accordance with their respective terms, each is based on a valid,
binding and enforceable contract(s) or commitment(s), each of which has been
executed and delivered in full compliance, in form and substance, with any and
all federal, state or local laws applicable to Bank, or to the other party or
parties to the contract(s) or commitment(s), including without limitation the
Truth-in-Lending Act, Regulations Z and U of the Federal Reserve Board, laws and
regulations providing for non-discriminatory practices in the granting of loans
or credit, applicable usury laws, laws imposing lending limits, and each has
been administered in full compliance with all applicable federal, state or local
laws or regulations. Except as set forth on Schedule 5.15, all Uniform
Commercial Code filings, or filings of trust deeds, or of lien or other security
interest documentation that are required by any applicable federal, state or
local government laws and regulations to perfect the security interests referred
to in any and all of such documents or other security agreements have been made,
and all security interests under such deeds, documents or security agreements
have been perfected, and all contracts have been entered into or assumed in full
compliance with all applicable material legal or regulatory requirements.
(c) To the best knowledge of Comstock and Bank, all loan files of
Bank are complete and accurate in all material respects and have been maintained
in accordance with good banking practice.
A-12
<PAGE> 88
(d) All notices of default, foreclosure proceedings or repossession
proceedings against any real or personal property collateral have been issued,
initiated and conducted by Bank in full formal and substantive compliance with
all applicable federal, state or local laws and regulations, and no loss or
impairment of any security interest, or exposure to meritorious lawsuits or
other proceedings against Comstock and Bank, has been or will be suffered or
incurred by Comstock and Bank.
(e) To the best knowledge of Comstock and Bank, Bank is not in
violation of any applicable servicer or other requirement of the FHA, VA, FNMA,
GNMA, FHLMC or any private mortgage insurer which insures any loans owned by
Bank or as to which Bank has sold to other investors, the effect of which
violation, individually or in the aggregate, would have a Material Adverse
Effect on the business, operations, properties, assets or condition (financial
or other) of Bank, and with respect to such mortgage loans Bank has not done or
failed to do, or caused to be done or omitted to be done, any act the effect of
which act or omission impairs or invalidates (i) any FHA insurance or
commitments of the FHA to insure, (ii) any VA guarantee or commitment of the VA
to guarantee, (iii) any private mortgage insurance or commitment of any private
mortgage insurer to insure, (iv) any title insurance policy, (v) any hazard
insurance policy, or (vi) any flood insurance policy required by the National
Flood Insurance Act of 1968, as amended, to the material detriment of Bank.
(f) Bank is not knowingly engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
purchasing or carrying any margin stock.
5.16 Employee Benefits.
(a) Schedule 5.16 contains a true and complete list of each employee
benefit, compensation or welfare benefit plan, program or agreement maintained
or contributed to or required to be contributed to by Comstock or Bank (the
"Plans"). Neither Comstock nor Bank has any formal plan or commitment, whether
legally binding or not, to create any additional Plan or modify or change any
existing Plan that would affect any employee or terminated employee of Comstock
or Bank.
(b) Except as set forth in Schedule 5.16, there are no employment
agreements entered into by Comstock or Bank and no other deferred compensation
or salary continuation agreements or commitments maintained or agreed to by
Comstock or Bank.
(c) With respect to each of the Plans, Comstock and Bank have
heretofore delivered to FSC true and complete copies of each of the following
documents: (i) each Plan and related trust, if any (including all amendments
thereto); (ii) annual report and actuarial report, if required to be filed under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), for
the last two (2) years and the latest financial statement, if any, for each such
Plan; (iii) the most recent summary plan description, together with each summary
of material modifications, required under ERISA; (iv) the most recent
determination letter received from the Internal Revenue Service ("IRS") with
respect to each Plan that is intended to be qualified under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"); and (v) information
which identifies (x) all asserted or unasserted claims arising under any Plan,
(y) all claims presently outstanding against any Plan, (z) a description of any
future compliance action required with respect to any Plan under ERISA, or
federal or state law.
(d) All required contributions have been, or will be, made with
respect to each Plan on or prior to the date of this Agreement and have been
properly recorded on the Financial Statements. Except as disclosed on Schedule
5.16, each trust associated with the Plans, if any, is fully funded as of the
date of this Agreement. Schedule 5.16 sets forth the amount of monthly payments
due and owing for each month that the 401(k) Plan, Bank Payroll Stock Deduction
Purchase Plan, Deferred Compensation Plan and two Salary Continuation Agreements
for Robert N. Barone ("Mr. Barone") and Larry A. Platz ("Mr. Platz") are
continued and the amount of liability for claims if Comstock or Bank were to
terminate the Plans and the costs involved in any such termination. Except as
disclosed in Schedule 5.16, there are no other material liabilities that would
be incurred in connection with the termination of the Plans.
(e) Except as disclosed on Schedule 5.16, each of the Plans has been
operated and administered since inception in all material respects in accordance
with applicable laws, including, but not limited to, ERISA and the Code and each
of the Plans that is intended to be "qualified" within the meaning of Section
401(a) of the Code is so qualified. The Plans are legally valid and binding and
in full force and effect.
A-13
<PAGE> 89
(f) All amendments required under the Code have been made by
Comstock or Bank and approved by the IRS with respect to each Plan on or prior
to the date of this Agreement.
(g) Except as set forth in Schedule 5.16, no Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees beyond their retirement or
other termination of service (other than (A) coverage mandated by applicable
law, (B) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (C) deferred
compensation benefits accrued as liabilities on the books of Comstock or Bank,
or (D) benefits the full cost of which is borne by the current or former
employee (or his or her beneficiary)).
(h) There are no pending or, to Comstock's or Bank's knowledge,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Plans or any trusts related thereto.
(i) Except as set forth in Schedule 5.16, the consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) (A) entitle any current or former
employee of Comstock or Bank to severance pay, employment compensation or any
other payment, benefit or award, or (B) accelerate or modify the time of payment
or vesting, or increase the amount of any benefit, award or compensation due any
such employee.
(j) Neither Comstock nor Bank has ever had liabilities to the
Pension Benefit Guaranty Corporation ("PBGC"). No material liability to the PBGC
has been or will be incurred by Bank or other trade or business under "common
control" with Comstock or Bank (as determined under Section 414(c) of the Code)
(each a "Common Control Entity") on account of any termination of a Plan subject
to Title IV of ERISA. On and after September 2, 1974, no filing has been made by
Comstock or Bank (or any Common Control Entity) with the PBGC (and no proceeding
has been commenced by the PBGC) to terminate any Plan subject to Title IV of
ERISA maintained, or wholly or partially funded, by Bank (or any Common Control
Entity). Neither Comstock, Bank nor any Common Control Entity, has (i) ceased
operations at a facility so as to become subject to the provisions of Section
4062(e) of ERISA, (ii) withdrawn as a substantial employer so as to become
subject to the provisions of Section 4063 of ERISA, (iii) ceased making
contributions on or before the Closing Date to any Plan subject to Section
4064(a) of ERISA to which Comstock or Bank (or any Common Control Entity) made
contributions during the five years prior to the Closing Date, or (iv) made a
complete or partial withdrawal from a multi-employer plan (as defined in Section
3(37) of ERISA) so as to incur withdrawal liability as defined in Section 4201
of ERISA (without regard to subsequent reduction or waiver of such liability
under Section 4207 or 4208 of ERISA).
5.17 Repurchase Agreements. Bank has, as of the date hereof, and as of the
Closing Date will have, valid and perfected first position security interests in
all government securities subject to repurchase agreements, and, to the
knowledge of Comstock and Bank, as of the date hereof, the value of the
collateral securing each such repurchase agreement equals or exceeds the amount
of the debt secured by such collateral under such agreement.
5.18 Taxes and Tax Returns. Comstock and Bank each has delivered (or will
deliver within five (5) days of execution of this Agreement) true and correct
copies of all tax returns filed for the years ending 1995, 1996, and 1997.
Comstock and Bank have filed all federal, state and local tax returns and forms
(including but not limited to forms 1099), which are required by law to be filed
or delivered as of the date hereof and have paid all taxes which have become
due. Except as set forth in Schedule 5.18, to the best knowledge of Comstock and
Bank, after due inquiry, Bank has timely filed all currency transaction reports
required by the Bank Secrecy Act, as amended, has timely filed all information
returns required by Sections 6041, 6041A, 6042, 6045, 6049, 6050H, and 6050J of
the Code; and has exercised due diligence in obtaining certified taxpayer
identification numbers as required pursuant to Treasury Regulation 35a.9999.
Where payment of such taxes is not required to be made as of the date hereof,
Comstock and Bank have set up an adequate reserve or accrual for the payment of
all taxes required to be paid in respect of the periods covered by such returns.
5.19 Consents and Approvals Except for (i) the filing of applications and
notices, as applicable, with the State of Nevada, the FDIC and/or the Federal
Reserve Board and approval of such applications, (ii) the filing of the Bank
Articles of Merger with the Nevada Secretary of State and the filing of the
Certificate of Merger with the respective Secretaries of State of Delaware and
Nevada, (iii) the filing with the SEC of a proxy statement in definitive form
relating to the meeting of Comstock's stockholders to be held in connection with
this Agreement and the transactions contemplated hereby (the "Proxy Statement"),
and (iv) the consents and approvals set forth in Schedule 5.19, no consents or
approvals of, or filings or registration with, any governmental entity or with
any third
A-14
<PAGE> 90
party are necessary in connection with (A) the execution and delivery by
Comstock and Bank of this Agreement or (B) the consummation by Comstock and Bank
of the transactions contemplated by this Agreement.
5.20 Insurance. Schedule 5.20 contains a true, complete and correct
description of all material policies of fire, liability, production, completion
bond, errors and omissions, workmen's compensation and other forms of insurance
owned or held by Comstock and Bank, copies of which have previously been
delivered to FSC. All such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the Closing Date
have been paid, and no notice of cancellation or termination has been received
with respect to any such policy. During the last three years neither Comstock
nor Bank has been refused any insurance with respect to its assets or
operations, nor has its coverage been limited, by any insurance carrier to which
it has applied for any such insurance or with which it has carried insurance.
5.21 Section 280G. No payment received by any person as a result of the
transactions contemplated hereby shall constitute an "excess parachute payment"
within the meaning of section 280G of the Code.
5.22 Disclosure. No representation or warranty by Comstock or Bank
contained in this Agreement, nor any statement or certificate furnished or to be
furnished by Comstock or Bank to FSC or FSB or their representatives in
connection herewith or pursuant hereto, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to make the statements herein or therein contained not misleading or
necessary in order to provide a prospective purchaser of the business of
Comstock and Bank with adequate information as to Comstock and Bank and their
condition (financial or otherwise), properties, assets, liabilities, business
and prospects, and Comstock and Bank have disclosed to FSC and FSB in writing
all material adverse facts known to them relating to same.
ARTICLE VI
COVENANTS, REPRESENTATIONS AND WARRANTIES OF FSC AND FSB
As an inducement to Comstock and Bank to enter into this Agreement, and in
addition to any representations and warranties made elsewhere in this Agreement,
FSC and FSB jointly and severally covenant, represent and warrant to and agree
with Comstock and Bank as of the date of this Agreement and as of the Closing
Date as follows:
6.1 Organization, Conduct of Business, etc. FSC and FSB (i) are each duly
organized and validly existing and in good standing under the laws of Delaware
(in the case of FSC), or the State of Nevada (in the case of FSB), (ii) have all
requisite power and authority (corporate and other) to own their respective
properties and conduct their respective businesses as now being conducted, (iii)
are each duly qualified to do business and are in good standing in each
jurisdiction in which the character of the properties owned or leased by them
therein or in which the transaction of their respective businesses makes such
qualification necessary, except when failure to so qualify would not have a
Material Adverse Effect on FSC and its consolidated subsidiaries, and (iv) are
not transacting business, or operating any properties owned or leased by any of
them, in violation of any provision of federal or state law or any rule or
regulation promulgated thereunder, which violation would have a Material Adverse
Effect on FSC and its consolidated subsidiaries.
6.2 Authorization and Validity of Agreement. FSC and FSB each have the
corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Executive Committee of the
Board of Directors of FSC and the Board of Directors of FSB, has been duly
executed and delivered on their behalf, and constitutes a valid and binding
agreement of each of FSC and FSB, enforceable in accordance with its terms,
subject to approval of the sole shareholder of FSB and ratification by the Board
of Directors of FSC.
6.3 FSC Reports. Since January 1, 1995, FSC and its consolidated
subsidiaries have filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that were required to
be filed with (i) the SEC, including but not limited to Form 10-K, Form 10-Q,
Form 8-K and proxy statements, (ii) the Federal Reserve Board, (iii) the Office
of the Comptroller of the Currency (the "OCC"), (iv) the FDIC, and (v) other
applicable state securities or banking authorities. All such reports and
statements filed with the SEC, the Federal Reserve Board, the OCC, the FDIC, and
other applicable state securities or banking authorities are collectively
referred to herein as the "FSC Reports." As of their respective dates, to the
best knowledge of the officers of FSC, the FSC Reports complied in all material
respects with all the statutes, rules and regulations enforced or promulgated by
the regulatory authority with which they were filed and did not contain any
untrue
A-15
<PAGE> 91
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
6.4 FSC Financial Statements; Tax Returns. FSC's Consolidated Balance
Sheets as of December 31, 1996 and December 31, 1997, and its Consolidated
Statements of Income and Consolidated Statements of Cash Flow for the years then
ended, heretofore delivered to Comstock and Bank, were prepared in accordance
with generally accepted accounting principles consistently applied and present
fairly its consolidated financial condition, results of operations and changes
in financial position as of such dates and for such periods. FSC will provide a
copy of its Consolidated Balance Sheet and its Consolidated Statement of Income
and Consolidated Statement of Cash Flow as of December 31, 1998 when available.
FSC has filed all federal, state and local tax returns and forms (including but
not limited to Forms 1099), which are required by law to be filed or delivered
as of the date hereof and have paid all taxes which have become due. Where
payment of such taxes is not required to be made as of the date hereof, FSC has
set up an adequate reserve or accrual for the payment of all taxes required to
be paid in respect of the periods covered by such returns.
Except as and to the extent stated in the FSC Financial Statements
provided by FSC to Comstock and Bank and except for those liabilities incurred
in the normal course of FSC's or any of its subsidiaries' respective businesses,
FSC and its consolidated subsidiaries do not have any material liabilities or
obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise).
6.5 Absence of Material Adverse Changes. Since December 31, 1997, there
has been no change, and no development involving a reasonably foreseeable
prospective change, in or affecting the financial condition (present or
prospective), businesses, properties or operations of FSC and its consolidated
subsidiaries that either individually or in the aggregate has had or is likely
to have a Material Adverse Effect on FSC and its consolidated subsidiaries.
6.6 Absence of Defaults Under Agreements. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will conflict with or result in a breach of or constitute a default under
any provision of FSC's or FSB's respective Articles of Incorporation, Bylaws, or
any agreement to which FSC or FSB is a party or by which either of them is bound
or to which any of their respective properties is subject, or result in the
creation of any liens or encumbrances upon their respective assets, and no
consents or waivers thereunder are required to be obtained in connection with
the transactions contemplated hereby, except for the approval of required
regulatory authorities and of the shareholders of FSB and Bank.
6.7 Actions, Proceedings, and Investigations. Except as set forth in FSC's
filings with the SEC, there are no actions, proceedings or investigations
pending, or to the knowledge of the executive officers of FSC, threatened or
contemplated, against or relating to FSC or any of its consolidated
subsidiaries, or any of their respective properties, which would have a Material
Adverse Effect on the financial condition (present or prospective), businesses,
properties or operations of FSC and its consolidated subsidiaries, or the
ability of FSC or FSB to consummate the Merger contemplated hereby.
6.8 Regulatory Approvals. FSC and FSB shall (i) use their best efforts in
good faith to obtain all necessary regulatory approvals and to take or cause to
be taken all other action required under this Agreement on their part to be
taken as promptly as practicable so as to permit the consummation of the
transactions contemplated by this Agreement at the earliest possible date, and
cooperate fully with Comstock and Bank to that end, and (ii) furnish all
necessary information for inclusion in any applications relating to the
consents, approvals, and permissions of regulatory authorities referred to in
Article VIII. FSC knows of no reasons why the transactions contemplated by this
Agreement should not be approved by the regulatory authorities. FSC shall give
Comstock prompt notice of receipt of the regulatory approvals referred to in
Section 8.1(a) and shall provide Comstock with copies of any written comments by
any regulatory authorities regarding or relating to the non-confidential
portions of the regulatory applications filed in connection with the
transactions contemplated hereby.
6.9 FSC Common Stock. All of the outstanding FSC Common Stock is duly
authorized and validly issued, fully paid and nonassessable. The FSC Common
Stock to be issued and delivered pursuant to the Merger, when issued as
contemplated hereby, shall be duly authorized, validly issued, fully paid and
nonassessable.
6.10 Registration of Shares. FSC will use its best efforts to cause a
Registration Statement on Form S-4 or other appropriate form (the "Registration
Statement") to be filed and declared effective under the Securities Act of 1933,
as amended (the "1933 Act"), with respect to the FSC Common Stock which is to be
issued in connection with the transactions contemplated by this Agreement, which
Registration Statement, at the time it becomes
A-16
<PAGE> 92
effective, and at the Effective Time, shall in all material respects conform to
the requirements of the 1933 Act and the General Rules and Regulations of the
SEC under said Act (the "1933 Rules"), and the FSC Common Stock to be issued by
FSC in connection with the Merger shall be duly qualified or exempted, as the
case may be, under applicable state Blue Sky securities laws in those states in
which Comstock has informed FSC that its shareholders reside. FSC will furnish
to Comstock, its counsel, investment banker and accountants drafts of
Registration Statement filings sufficiently in advance of filing so as to afford
a reasonable opportunity for review and comment.
6.11 Notification of Actions. FSC and FSB covenant and agree to
immediately notify Comstock and Bank in the event of the breach of any of the
covenants set forth in this Article VI.
6.12 NASDAQ/NMS Listing. FSC shall take all actions necessary to assure
that the shares of FSC Common Stock to be issued in the Merger will be approved
for listing on the National Association of Security Dealers Automatic Quotation,
National Market System ("NASDAQ/NMS") prior to the Closing Date.
6.13 Indemnification. FSC agrees that all rights to indemnification or
exculpation now existing in favor of the directors and officers of Comstock and
Bank as provided in their respective charters, bylaws, indemnification
agreements or otherwise in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall, to the greatest extent permitted by
Delaware law and the organizational documents of FSC as in effect, survive the
Merger and shall continue in full force and effect for a period of three (3)
years. If FSC or any of its successors or assigns (i) shall consolidate with or
merge into any other corporation or entity and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii) shall
transfer all or substantially all of its properties and assets to any
individual, corporation or other entity, then, and in each such case, FSC shall
use its commercially reasonable efforts to cause such successor and assigns of
FSC to assume the obligations set forth in this Section 6.13
FSC shall use its commercially reasonable efforts to cause the persons
serving as officers and directors of Comstock and Bank immediately prior to the
Effective Time to be covered for a period of three (3) years after the Effective
Time by the current policies of directors' and officers' liability insurance
maintained by Bank with respect to acts or omissions occurring prior to the
Effective Time which were committed by such officers and directors in their
capacity as such (provided that FSC may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no less
advantageous to such officers and directors); provided, however, that FSC shall
not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 150% of the premiums paid as of the date hereof by
Bank for such insurance.
6.14 Ongoing Credit Review. With respect to its ongoing credit review of
Bank between the date hereof and the Effective Time, FSC covenants and agrees
that it shall apply the same credit review procedures and credit standards it
used in the initial credit review and that in its ongoing credit review it will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a Material
Adverse Effect.
6.15 Limitations on FSC's Conduct Prior to the Effective Time. Between the
date hereof and the Effective Time or the time when this Agreement terminates as
provided herein, FSC shall not, without prior written consent of Comstock, take
any action which would or is reasonably likely to (i) adversely affect the
ability of FSC to obtain any necessary approvals of any governmental entity
required for the transactions contemplated hereby; (ii) adversely affect FSC's
ability to perform its covenants and agreements under this Agreement; or (iii)
result in any of the conditions to the performance of FSC's obligations
hereunder not being satisfied.
