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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1999.
or
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission file number 1-13819
MEGABANK FINANCIAL CORPORATION
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(Name of small business issuer in its charter)
COLORADO 84-0949755
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8100 E. ARAPAHOE ROAD, SUITE 214, ENGLEWOOD, COLORADO 80112
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(Address of principal executive offices) (Zip code)
(303) 740-2265
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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<S> <C>
Cumulative trust preferred securities American Stock Exchange
</TABLE>
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to the Form 10-KSB: [X]
The issuer's revenues for its most recent fiscal year: $33,149,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates based on the closing price of the common stock on The Nasdaq
Stock Market(R) as of February 15, 2000 was $25,117,528.
At February 15, 2000, there were 7,769,709 shares of the registrant's common
stock outstanding.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
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MEGABANK FINANCIAL CORPORATION
FORM 10-KSB
INDEX
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<S> <C> <C>
ITEM.1 BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 16
FORWARD LOOKING STATEMENT 16
ITEM 7. FINANCIAL STATEMENTS 28
INDEPENDENT AUDITORS' REPORT 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCUSSION 56
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 56
ITEM 10. EXECUTIVE COMPENSATION 57
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 59
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 60
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 63
SIGNATURES 64
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
MegaBank Financial Corporation (the "Company") was founded in 1984 by
its Chairman and Chief Executive Officer, Thomas R. Kowalski, with the objective
of building a banking franchise in the Denver, Colorado metropolitan area that
would deliver a broad based package of products and services to businesses and
individuals. The Company's banking subsidiary, MegaBank (the "Bank") was
organized in 1983. Since the advent of branch banking in Colorado in 1993, the
Bank has opened eight additional banking locations throughout the Denver area,
for a total of nine locations.
Since inception, the Bank has specialized its lending practice in the
residential construction industry. The Company's Chairman has extensive
experience in the home building industry and has expanded the Bank's lending
practice to date such that the Bank is a leading originator of land development
and residential construction loans to small-and medium-sized homebuilders.
Currently, the Bank can finance a builder or developer from the acquisition and
development loan process, including assistance with special district financing,
through the construction loan phase. During the three years ended December 31,
1999, the Bank originated over $925 million in total loans. While some of these
loans remain on the Company's balance sheet, most have been repaid, refinanced
or participated out to other financial institutions. The Bank intends to
continue to focus on its niche of residential construction lending in addition
to providing a complete array of products and services for its customers. High
quality customer service has been a fundamental tenet of the Bank's operating
strategy since its inception. The Bank intends to continue to pursue its
successful strategies and concentrate on increasing its market share through
referrals from existing customers and the implementation of advertising and
marketing strategies targeted at the communities in which its branches are
located.
The Company has achieved significant growth measured from the end of
1997. Total assets have increased to $328 million as of December 31, 1999 from
$231 million and $158 million as of December 31, 1998, December 31, 1997,
respectively. The Company has maintained above average profitability. During the
same time period, net income grew to $6.1 million for the year ended December
31, 1999 from $3.8 million and $2.8 million for the years ended December 31,
1998 and 1997, respectively. For the year ended December 31, 1999, return on
average assets equaled 2.21% while return on average equity equaled 19.40%.
In February 1998, MB Capital I, a Delaware trust subsidiary of the
Company, completed an offering of 1,200,000 shares totaling $12.0 million of
fixed-rate 8.75% Cumulative Trust Preferred Securities ("Preferred Securities"),
which are guaranteed by the Company. MB Capital I invested the total proceeds it
received in 8.75% Junior Subordinated Deferrable Interest Debentures issued by
the Company. Interest paid on the Debentures will be distributed to the holders
of the Preferred Securities. As a result, under current tax law, distributions
to the holders of the Preferred Securities are recorded as interest expense in
the consolidated statements of income. These Debentures are unsecured and rank
junior and are subordinate in right of payment to all senior debt of the
Company. See note H to notes to consolidated financial statements.
In September 1998, the Company changed its status to a unitary thrift
holding company within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA"). The Company is registered with the Office of Thrift
Supervision ("OTS") and is subject to OTS regulations, examinations, supervision
and reporting requirements. Also, in September 1998, the Bank converted its
charter from a Colorado state-chartered commercial bank to a federal savings
bank. Management believes that the flexibilities and opportunities with a thrift
charter complement the Bank's current lending practices.
In November 1998, the Company completed a public offering of 1,200,000
shares of its common stock at $11.00 per share. Net proceeds were approximately
$12.0 million. Proceeds were used to provide capital to the Bank, for branch
expansion, and for working capital.
In February, the Company formed a wholly owned subsidiary, MB Title
Company. On April 5, 1999, the Company purchased Empire Title & Escrow
Corporation and subsequently merged it with MB Title Company. The consideration
paid to the stockholders of Empire Title & Escrow Corporation consisted of the
Company's common stock and cash. MB Title Company then changed its name to
Empire Title & Escrow Corporation ("Empire"). The purchase price for Empire
included the potential for additional consideration based upon the
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future performance of Empire during the three years following the purchase.
Empire provides a full range of title insurance products and services to the
real estate community, including homebuilders and real estate firms. Management
expects that this acquisition will provide Empire the resources necessary to
accelerate its expansion plans while continuing to provide services to the
Colorado real estate community. This acquisition also allows the Company to
offer a broader array of financial products and services to its customers.
Empire operates as a wholly owned subsidiary of the Company. Accordingly, the
accounts of Empire are included in the Company's consolidated financial
statements.
On November 4, 1999, the Company signed a definitive agreement to merge
with Compass Bancshares, Inc., ("Compass") an $18 billion bank holding company
headquartered in Birmingham, Alabama. Compass' acquisition strategy has been
geographic repositioning by targeting attractive high-growth markets with
diverse economies. The acquisition is scheduled for completion the second
quarter of the year 2000. If the merger is completed, Company shareholders will
receive a total of 3,370,000 shares of Compass common stock. Each share of
Company common stock will be exchanged for approximately 0.426 shares of Compass
common stock.
As of December 31, 1999, the Company and its subsidiaries had 206
employees of which 174 are full-time employees. Management considers its
relationship with the employees to be good.
STRATEGY
GROWTH. The Bank's goal in continuing its expansion is to maintain a
profitable, customer-focused financial institution. To this end, management
believes that the Company's existing capital structure, management, data and
operational systems should be enhanced by the proposed merger with Compass,
allowing for further growth in asset size, revenues and capital. The merger with
Compass will allow the Company to increase its lending limits, thereby enabling
it to continue to serve the needs of its customers.
The Colorado banking market is dominated by large national and regional
financial institutions. This dominance was achieved through the purchase of
Colorado-based holding companies over the past several years, which resulted in
a significant consolidation of the Colorado banking industry. Management
believes that small and medium size businesses often are not of sufficient size
to be of interest to these large banks, particularly as it relates to
residential construction lending, and that individuals frequently have
difficulty in finding personalized banking services. Many of these customers
seek a banking relationship with a significantly more service-oriented community
banking organization such as the Bank. Through the Bank's primary emphasis on
customer service, management's experience and the Company's product line, the
Company will continue to focus on attracting these customers in achieving
internal growth. The Compass philosophy of customer service and providing
financial services to small and medium sized businesses closely mirrors that of
the Company.
The Bank's market area is the Denver metropolitan area, which is the
most densely populated area in the Rocky Mountain region. Total population is
approximately 2.2 million. Employment in the area is diversified across the
manufacturing, construction, financial services, tourism, transportation,
technology, cable television, retail trade, services and government sectors.
OPERATIONS AND MARKETING. Management believes that, in meeting the
needs of consumers and small to medium sized businesses in its market area, the
Bank's first and foremost strategy is to provide excellent customer service.
This strategy is emphasized above all others of the Company, from top management
down to each bank teller. The Bank's operational systems have been designed to
complement customer service. Management believes the Company's banking locations
are small enough to facilitate personalized services and decision-making, yet of
sufficient size to meet most customers' needs. It is expected that this strategy
will be continued by Compass.
The Bank seeks to maximize operational and support efficiencies
consistent with maintaining high quality customer service. Various management
and administrative functions are consolidated, including consumer credit
administration and lending, investment management and accounting, enabling
branch personnel to better focus on customer service and sales.
The Bank offers a wide range of consumer deposit products including
regular checking, checking with interest, money market accounts, regular
savings, certificates of deposit, and IRAs. The Bank also offers additional
access to its customers with an ATM/Visa Debit Card. The Bank's consumer loan
products are
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customized to meet the needs and requests of its customers. The Bank also offers
installment loans, including auto, recreational vehicle, classic car and other
secured and unsecured loans sourced directly by its branches and from indirect
sources. See "Loans" below for a discussion of products that the Bank provides
to commercial accounts.
The Company is able to provide additional services to its customers
through Empire. Empire provides a full range of title insurance products and
services to the real estate community, including homebuilders and real estate
firms. The Company has provided Empire the resources necessary to accelerate its
expansion plans while continuing to provide services to the Colorado real estate
community.
LOANS
The Company has the ability to provide a broad range of commercial and
retail lending services. However, the vast majority of the Bank's loans are
residential construction loans. The Company follows a uniform credit policy
which sets forth underwriting and loan administration criteria, including levels
of loan commitment, loan types, credit criteria, concentration limits, loan
administration, loan review and grading and related matters. In addition, the
Company provides ongoing loan officer training and review, obtains outside
independent loan reviews, operates a centralized processing, underwriting and
servicing center for consumer loans and manages problem assets centrally. At
December 31, 1999, substantially all loans outstanding were to customers within
the Company's market area. For a discussion of risks associated with the
Company's various types of loans, see "Management's Discussion and Analysis or
Plan of Operation -- Financial Condition -- Loan Portfolio Composition."
LAND DEVELOPMENT AND CONSTRUCTION LOANS. Land development and
construction loans include real estate construction loans and land loans. Real
estate construction loans are principally made to builders to construct single
family residences. These loans typically have maturities of six to 12 months and
adjustable interest rates, and are subject to origination fees. Terms may vary
depending upon many factors, including, but are not limited to, location, type
of project and financial condition of the builder.
Land loans consist of loans made on raw land for the acquisition and/or
development of real property. These loans typically have maturities of 12 to 18
months and variable interest rates. Terms may vary depending upon many factors,
including adverse economic conditions in the home building industry, location,
type of project and financial condition of the builder.
COMMERCIAL LOANS. Commercial loans consist primarily of loans to
businesses for various purposes, including revolving lines of credit, equipment
financing, and commercial real estate lending. The commercial loans secured by
real estate are typically 20 to 25 year amortizing loans, callable in three to
five years, with fixed interest rates. The loans secured by collateral other
than real estate generally mature within one year, have adjustable interest
rates and are secured by inventory, accounts receivable or other commercial
assets. Revolving lines of credit generally are for business purposes, generally
mature annually and have adjustable interest rates.
INSTALLMENT LOANS. Installment loans to individuals that are not
secured by real estate generally have terms of two to five years and bear
interest at fixed rates. These loans usually are secured by motor vehicles,
equipment, receivables, inventory, investment securities or other personal
assets, and in some instances are unsecured.
The Company maintains a loan committee approach to commercial lending,
which it believes yields positive results in both responsiveness to customer
needs and asset quality. The loan committee usually meets twice per week to
review and discuss new loan requests.
Interest rates charged on loans vary with the degree of risk, maturity,
underwriting and servicing costs, loan amount, and extent of other banking
relationships maintained with customers, and are further subject to competitive
pressures, money market rates, availability of funds and government regulations.
Most of the loans in the Company's portfolio at December 31, 1999 had interest
rates that float with the prime rate.
In the ordinary course of business, the Company issues letters of
credit. See note K of Notes to consolidated financial statements. The Company
applies the same credit standards to these commitments as it
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uses in all its lending activities and has included these commitments in its
lending risk evaluations. The Company's exposure to credit loss under letters of
credit is represented by the amount of these commitments. Under applicable
federal and state law, permissible loans to one borrower were limited to an
aggregate of approximately $5.6 million for the Company at December 31, 1999. As
of February 15, 2000, although the Bank's legal limit to one borrower was
approximately $5.8 million, the Bank elected to maintain its in-house limit to
one borrower at $5.0 million.
COMPETITION
The Company faces a high degree of competition. In its marketplace,
there are numerous small banks and several larger national and regional
financial banking groups. The Company also competes with insurance companies,
savings and loan associations, credit unions, leasing companies, mortgage
companies, and other financial service providers. Many of the banks and other
financial institutions with which the Company competes have capital resources
and legal lending limits substantially in excess of those of the Company.
The Company competes for loans and deposits principally based on the
range and quality of services provided, interest rates, loan fees and office
locations. The Company actively solicits deposit customers and competes by
offering them high quality customer service and a complete product line. Over
the past few years, competition has increased as a result of changes in Colorado
banking laws that permit statewide branching and allow out-of-state holding
companies to acquire Colorado-based financial institutions. The Company believes
its customer service and banking strategy enable it to compete in its market
area.
The Company expects the acquisition by Compass to provide a greater
degree of competitiveness with the region's financial institutions. After the
acquisition is complete, the Bank will have larger lending limits enabling the
Bank to more than adequately provide lending limits comparable to the needs of
our customers. The Bank will also have access to a wider range of consumer
products and services, including investment products, from Compass that it
currently is unable to offer its customers.
Empire faces intense competition in its title insurance business.
Empire competes with many other title companies in Colorado, some of whom have
greater financial and technical resources than Empire. Management believes that
Empire is able to compete in its area of operations by providing reliable, cost
effective services.
SUPERVISION AND REGULATION
GENERAL
The Bank is chartered under federal law by the Office of Thrift
Supervision ("OTS"). It is a member of the Federal Home Loan Bank ("FHLB")
System, and its deposit accounts are insured up to legal limits by the Federal
Deposit Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF").
The OTS is charged with overseeing and regulating the Bank's activities and
monitoring its financial condition. This regulatory framework sets parameters
for the Bank's activities and operations and grants the OTS extensive discretion
with regard to its supervisory and enforcement powers and examination policies.
The Bank files periodic reports with the OTS concerning its activities and
financial condition, must obtain OTS approval prior to entering into certain
transactions or initiating new activities, and is subject to periodic
examination by the OTS to evaluate the Bank's compliance with various regulatory
requirements.
The Company is a unitary savings and loan holding company and, like the
Bank, is subject to regulation by the OTS. As part of this regulation, the
Company is required to file certain reports with, and is subject to periodic
examination by, the OTS.
FINANCIAL MODERNIZATION LEGISLATION
The Gramm-Leach-Bliley Act ("GLBA"), enacted on November 12, 1999,
expands the bank holding company act framework to permit bank holding companies
with subsidiary banks meeting certain capital and management requirements to
elect to become "financial holding companies". Beginning March 2000, financial
holding companies may engage in a full range of financial activities, including
not only banking, insurance and securities activities, but also merchant banking
and additional activities determined to be "financial in nature". The
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GLBA also provides that the list of permissible activities will be expanded as
necessary for a financial holding company to keep abreast of competitive and
technological change.
Although it preserves the Federal Reserve as the umbrella supervisor of
financial holding companies, the GLBA adopts an administrative approach to
regulation that defers to the actions and paperwork requirements of the
"functional" regulators of insurers, broker-dealers, investment companies and
banks. Thus, the various state and federal regulators of financial holding
company's operating subsidiaries would retain their jurisdiction and authority
over such operating entities. As the umbrella supervisor, however, the Federal
Reserve has the potential to affect the operations and activities of financial
holding companies' subsidiaries through its power over the financial holding
company parent. In addition, the GLBA contains numerous trigger points related
to legal noncompliance and other serious problems affecting bank affiliates that
could lead to direct Federal Reserve involvement and to the possible exercise of
remedial authority affecting both financial holding companies and their
affiliated operating companies. The GLBA contains restrictions on financial
institutions regarding the sharing of customer nonpublic personal information
with non-affiliated third parties unless the customer has had an opportunity to
opt out of the disclosure. The act also imposes periodic disclosure requirements
concerning a financial institution's policies and practices regarding data
sharing with affiliated and non-afiliated parties. As a unitary thrift holding
company, the Company will not be directly affected by GLBA at this time.
However, future legislation, regulations or activities of the Company could
cause it to become subject to the foregoing provisions.
FEDERAL SAVINGS ASSOCIATION REGULATION
BUSINESS ACTIVITIES. The activities of savings associations are
governed by the Home Owners' Loan Act of 1933, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDIC Act"). The HOLA
and the FDIC Act were amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FIRREA was enacted for the purpose of
resolving problem savings associations, establishing a new thrift insurance
fund, reorganizing the regulatory structure applicable to savings associations,
and imposing bank-like standards on savings associations. FDICIA, among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional operational standards and restrictions
regarding safety and soundness. FIRREA and FDICIA both contain provisions
affecting numerous aspects of the operations and regulations of
federally-insured savings associations and empowers the OTS and the FDIC, among
other agencies, to promulgate regulations implementing its provisions.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to
satisfy a qualified thrift lender test ("QTL" test) by (i) maintaining 65% of
their portfolio assets (defined as all assets minus intangible assets, property
used by the association in conducting its business and liquid assets equal to
20% of total assets) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-backed
securities, along with small business, credit card, agriculture and education
loans) on a monthly basis in nine out of every twelve months, or (ii)
maintaining a similar-but different 60% asset test under the Internal Revenue
Code.
If a federal savings association fails the QTL test, it must convert to
a bank or conform its activities to those permitted to a national bank (but
which activities also are not inconsistent with the powers permitted to a
savings association), particularly as they relate to investments, branching and
dividends, and it also becomes ineligible for new advances from any Federal Home
Loan Bank. A federal savings association that fails the QTL test may requalify.
As of December 31, 1999, the Bank satisfied the QTL test.
BRANCHING. A federally chartered savings association, like the Bank,
can establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by a
federal savings association.
COMMERCIAL AND CONSUMER LENDING AUTHORITY. Federal savings associations
may lend up to 20% of their assets in commercial business loans (i.e., secured
or unsecured loans for commercial, corporate, business or agricultural
purposes), provided that amounts in excess of 10% may be used only for small
business loans and, subject to OTS approval for a higher amount, up to 400% of
their capital in commercial real estate loans. In addition, federal savings
associations are permitted to make consumer loans (i.e., loans for personal,
family or
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household purposes) in an amount not to exceed 35% of their assets. Credit card
and educational loans are exempted from any percentage of asset limitations
applicable to consumer loans.
LOANS TO ONE BORROWER. Savings associations are generally subject to
the national bank limits regarding loans to one borrower, meaning they may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of the association's unimpaired capital and surplus, where the borrowing
is not fully secured by readily-marketable collateral. An additional amount may
be lent, equal to 10% of the association's unimpaired capital and surplus, if
such additional borrowing is secured by readily-marketable collateral at least
equal to the amount of such additional funds. At December 31, 1999, the Bank had
no outstanding loans or commitments that exceeded the loans to one borrower
limit at the time made or committed.
ENFORCEMENT. The OTS has primary enforcement responsibility over
savings associations and has the authority to bring enforcement action against
all "institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured association. Civil
penalties cover a wide range of violations and actions. Criminal penalties for
most financial association crimes include fines and imprisonment. In addition,
regulators have substantial discretion to impose enforcement action on an
association that fails to comply with its regulatory requirements, particularly
with respect to amounts of capital. Possible enforcement action ranges from
requiring the preparation of a capital plan or imposition of a capital directive
to receivership, conservatorship or the termination of deposit insurance. Under
the FDIC Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action be taken with respect to a particular savings association. If
action is not taken by the Director, the FDIC has authority to take enforcement
action under certain circumstances.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS In the past, the
general assessment paid on a semi-annual basis has been computed based upon the
savings association's total assets, including consolidated subsidiaries, as
reported in the association's latest quarterly thrift financial report. The OTS
announced in August 1998 that it intends to propose a regulation revising its
assessment schedule, so that assessments will be based on the asset size and
financial condition of the institution and the complexity of its operations.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 regional FHLB's. The FHLB provides a central credit
facility primarily for member associations. The Bank, as a member of the
FHLB-Topeka, is required to acquire and hold shares of capital stock in that
FHLB in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20th of its advances from the FHLB-Topeka, whichever is greater.
The Bank is in compliance with this requirement, with an investment in
FHLB-Topeka stock at December 31, 1999 of $943,500. FHLB advances must be
secured by specified types of collateral and may be obtained only for the
purpose of purchasing or funding new residential housing finance assets.
OTS CAPITAL REQUIREMENTS. The OTS capital regulations require savings
associations to meet three capital standards: a 1.5% tangible capital standard,
a 4% leverage ratio (or core capital ratio) and an 8% risk-based capital
standard.
Tangible capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
earnings, certain non-withdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in equity accounts of fully
consolidated subsidiaries, less (i) intangible assets (other than purchased
credit card relationships and core deposit intangibles), (ii) non-mortgage
servicing assets, (iii) purchased credit card relationships, (iv) the amount of
mortgage servicing assets in excess of the lesser of 90 percent of their fair
market value, determined pursuant to a special OTS valuation formula, or 100
percent of their remaining unamortized book value, subject to certain aggregate
limits applicable to inclusion of servicing assets in tangible capital, and (v)
certain equity and debt investments in "non-qualifying subsidiaries"
(subsidiaries engaged in activities not permissible for a national bank). For
purposes of determining capital under OTS capital standards, the term
"intangible assets" means those assets considered to be intangible under
generally accepted accounting principles, such as goodwill, core deposit
premiums, purchased credit card relationships and favorable leaseholds.
Servicing assets are not intangible assets, and interest-only strips receivable
and other non-security financial instruments are not intangible assets under
this definition.
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Core capital (or leverage) ratio is the ratio of core capital to
adjusted tangible assets. Core capital is defined as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries, certain non-withdrawable accounts and pledged deposits of mutual
savings associations, certain amounts of goodwill resulting from prior
regulatory accounting practices, less (i) intangible assets (other than
purchased credit card relationships and core deposit intangibles), (ii) the
amount of servicing assets in excess of the lesser of 90 percent of their fair
market value, determined pursuant to a special OTS valuation formula, or 100
percent of their remaining unamortized book value, subject to certain aggregate
limits applicable to inclusion of servicing assets and sub-limits applicable to
inclusion of non-mortgage-related servicing assets in core capital, and (iii)
certain equity and debt investments in non-qualifying subsidiaries, such as the
proposed real estate investment and title subsidiaries.
The OTS' risk-based capital standard requires that savings associations
maintain a ratio of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In calculating total
capital, a savings association must deduct reciprocal holdings of depository
institution capital instruments, all equity investments and that portion of land
loans and nonresidential construction loans in excess of 80% loan-to-value ratio
and its interest rate risk component (as discussed below), in addition to the
assets that must be deducted in calculating core capital. In determining the
amount of risk-weighted assets, all assets, including certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. Also, savings associations with "above normal" interest rate risk
exposure would be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. Savings associations with
assets of less than $300 million and risk-based capital ratios in excess of 12%
are not subject to the interest rate risk component. As of December 31, 1999,
the Bank was not subject to interest rate exposure for purposes of calculating
its risk-based capital requirements.
The components of core capital are equivalent to those discussed above
under the 4% leverage standard. The components of supplementary capital include
cumulative preferred stock, long-term perpetual preferred stock, mutual capital
certificates, certain non-withdrawable accounts and pledged deposits, certain
net worth certificates, income capital certificates, certain perpetual
subordinated debt, mandatory convertible subordinated debt, certain
intermediate-term preferred stock, certain mandatorily redeemable preferred
stock and allowance for loan and lease losses (up to 1.25% of risk-weighted
assets). Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25%. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. The table below sets
for the Bank's capital ratios at December 31, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
RATIO ACTUAL MINIMUM REQUIRED
----- ------ ----------------
<S> <C> <C>
Tangible capital 10.64% 1.50%
Core (Tier l) capital 10.64% 4.00%
Risk-based capital 12.90% 8.00%
</TABLE>
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (e.g., cash, accrued interest on liquid assets, certain time
deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to not less
than a specified percentage of the average daily balance of its net withdrawal
deposit accounts plus short-term borrowings. This liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member associations;
this requirement is currently 4%.
INSURANCE OF DEPOSIT ACCOUNTS AND DEPOSIT INSURANCE PREMIUMS. FDICFA
required the FDIC to establish a risk-based assessment system for insured
depository associations that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. Under the
rule, the FDIC assigns an association to one of three capital categories
consisting of (i) "well capitalized," (ii) "adequately capitalized" or (iii)
"undercapitalized," and one of three supervisory subcategories consisting of
Group "A" (for financially solid institutions with only a few minor weaknesses),
Group "B" (for those institutions with weaknesses which, if uncorrected could
cause substantial deterioration of the institution and increase the risk to the
deposit insurance
-9-
<PAGE> 10
fund) and Group "C" (for those institutions with a substantial probability of
loss to the fund absent effective corrective action). The supervisory subgroup
to which an association is assigned is based on a supervisory evaluation
provided to the FDIC by the association's primary federal regulator and
information that the FDIC determines to be relevant to the association's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the association's state
supervisor). An association's assessment rate depends on the capital category
and supervisory category to which it is assigned. There are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessment rates range from 23
basis points for an association in the highest category (i.e., well-capitalized
and healthy) to 31 basis points for an association in the lowest category (i.e.,
undercapitalized and of substantial supervisory concern).
Although the Bank converted its charter from a Colorado state-chartered
commercial bank to a federal savings bank, the Bank has continued as a member of
the Bank Insurance Fund ("BIF"), rather than the Savings Association Insurance
Fund ("SAIF").
On September 30, 1996, President Clinton signed the Deposit Insurance
Funds Act of 1996 ("DIFA") that was part of the omnibus spending bill enacted by
Congress at the end of its 1996 session. DIFA mandated, among other things, the
merger of the SAIF and BIF, effective January 1, 1999, but only if no insured
depository institution is a savings association on that date. The combined
deposit insurance fund, if the funds are merged, will be called the "Deposit
Insurance Fund," or "DIF."
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain supervisory
actions against undercapitalized associations, the severity of which depends
upon the association's degree of undercapitalization. Generally, subject to a
narrow exception, FDICIA requires the OTS to appoint a receiver or conservator
for an association that is critically undercapitalized. FDICIA authorizes the
OTS to specify the ratio of tangible equity to assets at which an association
becomes critically undercapitalized and requires that ratio be no less than 2%
of assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8% or has a Tier I
risk-based capital ratio that is less than 4% or has a leverage ratio that is
less than 4% or has a leverage ratio less than 3% if the savings association is
rated composite 1 under the composite numerical rating assigned to the
association by the OTS under the Uniform Financial Institutions Rating System or
an equivalent rating under a comparable rating system adopted by the OTS in the
most recent rating of which the association has been notified in writing (the
"UFIRS"). A savings association that has risk-based capital less than 6% or a
Tier I risk-based capital ratio that is less than 3% or a leverage ratio that is
less than 3% would be considered to be "significantly undercapitalized." A
savings association that has a tangible equity to total assets ratio equal to or
less than 2% would be deemed to be "critically undercapitalized." Generally, a
capital restoration plan must be filed with the OTS within 45 days of the date
an association receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. In addition, numerous mandatory
supervisory actions become immediately applicable to the association, including,
but not limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. In addition, the OTS could issue a
capital directive to the savings association that includes additional
discretionary restrictions on the savings association.
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another association in a cash-out merger and other distributions
charged against capital. The regulations establish three tiers of associations.
An association that exceeds all fully phased-in capital requirements before and
after the proposed capital distribution ("Tier 1 Association") and has not been
advised by the OTS that it is in need of more than normal supervision, could,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year up to the higher of (a) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year or (b) 75%
of its net reserve over the most recent four-quarter period. Any additional
capital distributions would require prior regulatory approval. In computing the
association's permissible percentage of capital distributions, previous
distributions made during the prior four-quarter period must be included. As of
December 31, 1999, the Bank met the requirements of a Tier I Association. In the
event the Bank's capital fell below its fully phased-in requirement
-10-
<PAGE> 11
or the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any association, which
would otherwise be permitted by regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
COMMUNITY REINVESTMENT. The OTS, the FDIC, the Federal Reserve Board
and the OCC have jointly issued a final rule (the "Final Rule") under the
Community Reinvestment Act (the "CRA"). The Final Rule eliminates the existing
CRA regulation's 12 assessment factors and substitutes a performance based
evaluation system. The Final Rule was phased in over a period of time and became
fully effective by July 1, 1997. Under the Final Rule, an institution's
performance in meeting the credit needs of its entire community, including
low- and moderate-income areas, as required by the CRA, is generally evaluated
under three tests: the "lending test," the "investment test," and the "service
test."
An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million that
is a subsidiary of a holding company with assets of less than $1 billion, will
be evaluated under a streamlined assessment method based primarily on it lending
record. As of December 31, 1999, the Company's assets were approximately $328
million, thereby meeting the streamlined assessment method. The streamlined test
considers an institution's loan-to-deposit ratio adjusted for seasonal variation
and special lending activities, its percentage of loans and other lending
related activities in the assessment area its record of lending to borrowers of
different income levels and businesses and farms of different sizes the
geographic distribution of its loans, and its record of taking action, if
warranted, in response to written complaints. In lieu of being evaluated under
the three assessment tests or the streamlined test, a financial institution can
adopt a strategic plan and elect to be evaluated on the basis of achieving the
goals and benchmarks outlined in the strategic plan.
Failure to comply with the CRA's regulations could jeopardize future
growth plans of the Bank. The Bank is currently in compliance with the CRA.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the Company
and its non-savings-association subsidiaries or to make loans to certain
insiders, is limited by the Federal Reserve Act ("FRA"). The FRA limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in the FRA and the
purchase of low quality assets from affiliates is generally prohibited. Also,
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with non-affiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards that in good
faith would be offered to or would apply to non-affiliated companies.
Notwithstanding the above, FIRREA prohibits any savings association from lending
to any affiliate that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act ("BHC
Act"). Further, no savings association may purchase the securities of any
affiliate other than a subsidiary.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards. The
OTS regulation requires each savings association to establish and maintain
written internal real estate lending standards consistent with safe and sound
banking practices and appropriate to the size of the institution and the nature
and scope of its real estate lending activities. The policy must also be
consistent with accompanying OTS guidelines, which include maximum loan-to-value
ratios for the following types of real estate loans: raw land (65%), land
development (75%), nonresidential construction (80%), improved property (85%)
and one- to four-family residential construction (85%). Owner-occupied one- to
four-family mortgage loans and home equity loans do not have maximum
loan-to-value ratio limits, but those with a loan-to-value ratio at origination
of 90% or greater are to be backed by private mortgage insurance or readily
marketable collateral. Institutions are also permitted to make a limited amount
of loans that do not conform to the proposed loan-to-value limitations so long
as such exceptions are appropriately reviewed and justified. The guidelines also
list a number of lending situations in which exceptions to the loan-to-value
standard are justified.
-11-
<PAGE> 12
STANDARDS FOR SAFETY AND SOUNDNESS. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and other
benefits and asset quality and earnings (the "Guidelines"). The agencies expect
to request a compliance plan from an institution whose failure to meet one or
more of the standards is of such severity that it could threaten the safe and
sound operation of the institution. FDIC regulations enacted under FDICIA also
require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the institution's
internal control structure and procedures and compliance with laws and
regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
PROPOSED RULES GOVERNING FINANCIAL DERIVATIVES. In April 1998, the OTS
published a Notice of Proposed Rulemaking that, if adopted in final form, would
apply to all financial derivatives and would replace Its regulations on forward
commitments, futures transactions, and financial options transactions. The
proposal would continue to permit a savings association to engage in
transactions involving financial derivatives to the extent that these
transactions are authorized under applicable law and are otherwise safe and
sound. In addition, the proposed rule would describe the responsibilities of a
savings association's board of directors and management with respect to
financial derivatives. The rule defines a financial derivative as a financial
contract whose value depends on the value of one or more underlying assets,
indices, or reference rates. The most common types of financial derivatives are
futures, forward commitments, options, and swaps. A mortgage derivative
security, such as a collateralized mortgage obligation or a real estate mortgage
investment conduit, is not a financial derivative under the proposed rule. As of
December 31, 1999, the Bank did not own any financial derivatives as defined
under the proposed rule.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts'), non-personal time deposits
(those which are transferable or held by a person other than a natural person)
with an original maturity of less than one and one-half years and certain money
market accounts. The Federal Reserve Board regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$47.8 million or less (subject to adjustment by the Federal Reserve Board) and
an initial reserve of $1.4 million plus 10% against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustments by the Federal. Reserve
Board,) are exempted from the reserve requirements. As of December 31, 1999, the
Bank is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Bank's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings association.