6.16 Access to Information. Upon reasonable request by Comstock, Brad D.
Hardy, Executive Vice President & Chief Financial Officer, or Jay S. Bachman,
Senior Vice President, Corporate Development, shall be available in Salt Lake
City, Utah, to Comstock and its representatives, counsel, accountants and agents
to discuss FSC's operations, and FSC shall provide to Comstock and its
representatives, at their request, copies of all filings made with the SEC
between the date hereof and the Closing. Comstock covenants and agrees that it
and its representatives, counsel, accountants and agents will hold in strict
confidence all documents and information concerning FSC or any of its
subsidiaries so obtained (except to the extent that such documents or
information are a matter of public record or require disclosure in the Form S-4
or any of the public information of any application required to be filed with
any governmental or regulatory agency to obtain the approvals and consents
required to effect the transactions contemplated hereby), and if the
transactions contemplated herein are not consummated, such confidence shall be
maintained and all such documents shall be returned to FSC.
A-17
<PAGE> 93
6.17 FSB Board Position. FSC hereby agrees to elect Robert N. Barone to
serve as a member of the Board of Directors of FSB for a term of one (1) year
from and after the Effective Time. FSC further agrees to take no action to
remove Mr. Barone as a director during such period unless such removal is for
cause or results from Mr. Barone's inability to serve by reason of his physical
or mental illness or incapacity.
6.18 Federal Home Loan Bank Membership. FSC hereby agrees to maintain
Bank's membership, or obtain on behalf of FSB a membership, in the San Francisco
Federal Home Loan Bank for one (1) year from and after the Effective Time;
provided, however, that such membership may be terminated at any time during
such period in the event that the Management Committee of First Security Bank,
N.A. determines that there exist compelling business reasons to do so (such that
FSB's continued membership and investment in the FHLB exposes FSB to
unacceptable financial risk).
ARTICLE VII
PROXY STATEMENT; SHAREHOLDER MEETINGS
7.1 Proxy Statement. FSC (with the assistance of Comstock and Bank) shall
prepare the Registration Statement, as provided in Paragraph 6.10 above, which
Registration Statement will include a Proxy Statement to be used with respect to
providing the shareholders of Comstock with notice of the shareholder meeting
for Comstock. Comstock and Bank represent and warrant that the information they
provide for use in the Proxy Statement will comply in all material respects with
the requirements of the Securities Exchange Act of 1934 (the "1934 Act") and the
applicable rules and regulations promulgated by the SEC under such Act (the
"1934 Rules"), and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, except that Comstock and Bank
make no representation with respect to information furnished by FSC or FSB
expressly for inclusion in the Proxy Statement. FSC and FSB represent and
warrant that the Proxy Statement will comply in all material respects with the
requirements of the 1934 Act and the applicable 1934 Rules, and will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements contained therein not
misleading, except that FSC and FSB make no representation with respect to
information furnished in writing by Comstock and Bank expressly for inclusion in
the Proxy Statement.
7.2 Comstock Meeting. This Agreement shall be submitted for approval,
ratification and confirmation by the shareholders of Comstock at a meeting
thereof to be called in accordance with the applicable provisions of law and
held as promptly as practicable after the execution of this Agreement and in no
event later than the expiration of forty-five (45) days, or in the event of an
SEC comment period, the expiration of such SEC comment period, if applicable,
without the filing of any post-effective amendment to the Registration Statement
to be filed by FSC pursuant to Paragraph 6.10, following the effectiveness of
said Registration Statement. Comstock will mail the Proxy Statement prepared by
FSC as part of the Registration Statement to its shareholders for purposes of
the meeting of its shareholders. Consistent with the exercise of their fiduciary
duties to shareholders, the Board of Directors of Comstock shall recommend to
the shareholders that the shareholders approve the Agreement and the
transactions contemplated therein.
7.3 Bank and FSB Action By Unanimous Written Consent. This Agreement shall
be submitted to the sole shareholder of each of Bank and FSB for approval,
ratification and confirmation pursuant to an Action by Unanimous Written Consent
in accordance with the applicable provisions of law as promptly as practicable
after the execution of this Agreement, and in no event later than the expiration
of forty-five (45) days without the filing of any post-effective amendment to
the Registration Statement to be filed by FSC pursuant to Paragraph 6.10,
following the effectiveness of said Registration Statement. FSC owns
beneficially and of record all of the issued and outstanding shares of FSB
Common Stock and will vote all of such shares in favor of this Agreement.
Comstock owns all of the issued and outstanding shares of Bank Common Stock and
will vote all of such shares in favor of this Agreement.
A-18
<PAGE> 94
ARTICLE VIII
CONDITIONS OF CLOSING
8.1 Conditions of Closing For All Parties.
The consummation of the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Regulatory Approval. All consents, approvals and permissions and
the satisfaction of all of the requirements prescribed by law, including but not
limited to the consents, approvals and permissions of all applicable regulatory
authorities which are necessary to the carrying out of the Bank Merger and
Merger as described in this Agreement, shall have been procured; provided,
however, the approvals referred to in this subparagraph (a) shall not have
imposed any significant conditions which FSC and FSB on the one hand, or
Comstock and Bank, on the other, reasonably deem to be materially
disadvantageous or burdensome. An approval shall be deemed to be materially
disadvantageous or burdensome if the approval includes a condition which, in the
reasonable opinion of the Board of Directors of FSC, would have a Material
Adverse Effect on the anticipated economic and business benefits to FSC of the
transactions contemplated by this Agreement.
(b) Registration Statement, etc. The FSC Common Stock to be issued
by FSC hereunder shall be the subject of the Registration Statement and to
qualification or exemption under state securities laws as appropriate. The
Registration Statement shall have been declared effective and shall not be
subject to a stop order or any threatened stop order. Such FSC Common Stock
shall have been included for listing in the NASDAQ/NMS subject to official
notice of issuance.
(c) No Injunction, etc. There shall not have been instituted any
litigation, regulatory proceeding or other matter which challenges the legality
or effectiveness of the transactions contemplated hereby or seeks an order,
decree or injunction enjoining or prohibiting the consummation of the Merger.
(d) Tax Opinions. FSC and Comstock shall have received from Ray,
Quinney & Nebeker, counsel to FSC, an opinion reasonably satisfactory to FSC and
Comstock in the form of Schedule 8.1(d), respectively, to the general effect
that the Merger shall not result in the recognition of gain or loss for federal
income tax purposes by Comstock or FSC, nor shall the issuance of the FSC Common
Stock result in the recognition of gain or loss by the holders of Comstock
Common Stock who receive such stock in connection with the Merger. The opinion
shall be dated prior to the date the Prospectus is first mailed to the
shareholders of Comstock and such opinion shall not have been withdrawn or
modified in any material respect.
(e) Section 280G. There shall have been no payments received by any
person as a result of the transactions contemplated hereby that would constitute
an "excess parachute payment" within the meaning of Section 280G of the Code.
8.2 Conditions of Closing For FSC and FSB. The obligation of FSC and FSB,
respectively, to consummate the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Shareholder Approval. A majority of the shareholders of Comstock
shall have approved this Agreement and the Merger contemplated hereby (unless a
higher percentage of the outstanding shares of Comstock must approve the
transaction under the Articles of Incorporation or Bylaws of Comstock).
Comstock, as the sole shareholder of Bank, shall approve the Agreement and the
Bank Merger.
(b) Comstock and Bank Resolutions; Corporate Documents. Each of
Comstock and Bank shall have delivered to FSC and FSB (i) a copy of its Articles
of Incorporation as certified by the Nevada Secretary of State; (ii) a copy of
its bylaws certified by its corporate secretary, (iii) a certificate of good
standing dated as of the Closing Date, issued by the appropriate governmental
agency, (iv) certified copies of resolutions duly adopted by its Board of
Directors approving this Agreement and, in the case of the Board of Directors of
Comstock, directing the submission thereof to a vote of the shareholders of
Comstock, and (v) certified copies of resolutions duly adopted by the
shareholders of Comstock (owning the outstanding shares as required by
subparagraph (a) above) approving this Agreement and the Merger, all as
contemplated hereby.
(c) Comstock and Bank Representations and Warranties. Unless waived
in writing by FSB and FSC, the representations and warranties of Comstock and
Bank contained in this Agreement shall be true and correct
A-19
<PAGE> 95
on and as of the Closing Date with the same effect as though made on and as of
such date. Except as otherwise contemplated by this Agreement, Comstock and Bank
shall each have performed in all material respects all of its obligations and
agreements hereunder theretofore to be performed by it. FSC and FSB shall have
received at the Closing a certificate to the foregoing effect dated as of the
Closing Date and executed on behalf of Comstock and Bank by one of their duly
authorized executive officers.
(d) Comfort Letters. FSC shall have received letters from Kafoury,
Armstrong & Co., dated (i) the effective date of the Registration Statement and
(ii) shortly prior to the Effective Time, in form and substance satisfactory to
FSC, with respect to Comstock's and Bank's financial condition, which letters
shall be based upon customary specified procedures undertaken by such firm. The
"comfort letters" contemplated hereby shall include, but not be limited to,
those matters identified in Schedule 8.2(d) attached hereto.
(e) Opinion of Comstock and Bank Counsel. Unless waived in writing
by FSC and FSB, FSC and FSB shall have received at the Closing from Grady &
Associates, special counsel to Comstock and Bank, and other counsel to Comstock
and Bank acceptable to FSC, written opinions, dated the Closing Date,
substantially in the form of Schedule 8.2(e) hereto.
(f) Affiliate's Letter. Unless waived in writing by FSC, FSC shall
have received a letter from each person who, in the opinion of Comstock and its
counsel (who shall be entitled to rely on written certificates of such persons),
is an "affiliate" (as that term is defined in Rule 405 promulgated by the SEC
under the 1933 Act) of Comstock in the form attached hereto as Schedule 8.2(f).
Such "affiliate's" letter shall include covenants with respect to compliance
with the rules and regulations of the SEC for any public reoffering or sale of
the FSC Common Stock to be issued under the terms of this Agreement to such
affiliate.
(g) Condition of Bank. FSB shall have determined, based on an audit
and review by its officers, accountants and legal counsel, conducted prior to
the execution of this Agreement and updated as of the Closing Date, as provided
below, that (i) the assets, books, records and operations of Bank are in
reasonably satisfactory condition and will not adversely impact FSB after
consummation of the Merger; (ii) based on the review of the assets, books,
records and operations of Bank by FSC, there are no liabilities (existing,
threatened or contingent) which FSC, in its discretion, determines to be
unacceptable, as determined by reference to Articles IV and V of this Agreement;
(iii) the methodology for determining and the allowance for loan and lease
losses of Bank as determined by the grading of Bank loans and leases by FSC, is
adequate in all material respects; (iv) the net earnings after taxes for the
years ended 1995, 1996, 1997 and 1998 are as reported in the Financial
Statements delivered to FSC pursuant to Section 5.6; and (v) as of the Closing
Date, the net worth of Comstock and Bank, calculated in accordance with
generally accepted accounting principles and as more specifically set forth in
Schedule 8.2(g) attached hereto, will exceed $16,658,575, exclusive of
unrealized securities gains or losses pursuant to FASB 115 (see line 23 on
Schedule 8.2(g)). The net worth test shall be calculated after accrual or
payment of the expenses incurred by Comstock and Bank with respect to the Bank
Merger and Merger, including but not limited to investment banker's, auditor's
and attorney's fees and expenses incurred with respect to employee severance
payments and/or termination or freezing of any employee Plan, as defined in
Section 5.16 (provided that all of such expenses collectively shall not exceed
an aggregate total of $2,782,183 after tax (see lines 11 and 22 on Schedule
8.2(g) attached hereto)), but before pay-in of the exercise strike price,
including any tax effects of such exercise, for the Options and Warrants, all of
which shall inure to the benefit of FSC in addition to the equity target stated
herein, as more specifically set forth in Schedule 8.2(g). Such net worth target
assumes a Closing Date of March 31, 1999 and shall be increased by $190,000 per
month (on a pro-rated basis) if the Closing Date were to occur after March 31,
1999. In the event that Comstock and Bank incur costs as a result of Phase II
remediation related to the Carson City, Nevada, property of Five Hundred
Thousand Dollars ($500,000) or less, the parties agree that the purchase price
shall be decreased on a dollar-for-dollar (after-tax) basis. Should the
remediation costs exceed $500,000, the parties shall have the right to
renegotiate the terms of this transaction.
In the event FSB determines, and Bank agrees, that certain loans or assets
should be written down or charged off or that additions to the provision for
loan losses should be made, as contemplated by subparagraphs (ii) and (iii) of
this Section 8.2(g), Bank agrees to take such actions as are appropriate under
the circumstances and the net worth requirement set forth in this paragraph as a
condition to Closing shall be determined after the taking of such actions.
Any charge-offs, other asset write-downs or additions to the allowance for
loan loss or other financial adjustments at or prior to the Closing made at the
request, in writing, of FSC or FSB, for the convenience of FSC or FSB, and not
required by said subparagraphs (ii) and (iii) of this 8.2(g), which charge-offs
or additions Bank agrees
A-20
<PAGE> 96
to make, shall not reduce net worth for purposes of satisfaction of the net
worth condition set forth in this Section 8.2(g).
With respect to the credit review to be conducted by FSC and FSB
hereunder, FSC and FSB covenant and agree that the update credit review of Bank
by FSC and FSB shall be conducted approximately fifteen (15) business days prior
to the Closing Date. In conducting the update credit review, FSC and FSB agree
that they shall apply the same credit review procedures and credit standards
they used in the initial credit review and that in their update review they will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a material
adverse event. A demonstrable adverse change or a material adverse event shall
be defined by reference to the term Material Adverse Effect.
(h) Employment Agreements. Each of Mr. Barone and Mr. Platz shall
have executed and delivered an Employment Agreement in the form set forth as
Schedules 8.2(h-1) and 8.2(h-2), respectively, attached hereto and incorporated
herein.
(i) Condition of Properties. FSC shall have determined, based on the
Phase I and Phase II Environmental Reports, as provided in Section 4.6 above,
that there are no liabilities (existing, threatened or outright) associated with
the real properties owned by Comstock or Bank which are unacceptable. Such
determination shall be made by FSC within forty-five (45) days of receipt of
such Phase I and Phase II Environmental Reports delivered to FSC under Section
4.6, above.
(j) Options and Warrants. All Options and Warrants shall have been
exercised or cancelled (and no additional Options or Warrants shall have been
issued as of the Closing Date) and each of the Comstock Stock Option Plans and
agreements related thereto and the warrants covered by the Warrant Agreement
provided under cover of Schedule 5.3 shall have been redeemed.
(k) Cafeteria Plan Issues. Bank shall have (i) caused a Cafeteria
Plan document under Section 125 of the Code to be in place; (ii) caused Forms
5500-C/Rs for the years 1993 through 1997 to be filed with the Department of
Labor and the Internal Revenue Service under the Delinquent Filer Voluntary
Compliance Program ("DVCP"), and (iii) paid all penalties associated with such
DVCP filings. Payment of the penalties in connection with such filings shall
have no impact on the net worth test set forth in Section 8.2(g).
8.3 Conditions of Closing For Comstock and Bank. The obligation of
Comstock and Bank to consummate the transactions contemplated by this Agreement
is conditioned upon the following:
(a) FSC and FSB Representations and Warranties. Unless waived in
writing by Comstock and Bank, the representations and warranties of FSC and FSB
contained in this Agreement shall be correct on and as of the Closing Date with
the same effect as though made on and as of such date, except for changes which
are not, in the aggregate, material and adverse to the financial condition,
businesses, properties or operations of FSC and its consolidated subsidiaries,
and, except as otherwise contemplated by this Agreement, FSC and FSB shall have
performed in all material respects all of their obligations and agreements
hereunder theretofore to be performed by them. Comstock and Bank shall have
received at the Closing a certificate to the foregoing effect dated the Closing
Date and executed on behalf of FSC and FSB by one of their duly authorized
executive officers.
(b) Opinion of FSC Counsel. Unless waived in writing by Comstock and
Bank, Comstock and Bank shall have received at the Closing from Ray, Quinney &
Nebeker, a written opinion, dated the Closing Date, substantially in the form of
Schedule 8.3(b) hereto.
(c) FSC Resolutions; Corporate Documents. FSC shall have delivered
to Comstock a certified copy of resolutions duly adopted by the Board of
Directors of FSC approving this Agreement, the Merger and the Bank Merger, all
as contemplated hereby. FSC shall deliver to Comstock (i) a copy certified by
the Delaware Secretary of State's Office of FSC's Certificate of Incorporation;
(ii) a copy of FSC's Bylaws certified by the Corporate Secretary, and (iii) a
certificate of good standing dated as of a recent date, issued by the Delaware
Secretary of State's office.
A-21
<PAGE> 97
(d) Shareholder Approval. Under the Delaware General Corporation
Law, FSC shareholder approval is not required for the Merger. FSC, as the sole
shareholder of FSB, shall approve the Agreement and the Bank Merger. A majority
of the shareholders of Comstock shall have approved this Agreement and the
Merger.
(e) Fairness Opinion. Comstock shall have previously received a
letter from Hovde Financial, Inc. dated as of a date within five (5) days of the
mailing of the Comstock Proxy Statement to the shareholders of Comstock, to the
effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of Comstock.
ARTICLE IX
CLOSING OF MERGER
9.1 Closing. Unless the Agreement is earlier terminated in accordance with
Article X, below, the closing of the transactions contemplated herein (the
"Closing") shall take place at 10:00 a.m. on a date to be agreed upon by the
parties, and if such date is not agreed upon by the parties, the Closing shall
occur on the fifth business day after satisfaction or waiver of all of the
conditions precedent set forth in Article VIII and the expiration of the
required waiting period following approval of FSC's application to the Federal
Reserve Bank of San Francisco and the Nevada Financial Institutions Division, if
any, relating to the Merger and the Bank Merger but in no event later than
thirty (30) days after the expiration of such period (the "Closing Date"), at
the offices of Ray, Quinney & Nebeker, 79 South Main Street, Salt Lake City,
Utah 84111.
9.2 Filing of Certificate of Merger and Articles of Merger.
(a) Comstock and FSC shall execute a Certificate of Merger and
Articles of Merger in substantially the forms attached hereto as Exhibits A-1
and A-2 and shall cause such Certificate of Merger and Articles of Merger to be
filed with the Delaware Secretary of State's Office and the Nevada Secretary of
State's Office, respectively, on the Closing Date or as soon thereafter as
practicable. The Effective Time of the Merger shall be on such date as the
Delaware Secretary of State and the Nevada Secretary of State, under their
respective rules and regulations, deem the Merger effective.
(b) Bank and FSB shall execute articles of merger in substantially
the form attached hereto as Exhibit B and shall cause such articles of merger to
be approved by the Nevada Financial Institutions Division and filed with the
Nevada Secretary of State's office, on the Closing Date or as soon thereafter as
practicable. The Bank Merger shall take effect on such date as the Nevada
Secretary of State, under rules and regulations governing such office, deems the
Bank Merger effective, but in any event shall be effective after the Effective
Time of the Merger.
ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by mutual consent of the Executive Committee and Board of
Directors of FSC and FSB, respectively, and the Boards of Directors of Comstock
and Bank; or
(b) by the Boards of Directors of FSC and FSB, respectively, or the
Boards of Directors of Comstock and Bank at any time after the expiration of
nine (9) months from the date hereof, if the Bank Merger and Merger shall not
theretofore have been consummated by the failure to satisfy the conditions to
Closing not within the control of the electing party; or
(b) by Comstock and Bank, upon written notice to FSC and FSB at any
time if any representation or warranty of FSC and FSB contained in this
Agreement was materially incorrect when made or becomes materially incorrect on
or prior to the Closing Date, or if FSC or FSB fail to comply with any of their
respective covenants contained in this Agreement, and the same is not cured
within thirty (30) days after notice of such inaccuracy or noncompliance; or
(c) by FSC and FSB upon written notice to Comstock and Bank at any
time if any representation or warranty of Comstock and Bank contained in this
Agreement was materially incorrect when made or becomes materially incorrect on
or prior to the Closing Date, or if Comstock and Bank fail to comply with any of
their
A-22
<PAGE> 98
covenants contained in this Agreement, and the same is not cured within
thirty (30) days after notice of such inaccuracy or noncompliance; or
(d) by FSC and FSB, upon written notice to Comstock and Bank
at any time if a majority of Comstock's shareholders (or such higher level
mandated by the Articles of Incorporation or Bylaws of Comstock) does not
approve the Merger contemplated hereby, or if such Merger is disapproved by any
governmental authority whose approval is necessary; or
(e) by either Comstock or FSC, if Comstock shall have failed to act
or refrain from doing any act as required under this Agreement pursuant to
Section 11.9.
10.2 Effect of Termination. In the event of termination and abandonment
hereof pursuant to the provisions of Section 10.1, this Agreement shall become
void and have no force or effect, except that Sections 10.2, 11.2, 11.9 and
11.11 shall survive the termination. Such termination shall not relieve any
party of any liability for damages arising out of its willful breach of any
provision of this Agreement for any default prior to such termination.
ARTICLE XI
ADDITIONAL COVENANTS
11.1 Employee Matters. FSC shall use its best efforts to effect a
conversion of Comstock/Bank employees who become FSB employees to FSC benefit
plans within twelve (12) months of the Effective Date (the "Conversion Period").
During the Conversion Period, FSC shall continue only the following Plans
described in Section 5.16, for the benefit of the employees of Comstock/Bank who
become FSB employees pending termination or merger of the Plans into FSC benefit
plans:
(a) The Bank 401(k) plan; and
(b) The Bank Welfare Benefit Plans listed as or in items 4(a), (b),
(c), (d), (e), (f), (g), (h), and (j) of Schedule 5.16 hereto.
Upon conversion to FSC benefit plans, Comstock/Bank employees who are
still employed at such time shall cease participation in the Plans described in
Section 5.16 and shall be entitled to participate in such FSC benefit plans in
accordance with the terms thereof and in accordance with FSC policy. For
purposes of determining each such Comstock/Bank employee's eligibility and
vesting under such FSC benefit plans, FSC shall recognize such Comstock/Bank
employee's service with Bank beginning on the date such Bank employee commenced
employment with Bank; provided, however, that with respect to the FSC 401(k)
plan, prior service credit shall be given only for such period as Bank's 401(k)
plan has been in existence; and, provided further that prior service credit
shall not be given for purposes of accrual of benefits under the FSC retirement
plan.
FSC also covenants and agrees that any pre-existing condition, limitation
or exclusion in its health plans shall not apply to Comstock or Bank employees
or their covered dependents who are covered under similar Comstock or Bank
health plans on the Closing Date and who elect coverage under FSC's health plans
at the time such Comstock or Bank employees are first given the option to enroll
in FSC's health plans.
FSC will use its best efforts to either freeze the Plans or transfer such
benefits under the Plans (in a plan-to-plan transfer) into an existing benefit
plan maintained by FSC as to which such benefits may be transferred without cost
to FSC, or necessity of material amendment to, or adverse effect on
qualifications of, such FSC plan; provided, however, that no accounts shall be
permitted to roll-over to FSC's 401(k) plan without the express written consent
of the trustee and sponsor of FSC's 401(k) plan, in its sole discretion, to such
roll-over, which approval shall not be given in any event without receipt of
such documentation from Comstock and Bank as may be requested by FSC prior to
Closing, including, without limitation, an Internal Revenue Service ruling
obtained by Comstock approving the roll-over and ensuring the qualification of
the FSC 401(k) plan if the FSC 401(k) plan accepts such roll-overs.
Each of Mr. Barone and Mr. Platz have entered into a Salary
Continuation Agreement dated April 30, 1997 with Comstock (the "SERP Agreement")
which provides for certain payments to each of Mr. Barone and Mr. Platz,
respectively, upon a change in control of Bank as set forth therein. FSC agrees
that, notwithstanding the date of the Effective Time, each of Mr. Barone and Mr.
Platz shall be entitled to the April 30, 1999 benefit under the SERP Agreement.
A-23
<PAGE> 99
No provision of this Agreement shall be construed to prohibit FSC
from having the right to terminate the employment of any employee, with or
without cause, or to amend or terminate after the Closing Date any employee
benefit plan established, maintained or contributed to by FSC or its
subsidiaries.
11.2 Costs. Each of the parties to this Agreement shall pay its own
charges and costs incurred or to be incurred in connection with the execution
and performance of this Agreement. In the event of a willful breach of a
material agreement or covenant contained herein by either Comstock and Bank, on
the one hand, or FSC and FSB, on the other, which breach either directly or
indirectly results or would result in a failure to consummate the Bank Merger
and Merger, and which breach cannot be cured or is not cured within thirty (30)
days after written notice of such breach is given to the party committing such
breach, the party causing such breach shall be liable to the other party for
damages for an amount not to exceed $2,500,000; provided, further, that in the
event of a termination of this Agreement under Section 10.1(f), above, Comstock
shall pay to FSC a termination fee of $2,000,000. Either party may elect to
forego the recovery of damages and pursue its right to the specific performance
or enforcement of the terms and provisions of this Agreement.
11.3 Instruments of Transfer, etc. Each of the parties hereto shall
cooperate with the other parties in every way in carrying out the transactions
contemplated herein, in delivering instruments to perfect the conveyances,
assignments and transfers contemplated herein, and in delivering all documents
and instruments reasonably deemed necessary or useful by counsel for any party
hereto.
11.4 Notices. All notices, requests, consents and demands shall be given
to or made upon the parties at their respective addresses set forth below, or at
such other address as a party may designate in writing delivered to the other
parties. Unless otherwise agreed in this Agreement, all notices, requests,
consents and demands shall be given or made by personal delivery, by confirmed
air courier, by facsimile transmission ("fax"), with a copy to follow by first
class mail, or by certified first class mail, return receipt requested, postage
prepaid, to the party or parties addressed as aforesaid. If sent by confirmed
air courier, such notice shall be deemed to be given upon the earlier to occur
of the date upon which it is actually received by the addressee or the business
day upon which delivery is made at such address as confirmed by the air courier
(or if the date of such confirmed delivery is not a business day, the next
succeeding business day). If mailed, such notice shall be deemed to be given
upon the earlier to occur of the date upon which it is actually received by the
addressee or the second business day following the date upon which it is
deposited in a first-class postage-prepaid envelope in the United States mail
addressed as aforesaid. If given by fax, such notice shall be deemed to be given
upon the date it is actually received by the addressee, as confirmed by the fax
activity report generated upon transmission of such fax.
(a) If to FSC and FSB, to:
First Security Bank of Nevada
530 Las Vegas Blvd. S
Las Vegas, Nevada 89101
Attn: David J. Smith, President
and Chief Executive Officer
Fax Number (702) 385-8705
With a copy to:
First Security Corporation
79 South Main Street
Salt Lake City, Nevada 84111
Attn: Brad D. Hardy, Esq.
Executive Vice-President & General Counsel
Fax Number: (801) 359-6928
A-24
<PAGE> 100
With a copy to:
Sylvia I. Iannucci, Esq.
Ray, Quinney & Nebeker
400 Deseret Building
79 South Main Street
Salt Lake City, Utah 84111
Fax Number: (801) 532-7543
(b) If to Comstock and Bank, to:
Comstock Bank
6275 Neil Road
Reno, Nevada 89511
Attn: Robert N. Barone, Chief Executive Officer
Fax Number: (775) 828-0377
With a copy to:
Comstock Bancorp
6275 Neil Road
Reno, Nevada 89511
Attn: Robert N. Barone, Chief Executive Officer
Fax Number: (775) 828-0377
With a copy to:
Francis X. Grady, Esq.
Grady & Associates
20800 Center Ridge Road, Suite 116
Rocky River, Ohio 44116-4306
Fax Number: (440) 356-7254
Each party hereto shall notify promptly the other in writing of the occurrence
of any event which will or may result in the failure to satisfy the conditions
specified in Article VIII hereof. Between the date of this Agreement and the
Closing Date, each party hereto will advise the other of the satisfaction of
such conditions as they occur.
11.5 Amendments. Prior to the Effective Time, any provision of this
Agreement, except for Section 3.1 which establishes the Exchange Ratio, may be
amended or modified at any time, either before or after its approval, if any, by
the shareholders of any party to this Agreement, by an agreement in writing
between the parties hereto approved by their respective Boards of Directors (or
Executive Committee in the case of FSC) and executed in the same manner as this
Agreement.
11.6 Entire Agreement. This Agreement and all exhibits and schedules
hereto and other documents incorporated or referred to herein, contain the
entire agreement of the parties and there are no representations, inducements or
other provisions other than those expressed in writing. No modification, waiver
or discharge of any provision of or breach of this Agreement shall (i) be
effective unless it is executed in writing by the party effecting such
modification, waiver or discharge, or (ii) affect the right of either party
hereto thereafter to enforce any other provision or to exercise any right or
remedy in the event of a breach by a party hereto, whether or not similar.
11.7 Assignment. This Agreement may not be assigned by any party hereto
except with the prior written consent of the other parties.
11.8 Counterparts. Any number of counterparts of this Agreement may be
signed and delivered and each shall be considered an original and together they
shall constitute one agreement.
A-25
<PAGE> 101
11.9 Exclusive Merger Agreement. Comstock, Bank, and the Board of
Directors of Comstock covenant and agree that, between the date hereof and the
date of the meeting of the shareholders of Comstock described in Article VII
hereof, they will not, either directly or indirectly, solicit or attempt to
procure offers relating to the merger or acquisition of Comstock or Bank with or
by any entity not a party to this Agreement, or negotiate or enter into any
agreements relating to the merger or acquisition of Comstock or Bank with or by
any such third party, and such persons further agree to use his or her best
efforts to obtain the approval of the Merger by the shareholders of Comstock.
Notwithstanding the foregoing, neither Comstock, Bank nor any of their
respective officers or directors shall be required by this Section 11.9 to take
or refrain from taking any action if to do so would, in the written opinion of
Comstock's legal counsel, violate the duties imposed by law on the Comstock
directors or officers to the Comstock shareholders.
11.10 Public Statements. No party to this Agreement shall issue any press
release or other public statement concerning the transactions contemplated by
this Agreement without first providing the other parties hereto with a written
copy of the text of such release or statement and obtaining the consent of the
other parties respecting such release or statement, which consent will not be
unreasonably withheld. The consent provided for in this Section 11.10 shall not
be required if the delay necessary to obtain such consent would preclude the
timely issuance of a press release or public statement as required by law. The
provisions of this Section 11.10 shall not be construed as prohibiting the
filing of copies of this Agreement or descriptions of this Agreement with (i)
regulatory agencies as to which regulatory approvals are contemplated by this
Agreement or (ii) the SEC consistent with Comstock's obligations as a company
whose shares are registered pursuant to the Securities Exchange Act of 1934.
11.11 Confidentiality. Each party shall use all information that it obtains from
the others pursuant to this Agreement solely for the effectuation of the
transactions contemplated by this Agreement or for other purposes consistent
with the intent of this Agreement and shall not use any of such information for
any other purpose, including, without limitation, the competitive detriment of
the other parties. Each party shall maintain as strictly confidential all
information it learns from the others and shall, upon expiration or termination
of this Agreement, return promptly to the other parties all documentation (and
copies thereof) provided by them or made available by third parties. Each party
may disclose such information to its respective affiliates, counsel,
accountants, tax advisors and consultants. This provision shall not prohibit the
use or disclosure of confidential information pursuant to court order or which
has otherwise become publicly available.
11.12 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties and agreements in this Agreements or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 3.1(a), 3.4, 3.5, 6.10,
6.13, 6.17, 6.18, 11.1, 11.10 and 11.11, the Employment Agreements in the form
of Schedules 8.2(h-1) and 8.2(h-2), and the agreements of the Affiliates
contained in the letters referred to in Section 8.2(f).
11.13 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Closing, the parties may mutually
agree to revise the structure of the Bank Merger and the Merger and related
transactions provided that each of the transactions comprising such revised
structure shall (i) not change the amount or form of consideration to be
received by the holders of Comstock Common Stock, (ii) be capable of
consummation in as timely a manner as the structure contemplated herein and
(iii) not otherwise be prejudicial to the interest of the stockholders of
Comstock. This Agreement and any related documents shall be appropriately
amended in order to reflect any such revised structure.
11.14 Third Parties. Except with respect to Article III, Sections 6.13,
6.17, 6.18 and 11.1 which are intended to benefit the shareholders, employees,
officers and directors of Comstock, each party hereto intends that this
Agreement shall not benefit or create any right or cause of action to any person
other than parties hereto. As used in this Agreement, the term "parties" shall
refer only to FSC, FSB, Comstock or Bank as the context may require.
11.15 Severability. Except to the extent that application of this Section
11.15 would have a Material Adverse Effect on either party, any term or
provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provisions shall be interpreted to be only so broad as is
enforceable.
A-26
<PAGE> 102
11.16 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
11.17 Definition of "Material Adverse Effect". As used in this Agreement,
"Material Adverse Effect" shall mean with respect to a person, a Material
Adverse Effect upon (A) the business, financial condition, operations, or
prospects of such person, or (B) the ability of such person to timely perform
its obligations under the Agreement and to timely consummate the Merger;
provided, however, that in determining whether a Material Adverse Effect has
occurred there shall be excluded any effect on the referenced party the cause of
which is (i) any change in banking or similar laws, rules or regulations of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) any change in generally accepted accounting principles or
regulatory accounting principles applicable to banks or their holding companies
generally, (iii) any action or omission of FSC or Comstock or any subsidiary of
either of them taken with the prior written consent of FSC or Comstock, as
applicable, or permitted by this Agreement, and (iv) any changes in general
economic conditions affecting banks or their holding companies generally.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first set forth above.
FIRST SECURITY CORPORATION
By /s/ Morgan J. Evans
----------------------------------------
Morgan J. Evans, President and
Chief Operating Officer
FIRST SECURITY BANK OF NEVADA
By /s/ David J. Smith
----------------------------------------
David J. Smith, President and
Chief Executive Officer
COMSTOCK BANCORP
By /s/ Robert N. Barone
----------------------------------------
Robert N. Barone, Chairman and
Chief Executive Officer
COMSTOCK BANK
By /s/ Robert N. Barone
----------------------------------------
Robert N. Barone, Chairman and
Chief Executive Officer
A-27
<PAGE> 103
APPENDIX B
OPINION OF HOVDE FINANCIAL, INC.
<PAGE> 104
March 22, 1999
Board of Directors
Comstock Bancorp
6275 Neil Road
Reno, NV 89511
Members of the Board:
We have reviewed the Agreement and Plan of Reorganization (the
"Agreement") and related exhibits and schedules dated as of the date hereof by
and among First Security Corporation ("FSC"), First Security Bank of Nevada
("FSB"), Comstock Bancorp ("Comstock") and Comstock Bank ("Bank"), pursuant to
which, among other things, Comstock will be merged with and into FSC (the
"Merger"). As is set forth in the Agreement, all of the issued and outstanding
shares of Comstock Common Stock, including all Option and Warrant shares shall
be converted into the right to receive $65 million in FSC Common Stock, subject
to adjustment as provided for in the Agreement (the "Merger Consideration").
Capitalized terms used herein shall have the same meaning as in the Agreement,
unless specifically stated otherwise.
Hovde Financial, Inc. ("Hovde") specializes in providing investment
banking and financial advisory services to commercial bank and thrift
institutions. Our principals are experienced in the independent valuation of
securities in connection with negotiated underwritings, subscription and
community offerings, private placements, merger and acquisition transactions and
recapitalizations. Pursuant to a Consulting Agreement dated September 11, 1998,
between Comstock and Hovde, Hovde was engaged to assist Comstock in exploring
various strategic options, including a potential affiliation of Comstock with a
larger financial institution. Therefore, we are familiar with Comstock having
acted as its financial advisor in connection with the proposed transaction, and
having participated in the negotiations leading to the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of Comstock and FSC, and
material prepared in connection with the proposed transaction, including the
following: the Agreement; certain publicly available information concerning
Comstock and FSC, including consolidated financial statements for each of the
three years ended December 31, 1997, respectively, as well as subsequent
quarterly statements for the periods ended September 30, 1998 for Comstock and
FSC, respectively; the nature and terms of recent sale and merger transactions
involving banks and bank holding companies that we consider relevant; historical
and current market data for the common stock of Comstock and FSC; and financial
and other publicly available information provided to us by the managements of
Comstock and FSC.
In addition, we have conducted meetings with members of the senior
management of Comstock and FSC for the purpose of reviewing the future prospects
of both companies. We also took into account our assessment of general economic,
market and financial conditions and our experience in other similar
transactions, as well as our overall knowledge of the banking industry and our
general experience in securities valuations.
We have acted as financial advisor to Comstock with respect to the
proposed Merger and have received a fee from Comstock for our services. We will
also receive an additional fee if the proposed Merger is consummated. Please be
advised that we have no other financial advisory or other relationships with
Comstock. In the ordinary course of their businesses, affiliates of Hovde may
actively trade the debt and equity securities of FSC for their own account or
for the accounts of customers and, accordingly, they may at any time hold long
or short positions in such securities.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the publicly available materials
provided to us by Comstock and FSC, and in the discussions with management of
Comstock and FSC.
Based on the foregoing and our experience as investment bankers, we are
of the opinion that, as of the date hereof, the Merger Consideration to be
received by the shareholders of Comstock in connection with the Merger as
described in the Agreement is fair to such shareholders from a financial point
of view.
Sincerely,
HOVDE FINANCIAL, INC.
B-1
<PAGE> 105
APPENDIX C
EXTRACTS FROM NEVADA LAWS CONCERNING
DISSENTERS' RIGHTS OF COMSTOCK STOCKHOLDERS
<PAGE> 106
QUALIFICATIONS OF AND PROCEDURES
FOR DISSENTING STOCKHOLDERS
NEVADA REVISED STATUTES SECTION 92A
92A.300 DEFINITIONS. As used in Nevada Revised Statutes ("NRS") 92A.300
to 92A.500, inclusive, unless the context otherwise requires, the words and
terms defined in NRS 92A.305 to 92A.335, inclusive, have the meanings ascribed
to them in those sections.
92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder" means
a person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the action
of a domestic corporation.
92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation.
92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances.
92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY
COMPANY. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
C-1
<PAGE> 107
2. Unless otherwise provided in its articles of incorporation or bylaws,
no member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS
AND TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger
by NRS 92A.120 to 92A.160, inclusive, or the articles of
incorporation and he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's
interests will be acquired, if he is entitled to vote on the
plan.
(c) Any corporate action taken pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a
resolution of the board of directors provides that voting or
nonvoting stockholders are entitled to dissent and obtain payment
for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.
92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES
OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in
lieu of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of
the plan of merger or exchange, were either listed
on a national securities exchange, included in the
national market system by the National Association
of Securities Dealers, Inc., or held of record by
at least 2,000 holders of owner's interests of
record; or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of
subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require action of
the stockholders of the surviving domestic corporation under NRS 92A.130.
C-2
<PAGE> 108
92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY
TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL
STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer
than all of the shares registered in his name only if he dissents with respect
to all shares beneficially owned by any one person and notifies the subject
corporation in writing of the name and address of each person on whose behalf he
asserts dissenter's rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his other
shares were registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the
beneficial stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the
vote.
92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, the notice of the meeting must
state that stockholders are or may be entitled to assert dissenters' rights
under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those
sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders, the
domestic corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.
92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is
taken, written notice of his intent to demand payment for his
shares if the proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1
is not entitled to payment for his shares under this chapter.
92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and
when certificates, if any, for shares must be deposited:
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after
the demand for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of
the terms of the proposed action and requires that the person
C-3
<PAGE> 109
asserting dissenter's rights certify whether or not he acquired
beneficial ownership of the shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than
60 days after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF
RIGHTS OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's
notice for this certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter.
92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER
DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its
registered office in this state, of the county where the
dissenter resides or has its registered office. The court shall
dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a
statement of income for that year, a statement of changes in the
stockholders' equity for that year and the latest available
interim financial statements, if any:
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
C-4
<PAGE> 110
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF
DISSENTER'S NOTICE.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate of the
fair value of the shares, an explanation of how the interest was calculated, and
a statement of the dissenters' right to demand payment pursuant to NRS 92A.480.
92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for his
shares.
92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the
subject corporation; or
C-5
<PAGE> 111
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold
payment pursuant to NRS 92A.470.
92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS
AND FEES.