-12-
<PAGE> 13
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control of,
or acquiring by merger or purchase of assets, another savings association or
holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or (iii) acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings associations, the OTS must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary continues
to satisfy the QTL test. Upon any acquisition by the Company of a savings
association or a state-chartered BIF-insured savings bank meeting the QTL test
that is deemed to be a savings institution by OTS, except for a supervisory
acquisition, the Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and would
be subject to extensive limitations on the types of business activities in which
it could engage. The HOLA, as amended by the FIRREA, limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c) (8) of the BHC Act, subject to the prior approval of the OTS,
and activities in which multiple savings and loan holding companies were
authorized by regulation to engage in on March 5, 1987. Such activities include,
among others, mortgage banking, consumer finance, operation of a trust company,
and certain types of securities brokerage.
REGULATION OF EMPIRE
Empire is subject to regulation under the Colorado Insurance Code,
which governs title insurance companies doing business within Colorado and
comprehensive regulation by the Colorado Division of Insurance. The statute
provides that title insurance rates shall be regulated in the manner provided
for in the regulation of casualty and in surety insurance. The statute requires
title insurance not be written unless a title insurance company has conducted a
reasonable examination of title and has caused determination of insurability of
title in accordance with sound underwriting practices for title insurance
companies. A title insurance company shall keep records to evidence
determination of insurability. The statute provides that a title insurance
company in Colorado may not guaranty, underwrite or issue any kind of insurance
other than title insurance, give or receive remuneration in any form for the
referral of title insurance business nor receive or attempt to receive any
charge in connection with title insurance if the charge is not for services
actually rendered. The statute requires reserves to be maintained by title
insurance companies, which must constitute the unearned portions of premiums due
or received, and be carried as a reserve liability of title insurance companies.
Title insurance companies in Colorado must comply with investment requirements
for other insurance companies but may also invest in a title plant, which
consists generally of title abstracts, title briefs, copies of the conveyances
and other related documents. The statute also requires that insurance producers
who sell title insurance must be licensed with the Colorado Division of
Insurance and title companies must comply with detailed selling practice
regulations. Financial statements of title insurance companies are also required
to be filed with the Colorado Division of Insurance. Because this regulation may
be considered comprehensive, Empire has spent and expects to devote significant
efforts in complying with the regulation.
-13-
<PAGE> 14
ITEM 2. DESCRIPTION OF PROPERTY
The principal offices of both the Company and the Bank are located in a
three-story building at 8100 East Arapahoe Road, Englewood, Colorado, and its
telephone number is (303) 740-2265. The Bank maintains eight other full service
banking facilities in the Denver metropolitan area. The Bank also leases a
building for its central processing center for the Bank and its branch system.
Empire leases six facilities for its operations. Information concerning these
properties, as of December 31, 1999, is presented in the following table:
<TABLE>
<CAPTION>
APPROXIMATE
DESCRIPTION AND YEAR OWNED OR SQUARE
ADDRESS OPENED LEASED (1) FOOTAGE
------- ------ ---------- -------
<S> <C> <C> <C>
Principal offices 1983 Leased 22,300
8100 E. Arapahoe Road
Englewood, CO
Processing center 1999 Leased 6,390
3734 Osage Street
Denver, CO
BRANCH OFFICES:
North 1995 Owned 3,000
4988 Federal Boulevard
Denver, CO
Monaco 1996 Owned 3,000
777 S. Monaco Parkway
Denver, CO
South Broadway 1997 Owned 3,000
4600 South Broadway
Englewood, CO
West Highland 1997 Leased 2,600
3804 W. 32nd Avenue
Denver, CO
Greenwood Village 1985 Leased 850
6300 S. Syracuse
Englewood, CO
Lower Downtown ("LoDo") 1993 Leased 3,400
1401 17th Street
Denver, CO
Northglenn 1998 Owned 5,200
480 E. 120th Avenue
Northglenn, CO
Westminster 1999 Owned 5,200
7377 Federal Boulevard
Westminster, CO
OTHER:
Northland Shopping Center (2) Owned 32,000
88th and Washington Street
Thornton, CO
EMPIRE TITLE & ESCROW CORPORATION:
Downtown 1994 Leased 7,100
999 18th Street, Suite 3000
Denver, CO
Castle Rock 1994 Leased 1,650
107 Wilcox Street, Suite 200
Castle Rock, CO
Fort Collins 1998 Leased 2,360
1075 West Horsetooth Road, Suite 200
Fort Collins, CO
Northwest 1994 Leased 2,100
12000 Pecos Street, Suite 275
Westminster, CO
Southwest 1994 Leased 1,201
7125 West Jefferson Avenue, Suite 140
Lakewood, CO
Empire Title Southeast LLC 1999 Leased 1,400
9200 East Panorama Circle, Suite 170
Englewood, CO
</TABLE>
-14-
<PAGE> 15
- -------------
(1) All leased bank properties are leased from affiliated entities with the
exception of the Greenwood Village and LoDo branches. See "Item 12. Certain
Relationships and Related Transactions." All properties occupied by Empire
are leased from nonaffiliated third parties.
(2) Site originally purchased in 1998 for future branch but the future of the
space is currently unknown.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or any of its subsidiaries which, if determined adversely, would have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to security holders of the Company during the
fourth quarter of 1999 by the solicitation of proxy or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, for the periods indicated, the high and
low closing prices per share of the Company's common stock as reported on The
Nasdaq Stock Market(R). The Company's common stock began trading on The Nasdaq
Stock Market(R) on November 17, 1998 under the symbol "MBFC". These quotations
represent the prices between dealers and do not include retail mark ups, mark
downs or commissions and may not represent actual transactions. All share values
have been rounded to the nearest 1/8 of one dollar.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- -------- -------
<S> <C> <C>
Fourth quarter 11 3/4 9 1/2
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
---- -------- -------
<S> <C> <C>
First quarter 9 5/8 9
Second quarter 10 1/2 9 1/4
Third quarter 10 1/8 9 7/8
Fourth quarter 12 9
</TABLE>
On February 15, 2000, the last reported sales price of the Common Stock
reported on The Nasdaq Stock Market(R) was $7.62 per share. As of December 31,
1999, there were approximately 53 holders of record of the Common Stock.
However, management estimates that the number of beneficial owners is
approximately 600.
The Company's policy is to retain its earnings to support the growth of
its business, and it is unlikely that dividends will be paid in the foreseeable
future. The Board of Directors has never declared cash dividends on the
Company's common stock. Future cash dividends will be determined by the Board of
Directors based on the Company's earnings, financial condition, capital
requirements and other relevant factors.
-15-
<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion provides certain information regarding the
financial condition and results of operations of the Company. This discussion
should be read in conjunction with the Consolidated Financial Statements and
related notes included elsewhere herein.
Information herein contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which can be
identified by words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," or "continue," or comparable words. In addition, all statements
other than statements of historical facts that address activities that the
Company expects or anticipates will or may occur in the future are
forward-looking statements. Also, readers are urged to read "Risk Factors" in
the Company's Registration Statement on Form SB-2, SEC registration number
333-63369, which discussion is specifically incorporated herein by reference.
Accordingly, past results and trends may not be reliable indicators of future
results or trends. Actual results may vary materially from those anticipated by
management.
OVERVIEW
Since inception, the Company, through the Bank, has specialized its
lending practice in the residential construction industry. The Company's
Chairman has extensive experience in the home building industry and has expanded
the Bank's lending practice to date such that the Bank is one of the Denver,
Colorado area's leading originators of land development and residential
construction loans to small- and medium-sized homebuilders. Currently, the Bank
can finance a builder or developer from the acquisition and development loan
process, including assistance with special district financing, through the
construction loan phase. Empire provides a full range of title insurance
products and services to the real estate community, including homebuilders and
real estate firms.
The Company achieved significant growth measured from the end of 1997.
Total assets have increased to $328 million as of December 31, 1999 from $231
million and $158 million as of December 31, 1998 and December 31, 1997,
respectively. This represents a 40.3% average growth in assets over the past
three years. During the same time period, net income increased to $6.1million
for the year ended December 31, 1999 from $3.8 million and $2.8 million for the
years ended December 31, 1998 and 1997, respectively. The $2.3 million increase
in net income for 1999 represents a 61.5% increase over the net income for 1998.
During the past three years ended December 31, 1999, the Company's return on
average assets and return on average equity has averaged 2.02% and 23.89%,
respectively. For the year ended December 31, 1999, return on average assets for
the Company equaled 2.21% while return on average equity equaled 19.40%.
RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's net income is derived primarily from
net interest income. Net interest income is the difference between interest
income, principally from loans, investment securities and funds sold, and
interest expense, principally on customer deposits. Changes in net interest
income result from changes in volume, net interest spread and net interest
margin. Volume refers to the average dollar levels of interest-earning assets
and interest-bearing liabilities. Net interest spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
-16-
<PAGE> 17
The following tables set forth the average balances, net interest
income and expense and average yields and rates for the Company's earning assets
and interest-bearing liabilities for the indicated periods on a tax-equivalent
basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
BALANCE OR PAID OR COST BALANCE OR PAID OR COST
--------- --------- ------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Investment securities:
Taxable $ 7,959 $ 504 6.33% $ 5,290 $ 318 6.01%
Tax exempt (tax equivalent) 10,011 1,327 13.26 8,347 1,126 13.49
Funds sold and interest-bearing deposits 2,013 96 4.77 11,502 643 5.59
Loans (1) 231,159 27,172 11.75 150,951 18,464 12.23
Allowance for loan losses (3,058) -- -- (2,318) -- --
Other -- -- -- -- -- --
--------- --------- ------- --------- --------- -------
Total interest-earning assets $ 248,084 $ 29,099 11.73 $ 173,772 $ 20,551 11.83
========= ========= ======= ========= ========= =======
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand, interest-bearing $ 73,094 $ 2,756 3.77% $ 68,948 $ 3,039 4.41
Savings 6,870 151 2.20 5,488 170 3.10
Certificates of deposit:
Under $100,000 45,346 2,413 5.32 32,098 1,850 5.76
$100,000 and over 43,819 2,441 5.57 12,354 683 5.53
--------- --------- ------- --------- --------- -------
Total interest-bearing deposits 169,129 7,761 4.59 118,888 5,742 4.83
Advances from the Federal Home Loan
Bank and federal funds purchased (3) 7,560 405 5.36 1,094 99 9.05
Notes payable -- -- -- 167 19 11.38
Trust preferred securities 12,000 1,108 9.23 11,000 959 8.72
Repurchase agreements 499 21 4.21 693 35 5.05
--------- --------- ------- --------- --------- -------
Total interest-bearing liabilities $ 189,188 $ 9,295 4.91 $ 131,842 $ 6,854 5.20
========= ========= ======= ========= ========= =======
Net interest income (tax equivalent) $ 19,804 $ 13,697
========= =========
Net interest margin (2) 7.98% 7.88%
Net interest spread 6.82% 6.63%
Ratio of average interest-bearing liabilities
to average interest-earning assets 76.26% 75.87%
</TABLE>
- -----------
(1) Loans are net of unearned discount. Nonaccrual loans are included
in average loans outstanding. Loan fees are included in interest
income as follows: 1999 - $4,549,549; 1998 - $3,566,820.
(2) Net interest margin is net interest income divided by average total
earning assets
(3) Includes a one-time prepayment penalty incurred on the early
retirement of FHLB advances which management determined was
advantageous to the Company compared to the cost of such funds.
(4) Interest earned or paid includes interest paid to the Bank on the
common securities held plus amortized cost of issuance
Net interest income, on a tax-equivalent basis, was $19.8 million for
the year ended December 31, 1999, an increase of $6.1 million from $13.7 million
in 1998. Interest income increased $8.5 million to $29.1 million in 1999 from
$20.6 million in 1998. A significant component of interest earned on loans
consists of loan fees. Because the majority of the construction loans are real
estate loans with terms of one year or less, any decrease in real estate loan
production can be expected to have an adverse effect on loan fees. See "Loan
Maturities". This increase resulted primarily from an increase of $74.3 million
in average interest-earning assets to $248.1 million in 1999 from $173.8 million
in 1998. The majority of the asset growth was due to growth in the loan
portfolio. Average loans increased $80.2 million or 51.3% to $231.2 million in
1999 from $151.0 million in 1998 due primarily to the Company's continuing
growth. The change in the relative mix of interest-earning assets other than
loans was due primarily to the Company's objective of maximizing its yield on
funds not used for loans, including investing in double tax exempt securities.
The average yield on interest-earning assets decreased to 11.72% in 1999 from
11.83% in 1998 on a tax equivalent basis.
Interest expense increased $2.3 million to $9.2 million in 1999 from
$6.9 million in 1998. A $31.5 million increase in certificates of deposits over
$100,000 accounted for $1.8 million of the increase. These deposits increased
due to the Company's growth, including the use of wholesale deposits and the
addition of a new branch in 1999. Changes in the relative mix of average
interest-bearing liabilities included a $6.5 million increase in
-17-
<PAGE> 18
advances from the FHLB. The cost of interest-bearing liabilities for the years
ended December 31, 1999 and 1998 was 4.88% and 5.20%, respectively, and, when
combined with noninterest-bearing deposits, the cost of funds was 3.79% in 1999
compared to 3.86% in 1998. The net interest margin, on a tax-equivalent basis,
increased to 7.99% in 1999 from 7.88% in 1998, primarily as a result of higher
levels of interest earning assets due to loan growth.
The following table illustrates, for the periods indicated, the changes
in the Company's net interest income (on a tax-equivalent basis) due to changes
in volume and changes in interest rates. Changes in net interest income due to
both volume and rate have been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 COMPARED TO 1998: 1998 COMPARED TO 1997:
---------------------- -----------------------
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
NET INTEREST INCOME NET INTEREST INCOME
DUE TO CHANGE IN DUE TO CHANGE IN
---------------- ----------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning securities
Taxable $ 191 $ (5) $ 186 $ 48 $ (16) $ 32
Tax exempt (tax equivalent) 221 (20) 201 227 2 229
Funds sold (322) (225) (547) (77) 22 (55)
Loans 9,428 (720) 8,708 5,111 (453) 4,658
Other -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total interest-earning assets 9,518 (970) 8,548 5,309 (445) 4,864
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Demand, interest bearing 157 (440) (283) 687 (101) 586
Savings 30 (49) (19) 22 (12) 10
Certificates of deposit:
Under $100,000 704 (141) 563 392 14 406
$100,000 and over 1,753 5 1,758 144 (39) 105
Advances from the Federal Home
Loan Bank and federal funds purchased 346 (40) 306 (107) 54 (53)
Notes payable and trust preferred securities 107 23 130 722 77 799
Repurchase agreement (8) (6) (14) 35 -- 35
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 3,089 (648) 2,441 1,895 (7) 1,888
------- ------- ------- ------- ------- -------
Net increase (decrease) in net interest
income (tax equivalent) $ 6,429 $ (322) $ 6,107 $ 3,414 $ (438) $ 2,976
======= ======= ======= ======= ======= =======
</TABLE>
OTHER INCOME. The following table sets forth the Company's other income
for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Title fees $2,590 $ --
Service charges 518 144
Bank charges 485 394
Building rent 164 118
Gain on sale of investment securities 246 46
Other 498 291
------ ------
Total other income $4,501 $ 993
====== ======
</TABLE>
Other income for the year ended December 31, 1999 compared to 1998
increased due primarily to title fees attributable to Empire and additional fee
income from an increase in service fees. Increased expenses offset revenue
received in title fees from Empire. With rising interest rates and fewer
opportunities to refinance properties, Empire experienced a loss for the year
ended December 31, 1999 of approximately $142,000. The Company received a
request to change the ticker symbol for the Trust Preferred Securities issued by
MB Capital I. These securities traded under the symbol "MFC.Pr.A" on the
American Stock Exchange. At the request of the New York Stock Exchange, the
Company agreed to change its trading symbol to "MFG.Pr.A" to accommodate another
company. Additional miscellaneous income of $100,000 was realized through
compensation for relinquishing the rights to the ticker symbol "MFC".
-18-
<PAGE> 19
OTHER EXPENSES. The following table sets forth the Company's operating
expenses for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits $ 7,549 $ 4,100
Occupancy expense of premises 1,328 971
Furniture and equipment expense 702 447
Cost of title fees 529 --
Service fees 202 252
Legal fees 217 99
Indemnification and guarantee fees -- 350
Settlement with related company -- 355
Other expenses 2,623 1,479
------- -------
Total other expenses $13,150 $ 8,053
======= =======
</TABLE>
During the year ended December 31, 1999 total operating expenses
increased $5.1 million to $13.2 million from $8.1 million in 1998, with
increases occurring among the various components of salaries and occupancy
related expenses due to the Company's continued growth and the additional title
expenses, personnel and occupancy expenses associated with Empire.
FEDERAL INCOME TAX. The Company's consolidated income tax rate varies
from statutory rates principally due to interest income from tax-exempt
securities and loans. The Company recorded income tax expenses totaling $3.4
million in 1999 and $1.9 million in 1998.
FINANCIAL CONDITION
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated. Management believes that the balance sheet information as of the
dates indicated should be read in conjunction with the average balance
information in the tables above under "--Net Interest Income." As indicated
above, the Company specializes its lending practice in the residential
construction industry. Depending on life cycles of real estate development,
balances of the Company's commercial loans and construction loans may fluctuate
significantly. Therefore, the data below are not necessarily indicative of
trends within a particular category.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
AMOUNT % AMOUNT %
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Land development and construction $ 204,333 76.2% $ 136,243 72.9%
Commercial 61,944 23.1 47,225 25.3
Installment and other 7,646 2.9 7,910 4.2
Mortgage -- -- -- --
Loans held for sale -- -- -- --
--------- ------ --------- ------
Total face amount of loans 273,923 102.2 191,378 102.4
Deferred loan fees, discounts and costs, net (2,124) (0.8) (1,776) (1.0)
--------- ------ --------- ------
Loans 271,799 101.4 189,602 101.4
Less allowance for loan losses (3,674) (1.4) (2,610) (1.4)
--------- ------ --------- ------
Net loans $ 268,125 100.0% $ 186,992 100.0%
========= ====== ========= ======
</TABLE>
Loans as of December 31, 1999 were up $82.2 million compared to
December 31, 1998, principally due to greater amounts of construction and
commercial loans, which reflect the Company's growth discussed above. The
weighted average interest rate of the loan portfolio at December 31, 1999 was
11.51%.
The Company's two primary categories of loans, land development and
construction loans and commercial loans, trended upward as indicated. These
loans as a group were $266.3 million over the $183.5 million balance as of
December 31, 1998, with the majority being construction loans, up $68.1 million
over 1998.
Installment loans decreased slightly with a balance of $7.6 million as
of December 31, 1999 compared to $7.9 million as of December 31, 1998.
-19-
<PAGE> 20
Although the risk of non-payment exists for a variety of reasons with
respect to all loans, certain other more specific risks are associated with each
type of loan. Several risks are present in land development and construction
loans, including economic conditions in the home building industry, fluctuating
land values, the failure of the contractor to complete the work and the
borrower's inability to repay. The primary risks of land loans include a general
slowdown in the market resulting in fewer building permits and lower absorption
of newly developed sites to major homebuilders, building moratoriums by
municipalities, the general economy, and the fiscal condition of the developer.
Risks associated with commercial loans are quality of the borrower's management
and the impact of local economic factors. Installment loans also have risks
associated in a single type of loan. Installment loans additionally face the
risk of a borrower's unemployment as a result of deteriorating economic
conditions as well as the personal circumstances of the borrower.
The Company believes that its philosophy in extending credit is
relatively conservative in nature, with a presumption that most credit should
have both a primary and a secondary source of repayment, and that the primary
source should generally be operating cash flows, while the secondary source
should generally be disposition of collateral. The Company engages in limited
unsecured lending, and generally requires personal guarantees of principals for
business obligations. The Company practices a system of concurrence in the
approval of commercial credit whereby the documented concurrence of the loan
committee is obtained in addition to that of the recommending loan officer.
At December 31, 1999, net loans totaled approximately 100.5% of total
deposits and approximately 81.8% of total assets.
LOAN MATURITIES. The following tables present, at December 31, 1999 and
December 31, 1998, loans by maturity in each major category of the Company's
portfolio based on contractual repricing schedules. Actual maturities may differ
from the contractual repricing maturities shown below as a result of renewals
and prepayments. Loan renewals are evaluated in the same manner as new credit
applications.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR -------------------------- -------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
--------- ---------- ------------- ---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 203,645 $ 644 $ -- $ 44 $ -- $ 204,333
Commercial 45,665 13,028 911 2,340 -- 61,944
Installment and other 4,663 2,901 -- 82 -- 7,646
Mortgage -- -- -- -- -- --
--------- ---------- ------------- ---------- ------------- ---------
Total face amount of loans $ 253,973 $ 16,573 $ 911 $ 2,466 $ -- $ 273,923
Deferred loans fees (1,969) (129) (7) (19) -- (2,124)
--------- ---------- ------------- ---------- ------------- ---------
Total loans $ 252,004 $ 16,444 $ 904 $ 2,447 $ -- $ 271,799
========= ========== ============= ========== ============= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR -------------------------- -------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE TOTAL
--------- ---------- ------------- ---------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Land development and construction $ 132,583 $ 2,307 $ -- $ 1,353 $ -- $ 136,243
Commercial 30,049 13,460 115 3,601 -- 47,225
Installment and other 4,469 3,354 -- 87 -- 7,910
Mortgage -- -- -- -- -- --
--------- ---------- ------------- ---------- ------------- ---------
Total face amount of loans $ 167,101 $ 19,121 $ 115 $ 5,041 $ -- $ 191,378
Deferred loans fees (1,551) (178) -- (47) -- (1,776)
--------- ---------- ------------- ---------- ------------- ---------
Total loans $ 165,550 $ 18,943 $ 115 $ 4,994 $ -- $ 189,602
========= ========== ============= ========== ============= =========
</TABLE>
NONPERFORMING LOANS. Nonperforming loans consist of loans 90 days or
more delinquent and still accruing interest, nonaccrual loans and restructured
loans. When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest, regardless of the delinquency status of a loan, the
accrual of interest income is discontinued and interest accrued during the
current year is reversed through a charge to current year's earnings. While the
loan is on nonaccrual status, interest income is recognized only upon receipt
and then only if, in the judgment of management, there is no reasonable doubt as
to the collectibility of the principal balance. Loans 90 days or more delinquent
generally are changed to nonaccrual status unless the loan is in the process of
collection and management determines that full collection of principal and
accrued interest is probable.
-20-
<PAGE> 21
Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to the borrower or
the deferral of interest or principal, have been granted due to the borrower's
weakened financial condition. Interest on restructured loans is accrued at the
restructured rates when it is anticipated that no loss of original principal
will occur. The Company did not have any restructured loans as of December 31,
1999 or December 31, 1998.
The following table sets forth information concerning the nonperforming
assets of the Company at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans $ 4,095 $ 3,388
Other loans 90 days past due -- --
Other real estate -- --
------- -------
Total nonperforming loans $ 4,095 $ 3,388
======= =======
Ratio of nonaccrual and other loans 90
days past due to total loans 1.51% 1.81%
Ratio of nonperforming assets to total loans
plus other real estate 1.51 1.81
Ratio of nonperforming assets to total assets 1.25 1.47
</TABLE>
Of the amount of nonaccrual loans as of December 31, 1999,
approximately $1.2 million is the Bank's portion of a $3.0 million loan, which
was subject to a Chapter 11 bankruptcy proceeding. The loan is a consolidation
of four loans made at various times during 1994, 1995 and 1997 in connection
with a real estate development on which the developer had constructed a
residential building assembly plant. The loans are secured by real estate,
certificates of deposit, and two personal guarantees from the owners of the
developer, as well as a guarantee by a related limited partnership. When the
loans were consolidated, additional collateral in the form of an assignment of a
promissory note was taken. The loans have been discharged from the bankruptcy.
Principal payments of $1.1 million were received during 1999.
In addition to the above, the Bank has approximately $1.9 million of a
$2.1 million loan that were placed on nonaccrual status in December 1999. The
loan was originated as a commercial construction loan for a mini-storage
facility. The construction is complete and the mini-storage is open for
business. Real estate, two personal guarantees and a guarantee by a related
corporation secure the loan. Foreclosure proceedings have been initiated.
The Bank also has $0.9 million of a $1.3 million loan on nonaccrual.
This loan was placed on nonaccrual status at the end of 1998. The loan was cured
during the year and a principal reduction of approximately $1.5 million was made
in May 1999. This loan was placed back on nonaccrual status in August 1999. The
loan originated as an acquisition and development loan and is secured by real
estate. The Bank has started foreclosure proceedings.
Management believes that the Company is adequately protected on these
loans. Management is not aware of any adverse trend relating to the Company's
loan portfolio.
As of December 31, 1999, there was no significant balance of loans
excluded from nonperforming loans set forth above, where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment
terms and which may result in such loans becoming nonperforming.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is maintained at
a level considered adequate to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions, historical loss
experience, evaluation of the quality of the underlying collateral and holding
and disposal costs. The allowance is increased by additional charges to
operating income and reduced by loans
-21-
<PAGE> 22
charged off, net of recoveries. The Company's allowance for loan losses to total
loans has remained relatively level.
The following table sets forth information regarding changes in the
allowance for loan losses of the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average total loans $ 231,159 $ 150,951
========= =========
Total loans at end of period $ 271,799 $ 189,602
========= =========
Allowance at beginning of year $ 2,610 $ 2,083
Charge-offs:
Land development and construction -- --
Commercial and industrial (86) (2)
Installment (7) (8)
Mortgage -- --
Other -- --
--------- ---------
Total charge-offs (93) (10)
Recoveries:
Land development and construction -- --
Commercial and industrial -- 3
Installment 2 4
Mortgage -- --
Other -- --
--------- ---------
Total recoveries 2 7
--------- ---------
Net (charge-offs) recoveries (91) (3)
Provisions for loan losses 1,155 530
--------- ---------
Allowance at end of period $ 3,674 $ 2,610
========= =========
Ratio of net (charge-offs) recoveries
to average total loans (0.04%) (0.00%)
Allowance to total loans at end of period 1.35% 1.38%
Allowance to nonperforming loans 89.72% 77.04%
</TABLE>
Net charge-offs during 1999 totaled approximately $91,000 or less than
(0.04)% of average loans compared to net charge-offs of approximately $3,000 or
less that 0.01% of average loans in 1998.
The Company's lending personnel are responsible for continuous
monitoring of the quality of loan portfolios. The loan portfolios are also
monitored and examined by the Company loan review personnel. These reviews
assist in the identification of potential and probable losses, and also in the
determination of the level of the allowance for loan losses. The allowance for
loan losses is based primarily on management's estimates of possible loan losses
from the foregoing processes and historical experience. These estimates involve
ongoing judgments and may be adjusted over time depending on economic conditions
and changing historical experience.
State and federal regulatory agencies, as an integral part of their
examination process, review the Company's loans and its allowance for loan
losses. Management believes that the Company's allowance for loan losses is
adequate to cover anticipated losses. There can be no assurance, however, that
management will not determine a need to increase the allowance for loan losses
or that regulators, when reviewing the Company's loan portfolios in the future,
will not require the Company to increase such allowance, either of which could
adversely affect the Company's earnings. Further, there can be no assurance that
the Company's actual loan losses will not exceed its allowance for loan losses.
-22-
<PAGE> 23
The following tables set forth an allocation of the allowance for loan
losses by loan category as of the dates indicated. When determining the adequacy
of the allowance for loan losses, management considers changes in the size and
character of the loan portfolio, changes in nonperforming and past due loans,
historical loan loss experience, the existing risk of individual loans,
concentrations of loans to specific borrowers or industries and current and
projected economic conditions. The portion of the allowance that has not been
identified by the Bank as related to specific loan categories has been allocated
to the individual loan categories on a pro rata basis for purposes of the
following table only.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
---- ----
LOANS IN LOANS IN
CATEGORY CATEGORY
AS A AS A
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
OF GROSS OF TOTAL OF GROSS OF TOTAL
ALLOWANCE(1) LOANS ALLOWANCE(1) LOANS
------------ ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Land development and construction $ 2,577 74.6% $ 1,463 71.2%
Commercial and industrial 1,020 22.6 1,058 24.7
Installment and other 77 2.8 89 4.1
------------ ---------- ------------ ----------
Total $ 3,674 100.0% $ 2,610 100.0%
============ ============
</TABLE>
- ----------
(1) For purposes of this table only, the portion of the allowance that has not
been identified by the Bank as related to specific loan categories has been
allocated to the individual loan categories on a pro rata basis.
The total loan loss reserve at December 31, 1999 was $3.7 million or
1.35% of total loans and 89.7% of nonperforming assets. The majority of the loan
loss reserve increase at December 31, 1999 compared to December 31, 1998 was
included in the land development and construction category.
INVESTMENTS. The Company's investment policy is designed to ensure
liquidity for cash-flow requirements; to help manage interest rate risk; to
ensure collateral is available for public deposits, FHLB advances and repurchase
agreements; and to manage asset quality diversification. Investments are managed
centrally to maximize compliance and effectiveness of overall investing
activities. Ongoing review of the performance of the investment portfolio,
market values, market conditions, current economic conditions, profitability,
capital ratios, liquidity needs, collateral position with the FHLB and other
matters related to investing activities is made.
The Company's investment portfolio at December 31, 1999 was comprised
of U.S. Treasury bonds, corporate equity and debt securities, and general
obligation and revenue municipal bonds. Although the municipal securities are
non-rated and were privately placed, none of these investments are derivatives,
structured notes or similar instruments that are classified as "High-Risk
Securities" as defined by the Federal Financial Institutions Examinations
Counsel. In accordance with the principles of the Financial Accounting Standards
Board ("FASB") in its Statement of Financial Accounting Standards No. 115 ("FASB
115"), Accounting for Certain Investment in Debt and Equity Securities, all
investments are accounted for as "Available for Sale."
The following table sets forth the estimated market value of the
available for sale securities and the amortized cost basis of held to maturity
securities in the Company's investment portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities $ 3,983 $ 4,549
Corporate securities 843 2,741
Equity investment trust 373 --
Municipal securities (1) 12,909 7,982
------- --------
Total $18,108 $ 15,272
======= ========
</TABLE>
- ----------
(1) Exempt from both federal and state income taxation.
-23-
<PAGE> 24
INVESTMENT MATURITIES AND YIELD. The following table sets forth the
estimated market value and approximate yield of the securities in the investment
portfolio by type and maturity at December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
TYPE AND MATURITY AMOUNT YIELD
----------------- ------ -----
(DOLLARS IN THOUSANDS)
U.S. TREASURY SECURITIES:
<S> <C> <C>
One year or less $ 1,500 6.21%
Over one through five years 2,483 5.60
Over five through 10 years -- --
Over 10 years -- --
-------
Total $ 3,983 5.83
=======
CORPORATE SECURITIES:
One year or less $ -- --
Over one through five years -- --
Over five through 10 years -- --
Over 10 years 843 8.60
-------
Total $ 843 8.60
=======
MUNICIPAL SECURITIES:
One year or less $ -- --
Over one through five years 1,069 9.04
Over five through 10 years 558 9.00
Over 10 years 11,282 8.72
-------
Total $12,909 8.76
=======
TOTAL INVESTMENT IN SECURITIES:
One year or less $ 1,500 6.21
Over one through five years 3,551 6.63
Over five through 10 years 558 9.00
Over 10 years 12,126 8.71
-------
Total $17,735 8.09
=======
</TABLE>
DEPOSITS. The Company's primary source of funds has historically been
customer deposits, and deposits have experienced significant growth in recent
years with average deposits increasing to $219.5 million for the year ended
December 31, 1999 from $164.4 million for the year ended December 31, 1998.