1. The court in a proceeding to determine fair value shall determine all
of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially
comply with the requirements of NRS 92A.300 to 92A.500,
inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith with respect to the rights provided by NRS
92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the subject corporation,
the court may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
C-6
<PAGE> 112
APPENDIX D
SUMMARY ANNUAL REPORT OF COMSTOCK BANCORP
<PAGE> 113
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income $ 20,496 $ 15,517 $ 14,868 $ 12,814 $ 9,134
Interest Expense 7,320 5,623 4,434 3,811 2,296
Net Interest Income 13,176 9,894 10,434 9,003 6,838
Provision for Possible Loan Losses 620 270 250 270 105
Noninterest Income 868 541 414 278 407
Noninterest Expenses 9,219 7,653 7,603 6,637 5,724
Income Before Taxes 4,205 2,512 2,995 2,374 1,416
Applicable Income Taxes (254) 676 903 769 422
Net Income 4,459 1,836 2,092 1,605 994
PER COMMON SHARE DATA:
Earnings Per Share-Basic $ 0.99 $ 0.42 $ 0.49 $ 0.43 $ 0.29
Earnings Per Share-Diluted 0.91 0.39 0.46 0.38 0.26
Cash Dividends Declared -- -- -- -- 0.47
Book Value per Common Share 4.29 3.53 3.07 2.58 2.07
BALANCE SHEET ITEMS-PERIOD END:
Loans, Net of Unearned Income $141,822 $136,181 $ 96,524 $ 86,743 $ 69,999
Reserve for Possible Loan Losses 1,598 1,076 857 665 428
Total Assets 225,147 194,698 144,980 122,805 103,073
Deposits 196,246 179,101 131,303 111,169 93,006
Long-Term Debt
Shareholders' Equity 21,589 15,598 13,009 10,884 7,531
PROFITABILITY RATIOS:
Return on Average Assets 2.13% 1.12% 1.56% 1.41% 1.14%
Return on Average Stockholders'
Equity 25.50 12.90 17.70 18.60 14.70
Net Interest Margin, FTE (2) 4.81 4.87 4.98 4.94 4.36
Net Interest Spread, FTE (2) 4.63 4.47 4.44 4.13 3.70
Operating Expense Ratio (3) 69.00 74.50 71.50 73.00 65.80
Productivity Ratio (4) 4.41 4.66 5.69 5.83 6.54
CAPITAL RATIOS:
Shareholders' Equity to Assets 9.59% 8.01% 8.97% 8.86% 7.31%
Tangible Common Equity Ratio 9.59% 8.01% 8.97% 8.86% 7.31%
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of Period to:
Total Loans 1.13% 0.79% 0.89% 0.77% 0.62%
Nonaccruing and Renegotiated Loans 264.57 41.61 26.92 325.98 251.76
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate 0.01 0.02 0.04 0.00 0.01
Total Assets 0.00 0.01 0.02 0.00 0.01
Total Equity 0.03 0.17 0.28 0.01 0.10
Total Equity + Loan Loss Reserve 0.03 0.16 0.26 0.01 0.10
Net Loans Charged Off to Avg Loans 0.00 0.00 0.00 0.00 0.00
RATIO OF EARNINGS TO FIXED CHARGES: (5)
Excluding Interest on Deposits 2.27x 2.08x 1.98x 1.93x 1.65x
</TABLE>
D-1
<PAGE> 114
<TABLE>
<S> <C> <C> <C> <C> <C>
Including Interest on Deposits 1.48x 1.34x 1.40x 1.36x 1.25x
</TABLE>
NOTES:
(1) Historical data has been restated where appropriate to reflect a 10% stock
dividend in February 1995 and for a Conversion to Comstock Bancorp stock,
two for one in June 1997.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or
tax-favored loans, leases and securities with interest earned subject to
full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to combined
fixed charges, earnings represent net Income plus income taxes and fixed
charges. Fixed charges, including interest on deposits, include interest
expense.
D-2
<PAGE> 115
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following discussion reviews and analyzes the consolidated operating
results and financial condition of the Company. This discussion should be read
in conjunction with the consolidated financial statements and the other
financial data presented elsewhere herein.
Overview
The Company's total assets and deposits continued to grow in 1998.
Management believes that asset and deposit totals have increased for the last
five years as a result of an aggressive diversified lending posture on the part
of the Company's wholly owned bank subsidiary, the expansion of the branch
network, and economic growth in northern Nevada. In addition, management
believes that assets and deposits grew because of consolidation of local
institutions with large out of state banks.
Net income for the year ended December 31,1998 was $4,459,000 ($.99 per
share; $.91 per share fully diluted). Excluding tax benefits associated with the
exercise of stock options, operating profits approximated $3,300,000 ($.74 per
share: $.68 per share fully diluted) compared to $1,836,000 ($.42 per share;
$.39 fully diluted) in 1997, $2,092,000 ($.49 per share; $.46 fully diluted) in
1996; $1,605,000 ($.43 per share; $.38 fully diluted) in 1995; and $994,000
($.29 per share; $.27 fully diluted) in 1994.
Capitalization
As of December 31, 1995, the Company's wholly owned bank subsidiary's
(the "Bank") Leverage Ratio was 8.57%. As of December 31, 1996, the Leverage
Ratio rose to 9.16%. For the year ending December 31, 1997, the Bank's Leverage
Ratio decreased to 8.52% due an increase in the loan portfolio. As of December
31, 1998 the Company's capital structure was as follows (excluding outstanding
options and warrants to purchase Common Stock):
<TABLE>
<S> <C>
Shares outstanding............................................... 5,035,500
Stockholder equity . . . . . ...................................$21,589,933
Book value/share (stockholder equity).................................$4.29
Leverage Ratio ...................................................... 8.49%
</TABLE>
If all of the currently outstanding options and warrants were exercised,
the pro forma capital structure would be, as of December 31, 1998:
<TABLE>
<S> <C>
Shares Outstanding ...............................................5,185,900
</TABLE>
<TABLE>
<CAPTION>
Aggregate Per
Amount Share
----------- -----
<S> <C> <C>
Stockholder equity $22,403,751 $4.45
</TABLE>
D-3
<PAGE> 116
Capital Expenditures
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995
at a cost of approximately $3.7 million for the land and structure and $1.7
million for the furniture, fixtures and equipment. The building is approximately
26,000 square feet and houses the Bank's main branch office, the Company's
executive and administrative offices and the real estate and commercial lending
functions. The Company exercised its option to purchase a one acre adjacent
parcel for $174,240 in March, 1995 to facilitate future expansion of the
corporate headquarters facility, but has since determined that such expansion
would be too costly and the property was sold in 1998 for $340,000. In November,
1996, the Company signed a lease on approximately 7,130 square feet of
office/warehouse space approximately one mile from the administrative
headquarters to house a computer facility and other back office administrative
functions. The Company made the decision to bring the main frame data processing
operations in-house upon receipt of notification of cancellation by its data
processing service provider. Facility renovations of and department relocations
to the new leased property were completed in March, 1997 at a cost of $214,000
(plus $51,000 for furniture, fixtures and equipment). This facility also houses
a full data processing center, which became operational in October, 1997 at a
cost of $542,000. In addition, removal of the back-office functions from the
head office facility allowed for the expansion of the commercial and residential
lending origination functions within the headquarters facility. Those facility
renovations and department relocations within the administrative office to
expand the commercial and residential lending departments were completed in May,
1997, at a cost of $56,000 (plus $77,000 for furniture, fixtures and equipment).
In January, 1996, the Company signed a lease for a branch site located
in south Reno. The branch opened in February, 1997 at a cost of $139,000 for
leasehold improvements and $263,000 for furniture, fixtures and equipment.
In January, 1997, the Company signed a lease for a branch site located
in north Sparks. The branch opened in July, 1997 at a cost of $28,000 for the
leasehold improvements and $260,000 for the furniture, fixtures, and equipment.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area at a cost (including grading)
of $466,000.
In February, 1999, the Company closed escrow on a pad in northwest Reno.
The pad is located in a shopping center bordered by both established and
developing residential and retail areas. The site cost approximated $538,000.
The cash to finance the above described capital expenditures came from
existing liquid assets.
Operations and Liquidity
Total post-tax profits for 1998 were $4,459,000, an increase of 142.8%
from the $1,836,000 earned in 1997. The following table shows the overall
reasons for the change in the Bank's profitability.
<TABLE>
<CAPTION>
1998 1997 %Change
------------ ----------- --------
<S> <C> <C> <C>
Total loan income $ 14,077,117 $10,996,028 28.0
Total fee income 3,914,049 2,646,867 47.9
Overnight and investment
income 2,504,967 1,874,244 33.7
Service charges and
non-interest income 702,573 539,621 14.8
------------ ----------- --------
21,198,706 16,056,760 32.0
Total interest expense 7,319,554 5,623,352 30.2
Salaries and benefits
(excluding management
bonus) 4,683,318 3,879,940 20.7
Occupancy expenses 857,443 753,876 13.7
</TABLE>
D-4
<PAGE> 117
<TABLE>
<S> <C> <C> <C>
Furniture, fixtures and
equipment 720,188 584,839 18.8
Other operating expenses 2,136,412 2,062,543 3.6
------------ ----------- --------
15,716,915 12,904,550 21.8
Loan loss provision 620,000 270,000 129.6
------------ ----------- --------
Income from bank
operations 4,861,791 2,228,210 118.4
Management bonus accrual 822,346 371,461 121.4
Taxes (254,413) 675,615 (137.7)
Other income 164,867 926 17,704.2
------------ ----------- --------
Net income $ 4,458,725 $ 1,836,060 142.8
</TABLE>
The table shows that net income increased by 142.8% ($2,623,000) over 1997. The
largest contributing factor, in management's opinion, to the increase in income
was the exercise of employee and director options and the sale of tax favorable
municipal bonds, that resulted in a tax benefit of approximately $1,385,000
Interest income on loans grew 28%, and, again in 1998, was augmented by the
receipt of "additional" interest from a development loan in the Company's
portfolio for which the Company collects monthly interest payments plus an
additional $2,100 for each lot the developer sells. In 1998, 440 lots were sold
increasing interest income by $815,900. In 1997, 139 lots were sold and closed
giving the Company "additional" interest income of $292,000. In 1996, 128 lots
were sold and closed which added $268,800 in "additional" interest to Company
revenue. Of the total 811 lots, 102 remained to be sold as of December 31, 1998.
The Company expects lot sales to continue in 1999, but such sales are subject to
current market conditions including, but not limited to, the general health of
the economy, interest rates, and competition.
The $2,622,665 increase in pre-tax income reported was attributable to
the following:
<TABLE>
<S> <C>
+$3,081,089 increase in interest income
+ 1,267,182 increase in fee income
+ 630,723 increase in investment income
+ 162,952 increase in non-interest income
- 1,696,202 increase in interest paid on deposits and funds borrowed
- 803,378 increase in salary and benefit costs
- 238,916 increase in occupancy and furniture & equipment expense
- 73,869 increase in other operating expenses
- 636,944 change in bonus, loan loss provision and other
-----------
+$1,692,637 change in pre-tax income
+ 930,028 decrease in taxes
-----------
+$2,622,665 increase in post-tax income
</TABLE>
The increase in interest income (in addition to the interest from the
development loan discussed above) was due to a larger portfolio of held to
maturity loans. As of December 31, 1998, the Company's held $141 million in its
loan portfolios compared to $135 million, a year earlier. On an average basis,
the Company held $142 million in its loan portfolios in 1998 compared to $114
million in 1997, a 24.6% increase, similar to the 28.0% increase in loan income
recorded. The 33.7% increase in investment income came primarily from the
increase in investment holdings, which rose from $27.1 million at the end of
1997 to $39.8 million at the end of 1998. Investments in overnight funds
increased from $9.9 million to $17.2 million. The 30.2% increase in interest
paid on deposits and other borrowed funds resulted mainly from a 31.3% increase
in deposits, on average, between 1998 and 1997. The loan loss provision was
increased by $350,000 or 129.6% over 1997 to meet the risks traditionally
associated with the increase in commercial loan portfolios and to meet a level
more consistent with current economic conditions and expectations.
In 1993, the Company originated $206 million in residential real estate
mortgage loans and sold $176 million of this product in the secondary market.
Due to rapidly rising rates in 1994, the market for mortgage refinancing all but
disappeared. This phenomenon, accompanied by a re-emergence of competition from
the larger financial institutions, caused residential real estate loan
originations to fall by 19.6% to $165 million, and secondary
D-5
<PAGE> 118
market sales to fall to $147 million. In 1995, the Company originated $160
million in real estate loans and sold $153 million in the secondary market, a
decrease of 3.0% in loans originated and an increase of 4.1% in loans sold. In
1996, the Company originated $170 million in residential real estate loans and
sold $139 million in the secondary market, representing an increase of 6.3% and
a decrease of 10.1%, from 1995, respectively. In 1997, the Company originated
$140 million of residential real estate mortgage loans and sold $114 million in
the secondary market representing a decrease of 17.6% in originations and 18.0%
in secondary market sales. There were two major reasons for the lower real
estate mortgage loan volume in 1997. First, the floods in Reno in early January,
1997 severely depressed mortgage loan demand in the first quarter in Northern
Nevada. Second, the Company closed its Las Vegas mortgage loan origination
office in April, 1997. Northern Nevada mortgage originations were $138 million
in 1997 compared to $141 million in 1996, a 2% decrease. In 1998, the Company
originated $193 million of residential real estate mortgage loans and sold $160
million in the secondary market, representing an increase of 37.9 in
originations and 40.4% in secondary market sales.
In 1998, existing home sales rose 9.1% in Washoe County, a major segment
of the Company's market area. During that same time period, permits for new
housing units, including multi-family, rose 36%. Local housing experts cited low
interest rates, low inflation, and rising personal income as factors leading to
the improved sales. The growth in the Company's real estate origination business
was similar to the growth in the general market.
The Company's liquidity ratio, defined as the value of marketable assets
divided by volatile liabilities, stood at 31% as of December 31, 1998 as
compared to 26% as of December 31, 1997. As of December 31, 1998, the Company
had $17.2 million in overnight funds, $39.8 million in time deposits and
marketable securities which were available for sale, and borrowing capacity at
the Federal Home Loan Bank of San Francisco in excess of $67 million (30% of its
assets). Such borrowing capacity is subject to quarterly review and must be
collateralized. As of December 31, 1998, the Company had borrowed $6,000,000 and
had pledged approximately $33 million in loans and securities to the Federal
Home Loan Bank of San Francisco as collateral for the borrowing line.
In order to generate its relatively high lending volumes, the Company
has higher personnel and overhead expenses than most in its peer group because
residential real estate lending requires extensive back office operations
including loan underwriters, loan processors, a loan servicing and shipping
staff, secondary market sales personnel, and compliance personnel. Construction
lending requires a builders' control staff and inspectors. Finally, acquisition
and development lending typically requires close monitoring by lending staff,
thus requiring additional staff for other types of lending. At the beginning of
1993, the Company had approximately 50 full time equivalent ("FTE") employees.
By the end of 1993, with the expansion of lending to Las Vegas and the gear up
for the planned growth in commercial lending, the Company employed 97 FTE
employees. At the end of 1994 and 1995 FTE employees numbered 108. And, at the
end of 1996 the Company employed 118 FTE employees. The increase included the
addition of a Compliance Officer, expansion of the commercial lending functions
and partial staffing for the additional branch office that opened in February,
1997. At the end of 1997, FTE were 121. In 1997, two branches were opened and
the Company expanded its commercial lending operation and its Management
Information Department. It also closed its Las Vegas mortgage loan origination
facility. By the end of 1998, the Company had an FTE of 119.5.
According to data publicly available on first mortgage filings, the
Company believes that it is in the top ten of first mortgage lenders in Washoe
County, and the in the top two of first mortgage lenders in Carson City. The
income generated from the Company's high volume of lending activity usually
places the Company's and the Bank's net interest margin in the top 10% of peer
group analysis. Because of the personnel and expense generated in the mortgage
operation which are not found in peer group comparative numbers, management does
not rely on peer group analysis of its specific overhead expense ratios or its
net interest margins when analyzing performance. Rather, management relies on
other productivity measures such as analysis of loan representative lending
volumes and on overall profitability measures including return on assets and
return on stockholders' equity.
3Impact of Changing Interest Rates - Interest Rate Risk
The impact of changing interest rates (and inflation) on banks differs
from the impact on other companies. As financial intermediaries, banks have
assets and liabilities that may move in concert with interest rates. This is
especially true for banks with a high percentage of rate sensitive interest
earning assets and interest bearing liabilities. A bank can reduce the impact of
changing interest rates on its interest margin if it can manage its interest
rate sensitivity gap (the "gap") (also known as "Interest Rate Risk"). The gap
for any period is the volume difference between the assets and the liabilities
which reprice to market conditions in that period. Management's
D-6
<PAGE> 119
goal is to adjust the gap so that the impact of falling or rising interest rates
has a neutral impact on the Company's interest margin. To do this, it is
necessary for management to anticipate the general movement of interest rates.
Thus, there is no guarantee that the Company will always be able to maintain its
current interest margins.
The table below shows changes in income and expenses due to changes in
interest rates and business volumes. Since the interest yields on loans was
substantially unchanged at 9.45% in 1998 versus 1997, the lion's share of total
income change of $2.774 million was due to volume increases ($2.757 million).
For the Company's overnight investments in Fed Funds and bank qualified
overnight mutual funds, the yield fell 20 basis points as the Federal Reserve
lowered short-term interest rates in the second half of 1998. Of the $172,772
positive change in income, $196,321 was due to higher investment levels and
- -$16,359 was due to lower yields (with -$7,190 due to the combination of rate
and volume).
Investment securities had significantly higher volume levels and
slightly lower yields, again due to falling national interest rates. Of the
$429,356 rise in income in investments, $454,597 was due to volume and -$18,746
was due to lower yields (with -$6,496 due to the combination of rate and
volume). Total interest income grew by $3,363 million with yields 9 basis points
lower in 1998 than in 1997. Of the $3.363 million, $3.511 million was due to
increased volume and -$127,407 was due to lower yields (with $35,412 due to the
combination of rate and volume).
Deposit volumes also rose in 1998 with interest costs on transaction
accounts rising by $385,042. The yield cost of transactions accounts fell by
seven basis points due to lower national interest rates. Thus, of the $385,042
of increased costs, $425,517 was volume related while the Company saved $31,720
directly from lower yield costs (and $8,755 from the combination of rate and
volume). The cost of time and savings deposits rose by $1.040 million due to
increases in both yield costs and volumes. Volume was responsible for $966,836
of the costs and yields for %59,088 (a rise of eight basis points). The yield
costs rose here due to the timing of the national rate declines and competition
in the local time certificate market. Borrowed funds (from FHLB) rose $270,897
in 1998 versus 1997. Of this amount, $268,053 was due to higher average volume
of borrowings and $762 due to higher yield costs (with $2,082 due to the
rate/volume combination).
As a result of the components, the Company's net interest income rose
$1.667 million. Of that amount, $1.895 million was due to increases in the
volume of business. However, a shrinking interest margin (14 basis points) cost
the Company $189,371.
D-7
<PAGE> 120
COMSTOCK BANCORP
INTEREST RATE SENSITIVITY ANALYSIS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Unaudited) Rate/
Dec. 31, Yield/ (Unaudited) Yield/ Total Volume Rate Volume
YEAR-TO-DATE ENDED: 1998 Rate Dec. 30, 1997 Rate Change Variance Variance Variance
----------- ----- ----------- ----- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS:
Loan Income $13,539,860 9.45% $10,765,926 9.45% $ 2,773,934 $ 2,756,662 $ 4,671 $ 1,195
Loan Fees and
Servicing Income 4,498,394 2,916,512 1,581,882 -- -- --
----------- ----------- ----------- ----------- --------- --------
Total Loan, Servicing,
and Fee Income 18,038,254 12.59% 13,682,437 12.01% 4,355,817 -- -- --
INVESTMENTS:
Fed Funds and Mutual
Fund Income 619,481 5.27% 446,710 5.47% 172,772 $ 196,321 $ (16,359) $ (7,190)
Income from
Investment Securities 1,741,207 5.66% 1,311,851 5.74% 429,356 $ 454,597 $ (18,746) $ (6,496)
Interest-Bearing
Deposit Income 81,202 6.61% 94,043 6.51% (12,841) $ (14,065) $ 1,440 $ (215)
----------- ----------- ----------- ----------- --------- --------
Total Investment Income 2,441,890 5.58% 1,852,604 5.71% 589,286 $ 644,447 $ (40,925) $(14,236)
Trading Account Assets
and Other Investments 63,077 7.63% 21,640 4.87% 41,437 $ 18,585 $ 12,293 $ 10,558
EARNING ASSETS:
Total Interest Income $15,981,750 8.51% $12,618,530 8.60% $ 3,363,220 $ 3,511,341 $(127,407) $(35,412)
Total Interest, Servicing,
Fee, and Trading
Account Income $20,543,221 10.94% $15,556,683 10.59% $ 4,986,539 -- -- --
DEPOSITS:
Interest on Deposits:
Transaction Accounts $ 1,926,671 3.21% $ 1,541,629 3.28% $ 385,042 $ 425,517 $ (31,720) $ (8,755)
Time and Savings Deposits 5,023,941 5.33% 3,983,677 5.25% 1,040,264 966,836 59,088 14,341
----------- ----------- ----------- ----------- --------- --------
Total Deposit
Interest Expense 6,950,612 4.51% 5,525,306 4.50% 1,425,306 1,411,446 11,039 2,820
BORROWED FUNDS:
Other Borrowed Funds 368,942 6.15% $ 98,046 6.10% $ 270,897 $ 268,053 $ 762 $ 2,082
----------- ----------- ----------- ----------- --------- --------
Total Interest Expense $ 7,319,554 4.57% $ 5,623,352 4.52% $ 1,696,202 $ 1,616,426 $ 61,964 $ 17,812
NET INTEREST
DIFFERENTIAL $ 8,662,196 3.94% $ 6,995,177 4.08% $ 1,667,019 $ 1,894,915 $(189,371) $(53,224)
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $13,223,667 6.37% $ 9,933,330 6.08% $ 3,290,337 -- -- --
(Includes fee income)
</TABLE>
NOTES TO INTEREST RATE SENSITIVITY ANALYSIS TABLE:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets.
[2] "Yield/Rate" is the interest income or interest expense, annualized,
divided by the average respective outstanding balance for the period.
[3] "Total Change" represents the change in the interest income or interest
expense between the respective periods.
[4] "Volume Variance" equals the change in average volumes (balances) between
the periods times the previous period interest rate.
[5] "Rate Variance" equals the change in yields or rates between the periods
times the previous period average balance.
[6] "Rate/Volume Variance" reflects the change in interest income or interest
expense attributable to simultaneous changes in both rate and volumes
between the respective time periods.
D-8
<PAGE> 121
Interest Margin
The table below shows the sources of the Company's earnings.
Loan yields, including the fees, increased slightly between 1997 and
1998, largely due to the "additional" interest earned on the development loan
discussed previously. Loan yields declined in 1997 and 1998 from 1996 levels due
to a change in accounting for fees and due to increased competition from other
lenders. Since 1994, the Company has consistently expanded its commercial
lending while leaving the resources devoted to its real estate lending constant.
The growth in these portfolios has offset any declining yields resulting from
the prime rate reductions. In 1995, originations were $229 million. In 1996,
that figure rose to $308 million and then fell to $269 million in 1997. In 1998,
the originations rose again to $303 million.
All other portfolio yields were comparable or slightly higher between
1997 and 1998, mirroring the general movement of national interest rates. Yields
on investments rose slightly as the Company increased the duration of the
"Available for Sale" portfolio from 1.25 years to 2.61 years.
The cost of funds moved up from 4.52% in 1997 to 4.57% in 1998 partly reflecting
the Company's desire to offer competitive rates to established customers and to
remain competitive in the volatile CD market.
Overall, the 1998 net interest margin, both including and excluding fees,
remained consistent with 1997 levels.
<TABLE>
<CAPTION>
Net Interest Margin 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Include fees: 6.6% 6.6% 8.5%
Exclude fee: 4.7% 4.8% 4.9%
</TABLE>
D-9
<PAGE> 122
COMSTOCK BANCORP
CONSOLIDATED AVERAGE BALANCES
INTEREST INCOME/EXPENSE AND YIELDS/RATES
AS OF DECEMBER 31, 1998, DECEMBER 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS - YIELDS ARE TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1998 1997
----------------------------------- --------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- --------- ------- --------
(IN THOUSANDS)
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income* $142,730 $17,991 12.61% $113,663 $13,677 12.03%
Investment securities:
Taxable 21,676 1,345 6.21% 18,536 1,112 6.00%
Tax-exempt 9,880 662 6.70% 4,777 321 6.72%
-------- ------- -------- -------
Total investment securities 31,556 2,007 6.36% 23,314 1,433 6.15%
Trading account securities 10 2 23.88% 19 0 0.00%
Federal funds sold and securities purchased 11,760 619 5.27% 8,170 447 5.47%
under agreements to resell
Interest bearing deposits with other banks 1,228 81 6.61% 1,444 94 6.51%
-------- ------- -------- -------
Total earning assets $187,284 $20,701 11.05% $146,609 $15,650 10.67%
Allowance for loan losses (1,312) (948)
Unrealized gain (loss) on securities available 30 (37)
for sale
Cash and due from banks 8,542 6,536
Other assets 14,353 11,915
-------- --------
Total assets $208,896 $164,074
======== ========
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Deposits:
MMDA & Now $60,001 $1,927 3.21% $47,022 $1,542 3.28%
Savings 9,432 239 2.54% 9,844 262 2.66%
Certificates of deposit less than $100,000 and 55,014 3,106 5.65% 42,778 2,410 5.63%
other time deposits
Certificates of deposit of $100,000 or more 29,798 1,679 5.63% 23,215 1,312 5.65%
-------- ------- -------- -------
Total interest bearing deposits $154,246 $ 6,951 4.51% $122,860 $5,525 4.50%
Federal funds purchased 0 0 -- 75 5 7.10%
Securities sold under agreements to repurchase 0 0 -- 0 0 --
Other short-term borrowings 0 0 -- 0 0 --
FHLB and other borrowings 6,000 369 6.15% 1,532 93 6.05%
-------- ------- -------- -------
Total interest bearing liabilities $160,246 $7,320 4.57% $124,467 $5,623 4.52%
Non-interest bearing demand deposits 29,802 24,675
Accrued expenses and other liabilities 1,379 705
Shareholders' equity 17,469 14,227
-------- ------- -------- -------
Total liabilities and shareholders' equity $208,896 $164,074
======== ========
Net interest income/net interest spread 13,381 6.49% 10,027 6.16%
===== =====
Net yield on earning assets 7.14% 6.84%
===== =====
Taxable equivalent adjustment:
Loans 0 0
Investment securities available for sale 205 99
------- -------
Total taxable equivalent adjustment 205 99
------- -------
Net interest income $13,176 $ 9,928
======= =======
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
------- ------ --------
(IN THOUSANDS)
Earning assets:
<S> <C> <C> <C>
Loans, net of unearned income* $88,645 $13,176 14.86%
Investment securities:
Taxable 13,287 752 5.66%
Tax-exempt 2,810 180 6.40%
-------- ------
Total investment securities 16,097 932 5.79%
Trading account securities 33 0 0.00%
Federal funds sold and securities purchased 13,181 $708 5.37%
under agreements to resell
Interest bearing deposits with other banks 1,698 109 6.42%
-------- ------
Total earning assets $119,654 $14,925 12.47%
Allowance for loan losses (794)
Unrealized gain (loss) on securities available (92)
for sale
Cash and due from banks 5,606
Other assets 9,263
--------
Total assets $133,637
========
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Deposits:
MMDA & Now $38,678 $1,298 3.36%
Savings 9,983 268 2.68%
Certificates of deposit less than $100,000 and 34,325 1,907 5.56%
other time deposits
Certificates of deposit of $100,000 or more 16,829 945 5.62%
-------- ------
Total interest bearing deposits $99,816 $4,418 4.43%
Federal funds purchased 0 0 -
Securities sold under agreements to repurchase 0 0 -
Other short-term borrowings 0 0 -
FHLB and other borrowings 251 16 6.37%
-------- ------
Total interest bearing liabilities $100,067 $4,434 4.43%
Non-interest bearing demand deposits 21,117
Accrued expenses and other liabilities 652
Shareholders' equity 11,801
--------
Total liabilities and shareholders' equity $133,637
========
Net interest income/net interest spread 10,491 8.04%
=====
Net yield on earning assets 8.77%
=====
Taxable equivalent adjustment:
Loans 0
Investment securities available for sale 56
-------
Total taxable equivalent adjustment 56
-------
Net interest income $10,435
=======
</TABLE>
- ----------
* Loans on non-accrual status have been included in the computation of average
balances.
D-10
<PAGE> 123
OTHER ASSETS
In 1997 the Company had one property classified as other real estate
owned at a book value of $8,250. The Company had a 15% interest in the
property received through judgment (the other 85% belonged to the loan
guarantor). As of December 31, 1998, $2,184,478 classified as OREO
(previously reported as non-accrual loans) is comprised of two residential
development properties. In July, the Company completed the foreclosure on a
project in Reno, which contained 13 partially completed homes. Of the 13,
two were sold in 1998, two are in escrow, two have offers pending, and the
other 7 are on schedule to be completed in March of 1999. In September, the
Company foreclosed on a project containing 2 condominiums and 11 finished
lots in Boulder, NV, in the Las Vegas area. The Company is marketing this
property on a multiple listing service and is in negotiations on an offer
for the 11 lots. The Company does not expect significant losses of principal
on either of its OREO properties. Management believes that the acquisition
of title to these projects and their placement into OREO is a positive step
in the resolution of these problem assets.
The Bank has historically serviced a portfolio of loans for the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National
Mortgage Corporation ("FNMA") as well as for others. As of December 31,
1997, the portfolio amounted to $49.0 million. For performing this servicing
function, the Company earned a fee of approximately .47% of the aggregate
principal balance of the loans in the portfolio. The level of the servicing
portfolio has remained steady at about $50 million for the past 3 years due
to the fact that, in falling interest rate environments, management believes
that the Company is better off with the fees earned in selling the servicing
than with the fees earned from directly servicing mortgages that have an
incentive to prepay. As a result of the desire to sell all servicing and an
analysis of the cost to maintain the existing servicing, the Company made
the decision to sell the servicing portfolio in 1998 for a gain of $326,000.
D-11
<PAGE> 124
Income & Expense
The table below shows the major income and expense categories. Several
of the categories are discussed and detailed in tables that follow.
<TABLE>
<CAPTION>
INCOME & EXPENSE
Years ended December 31
--------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Interest income:
Interest income $ 14,077 $ 10,996 $ 8,871
Fee income 3,914 2,647 4,305
-------- -------- --------
Interest and fees on loans 17,991 13,643 13,176
Investments and deposits 1,885 1,427 984
Interest on fed funds sold 620 447 708
-------- -------- --------
Total interest income $ 20,496 $ 15,517 $ 14,868
======== ======== ========
Provision for credit losses 620 270 250
Interest expense:
Interest on deposits 6,951 5,525 4,418
Interest on other borrowings 369 98 16
-------- -------- --------
Total interest expense $ 7,320 $ 5,623 $ 4,434
======== ======== ========
Non-interest income 868 541 414
Non-interest expense 9,219 7,653 7,603
Income before income taxes,
Minority interest, and 4,205 2,512 2,995
Extraordinary items
Provision for taxes (254) 676 903
-------- -------- --------
Post-tax income $ 4,459 $ 1,836 $ 2,092
======== ======== ========
</TABLE>
Interest Income
Interest income increased by 28.0% in 1998 ($3,081,000). Loan yields
increased by .58% while the average level of the loan portfolio increased by
25.6%. In 1994, as a result of a softening in the single family mortgage lending
market, the Company made an effort to increase commercial lending. As a result,
interest income increased by 67.4% in 1995, as increased commercial portfolio
levels combined with increased rates to produce increased interest income. In
1996 portfolio levels continued to increase while rates remained constant and
interest income rose 14.8%. In 1997, loan yields fell slightly while the average
level of the loan portfolio grew 28.3% another indication of reduced margins.
Fee income fell in 1997 over 1996 levels as a result of an accounting change in
fee recognition, but rose again 1998 with increase volumes.
As a result of growth and the use of some of the Company's liquidity in
the investment portfolio, income attributable to investments and overnight
deposits with other financial institutions rose 37% in 1998 to $2.7 million from
$1.9 million in 1997.
Interest Expense
D-12
<PAGE> 125
In 1995, interest rates began to decline, but the Company's deposit
costs, in dollar terms, were up due to increased deposit levels. In 1996,
interest rates remained fairly steady, while costs rose due to deposit level
increases. In 1997, deposit levels rose significantly, the Company borrowed
funds, and deposit costs were up slightly. As a result, Total interest expense
increased 30.2% from $5.6 million in 1997 to $7.3 million in 1998 largely due to
the increase in deposit balances (28.7%).
Non-Interest Income
The table below shows non-interest income for the years 1996, 1997, and
1998. Account service charges have increased with the growth in the deposit
base.
The line item "Gain on Sale, Investments and Trading Acct" reflected the
impact of marking the trading account to market and the sale of held for sale
securities.
The large increase in "other income" is largely due to a gain of
$164,000 realized on the sale of a parcel of land (previously discussed). In
accordance with FASB 125, the Company placed a loan service asset on its books
(with no liability offset) in the net amount of $34,000 in 1997. This amount was
adjusted as new loans were funded, as loans were paid off, and was reversed at
the time the servicing portfolio was sold in 1998. The following table
summarizes the Bank's non-interest income for 1997, 1996 and 1995:
D-13
<PAGE> 126
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997 1996
------ ------ ------
(In thousands of dollars)
<S> <C> <C> <C>
Account service charges $ 350 $ 288 $ 265
Gain on sale, investments,
And trading account 86 (9) (13)
Other income 432 262 162
------ ------ ------
$ 868 $ 541 $ 414
====== ====== ======
</TABLE>
Non-Interest Expenses
Almost all of the non-interest expenses appear high when compared to the
Company's and Bank's peer groups. In order to support its mortgage banking
business the Company has a loan center in the headquarters building in Reno
which handles real estate loan origination, houses loan representatives and
secondary market personnel, loan processing, loan servicing, and a builders'
control unit. The Carson City office also houses real estate loan
representatives and a real estate loan processing unit. The facilities,
equipment and personnel support for the mortgage lending operation make the
non-interest expenses much higher than those of most others in the "peer groups"
which generally do not have extensive mortgage lending units. The fee income
generated from the mortgage lending operations more than offsets the added
expenses.
The following table summarizes non-interest expenses for 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1998 1997 1996
------ ------ ------
(In thousands of dollars)
<S> <C> <C> <C>
Salaries and benefits $5,506 $4,251 $4,781
Occupancy expense 857 754 528
Furniture and equipment expense 720 585 464
Other operating expense 2,136 2,063 1,830
------ ------ ------
$9,219 $7,653 $7,603
====== ====== ======
</TABLE>
Salary and benefit expenses reflect full staffing in the new branch and
computer operations facilities and an increase in the management incentive plan
based on the increase in net income. The comparable salary expense for 1997 was
10.3% higher than that of 1996. Increases in occupancy, furniture, fixtures and
equipment expenses, and in other operating expenses occurred as a result of a
full year of operations in the two new branches and the operations center (see
Capital Expenditures above).
Taxes
In 1996, the Company's effective tax rate was 30.2%, less than the
statutory 34% due to tax benefits derived from tax losses on the sale of certain
municipal bonds that were significantly larger than the financial statement
losses. In 1997, as a result of similar municipal bond sales and tax losses as
in 1996, a larger portfolio of tax exempt securities, and the exercise of stock
options by employees for which the Company received a tax deduction as if it had
paid the employees compensation, the tax rate dropped to 26.9%. For the year
ended December 31, 1998, the activity in municipal bond sales together with a
significant increase in stock option exercises resulted in an effective tax rate
of -6.05% (the Company is recovering taxes paid in past years.
D-14
<PAGE> 127
FORWARD LOOK STATEMENTS
Certain statements herein regarding the Company's financial position,
business strategy and the plans and objectives of Company management for future
operations are forward-looking statements rather than statements of historical
or current fact. When used herein, words such as "anticipate", "believe",
"estimate", "expect", "intend", and similar expressions, as they relate to the
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are inherently uncertain, and there can be
no assurance that the underlying assumptions will prove valid. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to changes
in prevailing interest rates, competitive factors and pricing pressures, changes
in legal and regulatory requirements, technological change, product development
risks and general economic conditions. Such statements reflect the current views
of the Company with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
D-15
<PAGE> 128
COMSTOCK BANCORP AND SUBSIDIARY
DECEMBER 31, 1998, 1997, AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INDEPENDENT AUDITOR'S REPORT D-17
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition D-18
Consolidated Statements of Income D-19
Consolidated Statements of Changes in Stockholders' Equity D-20
Consolidated Statements of Cash Flows D-01 to D-22
Notes to Financial Statements D-23 to D-43
</TABLE>
D-16
<PAGE> 129
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
of Comstock Bancorp and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Comstock Bancorp and Subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Bancorp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comstock
Bancorp and Subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Kafoury, Armstorng & Co.
Carson City, Nevada
January 11, 1999
D-17
<PAGE> 130
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 17,991,000 $ 13,643,000 $ 13,176,000
Interest on investment and trading securities:
Taxable 1,348,000 1,112,000 751,000
Exempt from federal income tax 457,000 221,000 124,000
Interest on federal funds sold 619,000 447,000 708,000
Interest on deposits with banks 81,000 94,000 109,000
------------ ------------ ------------
Total Interest Income 20,496,000 15,517,000 14,868,000
------------ ------------ ------------
Interest expense:
Interest on deposits 6,951,000 5,525,000 4,418,000
Interest on line of credit 369,000 98,000 16,000
------------ ------------ ------------
Total Interest Expense 7,320,000 5,623,000 4,434,000
------------ ------------ ------------
Net interest income 13,176,000 9,894,000 10,434,000
Provision for credit losses (620,000) (270,000) (250,000)
------------ ------------ ------------
Net interest income after provision for credit
losses 12,556,000 9,624,000 10,184,000
------------ ------------ ------------
Other income:
Service charges on deposit accounts 350,000 288,000 265,000
Gain (loss) on sale of investment securities 88,000 1,000 (19,000)
Gain (loss) on sale of trading securities (2,000) 1,000 6,000
Other 432,000 251,000 162,000
------------ ------------ ------------
Total Non-Interest Income 868,000 541,000 414,000
------------ ------------ ------------
Other expense:
Salaries and employee benefits 5,506,000 4,251,000 4,781,000
Occupancy expenses 857,000 754,000 528,000
Furniture and equipment expense 720,000 585,000 464,000
Other operating expenses 2,136,000 2,063,000 1,830,000
------------ ------------ ------------
Total Non-Interest Expense 9,219,000 7,653,000 7,603,000
------------ ------------ ------------
Income before income taxes 4,205,000 2,512,000 2,995,000
Income tax expense (benefit) (254,000) 676,000 903,000
------------ ------------ ------------
Net income $ 4,459,000 $ 1,836,000 $ 2,092,000
============ ============ ============
Basic earnings per share $ 0.99 $ 0.42 $ 0.49
============ ============ ============
Diluted earnings per share $ 0.91 $ 0.39 $ 0.46
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-18
<PAGE> 131
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 17,991,000 $ 13,643,000 $ 13,176,000
Interest on investment and trading securities:
Taxable 1,348,000 1,112,000 751,000
Exempt from federal income tax 457,000 221,000 124,000
Interest on federal funds sold 619,000 447,000 708,000
Interest on deposits with banks 81,000 94,000 109,000
------------ ------------ ------------
Total Interest Income 20,496,000 15,517,000 14,868,000
------------ ------------ ------------
Interest expense:
Interest on deposits 6,951,000 5,525,000 4,418,000
Interest on line of credit 369,000 98,000 16,000
------------ ------------ ------------
Total Interest Expense 7,320,000 5,623,000 4,434,000
------------ ------------ ------------
Net interest income 13,176,000 9,894,000 10,434,000
Provision for credit losses (620,000) (270,000) (250,000)
------------ ------------ ------------
Net interest income after provision for credit
losses 12,556,000 9,624,000 10,184,000
------------ ------------ ------------
Other income:
Service charges on deposit accounts 350,000 288,000 265,000
Gain (loss) on sale of investment securities 88,000 1,000 (19,000)
Gain (loss) on sale of trading securities (2,000) 1,000 6,000
Other 432,000 251,000 162,000
------------ ------------ ------------
Total Non-Interest Income 868,000 541,000 414,000
------------ ------------ ------------
Other expense:
Salaries and employee benefits 5,506,000 4,251,000 4,781,000
Occupancy expenses 857,000 754,000 528,000
Furniture and equipment expense 720,000 585,000 464,000
Other operating expenses 2,136,000 2,063,000 1,830,000
------------ ------------ ------------
Total Non-Interest Expense 9,219,000 7,653,000 7,603,000
------------ ------------ ------------
Income before income taxes 4,205,000 2,512,000 2,995,000
Income tax expense (benefit) (254,000) 676,000 903,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-19
<PAGE> 132
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Stock Treasury
---------------------- Stock Paid-In Retained
Shares Amount at Cost Surplus Earnings
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 4,232,000 $ 42,000 $ -- $ 8,164,000 $ 2,700,000
Net income -- -- -- -- 2,092,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $6,000 -- -- -- -- --
Comprehensive income
Sale of common stock 4,000 -- -- 20,000 --
--------- -------- --------- ----------- -----------
Balances, December 31, 1996 4,236,000 42,000 -- 8,184,000 4,792,000
Net income -- -- -- -- 1,836,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $14,000 -- -- -- -- --
Comprehensive income
Sale of common stock 188,000 2,000 -- 724,000 --
--------- -------- --------- ----------- -----------
Balances, December 31, 1997 4,424,000 44,000 -- 8,908,000 6,628,000
Net income -- -- -- -- 4,459,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of ($1,000) -- -- -- -- --
Comprehensive income
Sale of common stock 620,000 6,000 -- 1,593,000 --
Common stock repurchase (8,000) -- (63,000) -- --
--------- -------- --------- ----------- -----------
Balances, December 31, 1998 5,036,000 $ 50,000 $ (63,000) $10,501,000 $11,087,000
========= ======== ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Stockholders' Comprehensive
Income Equity Income
------------- ------------- -------------
<S> <C> <C> <C>
Balances, December 31, 1995 $(21,000) $10,885,000
Net income -- 2,092,000 $2,092,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $6,000 12,000 12,000 12,000
----------
Comprehensive income $2,104,000
==========
Sale of common stock -- 20,000
-------- -----------
Balances, December 31, 1996 (9,000) 13,009,000
Net income -- 1,836,000 $1,836,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $14,000 26,000 26,000 26,000
----------
Comprehensive income $1,862,000
==========
Sale of common stock -- 726,000
-------- -----------
Balances, December 31, 1997 17,000 15,597,000
Net income -- 4,459,000 $4,459,000
Net change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of ($1,000) (3,000) (3,000) (3,000)
----------
Comprehensive income $4,456,000
==========
Sale of common stock -- 1,599,000
Common stock repurchase -- (63,000)
-------- -----------
Balances, December 31, 1998 $ 14,000 $21,589,000
======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-20
<PAGE> 133
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Page 1 of 2)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,459,000 $ 1,836,000 $ 2,092,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 620,000 270,000 250,000
Depreciation and amortization 917,000 573,000 568,000
Net (gain) loss on sale of assets (160,000) -- --
Net (gain) loss on sales of available for sale securities (88,000) (1,000) 19,000
Net (gain) loss on trading securities 4,000 (1,000) (6,000)
Increase (decrease) in deferred taxes
due to change in unrealized loss on
securities available-for-sale (1,000) 14,000 (6,000)
Proceeds from sales of trading securities -- 17,000 13,000
Net (increase) decrease in:
Accrued interest receivable (63,000) (149,000) (88,000)
Other assets (2,231,000) (1,863,000) (259,000)
Loans held for sale (1,142,000) (6,140,000) 2,777,000
Net increase (decrease) in:
Accrued interest payable (40,000) 132,000 27,000
Accounts payable and accrued expenses 155,000 398,000 (63,000)
Income taxes payable (102,000) 102,000 (48,000)
------------ ------------ ------------
Net Cash Provided (Used) By
Operating Activities 2,328,000 (4,812,000) 5,276,000
------------ ------------ ------------
Cash flows from investing activities:
Net change in interest bearing deposits in
domestic financial institutions 701,000 6,000 287,000
Proceeds from sales of available-for-sale securities 10,795,000 3,124,000 4,647,000
Proceeds from maturities of available-for-sale securities 10,751,000 4,958,000 4,029,000
Purchases of available-for-sale securities (35,723,000) (10,529,000) (8,768,000)
Purchases of held-to-maturity securities -- (6,820,000) (3,157,000)
Proceeds from maturities of held-to-maturity securities -- 1,674,000 506,000
Net change in loans held to maturity (6,779,000) (33,568,000) (12,616,000)
Purchases of premises and equipment, net (258,000) (1,861,000) (1,052,000)
Purchase of Federal Home Loan Bank stock (55,000) (410,000) (58,000)
------------ ------------ ------------
Net Cash Provided (Used) By
Investing Activities (20,568,000) (43,426,000) (16,182,000)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-21
<PAGE> 134
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(Page 2 of 2)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net change in demand deposits, savings,
money market and NOW accounts $ 14,968,000 $ 15,165,000 $ 8,967,000
Net change in time deposits 9,476,000 25,333,000 11,168,000
Proceeds of line of credit payable -- 6,000,000 --
Proceeds from sale of common stock, net 1,599,000 726,000 20,000
Purchase of treasury stock (63,000) -- --
------------ ------------ ------------
Net Cash Provided (Used) By
Financing Activities 25,980,000 47,224,000 20,155,000
------------ ------------ ------------
Increase (Decrease) In Cash
and Cash Equivalents 7,740,000 (1,014,000) 9,249,000
Cash and cash equivalents:
Beginning of year 19,317,000 20,331,000 11,082,000
------------ ------------ ------------
End of Year $ 27,057,000 $ 19,317,000 $ 20,331,000
============ ============ ============
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 7,360,000 $ 5,204,000 $ 4,407,000
============ ============ ============
Income Taxes $ 1,560,000 $ 797,000 $ 1,054,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-22
<PAGE> 135
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE 1 - Summary of Significant Accounting Policies:
Principles of Consolidation
On June 16, 1997, Comstock Bancorp (the "Bancorp") acquired
Comstock Bank (the "Bank") in a business combination accounted for as a
pooling of interest. Comstock Bank became a wholly owned subsidiary of
the Bancorp through the exchange of 4,421,668 shares of the Bancorp's
common stock for 100% of the outstanding shares of the Bank. Significant
intercompany accounts and transactions have been eliminated in the
consolidation. The accompanying financial statements for 1997 are based
on the assumption that the companies were combined for the full year,
and financial statements of the prior year have been restated to give
effect to the combination.