These increases are primarily a result of internal growth with the opening of
one new branch in 1999, and one branch in 1998 and the addition of $58.1 million
in deposits from other sources. Management has determined that wholesale sources
of deposits provide a cost effective and profitable means of funding new loan
growth that cannot be funded from internal sources. These wholesale deposits
bear interest at rates ranging from 5.25% to 6.72% and have maturities of
various dates through February 2002. At December 31, 1999, noninterest-bearing
deposits comprised 21.4% of total deposits. Management believes this ratio may
decrease as the mix of deposits in new branches tend to be more interest-bearing
rather than noninterest-bearing due to start up marketing activities.
The following table presents the average balances for each major
category of deposits and the weighted average interest rates paid for
interest-bearing deposits for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
AVERAGE AVERAGE
AVERAGE INTEREST AVERAGE INTEREST
BALANCE COST BALANCE COST
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand, interest-bearing $ 73,094 3.77% $ 68,948 4.41%
Savings 6,870 2.20 5,488 3.10
Certificates of deposit under $100,000 45,346 5.32 32,098 5.76
Certificates of deposit $100,000 and over 43,819 5.57 12,354 5.52
--------- ---------
Total interest-bearing demand deposits 169,129 4.59 $ 118,888 4.83
Noninterest-bearing demand deposit 50,343 45,545
--------- ---------
Total Deposits $ 219,472 $ 164,433
========= =========
</TABLE>
The decreases in average costs were due primarily to a lower interest rate
environment.
-24-
<PAGE> 25
The following table sets forth the amount of certificates of deposits
at their stated rates as of December 31, 1999:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
3.99% or less $ 1,439
4.00% to 4.99% 9,807
5.00% to 5.99% 80,806
6.00% to 6.99% 37,494
----------
Total $ 129,546
==========
Weighted average interest rate 5.59%
</TABLE>
At December 31, 1999, the scheduled maturities of certificates of
deposit were are follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000 $116,857
2001 10,822
2002 1,491
2003 257
2004 43
Thereafter 76
--------
Total $129,546
========
</TABLE>
The following table sets forth the amount and maturity of certificates
of deposit that had balances of more than $100,000 at December 31, 1999.
<TABLE>
<CAPTION>
REMAINING MATURITY (IN THOUSANDS)
<S> <C>
Less than three months $ 5,600
Three months up to six months 15,886
Six months up to one year 53,089
One year and over 7,687
-------
Total $82,262
=======
</TABLE>
FHLB BORROWINGS. The Bank is a member of the Federal Home Loan Bank of
Topeka, which is one of 12 regional FHLB's. The FHLB system functions as a
central bank providing credit for members. As a member of the FHLB, the Bank is
entitled to borrow funds from the FHLB and is required to own FHLB stock in an
amount determined by a formula based upon the Bank's total assets and its FHLB
borrowings. The Bank may use FHLB borrowings to supplement deposits as a source
of funds. See "Liquidity--Asset/Liability Management." Average FHLB borrowings
for the year ended December 31, 1999 were $7.6 compared to $409,000 for the year
ended December 31, 1998. At December 31, 1999, based on its FHLB stockholdings,
the Bank's total available and unused borrowing capacity based on the Bank's
current FHLB stockholdings was approximately $11 million, which was available
through a line of credit and term advances. FHLB borrowings are collateralized
by the Bank's FHLB stock, other investment securities and certain loans.
A variety of borrowing terms and maturities can be chosen from the
FHLB. Maturities available range generally from one day to 15 years. Interest
rates can be either fixed or variable and prepayment options are available if
desired. The FHLB offers both amortizing and nonamortizing advances. To date,
FHLB stock has been redeemable at the preset price of $100 per share, but there
can be no assurance that this will continue to be the case.
CAPITAL RESOURCES
The Company monitors compliance with federal regulatory capital
requirements, focusing primarily on risk-based capital guidelines. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent upon the amount and composition of assets recorded on the balance
sheet, and the amount and composition of off-balance sheet items, in addition to
the level of capital.
-25-
<PAGE> 26
The following tables set forth the Company's capital ratios as of the
indicated dates.
<TABLE>
<CAPTION>
CAPITAL RATIOS
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Core (Tier 1) capital $ 34,038 10.64% $ 28,410 12.53%
Core (Tier 1) capital minimum requirement (1) 12,801 4.00 9,069 4.00
--------- ------- --------- -------
Excess $ 21,237 6.64% $ 19,341 8.53%
========= ======= ========= =======
Tangible capital $ 34,038 10.64% $ 28,410 12.53%
Tangible capital minimum requirement (1) 4,795 1.50 3,401 1.50
--------- ------- --------- -------
Excess $ 29,243 9.14% $ 25,009 11.03%
========= ======= ========= =======
Adjusted tangible assets $ 320,027 $ 226,731
========= =========
</TABLE>
- ---------
(1) Based on risk-based capital guidelines of the Office of Thrift Supervision,
a savings association is required to maintain a Core (Tier 1) capital
requirement of 4% of adjusted tangible assets and a tangible capital
requirement of 1.5% of tangible assets. See "Supervision and
Regulation--Federal Savings Association Regulation - OTS Capital
Requirements" for definitions of the ratio terms.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
DECEMBER 31, DECEMBER 31,
1999 1998
---- ----
AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total risk-based capital $ 37,345 12.90% $ 30,315 15.38%
Minimum requirement (1) 23,154 8.00 15,766 8.00
--------- ------- --------- -------
Excess $ 14,191 4.90% $ 14,549 7.38%
========= ======= ========= =======
Total risk-based assets $ 289,422 $ 197,077
========= =========
</TABLE>
- ----------
(1) Based on risk-based capital guidelines of the Office of Thrift Supervision,
a savings association generally is defined to maintain a total capital to
risk-based assets ratio of 8%. See "Supervision and Regulation--Federal
Savings Association Regulation - OTS Capital Requirements" for definitions
of terms relating to the ratio.
LIQUIDITY
SOURCES OF LIQUIDITY. The Company has two basic sources of liquidity.
The first source is its retail deposit market served by its banking offices. The
Company has increased core deposits through growth of its existing deposits and
through promotions directed at existing and potential customers. Additionally,
in compliance with the Bank's Liquidity Policy, the Company supplemented retail
deposit growth by obtaining deposits of $29.4 million from other sources during
the fourth quarter ended December 31, 1999. Deposits increased to $266.8 million
at December 31, 1999 compared to $189.9 million at December 31, 1998. Deposits
from other sources totaled approximately $58.1 million at December 31, 1999.
Management's determination to use an outside funding source may continue in the
future depending on funding needs and the cost of these funds. Currently,
wholesale sources increase the Bank's cost of interest-bearing liabilities by
approximately 0.08%, effectively securing funds at an overall lower rate than if
the Bank had to internally generate additional deposits through promotions or
other methods.
The second source of the Company's liquidity is Federal Home Loan Bank
("FHLB") advances and Company lines of credit. FHLB advances are used in the
cash management function both to fund a portion of the investment portfolio and
to manage the day-to-day fluctuations in liquidity resulting from needs of
depositors and borrowers. At December 31, 1999 the Company had borrowed $11
million from the FHLB and its other lenders and had available $11 million of
unused borrowing capacity from the FHLB and $16.7 million from its other
lenders. . During the fourth quarter, the Company elected to borrow short-term
funds in addition to seeking additional deposits from customers and other
sources. The Company anticipates that it will continue to rely primarily upon
customer deposits, FHLB borrowings, other lending sources, loan repayments, loan
sales and retained earnings to provide liquidity, and will use funds so provided
primarily to make loans and to purchase investment securities.
-26-
<PAGE> 27
ASSET/LIABILITY MANAGEMENT. A principal function of asset/liability
management is to coordinate the levels of interest-sensitive assets and
liabilities to minimize net interest income fluctuations in times of fluctuating
market interest rates. Interest-sensitive assets and liabilities are those that
are subject to repricing in the near term, including both variable rate
instruments and those fixed-rate instruments which are approaching maturity.
Changes in net yield on interest-sensitive assets arise when interest rates on
those assets (e.g. loans and investment securities) change in a different time
period from that of interest rates on liabilities (e.g. time deposits). Changes
in net yield on interest-sensitive assets also arise from changes in the mix and
volumes of earning assets and interest-bearing liabilities.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities as of December 31, 1999, and sets forth the
repricing dates of the Company's interest-earning assets and interest-bearing
liabilities as of that date, as well as the Company's interest rate sensitivity
gap percentages for the periods presented. The table is based upon assumptions
as to when assets and liabilities will reprice in a changing interest rate
environment, and since such assumptions can be no more than estimates, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on the Company's net interest income.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT
DECEMBER 31, 1999
----------------------------------------
THREE MONTHS
LESS THAN TO LESS THAN ONE TO OVER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Funds sold and interest-bearing deposits $ 9,384 $ 83 $ -- $ -- $ 9,467
Investment securities available for sale 501 999 3,551 12,684 17,735
Loans 271,622 104 73 -- 271,799
------------ ------------ ---------- ---------- ---------
Total interest-earning assets 281,507 1,186 3,624 12,684 299,001
Interest-bearing liabilities:
Deposits:
Demand, interest-bearing 73,292 -- -- -- 73,292
Savings 6,747 -- -- -- 6,747
Certificates of deposit
under $100,000 14,413 27,869 4,926 76 47,284
$100,000 and over 5,600 68,975 7,687 -- 82,262
Federal Home Loan Bank borrowings 11,000 -- -- -- 11,000
Trust preferred securities -- -- -- 12,000 12,000
Repurchase agreements 358 -- -- -- 358
------------ ------------ ---------- ---------- ---------
Total interest-bearing liabilities 111,410 96,844 12,613 12,076 232,943
------------ ------------ ---------- ---------- ---------
Interest rate gap $ 170,097 $ (95,658) $ (8,989) $ 608 $ 66,058
============ ============ ========== ========== =========
Cumulative interest rate gap at
December 31, 1999 $ 170,097 $ 74,439 $ 65,450 $ 66,058
============ ============ ========== ==========
Cumulative interest rate gap
to total assets 51.92% 22.72% 19.98% 20.16%
============ ============ ========== ==========
</TABLE>
Due to the volume of loans that reprice with changes in the prime
lending rate and the volume of noninterest-bearing deposits, the Company has
experienced a positive gap in assets and deposits that reprice or mature in less
than three months. Of the total interest-earning assets at December 31, 1999,
94.2% reprice or mature in less than three months while 47.8% of all
interest-bearing liabilities reprice or mature in that same time frame. The
Bank's positive interest rate gaps indicate that the Bank's net income would
increase in the event of rising interest rates and would decrease in the event
of decreasing interest rates. In the highly unlikely event of an immediate,
parallel and sustained shift of market interest rates of 200 basis points,
management estimates that the Bank's net income during the 12 months ending
December 31, 2000 would likely increase greater than 10% compared to the prior
like 12-month period if interest rates rose by 200 basis points and likely fall
by greater than 10% compared to the prior like 12-month period if rates fell of
the same amount. These are good faith
-27-
<PAGE> 28
estimates assuming all other factors do not change materially, and, in
management's belief, are not necessarily indicative of what actually could occur
in the event of immediate interest rate increases or decreases of this
magnitude. Management believes that it is highly unlikely that such changes
would occur in a short time period. As interest-bearing assets and liabilities
reprice at different time frames and proportions to market interest rate
movements, various assumptions must be made based on historical relationships of
these variables in reaching any conclusion. Since these correlations are based
on competitive and market conditions, future results could, in management's
belief, be materially different from the foregoing estimates.
EFFECTS OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than inflation. Although interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services, increases in inflation generally have resulted in increased
interest rates. Over short periods of time interest rates may not move in the
same direction or magnitude as inflation.
YEAR 2000 COMPLIANCE
The Company did not experience any problems with the date change to
year 2000 or the date value for the year 2000. Expenses incurred during fiscal
year 1999 associated with year 2000 compliance totaled approximately $70,000.
ITEM 7. FINANCIAL STATEMENTS
-28-
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
Board of Directors
MegaBank Financial Corporation
Englewood, Colorado
We have audited the consolidated balance sheet of MegaBank Financial
Corporation and Subsidiaries as of December 31, 1999 and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial position of
MegaBank Financial Corporation and Subsidiaries at December 31, 1999 and the
consolidated results of their operations and consolidated cash flows for each of
the two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/Fortner, Bayens, Levkulich and Co., P.C.
Denver, Colorado
January 14, 2000
-29-
<PAGE> 30
MEGABANK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks $ 3,133
Federal funds sold 9,350
Other interest-bearing deposits 117
---------
Cash and cash equivalents 22,600
Investment securities available for sale 18,108
Loans 271,799
Less allowance for loan losses (3,674)
---------
268,125
Federal Home Loan Bank stock, at cost 944
Bank premises, leasehold improvements and equipment, net 10,289
Investment in title plant 670
Accrued interest receivable 1,611
Deferred tax asset 1,201
Trust preferred securities issuance costs, net 703
Goodwill 2,919
Other assets 464
---------
$ 327,634
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits $ 266,800
Federal Home Loan Bank borrowings 11,000
Securities sold under agreements to repurchase 358
Income taxes payable 520
Accrued interest payable 886
Other liabilities 1,147
---------
Total liabilities 280,711
Company obligated manditorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures 12,000
Minority interest in consolidated subsidiary 333
Commitments (notes B, C, K and L)
Shareholders' equity
Preferred stock; no par value, 10,000,000 shares authorized, none issued --
Common stock; no par value, 50,000,000 shares authorized,
7,776,709 shares issued and outstanding 15,473
Retained earnings 19,529
Accumulated other comprehensive income (412)
---------
34,590
---------
$ 327,634
=========
</TABLE>
The accompanying notes are an integral part of this statement.
-30-
<PAGE> 31
MEGABANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest income
Loans, including fees $ 27,172 $ 18,464
Taxable investment securities 504 318
Nontaxable investment securities 876 743
Funds sold 47 463
Other interest 49 181
-------- --------
Total interest income 28,648 20,169
Interest expense
Deposits 7,761 5,742
Borrowed funds 426 134
Trust preferred securities 1,108 959
Notes payable -- 19
-------- --------
Total interest expense 9,295 6,854
-------- --------
Net interest income 19,353 13,315
Provision for loan losses 1,155 530
-------- --------
Net interest income after provision for
loan losses 18,198 12,785
Other income
Title policy revenues and fees 2,590 --
Service charges on deposit accounts 1,003 538
Gain on sale of investment securities 246 46
Other income 662 409
-------- --------
Total other income 4,501 993
Other expenses
Salaries and employee benefits 7,549 4,100
Occupancy expenses of premises 1,328 971
Furniture and equipment expense 702 447
Cost of title fees 529 --
Service fees 202 252
Legal fees 217 99
Goodwill amortization 90 --
Minority interest in loss of subsidiary (60) --
Indemnification and guarantee fees (note N) -- 350
Settlement with related company (note N) -- 355
Other expenses 2,593 1,479
-------- --------
Total other expenses 13,150 8,053
-------- --------
Income before income taxes 9,549 5,725
Income tax expense 3,403 1,920
-------- --------
NET INCOME $ 6,146 $ 3,805
======== ========
Earnings per share
Basic $ 0.80 $ 0.58
======== ========
Diluted $ 0.79 $ 0.58
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
-31-
<PAGE> 32
MEGABANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net income $ 6,146 $ 3,805
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale (446) (5)
------- -------
Other comprehensive income (loss) (446) (5)
------- -------
Comprehensive income $ 5,700 $ 3,800
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
-32-
<PAGE> 33
MEGABANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
other
Common Retained comprehensive
stock earnings income Total
-------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1,961 $ 9,578 $ 39 $ 11,578
Issuance of 1,200,000 shares of common
stock initial public offering at $11 per
share, less selling expenses of $1,187,000 12,013 -- -- 12,013
Net income -- 3,805 -- 3,805
Other comprehensive income (loss) -- -- (5) (5)
-------- ---------- -------------- ---------
Balance at December 31, 1998 13,974 13,383 34 27,391
Issuance of 162,369 shares of common
stock in connection with the acquisition of
Empire Title & Escrow Corporation (note B) 1,499 -- -- 1,499
Net income -- 6,146 -- 6,146
Other comprehensive income (loss) -- -- (446) (446)
-------- ---------- -------------- ---------
Balance at December 31, 1999 $ 15,473 $ 19,529 $ (412) $ 34,590
======== ========== ============== =========
</TABLE>
The accompanying notes are an integral part of this statement.
-33-
<PAGE> 34
MEGABANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,146 $ 3,805
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 1,155 530
Depreciation and amortization of fixed assets 814 486
Amortization of preferred securities issuance costs 26 23
Amortization of goodwill 90 --
Net discount accretion on investment securities (3) (13)
Stock dividend received (42) (32)
Gain on sale of investment securities available for sale (246) (46)
Deferred income taxes (349) (82)
Minority interest in loss of subsidiary 60 --
Changes in deferrals and accruals
Accrued interest receivable (507) (206)
Accrued interest payable 452 282
Income taxes payable 449 (61)
Other, net 57 (174)
-------- --------
Net cash provided by operating activities 8,102 4,512
Cash flows from investing activities
Purchase of securities available for sale (7,918) (4,482)
Proceeds from maturities of securities available for sale 3,110 1,250
Proceeds from sales of securities available for sale 1,496 1,158
Net increase in loans (82,288) (63,518)
Acquisition of subsidiary under purchase method of
accounting, net of cash acquired (1,478) --
Additions to bank premises and equipment (2,179) (4,533)
Additions to title plant (160) --
-------- --------
Net cash used in investing activities (89,417) (70,125)
Cash flows from financing activities
Net increase in deposits 76,921 48,001
Trust preferred securities issuance costs -- (497)
Increase (decrease) in Federal Home Loan Bank borrowings 11,000 (1,423)
Increase (decrease) in securities sold under repurchase agreements (85) 443
Proceeds from issuance of trust preferred securities -- 12,000
Principal payments on notes payable -- (2,000)
Proceeds from sale of common stock -- 12,013
-------- --------
Net cash provided by financing activities 87,836 68,537
-------- --------
Net increase in cash and cash equivalents 6,521 2,924
Cash and cash equivalents at beginning of year 16,079 13,155
-------- --------
Cash and cash equivalents at end of year $ 22,600 $ 16,079
======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 8,842 $ 6,572
Income taxes 3,302 2,062
</TABLE>
The accompanying notes are an integral part of this statement.
-34-
<PAGE> 35
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
MegaBank Financial Corporation ("the Company") owns the shares of and
acts as parent holding company for MegaBank ("the Bank"), MB Capital I
and Empire Title & Escrow Corporation ("Empire"). The Bank provides a
full range of banking services to individual and corporate customers
principally in the Denver metropolitan area. A majority of the Bank's
loans are related to real estate (principally residential construction)
and commercial activities. The Bank is subject to competition from other
financial institutions for loans and deposit accounts. The Bank is also
subject to regulation by certain governmental agencies and undergoes
periodic examinations by those regulatory agencies. In connection with an
offering of Cumulative Trust Preferred Securities in 1998, the Company
formed MB Capital I, which is treated as a wholly owned subsidiary of the
Company. Empire was acquired in April 1999. Results of its operations
since acquisition are included in the consolidated financial statements.
Empire's principal business activity is the sale of title insurance
policies.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
loan losses. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties and assesses estimated future cash flows from borrowers'
operations and the liquidation of loan collateral.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, changes
in economic conditions may necessitate revisions in future years. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additional losses
based on their judgments about information available to them at the time
of their examination.
INVESTMENT SECURITIES
Management determines the classification of debt securities at the time
of purchase and reevaluates such designations as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Bank
has the positive intent and ability to hold the securities to maturity.
Debt securities not classified as held to maturity are classified as
available for sale. Available for sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a
component of retained earnings in shareholders' equity.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion
of discounts to maturity or, in the case of mortgage-backed securities,
over the estimated life of the security. Such amortization and accretion
is included as an adjustment to interest income from investments.
Realized gains and losses and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The
cost of securities sold is based on the specific identification method.
-35-
<PAGE> 36
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES
The accrual of interest on loans is discontinued when management believes
that interest or principal may not be collectible or recoverable.
Generally, loans that are 90 days past due as to interest, principal, or
both; loans that are not 90 days past due but where the likelihood of
collecting the interest, principal, or both within 90 days is unlikely;
and loans which have been partially charged off will be placed on
nonaccrual status. When placing a loan in nonaccrual status, interest
accrued to date is generally reversed. When such a reversal is made,
interest accrued during prior years is charged to the allowance for loan
losses. All other interest reversed on nonaccrual loans is charged
against current year interest income. Payments received on a loan on
nonaccrual status are charged against the balance of the loan. A loan is
returned to accrual status when principal and interest are no longer past
due and collectibility is no longer doubtful. Restructured loans are
those on which concessions in terms have been made as a result of
deterioration in a borrower's financial condition. Interest on these
loans is accrued under the new terms.
Impaired loans are all specifically identified loans for which it is
probable that the Company will not collect all amounts due according to
the contractual terms of the loan agreement. Included in impaired loans
are all nonaccrual and restructured loans. Loan impairment is measured
based on the present value of expected future cash flows discounted at
the loan's original effective interest rate. As a practical expedient,
impairment may be measured based on the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance. The valuation allowance is a component of the allowance for
loan losses. Any excess of the carrying value of impaired loans over
amounts realized from the liquidation of collateral and other sources is
charged to the allowance for loan losses.
Loan origination fees, net of certain direct origination costs, are
deferred and amortized on a basis that approximates level yield over the
contractual lives of the underlying loans. In addition, fees for a
commitment to originate or purchase loans are offset against direct loan
origination costs incurred to make such commitments. The net amounts are
deferred and, if the commitment is exercised, recognized over the life of
the related loan as a yield adjustment or, if the commitment expires
unexercised, recognized as income upon expiration of the commitment. When
a loan is placed on nonaccrual status, no income is recognized on the
unamortized balance of loan origination fees until the loan is returned
to accrual status or is repaid.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans,
according to an established delinquency schedule. The allowance is an
amount that management believes will be adequate to absorb losses
inherent in existing loans, leases and commitments to extend credit,
based on evaluations of the collectibility and prior loss experience of
loans, leases and commitments to extend credit. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific
problem loans, leases and commitments, and current and anticipated
economic conditions that may affect the borrowers' ability to pay.
Recoveries realized on loans previously charged off are credited to the
allowance for loan losses.
BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
These assets are stated at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on the straight-line method.
-36-
<PAGE> 37
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
TITLE PLANT
In connection with the purchase of Empire in 1999, the Company acquired a
title plant. A title plant constitutes an historical record of all
matters affecting title to parcels of land in a particular geographic
area. This asset is carried at its appraised value as of the date of
acquisition plus the cost of subsequent additions. The costs of
maintaining this plant are charged to expense as incurred. Because
properly maintained title plants have indefinite lives and do not
diminish in value with the passage of time, no provision has been made
for depreciation.
TRUST PREFERRED SECURITIES ISSUANCE COSTS
Direct costs incurred in connection with the issuance of Trust Preferred
Securities have been capitalized. These costs are amortized on a
straight-line basis through the maturity date of the securities.
GOODWILL
Goodwill consists of the cost in excess of fair value of the net assets
acquired in the 1999 acquisition of Empire. Amortization is computed on
the straight-line method over 25 years. Capitalized costs and accumulated
amortization for costs in excess of fair value of net assets acquired, as
of December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
Capitalized costs $ 3,009
Less accumulated amortization (90)
-------
$ 2,919
=======
</TABLE>
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest
on state and municipal securities) and deferred taxes on temporary
differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted
income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include cash and due from banks, other interest-bearing
deposits and federal funds sold. Generally federal funds sold are held
for one day.
-37-
<PAGE> 38
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PER SHARE COMPUTATIONS
Basic earnings per share is based on the weighted average number of
common shares outstanding during each year.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year plus
common share equivalents. Common shares used in the determination of
basic and diluted earning per share follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Basic
Weighted average common shares outstanding 7,727,449 6,542,135
Common share equivalents
Stock options -- 12,187
Contingent consideration related to Empire acquisition 61,644 --
---------- ----------
Diluted 7,789,093 6,554,322
========== ==========
</TABLE>
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for any stock options issued to employees.
Under APB 25, no compensation expense is recorded for any stock options
for which the exercise price equals the market price of the underlying
stock on the date of the grant. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
COMPREHENSIVE INCOME
The Company has adopted Financial Accounting Standards Board Statement
No. 130, Reporting Comprehensive Income, (SFAS No. 130). SFAS No. 130
establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains, and losses). Components of
comprehensive income are net income and all other non-owner changes in
equity. The statement requires an enterprise to classify items of other
comprehensive income by their nature in the financial statements and to
display the accumulated balance of other comprehensive income separately
from other components of equity in the balance sheet. The only component
of comprehensive income consists of net unrealized holding gains and
losses on available for sale securities, less the related tax effects.
The Company has disclosed comprehensive income in a separate income
statement.
OPERATING SEGMENTS
The Company had evaluated Financial Accounting Standards Board Statement
No. 131, Disclosures about Segments of an Enterprise and Related
Information, (SFAS No. 131). This statement establishes standards for
reporting information about segments in annual and interim financial
statements. SFAS No. 131 introduces a new model for segment reporting
called the "management approach". The management approach is based on the
way the chief operating decision-maker organizes segments within a
company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure and any other in which management
disaggregates a company. Based on the "management approach" model, the
Company has determined that its principal business, commercial banking,
is comprised of a single operating segment and that SFAS No. 131
therefore has no impact on its financial statements.
-38-
<PAGE> 39
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - ACQUISITION
On April 5, 1999, the Company purchased all of the outstanding stock of Empire
Title & Escrow Corporation ("Empire"). Empire owns 50% of the outstanding
common stock of Colorado Record Data, LLC. The Company paid cash of $1,500,000
and issued 162,369 shares of its common stock to shareholders of Empire. The
issued stock was valued by the Company at $9.238 per share.
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on the estimated fair value
at the date of acquisition. The excess of purchase price over the net assets
acquired has been recorded as an intangible asset, which is amortized over 25
years. The estimated fair values of consolidated assets acquired and
liabilities assumed are summarized as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 96
Investment in title plant 510
Property and equipment 78
Goodwill 3,009
Other assets 112
Deferred income taxes (130)
Other liabilities (363)
Minority interest in consolidated subsidiary (238)
-------
Cash paid, direct costs of acquisition and value
of common stock issued $ 3,074
=======
</TABLE>
Pro forma results of operations presented as though the enterprises had
combined at the beginning of 1998 have not been presented since they are
deemed to be immaterial to the Company's historical results of operations.
The merger agreement with Empire includes the potential for former
shareholders of Empire to realize additional consideration based on the future
performance of Empire during the three years following the purchase. These
shareholders have the contingent right to receive up to $1,000,000 in
additional consideration. This consideration is payable in cash and shares of
the Company's common stock, divided equally. The additional consideration is
subject to upward adjustment to a maximum of $1,500,000 or downward adjustment
based on Empire's actual results of operations in relation to "Pro Forma
Earnings". If Empire's results of operations in relation to Pro Forma Earnings
do not reach a minimum level, no additional compensation is payable for that
period. For the period from the date of acquisition through December 31, 1999,
no additional compensation is payable. Future payments of additional
consideration, if any, would be accounted for as an addition to the purchase
price.
NOTE C - MERGER AGREEMENT
On November 4, 1999, the Company entered into a merger agreement with Compass
Bancshares, Inc. ("Compass"), headquartered in Birmingham, Alabama. If the
merger is completed, shareholders of the Company will receive 3,370,000 shares
of common stock in exchange for their shares of the Company's common stock.
The merger is scheduled for completion during the second quarter of the year
2000.
The Company will operate as a subsidiary of Compass. The merger will be
accounted for under the pooling-of-interests method of accounting.
-39-
<PAGE> 40
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - MERGER AGREEMENT (CONTINUED)
The Company has utilized the services of an investment advisor in connection
with this transaction. A fee of approximately $750,000 is payable to the
investment advisor upon completion of the merger. This cost will be charged to
operations when the merger takes place. Additionally, under the provisions of
the Company's agreement with former shareholders of Empire (discussed in note
B), additional purchase price consideration becomes payable to those
individuals upon the change of control of the Company. The consideration
payable as of December 31, 1999, under the remaining term of the agreement is
$1,125,000 of which one-half would be in the form of common stock.
NOTE D - INVESTMENT SECURITIES
At December 31, 1999, the Company had securities with the following amortized
cost and estimated fair market values (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury securities $ 3,999 $ 1 $ 17 $ 3,983
State and political subdivisions 12,781 128 -- 12,909
Corporate debt securities 1,490 -- 647 843
Corporate equity securities 494 -- 121 373
--------- ---------- ----------- ---------
$ 18,764 $ 129 $ 785 $ 18,108
========= ========== =========== =========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1999 by contractual maturity are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
--------- ---------
<S> <C> <C>
Due in one year or less $ 1,500 $ 1,500
Due after one year through five years 3,478 3,551
Due after five years through ten years 557 558
Due after ten years 12,735 12,126
--------- ---------
$ 18,270 $ 17,735
========= =========
</TABLE>
Securities included in the accompanying balance sheet at December 31, 1999
with a market value of $14,907,000 have been pledged as collateral for public
deposits and for other purposes as required or permitted by law.
Available for sale securities were sold in 1999 and 1998 and are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Gains realized $ 246 $ 46
Losses realized -- --
------ ------
$ 246 $ 46
====== ======
</TABLE>
-40-
<PAGE> 41
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - LOANS AND ALLOWANCE FOR LOAN LOSSES
The components of the loan portfolio at December 31, 1999 are summarized as
follows (in thousands):
<TABLE>
<S> <C>
Land development and construction $ 204,333
Commercial 61,944
Installment and other 7,646
---------
273,923
Less unearned loan fees (2,124)
---------
$ 271,799
=========
</TABLE>
Transactions in the allowance for loan losses for 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance at beginning of year $ 2,610 $ 2,083
Provision for loan losses 1,155 530
Recoveries 2 7
Loans charged off (93) (10)
------- -------
Balance at end of year $ 3,674 $ 2,610
======= =======
</TABLE>
There were no accruing loans having payments delinquent more than ninety
days at December 31, 1999 and 1998.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $4,095,000 and $3,388,000 at December 31, 1999 and 1998,
respectively.
Information related to impaired loans is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Total impaired loans at end of year $4,095 $3,388
Average impaired loans during the year 4,670 1,529
Allowance for loan loss related to impaired loans 614 551
</TABLE>
No interest income was recognized during the periods that loans were deemed
to be impaired. The Company is not committed to lend additional funds to
debtors whose loans are impaired.
No loans were transferred to foreclosed real estate in 1999 or 1998.
NOTE F - BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, 1999, bank premises, leasehold improvements and equipment,
less accumulated depreciation and amortization, consisted of the following
(in thousands):
<TABLE>
<S> <C>
Buildings and improvements $ 5,817
Leasehold improvements 718
Equipment 3,833
Land 1,868
--------
12,236
Less accumulated depreciation and amortization (1,947)
--------
$ 10,289
========
</TABLE>
-41-
<PAGE> 42
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1999 is summarized as follows
(in thousands):
<TABLE>
<S> <C>
Loans $1,353
Investment securities and interest-bearing deposits 258
------
$1,611
======
</TABLE>
NOTE H - DEPOSITS
Deposits are summarized at December 31, 1999 as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted
average
interest
Balance Percent rate
--------- ------- --------
<S> <C> <C> <C>
Demand, noninterest-bearing $ 57,216 21.45% --%
NOW accounts 9,217 3.45 2.02
Money market deposit accounts 64,074 24.02 4.04
Savings deposits 6,747 2.53 2.20
Certificates of deposit
Under $100,000 47,284 17.72 5.32
$100,000 and over 82,262 30.83 5.57
--------- ------
$ 266,800 100.00% 4.59%
========= ======
</TABLE>
Interest expense on deposits for 1999 and 1998 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
NOW accounts $ 173 $ 239
Money market deposit accounts 2,583 2,800
Savings deposits 151 170
Certificates of deposit
Under $100,000 2,413 1,850
$100,000 and over 2,441 683
------ ------
$7,761 $5,742
====== ======
</TABLE>
As of December 31, 1999, the Company has brokered certificates of deposit
totaling $58,122,000. These bear interest at rates ranging from 5.25% to
6.72% and have maturities of various dates through February 2002.