Nature of Operations
Comstock Bank is a Nevada State chartered bank. The Bank provides
a variety of financial services to individuals and corporate customers
through its branches in Nevada. The Bank's primary deposit products are
non-interest-bearing and interest-bearing checking accounts, savings,
money market, NOW accounts, and certificates of deposit. Its primary
lending products are commercial loans related to the development of
single family homes and commercial properties, and single family
residential loans. Accordingly, its revenues are derived primarily from
these products. The accounting and reporting policies of Comstock Bank
conform with generally accepted accounting principles and with general
practice within the banking industry. The following is a summary of the
most significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
credit losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans
and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because
of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the
near term.
Securities
Management adopted Financial Accounting Standards Board (FASB)
115 on January 1, 1994; and, therefore, determines the appropriate
classification of securities at the time of purchase. If management has
the intent and the ability at the time of purchase to hold securities
until maturity, they are classified as held to maturity and carried at
amortized historical cost. Securities to be held for indefinite periods
of time and not intended to be held to maturity are classified as
available for sale and are carried at fair value. Securities held for
indefinite periods of time include securities that management intends to
use as part of its asset and liability management strategy and that may
be sold in response to changes in interest rates, resultant prepayment
risk and other factors.
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on
investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and
losses are credited or charged to stockholders' equity, whereas realized
gains and losses are charged to operations. Premiums and discounts are
recognized in interest income using the interest method over the period
to maturity.
Loans
Loans, including the unamortized balance of loan origination,
commitment, and other fees and costs are stated at the principal amounts
outstanding. Loans held for sale are stated at
D-23
<PAGE> 136
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
the lower of cost or market value. Current market value is based on
quoted market prices for similar loans.
Loan Origination Fees
Loan origination fees, net of certain related costs, are being
deferred and amortized over the expected lives of the related loans
using methods that approximate the interest method.
Allowance for Credit Losses
An allowance for credit losses is provided through charges to
operations in the form of a provision for credit losses. Loans which
management believes are uncollectible, together with any accrued income,
are charged against this account with subsequent recoveries, if any,
credited to the account.
The amount of the current provision for credit losses charged to
operations is determined by management's evaluation of the quality and
inherent risks in the loan portfolio, economic conditions, and other
factors which warrant current recognition.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization, which is determined using the straight
line method over estimated useful lives ranging from three to forty
years.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in
the valuation allowance are included in loss on foreclosed real estate.
Typically, such properties are disposed of within one year.
Income Taxes
Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income and
inclusion of expenses deductible for federal income tax purposes which
are not expenses for financial reporting purposes) and include deferred
taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes.
Interest Income on Loans
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans
(including unamortized fees) is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to
meet payments as they come due. Upon such discontinuance, all unpaid
accrued interest is reversed.
Dividends
In accordance with Nevada Revised Statutes, the Bancorp's
dividend policy prohibits payments of dividends in excess of its
retained earnings.
Cash Flow Information
Cash and cash equivalents for purposes of the cash flow
statements include cash and due from banks and federal funds sold.
Prior Years' Reclassification
The prior years' financial statements have been reclassified
where applicable to conform to the current year's
D-24
<PAGE> 137
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
presentation.
NOTE 2 - Loan Contracts Serviced for Others:
During 1998, the Bank sold its servicing portfolio to an
unrelated party. The gain, which is included in interest and fee income
on loans, was not material.
Commercial loans and mortgage contracts with unpaid balances of
approximately $0, $55,342,000, and $52,004,000, were being serviced for
others at December 31, 1998, 1997, and 1996, respectively.
NOTE 3 - Trading Account Securities:
Trading account securities consist of U.S. Treasury and hedging
securities with varying maturity dates. The investments are carried at
market value.
NOTE 4 - Securities:
During 1998, the Bank adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. On the date of adoption, all securities in the
held-to-maturity portfolio were reclassified into the available-for-sale
portfolio.
The carrying amounts of investment securities as shown in the
Statements of Financial Condition of the Bancorp and their approximate
fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Securities
----------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury and Agency Securities $ 5,190,000 $ 31,000 $ 5,000 $ 5,216,000
State and Municipal Securities 10,537,000 116,000 91,000 10,562,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 23,322,000 37,000 66,000 23,293,000
Other Debt Securities ______ - -- -- -- --
----------- -------- -------- -----------
$39,049,000 $184,000 $162,000 $39,071,000
=========== ======== ======== ===========
December 31, 1997:
U.S. Treasury and Agency Securities $ 6,730,000 $ 8,000 $ 6,000 $ 6,732,000
State and Municipal Securities 1,265,000 10,000 2,000 1,273,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 6,197,000 23,000 7,000 6,213,000
Other Debt Securities ______- -- -- -- --
----------- -------- -------- -----------
$14,192,000 $ 41,000 $ 15,000 $14,218,000
=========== ======== ======== ===========
</TABLE>
D-25
<PAGE> 138
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-------------------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury and Agency Securities $ -- $ -- $ -- $ --
State and Municipal Securities -- -- -- --
Collateralized Mortgage Obligations
and Mortgage-backed Securities -- -- -- --
Other Debt Securities ______- -- -- -- --
----------- ------- ----------- -----------
$ -- $ -- $ -- $ --
=========== ======= =========== ===========
December 31, 1997:
U.S. Treasury and Agency Securities $ 2,844,000 $ 9,000 $ 51,000 $ 2,802,000
State and Municipal Securities 3,101,000 56,000 15,000 3,142,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 4,601,000 19,000 18,000 4,602,000
Other Debt Securities ______- 90,000 -- 4,000 86,000
----------- ------- ----------- -----------
$10,636,000 $84,000 $ 88,000 $10,632,000
=========== ======= =========== ===========
</TABLE>
The amortized cost and approximate market value of securities
held-to-maturity and available-for-sale at December 31, 1998, by
contractual maturity, are shown below.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
-------------------------- -----------------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $ 4,525,000 $ 4,538,000
Due after one year
through five years -- -- 4,738,000 4,804,000
Due after five years
through ten years -- -- 4,005,000 4,034,000
Due after ten years -- -- 25,781,000 25,695,000
-------- ----------- ----------- -----------
$ 0 $ 0 $39,049,000 $39,071,000
======== =========== =========== ===========
</TABLE>
Maturities of mortgage-backed securities are classified in
accordance with the contractual repayment schedules. Expected maturities
will differ from the contractual maturities reported above, because debt
security issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Securities held-to-maturity with a carrying value of
approximately $0 and $7,445,000 and securities available-for-sale with a
carrying value of approximately $28,504,000 and $12,928,000 were pledged
to FHLB and Federal Reserve Bank at December 31, 1998 and 1997,
respectively.
D-26
<PAGE> 139
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Gross proceeds, gross realized gains, and gross realized losses on sales
of available-for-sale securities were:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Gross proceeds:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 5,304,000 1,445,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 5,491,000 1,679,000
Other Debt Securities -- --
----------- ----------
$10,795,000 $3,124,000
=========== ==========
Gross realized gains:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 85,000 7,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 36,000 2,000
Other Debt Securities -- --
----------- ----------
$ 121,000 $ 9,000
=========== ==========
Gross realized losses:
U.S. Treasury and Agency Securities $ -- $ --
State and Municipal Securities 6,000 3,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 10,000 5,000
Other Debt Securities 17,000 --
----------- ----------
$ 33,000 $ 8,000
=========== ==========
</TABLE>
The net realized gains of $88,000 and $1,000 on the sale of
securities resulted in an income tax cost of approximately $30,000 and
$0 for 1998 and 1997, respectively.
NOTE 5 - Loans:
Loans held for sale were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Real estate mortgages $15,088,000 $13,946,000
=========== ===========
</TABLE>
The Bank funded and subsequently sold approximately $193,250,000
and $144,392,000 of loans held for sale in 1998 and 1997, respectively.
The resulting gain and loss was insignificant in both years.
D-27
<PAGE> 140
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Major loan classifications were as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Commercial and industrial $ 103,447,000 $ 101,812,000
Real estate:
Construction and land development 15,468,000 15,218,000
Mortgages 3,561,000 2,326,000
Installment 4,810,000 3,411,000
------------- -------------
Subtotal 127,286,000 122,767,000
Deferred loan fees, net (552,000) (532,000)
Allowance for credit losses (1,598,000) (1,076,000)
------------- -------------
Net Loans $ 125,136,000 $ 121,159,000
============= =============
</TABLE>
Loans with a carrying value of approximately $6,528,000 and
$8,250,000 at December 31, 1998 and 1997, respectively, were pledged to
secure the line of credit with FHLB (see Note 7).
The Bank's business activity is with customers primarily located
within Northern Nevada. The Bank grants commercial, real estate, and
installment loans to these customers. Although the Bank has a
diversified loan portfolio, a significant portion of its customers'
ability to repay the loans is dependent upon the economic health of
commercial and residential real estate development. Generally, the loans
are secured by real estate. The loans are expected to be repaid from
cash flow or proceeds from the sale of the real estate of the borrower.
The Bank's policy is generally to require adequate collateral for all
commercial and residential real estate development credit extended. The
bank may be required to take legal action to enforce its rights to
pledged collateral.
A summary of the changes in the allowance for credit losses for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Beginning balance $ 1,076,000 $ 857,000 $ 665,000
Loans charged off (102,000) (79,000) (61,000)
Loan recoveries 4,000 28,000 3,000
----------- ----------- ---------
Net Recoveries
(Charge-Offs) (98,000) (51,000) (58,000)
Provision charged to operations 620,000 270,000 250,000
----------- ----------- ---------
Ending Balance $ 1,598,000 $ 1,076,000 $ 857,000
=========== =========== =========
</TABLE>
D-28
<PAGE> 141
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Impairment of loans having carrying values of $1,005,000 and
$2,541,000 at December 31, 1998 and 1997, respectively, have been
recognized in conformity with FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan. The total allowance for credit
losses related to those loans was $484,000 and $66,000, respectively.
For impairment recognized in conformity with FASB Statement No. 114, the
entire change in present value of expected cash flows is reported as
provision for credit losses in the same manner in which impairment
initially was recognized or as a reduction in the amount of provision
for credit losses that otherwise would be reported.
The average recorded investment in impaired loans was $3,381,000
and $2,935,000 during 1998 and 1997, respectively. The amount of
interest income recognized during 1998 and 1997 was approximately
$41,000 and $42,000, respectively, which was approximately the same
amount that would have been recognized on a cash basis. If an impaired
loan is placed on nonaccrual status, all future collections while on
nonaccrual status are recognized as a reduction of the loan investment.
For impaired loans not on nonaccrual status, interest income is
recognized when earned.
At December 31, 1998 and 1997, the Bank's significant credit risk
was in commercial and industrial, and construction and land development
loans. Of the total allowance for credit losses at the end of each of
those years, nearly all of the allowance was for loans in those two
categories.
NOTE 6 - Premises and Equipment:
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,231,000 $ 1,371,000
Buildings 4,996,000 4,890,000
Furniture, fixtures, and equipment 4,276,000 3,929,000
------------ ------------
10,503,000 10,190,000
Less: Accumulated depreciation
and amortization (3,240,000) (2,480,000)
------------ ------------
$ 7,263,000 $ 7,710,000
============ ============
</TABLE>
Depreciation and amortization expense was approximately $917,000,
$573,000, and $568,000, for the years ended December 31, 1998, 1997, and
1996, respectively.
NOTE 7 - Credit Arrangement:
The Bank has a credit agreement with the Federal Home Loan Bank
of San Francisco (FHLB) whereby the Bank may borrow up to 30 percent of
the Bank's assets, with terms up to 240 months. The above line of credit
requires the Bank to maintain certain collateral maintenance, credit,
and other requirements as set forth by FHLB. The line is secured by
securities and mortgage loans pledged to the FHLB which amounted to
approximately $32,538,226 and $25,153,000 at December 31, 1998 and 1997,
respectively.
D-29
<PAGE> 142
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
At December 31, 1998 and 1997, $6,000,000 was owed to FHLB. This
amount accrues interest at an average rate of 6.13 percent and matures
in the year 2000.
The Bank also has an uncollateralized credit line with Union Bank
of California, whereby the Bank may borrow federal funds up to
$2,500,000. This agreement expires July 31, 1999 and requires a
compensating balance of $200,000. There were no borrowings on this line
at December 31, 1998 or 1997.
NOTE 8 - Other Operating Expenses:
The major categories of other operating expenses for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Data processing fees $ 58,000 $ 191,000 $ 235,000
Legal and consulting fees 294,000 219,000 226,000
Office supplies 199,000 211,000 359,000
Advertising 329,000 400,000 253,000
Other operating expenses 1,256,000 1,042,000 757,000
---------- ---------- ----------
$2,136,000 $2,063,000 $1,830,000
========== ========== ==========
</TABLE>
All advertising costs are expensed as incurred.
NOTE 9 - Income Taxes:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current federal income tax expense $ (6,000) $ 861,000 $ 990,000
Deferred federal income tax expense (248,000) (185,000) (87,000)
--------- --------- ---------
$(254,000) $ 676,000 $ 903,000
========= ========= =========
</TABLE>
A reconciliation of income tax at the statutory rate to the
Bank's effective rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Tax-exempt life insurance income -1.1% -1.8% -0.8%
Tax loss in excess of book loss on
sale of investment securities -1.5% -2.0% -0.8%
Compensation on stock options -34.7% -1.2% 0.0%
Tax-exempt interest income -3.7% -3.0% -1.4%
Other, net 0.9% 0.9% -0.8%
------ ------ ------
-6.1% 26.9% 30.2%
====== ====== ======
</TABLE>
D-30
<PAGE> 143
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
Deferred income taxes result from temporary differences in the
basis of assets and liabilities for financial reporting and income
taxes. The source of these temporary differences and their resulting
effect on income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation $ 7,000 $ 22,000 $ 6,000
Provision for loan losses (176,000) (92,000) (85,000)
Loan fees (7,000) (77,000) (15,000)
Valuation of loans held for sale (72,000) -- --
Other, net -- (38,000) 7,000
---------- ---------- ----------
$ (248,000) $ (185,000) $ (87,000)
========== ========== ==========
</TABLE>
Significant components of the deferred tax liabilities and assets
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 96,000 $ 84,000
Valuation of available-for-sale securities 7,000 9,000
-------- --------
103,000 93,000
Deferred tax assets:
Valuation of available-for-sale securities -- --
Excess of financial reporting provision
for credit losses over tax basis 512,000 334,000
Deferred compensation 110,000 38,000
Deferred fee income 188,000 181,000
-------- --------
810,000 553,000
-------- --------
Net deferred tax asset $707,000 $460,000
======== ========
</TABLE>
NOTE 10 - Earnings Per Share:
Earnings per share have been restated retroactively for the year
ended December 31, 1996 to reflect the business combination and the
adoption of SFAS No. 128, "Earnings per Share" during 1997.
D-31
<PAGE> 144
Basic earnings per share and diluted earnings per share have been
computed based on the following:
<TABLE>
<CAPTION>
1998
----------------------------------
Common
Income Shares
Numerator Denominator EPS
---------- ---------- -----
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $4,459,000 4,535,000 $0.99
=====
Dilutive Effect of Potential Common Stock
Stock options -- 384,000
---------- ---------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $4,459,000 4,919,000 $0.91
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------
Common
Income Shares
Numerator Denominator EPS
---------- ---------- -----
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $1,836,000 4,356,000 $0.42
=====
Dilutive Effect of Potential Common Stock
Stock options -- 433,000
---------- ---------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $1,836,000 4,789,000 $0.39
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
Common
Income Shares
Numerator Denominator EPS
---------- ---------- -----
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $2,092,000 4,234,000 $0.49
=====
Dilutive Effect of Potential Common Stock
Stock options -- 323,000
---------- ---------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $2,092,000 4,557,000 $0.46
========== ========= =====
</TABLE>
D-32
<PAGE> 145
NOTE 11 - Stock Options:
The Bancorp has stock option plans which provide for the grant of
non-qualified stock options to certain directors, officers, and key
employees. At December 31, 1998, there were 213,936 shares of common
stock available for future grant or award and all of the outstanding
options were exercisable. Options are granted at prices not less than
fair market value at the date of grant and for terms of up to ten years.