-42-
<PAGE> 43
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - DEPOSITS (CONTINUED)
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
--------------------------------------------------------------------
Rate 2000 2001 2002 2003 2004 Thereafter Total
-------------- -------- -------- -------- ------ ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
3.99% or less $ 1,431 $ -- $ 8 $ -- $ -- $ -- $ 1,439
4.00% to 4.99% 8,436 1,288 40 -- 43 -- 9,807
5.00% to 5.99% 78,836 1,946 19 5 -- -- 80,806
6.00% to 6.99% 28,154 7,588 1,424 252 -- 76 37,494
-------- -------- -------- ------ ------ ---------- --------
$116,857 $ 10,822 $ 1,491 $ 257 $ 43 $ 76 $129,546
======== ======== ======== ====== ====== ========== ========
</TABLE>
NOTE I - BORROWING COMMITMENTS
As of December 31, 1999, the Bank had lines of credit with Federal Home Loan
Bank, Bankers' Bank of the West, and other banks of $21,722,000, $16,730,000
and $700,000, respectively. At December 31, 1999, $11,000,000 was advanced
on these lines.
NOTE J - COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In February 1998, MB Capital I, a special-purpose wholly-owned Delaware
trust subsidiary of the Company, completed an offering of 1,200,000 shares
(issue price of $10 per share) totaling $12.0 million of fixed-rate 8.75%
Cumulative Trust Preferred Securities (Preferred Securities), which are
guaranteed by the Company. MB Capital I invested the total proceeds it
received in 8.75% Junior Subordinated Deferrable Interest Debentures
(Debentures) issued by the Company. Interest paid on the Debentures will be
distributed to the holders of the Preferred Securities. As a result, under
current tax law, distributions to the holders of the Preferred Securities
will be tax deductible by the Company. Distributions payable on the
Preferred Securities are recorded as interest expense in the consolidated
statements of income. These Debentures are unsecured and rank junior and are
subordinate in right of payment to all senior debt of the Company.
The distribution rate payable on the Preferred Securities is cumulative and
payable quarterly in arrears and commenced on April 15, 1998. The Company
has the right, subject to events of default, to defer payments of interest
on the Debentures at any time by extending the interest payment period for a
period not exceeding 20 consecutive quarters with respect to each deferral
period, provided that no extension period may extend beyond the redemption
or maturity date of the Debentures. The Preferred Securities are subject to
mandatory redemption upon repayment of the Debentures. The Debentures mature
on February 9, 2028, which may be shortened to not earlier than February 9,
2003, if certain conditions are met, or at any time upon the occurrence and
continuation of certain changes in either the tax treatment or the capital
treatment of MB Capital I, the Debentures or the Preferred Securities. The
Company has the right to terminate MB Capital I and cause the Debentures to
be distributed to the holders of the Capital Securities in liquidation of
such trust, all subject to the Company having received prior approval of the
Office of Thrift Supervision, if required.
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and stand-by letters of credit.
Those instruments involve, to a varying degree, elements of credit risk in
excess of the amount recognized in the statement of financial position. The
contract amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
-43-
<PAGE> 44
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
The Company's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial instruments whose contract amounts represent credit risk as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Commitments to grant loans $ 25,916
Unfunded commitments under lines of credit 138,855
Stand-by letters of credit 17,937
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon or be participated to other financial
institutions, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's
credit-worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation. Collateral
held varies, but may include accounts receivable, inventory, property, plant
and equipment and income-producing commercial properties.
Stand-by letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE L - LEASE COMMITMENTS
Future minimum rental and lease payments under noncancellable operating
leases for premises, expiring at various dates through 2006 are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
2000 $ 884
2001 898
2002 759
2003 627
2004 522
Thereafter 270
-------
$ 3,960
=======
</TABLE>
Total lease expense for all operating leases was $685,000 and $445,000 in
1999 and 1998, respectively.
-44-
<PAGE> 45
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - INCOME TAXES
The provision for income taxes for 1999 and 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Current
Federal $3,286 $1,749
State 466 253
------ ------
3,752 2,002
Deferred
Federal (298) (71)
State (51) (11)
------ ------
(349) (82)
------ ------
$3,403 $1,920
====== ======
</TABLE>
The effective income tax rate varies from the statutory federal rate because
of several factors, the most significant being nontaxable interest income
earned on obligations of state and municipalities. The following table
reconciles the Company's effective tax rate to the statutory federal rate.
<TABLE>
<CAPTION>
1999 1998
---------------------- -------------------
Amount Percent Amount Percent
------- ------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Tax expense at statutory rate $ 3,247 34.0% $ 1,946 34.0%
Increase (decrease) in taxes due to:
Tax exempt municipal interest (320) (3.4) (235) (4.1)
State tax, net of federal tax effect 308 3.2 167 2.9
Other 168 1.8 42 .7
------- ------- -------- --------
Total provision for income taxes $ 3,403 35.6% $ 1,920 33.5%
======= ======= ======== ========
</TABLE>
Deferred tax assets and liabilities are recorded based on the differences
between financial statement and tax basis of assets and liabilities and the
tax rates in effect when these differences are expected to reverse. Timing
differences in the recognition of revenue and expense for tax and financial
reporting purposes resulted in a deferred tax asset as of December 31, 1999
as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets
Provision for loan losses $ 1,195
Market value adjustment to investment securities
available for sale 245
Other 19
-------
Total deferred tax assets 1,459
Deferred tax liabilities
Bases of fixed assets and title plant (258)
-------
Total deferred tax liabilities (258)
-------
Net deferred tax asset $ 1,201
=======
</TABLE>
-45-
<PAGE> 46
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - RELATED PARTY TRANSACTIONS
As discussed in note R, the Company, as of September 1, 1998, became a
unitary thrift holding company, and as such, has the power to engage in
activities not currently allowed under the Bank Holding Company Act. Orchard
Valley Financial Corporation ("OVFC"), a bank holding company related to the
Company through common ownership, was notified that it would either be
required to reduce its ownership in the Company to less than 5% or the
Company would be prevented from exercising its powers under its new
regulations. OVFC agreed to reduce its ownership of the Company to under 5%.
The Company paid OVFC $355,000 in 1999 to reimburse it for the income tax
liability incurred due to the involuntary sale of the Company's stock.
The Company has entered into certain loan participations with First State
Bank of Hotchkiss, a financial institution related through common ownership.
Approximate loan principal balances outstanding under these participations
at December 31, 1999 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Participations sold $ 14,520
Participations purchased 2,446
</TABLE>
The Company has also sold loan participations to other related parties
(shareholders, directors, family members, businesses related through common
ownership). At December 31, 1999 the participations sold to related parties
were approximately $6,353,000.
The following is an analysis of loans that were made to shareholders,
directors and executive officers of the Company, and to corporations and
others associated with those individuals (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1999 $ 1,305
New loans 1,295
Repayments (689)
-------
Balance at December 31, 1999 $ 1,911
=======
</TABLE>
Certain officers, directors, and shareholders of the Company personally
guaranteed a note payable which was repaid in 1998. In return for the
guarantee, the Company agreed to indemnify the guarantors for all
liabilities, costs or expenses relating to the guarantee and to provide
additional compensation to the guarantors. The additional compensation has
consisted of an aggregate fee equal to 1.5% of the outstanding balance of
the loan on each anniversary date plus a performance bonus based on earnings
of the Bank as specified in the agreement. No fees were paid to guarantors
in 1999. Total fees paid to the guarantors were $350,000 in 1998.
The Company has a consulting agreement with a company owned by an individual
who is an officer, director and shareholder of the Company. Payments by the
Company under the agreement are $5,000 per month. The term of the agreement
is for one year, but automatically renews unless explicitly terminated by
either party.
NOTE O - EMPLOYEE BENEFITS
Through June 30, 1998, the Bank had an IRA contribution plan available for
all personnel who have been employed at least six months. In 1998, the Board
of Directors of the Bank approved the MegaBank 401(k) Savings Plan. The Plan
was effective July 1, 1998. Employees who have completed three months of
service, and meet other conditions, are eligible for the Plan. The Bank will
match 50% of the first 6% of compensation which employees contribute to the
Plan. The Bank's contributions to the Plan vest ratably over six years. The
Plan replaces the IRA contribution plan. Contributions in 1999 and 1998 were
$68,000 and $21,000, respectively.
-46-
<PAGE> 47
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
--------- ---------
<S> <C> <C>
Financial assets
Cash and due from banks $ 13,133 $ 13,133
Federal funds sold 9,350 9,350
Other interest-bearing deposits 117 117
Investment securities available for sale 18,108 18,108
Federal Home Loan Bank stock 944 944
Loans, less allowance for loan losses 268,125 267,891
Accrued interest receivable 1,611 1,611
Financial liabilities
Deposits
Non-interest bearing 57,216 57,216
Interest-bearing 209,584 209,430
Federal Home Loan Bank borrowings 11,000 11,000
Securities sold under agreements to repurchase 358 358
Accrued interest payable 886 886
Company obligated manditorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures 12,000 10,650
Unrecognized financial instruments (net of contract amount)
Commitments to grant loans 25,916 25,916
Unfunded commitments under lines of credit 138,885 138,885
Stand-by letters of credit 17,937 17,937
</TABLE>
The following summary presents the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments. The Company
operates as a going concern and except for its investment portfolio, no
active market exists for its financial instruments. Much of the information
used to determine fair value is highly subjective and judgmental in nature
and, therefore, the results may not be precise. The subjective factors
include, among other things, estimates of cash flows, risk characteristics,
credit quality and interest rates, all of which are subject to change. Since
the fair value is estimated as of the balance sheet date, the amounts which
will actually be realized or paid upon settlement or maturity of the various
financial instruments could be significantly different.
CASH AND CASH EQUIVALENTS
For these short-term instruments, the carrying amount approximates fair
value.
INVESTMENTS
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
The carrying amount of accrued interest receivable approximates its
fair value.
-47-
<PAGE> 48
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same
remaining maturities. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. For loans where collection of
principal is in doubt, an allowance for losses has been estimated.
Loans with similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates its
fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, NOW accounts, and
certain money market deposits is the amount payable on demand at the
reporting date (i.e. their carrying amount). The fair value of fixed
maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
SHORT-TERM BORROWINGS
For short-term borrowings, the carrying amount is a reasonable estimate
of fair value.
LONG-TERM BORROWINGS
The fair value of long-term borrowings is estimated by discounting the
future cash flows using the current rate at which a similar loan could
be financed.
TRUST PREFERRED SECURITIES
For Trust Preferred Securities, the fair value is determined based on
the quoted market price.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND LINES OF CREDIT
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counterparts. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit and lines of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the
obligations with the counterparts at the reporting date.
-48-
<PAGE> 49
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS
AUTHORIZED CAPITAL AND STOCK SPLIT
Effective January 15, 1998, the Company increased its authorized
capital stock to 50 million shares of Common Stock and authorized 10
million shares of Preferred Stock. The increase was made to provide for
possible future needs of the Company. In 1998, the Company effected a
thirty-for-one stock split. References in the accompanying financial
statements to numbers of shares and per share amounts have been
retroactively restated to reflect the stock split.
STOCK PURCHASE AGREEMENT
The Company has a Stock Purchase Agreement with certain of its
shareholders. This agreement, as amended and restated, provides that
upon the death of the Company's Chairman of the Board of Directors, the
shareholders will have the option to require the Company to purchase a
pro rata portion of their shares of the Company's stock to the extent
the Company receives proceeds from a life insurance policy on the life
of the Chairman. These shareholders currently hold an aggregate of
2,658,192 shares of common stock. Based on an amendment to the
agreement in 1998, the purchase price of the common stock would be
based on the greater of 80% of its average closing bid price on any
recognized quotation system for a designated period or its appraised
value. The Company has purchased a life insurance policy in the amount
of $3,000,000 on the Chairman.
STOCK INCENTIVE PLAN
In August 1998, the Company adopted the 1998 Long-Term Incentive Plan
(the "Incentive Plan"). The purpose of the Incentive Plan is to provide
continuing incentives to the Company's and its subsidiaries' key
employees, which may include officers and members of the Board of
Directors. The Incentive Plan provides for an authorization of 500,000
shares of common stock for issuance thereunder. Under the Incentive
Plan, the Company may grant to participants awards of stock options,
restricted stock, stock appreciation rights, performance shares or any
combination thereof.
The Incentive Plan is administered by the Board of Directors or a
Compensation Committee of the Board of Directors composed of at least
two non-employee members. Subject to the terms of the Incentive Plan,
the Board or Compensation Committee determines, among other matters,
the persons to whom awards are granted and the terms of the awards.
Under the stock option component of the Incentive Plan, the Company may
grant both incentive stock options ("incentive stock options") intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and options which are not qualified as incentive
stock options. Incentive stock options may not be granted at an
exercise price of less than the fair market value of the common stock
on the date of grant, while non-qualified stock options may be granted
at any exercise price. The exercise price may be paid in cash, in
shares of common stock (valued at fair market value at the date of
exercise) or by a combination of such means of payment, as may be
determined by the Board or Compensation Committee.
Under the restricted component of the Incentive Plan, the Company may
award shares of restricted stock upon payment of consideration as
determined by the Board or Compensation Committee. Upon the award, a
restriction period (not to exceed ten years) and/or performance goals
may be set. Subject to the terms of each individual award, the
recipient forfeits a restricted stock award upon termination of
employment during the restriction period and any consideration paid by
the participant is returned.
An award of a stock appreciation right allows a recipient to receive a
cash payment or shares of common stock to the extent of any
appreciation in the book value or the fair market value of the common
stock of the Company over a specified period of time. Stock
appreciation rights may also be awarded in tandem with stock options,
and recipients of such tandem awards may elect to exercise the award as
a stock option or as a stock appreciation right.
-49-
<PAGE> 50
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)
Under the performance share component of the Incentive Plan, recipients
are awarded a specified number of shares of common stock of the Company
subject to the recipient or the Company attaining specified performance
goals as the Board or Compensation Committee may determine. The Board
or Compensation Committee, under certain circumstances, may waive or
modify performance criteria on existing performance share awards.
The Incentive Plan will be discontinued in the event of the dissolution
or liquidation of the Company or in the event of a reorganization (such
as a merger, consolidation, or sale of substantially all of the assets
of the Company) in which the Company is not the surviving or acquiring
company, or in which the Company is or becomes a wholly-owned
subsidiary of another company after the effective date of the
reorganization and no plan or agreement respecting the reorganization
is established which specifically provides for the continuation of the
Incentive Plan and the change, conversion, or exchange of the common
stock relating to existing awards under the Incentive Plan for
securities of another corporation. Upon the dissolution of the
Incentive Plan, all awards will become fully vested and all outstanding
options and stock appreciation rights will become immediately
exercisable by the holder thereof.
On September 1, 1998, the Company granted options to purchase up to
108,500 shares of common stock to directors and employees of the
Company, exercisable as follows:
<TABLE>
<CAPTION>
Options Exercise price
granted per share
------- ------------
<S> <C>
58,500 $10
50,000 11
</TABLE>
These options were issued at the completion of the Company's public
stock offering.
A summary of the activity in the Incentive Plan for 1999 and 1998 is
presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 108,500 $ 10.46 -- $ --
Granted 2,500 10.00 108,500 10.46
Exercised -- -- -- --
Forfeited (14,000) 10.00 -- --
-------- -------- -------- ---------
Outstanding, end of year 97,000 10.52 108,500 10.46
======== ========
Options exercisable, end of year None None
</TABLE>
-50-
<PAGE> 51
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q - EQUITY TRANSACTIONS AND AGREEMENTS (CONTINUED)
Of the 97,000 options outstanding at December 31, 1999, 15,000 were
nonqualified stock options and 82,000 were incentive stock options. The
exercise price of the options was the estimated fair market value of
the Company's common stock as of the date granted. Options must be
exercised within a ten-year period. Options to purchase shares of
common stock are exercisable as follows:
<TABLE>
<CAPTION>
Exercisable
On or after options
----------------- -----------
<S> <C>
September 1, 2000 10,000
September 1, 2001 29,100
September 1, 2002 57,900
-----------
97,000
===========
</TABLE>
The Stock Incentive Plan is accounted for under APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost is
recognized for the Plan. Had compensation cost for the Plan been
determined consistent with the fair value method of SFAS No. 123, the
Company's net income and income per share for 1999 and 1998 would not
have been materially effected.
NOTE R - REGULATORY MATTERS
In September 1998, the Company received permission from the Office of Thrift
Supervision, Department of Treasury, to change its status to a savings and
loan holding company within the meaning of the Home Owners' Loan Act of 1933
("HOLA"), as amended. The Company is registered with the Office of Thrift
Supervision ("OTS") and subject to OTS regulations, examinations, supervision
and reporting requirements. In addition, in September 1998, the Bank received
permission from the Office of Thrift Supervision to convert the Bank's
charter from a state-chartered stock institution to a federal stock savings
bank. Management believes that the Bank's balance sheet is currently more
reflective of a thrift than a commercial bank. In connection with its charter
conversion, the Bank changed its name from MegaBank of Arapahoe to MegaBank.
The Bank is subject to various regulatory capital requirements administered
by the OTS. 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 1 capital to risk-weighted assets (as
defined), and of Tier 1 (core) capital and tangible capital to adjusted total
assets. Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
-51-
<PAGE> 52
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - REGULATORY MATTERS (CONTINUED)
The Bank is well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, institutions must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 (core)
ratios as set forth in the table below as of December 31, 1999:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(to risk-weighted assets) $37,345 12.90% $ 23,160 >or=8.0% $ 28,950 >or=10.0%
Tier 1 risk-based capital
(to risk-weighted assets) 34,038 11.76% 11,578 >or=4.0% 17,367 >or=6.0%
Core capital
(to adjusted tangible assets) 34,038 10.64% 9,588 >or=3.0% 15,980 >or=5.0%
Tangible capital
(to tangible assets) 34,038 10.64% 9,588 >or=1.5% N/A N/A
</TABLE>
Cash dividends paid to the Company by the Bank amounted to $1,500,000 in
1999. The payment of dividends to the Company by the Bank is subject to
various regulatory limitations.
-52-
<PAGE> 53
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
The following presents the condensed balance sheet as of December 31, 1999
and statements of income and cash flows for each of the two years in the
period ended December 31, 1999 for MegaBank Financial Corporation:
MegaBank Financial Corporation
BALANCE SHEET
December 31, 1999
(Amounts in thousands)
<TABLE>
<S> <C>
ASSETS
Cash and interest bearing deposits $ 5,590
Investment securities available for sale 1,217
Investment in bank subsidiary 34,109
Investment in trust subsidiary 317
Investment in title company 3,432
Property and equipment 1,747
Trust preferred securities issuance cost, net 702
Other assets 864
--------
Total assets $ 47,978
========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Accrued interest payable and other liabilities $ 1,017
Company obligated manditorily redeemable
preferred securities of subsidiary trust holding
solely Junior Subordinated Debentures 12,371
Shareholders' equity 34,590
--------
Total liabilities and shareholders' equity $ 47,978
========
</TABLE>
-53-
<PAGE> 54
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
MegaBank Financial Corporation
STATEMENTS OF INCOME
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Income
Dividends from subsidiary $ 1,500 $ --
Interest 386 148
Rental income from subsidiary 415 407
Other rental income 164 121
Gain on sale of investment securities -- 34
Miscellaneous income 100 6
------- -------
Total income 2,565 716
Expenses
Interest 1,108 981
Occupancy and equipment expense 469 513
Other 693 853
------- -------
Total expenses 2,270 2,347
------- -------
Income (loss) before income taxes and equity
in undistributed net income of subsidiaries 295 (1,631)
Income tax benefit 365 605
------- -------
Income (loss) before undistributed net
income of subsidiaries 660 (1,026)
Equity in undistributed net income of subsidiaries 5,486 4,831
------- -------
Net income $ 6,146 $ 3,805
======= =======
</TABLE>
-54-
<PAGE> 55
MEGABANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
MegaBank Financial Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31,
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,146 $ 3,805
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 34 19
Amortization of preferred securities issuance costs 26 23
Equity in undistributed net income of subsidiaries (5,486) (4,831)
Gain on sale of investment securities available for sale -- (34)
(Increase) decrease in other assets (280) (73)
Increase (decrease) in accrued expenses and other liabilities 749 (62)
-------- --------
Net cash provided by (used in) operating activities 1,189 (1,153)
Cash flows from investing activities
Purchase of securities available for sale -- (2,145)
Proceeds for sales of securities available for sale -- 661
Acquisition of subsidiary under purchase method of accounting,
net of cash acquired (1,478) --
Additions to property and equipment (548) (1,250)
Capital investment in bank subsidiary -- (11,000)
Capital investment in title company subsidiary (500) --
Investment in trust subsidiary -- (371)
-------- --------
Net cash used in investing activities (2,526) (14,105)
Cash flows from financing activities
Preferred securities issuance costs -- (495)
Principal payments on note payable -- (2,000)
Proceeds from issuance of preferred securities -- 12,371
Proceeds from sale of common stock -- 12,013
-------- --------
Net cash provided by financing activities -- 21,889
-------- --------
Net increase (decrease) in cash (1,337) 6,631
Cash at beginning of year 6,927 296
-------- --------
Cash at end of year $ 5,590 $ 6,927
======== ========
</TABLE>
-55-
<PAGE> 56
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no such changes and disagreements during the applicable
period.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The executive officers and directors of the Company, their respective
ages and positions as of March 1, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Thomas R. Kowalski 60 Chairman of the Board and Chief Executive Officer of the Company and the Bank
Larry A. Olsen (1) 54 President, Chief Operating Officer and Director of the Company and the Bank
Raymond L. Anilionis 52 Vice President and Director of the Company and Director of the Bank
Susan A. Putland 52 Vice President, Finance, Chief Accounting Officer, and Secretary of the Company
and Vice President, Financial Services, Treasurer and Secretary of the Bank
Ryan R. Kowalski 32 Director of the Company and Vice President and Director of the Bank
Dr. Donald B. Brown (1) 71 Director of the Company and the Bank
William F. Sievers (1) 56 Director of the Company and the Bank
Roger L. Morgan 57 Director of the Company and the Bank
</TABLE>
- ----------
(1) Member of the Audit Committee.
There are no family relationships among any of the directors and
executive officers of the Company or the Bank with the exception that Thomas R.
Kowalski is the father of Ryan Kowalski, a Director and Vice President of Real
Estate of the Bank. All directors of the Company hold office until the next
meeting of shareholders or until their successors are elected and qualified.
Thomas R. Kowalski has been Chairman of the Board and Chief Executive
Officer of the Company since he founded it in 1984, and has served in the same
positions for the Bank since January 1983. Since 1980 he has been Chairman of
the Board and Chief Executive Officer of the First State Bank of Hotchkiss, a
Colorado bank. Mr. Kowalski is also Chief Executive Officer, and beneficial
owner of approximately 97.0% of the outstanding stock, of Orchard Valley
Financial Corporation, the bank holding company that owns First State Bank of
Hotchkiss. From October 1972 through September 1992, Mr. Kowalski was President
of Realtek Company, a general contractor and real estate development corporation
he sold to Ryan Kowalski in 1992.
Larry A. Olsen has been President, Chief Operating Officer and Director
of the Company since 1997 and has served in the same positions of the Bank since
1994. From 1989 to 1994, Mr. Olsen was the Chief Operating Officer of Non-Legal
Affairs for Codilis and Stawiarski, P.C., a law firm. From 1972 to 1988, Mr.
Olsen was employed by Columbia Savings & Loan Association, having served from
1986 to 1988 as President and Chief Operating Officer.
Raymond L. Anilionis has been a Vice President and Director of the
Company since 1984 and a Director of the Bank since 1984. Since January 1994,
Mr. Anilionis has been the President of Landmark Realty Advisors,
-56-
<PAGE> 57
a real estate consulting and appraisal company. From 1974 to December 1993, Mr.
Anilionis was employed in the mortgage banking and real estate development and
management industry by Mortgage Investment Company and Associated Investment
Company in various positions, including Senior Vice President. He is also the
owner of First Fidelity Service Corp., a real estate consulting firm.
Susan A. Putland has been Vice President, Finance and Secretary of the
Company since 1997 and Vice President, Financial Services of the Bank since
1996. Ms. Putland also serves as an independent director of CITGO Funding
Company, L.L.C., and CITGO Funding Corporation II, special purpose finance
securitization entities. Ms. Putland was Vice President, Structured Finance for
The Chotin Group Corporation and its affiliates, a privately-held securities
issuer and investor, from 1989 to December 1995. Subsequent to December 31,
1999, Ms. Putland was appointed Chief Accounting Officer for the Company and
Treasurer for the Bank.
Ryan R. Kowalski has been a Director of the Company since 1999 and a
Vice President and Director of the Bank since 1997. Prior to his employment with
the Bank, Mr. Kowalski was self-employed as a land developer and residential and
commercial general contractor for nine years.
Dr. Donald B. Brown has been a Director of the Company since 1997 and a
Director of the Bank since 1989. Dr. Brown previously served as a Director of
the Company from 1989 to 1994. Dr. Brown has practiced medicine as an
endocrinologist since 1961.
William F. Sievers has been a Director of both the Company and the Bank
since 1997. Since 1994, Mr. Sievers has been employed with Lucent Technologies
as Program Management Vice President in the Network Systems Division.
Previously, he worked for AT&T for over 30 years in several capacities,
including the senior management positions of Manufacturing Vice President and
Regional Vice President.
Roger L. Morgan has been a Director of the Company and the Bank since
January, 1999. Prior to his retirement in 1998, for twelve years, Mr. Morgan was
President, Chief Operating Officer and Director of HomeAmerican Mortgage
Corporation, a nationwide residential mortgage lender affiliated with M.D.C.
Holdings, Inc., and Richmond American Homes.
Directors of the Company receive $500 for each regular board meeting
attended. Officers and directors of the Company in their capacities as Directors
of the Bank, receive $300 per Board meeting attended. In addition, directors are
reimbursed for expenses incurred in attending board meetings.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the
Company to its Chief Executive Officer and all other named executive officers
who received cash compensation exceeding $100,000 for 1999, 1998 or 1997. No
other executive officer of the Company received compensation from the Company
exceeding $100,000 during 1999, 1998 and 1997.
-57-
<PAGE> 58
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Awards Payouts
----------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Compen- Stock Options/ LTIP Compen-
Name Salary Bonus sation Awards(s) SARs Payouts sation
and Principal Position Year ($) ($) ($) ($) ($) ($) ($)
- ------------------------------ ----- -------- ------------ --------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas R. Kowalski, 1999 150,000 692,500(1) -- -- -- -- --
Chairman of the Board 1998 150,000 298,490 -- -- -- -- --
and CEO 1997 150,000 275,000 -- -- -- -- --
Larry A. Olsen, President 1999 125,000 66,100 -- -- -- -- 3,751
and COO of the Company 1998 105,000 11,167 -- -- -- -- 1,444
and the Bank 1997 86,250 8,733 -- -- -- -- --
Ryan R. Kowalski, Vice 1999 95,000 20,600 -- -- -- -- 1,425
President of the Bank 1998 95,000 19,259 -- -- -- -- 1,108
1997 95,000 5,666 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) A portion of the bonus reported for 1999 was paid in 1999 but was
accrued in 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
The following table sets forth the aggregate options held by the above
named executive officers as of December 31, 1999. The options were granted in
1998. No options were granted to or exercised by the specified officers in 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Shares Number of Securities In-the-Money Options at
Acquired on Value Underlying Options December 31, 1999
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
------------------------------ ------------- -------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Thomas R. Kowalski,
Chairman of the Board
and CEO -- -- 0/50,000 $0/$0
Larry A. Olsen, President
and COO of the Company
and the Bank -- -- 0/5,000 $0/$0
Ryan R. Kowalski, Vice
President of the Bank -- -- 0/5,000 $0/$0
------------------------------ ------------- -------------- ----------------------------- -------------------------
</TABLE>
STOCK INCENTIVE PLAN. In August 1998, the Company adopted the 1998
Long-Term Incentive Plan (the "Incentive Plan"). The purpose of the Incentive
Plan is to provide continuing incentives to the Company's and its subsidiaries'
key employees, which may include officers and members of the Board of Directors.
The Incentive Plan authorizes 500,000 shares of common stock to be reserved for
issuance thereunder. Under the Incentive Plan, the Company may grant to
participants awards of stock options, restricted stock, stock appreciation
rights, performance shares or any combination thereof. The Incentive Plan is
administered by the Board of Directors or a Compensation Committee of the Board
of Directors composed of at least two non-employee members. Subject to the terms
of the Incentive Plan, the Board or Compensation Committee determines, among
other matters, the persons to whom awards are granted and the terms of the
awards.
Under the stock option component of the Incentive Plan, the Company may
grant both incentive stock options intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and options which are
not qualified as incentive stock options. Incentive stock options may not be
granted at an exercise price of less than the fair market value of the common
stock on the date of grant, while non-qualified stock options may be granted at
any exercise price. The exercise price may be paid in cash, in shares of common
stock (valued at fair market value at the date of exercise) or by a combination
of such means of payment, as may be determined by the Board or Compensation
Committee.
Under the restricted stock component of the Incentive Plan, the Company
may award shares of restricted stock upon payment of consideration as determined
by the Board or Compensation Committee. Upon the award, a restriction period
(not to exceed 10 years) and/or performance goals may be set. Subject to the
terms of each individual award, a restricted stock award is forfeited upon
termination of employment by the recipient during the restriction period and any
consideration paid by the participant is returned. An award of a stock
appreciation right
-58-
<PAGE> 59
allows a recipient to receive a cash payment or shares of common stock to the
extent of any appreciation in the book value or the fair market value of the
common stock of the Company over a specified period of time. Stock appreciation
rights may also be awarded in tandem with stock options, and recipients of such
tandem awards may elect to exercise the award as a stock option or as a stock
appreciation right. Under the performance share component of the Incentive Plan,
recipients are awarded a specified number of shares of common stock subject to
the recipient or the Company attaining specified performance goals. The Board or
Compensation Committee, under certain circumstances, may waive or modify
performance criteria on existing performance share awards.
The Incentive Plan will be discontinued in the event of the dissolution
or liquidation of the Company or in the event of a reorganization in which the
Company is not the surviving or acquiring company, or in which the Company is or
becomes a wholly-owned subsidiary of another company after the effective date of
the reorganization and no plan or agreement respecting the reorganization is
established which specifically provides for the continuation of the Incentive
Plan and the conversion, or exchange of the common stock relating to existing
awards for securities of another company. Upon the dissolution of the Incentive
Plan, all awards will become fully vested and all outstanding options and stock
appreciation rights will become immediately exercisable by the holders.
In the case of any reclassification, recapitalization, stock dividend,
stock split or other similar event, the Board or Compensation Committee is
empowered to make adjustments as to the number and kind of securities covered by
each outstanding award and, where applicable to adjust the exercise price
thereunder.
TERMINATION OF THE PLAN. As a result of the proposed merger with
Compass, the Board of Directors has determined to discontinue the Incentive Plan
effective March 6, 2000. All options will be fully vested as of that date and
all shares underlying the options may be exercised on or after that date;
provided, however, that the options will expire and become void as of March 21,
2000. Termination of the Plan and the acceleration of the vesting of the options
are contingent on consummation of the merger with Compass. If, for any reason,
the merger is not consummated, the Plan and options will continue in full force
and effect under the original terms.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF
1934. Based solely upon a review of Forms 3 and 4 and amendments thereto and
Forms 5 furnished to the Company and with respect to 1999, the Company is
unaware of any late filings. The Company is unaware of any other known failure
to report in compliance with Section 16(a).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock of the Company, as of February 15, 2000, by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
the outstanding Common Stock and (ii) each director of the Company and certain
executive officers and (iii) all directors and executive officers as a group.
Unless otherwise indicated, based on information furnished by such owners,
management believes that the shareholders listed below have sole investment and
voting power with respect to their shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
---------------- ------------- ----------
<S> <C> <C>
Thomas R. Kowalski. 2,970,192(1) 38.2%
8100 East Arapahoe Road
Englewood, Colorado 80112
Raymond L. Anilionis 642,780(2) 8.3%
9034 East Easter Place, Suite 202
Englewood, Colorado 80112
</TABLE>
-59-
<PAGE> 60
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED OF CLASS
---------------- ------------- ----------
<S> <C> <C>
Warren P. Cohen 707,500(3) 9.1%
595 South Broadway, Suite 200
Denver, Colorado 80209
Realtek Company Employees' Profit 614,820(4) 7.9%
Sharing Plan and Trust
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Vernon J. Purdy 468,750 6.0%
1900 East Girard, Suite 509
Englewood, Colorado 80110
Larry A. Olsen 151,590 2.0%
8100 East Arapahoe Road
Englewood, Colorado 80112
Susan A. Putland 545 *
8100 East Arapahoe Road
Englewood, Colorado 80112
Hiram J. Welton 1,000 *
8100 East Arapahoe Road
Englewood, Colorado 80112
Ryan R. Kowalski 76,890(5) 1.0%
8100 East Arapahoe Road
Englewood, Colorado 80112
Dr. Donald B. Brown -- --
6700 East Berry
Englewood, Colorado 80111
William F. Sievers 2,000 *
26 West Dry Creek Circle, Suite 750
Littleton, Colorado 80120
Roger L. Morgan -- --
1615 Country Club Road
Ft. Collins, Colorado 80524
All executive officers and
directors as a group (nine persons) 3,768,107 48.5%
</TABLE>
- ------------
(1) Of this amount, 1,343,232 shares are owned directly, and all other shares
are owned indirectly through entities or persons controlled by Mr.
Kowalski.
(2) Of this amount, 399,000 shares are owned directly, and all other shares are
owned by entities controlled by Mr. Anilionis.
(3) Of this amount, 455,473 shares are owned directly, and all other shares are
owned by an entity controlled by Mr. Cohen.
(4) Due to Mr. Kowalski's significant beneficial ownership of the named entity,
these shares are included in the ownership of Thomas R. Kowalski in the
table.
(5) Ryan R. Kowalski owns 76,890 shares through the Ryan R. Kowalski Trust;
however, he disclaims beneficial ownership of such securities. Since Thomas
R. Kowalski is the trustee of the Ryan R. Kowalski Trust, these shares are
included in the ownership of Thomas R. Kowalski.
* Less than 1.0%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PROPERTIES. Nagrom LLC, a Colorado limited liability company, owns the
building and land in which the Company's principal office is located. The Bank
leases office space in the building. The lease began in 1995 and is for a period
of 10 years. The rent for 1999 was approximately $350,000, and will increase
3.5% per year. The Board of Directors of the Company believes that the rates are
comparable to those that could be obtained from unaffiliated third parties.
Nagrom LLC is beneficially owned by Kowalski Capital LLC, a Colorado limited
liability company (71.0%), Raymond L. Anilionis (13.0%), an officer and director
of the Company, and Med Partnership LLLP (16.0%) an entity controlled by Warren
P. Cohen, a director of the Bank. Kowalski Capital LLC is owned 95.0% by the
Thomas R. Kowalski Irrevocable Trust. The beneficiaries of the trust are Ryan
Kowalski (the adult
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<PAGE> 61
son of Thomas R. Kowalski) and Ryan Kowalski's minor daughter. The remaining
5.0% of Kowalski Capital LLC is owned by Respond Corp., of which Thomas R.
Kowalski is the sole shareholder.
1996 Newton LLC, a Colorado limited liability company, leases space to
the Bank for its branch at 32nd Avenue and Newton, Denver. 1996 Newton LLC is
owned by Kowalski Capital (50.0%), Raymond L. Anilionis (25.0%) and the Warren
P. Cohen Beneficial Trust (25.0%). The lease commenced in May 1996 and runs for
a period of 10 years. Rent is approximately $32,000 per annum, and incrementally
increases to $36,000 per year for the last five years of the lease. The Board of
Directors of the Company believes that the rates are comparable to those that
could be obtained from unaffiliated third parties.
Osage 3734, LLC, a Colorado limited liability company, leases space to
the Bank for its new centralized processing center at 3734 Osage Street, Denver.
Osage 3734, LLC is owned equally by KLA/4 Family Limited Partnership RLLLP, an
entity controlled by Raymond L. Anilionis, Ryan Kowalski, Vice President and
Director of the Bank and son of Thomas R. Kowalski, and Respond Corporation, an
entity owned by Thomas R. Kowalski. Rent is approximately $48,000 per annum and
the Bank occupies the building under the terms of a ten-year triple net lease.
The Board of Directors of the Company believes that the leasing terms are
comparable to those that could be obtained from unaffiliated third parties.
In connection with the consummation of the merger, Compass will merge
Osage 3734 LLC, 1996 Newton LLC and Nagrom LLC (collectively "LLC's") in
exchange for 150,000 shares of Compass common stock. It is a condition to the
completion of the merger that Compass merge the LLC's'.
EMPLOYMENT AGREEMENTS. Compass Bank and Thomas R. Kowalski, Chairman of
the Company, entered into an employment agreement, which will become effective
upon completion of the merger with Compass. Under the employment agreement, Mr.
Kowalski will serve as a senior officer of Compass Bank for three years
beginning at the effective time of the Merger. Mr. Kowalski's annual salary will
be $175,000 with merit increases based upon performance. Mr. Kowalski will also
receive benefits available to Compass Bank employees of equal title and base
salary. The employment agreement also contains noncompetition and
confidentiality provisions. Larry Olsen, President of the Company, also entered
into an employment agreement to become effective upon completion of the merger
with Compass. Under the employment agreement, Mr. Olsen will serve as a senior
officer of Compass Bank for two years beginning at the effective time of the
merger. Mr. Olsen's annual salary will be $145,000 with merit increases based
upon performance. Mr. Olsen will also receive benefits available to Compass Bank
employees of equal title and base salary. The employment agreement also contains
noncompetition and confidentiality provisions. Certain other employees of the
Bank and Empire also entered into employment agreements, which will become
effective upon completion of the Merger.
In March 1997, the Bank entered into a Consulting Agreement with First
Fidelity Service Corp. ("First Fidelity"), a consulting firm, which is wholly
owned by Raymond L. Anilionis. The agreement provides that First Fidelity will
render services regarding bank site acquisitions, real estate acquisitions,
management of construction projects, evaluation and assistance with negotiations
of complex loans and work out transactions and any other services reasonably
requested by the Bank. The term of the agreement is for one year, but
automatically renews each year unless terminated by either party upon 30 days
notice. Pursuant to the terms of the consulting agreement, First Fidelity is
paid $5,000 per month for its services. Mr. Anilionis also entered into a
consulting agreement with Compass Bank, which will become effective upon
completion of the merger. The consulting agreement is for one year and contains
noncompetition and confidentiality provisions.
LOAN PARTICIPATIONS. The Bank has entered into certain loan
participations with First State Bank of Hotchkiss, an entity controlled by
Thomas R. Kowalski. Approximate loan principal balances outstanding under these
participations are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Participations sold $ 14,520 $ 9,703
Participations purchased 2,446 1,346
</TABLE>
The Bank has also sold loan participations to shareholders, officers
and directors of the Company on the same terms as sold to third parties. At
December 31, 1999 and 1998, the participations sold to related parties were
approximately $6.4 million and $4.0 million, respectively.
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<PAGE> 62
CREDIT TRANSACTIONS. The officers, directors and principal shareholders
of the Company and members of their immediate families and businesses in which
they hold controlling interests are customers of the Bank. Credit transactions
with these parties are subject to review by the Bank's board of directors. All
outstanding loans and extensions of credit by the Bank to these parties were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and in the opinion of management did
not involve more than the normal risk of collectibility or present other
unfavorable features. At December 31, 1999, the aggregate balance of loans and
advances under existing lines of credit to these parties was approximately $1.9
million or 0.7% of the Bank's total loans.
STOCK PURCHASE AGREEMENT. In December 1990, the Company, Thomas R.
Kowalski, Ryan R. Kowalski Trust, Realtek Company Profit Sharing Plan and Trust,
Thomas Investments and Orchard Valley Financial Corporation (the "Shareholders")
entered into a Stock Purchase Agreement in order to provide for the orderly
continuation of the affairs of the Company. The agreement, as amended, provides
that upon the death of Thomas R. Kowalski, the Shareholders will have the option
to require the Company to purchase their shares of Company Common Stock to the
extent the Company receives proceeds from a life insurance policy on the life of
Thomas R. Kowalski. As of December 31, 1999, the Shareholders held an aggregate
of 2,658,192 shares of Common Stock. The agreement specifies that the purchase
price for the stock shall be the greater of 80% of the average closing price of
the Common Stock of the Company on any national securities exchange or
recognized quotation system for five trading days preceding the death of Thomas
R. Kowalski or the appraised value as determined by an appraiser selected
mutually by the Company and the surviving Shareholders. It is a condition of the
Merger with Compass that the Stock Purchase Agreement be nullified at the time
of completion of the Merger.
INDEMNIFICATION. For five years after the Merger, Compass will
indemnify the officers, directors and employees of the Company for all
liabilities arising before the Merger to the maximum extent permitted by law.
-62-
<PAGE> 63
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
3.1 Amended and Restated Articles of Incorporation of MegaBank
Financial Corporation(2).
3.2 Bylaws of MegaBank Financial Corporation(2).
4.1 Form of Subordinated Indenture dated February 9, 1998 entered
into between the Issuer and Wilmington Trust Company, as
Indenture Trustee (2).
4.2 Form of Junior Subordinated Debenture (included as an exhibit to
Exhibit 4.1)(2).
4.7 Preferred Securities Guarantee Agreement (2).
4.8 Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.5)(2).
4.9 Specimen Common Stock Certificate of Issuer(1).
10.1 Federal Funds Transactions Purchase Agreement dated November 8,
1993 between MegaBank of Arapahoe and Bankers' Bank of the West
and renewal letter dated October 20, 1997 from Bankers' Bank of
the West(2).
10.2 Lease dated December 29, 1994 between Nagrom, L.L.C. and MegaBank
Financial Corporation (2).
10.3 Advance, Pledge and Security Agreement dated October 26, 1995
between Federal Home Loan Bank of Topeka and MegaBank of
Arapahoe(2).
10.4 Federal Funds line of credit agreement signed September 24, 1997
between Norwest Bank Colorado, N.A. and MegaBank of Arapahoe(2).
10.5 Consulting Agreement - First Fidelity Corp.(2).
10.6 Branching Rights Purchase Agreement - First State Bank of
Hotchkiss(2).
10.7 Amended and Restated Stock Purchase Agreement by and among
MegaBank Financial Corporation, Thomas R. Kowalski, the Ryan R.
Kowalski Trust, the Realtek Company Profit Sharing Plan and
Trust, Thomas Investments Partnership and Orchard Valley
Financial Corporation dated as of December 4,1 997 and as further
amended on September 1, 1998(1).
10.8 Indemnification Agreement dated July 20, 1995 between MegaBank
Financial Corporation and Raymond L. Anilionis, Warren P. Cohen
and Thomas R. Kowalski (the "Guarantors")(2).
10.9 Issuer's 1998 Long-Term Incentive Plan(1).
10.10 Agreement and Plan of Merger by and between Compass Bancshares,
Inc. and MegaBank Financial Corporation dated as of November 4,
1999.
11.1 Statement re Computation of per share earnings - see Consolidated
Financial Statements.
21. Subsidiaries of the Issuer (2).
27.1 Financial data schedule.
99.1 Risk factors incorporated by reference from Registration
Statement on Form SB-2 (Registration number 333-63369) dated
November 16, 1998.
(1) Incorporated by reference herein to the filing under the same
exhibit number to the Company's Registration Statement on Form
SB-2 (Registration number 333-63369) dated November 16, 1998.
(2) Incorporated by reference herein to the filing under the same
exhibit number to the Issuer's Registration Statement on Form
SB-2 (Registration No. 333-42189 and 333-42191) dated December
12, 1997 and as amended on January 22, 1998 and January 29, 1998.
b. Reports on Form 8-K.
None
-63-
<PAGE> 64
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MEGABANK FINANCIAL CORPORATION
By: /s/ THOMAS R. KOWALSKI
---------------------------------------
Thomas R. Kowalski
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ SUSAN A. PUTLAND
---------------------------------------
Susan A. Putland
Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
Dated: March 2, 2000
Each person whose signature appears below constitutes and appoints
Thomas R. Kowalski and Larry A. Olsen his trust and lawful attorneys-in-fact and
agents, each acting alone, with full power of stead, in any and all capacities,
to sign any or all amendments to this Annual Report on Form 10-KSB and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could in each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated as of March 2, 2000.
/s/ THOMAS R. KOWALSKI /s/ RAYMOND L. ANILIONIS
- ---------------------- ------------------------
Thomas R. Kowalski Raymond L. Anilionis
Chairman of the Board Director
/s/ LARRY A. OLSEN /s/ RYAN R. KOWALSKI
- ------------------ --------------------
Larry A. Olsen Ryan R. Kowalski
Director Director
/s/ DR. DONALD B. BROWN /s/ WILLIAM F. SIEVERS
- ----------------------- ----------------------
Dr. Donald B. Brown William F. Sievers
Director Director
/s/ ROGER L. MORGAN
- -------------------
Roger L. Morgan
Director
-64-
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of MegaBank
Financial Corporation(2).
3.2 Bylaws of MegaBank Financial Corporation(2).
4.1 Form of Subordinated Indenture dated February 9, 1998 entered into
between the Issuer and Wilmington Trust Company, as Indenture
Trustee (2).
4.2 Form of Junior Subordinated Debenture (included as an exhibit to
Exhibit 4.1)(2).
4.7 Preferred Securities Guarantee Agreement (2).
4.8 Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.5)(2).
4.9 Specimen Common Stock Certificate of Issuer(1).
10.1 Federal Funds Transactions Purchase Agreement dated November 8,
1993 between MegaBank of Arapahoe and Bankers' Bank of the West
and renewal letter dated October 20, 1997 from Bankers' Bank of
the West(2).
10.2 Lease dated December 29, 1994 between Nagrom, L.L.C. and MegaBank
Financial Corporation (2).
10.3 Advance, Pledge and Security Agreement dated October 26, 1995
between Federal Home Loan Bank of Topeka and MegaBank of
Arapahoe(2).
10.4 Federal Funds line of credit agreement signed September 24, 1997
between Norwest Bank Colorado, N.A. and MegaBank of Arapahoe(2).
10.5 Consulting Agreement - First Fidelity Corp.(2).
10.6 Branching Rights Purchase Agreement - First State Bank of
Hotchkiss(2).
10.7 Amended and Restated Stock Purchase Agreement by and among
MegaBank Financial Corporation, Thomas R. Kowalski, the Ryan R.
Kowalski Trust, the Realtek Company Profit Sharing Plan and Trust,
Thomas Investments Partnership and Orchard Valley Financial
Corporation dated as of December 4,1 997 and as further amended on
September 1, 1998(1).
10.8 Indemnification Agreement dated July 20, 1995 between MegaBank
Financial Corporation and Raymond L. Anilionis, Warren P. Cohen
and Thomas R. Kowalski (the "Guarantors")(2).
10.9 Issuer's 1998 Long-Term Incentive Plan(1).
10.10 Agreement and Plan of Merger by and between Compass Bancshares,
Inc. and MegaBank Financial Corporation dated as of November 4,
1999.
11.1 Statement re Computation of per share earnings - see Consolidated
Financial Statements.
21. Subsidiaries of the Issuer (2).
27.1 Financial data schedule.
99.1 Risk factors incorporated by reference from Registration
Statement on Form SB-2 (Registration number 333-63369) dated
November 16, 1998.
(1) Incorporated by reference herein to the filing under the same
exhibit number to the Company's Registration Statement on Form
SB-2 (Registration number 333-63369) dated November 16, 1998.
(2) Incorporated by reference herein to the filing under the same
exhibit number to the Issuer's Registration Statement on Form
SB-2 (Registration No. 333-42189 and 333-42191) dated December
12, 1997 and as amended on January 22, 1998 and January 29, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 10.10
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
COMPASS BANCSHARES, INC.
AND
MEGABANK FINANCIAL CORPORATION
Dated as of November 4, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I. THE MERGER.............................................................................................1
SECTION 1.1 The Merger.........................................................................1
SECTION 1.2 Effective Time.....................................................................1
SECTION 1.3 Certain Effects of the Merger......................................................2
SECTION 1.4 Articles of Incorporation and By-Laws..............................................2
SECTION 1.5 Directors and Officers.............................................................2
SECTION 1.6 Conversion of Shares...............................................................2
SECTION 1.7 Shareholders' Meeting..............................................................3
SECTION 1.8 Registration of the Compass Common Stock...........................................3
SECTION 1.9 Tax Consequences...................................................................4
SECTION 1.10 Closing............................................................................4
SECTION 1.11 Modification of Structure..........................................................5
ARTICLE II. DISSENTING SHARES; EXCHANGE OF SHARES.................................................................5
SECTION 2.1 Dissenting Shares..................................................................5
SECTION 2.2 Exchange of Shares.................................................................5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................6
SECTION 3.1 Organization and Qualification.....................................................7
SECTION 3.2 Company Capitalization.............................................................7
SECTION 3.3 Subsidiary Capitalization; Other Securities........................................7
SECTION 3.4 Authority Relative to the Agreement................................................8
SECTION 3.5 No Violation.......................................................................8
SECTION 3.6 Consents and Approvals.............................................................9
SECTION 3.7 Regulatory Reports.................................................................9
SECTION 3.8 Securities Issuances...............................................................9
SECTION 3.9 Financial Statements...............................................................9
SECTION 3.10 Absence of Certain Changes.........................................................10
SECTION 3.11 Company Indebtedness...............................................................12
SECTION 3.12 Litigation.........................................................................12
SECTION 3.13 Tax Matters........................................................................12
SECTION 3.14 Employee Benefit Plans.............................................................13
SECTION 3.15 Employment Matters.................................................................16
SECTION 3.16 Leases, Contracts and Agreements...................................................16
SECTION 3.17 Related Company Transactions.......................................................17
SECTION 3.18 Compliance with Laws...............................................................17
SECTION 3.19 Insurance..........................................................................17
SECTION 3.20 Loans..............................................................................17
SECTION 3.21 Fiduciary Responsibilities.........................................................17
SECTION 3.22 Patents, Trademarks and Copyrights.................................................18
SECTION 3.23 Environmental Compliance...........................................................18
SECTION 3.24 Regulatory Actions.................................................................19
SECTION 3.25 Title to Properties; Encumbrances..................................................19
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 3.26 Shareholder List..................................................................20
SECTION 3.27 Dissenting Shareholders...........................................................20
SECTION 3.28 Takeover Laws.....................................................................20
SECTION 3.29 Employee Stock Options............................................................20
SECTION 3.30 Accounting Matters................................................................20
SECTION 3.31 Year 2000 Representation..........................................................20
SECTION 3.32 Title Companies...................................................................21
SECTION 3.33 Representations Not Misleading....................................................21
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.......................................................................21
SECTION 4.1 Organization and Authority........................................................21
SECTION 4.2 Authority Relative to Agreement...................................................21
SECTION 4.3 Financial Reports.................................................................22
SECTION 4.4 Capitalization....................................................................23
SECTION 4.5 Consents and Approvals............................................................23
SECTION 4.6 Availability of the Compass Common Stock..........................................23
SECTION 4.7 Regulatory Actions................................................................23
SECTION 4.8 Takeover Laws.....................................................................23
SECTION 4.9 Accounting Matters................................................................24
SECTION 4.10 Representations Not Misleading....................................................24
SECTION 4.11 Litigation........................................................................24
SECTION 4.12 Absence of Certain Changes........................................................24
ARTICLE V. COVENANTS OF THE COMPANY..............................................................................24
SECTION 5.1 Affirmative Covenants of the Company..............................................24
SECTION 5.2 Negative Covenants of the Company.................................................26
ARTICLE VI. ADDITIONAL AGREEMENTS................................................................................28
SECTION 6.1 Access To, and Information Concerning, Properties and Records.....................28
SECTION 6.2 Filing of Regulatory Approvals....................................................28
SECTION 6.3 Miscellaneous Agreements and Consents.............................................29
SECTION 6.4 Company Indebtedness..............................................................29
SECTION 6.5 Best Good Faith Efforts...........................................................29
SECTION 6.6 Exclusivity.......................................................................29
SECTION 6.7 Public Announcement...............................................................30
SECTION 6.8 Employee Benefit Plans............................................................30
SECTION 6.9 Merger of Bank....................................................................31
SECTION 6.10 Environmental Investigation; Right to Terminate Agreement.........................31
SECTION 6.11 Proxies...........................................................................33
SECTION 6.12 Exchange Agreement................................................................33
SECTION 6.13 Year 2000 Investigation...........................................................34
SECTION 6.14 Director and Officer Indemnification..............................................34
SECTION 6.15 Exercise of Convertible Securities................................................35
SECTION 6.16 Actions Respecting Debentures.....................................................35
SECTION 6.17 Publication of 30 Days of Post Combination Results................................35
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 6.18 Notification of Related Party Transactions........................................36
ARTICLE VII. CONDITIONS TO CONSUMMATION OF THE MERGER............................................................36
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger........................36
SECTION 7.2 Conditions to the Obligations of Compass and Merger Sub
to Effect the Merger............................................................. 37
SECTION 7.3 Conditions to the Obligations of the Company to Effect the Merger.................39
ARTICLE VIII. TERMINATION; AMENDMENT; WAIVER.....................................................................40
SECTION 8.1 Termination.......................................................................40
SECTION 8.2 Effect of Termination.............................................................42
SECTION 8.3 Amendment.........................................................................42
SECTION 8.4 Extension; Waiver.................................................................42
SECTION 8.5 Termination Fee...................................................................42
ARTICLE IX. SURVIVAL.............................................................................................42
SECTION 9.1 Survival of Representations and Warranties........................................42
ARTICLE X. MISCELLANEOUS.........................................................................................43
SECTION 10.1 Expenses..........................................................................43
SECTION 10.2 Brokers and Finders...............................................................43
SECTION 10.3 Entire Agreement; Assignment......................................................43
SECTION 10.4 Further Assurances................................................................43
SECTION 10.5 Enforcement of the Agreement......................................................44
SECTION 10.6 Severability......................................................................44
SECTION 10.7 Notices...........................................................................44
SECTION 10.8 Governing Law.....................................................................45
SECTION 10.9 Descriptive Headings..............................................................45
SECTION 10.10 Parties in Interest...............................................................45
SECTION 10.11 Counterparts......................................................................45
SECTION 10.12 Incorporation by References.......................................................45
SECTION 10.13 Certain Definitions...............................................................45
</TABLE>
iii
<PAGE> 5
ATTACHMENTS
EXHIBITS
A. Pooling Transfer Restrictions Agreement
B. Exchange Agent Agreement
C. Pooling of Interest Criteria
D. Voting Agreement and Irrevocable Proxy
E. Opinion of Counsel for the Company and the Bank
F. Opinion of Counsel for Compass and Merger Sub
G. Representations Certificate
H. Release
I. Release
J. Tax Opinion
LIST OF SCHEDULES
Schedule 3.2 Company Capitalization
Schedule 3.3 Subsidiary Capitalization; List of Equity Ownership
Schedule 3.5 Violations of Law; Conflicts of Interest; Share Litigation;
Termination of Existence
Schedule 3.6 Company Prior Consents
Schedule 3.7 Regulatory Reports
Schedule 3.10 Absence of Material Changes or Adverse Effects
Schedule 3.12 Company Legal Proceedings
Schedule 3.13 Tax Liabilities
Schedule 3.14(a) Employee Welfare Benefit Plans
iv
<PAGE> 6
Schedule 3.14(b) Employee Pension Benefit Plans
Schedule 3.14(c) Deferred Compensation, Bonus and Stock Purchase Plans
Schedule 3.14(l) Additional Payments Due Under Deferred Compensation, Bonus,
Employee Welfare Benefit Plans and Employee Pension Benefit
Plans
Schedule 3.15 Employment Contracts and Collective Bargaining Agreements
Schedule 3.16 Leases, Subleases, Contracts and Agreements; Participations;
Default of Contracts; Marketable Title
Schedule 3.17 Related Company Transactions
Schedule 3.18 Compliance with Laws
Schedule 3.19 Insurance Policies
Schedule 3.20 Loans Exceeding Legal Lending Limit, Troubled Loans
Schedule 3.22 Patents, Trademarks and Copyrights
Schedule 3.23 Environmental Compliance
Schedule 3.24 Regulatory Actions; Agreements
Schedule 3.25 Title to Properties; Title Policies; Property
Schedule 3.29 Stock Option Plans
Schedule 4.2 Compass Prior Consents
Schedule 5.1(j) List of Accounts and Safe Deposit Boxes
Schedule 5.1(k) List of Liabilities and Obligations of the Company and the
Bank
Schedule 6.11 List of Proxy Holders Voting Affirmatively for the Agreement
Schedule 10.13(f) List of Officers with Knowledge
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of November 4,
1999, by and between Compass Bancshares, Inc. a Delaware corporation
("Compass"), and MegaBank Financial Corporation, a Colorado corporation
("Company").
WHEREAS, Compass desires to affiliate with the Company and its wholly
owned subsidiary, MegaBank, a federal savings bank (the "Bank"), and the Company
and the Bank desire to affiliate with Compass in the manner provided in this
Agreement;
WHEREAS, Compass and the Company believe that the Merger (as defined
herein) of the Company with a to-be-formed subsidiary ("Merger Sub") of Compass
incorporated under the laws of the State of Colorado to be added as a party to
this Agreement after the date hereof in the manner provided by, and subject to
the terms and conditions set forth in, this Agreement and all exhibits,
schedules and supplements hereto is desirable and in the best interests of their
respective institutions and shareholders;
WHEREAS, Compass, Merger Sub and the Company intend the Merger to
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder; and
WHEREAS, the respective boards of directors of the Company and Compass
have approved this Agreement and the proposed transactions substantially on the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties, intending
to be legally bound, hereby agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Colorado Business Corporation Act (the
"CBCA"), Merger Sub shall be merged with and into the Company (the "Merger") as
soon as practicable following the satisfaction or waiver, if permissible, of the
conditions set forth in Article VII hereof. Following the Merger, the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
the separate corporate existence of Merger Sub shall cease. Compass shall not be
deemed a party to the Merger for the purposes of Section 7-111-106 of the CBCA.
SECTION 1.2 Effective Time. The Merger shall be consummated by the
filing by the Colorado Secretary of State of Articles of Merger, in the form
required by and executed in accordance with the relevant provisions of the CBCA,
and by the issuance of a Certificate of Merger by the Secretary of State of
Colorado. (The date of such issuance and filing or such
<PAGE> 8
other time and date as may be specified in the Articles and Certificate of
Merger shall be the "Effective Time").
SECTION 1.3 Certain Effects of the Merger. The Merger shall have the
effects set forth in Article 7-111-106 of the CBCA.
SECTION 1.4 Articles of Incorporation and By-Laws. The Articles of
Incorporation and the By-Laws of the Company, in each case as in effect at the
Effective Time, shall be the Articles of Incorporation and By-Laws of the
Surviving Corporation.
SECTION 1.5 Directors and Officers. The directors and officers of
Merger Sub at the Effective Time shall be the directors and officers of the
Surviving Corporation and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the manner
provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
SECTION 1.6 Conversion of Shares.
(a) Each share of the Company's common stock, no par value per share
("Company Common Stock" or "Shares"), issued and outstanding immediately prior
to the Effective Time ("Common Shares Outstanding"), other than Dissenting
Shares (as defined in Section 2.1), shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into and represent
the right to receive the consideration payable as set forth below (the "Merger
Consideration") to the holder of record thereof, without interest thereon, upon
surrender of the certificate representing such Share. For the purposes of
determining the number of Common Shares Outstanding, the number of Shares issued
and outstanding shall be increased by the number and class of Shares that may be
acquired upon exercise or conversion of any warrant, option, convertible
debenture or other security entitling the holder thereof to acquire Shares which
is in effect or outstanding immediately prior to the Effective Time and shall
include, without limitation, Shares issuable in respect of the Empire Merger
Agreement (as defined in Section 10.13(g) hereof) due to the consummation of the
Merger. At the Closing, the Company shall calculate and certify to Compass the
Common Shares Outstanding.
(b) Each holder of Company Common Stock shall receive for each share of
Company Common Stock held immediately prior to the Effective Time Merger
Consideration equal to the quotient of 3,370,000 shares of Compass Common Stock,
par value $2.00 per share ("Compass Common Stock") divided by the Common Shares
Outstanding. In no event, however, shall Compass be obligated to issue any more
than 3,370,000 shares of Compass Common Stock in exchange for all Common Shares
Outstanding. The ratio of the number of shares of Compass Common Stock to be
exchanged for each Share, respectively, shall be adjusted appropriately to
reflect any stock dividends or splits with respect to Compass Common Stock,
where the record date or payment occurs prior to the Effective Time.
(c) Compass will not issue any certificates for any fractional shares
of Compass Common Stock otherwise issuable pursuant to the Merger. In lieu of
issuing such fractional shares, Compass shall pay cash to any holder of Shares
otherwise entitled to receive such fractional share. Such cash payment shall be
based on the average of the closing sale price for
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Compass Common Stock as reported by the NASDAQ National Market System for the
twenty days of trading preceding the fifth trading day prior to the Effective
Time ("Average Closing Price").
(d) Each share of capital stock of Merger Sub issued and outstanding
immediately before the Effective Time shall be converted into 7,769,709 shares
of common stock of the Surviving Corporation.
SECTION 1.7 Shareholders' Meeting. The Company, acting through its
Board of Directors, shall, in accordance with applicable law:
(a) duly call, give notice of, convene and hold a meeting (the
"Shareholders' Meeting") of its shareholders as soon as practicable after the
Registration Statement (as defined herein) is declared effective by the
Securities and Exchange Commission ("SEC") for the purpose of approving and
adopting this Agreement;
(b) require no greater than the minimum vote required by applicable
law, or its Articles of Incorporation, if greater, of each class of the Shares
in order to approve the Merger;
(c) include in the Proxy Statement (defined in Section 1.8(a)) below)
the unanimous recommendation of its Board of Directors that the shareholders of
the Company vote in favor of the approval and adoption of this Agreement; and
(d) use its best efforts to obtain the approval and adoption of the
Merger by shareholders holding at least the minimum number of shares of each
class of the shares entitled to vote at the Shareholders' Meeting to approve the
Merger under applicable law or its Articles of Incorporation, if greater.
SECTION 1.8 Registration of the Compass Common Stock.
(a) Compass shall prepare a registration statement on Form S-4 (the
"Registration Statement") to be filed by Compass with the SEC under the
Securities Act of 1933, as amended ("Securities Act"), covering the shares of
Compass Common Stock to be issued to Company shareholders in the Merger,
including the proxy statement and prospectus and other proxy solicitation
materials of the Company constituting a part thereof (the "Proxy Statement").
The Company agrees to cooperate, and to cause its Subsidiaries to cooperate,
with Compass, its counsel and its accountants, in the preparation of the
Registration Statement and the Proxy Statement; and provided that the Company
and its Subsidiaries have cooperated as required above, Compass agrees to file
the Registration Statement with the SEC as promptly as reasonably practicable
and shall use reasonable efforts to cause such filing to occur within 50 days
after execution of this Agreement, subject to the receipt of all necessary
information on the part of the Company for inclusion in the Registration
Statement and Proxy Statement. Each of the Company and Compass agrees to use all
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as reasonably practicable after filing
thereof. Compass also agrees to use all reasonable efforts to obtain, prior to
or at the effective date of the Registration Statement, all necessary state
securities law or "Blue Sky" permits and approvals required to carry out the
Merger contemplated by this Agreement. The
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Company agrees to furnish to Compass all information concerning the Company, its
Subsidiaries, officers, directors and stockholders as may be requested in
connection with the foregoing.
(b) Each of the Company and Compass agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time the Registration Statement and each amendment or supplement thereto,
if any, becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statement therein not misleading, and (ii) the
Proxy Statement and any amendment or supplement thereto will not, at the date of
mailing to the Company stockholders and at the time of the Shareholders' Meeting
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or any statement which, in the light of the circumstances under
which such statement is made will be false or misleading, with respect to any
material fact, or which will omit to state any material fact necessary in order
to make the statements therein not false or misleading or necessary to correct
any statement in any earlier statement in the Proxy Statement or any amendment
or supplement thereto. Each of the Company and Compass further agrees that if it
shall become aware prior to the Effective Time of any information furnished by
it that would cause any of the statements in the Proxy Statement to be false or
misleading with respect to any material fact, or to omit to state any material
fact necessary to make the statements therein not false or misleading to
promptly inform the party thereof and to take the necessary steps to correct the
Proxy Statement.