Activity in the stock option plans was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Per Share
of Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1995 641,032 2.52
Granted 46,700 5.04
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1996 687,732 2.68
Granted 47,500 6.99
Exercised 34,400 3.81
Cancelled -- --
------- -------
Outstanding at December 31, 1997 700,832 2.92
Granted 14,900 10.00
Exercised 618,132 2.56
Cancelled -- --
------- -------
Outstanding at December 31, 1998 97,600 6.25
======= =======
</TABLE>
The Bancorp has also issued warrants to shareholders in
connection with the issuance of stock. The activity of those stock
options was as follows:
<TABLE>
<S> <C> <C>
Outstanding at December 31, 1995 206,800 3.87
Granted -- --
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1996 206,800 3.87
Granted -- --
Exercised 154,000 3.86
Cancelled -- --
------- -------
Outstanding at December 31, 1997 52,800 3.86
Granted -- --
Exercised -- --
Cancelled -- --
------- -------
Outstanding at December 31, 1998 52,800 3.86
======= =======
</TABLE>
D-33
<PAGE> 146
The Bancorp applies APB Opinion 25 in accounting for its fixed
and performance-based stock compensation plans. Accordingly, no
compensation cost has been recognized in 1998, 1997, or 1996. Had
compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net income and earnings per share would have
been reduced as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $4,459,000 $1,836,000 $2,092,000
========== ========== ==========
Pro forma $4,401,000 $1,715,000 $2,007,000
========== ========== ==========
Basic earnings per share:
As reported $.99 $.42 $.49
==== ==== ====
Pro forma $.97 $.39 $.47
==== ==== ====
Diluted earnings per share:
As reported $.91 $.39 $.46
==== ==== ====
Pro forma $.89 $.36 $.44
==== ==== ====
</TABLE>
The fair value of each option grant is estimated on the date of
grant using an option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 39.75% 37.15% 30.45%
Risk free interest rate 4.68% 5.53% 6.68%
Expected lives 10 years 10 years 10 years
</TABLE>
NOTE 12 - Profit Sharing Plan:
Effective January 1, 1992, the Bank established a 401(k) Profit
Sharing Plan and Trust that covers all eligible employees. The Bank
makes discretionary matching contributions based on 50 percent of the
amount of salary deferral elected by the employee, up to 6 percent of
the employee's salary. Contributions to the plan charged to operations
were not material for the years ended December 31, 1998, 1997, and 1996.
NOTE 13 - Operating Leases:
The Bank leases premises and equipment under operating leases
expiring through 2011. The aggregate future minimum annual rental
commitment as of December 31, 1998, under operating leases having
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999 $ 397,000
2000 379,000
2001 363,000
2002 257,000
2003 231,000
Thereafter 2,078,000
----------
$3,705,000
==========
</TABLE>
D-34
<PAGE> 147
Rent expense for the years ended December 31, 1998, 1997, and
1996 amounted to approximately $463,000, $368,000, and $202,000,
respectively. Certain operating leases provide for renewal options for
periods of 5 to 15 years at the fair rental value at the time of
renewal. In the normal course of business, operating leases are
generally renewed or replaced by other leases.
NOTE 14 - Financial Instruments with Off-Balance Sheet Risk:
In the ordinary course of business, the Bank enters into various
types of transactions which involve financial instruments with
off-balance sheet risk. These instruments include commitments to extend
credit and standby letters of credit and are not reflected in the
accompanying balance sheet. These transactions may involve, to varying
degrees, credit and interest rate risk in excess of the amount, if any,
recognized in the balance sheet.
Management does not anticipate any loss to result from these
commitments; however, in case of default, legal action may be required
to enforce its rights to collateral pledged to secure these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit.
The Bank applies the same credit standards to these contracts as it uses
in its lending process.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Financial instruments whose
contractual amount represented
risk:
Commitments to extend credit $60,874,000 $50,453,000 $56,716,000
=========== =========== ===========
Standby letters of credit $ 1,392,000 $ 3,504,000 $ 3,729,000
=========== =========== ===========
</TABLE>
Commitments to extend credit are arrangements to lend to
customers. These commitments have specified interest rates and generally
have fixed expiration dates, but may be terminated by the Bank if
certain conditions of the contract are violated. These commitments are
normally collateralized by real estate.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party.
Credit risk arises in these transactions from the possibility that a
customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual
evaluation of each customer's credit worthiness, but may include cash
and securities.
NOTE 15 - Commitments and Contingencies:
Because of the nature of its business, the Bank is often a
defendant in legal actions. Based upon advice of counsel, management
does not anticipate that the final outcome of any litigation in process,
or anticipated, will have a materially adverse effect on the Bank's
operations or financial condition.
D-35
<PAGE> 148
NOTE 16 - Related Party Transactions:
The Bank has entered into transactions (including loans and
deposits) with its directors, officers, and significant shareholders.
Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates
and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features.
The following is a summary of the aggregate loan activity
involving related party loans during 1997 and 1998.
<TABLE>
<S> <C>
Balance, December 31, 1996 $ 427,000
Additions 269,000
Repayments (53,000)
----------
Balance, December 31, 1997 643,000
Additions 828,000
Repayments (275,000)
Balance, December 31, 1998 $1,196,000
==========
</TABLE>
NOTE 17 - Regulatory Matters:
The Bank is required to maintain certain average reserve
requirements with the Federal Reserve Bank. Reserve requirements are
based on a percentage of deposit liabilities. The average required
reserves during 1997 and 1998 ranged from $875,000 to $1,250,000.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements
to which it is subject.
D-36
<PAGE> 149
As of December 31, 1998, the most recent notification from
federal banking agencies categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
----------- -------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $20,313,000 13.5% =/>$12,040,000 =/>8.0% =/>$15,050,000 =/>10.0%
Tier I Capital
(to Risk Weighted Assets) 18,715,000 12.4% =/> 6,020,000 =/>4.0% =/> 9,030,000 =/> 6.0%
Tier I Capital
(to Average Assets) 18,715,000 8.5% =/> 8,815,000 =/>4.0% =/> 11,019,000 =/> 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $16,470,000 11.7% =/>$11,309,000 =/>8.0% =/>$14,136,000 =/>10.0%
Tier I Capital
(to Risk Weighted Assets) 15,397,000 10.9% =/> 5,654,000 =/>4.0% =/> 8,482,000 =/> 6.0%
Tier I Capital
(to Average Assets) 15,397,000 8.3% =/> 7,400,000 =/>4.0% =/> 9,250,000 =/> 5.0%
</TABLE>
NOTE 18 - Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Values of Financial
Instruments," requires disclosure of information about the fair value of
financial instruments for which it is practicable to estimate a value,
whether or not recognized in the statement of condition. Whenever
possible, quoted market prices are used to estimate fair values. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Therefore, in many cases, the estimated fair values may not be realized
in an immediate sale of the instruments.
D-37
<PAGE> 150
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate of the estimated fair value amounts is not intended to
represent the underlying value of the Bancorp.
The carrying amounts and the estimated fair values are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 27,057,000 $ 27,057,000
Interest-bearing deposits 791,000 791,000
Trading account securities 8,000 8,000
Investment securities 39,071,000 39,071,000
Federal Home Loan Bank Stock 843,000 843,000
Loans receivable 140,224,000 147,150,000
Accrued interest receivable 1,052,000 1,052,000
------------ ------------
Total Asset Financial
Instruments $209,046,000 $215,972,000
============ ============
Liabilities:
Deposits $196,246,000 $197,283,000
Accrued interest payable 281,000 281,000
Line of credit payable 6,000,000 6,285,000
------------ ------------
Total Liability Financial
Instruments $202,527,000 $203,849,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 19,317,000 $ 19,317,000
Interest-bearing deposits 1,492,000 1,492,000
Trading account securities 12,000 12,000
Investment securities 24,854,000 24,850,000
Federal Home Loan Bank Stock 788,000 788,000
Loans receivable 135,106,000 138,741,000
Accrued interest receivable 989,000 989,000
------------ ------------
Total Asset Financial
Instruments $182,558,000 $186,189,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
Liabilities:
Deposits $171,802,000 $171,936,000
Accrued interest payable 321,000 321,000
Line of credit payable 6,000,000 6,006,000
------------ ------------
Total Liability Financial
Instruments $178,123,000 $178,263,000
============ ============
</TABLE>
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
D-38
<PAGE> 151
Cash and Cash Equivalents
The carrying amounts reported in the statement of financial
condition for cash and cash equivalents approximate those assets' fair
values.
Interest-Bearing Deposits
Fair values for interest-bearing deposits in domestic financial
institutions are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Trading Account Securities
Fair values for the Bank's trading account assets, which also are
the amounts recognized in the statement of condition, are based on
quoted market prices.
Investment Securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Federal Home Loan Bank Stock
Fair values for Federal Home Loan Bank stock is based on its par
value since it is redeemable at par.
Loans Receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values of fixed-rate mortgage loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. The fair values of other fixed-rate loans are
estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Accrued Interest Receivable
The carrying amount reported in the statement of financial
condition for accrued interest receivable approximates its fair value.
Deposit Liabilities
The carrying amounts for interest-bearing and
non-interest-bearing demand, savings, money market, and NOW accounts
approximate those liabilities' fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Accrued Interest Payable
The carrying amount reported in the statement of financial
condition for accrued interest payable approximates its fair value.
Line of Credit Payable
Fair value for line of credit payable is estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar lines of credit.
NOTE 19 - Subsequent Events:
On January 13, 1999, Comstock Bancorp announced it had reached an
agreement to be acquired by First Security Corporation. The acquisition
is contingent upon stockholder and regulatory approval.
D-39
<PAGE> 152
NOTE 20 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Provision
Net for
Interest Interest Interest Credit
Three Months Ended Income Expense Income Losses
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1998 $ 4,664,000 $1,737,000 $ 2,927,000 $110,000
June 30, 1998 5,607,000 1,832,000 3,775,000 150,000
September 30, 1998 5,396,000 1,934,000 3,462,000 210,000
December 31, 1998 4,829,000 1,817,000 3,012,000 150,000
----------- ---------- ----------- --------
$20,496,000 $7,320,000 $13,176,000 $620,000
=========== ========== =========== ========
March 31, 1997 $ 3,306,000 $1,210,000 $ 2,096,000 $ 60,000
June 30, 1997 3,849,000 1,330,000 2,519,000 60,000
September 30, 1997 3,986,000 1,431,000 2,555,000 60,000
December 31, 1997 4,376,000 1,652,000 2,724,000 90,000
----------- ---------- ----------- --------
$15,517,000 $5,623,000 $ 9,894,000 $270,000
=========== ========== =========== ========
</TABLE>
D-40
<PAGE> 153
<TABLE>
<CAPTION>
Gain
(Loss) on
Available-
for-Sale Basic Diluted
Investment Net Earnings Earnings
Securities Income Per Share Per Share
- ---------- ---------- --------- ---------
<S> <C> <C> <C>
$ (8,000) $ 601,000 $.14 $.12
- 1,119,000 .25 .23
(12,000) 886,000 .20 .18
108,000 1,853,000 .40 .38
- -------- ---------- ---- ----
$ 88,000 $4,459,000 $.99 $.91
======== ========== ==== ====
$ (3,000) $ 265,000 $.06 $.06
- 431,000 .10 .09
- 488,000 .11 .10
4,000 652,000 .15 .14
- -------- ---------- ---- ----
$ 1,000 $1,836,000 $.42 $.39
======== ========== ==== ====
</TABLE>
D-41
<PAGE> 154
NOTE 21 - Parent Company Statements:
The parent company was formed during 1997; therefore, no parent
company statements are presented for years prior to 1997.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Condensed Balance Sheet:
Assets:
Cash $ 1,780,000 $ 311,000
Investment in subsidiary 18,729,000 15,414,000
Other assets 1,477,000 136,000
----------- -----------
Total Assets $21,986,000 $15,861,000
=========== ===========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 396,000 $ 264,000
----------- -----------
Shareholders' equity 21,590,000 15,597,000
----------- -----------
Total Liabilities and
Shareholders' Equity $21,986,000 $15,861,000
=========== ===========
Condensed Statement of Income:
Revenues:
Cash dividends from bank subsidiary $ -- $ 300,000
Income from subsidiary 3,317,000 1,663,000
Other income 1,110,000 307,000
----------- -----------
Total Revenues 4,427,000 2,270,000
----------- -----------
Expenses:
Employee compensation and benefits 1,179,000 441,000
Other expenses 190,000 61,000
----------- -----------
Total expenses 1,369,000 502,000
----------- -----------
Income before income taxes 3,058,000 1,768,000
Income tax benefit 1,401,000 68,000
----------- -----------
Net Income $ 4,459,000 $ 1,836,000
=========== ===========
</TABLE>
D-42
<PAGE> 155
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Condensed Statement of Cash Flows:
Cash flows from operating activities:
Net Income $ 4,459,000 $ 1,836,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization 14,000 7,000
Undistributed earnings of subsidiary (3,317,000) (1,663,000)
Change in other assets (1,355,000) (143,000)
Change in liabilities 132,000 264,000
----------- -----------
Net Cash Provided by Operating
Activities (67,000) 301,000
----------- -----------
Cash flows from financing activities:
Sale of stock 1,599,000 10,000
Treasury stock purchase (63,000) --
----------- -----------
Net Increase in Cash 1,469,000 311,000
Cash, beginning of year 311,000 --
----------- -----------
Cash, end of year $ 1,780,000 $ 311,000
=========== ===========
</TABLE>
D-43
<PAGE> 156
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware contains
detailed provisions on indemnification of directors and officers of a Delaware
corporation against expenses, judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with litigation.
The Certificate of Incorporation of First Security Corporation provides
for indemnification of directors and officers to the full extent permitted or
allowed by the laws of the State of Delaware, as such laws exist or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the registrant to provide broader indemnification
rights than permitted or allowed by Section 145). The registrant also insures
its officers and directors to the full extent permitted by Section 145.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The Registration Statement includes the following
Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2 Agreement and Plan of Reorganization dated as of January 12,
1999, by and among First Security Corporation, First Security
Bank of Nevada, Comstock Bancorp and Comstock Bank (included as
Appendix A to the Prospectus/Proxy Statement.
3(1). Certificate of Incorporation, as amended (Exhibit 3.1 to First
Security's Registration Statement on Form S-4, Reg #333-30045,
filed July 24, 1990, incorporated by reference).
3(2). Bylaws of First Security, as amended Jan. 26, 1998 (Exhibit 3.2
to First Security's Annual Report on Form 10-K for the year ended
Dec. 31, 1997, incorporated by reference).
4(1). No instruments defining the rights of holders of long-term debt
of First Security and its subsidiaries have been included as
exhibits because the total amount of indebtedness authorized
under any such instrument does not exceed 10% of the total assets
of First Security and its subsidiaries on a consolidated basis.
4(2). Rights Agreement between First Security and First Security Bank,
N.A., dated Aug. 28, 1990, which includes: Exhibit A, the form of
Rights Certificate and the form of Election of Exercise; Exhibit
B, the form of Certificate of Designation of First Security's
Junior Series B Preferred Stock, no par value per share; and
Exhibit C, the Summary of Rights (Exhibit 4 to First Security's
Current Report on Form 8-K, dated Aug. 28, 1990, filed Sept. 1,
1990, incorporated by reference) and as amended and extended in
1998 (see Exhibit 4 to First Security's Current Report of Form
8-K, dated November 2, 1998, incorporated by reference.)
4(3). Amendment Agreement between First Security and First Security
Bank, N.A., dated Sept. 26, 1990, amending the Rights Agreement
between the same parties dated Aug. 28, 1990, (Exhibit 1 to First
Security's Amendment #1 on Form 8-A, dated Oct. 10, 1990, filed
Oct. 16, 1990, amending First Security's Report on Form 8-K,
dated Aug. 28, 1990, filed Sept. 1, 1990, incorporated by
reference).
4(4) Amendments to Rights Plan, filed in Registrant's Current Report
on Form 8-K dated November 11, 1998 (incorporated by reference).
5. Opinion of Ray, Quinney & Nebeker as to the legality of the
shares being registered.
8. Opinion of Ray, Quinney & Nebeker re: Tax Matters.
</TABLE>
II-1
<PAGE> 157
<TABLE>
<S> <C>
10(1). Amended and Restated First Security Comprehensive Management
Incentive Plan (Exhibit 10.1 to First Security's Annual Report on
Form 10-K for the year ended Dec. 31, 1994, incorporated by
reference).
10(2). Employment Agreement between First Security and Spencer F.
Eccles, dated Oct. 16, 1996 (Exhibit 10.3 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(3). Employment Agreement between First Security and Morgan J. Evans,
dated Oct. 16, 1996 (Exhibit 10.4 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(4). Employment Agreement between First Security and Michael P.
Caughlin, dated Oct. 16, 1996 (Exhibit 10.9 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(5). Employment Agreement between First Security and Brad D. Hardy,
dated Oct. 16, 1996 (Exhibit 10.8 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(6). Employment Agreement between First Security and Mark D. Howell,
dated Oct. 16, 1996 (Exhibit 10.10 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(7). Employment Agreement between First Security and J. Patrick
McMurray, dated Oct. 16, 1996 (Exhibit 10.6 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(8). Employment Agreement between First Security and L. Scott Nelson,
dated Oct. 16, 1996 (Exhibit 10.5 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(9). Employment Agreement between First Security and Scott C. Ulbrich,
dated Oct. 16, 1996 (Exhibit 10.7 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed Feb.
13, 1997, incorporated by reference).
10(10). The form of First Security's Deferred Compensation Plan Deferral
Election -- 01/01/95 -- 12/31/95 (Exhibit 10.10 to First
Security's Annual Report on Form 10-K for the year ended Dec. 31,
1994, incorporated by reference).
13(1). First Security's Annual Report on Form 10-K for the year ended
December 31, 1997 (as amended and restated to give effect to the
California State Bank acquisition, which was accounted for as a
pooling of interests, as set forth in the Current Report on Form
8-K, dated October 1, 1998) hereby incorporated by reference
[File No. 1-6906].
21. First Security's Subsidiaries (Exhibit 21 to First Security's
Annual Report on Form 10-K for the year ended December 31, 1997
(as amended and restated to give effect to the California State
Bank acquisition, which was accounted for as a pooling of
interests, as set forth in the Current Report on Form 8-K, dated
October 1, 1998), and incorporated by reference).
23(1). Consent of Deloitte & Touche LLP for First Security.
23(2). Consent of Kafoury, Armstrong & Co. for Comstock.
23(3). Consent of Ray, Quinney & Nebeker (filed as part of Exhibit 5 and
Exhibit 8(1)).
24. Power of Attorney (included in signature pages of original filing
of Registration Statement).
</TABLE>
II-2
<PAGE> 158
<TABLE>
<S> <C>
99(1) Consent of Hovde Financial, Inc..
99(2). Form of Comstock stockholder Proxy Card.
</TABLE>
II-3
<PAGE> 159
ITEM 22. UNDERTAKINGS.
First Security hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "1933 Act"), each
filing of First Security's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (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, as amended), that is incorporated
by reference in the registration statement will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
First Security hereby undertakes 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), 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 UNDERTAKING AS TO INDEMNIFICATION OF OFFICERS AND DIRECTORS
REQUIRED TO BE DISCLOSED BY ITEM 512(i) OF REGULATION S-K IS FOUND IN
"COMPARATIVE RIGHTS OF STOCKHOLDERS--DIRECTORS LIABILITY" IN THE PROSPECTUS /
PROXY STATEMENT.
First Security hereby undertakes that every prospectus (i) that is
filed pursuant to the paragraph immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the 1933 Act 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 1933 Act, each such post-effective amendment will be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
First Security hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 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
effectiveness of the registration statement through the date of responding to
the request.
First Security hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired, that was not the subject of and included in the registration statement
when it became effective.
First Security hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effectiveness of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
II-4
<PAGE> 160
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-5
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, First
Security Corporation has duly caused this Pre-Effective Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Salt Lake City, Utah, on the 22nd day of March
1999.