(c) Compass agrees to advise the Company promptly after Compass
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of Compass Common Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose or of any request by the SEC for the amendment
or supplement of the Registration Statement.
(d) Within 30 days after the date hereof, the Company shall enter into
and cause each Company shareholder who is an "affiliate" (as defined in SEC Rule
405) of the Company to enter into with Compass a written agreement in
substantially the form of Exhibit A attached hereto.
SECTION 1.9 Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code, and the parties hereto hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
SECTION 1.10 Closing. Upon the terms and subject to the conditions
hereof, as soon as practicable after the vote of the shareholders of the Company
in favor of the approval and adoption of this Agreement has been obtained, and
the satisfaction or waiver, if permissible, of the conditions set forth in
Article VII hereof, the Company and Merger Sub shall execute and deliver the
Articles of Merger as described in Section 1.2, and the parties hereto shall
take all such other and further actions as may be required by law to make the
Merger effective; provided,
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however, that the Effective Time shall not occur prior to April 1, 2000, unless
otherwise agreed. Prior to the filing referred to in this Section, a closing
(the "Closing") will be held at the office of Locke Liddell & Sapp LLP in
Houston, Texas (or such other place as the parties may agree) for the purpose of
confirming all of the foregoing.
SECTION 1.11 Modification of Structure. Notwithstanding any provision
of this Agreement to the contrary, Compass may elect with the prior written
consent of the Company (such consent not to be unreasonably withheld), subject
to the filing of all necessary applications and the receipt of all required
regulatory approvals, to modify the structure of the transactions contemplated
hereby so long as (i) there are no adverse federal income tax consequences to
the shareholders of the Company as a result of such modification, (ii) the
consideration to be paid to holders of Company Common Stock under this Agreement
is not thereby changed in kind or reduced in amount solely because of such
modification, (iii) such modification will not be likely to materially delay or
jeopardize receipt of any required regulatory approvals, and (iv) adversely
affect the rights, privileges, and preferences of the Company Subordinated
Debentures (as defined herein).
ARTICLE II.
DISSENTING SHARES; EXCHANGE OF SHARES
SECTION 2.1 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, Shares which are issued and outstanding immediately
prior to the Effective Time and which are held by shareholders who have not
voted such Shares in favor of the Merger and who shall have delivered a written
demand for payment of the fair value of such Shares within the time and in the
manner provided in Article 113 of the CBCA (the "Dissenting Shares") shall not
be converted into or be exchangeable for the right to receive the Merger
Consideration provided in Section 1.6 of this Agreement, unless and until such
holder shall have failed to perfect or shall have effectively withdrawn or lost
his right to appraisal and payment under the CBCA. If any such holder shall have
so failed to perfect or shall have effectively withdrawn or lost such right,
such holder's Shares shall thereupon be deemed to have been converted into and
to have become exchangeable for, at the Effective Time, the right to receive the
Merger Consideration without any interest thereon.
SECTION 2.2 Exchange of Shares.
(a) At or prior to the Effective Time pursuant to an exchange agent
agreement in substantially the form attached hereto as Exhibit B (the "Exchange
Agreement"), Compass shall (i) deposit with Continental Stock Transfer and Trust
Company (the "Exchange Agent") the shares of Compass Common Stock in the amounts
provided in Section 1.6 to effect the exchange of Compass Common Stock for
certificates formerly representing shares of Company Common Stock; and (ii)
deposit or cause to be deposited with the Exchange Agent, prior to the Effective
Time cash in an aggregate amount estimated to be sufficient to make the cash
payments in lieu of fractional shares of Compass Common Stock pursuant to
Section 1.6 hereof and to make the appropriate cash payments, if any, to holders
of Dissenting Shares (such amounts being hereinafter referred to as the
"Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions
jointly given by the Company and Compass, promptly make the
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payments in lieu of fractional shares out of the Exchange Fund upon surrender of
Shares in accordance with Section 2.2(b) hereof. Payments to dissenting
shareholders shall be made as required by Article 113 of the CBCA. The Exchange
Fund shall not be used for any other purpose, except as provided in this
Agreement.
(b) Promptly after the Effective Time, the Exchange Agent shall mail to
each record holder of an outstanding certificate or certificates which as of the
Effective Time represented Shares (the "Certificates"), a form letter of
transmittal approved by the Company and Compass (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Certificates for payment
therefor. Upon surrender to the Exchange Agent of a Certificate, together with
such letter of transmittal duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor cash and Compass Common Stock in the
amount provided in Section 1.6 hereof, and such Certificate shall forthwith be
canceled. No interest will be paid or accrued on the cash payable upon surrender
of the Certificate and no dividend will be disbursed with respect to the shares
of Compass Common Stock until the holder's Shares are surrendered in exchange
therefor. If payment or delivery of Compass Common Stock is to be made to a
person other than the person in whose name the Certificate surrendered is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment and delivery of Compass Common Stock to
a person other than the registered holder of the Certificate surrendered or
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered in accordance with the
provisions of this Section 2.2, each Certificate (other than Certificates
representing Dissenting Shares) shall represent for all purposes the right to
receive the Merger Consideration without any interest thereon.
(c) After the Effective Time, the stock transfer ledger of the Company
shall be closed and there shall be no transfers on the stock transfer books of
the Company of the Shares which were outstanding immediately prior to such time
of filing. If, after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be promptly presented to the Exchange Agent
and exchanged as provided in this Article II.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of the Company
for six months after the Effective Time shall be paid to Compass, and the
holders of Shares not theretofore presented to the Exchange Agent shall look to
Compass only, and not the Exchange Agent, for the payment of any Merger
Consideration in respect of such shares.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the representations and warranties set forth
in this Article III to Compass. The Company has delivered to Compass the
Schedules to this Agreement referred to in this Article III prior to the date
hereof. The Company agrees at the Closing to provide
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Compass and Merger Sub with supplemental Schedules reflecting any changes
thereto between the date of such Schedules and the date of the Closing.
SECTION 3.1 Organization and Qualification. The Company is a Colorado
corporation and a unitary savings and loan holding company under the Home
Owners' Loan Act, as amended, and is duly organized, validly existing and in
good standing under the laws of the State of Colorado and all laws, rules, and
regulations applicable to unitary savings and loan holding companies. The Bank
is a federal savings bank, duly organized, validly existing and in good standing
under the laws of the United States of America, and is not a member of the
Federal Reserve System. Each of the Company and its Subsidiaries (as defined in
Section 10.13(a)) has all requisite corporate power and authority to carry on
its business as now being conducted and to own, lease and operate its properties
and assets as now owned, leased or operated. Except as set forth on Schedule
3.17, the Company does not own or control any Affiliate (as defined in Section
3.17) other than the Bank. True and correct copies of the Articles of
Incorporation or Association, Bylaws and charter documents of the Company and
its Subsidiaries, with all amendments thereto through the date of this
Agreement, have been delivered by the Company to Compass. The Company's
Subsidiaries are duly qualified or licensed to do business and are in good
standing in the State of Colorado. The nature of the business of the Company and
its Subsidiaries and their respective activities, as currently conducted, do not
require them to be qualified to do business in any jurisdiction other than the
State of Colorado.
SECTION 3.2 Company Capitalization. As of the date hereof, the
authorized capital stock of the Company consists solely of (a) 50,000,000 shares
of Company Common Stock, of which 7,769,709 shares are issued and outstanding,
of which 99,000 shares are subject to option, and none of which are held in
treasury, and (b) 10,000,000 shares of Preferred Stock, no par value per share,
none of which are outstanding. Except as set forth on Schedule 3.2, there are no
outstanding subscriptions, options, convertible securities, rights, warrants,
calls, or other agreements or commitments of any kind issued or granted by, or
binding upon, the Company or its Subsidiaries to purchase or otherwise acquire
any security of or equity interest in the Company or its Subsidiaries. Except as
set forth on Schedule 3.2, there are no outstanding subscriptions, options,
rights, warrants, calls, convertible securities or other agreements or
commitments obligating the Company to issue any shares of the Company, or to the
knowledge of the Company, irrevocable proxies or any agreements restricting the
transfer of or otherwise relating to shares of its capital stock of any class.
All of the Shares that have been issued have been duly authorized, validly
issued and are fully paid and non-assessable, and are free of preemptive rights.
There are no restrictions applicable to the payment of dividends on the Shares
except pursuant to the CBCA and applicable banking laws and regulations and all
dividends declared prior to the date hereof have been paid.
SECTION 3.3 Subsidiary Capitalization; Other Securities. All of the
issued and outstanding shares of the capital stock of the Company's Subsidiaries
(i) are duly authorized, validly issued, fully paid and nonassessable, (ii)
except as referred to in Schedule 3.3 are free and clear of any liens, claims,
security interests and encumbrances of any kind, and (iii) there are no
irrevocable proxies with respect to such shares and there are no outstanding or
authorized subscriptions, options, warrants, calls, rights, or other agreements
or commitments of any kind restricting the transfer of, requiring the issuance
or sale of, or otherwise relating to any of such
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shares of capital stock to any person. Except as set forth on Schedule 3.3
hereto, the Company owns, directly, all of the issued and outstanding capital
stock of its Subsidiaries. Set forth on Schedule 3.3 hereto is a list of all
equity ownership by the Company or its Subsidiaries for the account of the
Company or its Subsidiaries in any other person other than the Bank (the "Other
Securities"). The Company or its Subsidiaries own each Other Security free and
clear of any lien, encumbrance, security interest or charge. The Other
Securities represent less than five percent of the outstanding equity securities
of each such person. Neither Empire/MB Real Estate Corporation nor Empire/MB
Land Company (the "Real Estate Subsidiaries") has commenced operations or has
any assets other than its initial capitalization by the Company.
SECTION 3.4 Authority Relative to the Agreement. The Company has full
corporate power and authority, and, except for the approval by the Company's
shareholders, no further proceedings on the part of the Company are necessary,
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby which have been duly and validly authorized by its Board of
Directors. This Agreement has been duly executed and delivered by the Company
and is a duly authorized, valid, legally binding and enforceable obligation of
the Company, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to creditors' rights generally and
general equitable principles, and subject to such shareholder approvals and such
approval of regulatory agencies and other governmental authorities having
authority over the Company as may be required by statute or regulation. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will not conflict with, or result in any
violation or breach of or default under the respective Articles of Incorporation
or Association or By-Laws of the Company or its Subsidiaries.
SECTION 3.5 No Violation. Except as set forth on Schedule 3.5, neither
the execution, delivery nor performance of this Agreement in its entirety, nor
the consummation of all of the transactions contemplated hereby, following the
receipt of such approvals as may be required from the Company's shareholders,
the SEC, the Office of Thrift Supervision ("OTS"), the Board of Governors of the
Federal Reserve System ("FRB"), the Federal Deposit Insurance Corporation
("FDIC"), the Commissioner for the Colorado Division of Banking ("Commissioner")
and the Alabama Superintendent of Banks ("Superintendent") and any required
notification to the Colorado Division of Insurance ("Insurance Division") will
(i) violate (with or without the giving of notice or the passage of time), any
law, order, writ, judgment, injunction, award, decree, rule, statute, ordinance
or regulation applicable to the Company or its Subsidiaries or (ii) be in
conflict with, result in a breach or termination of any provision of, cause the
acceleration of the maturity of any debt or obligation pursuant to, constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of the Company or its Subsidiaries
pursuant to, any terms, conditions or provisions of any note, license,
instrument, indenture, mortgage, deed of trust or other agreement or
understanding or any other restriction of any kind or character, to which the
Company or its Subsidiaries is a party or by which any of their assets or
properties are subject or bound. Except as set forth on Schedule 3.5, there are
no proceedings pending or, to the knowledge of the Company or its Subsidiaries,
threatened, against the Company, its Subsidiaries or involving the Shares, at
law or in equity or before or by any foreign, federal, state, municipal or other
governmental court, department, commission, board, bureau, agency,
instrumentality or other person which may result in liability
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to Compass or Merger Sub upon the consummation of the transactions contemplated
hereby or which would prevent or delay such consummation. Except as set forth in
Schedule 3.5, or as contemplated hereby, the corporate existence, business
organization, assets, licenses, permits, authorizations and contracts of the
Company and its Subsidiaries will not be terminated or impaired by reason of the
execution, delivery or performance by the Company of this Agreement or
consummation by the Company of the transactions contemplated hereby, assuming
the receipt of required shareholder and regulatory approvals.
SECTION 3.6 Consents and Approvals. The Company's Board of Directors
(at a meeting called and duly held) has unanimously determined that the Merger
is fair to the Company's shareholders and has unanimously resolved to recommend
approval and adoption of this Agreement by the Company's shareholders. Except as
described in Schedule 3.6 hereto, no prior consent, approval or authorization
of, or declaration, filing or registration with any person, domestic or foreign,
is required of the Company in connection with the execution, delivery and
performance by the Company of this Agreement and the transactions contemplated
hereby or the resulting change of control of its Subsidiaries, except the filing
of the Articles of Merger under the CBCA, and such approvals as may be required
from the SEC, the FRB, the OTS, the Superintendent, the Commissioner and holders
of Shares under the CBCA and notification to the Insurance Division.
SECTION 3.7 Regulatory Reports. Except as set forth on Schedule 3.7,
the Company and its Subsidiaries have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the FRB, the OTS, the Commissioner, the FDIC, or any
other regulatory authority having jurisdiction over any such persons, other than
plans, reports or information listed on Schedule 3.7.
SECTION 3.8 Securities Issuances. All issuances of securities by the
Company and its Subsidiaries have been registered under the Securities Act, the
Securities Act of the State of Colorado, and all other applicable laws or were
exempt from any such registration requirements. The Company and its Subsidiaries
have made all filings required to be made in compliance with the Exchange Act of
1934, as amended (the "Exchange Act"). None of the information contained in any
filing by the Company or any Subsidiary is false or misleading with respect to
any material fact, or omits to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleadings.
SECTION 3.9 Financial Statements. The Company has provided Compass with
a true and complete copy of the audited consolidated statement of financial
position of the Company and its Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and
changes in cash flows for the years ended December 31, 1998 and 1997, plus
management prepared consolidating financial statements of the Company's
Subsidiaries, and the consolidated statements of financial position of the
Company and its Subsidiaries as of March 31 and June 30 1999 and the related
consolidated statements of income, shareholders' equity and changes in cash
flows for the three- and six- month periods ended March 31 and June 30, 1999,
and promptly following their availability the Company will provide Compass with
the Company's audited consolidated statement of financial position of the
Company and its Subsidiaries as of December 31, 1999 and the related
consolidated statements of income, shareholders' equity and changes in cash flow
for the year
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ended December 31, 1999 (such consolidated statements of financial position and
the related consolidated statements of income, shareholders' equity and changes
in cash flows are collectively referred to herein as the "Consolidated Financial
Statements"), plus all management prepared consolidating financial statements
for its Subsidiaries (collectively, with the Consolidated Financial Statements
and the notes and schedules thereto, referred to as the "Financial Statements").
Except as described in the notes to the Consolidated Financial Statements, the
Consolidated Financial Statements, including the consolidated statement of
financial position and the related consolidated statements of income,
shareholders' equity and changes in cash flows (including the related notes
thereto) of the Company and its Subsidiaries, fairly present the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of operations and changes in consolidated financial position of the
Company and its Subsidiaries for the periods then ended, in conformity with
Generally Accepted Accounting Principles ("GAAP") applied on a basis consistent
with prior periods (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments and in the case of unaudited interim
financial statements and management prepared consolidating financial statements,
to the fact that they do not contain all of the footnote disclosures required by
GAAP), except as otherwise noted therein, and the accounting records underlying
the Consolidated Financial Statements accurately and fairly reflect in all
material respects the transactions of the Company and its Subsidiaries. As of
their dates, the Consolidated Financial Statements conformed, or will conform
when delivered, in all material respects with all applicable rules and
regulations promulgated by the FRB, the OTS, the Commissioner, and the FDIC.
Neither the Company nor its Subsidiaries have any liabilities or obligations of
a type which should be included in or reflected on the Financial Statements if
prepared in accordance with GAAP, whether related to tax or non-tax matters,
accrued or contingent, due or not yet due, liquidated or unliquidated, or
otherwise, except as and to the extent disclosed or reflected in the Financial
Statements. The Company will provide Compass with the unaudited consolidated and
unconsolidated statements of financial position of the Company and its
Subsidiaries as of the end of each month hereafter, prepared on a basis
consistent with prior periods and promptly following their availability, the
Company will provide Compass with the Thrift Financial Reports of its
Subsidiaries for all periods ending after June 30, 1999. The Company and its
Subsidiaries have no off balance sheet liabilities associated with financial
derivative products or potential liabilities associated with financial
derivative products.
SECTION 3.10 Absence of Certain Changes. Except as and to the extent
set forth on Schedule 3.10, since June 30, 1999 (the "Balance Sheet Date")
neither the Company nor any of its Subsidiaries has:
(a) made any amendment to its Articles of Incorporation or Association
or Bylaws or changed the character of its business in any material manner;
(b) suffered any Material Adverse Effect (as defined in Section
10.13(b));
(c) entered into any agreement, commitment or transaction except in the
ordinary course of business and consistent with prudent banking practices;
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(d) except in the ordinary course of business and consistent with
prudent banking practices, incurred, assumed or become subject to, whether
directly or by way of any guarantee or otherwise, any obligations or liabilities
(absolute, accrued, contingent or otherwise);
(e) permitted or allowed any of its property or assets to be subject to
any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind (other than statutory liens not yet delinquent) except in the
ordinary course of business and consistent with prudent banking practices;
(f) except in the ordinary course of business and consistent with
prudent banking practices, canceled any debts, waived any claims or rights, or
sold, transferred, or otherwise disposed of any of its properties or assets;
(g) disposed of or permitted to lapse any rights to the use of any
trademark, service mark, trade name or copyright, or disposed of or disclosed to
any person other than its employees or agents, any trade secret not theretofore
a matter of public knowledge;
(h) except for regular salary increases granted in the ordinary course
of business within the Company's or its Subsidiaries' 1999 budgets and
consistent with prior practices, granted any increase in compensation or paid or
agreed to pay or accrue any bonus, percentage compensation, service award,
severance payment or like benefit to or for the credit of any director, officer,
employee or agent, or entered into any employment or consulting contract or
other agreement with any director, officer or employee or adopted, amended or
terminated any pension, employee welfare, retirement, stock purchase, stock
option, stock appreciation rights, termination, severance, income protection,
golden parachute, savings or profit-sharing plan (including trust agreements and
insurance contracts embodying such plans), any deferred compensation, or
collective bargaining agreement, any group insurance contract or any other
incentive, welfare or employee benefit plan, program or agreement maintained by
the Company or its Subsidiaries, for the directors, employees or former
employees of the Company or its Subsidiaries ("Employee Benefit Plan");
(i) directly or indirectly declared, set aside or paid any dividend or
made any distribution in respect to its capital stock or redeemed, purchased or
otherwise acquired, or arranged for the redemption, purchase or acquisition of,
any shares of its capital stock or other of its securities, except for dividends
paid to the Company by its Subsidiaries;
(j) organized or acquired any capital stock or other equity securities
or acquired any equity or ownership interest in any person (except through
settlement of indebtedness, foreclosure, the exercise of creditors' remedies or
in a fiduciary capacity, the ownership of which does not expose the Company or
its Subsidiaries to any liability from the business, operations or liabilities
of such person);
(k) issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
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(l) made any or acquiesced with any change in any accounting methods,
principles or practices;
(m) experienced any change in relations with customers or clients of
the Company or its Subsidiaries which could have a Material Adverse Effect on
the Company or its Subsidiaries;
(n) except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered into,
modified or amended any contract or commitment, other than in the ordinary
course of business and consistent with prudent banking practices; or
(o) agreed, whether in writing or otherwise, to take any action the
performance of which would change the representations contained in this Section
3.10 in the future so that any such representation would not be true in all
material respects as of the Closing.
SECTION 3.11 Company Indebtedness. The Company has delivered to Compass
true and complete copies of all loan documents ("Company Loan Documents")
related to indebtedness of the Company and its Subsidiaries, other than deposits
("Company Indebtedness"), and made available to Compass all material
correspondence concerning the status of Company Indebtedness.
SECTION 3.12 Litigation. Except as set forth on Schedule 3.12, there
are no actions, suits, claims, investigations, reviews or other proceedings
pending or, to the knowledge of the Company or its Subsidiaries, threatened
against the Company or any of its Subsidiaries or involving any of their
respective properties or assets, at law or in equity or before or by any
foreign, federal, state, municipal, or other governmental court, department,
commission, board, bureau, agency, or other instrumentality or person or any
board of arbitration or similar entity ("Proceeding"). The Company will notify
Compass immediately in writing of any Proceedings against the Company or its
Subsidiaries other than mechanics liens arising in the ordinary course of
business in respect of the loan assets of the Company and its Subsidiaries.
SECTION 3.13 Tax Matters. The Company and its Subsidiaries have duly
filed all tax returns that they were required to file (the "Filed Returns"). All
such Filed Returns were correct and complete in all material respects. The
Company and its Subsidiaries have paid, or have established adequate reserves
for the payment of, all federal income taxes and all state and local income
taxes and all franchise, property, sales, employment, foreign or other taxes
required to be paid with respect to the periods covered by the Filed Returns.
None of the Company or its Subsidiaries currently is the beneficiary of any
extension of time within which to file any tax return. With respect to the
periods for which returns have not yet been filed, the Company and its
Subsidiaries have established adequate reserves determined in accordance with
GAAP for the payment of all federal income taxes and all state and local income
taxes and all franchise, property, sales, employment, foreign or other taxes.
Except as described in Schedule 3.13, the Company and its Subsidiaries have no
direct or indirect liability for the payment of federal income taxes, state and
local income taxes, and franchise, property, sales, employment or other taxes in
excess of amounts paid or reserves established. There are no liens for any taxes
on any assets of the Company or its Subsidiaries except for liens for taxes not
yet due or for taxes being
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contested in good faith and for which adequate reserves have been established in
accordance with GAAP. Except as set forth on Schedule 3.13, the Company has not
entered into any tax sharing agreement or other agreement regarding the
allocation of the tax liability of the Company or the Bank or similar
arrangement with its other Subsidiaries. Set forth on Schedule 3.13 are the
dates of filing of all Filed Returns for all fiscal years since and including
January 1, 1990 and any amendments thereto which relate to federal or state
income or franchise taxes. Neither the Company nor its Subsidiaries have filed
any Internal Revenue Service ("IRS") Forms 1139 (Application for Tentative
Refund). Except as set forth on Schedule 3.13, there are no pending questions
raised in writing by the IRS or other taxing authority for taxes or assessments
of the Company or its Subsidiaries, nor are there any outstanding agreements or
waivers extending the statutory period of limitation applicable to any tax
assessment or deficiency against the Company or its Subsidiaries for any period.
The Company and its Subsidiaries have withheld and paid over all taxes to the
proper governmental authorities required to be so withheld and paid over in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder or other third party. The Company and its Subsidiaries are
neither obligated to make any payments nor are they parties to any agreement
that under certain circumstances could obligate them to make any payments that
will not be deductible under Section 280G of the Code. Except as disclosed in
Schedule 3.13, the Company and its Subsidiaries have never agreed to make, nor
is the Company or its Subsidiaries required to make, any adjustment under
Section 481(a) of the Code by reason of a change in the method of accounting or
otherwise. The Company and its Subsidiaries have not, with regard to any assets
held, acquired or to be acquired, filed a consent to the application of Section
341(f) of the Code. None of the Company and its Subsidiaries has been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code. None of the Company and its Subsidiaries (i) has been a member of
an affiliated group filing a consolidated federal income tax return (other than
a group the common parent of which was the Company) or (ii) has any liability
for the taxes of any person (other than any of the Company and its Subsidiaries)
under Reg. Section 1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise. Neither
the Company nor any of its Subsidiaries has any reason to believe that any
conditions exist that might prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code. For the
purposes of this Agreement, the term "tax" shall include all federal, state,
local and foreign taxes and related governmental charges and any interest or
penalties payable in connection with the payment of taxes.
SECTION 3.14 Employee Benefit Plans. With respect to all employee
benefit plans and programs in which employees of the Company or its Subsidiaries
participate the following are true and correct:
(a) Schedule 3.14(a) lists each "employee welfare benefit plan" (as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) maintained by the Company or its Subsidiaries or any
entity which is a member of a controlled group or affiliated service group with
the Company or any of its Subsidiaries under ERISA Section 4001 or Section 414
of the Code (such Subsidiaries and entities collectively, "ERISA Affiliates") or
to which the Company or ERISA Affiliates contribute or are required to
contribute, including any multiemployer welfare plan (such employee welfare
benefit plans being hereinafter collectively referred to as the "Welfare Benefit
Plans") and sets forth (i) the
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amount of any liability of the Company or ERISA Affiliates for contributions
more than thirty days past due with respect to each Welfare Benefit Plan as of
the date hereof and as of the end of any subsequent month ending prior to the
Closing and (ii) the annual cost attributable to each of the Welfare Benefit
Plans; no Welfare Benefit Plan provides for continuing benefits or coverage for
any participant, beneficiary or former employee after such participant's or
former employee's termination of employment except as may be required by Section
4980B of the Code and Sections 601-608 of ERISA;
(b) Schedule 3.14(b) lists each "employee pension benefit plan" (as
defined in Section 3(2) of ERISA and not exempted under Section 4(b) or 201 of
ERISA) maintained by the Company or an ERISA Affiliate or to which the Company
or ERISA Affiliates contribute or are required to contribute, including any
multiemployer plan (as defined in Section 3(37) of ERISA) (such employee pension
benefit plans being hereinafter collectively referred to as the "Pension Benefit
Plans");
(c) Schedule 3.14(c) lists each deferred compensation plan, bonus plan,
stock option plan, employee stock purchase plan, restricted stock, excess
benefit plan, incentive compensation, stock bonus, cash bonus, severance pay,
golden parachute, life insurance, all nonqualified deferred compensation
arrangements, rabbi trusts, cafeteria plans, dependent care plans, all unfunded
plans and any other employee benefit plans or programs, agreements, arrangements
or commitments not required under a previous subsection to be listed (other than
normal policies concerning holidays, vacations and salary continuation during
short absences for illness or other reasons) maintained by the Company or ERISA
Affiliates (referred to as ("Other Programs");
(d) All of the Pension Benefit Plans and Welfare Benefit Plans and any
related trust agreements or annuity contracts (or any other funding instruments)
and all Other Programs comply currently, and have complied in the past, in all
material respects, both as to form and operation, with the provisions of ERISA,
the Code and with all other applicable laws, rules and regulations governing the
establishment and operation of the Pension Benefit Plans, Welfare Benefit Plans
and all Other Programs; all necessary governmental approvals relating to the
establishment of the Pension Benefit Plans have been obtained; and with respect
to each Pension Benefit Plan that is intended to be tax-qualified under Section
401(a) or 403(a) of the Code, a favorable determination letter as to the
qualification under the Code of each such Pension Benefit Plan and each material
amendment thereto has been issued by the Internal Revenue Service (and nothing
has occurred since the date of the last such determination letter which resulted
in, or is likely to result in the revocation of such determination);
(e) Each Welfare Benefit Plan, each Pension Benefit Plan and each Other
Program has been administered in all material respects in compliance with the
requirements of the Code, ERISA and all other applicable laws, and all reports
and disclosures required by ERISA, the Code and any other applicable laws with
respect to each Welfare Benefit Plan, each Pension Benefit Plan and each Other
Program have been timely filed;
(f) Neither the Company, any Company Subsidiary nor any plan fiduciary
of any Welfare Benefit Plan or Pension Benefit Plan has ever engaged in any
transaction in violation of
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Section 406 of ERISA (for which transaction no exemption exists under Section
408 of ERISA) or in any "prohibited transaction" as defined in Section
4975(c)(1) of the Code (for which no exemption exists under Section 4975(c)(2)
or 4975(d) of the Code);
(g) Neither the Company nor any ERISA Affiliate is, or has been within
the past five years, a contributing sponsor (as defined in Section 4001(a)(13)
of ERISA) of a Pension Benefit Plan subject to the provisions of Title IV of
ERISA, nor has the Company or any ERISA Affiliate maintained or participated in
any employee pension benefit plan (defined in Section 3(2) of ERISA) subject to
the provision of Title IV of ERISA. In addition, neither the Company nor any
ERISA Affiliate (i) is a party to a collective bargaining agreement, (ii) has
maintained or contributed to, or has participated in or agreed to participate
in, a multiemployer plan (as defined in Section 3(37) of ERISA), or (iii) has
made a complete or partial withdrawal from a multiemployer plan (as defined in
Section 3(37) of ERISA) so as to incur withdrawal liability as defined in
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under Section 4207 or 4208 of ERISA);
(h) True and complete copies of each Welfare Benefit Plan, each Pension
Benefit Plan and each Other Program, related trust agreements or annuity
contracts (or any other funding instruments), summary plan descriptions, the
most recent determination letter issued by the Internal Revenue Service with
respect to each Pension Benefit Plan, the most recent application for a
determination letter from the Internal Revenue Service with respect to each
Pension Benefit Plan and Annual Reports on Form 5500 Series filed with any
governmental agency for each Welfare Benefit Plan, Pension Benefit Plan and
Other Program for the three most recent plan years, have been made available to
Compass;
(i) All Welfare Benefit Plans, Pension Benefit Plans, and Other
Programs related trust agreements or annuity contracts (or any other funding
instruments), are legally valid and binding and in full force and effect and
there are no promised increases in benefits (whether expressed, implied, oral or
written) under any of these plans nor any obligations, commitments or
understandings to continue any of these plans, (whether expressed, implied, oral
or written) except as required by Section 4980B of the Code and Sections 601-608
of ERISA;
(j) There are no claims pending with respect to, or under, any Pension
Benefit Plan, Welfare Benefit Plan or any Other Program, other than routine
claims for plan benefits, and there are no disputes or litigation pending or, to
the knowledge of Company and its Subsidiaries threatened, with respect to any
such plans;
(k) No action has been taken, nor has there been a failure to take any
action that would subject any person or entity to any liability for any income,
excise or other tax or penalty in connection with any Pension Benefit Plan,
Welfare Benefit Plan or any Other Program, other than for income taxes due with
respect to benefits paid; and
(l) Except as otherwise set forth in Schedule 3.14(l), neither the
execution and delivery of this Agreement nor the consummation of the transaction
contemplated hereby will (i) result in any payment to be made by the Company or
any ERISA Affiliate (including, without limitation, severance, unemployment
compensation, golden parachute (defined in Section 280G
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of the Code), or otherwise) becoming due to any employee, director or
consultant, or (ii) increase any benefits otherwise payable under any Welfare
Benefit Plan, Pension Benefit Plan, or any Other Program.
SECTION 3.15 Employment Matters. Except as disclosed on Schedule 3.15,
neither the Company nor any Company Subsidiary is a party to any oral or written
contracts or agreements granting benefits or rights to employees or any
collective bargaining agreement or to any conciliation agreement with the
Department of Labor, the Equal Employment Opportunity Commission or any federal,
state or local agency which requires equal employment opportunities or
affirmative action in employment. There are no unfair labor practice complaints
pending against the Company or any Company Subsidiary before the National Labor
Relations Board and no similar claims pending before any similar state, local or
foreign agency. To the knowledge of the Company, there is no activity or
proceeding of any labor organization (or representative thereof) or employee
group to organize any employees of the Company or any Company Subsidiary, nor of
any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with
respect to any such employees. The Company and its Subsidiaries are in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and neither the Company nor its Subsidiaries are engaged in any
unfair labor practice.
SECTION 3.16 Leases, Contracts and Agreements. Schedule 3.16 sets forth
an accurate and complete description of all leases, subleases, licenses,
contracts and agreements to which the Company or any Company Subsidiary is a
party or by which the Company or any Company Subsidiary is bound which obligate
or may obligate the Company or any Company Subsidiary for an amount in excess of
$50,000 per lease, sublease, license, contract or agreement over the entire term
of any such agreement or any leases, subleases, licenses, contracts or
agreements with a current term of one year or longer (the "Contracts"). The
Company has made available to Compass true and correct copies of all Contracts.
For the purposes of this Agreement, the Contracts shall be deemed not to include
loans made by, repurchase agreements made by, spot foreign exchange transactions
of, bankers acceptances of, agreements with Bank customers for trust services,
or deposits by the Company or its Subsidiaries, but does include unfunded loan
commitments and letters of credit issued by the Company or its Subsidiaries
where the borrowers' total direct and indirect indebtedness to its Subsidiaries
is in excess of $50,000. Except as set forth in Schedule 3.16, no participations
or loans have been sold which have buy back, recourse or guaranty provisions
which create contingent or direct liabilities of the Company or its
Subsidiaries. All of the Contracts are legal, valid and binding obligations of
the parties to the Contracts enforceable in accordance with their terms, subject
to the effect of bankruptcy, insolvency, reorganization, moratorium, or other
similar laws relating to creditors' rights generally and to general equitable
principles, and are in full force and effect. Except as described in Schedule
3.16, all rent and other payments by the Company and its Subsidiaries under the
Contracts are current, there are no existing defaults by the Company or its
Subsidiaries under the Contracts and no termination, condition or other event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default. The
Company and each of its Subsidiaries has a good and valid leasehold interest in
each parcel of real property leased by it free and clear of all mortgages,
pledges, liens, encumbrances and security interests.
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SECTION 3.17 Related Company Transactions. Except as set forth on
Schedule 3.17, there are no agreements, instruments, commitments, extensions of
credit, tax sharing or allocation agreements or other contractual agreements of
any kind between or among the Company, whether on its own behalf or in its
capacity as trustee or custodian for the funds of any employee benefit plan (as
defined in ERISA), and any of its Affiliates (including its Subsidiaries). The
term "Affiliate" as used in this Agreement means, with respect to any person,
any person that, directly or indirectly, controls, is controlled by, or is under
common control with, such person in question. For the purposes of this
definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with") as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
SECTION 3.18 Compliance with Laws. Except as set forth on Schedule
3.18, neither the Company nor any of its Subsidiaries is in default in respect
to or is in violation of (i) any judgment, order, writ, injunction or decree of
any court, or (ii) in any material respect, any statute, law, ordinance, rule,
order or regulation of any governmental department, commission, board, bureau,
agency or instrumentality, federal, state or local, including (for purposes of
illustration and not limitation) capital and FRB reserve requirements, capital
ratios and loan limitations of the OTS or the FDIC, and the consummation of the
transactions contemplated by this Agreement will not constitute such a default
or violation as to the Company or any of its Subsidiaries. The Company and its
Subsidiaries have all permits, licenses, and franchises from governmental
agencies required to conduct their businesses as they are now being conducted.
SECTION 3.19 Insurance. The Company and its Subsidiaries have in effect
the insurance coverage (including fidelity bonds) described in Schedule 3.19 and
have had similar insurance in force for the last 5 years. There have been no
claims under such bonds within the last 5 years and neither the Company nor its
Subsidiaries is aware of any facts which would form the basis of a claim under
such bonds. Neither the Company nor its Subsidiaries has any reason to believe
that the existing fidelity coverage would not be renewed by its carrier on
substantially the same terms. The Company has made available to Compass true and
accurate copies of the policies and declaration pages evidencing such insurance
coverage.
SECTION 3.20 Loans. Each loan reflected as an asset in the Financial
Statements is the legal, valid and binding obligation of the obligor of each
loan, enforceable in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
relating to creditors' rights generally and to general equitable principles;
provided, however, that no representation or warranty is made as to the
collectibility of such loans. The Company's Subsidiaries do not have in their
portfolios any loan exceeding their legal lending limit, and except as disclosed
on Schedule 3.20, the Company's Subsidiaries have no known significant
delinquent, substandard, doubtful, loss, nonperforming or problem loans.
SECTION 3.21 Fiduciary Responsibilities. The Company and its
Subsidiaries have performed in all material respects all of their respective
duties as a trustee, custodian, guardian or as an escrow agent in a manner which
complies in all material respects with all applicable laws, regulations, orders,
agreements, instruments and common law standards.
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SECTION 3.22 Patents, Trademarks and Copyrights. Except as set forth in
Schedule 3.22, neither the Company nor its Subsidiaries require the use of any
material patent, patent application, invention, process, trademark (whether
registered or unregistered), trademark application, trade name, service mark,
copyright, or any material trade secret for the business or operations of the
Company or its Subsidiaries. The Company and its Subsidiaries own or are
licensed or otherwise have the right to use the items listed in Schedule 3.22.
SECTION 3.23 Environmental Compliance. Except as set forth in Schedule
3.23:
(a) The Company, its Subsidiaries and any Property owned or operated by
any of them have been and are in compliance with all applicable Environmental
Laws (as defined in Section 10.13(c)). There is no past or present event,
condition or circumstance that could (1) interfere with the conduct of the
business of the Company or its Subsidiaries in the manner now conducted relating
to such entity's compliance with Environmental Laws, (2) constitute a violation
of, or serve as the basis of liability pursuant to, any Environmental Law or (3)
which could have a Material Adverse Effect upon the Company or any Company
Subsidiary;
(b) The Company, its Subsidiaries, and their Properties have not been,
and are not now subject to any actual, or, to the knowledge of the Company or
any Company Subsidiary, any potential or threatened Proceeding pursuant to any
Environmental Law and neither the Company nor any Company Subsidiary has
received any notice (whether from any regulatory body or private person) of any
actual or alleged violation of, or liability pursuant to, any Environmental Law;
(c) There is no Property for which the Company or any Company
Subsidiary is or was required to obtain any permit, license, or other
authorization under RCRA, FWPCA, TSCA, CAA, or any state or local counterparts
to any of the foregoing.
(d) Neither the Company nor any Company Subsidiary has generated any
Hazardous Substances for which it was required under an Environmental Law to
execute any hazardous waste disposal manifest;
(e) There are no underground or above ground storage tanks on or under
any Property nor any Hazardous Substances (except for asbestos containing
material ("ACM")) at, in, on, under or emanating from any Property in any
quantity or concentration exceeding any standard or limit established pursuant
to any Environmental Law;
(f) There is no ACM present in any Controlled Property except
non-friable ACM which can be managed in place in compliance with Environmental
Laws without air monitoring, removal or encapsulation and which is managed under
and in compliance with an operations and maintenance program.
(g) For purposes of this Section 3.23 and Section 6.10, "Property"
includes (1) any property (whether real or personal) which the Company or any
Company Subsidiary currently or in the past has leased, operated or owned or
managed in any manner including without limitation any property acquired by
foreclosure or deed in lieu thereof ("Controlled Property") and (2) property now
held as security for a loan or other indebtedness by the
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Company or any Company Subsidiary or property currently proposed as security for
loans or other credit the Company or any Company Subsidiary is currently
evaluating whether to extend or has committed to extend ("Collateral Property").
With respect to any Collateral Property, the representations of this Section
3.23 shall be limited to the knowledge of the Company. With respect to any
Controlled Property formerly leased, operated, owned or managed by the Company
or any Company Subsidiary, the representations of this Section 3.23 shall be
construed to relate to conditions, events, facts or circumstances which existed,
occurred or commenced prior to the latest date of any leasehold interest,
operation, ownership or management of such Controlled Property by the Company or
any Company Subsidiary.
SECTION 3.24 Regulatory Actions. Except as set forth on Schedule 3.24,
there are no actions or proceedings pending or, to the knowledge of the Company
and its Subsidiaries, threatened against the Company or its Subsidiaries by or
before the OTS, the FDIC, the Environmental Protection Agency, the Colorado
Department of Health and Environment or any other nation or government, any
state or political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government. Except as set forth on Schedule 3.24, neither the Company nor any
of its Subsidiaries are subject to a formal or informal agreement, memorandum of
understanding, enforcement action with or any type of financial assistance by
any regulatory authority having jurisdiction over such entity. Neither the
Company nor any of its Subsidiaries have taken or agreed to take any action or
has knowledge of any fact or circumstance that would materially impede or delay
receipt of any required regulatory approval. Except as set forth in Schedule
3.24, the Company and its Subsidiaries have not received or been made aware of
any complaints or inquiries under the Community Reinvestment Act, the Fair
Housing Act, the Equal Credit Opportunity Act or any other state or federal
anti-discrimination fair lending law and, to the knowledge of the Company and
its Subsidiaries, there is no fact or circumstance that would form the basis of
any such complaint or inquiry.
SECTION 3.25 Title to Properties; Encumbrances. Except as set forth on
Schedule 3.25, in notes to the Financial Statements, or for such encumbrances
arising by operation of law, the Company and each of its Subsidiaries has
unencumbered, good, legal, and indefeasible title to all its properties and
assets, real and personal, including, without limitation, all the properties and
assets reflected in the Financial Statements except for those properties and
assets disposed of for fair market value in the ordinary course of business and
consistent with prudent banking practice since the date of the Financial
Statements. Except as set forth on Schedule 3.25, the Company has a title policy
in full force and effect from a title insurance company which, to the best of
Company's knowledge, is solvent, insuring good and indefeasible title to all
real property owned by the Company and its Subsidiaries in favor of the Company
or its Subsidiaries, whichever is applicable. The Company has made available to
Compass all of the files and information in the possession of the Company or its
Subsidiaries concerning such properties, including any title exceptions which
might affect indefeasible title or value of such property. The Company and its
Subsidiaries each hold good and legal title or good and valid leasehold rights
to all assets that are necessary for them to conduct their respective businesses
as they are currently being conducted. Except as set forth on Schedule 3.25, the
Company owns all furniture, equipment, art and other property used to transact
business presently located on its premises. Except as set forth on Schedule
3.25, no Property has been deed recorded or otherwise
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been identified in public records or should have been recorded or so identified
as containing Hazardous Substances.
SECTION 3.26 Shareholder List. The Company has provided to Compass
prior to the date of this Agreement a list of the holders of Shares and the
holders of any outstanding warrant, option, convertible debenture or other
security entitling the holder thereof to acquire Shares as of September 30, 1999
containing the names, addresses and number of Shares or such other securities
held of record, which is accurate in all respects as of such date, and the
Company will promptly, and in any event prior to the mailing of the Proxy
Statement, advise Compass of any significant changes thereto.
SECTION 3.27 Dissenting Shareholders. The Company and the Bank, and
their respective directors, have no knowledge of any plan or intention on the
part of any Company shareholders to make written demand for payment of the fair
value of such Shares in the manner provided in Article 113 of the CBCA.
SECTION 3.28 Takeover Laws. This Agreement and the Merger contemplated
hereby are not subject to the requirements of any "moratorium," "control share,"
"fair price," "affiliate transactions," "business combination" or other
antitakeover laws and regulations of any state applicable to the Company or any
of its Subsidiaries.
SECTION 3.29 Employee Stock Options. Except as set forth on Schedule
3.29, there are no Company employee stock option plans or provisions in any
other plan, program, or arrangement providing for the issuance or grant of any
other interest in respect of the capital stock of the Company or any Company
Subsidiary.
SECTION 3.30 Accounting Matters. Neither the Company nor any of its
affiliates has taken or agreed to take any action that would prevent Compass
from accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto.
SECTION 3.31 Year 2000 Representation. All software, firmware,
hardware, equipment, microprocessing chips and other data processing devices and
services (both as a recipient and as a provider), capabilities and facilities
utilized by, and material to the business operations or financial condition of,
the Company and its Subsidiaries are or will be able to record and process all
calendar dates (whether before, in or after the year 2000) correctly and will be
able to communicate with other applicable systems in a manner that resolves any
ambiguities as to century in a properly defined manner (collectively, "Year 2000
Compliant"). The Company and its Subsidiaries have adequately assessed the Year
2000 Compliant status of all vendors, suppliers, service providers, customers
and business partners or venturers ("Critical Third Parties") whose goods,
services or business activities are material to the business operations or
financial condition of the Company or its Subsidiaries. The Company and its
Subsidiaries have developed adequate contingency plans to prevent material loss
to or liability of the Company and its Subsidiaries in the event the Company's
or its Subsidiaries' property or services or any Critical Third Party (or their
respective critical suppliers, vendors, service providers, customers and
business partners and venturers) fails to be Year 2000 Compliant. The Company
has contingency plans for cash availability and liquidity sources.
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SECTION 3.32 Title Companies. Each Subsidiary of the Company which is a
title insurance or escrow company has (i) paid to its underwriters all premiums
to which each underwriter is entitled, and (ii) complied in all material
respects with all requirements set forth in the underwriting agreements to which
such Subsidiary is a party, including without limitation, all underwriting and
title examination guidelines. No Company Subsidiary which is a title insurance
or escrow company has used escrow or trust funds as collateral for loans or for
other corporate purposes.
SECTION 3.33 Representations Not Misleading. No representation or
warranty by the Company in this Agreement, or in any exhibit or schedule
furnished to Compass or Merger Sub by the Company or its Subsidiaries under and
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF COMPASS
Compass hereby makes the representations and warranties set forth in
this Article IV to the Company. Compass has delivered to the Company the
Schedules to this Agreement referred to in this Article IV prior to the date
hereof. Compass agrees at the Closing to provide the Company with supplemental
Schedules reflecting any changes thereto between the date of such Schedules and
the date of Closing.
SECTION 4.1 Organization and Authority.
(a) Compass is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to conduct its business as now conducted, to own,
lease and operate its properties and assets as now owned, leased or operated and
to enter into and carry out its obligations under this Agreement.
(b) Compass is a bank holding company under the Bank Holding Company
Act of 1956, as amended, and in good standing under all laws, rules and
regulations applicable to bank holding companies. Compass is duly qualified or
licensed and in good standing in each jurisdiction which requires such
qualification where it owns or leases properties or conducts business.
SECTION 4.2 Authority Relative to Agreement. Compass has full corporate
power and authority and no further corporate proceedings on the part of Compass
are necessary to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, all of which have been duly and validly
authorized by Compass' Board of Directors. This Agreement has been duly executed
and delivered by Compass and is a duly authorized, valid, legally binding and
enforceable obligation of Compass, subject to the effect of bankruptcy,
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insolvency, reorganization, moratorium, or other similar laws relating to
creditors' rights generally and general equitable principles, and subject to
such shareholder approvals and such approval of regulatory agencies and other
governmental authorities having authority over Compass as may be required by
statute or regulation. Compass is not in violation of or default under its
Certificate of Incorporation or By-Laws or any agreement, document or instrument
under which Compass is obligated or bound, or any law, order, judgment,
injunction, award, decree, statute, rule, ordinance or regulation applicable to
Compass or any of its Subsidiaries, the violation or breach of which could have
a Material Adverse Effect on Compass and its Subsidiaries taken as a whole.
Except as set forth on Schedule 4.2, neither the execution, delivery nor
performance of this Agreement in its entirety, nor the consummation of all the
transactions contemplated hereby, following the receipt of such approvals as may
be required from the SEC, the OTS, the FRB, the FDIC, the Commissioner and the
Superintendent and any notification to the Insurance Division will (i) conflict
with or result in any violation or breach of or default under its Certificate of
Incorporation or Bylaws; (ii) violate (with or without the giving of notice or
passage of time), any law, order, writ, judgment, injunction, award, decree,
rule, statute, ordinance or regulation applicable to Compass, or (iii) be in
conflict with, result in a breach or termination of any provision of, cause the
acceleration of the maturity of any debt or obligation pursuant to, constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any security interest, lien, charge or other
encumbrance upon any property or assets of Compass pursuant to, any terms,
conditions or provisions of any note, license, instrument, indenture, mortgage,
deed of trust or other agreement or understanding or any other restriction of
any kind or character, to which Compass is a party or by which any of its assets
or properties are bound. Except as set forth on Schedule 4.2, there are no
proceedings pending or, to the knowledge of Compass, threatened, against
Compass, at law or in equity or before any foreign, federal, state, municipal or
other governmental court, department, commission, board, bureau, agency,
instrumentality or other person which may result in liability to the Company or
its Subsidiaries on the consummation of the transactions contemplated hereby or
which would prevent or delay such consummation. Except as set forth in Schedule
4.2, or as contemplated hereby, the corporate existence, business, organization,
assets, licenses, permits, authorizations and contracts of Compass will not be
terminated or impaired by reason of the execution, delivery or performance by
Compass of this Agreement or consummation by Compass of the transactions
contemplated hereby, assuming receipt of the required regulatory approvals.
SECTION 4.3 Financial Reports. Compass has previously furnished the
Company a true and complete copy of (i) the 1998 Annual Report to Shareholders,
which report (the "Compass 1998 Annual Report") includes, among other things,
consolidated balance sheets of Compass and its Subsidiaries as of December 31,
1998 and 1997, the related consolidated statements of income, shareholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996 and
(ii) Compass' quarterly reports on Form 10-Q for the quarters ended March 31 and
June 30, 1999 (the "Quarterly Reports") which reports include among other things
unaudited balance sheets of Compass and its Subsidiaries as of March 31 and June
30, 1999 and 1998, respectively, and the related unaudited consolidated
statements of income and cash flows for the three- and six-month periods ending
March 31 and June 30, 1999 and 1998. The financial statements contained in the
Compass 1998 Annual Report and such Quarterly Reports have been prepared in
conformity with GAAP applied on a basis consistent with prior periods. The
consolidated balance sheets of Compass and its Subsidiaries as of December 31,
1998 and
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1997 contained in the Compass 1998 Annual Report fairly present the consolidated
financial condition of Compass and its Subsidiaries as of the dates thereof, and
the related consolidated statements of income, shareholders' equity and cash
flows of Compass and its Subsidiaries contained therein fairly present the
results of operations and cash flows thereof for the fiscal years then ended.
The unaudited consolidated financial statements of Compass and its Subsidiaries
as of March 31 and June 30, 1999 and 1998, contained in Compass' Quarterly
Reports, fairly present the financial condition, the results of the operations
and changes in cash flows thereof as of such dates and for the periods
indicated. For the purposes of this Agreement, all financial statements referred
to in this Section 4.3 shall be deemed to include any notes to such financial
statements. Compass has made all filings required to be made in compliance with
the Exchange Act. None of the information contained in the Compass 1998 Annual
Report or Compass' Quarterly Reports is false or misleading with respect to any
material fact, or omits to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
SECTION 4.4 Capitalization. The shares of Compass Common Stock to be
issued pursuant to this Agreement, when so issued, will be duly and validly
authorized and issued, fully paid and nonassessable, and not issued in violation
of any preemptive rights. As of July 31, 1999, Compass had 113,629,765 shares of
common stock, $2.00 per share par value, issued and outstanding. None of the
shares of Compass Common Stock to be issued pursuant to this Agreement will be
subject to any lien, charge, encumbrance, claim, rights of others, mortgage,
pledge or security interest, and none will be subject to any agreements or
understandings among any persons with respect to the voting or transfer of such
shares of Compass Common Stock except as contemplated hereby.
SECTION 4.5 Consents and Approvals. No prior consent, approval or
authorization of, or declaration, filing or registration with any person,
domestic or foreign, is required of or by Compass in connection with the
execution, delivery and performance by Compass of this Agreement and the
transactions contemplated hereby or the resulting change in control of the
Company and its Subsidiaries, except the filing of Articles of Merger under the
CBCA and such approvals as may be required from the SEC, the FRB, the OTS, the
Commissioner, the Superintendent and the FDIC and any notification to the
Insurance Division.
SECTION 4.6 Availability of the Compass Common Stock. Compass has
available a sufficient number of authorized and unissued shares of Compass
Common Stock to pay the Merger Consideration, and Compass will not take any
action during the term of this Agreement that will cause it not to have a
sufficient number of authorized and unissued shares of the Compass Common Stock
to pay the Merger Consideration.
SECTION 4.7 Regulatory Actions. Neither Compass nor any of its
Subsidiaries have taken or agreed to take any action or has knowledge of any
fact or circumstance that would materially impede or delay receipt of any
required regulatory approval.
SECTION 4.8 Takeover Laws. This Agreement and the Merger contemplated
hereby are not subject to the requirements of any "moratorium," "control share,"
"fair price," "affiliate transactions," "business combination" or other
antitakeover laws and regulations of any state applicable to Compass or any of
its Subsidiaries.
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SECTION 4.9 Accounting Matters. Neither Compass nor any of its
affiliates has taken or agreed to take any action that would prevent Compass
from accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto.
SECTION 4.10 Representations Not Misleading. No representation or
warranty by Compass in this Agreement nor exhibit or schedule furnished to the
Company under and pursuant to this Agreement, contains or will contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading.
SECTION 4.11 Litigation. There are no material Proceedings pending, or
to the knowledge of Compass or its Subsidiaries, threatened against Compass or
its Subsidiaries or involving any of their respective properties or assets which
are required to be disclosed, but have not been so disclosed, in filings
required to be made with the SEC pursuant to the Exchange Act.
SECTION 4.12 Absence of Certain Changes. Since June 30, 1999, no event
has occurred or circumstances arisen that, individually, or taken together, with
all other facts, circumstances and events, would have required a filing with the
SEC pursuant to the Exchange Act which has not been so filed.
ARTICLE V.
COVENANTS OF THE COMPANY
SECTION 5.1 Affirmative Covenants of the Company. For so long as this
Agreement is in effect, the Company shall, and shall use its best efforts to
cause its Subsidiaries (collectively, the "Acquired Companies") to, from the
date of this Agreement to the Closing, except as specifically contemplated by
this Agreement:
(a) operate and conduct the businesses of the Acquired Companies in the
ordinary course of business and consistent with prudent banking practices;
(b) preserve intact the Acquired Companies' corporate existence,
business organization, assets, licenses, permits, authorizations, and business
opportunities;
(c) comply with all material contractual obligations applicable to the
Acquired Companies' operations;
(d) maintain all the Acquired Companies' properties in good repair,
order and condition, reasonable wear and tear excepted, and maintain the
insurance coverages described in Schedule 3.19 (which shall list all Property
insured by such coverages) or obtain comparable insurance coverages from
reputable insurers which, in respect to amounts, types and risks insured, are
adequate for the business conducted by the Acquired Companies and consistent
with the existing insurance coverages;
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(e) in good faith and in a timely manner (i) cooperate with Compass and
Merger Sub in satisfying the conditions in this Agreement, (ii) assist Compass
and Merger Sub in obtaining as promptly as possible all consents, approvals,
authorizations and rulings, whether regulatory, corporate or otherwise, as are
necessary for Compass and Merger Sub and the Company (or any of them) to carry
out and consummate the transactions contemplated by this Agreement, including
all consents, approvals and authorizations required by any agreement or
understanding existing at the Closing between the Company and any governmental
agency or other third party, (iii) furnish information concerning the Acquired
Companies not previously provided to Compass required for inclusion in any
filings or applications that may be necessary in that regard and (iv) perform
all acts and execute and deliver all documents necessary to cause the
transactions contemplated by this Agreement to be consummated at the earliest
possible date;
(f) timely file with the OTS, and the FDIC, all financial statements
and other reports required to be so filed by any of the Acquired Companies and
to the extent permitted by applicable law, promptly thereafter deliver to
Compass copies of all financial statements and other reports required to be so
filed;
(g) comply in all material respects with all applicable laws and
regulations, domestic and foreign;
(h) promptly notify Compass upon obtaining knowledge of any default,
event of default or condition with which the passage of time or giving of notice
would constitute a default or an event of default under the Company Loan
Documents and promptly notify and provide copies to Compass of any material
written communications concerning the Company Loan Documents;
(i) between the date of this Agreement and Closing, promptly give
written notice to Compass upon obtaining knowledge of any event or fact that
would cause any of the representations or warranties of the Company contained in
or referred to in this Agreement to be untrue or misleading in any material
respect;
(j) deliver to Compass a list (Schedule 5.1(j)), dated as of the
Effective Time, showing (i) the name of each bank or institution where the
Acquired Companies have accounts or safe deposit boxes, (ii) the name(s) in
which such accounts or boxes are held and (iii) the name of each person
authorized to draw thereon or have access thereto;
(k) deliver to Compass a list (Schedule 5.1(k)), dated as of the
Effective Time, showing all liabilities and obligations of the Acquired
Companies, except those arising in the ordinary course of their respective
businesses, incurred since the Balance Sheet Date, certified by an officer of
Company;
(l) shall continue to have contingency plans for cash availability and
liquidity sources;
(m) promptly notify Compass of any material change or inaccuracies in
any data previously given or made available to Compass or Merger Sub pursuant to
this Agreement; and
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(n) provide access, to the extent that the Company or its Subsidiaries
have the right to provide access, to any or all Property (as defined in Section
3.23) so as to enable Compass to physically inspect any structure or components
of any structure on such Property, including without limitation surface and
subsurface testing and analyses.
SECTION 5.2 Negative Covenants of the Company. Except with the prior
written consent of Compass or as otherwise specifically permitted by this
Agreement, the Company will not and will use its best efforts not to permit the
Bank, or any other Subsidiary of the Company, to, from the date of this
Agreement to the Closing:
(a) make any amendment to its articles of incorporation or association
or bylaws;
(b) make any change in the methods used in allocating and charging
costs, except as may be required by applicable law, regulation or GAAP and after
notice to Compass;
(c) make any change in the number of shares of the capital stock issued
and outstanding, or issue, reserve for issuance, grant, sell or authorize the
issuance of any shares of its capital stock or subscriptions, options, warrants,
calls, rights or commitments of any kind relating to the issuance or sale of or
conversion into shares of its capital stock;
(d) contract to create any obligation or liability (absolute, accrued,
contingent or otherwise) except in the ordinary course of business and
consistent with prudent banking practices;
(e) contract to create any mortgage, pledge, lien, security interest or
encumbrances, restrictions, or charge of any kind (other than statutory liens
for which the obligations secured thereby shall not become delinquent), except
in the ordinary course of business and consistent with prudent banking
practices;
(f) cancel any debts, waive any claims or rights of value or sell,
transfer, or otherwise dispose of any of its material properties or assets,
except in the ordinary course of business and consistent with prudent banking
practices;
(g) sell any real estate owned as of the date of this Agreement or
acquired thereafter, which real estate qualifies as "other real estate owned"
under accounting principles applicable to it, except in the ordinary course of
business and consistent with prudent banking practices and applicable banking
laws and regulations;
(h) dispose of or permit to lapse any rights to the use of any material
trademark, service mark, trade name or copyright, or dispose of or disclose to
any person other than its employees any material trade secret not theretofore a
matter of public knowledge;
(i) except as set forth on Schedule 3.10 and except for regular salary
increases granted in the ordinary course of business within the Company or its
Subsidiaries' 1999 budgets and consistent with prior practices, grant any
increase in compensation or directors' fees, or pay or agree to pay or accrue
any bonus or like benefit to or for the credit of any director, officer,
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employee or other person or enter into any employment, consulting or severance
agreement or other agreement with any director, officer or employee, or adopt,
amend or terminate any Employee Benefit Plan or change or modify the period of
vesting or retirement age for any participant of such a plan;
(j) declare, pay or set aside for payment any dividend or other
distribution or payment in respect of shares of its capital stock, except for
dividends from the Bank to the Company;
(k) except through settlement of indebtedness, foreclosure, the
exercise of creditors' remedies or in a fiduciary capacity, acquire the capital
stock or other equity securities or interest of any person;
(l) make any capital expenditure or a series of expenditures of a
similar nature in excess of $100,000 in the aggregate;
(m) make any income tax or franchise tax election or settle or
compromise any federal, state, local or foreign income tax or franchise tax
liability, or, except in the ordinary course of business consistent with prudent
banking practices, make any other tax election or settle or compromise any other
federal, state, local or foreign tax liability;
(n) except for negotiations and discussions between the parties hereto
relating to the transactions contemplated by this Agreement or as otherwise
permitted hereunder, enter into any transaction, or enter into, modify or amend
any contract or commitment other than in the ordinary course of business and
consistent with prudent banking practices;
(o) except as contemplated by this Agreement, adopt a plan of complete
or partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization, or other reorganization or business combination of the Company
or any of its Subsidiaries;
(p) issue any certificates of deposit except in the ordinary course of
business and in accordance with prudent banking practices;
(q) make any investments except in the ordinary course of business and
in accordance with prudent banking practices;
(r) modify, amend, waive or extend either the Company Loan Documents or
any rights under such agreements;
(s) modify any outstanding loan, make any new loan, or acquire any loan
participation, unless such modification, new loan, or participation is made in
the ordinary course of business and in accordance with prudent banking
practices;
(t) sell or contract to sell any part of the Company's or its
Subsidiaries' premises;
(u) change any fiscal year or the length thereof;
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(v) take or agree to take any action that would prevent Compass from
accounting for the business combination to be effected by the Merger as a
pooling of interests, including, without limitation, any action inconsistent
with the provisions of Exhibit C hereto;
(w) prepay in whole or in part the Company Indebtedness;
(x) commence operations or acquire any assets into the Real Estate
Subsidiaries; or
(y) enter into any agreement, understanding or commitment, written or
oral, with any other person which is in any manner inconsistent with the
obligations of the Company and its directors and its Subsidiaries under this
Agreement or any related written agreement. Nothing contained in this Section
5.2 or in Section 5.1 is intended to influence the general management or overall
operations of the Company or its Subsidiaries in a manner not permitted by
applicable law and the provisions thereof shall automatically be reduced in
compliance therewith.
ARTICLE VI.
ADDITIONAL AGREEMENTS
SECTION 6.1 Access To, and Information Concerning, Properties and
Records. During the pendency of the transactions contemplated hereby, the
Company shall, to the extent permitted by law, give Compass, its legal counsel,
accountants and other representatives full access, during normal business hours
and upon reasonable advance notice, throughout the period prior to the Closing,
to all of the Company's and its Subsidiaries' properties, books, contracts,
commitments and records, permit Compass to make such inspections (including
without limitation physical inspection of the surface and subsurface of any
property thereof and any structure thereon) as they may require and furnish to
Compass during such period all such information concerning the Company and its
Subsidiaries and their affairs as Compass may reasonably request. All
information disclosed by the Company to Compass which is confidential and is so
identified to Compass as confidential shall be held confidential by Compass and
its representatives, except to the extent counsel to Compass, in its reasonable
opinion, has advised it such information is required to or should be disclosed
in filings with regulatory agencies or governmental authorities or in proxy
materials delivered to shareholders of the Company. In the event this Agreement
is terminated pursuant to the provisions of Article VIII, upon the written
request of the Company, Compass agrees to destroy or return to the Company all
copies of such confidential information.
SECTION 6.2 Filing of Regulatory Approvals. Compass and the Company
shall use their reasonable efforts to file all notices and applications to the
FRB, the OTS, the Superintendent, the Commissioner, the FDIC and the Insurance
Division which Compass deems necessary or appropriate to complete the
transactions contemplated herein, including the merger of the Bank and Compass
Bank ("Compass Bank") on or before December 1, 1999. Compass will deliver to the
Company and its counsel, and the Company will deliver to Compass and its
counsel, copies of all non-confidential portions of any such applications.
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SECTION 6.3 Miscellaneous Agreements and Consents. Subject to the terms
and conditions of this Agreement, Compass and the Company agree to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to consummate and make effective, as soon as practicable
after the date hereof, the transactions contemplated by this Agreement. Compass
and the Company shall use their respective best efforts to obtain or cause to be
obtained consents of all third parties and governmental and regulatory
authorities necessary or desirable for the consummation of the transactions
contemplated herein.
SECTION 6.4 Company Indebtedness. Prior to the Effective Time, the
Company shall pay all regularly scheduled payments on all Company Indebtedness
and shall cooperate with Compass in taking such actions as are reasonably
appropriate or necessary in connection with the redemption, prepayment,
modification, satisfaction or elimination of any outstanding indebtedness of the
Company or its Subsidiaries with respect to which a consent is required to be
obtained to effectuate the Merger and the transactions contemplated by this
Agreement and has not been so obtained.
SECTION 6.5 Best Good Faith Efforts. All parties hereto agree that the
parties will use their best good faith efforts to secure all regulatory
approvals necessary to consummate the Merger and other transactions provided
herein and to satisfy the other conditions to Closing contained herein.