FIRST SECURITY CORPORATION
By: /s/ Morgan J. Evans
------------------------------------
Morgan J. Evans
President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 to Registration Statement has been signed by
the following persons in the capacities and on the date or dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Spencer F. Eccles Chairman and Chief
- ---------------------------------- Executive Officer, Director March 22, 1999
Spencer F. Eccles
/s/ Morgan J. Evans President and Chief
- ---------------------------------- Operating Officer, Director March 22, 1999
Morgan J. Evans
/s/ Brad D. Hardy Executive Vice President, General
- ---------------------------------- Counsel and Chief Financial Officer March 22, 1999
Brad D. Hardy (Principal Financial and
Accounting Officer)
/s/ James C. Beardall Director
- ---------------------------------- March 22, 1999
James C. Beardall
/s/ Rodney H. Brady Director
- ---------------------------------- March 22, 1999
- ------------
Rodney H. Brady
/s/ James E. Bruce Director
- ---------------------------------- March 22, 1999
James E. Bruce
/s/ Thomas D. Dee II Director
- ---------------------------------- March 22, 1999
Thomas D. Dee II
</TABLE>
II-6
<PAGE> 162
<TABLE>
<S> <C> <C>
Dr. David P. Gardner Director
- ---------------------------------- March 22, 1999
Dr. David P. Gardner
/s/ Robert H. Garff Director
- ---------------------------------- March 22, 1999
Robert H. Garff
/s/ Jay Dee Harris Director
- ---------------------------------- March 22, 1999
Jay Dee Harris
/s/ Robert T. Heiner Director
- ---------------------------------- March 22, 1999
Robert T. Heiner
/s/ Karen H. Huntsman Director
- ---------------------------------- March 22, 1999
Karen H. Huntsman
/s/ G. Frank Joklik Director
- ---------------------------------- March 22, 1999
G. Frank Joklik
/s/ B. Z. Kastler Director
- ---------------------------------- March 22, 1999
B. Z. Kastler
/s/ Dr. J. Bernard Machen Director
- ---------------------------------- March 22, 1999
Dr. J. Bernard Machen
/s/ Joseph G. Maloof Director
- ---------------------------------- March 22, 1999
Joseph G. Maloof
/s/ Michele Papen-Daniel, Ph.D. Director
- ---------------------------------- March 22, 1999
Michele Papen-Daniel, Ph.D.
/s/ Scott S. Parker Director
- ---------------------------------- March 22, 1999
Scott S. Parker
/s/ James L. Sorenson Director
- ---------------------------------- March 22, 1999
James L. Sorenson
/s/ Harold J. Steele Director
- ---------------------------------- March 22, 1999
Harold J. Steele
/s/ James R. Wilson Director
- ---------------------------------- March 22, 1999
James R. Wilson
</TABLE>
II-7
<PAGE> 1
EXHIBIT 5
OPINION OF RAY, QUINNEY & NEBEKER AS TO THE
LEGALITY OF THE SHARES BEING REGISTERED.
March 22, 1999
First Security Corporation Comstock Bancorp
Attn: Morgan J. Evans, President Attn: Robert N. Barone, CEO
79 South Main Street 6275 Neil Road
Salt Lake City, Utah 84111 Reno, Nevada 89511
Re: REGISTRATION AND ISSUANCE OF FIRST SECURITY CORPORATION COMMON
STOCK TO STOCKHOLDERS OF COMSTOCK BANCORP
Dear Messrs. Evans and Barone:
This Firm has acted as counsel to First Security Corporation, a Delaware
corporation ("the Company), in connection with its registration of shares of its
common stock, par value $1.25 ("the Shares") for use in the merger (as defined
in the Prospectus/Proxy Statement included in the Company's Registration
Statement on Form S-4 as filed with the Securities and Exchange Commission on
February , 1999.)
In connection with this representation, we have examined the originals,
or copies identified to our satisfaction, of such minutes, agreements, corporate
records and filings and other documents necessary to our opinion contained in
this letter. We have also relied as to certain matters of fact upon
representations made to us by officers and agents of the Company and of
Comstock. Based upon and in reliance on the foregoing, it is our opinion that:
1. The Company has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of the State of Delaware;
and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus/Proxy Statement
referred to above.
2. When issued and distributed to the Stockholders of Comstock Bancorp
under the terms of the merger agreement, the Shares will be duly and
validly issued and will be fully paid and nonassessable.
<PAGE> 2
Morgan Evans
Robert Barone
March 22, 1999
Page 2
3. The stockholders of the Company have no pre-emptive rights to acquire
additional shares of First Security common stock in respect of the
Shares.
We hereby consent to the use of our name in the Prospectus/Proxy
Statement and therein being disclosed as counsel to the Company in this matter.
Very truly yours,
RAY, QUINNEY & NEBEKER
By: /S/ A. R. THORUP
---------------------------------
A. Robert Thorup,
a Stockholder and
Director of the Firm
<PAGE> 1
EXHIBIT 8
OPINION OF RAY, QUINNEY & NEBEKER RE: TAX MATTERS.
March 20, 1999
First Security Corporation Comstock Bancorp
Attn: Morgan J. Evans, President Attn: Robert Barone, Chief Executive Officer
79 South Main Street 6275 Neil Road
Salt Lake City, Utah 84111 Reno, Nevada 89449
Ladies and Gentlemen:
We have acted as counsel to First Security Corporation, a Delaware
corporation ("First Security"), in connection with the merger (the "Merger") of
Comstock Bancorp ("Comstock") with and into First Security Corporation, all as
fully described in that certain Merger Agreement, dated as of January 12, 1999
(the "Agreement"), by and among First Security, First Security Bank of Nevada,
Comstock and Comstock Bank and in that certain S-4 Registration Statement dated
as of _____________, 1999 (the "Registration Statement"), to be filed with the
Securities and Exchange Commission. This opinion is delivered to you pursuant to
the Agreement. Unless otherwise defined herein, capitalized terms will have the
meanings given them in the Agreement. Further, all references to the Internal
Revenue Code are to the Internal Revenue Internal Revenue Code of 1986, as
amended.
In connection with this opinion, we have reviewed a signed copy of the
Agreement, the Registration Statement and all other documents we have deemed
necessary or appropriate for purposes of this opinion. In addition, we expressly
rely upon the representations and facts set forth in the Agreement, the
Registration Statement, and in certificates of responsible officers of First
Security and of Comstock concerning matters within the areas of responsibility
of such officers, dated ____________, 1999 and __________, 1999, respectively
(the "Certificates"). If any of the representations and facts set forth in the
Agreement, the Registration Statement and the Certificates upon which this
opinion is based are not true and accurate, both on the date of this letter and
at the effective date of the merger, then we express no opinion. Further, our
opinion assumes that the merger will occur fully in accordance with the terms
and provisions of the Agreement insofar as they are pertinent to this opinion.
If it does not, then we express no opinion.
Based on the foregoing, and subject to the qualifications and exceptions
heretofore and hereafter set forth, it is our opinion that for Federal income
tax purposes:
1. The merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code.
2. No gain or loss will be recognized by the holders of Comstock common
stock who exchange such stock for First Security common stock pursuant
to the merger (with the exception of gain recognized upon the receipt of
cash in lieu of fractional shares (see below)).
3. The basis of the First Security common stock received by the holders
of Comstock common stock in the merger will be the same as the basis of
Comstock common stock exchanged therefor, after appropriate reduction
for the basis of fractional shares for which cash is received.
4. The holding period of the First Security common stock received by the
holders of Comstock common stock pursuant to the merger will include the
holding period of the Comstock common stock surrendered in exchange
therefor, provided that the Comstock common stock so surrendered was
held as a capital asset at the time of the exchange.
5. Any cash received by the holders of Comstock common stock in lieu of
a fractional share of First Security common stock will be treated as
having been received in redemption of the fractional share so cashed
out, and will result in taxable gain or loss. The amount of such gain or
loss will be the difference between the cash
<PAGE> 2
received and the basis of the fractional share interest surrendered in
exchange therefor. Provided the fractional share interest was held as a
capital asset at the time of redemption, such gain or loss will
constitute capital gain or loss.
6. Neither Comstock nor First Security will recognize gain or loss as a
result of the merger.
The opinions set forth above are predicated upon and are limited by the
assumptions set forth herein and are further subject to the qualifications,
assumptions, exceptions, and limitations set forth below:
(a) The opinions and conclusions set forth herein are based upon the
Federal income tax laws of the United States, including the Internal Revenue
Code, Treasury Regulations and judicial and administrative interpretations
thereof, as they exist on the date of this letter. There can be no assurance
that the legal authorities upon which our opinion is based will not be modified,
revoked, supplemented or otherwise changed, with possible retroactive effect. If
there is a material change in the legal authorities or the facts, information,
covenants, statements, representations or assumptions upon which our opinion is
based, we express no opinion. However, we undertake no obligation to reexamine
or revise our opinion in the light of any such changes.
(b) The opinions set forth herein are limited to those Federal income tax
consequences of the merger which are specifically addressed in the six numbered
paragraphs above. In particular, no opinion is expressed with respect to the tax
consequences of the merger under Internal Revenue Code Sections 55 through 59
and the Regulations thereunder (providing for alternative minimum tax). We also
express no opinion or conclusion with regard to foreign, state or local income
tax consequences.
(c) The opinions set forth herein are given only as of the date hereof. We
undertake no obligation to advise you of changes of law or fact that occur after
the date of this opinion letter.
(d) The opinions set forth herein are given solely to First Security and to
Comstock for their benefit and are given solely in connection with the merger
and shall not be deemed binding for any other purpose, and you shall not have
the right to rely thereon for any other purpose.
Very truly yours,
RAY, QUINNEY & NEBEKER
/s/
------------------------------------------
Gerald T. Snow,
A Stockholder and Director of the Firm
<PAGE> 1
EXHIBIT 23(1)
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Pre-Effective Amendment No.
1 to Registration Statement No. 333-74119 of First Security Corporation on Form
S-4 of our report dated February 20, 1998 (May 20, 1998 as to Note 20), which
report expressed an unqualified opinion and included explanatory language
describing the restatement of the financial statements to give effect to the
California State Bank acquisition, which was accounted for as a pooling of
interests, appearing in the Current Report on Form 8-K dated October 1, 1998 of
First Security Corporation and to the reference to us under the heading
"Experts" in the Prospectus/Proxy Statement, which is part of this Pre-Effective
Amendment No. 1 to Registration Statement.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 22, 1999
<PAGE> 1
EXHIBIT 23(2)
CONSENT OF
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 1 to
Registration Statement on Form S-4 of our report, dated January 11, 1999
relating to the consolidated financial statements of Comstock Bancorp and
subsidiaries. We also consent to the reference of our Firm under the caption
"Experts" in the Prospectus/Proxy Statement.
/s/ Kafoury, Armstorng & Co.
Kafoury, Armstrong & Co.
Carson City, Nevada
March 22, 1999
<PAGE> 1
EXHIBIT 99(1)
CONSENT OF HOVDE FINANCIAL, INC.
First Security Corporation
79 South Main Street
Salt Lake City, Utah 84111
Gentlemen:
We hereby consent to the inclusion of our Fairness Opinion addressed to
the Board of Directors of Comstock Bancorp in Pre-Effective Amendment No. 1 to
the Form S-4 Registration Statement of First Security Corporation to be filed in
connection with the pending acquisition of Comstock Bancorp by First Security
Corporation. We also consent to the inclusion in the such Pre-Effective
Amendment to Form S-4 Registration Statement of references to our firm.
Sincerely,
March 22, 1999 HOVDE FINANCIAL, INC.
/s/ Braddock J. LaGrua
------------------------------------
Senior Vice President
<PAGE> 1
EXHIBIT 99(2)
FORM OF COMSTOCK STOCKHOLDER LETTER, NOTICE, AND PROXY CARD
<PAGE> 2
COMSTOCK BANCORP
6275 NEIL ROAD
RENO, NEVADA 89511
MARCH 19, 1999
Dear Comstock Bancorp stockholders:
You are cordially invited to attend the Annual Meeting to be held on
April 28, 1999, at 4:00 p.m. Pacific Time in the second floor Conference Center
of Comstock Bank's Administrative Headquarters Building, 6275 Neil Road, Reno,
Nevada 89511. At the Annual Meeting, holders of common stock of Comstock Bancorp
will be asked to adopt the merger agreement dated as of January 12, 1999 by and
among First Security Corporation, its subsidiary First Security Bank of Nevada,
Comstock Bancorp and its subsidiary, Comstock Bank. The merger agreement
provides for the merger of Comstock Bancorp with and into First Security
Corporation, and for the subsequent combination of Comstock Bank into First
Security Bank of Nevada.
When the merger of Comstock Bancorp with and into First Security
Corporation becomes effective, each outstanding share of Comstock Bancorp common
stock (other than shares held by stockholders who properly perfect dissenters'
rights) will be exchanged for First Security Corporation common stock. We have
received an opinion from Hovde Financial, Inc., Comstock Bancorp's financial
advisor, that the merger consideration is fair from a financial point of view to
the holders of Comstock Bancorp common stock.
Your Board of Directors believes that the merger of Comstock Bancorp
with and into First Security Corporation is in the best interests of Comstock
Bancorp's stockholders. The Board of Directors unanimously recommends that
stockholders vote FOR adoption of the merger proposal. The terms of the proposed
merger and important information relating to Comstock Bancorp and First Security
Corporation are explained in the accompanying Prospectus/Proxy Statement. Please
give this document your prompt attention.
TO APPROVE THE PROPOSED MERGER, IT IS NECESSARY THAT THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF COMSTOCK BANCORP COMMON STOCK VOTE
IN FAVOR OF THE MERGER. AN ABSTENTION OR FAILURE TO VOTE HAS THE SAME
EFFECT AS A VOTE AGAINST THE PROPOSED MERGER.
At the Annual Meeting, Comstock Bancorp stockholders will also be asked
to consider and vote upon (i) election of nine nominees to serve as directors of
Comstock Bancorp until the 2000 Annual Meeting of Stockholders or until
completion of the merger and (ii) ratification of the Board of Directors'
appointment of Kafoury, Armstrong & Company to serve as independent auditors of
Comstock Bancorp for the year ending December 31, 1999.
We enclose a proxy for your use. The proxy relates to the proposal to
adopt the merger agreement and approve the acquisition contemplated thereby, as
well as the proposals to elect directors and ratify the appointment of
independent auditors. Please indicate your voting instructions and sign, date
and return the proxy promptly in the postage-paid envelope provided. Regardless
of whether you plan to attend the Annual Meeting in person, it is important that
you return the enclosed proxy so that your shares of Comstock Bancorp common
stock will be voted.
Thank you for your attention to this important matter.
Sincerely,
/s/ Robert N. Barone
Robert N. Barone
Chairman and Chief Executive Officer
<PAGE> 3
COMSTOCK BANCORP
6275 NEIL ROAD
RENO, NEVADA 89511
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 28, 1999
TO OUR STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Comstock
Bancorp will be held at Comstock Bank's Administrative Headquarters Building,
Second Floor Conference Center, 6275 Neil Road, Reno, Nevada 89511 on Wednesday,
April 28, 1999 at 4:00 p.m. Pacific Time for purposes of considering and voting
on the following matters:
1. Approval of Merger Agreement:
Adoption and approval of the merger agreement dated as of January 12, 1999 by
and among First Security Corporation, its subsidiary First Security Bank of
Nevada, Comstock Bancorp and its subsidiary Comstock Bank;
2. Election of Directors:
Election of nine directors to serve until the 2000 Annual Meeting of
Stockholders or until their successors are elected and qualified or the merger
contemplated by the merger agreement, if approved, is consummated;
3. Ratification of Appointment of Independent Auditors:
Ratification of the appointment of Kafoury, Armstrong & Co. as independent
auditors of Comstock Bancorp for the fiscal year ending December 31, 1999 or the
merger contemplated by the merger agreement, if approved, is consummated;
4. Other Business:
Transaction of such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
Comstock Bancorp stockholders of record as of the close of business on March 19,
1999, are entitled to notice of and to vote at the meeting and any adjournment
or postponement thereof. Any action may be taken on the foregoing proposals at
the Annual Meeting on the date specified or on any date or dates to which the
meeting may be adjourned or postponed.
Under Nevada law, stockholders of record of Comstock Bancorp on March 19, 1999
have the right to dissent from the merger contemplated by the merger agreement
and, if the merger is consummated, to receive payment in an amount equal to the
fair value of their shares of Comstock Bancorp common stock. Stockholders of
Comstock Bancorp who desire to exercise dissenters' rights must follow the
procedures set forth in '92A.300 through '92A.500 of the Nevada Revised
Statutes, a copy of which is attached hereto as Appendix C. Failure by a
stockholder to comply with the procedures set forth in '92A.300 through '92A.500
of the Nevada Revised Statutes could result in the loss of his or her
dissenters' rights.
AT ANY TIME PRIOR TO THE PROXIES BEING VOTED, PROXIES ARE REVOCABLE BY WRITTEN
NOTICE TO THE SECRETARY OF COMSTOCK BANCORP OR BY GIVING A DULY EXECUTED PROXY
BEARING A LATER DATE.
THE BOARD OF DIRECTORS OF COMSTOCK BANCORP RECOMMENDS THAT YOU VOTE
- - FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT;
- - FOR ELECTION OF THE NINE NOMINEES IDENTIFIED HEREIN AS DIRECTORS OF
COMSTOCK BANCORP; AND
- - FOR RATIFICATION OF THE BOARD OF DIRECTORS' APPOINTMENT OF INDEPENDENT
AUDITORS.
By Order of the Board of Directors,
Reno, Nevada /s/ Robert N. Barone
March 19, 1999 ROBERT N. BARONE,
Chairman, Chief Executive Officer and Treasurer
/s/ Larry A. Platz
LARRY A. PLATZ, President and Secretary
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE COMSTOCK BANCORP THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES. A SELF-ADDRESSED, PREPAID ENVELOPE IS ENCLOSED
FOR YOUR CONVENIENCE.
<PAGE> 4
PROXY
COMSTOCK BANCORP
1999 ANNUAL MEETING OF STOCKHOLDERS
APRIL 28, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints each of Messrs. Robert N. Barone and Larry A.
Platz (together, the "Proxies"), each with the power to appoint his or her
substitute, as proxies of the undersigned, and hereby authorizes them to
represent and to vote all the shares of common stock, of Comstock Bancorp held
by the undersigned on March 19, 1999, at the Annual Meeting of Stockholders of
Comstock Bancorp to be held at the main office of Comstock Bank, 6275 Neil
Road, Reno, Nevada at 4:00 p.m. Pacific Time on April 28, 1999 and any
adjournment thereof, as follows:
<TABLE>
<S> <C> <C>
1. A proposal to adopt and approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization dated as of January 12, 1999 by and among First [ ] [ ] [ ]
Security Corporation, First Security Bank of Nevada, Comstock Bancorp
and Comstock Bank, pursuant to which Comstock Bancorp will be merged
with and into First Security Corporation.
WITHOLD
2. A proposal to elect the nominees named herein to serve as WITHHOLD FOR AUTHORITY
directors until the 2000 Annual Meeting of Stockholders, or FOR [ ] [ ]
AUTHORITY until their successors are elected and qualified.
NOMINEES:
Edward E. Allison Robert N. Barone
Stephen C. Benna John A. Coombs
Michael W. Dyer Mervyn J. Matorian
Samuel P. McMullen Larry A. Platz
Ronald R. Zideck
To withhold authority to vote for any individual nominee, print the
name(s) here:
-----------------------------------------------------------------------
3. Ratification of the Board of Directors' appointment of Kafoury, FOR FOR AGAINST ABSTAIN
AGAINST ABSTAIN Armstrong & Company to serve as independent auditors of [ ] [ ] [ ]
Comstock Bancorp for the year ending December 31, 1999.
4. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting and any adjournment
thereof.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3.
YOUR VOTE IS IMPORTANT. FAILURE TO VOTE IN PERSON OR BY PROXY IS
EQUIVALENT TO A VOTE AGAINST THE PROPOSALS BEING SUBMITTED TO STOCKHOLDERS FOR
THEIR CONSIDERATION AT THE MEETING.
The undersigned acknowledges receipt prior to the execution of this
proxy of a Notice of 1999 Annual Meeting of Stockholders, a Prospectus/Proxy
Statement dated March 24, 1999 and the Annual Report for the year ended December
31, 1998 of Comstock Bancorp, including financial statements and an independent
auditor's opinion thereon.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on reverse side)
<PAGE> 5
(Continued from other side)
Should the undersigned be present and elect to vote at the 1999 Annual Meeting
of Stockholders or at any adjournment thereof and after notification to the
Secretary of Comstock Bancorp at the meeting of the stockholder's decision to
terminate this proxy, then the power of said attorneys and proxies shall be
deemed terminated and of no further force and effect.
Dated: , 1999 Please sign exactly as name appears below.
When shares are held by joint tenants, both
must sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such.
If a corporation, please sign in full
corporate name by the president or other
authorized officer. If a partnership,
please sign in partnership name by any
authorized person.
Signature
Signature, if held jointly
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