SECTION 6.6 Exclusivity. (a) The Company agrees that it shall not, and
shall cause its Subsidiaries and its and its Subsidiaries' officers, directors,
agents and advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal. It shall immediately cease and cause to
be terminated any activities, discussions or negotiations conducted prior to the
date of this Agreement with any parties. The Company shall promptly advise
Compass following the receipt by the Company or any of its Subsidiaries of any
Acquisition Proposal and the substance thereof (including the identity of the
person making such Acquisition Proposal), and advise Compass of any developments
with respect to such Acquisition Proposal immediately upon the occurrence
thereof. For purposes of this Section 6.6 an "Acquisition Proposal" means any
tender or exchange offer, proposal for a merger, consolidation or other business
combination or similar transaction involving the Company or its Subsidiaries or
any proposal or offer to purchase or acquire in any manner all or a majority of
the voting ownership, beneficial ownership or right to vote securities in, or a
majority of the assets or deposits of the Company or any of its Subsidiaries,
other than the transaction contemplated by this Agreement, provided, however,
that nothing contained in this Section 6.6 shall prohibit the Board of Directors
of the Company from furnishing information to, or entering into discussions,
negotiations or an agreement with, any person or entity that makes an
unsolicited Acquisition Proposal after the date hereof if, and only to the
extent that the Board of Directors of the Company, after consultation with and
based upon the written opinion of outside counsel, concludes in good faith that
such action is necessary for the Board of Directors of the Company, to comply
with its fiduciary duties to its shareholders under applicable law.
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(b) The Board of Directors of the Company shall not (i) withdraw or
modify the approval or recommendation by such Board of Directors of this
Agreement or the Merger, (ii) approve or recommend an Acquisition Proposal or
(iii) enter into any agreement with respect to any Acquisition Proposal, unless
the Company receives an Acquisition Proposal and the Board of Directors of the
Company concludes in good faith, after consultation with and based upon the
written opinion of outside counsel, that in order to comply with its fiduciary
duties to its shareholders under applicable law it is necessary for the Board of
Directors to withdraw or modify its approval or recommendation of this Agreement
or the Merger, approve or recommend such Acquisition Proposal or enter into an
agreement with respect to such Acquisition Proposal. Notwithstanding anything
contained in this Agreement to the contrary, any action by the Board of
Directors permitted by this Section 6.6(b) shall not constitute a breach of this
Agreement by the Company.
SECTION 6.7 Public Announcement. Subject to written advice of counsel
with respect to legal requirements relating to public disclosure of matters
related to the subject matter of this Agreement, the timing and content of any
announcements, press releases or other public statements concerning the proposal
contained herein will occur upon, and be determined by, the mutual consent of
the Company and Compass.
SECTION 6.8 Employee Benefit Plans. Compass presently intends that,
after the Effective Time, Compass, the Company and its Subsidiaries will not
make additional contributions to the employee benefit plans that were sponsored
by the Company or an ERISA Affiliate immediately prior to the Effective Time.
Compass agrees that the employees of the Company and its Subsidiaries who are
retained as employees of Compass or Compass Bank will be entitled to participate
as newly hired employees in the employee benefit plans and programs maintained
for employees of Compass and its affiliates, in accordance with the respective
terms of such plans and programs, and Compass shall take all actions necessary
or appropriate to facilitate coverage of the Company's and its Subsidiaries'
employees in such plans and programs from and after the Effective Time, subject
to the following:
(i) Employee Welfare Benefit Plans and Programs: Each employee of the
Company and its Subsidiaries retained by Compass will be entitled to credit for
prior service with the Company and its Subsidiaries for all purposes under the
employee welfare benefit plans and other employee benefit plans and programs
(other than those described in subparagraph (ii) below and any stock option
plans) sponsored by Compass to the extent the Company or any of its Subsidiaries
sponsored a similar type of plan which the Company or Company Subsidiary
employee participated in immediately prior to the Effective Time. To the extent
permitted under Compass' existing insurance contracts, any waiting period and
preexisting condition exclusion applicable to such plans and programs shall be
waived with respect to any such Company or Company Subsidiary employee. For
purposes of determining each Company or Company Subsidiary employee's benefit
for the year in which the Merger occurs under the Compass vacation program, any
vacation taken by a Company or Company Subsidiary employee preceding the
Effective Time for the year in which the Merger occurs will be deducted from the
total Compass vacation benefit available to such employee for such year. Compass
agrees that for purposes of determining the number of vacation days available
with respect to each Company employee for the year in which the Merger occurs,
that the number of vacation days for such
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year shall be determined under the Company or its Subsidiaries vacation policies
in effect as of January 1, 1999.
(ii) Employee Pension Benefit Plans: Each Company and Company
Subsidiary employee retained by Compass shall be entitled to credit for past
service with the Company and its Subsidiaries for the purpose of satisfying any
eligibility or vesting periods applicable to the Compass employee pension
benefit plans which are subject to Sections 401(a) and 501(a) of the Code
(including, without limitation, the Compass 401(k)/ESOP Plan). Notwithstanding
the foregoing, Compass shall not grant any prior years of service credit to
employees of the Company and its Subsidiaries with respect to any defined
benefit pension plans sponsored (or contributed to) by Compass; instead, Company
and Company Subsidiary employees shall be treated as newly hired employees of
Compass as of the date following the Effective Time for purposes of determining
eligibility, vesting and benefit accruals thereunder.
The Company shall take such actions as may be necessary to terminate
the 401(k) plan sponsored by the Company effective immediately prior to the
Effective Time.
SECTION 6.9 Merger of Bank. Compass presently intends to cause the Bank
to merge into Compass Bank immediately after the Effective Time, and the Company
agrees to cause the Bank and its other Subsidiaries to execute documents and
take actions (conditioned on the Merger being effective) and otherwise cooperate
with Compass during the time the Merger transaction is pending in order to
facilitate such merger of the Bank into Compass Bank immediately after the
Closing.
SECTION 6.10 Environmental Investigation; Right to Terminate Agreement.
(a) Compass and its consultants, agents and representatives, shall have
the right to the same extent that the Company and its Subsidiaries have such
right, but not the obligation or responsibility, to inspect any Controlled
Property, upon reasonable advance notice, including, without limitation, for the
purpose of conducting asbestos surveys and sampling, and other environmental
assessments and investigations ("Environmental Inspections"). Compass' right to
conduct Environmental Inspections shall include the right to sample and analyze
air, sediment, soil and groundwater of any Controlled Property to the same
extent that the Company or its Subsidiaries have such right. Compass may conduct
such Environmental Inspections at any time subject to Section 6.10(d) below.
(b) Using an approach and scope which is equivalent to the written
environmental policies of Compass, a copy of which has been delivered to the
Company, the Company and its Subsidiaries shall cause to be performed, and
subsequently evaluate the results of, an environmental investigation of any
Property acquired, leased, foreclosed, managed or controlled by the Company or
its Subsidiaries, or in which the Company or its Subsidiaries acquires a
security interest, in each case between the date hereof and the Closing Date,
and the scope and results of which shall be acceptable to Compass in its sole
reasonable discretion. The Company shall not be required to conform its
commitment language to customers to the commitment language used by Compass,
subject to the Company's compliance with the foregoing sentence.
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(c) Compass shall notify the Company of any Environmental Inspections
of Controlled Property which it intends to conduct, and the Company may place
reasonable restrictions on the time of such inspections. Upon Compass'
notification to the Company of the Controlled Property upon which it intends to
conduct such physical inspections, the Company and its Subsidiaries shall notify
the owner of such Controlled Property and use their reasonable best efforts to
secure access to such Controlled Property for Compass. Compass shall notify the
Company on or prior to January 15, 2000 of any Controlled Properties that, in
the sole discretion of Compass, are not acceptable and require further
assessment, remediation, correction, or monitoring ("Environmental Response").
Compass shall order Phase I environmental reports within 15 days of the
execution of this Agreement.
(d) (1) With respect to any Controlled Property that Compass has
notified the Company is not acceptable and requires Environmental Response, the
Company shall promptly prepare a remediation plan acceptable to Compass, and use
best efforts to obtain approval of such remediation plan by the Colorado
Department of Public Health and Environment or any other appropriate
governmental authority ("Environmental Regulatory Authority"), if approval is
necessary, and implement the same on or prior to Closing.
(2) Notwithstanding the foregoing, and without limiting any rights
of Compass to terminate this Agreement, the Company shall not be obligated to
incur aggregate expenditures in excess of $500,000 in connection with
Environmental Response, preparing and obtaining approval by the appropriate
Environmental Regulatory Authority of remediation plans with respect to
Controlled Properties (the "Aggregate Environmental Expense Limit"); provided,
however, that the determination of the Aggregate Environmental Expense Limit
shall include the aggregate expenses in connection with Environmental Response
and preparing and obtaining approval by the appropriate Environmental Regulatory
Authority of remediation plans with respect to Controlled Property (as defined
under the Ancillary Agreements as defined herein), under this Agreement and the
Ancillary Agreements.
(e) Each party hereto agrees to indemnify and hold harmless the other
party for any claims for damage to the Controlled Property or injury or death to
persons in connection with any Environmental Inspection of the Controlled
Property to the extent such damage, injury or death is directly attributable to
the negligent actions or negligent omissions of such indemnifying party. Compass
shall have no liability or responsibility of any nature whatsoever for the
results, conclusions or other findings related to any Environmental Inspection.
If this Agreement is terminated, then except as otherwise required by law,
Compass shall have no obligation to make any reports to any governmental
authority of the results of any Environmental Inspection, but such reporting
shall remain the responsibility of and within the discretion of the Company.
Compass shall have no liability to the Company or its Subsidiaries for making
any report of such results to any governmental authority.
(f) Compass shall have the right to terminate this Agreement in the
following circumstances:
(i) the factual substance of any warranties set forth in Section
3.23 is not true and accurate irrespective of the knowledge or lack of knowledge
of the Company, and
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losses, damages, Environmental Response costs, liabilities (INCLUDING WITHOUT
LIMITATION STRICT LIABILITIES), fines, penalties, costs and expenses which might
arise therefrom could reasonably be expected to exceed the Aggregate
Environmental Expense Limit;
(ii) if the Environmental Inspection identifies any past or
present event, condition or circumstance that, based on the reasonable estimates
of the environmental professionals referred to in this Section 6.10, may
currently or in the future require expenditures by the Company or its
Subsidiaries, in connection with (1) Environmental Response of any Controlled
Property (including without limitation eventual removal of asbestos-containing
material), (2) preparing and obtaining approval by the appropriate Environmental
Regulatory Authority of remediation plans with respect to Controlled Properties,
or (3) any violations of applicable Environmental Laws, which expenditures
individually or in the aggregate may exceed the Aggregate Environmental Expense
Limit;
(iii) Compass is not permitted to conduct an Environmental
Inspection of any currently Controlled Property and Property that becomes
Controlled Property after the date hereof to the extent it deems appropriate,
consistent with the provisions of Section 6.10(a);
(iv) If on or before Closing, for each Controlled Property
identified by Compass as unacceptable and requiring Environmental Response, the
Company does not deliver to Compass written evidence acceptable to Compass that
the Company has used best efforts to develop a remediation plan approved by the
applicable Environmental Regulatory Authority, and implemented the same.
(g) The Company agrees to make available to Compass and its
consultants, agents and representatives all documents and other material
relating to environmental conditions of the Property in its possession
including, without limitation, the results of all other environmental
inspections and surveys. The Company also agrees that all engineers and
consultants who prepared or furnished such reports may discuss such reports and
information with Compass and shall be entitled to certify the same in favor of
Compass and its consultants, agents and representatives in such a manner which
will entitle Compass to rely upon such reports and make all other data available
to Compass and its consultants, agents and representatives. At the written
request of the Company, Compass agrees to provide the Company with a copy of all
environmental reports prepared by its consultants as a result of the
Environmental Inspections.
SECTION 6.11 Proxies. The Company acknowledges that the persons listed
in Schedule 6.11 have agreed that they will vote the Shares owned by them in
favor of this Agreement and the transactions contemplated hereby, subject to
required regulatory approvals, and that they will retain the right to vote such
Shares during the term of this Agreement and have given Compass a proxy to vote
such Shares in favor of the Merger if they should fail to do so, pursuant to a
Voting Agreement and Irrevocable Proxy in substantially the form attached hereto
as Exhibit D.
SECTION 6.12 Exchange Agreement. Immediately prior to the Effective
Time, the Company and Compass agree to enter into, and Compass agrees to cause
Merger Sub to enter into, the Exchange Agreement with the Exchange Agent, or if
the Exchange Agent refuses to
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serve as exchange agent, such other exchange agent as shall mutually agreed to
by the Company and Compass.
SECTION 6.13 Year 2000 Investigation.
(a) Using an approach and scope which is equivalent to the Year 2000
risk management policies and procedures for Year 2000 credit exposure of Compass
previously delivered to the Company ("Year 2000 Inspection"), the Company and
its Subsidiaries shall cause to be performed, and subsequently evaluate the
results of, a Year 2000 Inspection of issuers of municipal investment securities
where the investment in the securities of any one issuer equals or exceeds
$125,000, in each case between the date hereof and the Closing Date, and the
scope and results of which shall be acceptable to Compass in its sole reasonable
discretion.
(b) The Company shall provide to Compass on or before December 15,
1999, its initial assessment of all municipal issuers and their appropriate
contracting parties or providers subject to Year 2000 Inspections.
(c) The Company shall use its best efforts to remediate any borrowers
or municipal issuers which are assessed as high risk as a result of Year 2000
Inspections.
(d) The Company agrees to (i) charge-off prior to the Effective Time
securities with respect to municipal issuers, and (ii) add in, prior to the
Effective Time, to the Company's and its Subsidiaries' loan loss reserves 110%
of the collateral deficit for borrowers, as to each such issue or loan
determined to be high risk and of uncertain collectibility and are not capable
of remediation each as a result of Year 2000 Inspections. The borrowers and the
amount of the collateral deficit for any such borrower shall be determined
jointly between the Company and Compass, each party to be reasonable in its
making a determination.
(e) The Company has performed unit tests on deposit, loan, ACH, fund
transfer, federal line, and telecom switches to determine their Year 2000
Compliant status and has taken remedial action or shall take remedial action as
required by the results of such tests in a manner reasonably satisfactory to
Compass.
SECTION 6.14 Director and Officer Indemnification.
(a) Following the Effective Time and for a period of five years
thereafter, Compass shall indemnify, defend, and hold harmless the present and
former directors, officers and employees of the Company and its Subsidiaries
(each, an "Indemnified Party") against all costs or expenses, including
reasonable attorneys' fees, judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative, or investigative,
arising out of actions or omissions accruing at or prior to the Effective Time)
including, without limitation, the transactions contemplated by this Agreement)
to the fullest extent that the Company and its Subsidiaries are permitted to
indemnify (and advance expenses to) its directors, officers and employees under
the Company's and its Subsidiaries' Articles of Incorporation or Association,
the Company's and the Subsidiaries' By-laws and indemnification agreements
between the Company and any of its
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Subsidiaries and their respective directors and officers, as in effect on the
date hereof; provided that any determination required to be made with respect to
whether an officer's, director's, or employee's conduct complies with the
standard set forth under the Company's Articles, the Company's and the
Subsidiaries' By-laws, and other indemnification agreements between the Company
or its Subsidiaries and their respective directors and officers shall be made by
independent counsel (which shall not be counsel that provides material services
to Compass, the Company or the person seeking indemnification hereunder)
selected by Compass and reasonably acceptable to such officer or director or
employee. The indemnification provisions currently contained in the Articles of
Incorporation or Association, Bylaws and written agreements of the Company and
its Subsidiaries shall not be amended after the date hereof.
(b) Compass agrees that the Company and its Subsidiaries may obtain
extended reporting coverage (otherwise known as "tail coverage") under the
Company and its Subsidiaries' existing directors and officers liability policy
or other similar coverage for two years; provided, however, that the premium
expense for such coverage shall not exceed $30,000 in the aggregate over such
two-year period.
(c) Any Indemnified Party wishing to claim indemnification under
Section 6.14(a) upon learning of any action, claim, suit, proceeding or
investigation described above shall promptly notice Compass thereof; provided,
that the failure to so notify shall not affect the obligations of Compass under
Section 6.13(a) unless and to the extent that Compass is actually prejudiced as
a result of such failure.
(d) If Compass or any of its successors or assigns shall consolidate
with or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provisions shall
be made so that the successors and assigns of Compass shall assume the
obligations set forth in this Section 6.13.
SECTION 6.15 Exercise of Convertible Securities. The Company shall use
its best efforts to cause each holder of outstanding warrants, options, rights,
convertible debentures or other securities entitling the holder thereof to
acquire Shares (collectively, the "Convertible Securities") to exercise or
convert such Convertible Securities in full prior to the Effective Time.
SECTION 6.16 Actions Respecting Debentures. Compass and the Company
agree to take such actions as are necessary to satisfy the requirements of the
Indenture relating to the MB Capital I 8.75% Junior Subordinated Debentures
("Company Subordinated Debentures") in the event of a business combination
between the Company and Compass.
SECTION 6.17 Publication of 30 Days of Post Combination Results.
Compass shall publish at the earliest opportunity combined financial results of
Compass and the Company covering the first 30 days after the Effective Time so
as to permit Company Affiliates and Compass Affiliates to sell immediately after
such publication shares of Compass Common Stock under the rules applicable to
"pooling of interests" accounting treatment; provided, however, that Compass
shall not be required to so publish financial results if the Effective Time
occurs in the second month of any calendar quarter other than its regular
quarterly press release.
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SECTION 6.18 Notification of Related Party Transactions. The Company
shall notify Compass in writing of, and provide Compass a reasonable opportunity
to object to, the entering into any new transactions with Affiliates of the
Company, other than origination of loans and the sale of loan participations to
First State Bank of Hotchkiss each in the ordinary course of business and in
accordance with prudent banking practices.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver of the following conditions prior to the Effective Time:
(a) the receipt of regulatory approvals which approvals shall not have
imposed any condition or requirement which in the reasonable judgment of Compass
would adversely impact the economic or business benefits of the transactions
contemplated by this Agreement or otherwise would in the judgment of Compass be
so burdensome as to render inadvisable the consummation of the Merger, and the
expiration of any applicable waiting period with respect thereto;
(b) the Closing will not violate any injunction, order or decree of any
court or governmental body having competent jurisdiction;
(c) the approval of the Merger by the Company's shareholders entitled
to vote at the Shareholders' Meeting;
(d) a registration statement covering the Compass Common Stock to be
issued in the Merger shall be effective under the Securities Act and any
applicable state securities or "blue sky" acts and no stop order suspending the
effectiveness of such registration statement shall be in effect and no
proceedings for such purpose, or any proceedings under the SEC or applicable
state securities authorities rules with respect to the transactions contemplated
hereby, shall be pending before or threatened by the SEC or any applicable state
securities or blue sky authorities;
(e) the shares of Compass Common Stock to be issued in the Merger shall
have been approved for listing on the NASDAQ, subject to official notice of
issuance; and
(f) Compass and the Company shall have received an opinion of counsel
from counsel to Compass in substantially the form attached hereto as Exhibit J
to the effect that on the basis of certain facts, representations, and opinions
set forth in such opinion that the Merger will qualify as a reorganization under
Section 368(a) of the Code. In rendering such opinion, such counsel may require
and rely upon and may incorporate by reference representations and covenants,
including those contained in certificates of officers and/or directors of
Compass, Merger Sub, the Company and others.
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SECTION 7.2 Conditions to the Obligations of Compass and Merger Sub to
Effect the Merger. The obligations of Compass and Merger Sub to effect the
Merger are subject to the satisfaction or waiver of the following conditions
prior to the Effective Time:
(a) all representations and warranties of the Company shall be true and
correct in all material respects as of the date hereof and at and as of the
Closing, with the same force and effect as though made on and as of the Closing;
(b) the Company shall have performed in all material respects all
obligations and agreements and in all material respects complied with all
covenants and conditions, contained in this Agreement to be performed or
complied with by it prior to the Effective Time;
(c) there shall not have occurred a Material Adverse Effect with
respect to the Company or its Subsidiaries;
(d) the directors of the Company and its Subsidiaries shall have
delivered to Compass an instrument in the form of Exhibit H attached hereto
dated the Effective Time releasing the Company and its Subsidiaries from any and
all claims of such directors (except as to their deposits and accounts, and as
to their rights of indemnification pursuant to the Articles of Incorporation,
Association or Bylaws of the Company and the Bank) and shall have delivered to
Compass their resignations as directors of the Company and its Subsidiaries;
(e) the executive officers of the Company and its Subsidiaries shall
have delivered to Compass an instrument in the form of Exhibit H attached hereto
dated the Effective Time releasing the Company and its Subsidiaries from any and
all claims of such officers (except as to deposits and accounts and accrued
compensation permitted by their respective agreements with the Company or its
Subsidiaries and as to their rights of indemnification pursuant to the Articles
of Incorporation, Association or Bylaws of the Company and the Bank);
(f) Compass shall have received the opinions of counsel to the Company
acceptable to it as to the matters set forth on Exhibit D attached hereto;
(g) the holders of no more than the lesser of (i) 10% of the Shares or
(ii) such number of Shares that shall not disqualify the Merger for
pooling-of-interest accounting treatment, shall have demanded or be entitled to
demand payment of the fair value of their shares as dissenting shareholders;
(h) Compass shall have received a letter from Arthur Andersen, LLP,
dated as of the Effective Time, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment if closed and consummated in
accordance with this Agreement;
(i) the aggregate principal amount of all Company Indebtedness shall
not exceed $50,000,000;
(j) Compass shall have received from holders of the Company's capital
stock receiving at least 50% of the total Merger Consideration a representation
that they have no plan or intention to sell or otherwise dispose of (i) shares
of the Company prior to and in connection
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with the Merger to the Company or any party related to the Company or Compass
and (ii) shares of Compass Common Stock received pursuant to the Merger to
Compass or any party related to Compass.
(k) Compass shall have determined, in its sole reasonable judgment,
that the liabilities and obligations set forth on Schedule 5.1(k) do not have a
Material Adverse Effect;
(l) all warrants, options, rights, convertible debentures or other
securities entitling the holder thereof to acquire Shares shall have been
exercised or converted, or shall have expired, lapsed or terminated, prior to
the Effective Time;
(m) all software, firmware, hardware, equipment, microprocessing chips
and other data processing devices and services (both as a recipient and as a
provider), capabilities and facilities utilized by, and material to the business
operations or financial condition of, the Company and its Subsidiaries shall
have been able to record and process all calendar dates since the date of this
Agreement correctly and shall have been able to communicate with other
applicable systems in a manner that resolves any ambiguities as to century in a
properly defined manner;
(n) all Critical Third Parties of the Company and its Subsidiaries are
Year 2000 Compliant in all material respects;
(o) the transactions contemplated by those certain Agreements and Plans
of Merger of even date herewith between Nagrom LLC, Osage 3734 LLC and 1996
Newton LLC, respectively, and Compass ("Ancillary Agreements") shall have been
simultaneously consummated herewith;
(p) The Real Estate Subsidiaries shall not have commenced any
operations or acquired any assets;
(q) that certain Consulting Agreement dated March 3, 1997 between First
Fidelity Service Corp. and the Bank shall have been terminated without cost to
the Company or its Subsidiaries;
(r) that certain Amended and Restated Stock Purchase Agreement by and
among the Company, Thomas R. Kowalski, the Ryan R. Kowalski Trust, the Realtek
Company Profit Sharing Plan and Trust, Thomas Investment Partnership and Orchard
Valley Financial Corporation dated as of December 4, 1997 and as further amended
on September 1, 1998 shall have been terminated without cost to the Company or
its Subsidiaries;
(s) the Key Man Life Insurance Policy in the amount of $3,000,000 on
the life of Thomas R. Kowalski shall have been cancelled;
(t) the Company and its Subsidiaries shall have accrued and paid all
professional fees incurred in connection with this transaction and all change of
control payments to employees of Empire Title and Escrow Corporation ("Empire")
prior to the Effective Time;
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(u) United General Title Insurance Company ("United") shall have
consented to the change of controlling interest in Empire and waived its right
to terminate that certain Title Policy Issuing Agreement ("United Agreement")
dated March 1, 1999 between United and Empire to the extent such consent and
waiver is required under the United Agreement;
(v) the Company shall have obtained all necessary consents to continue
access to information maintained by Colorado Record Data, LLC;
(w) The Company or Empire shall have obtained clarification from First
American Title Insurance Company ("First American") under the Underwriting
Agreement dated July 1, 1995 to the effect that the amount of fees Empire shall
remit to First American is 15% of the total amount of fees for First American
title policies issued through Empire's offices;
(x) Section 3.3 of the Empire Merger Agreement shall have been amended
to provide that such Section 3.3 shall terminate as of the Effective Time; and
(y) Compass shall have received certificates dated the Closing executed
by the Chairman of the Board of the Company and by the Chairman of the Board of
its Subsidiaries, and the Secretary or Cashier of the Company and its
Subsidiaries, respectively, certifying in such reasonable detail as Compass may
reasonably request, to the effect described in Sections 7.2(a), (b), (c), (g),
(i), (l) and (p).
SECTION 7.3 Conditions to the Obligations of the Company to Effect the
Merger. The obligations of the Company to effect the Merger are subject to the
satisfaction or waiver of the following conditions prior to the Effective Time:
(a) all representations and warranties of Compass shall be true and
correct in all material respects as of the date hereof and at and as of the
Closing, with the same force and effect as though made on and as of the Closing;
(b) Compass and Merger Sub shall have performed in all material
respects all obligations and agreements and in all material respects complied
with all covenants and conditions contained in this Agreement to be performed or
complied with by either of them prior to the Effective Time; and
(c) the Company shall have received the opinion of counsel to Compass
and Merger Sub acceptable to it, as to the matters set forth on Exhibit E
attached hereto;
(d) the Company and its Subsidiaries shall have delivered to the
directors and executive officers of the Company and its Subsidiaries an
instrument in the form of Exhibit I attached hereto dated the Effective Time
releasing such directors from any and all claims of the Company and its
Subsidiaries (except as to indebtedness or other contractual liabilities);
provided, however, that such releases shall not release an action against such
directors by Compass or Merger Sub in connection with the transactions
contemplated by this Agreement;
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(e) the Company shall have received certificates dated the Closing,
executed by an appropriate officers of Compass and Merger Sub, respectively,
certifying, in such detail as the Company may reasonably request, to the effect
described in Sections 7.3(a) and (b);
(f) there shall not have occurred a Material Adverse Effect with
respect to Compass; and
(g) the Company shall have received immediately prior to the filing of
the Registration Statement, the opinion of Hovde Financial, Inc. and Howe Barnes
Investment, Inc. to the effect that the Merger and the Merger Consideration to
be received by the shareholders of the Company in connection with the Merger is
fair to such shareholders from a financial point of view.
ARTICLE VIII.
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the shareholders of the Company, but prior to the Effective Time:
(a) by mutual written consent duly authorized by the Boards of
Directors of Compass and the Company;
(b) by Compass (i) if Compass learns or becomes aware of a state or
series of facts or one or more breaches or inaccuracies of any representation or
warranty of the Company contained in Article III which constitutes a Material
Adverse Effect, (ii) pursuant to Section 6.10, (iii) if Compass learns or
becomes aware of a state or series of facts or one or more breaches or
inaccuracies of any representation or warranty with respect to Empire Title and
Escrow Corporation and/or its Subsidiaries such that, in Compass' reasonable
discretion, Compass or Empire Title and Escrow Corporation and/or its or their
Subsidiaries may be subject to potential financial losses or potential
liabilities in excess of $300,000 in the aggregate; provided, however, that any
such losses or liabilities shall not include for these purposes compensation
payable to employees of Empire pursuant to those certain Employment Agreements
dated April 5, 1999 and additional merger consideration payable to shareholders
of Empire pursuant to the Empire Merger Agreement; or (iv) if any of the
conditions to Closing contained in Section 7.1 or 7.2 are not satisfied or
waived in writing by Compass;
(c) by the Company if the conditions to Closing contained in Section
7.1 or 7.3 are not satisfied or waived in writing by the Company;
(d) by Compass or the Company if the Effective Time shall not have
occurred on or before the expiration of eight months from the date of this
Agreement or such later date agreed to in writing by Compass and the Company;
(e) by Compass or the Company if any court of competent jurisdiction in
the United States or other United States (federal or state) governmental body
shall have issued an
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order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have been final and nonappealable;
(f) by Compass or the Company in the event one or more of the Ancillary
Agreements are terminated;
(g) by the Company if the Company learns or becomes aware of a state or
series of facts or one or more breaches or inaccuracies of any representation or
warranty of Compass contained in Article IV which constitutes a Material Adverse
Effect;
(h) by the Company in the event the Company enters into an agreement
with respect to an Acquisition Proposal in accordance with the provisions of
Section 6.6(b) of this Agreement; provided, however, that the Company may only
terminate this Agreement pursuant to this subsection (h) if it simultaneously
with such termination delivers to Compass the termination fee provided for in
Section 8.5 hereof;
(i) by Compass (a) if there shall have been a breach of Section 6.6
hereof, or (b) if at anytime, the Company shall have failed to make its
recommendation referred to in Section 1.7 hereof, withdrawn such recommendation
or modified or changed such recommendation in a manner adverse in any respect to
the interests of Compass; or
(j) by the Company at any time during the two business day period
following the fifth trading day prior to the Closing, if both of the following
conditions are satisfied:
(1) the Average Closing Price is less than $23.00; and
(2) (i) the number obtained by dividing the Average Closing Price
by the Starting Price shall be less than (ii) the number obtained by dividing
the Average Index Value by the Index Value on the Starting Date and subtracting
0.15 from the quotient in this clause 2(ii).
For purposes of this Section 8.1(f), the following terms shall
have the meanings indicated:
"Average Index Value" means the average of the Index Values for
the twenty days of trading preceding the fifth trading day prior to the
Effective Time.
"Index Value" on a given date means the Index Value of the NASDAQ
Index Banks as published by NASDAQ.
"Starting Date" means November 4, 1999.
"Starting Price" shall mean the last reported sale price per share
of Compass Common Stock on the Starting Date, as reported by NASDAQ/National
Market System.
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SECTION 8.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of Sections 6.1 (as it pertains to confidentiality), 6.10, 8.2, 8.5,
10.1 and 10.8 of this Agreement. Nothing contained in this Section 8.2 shall
relieve any party from liability for any breach of this Agreement.
SECTION 8.3 Amendment.
(a) To the extent permitted by applicable law, this Agreement may be
amended by action taken by or on behalf of the Board of Directors of the
Company, Compass and, if required, Merger Sub at any time before or after
adoption of this Agreement by the shareholders of the Company but, after any
submission of this Agreement to such shareholders for approval, no amendment
shall be made which reduces the Merger Consideration or which materially and
adversely affects the rights of the Company's shareholders hereunder without any
required approval of such shareholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of all the parties.
(b) The parties hereto hereby agree to enter into an amendment of this
Agreement for the purpose of adding Merger Sub as a party hereto, which
amendment shall be made prior to any submission of this Agreement to
shareholders of the Company for their approval. As a condition to the Company's
entry into such an amendment, Merger Sub shall deliver to the Company a
certificate in substantially the form of Exhibit G attached hereto.
SECTION 8.4 Extension; Waiver. At any time prior to the Effective Time,
the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto, or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
SECTION 8.5 Termination Fee. If the Company either (x) violates its
obligations set forth in Section 6.6 hereof and this Agreement is terminated
pursuant to Section 8.1(i)(a), or (y) prior to termination of this Agreement
receives any Acquisition Proposal and this Agreement is thereafter terminated
pursuant to Sections 8.1(h) or 8.1(i) as a result of receipt of such Acquisition
Proposal, then the Company shall pay to Compass an aggregate fee of $4,000,000
in cash at the time of such termination.
ARTICLE IX.
SURVIVAL
SECTION 9.1 Survival of Representations and Warranties. The parties
hereto agree that all of their respective representations and warranties
contained in this Agreement shall not survive after the Effective Time.
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ARTICLE X.
MISCELLANEOUS
SECTION 10.1 Expenses. (a) All costs and expenses incurred in
connection with the transactions contemplated by this Agreement, including
without limitation, attorneys' fees, accountants' fees, other professional fees
and costs related to expenses of officers and directors of the Company and its
Subsidiaries, shall be paid by the party incurring such costs and expenses. Each
party hereto hereby agrees to and shall indemnify the other parties hereto
against any liability arising from any such fee or payment incurred by such
party.
(b) In recognition of the significant expenditure of management time
and resources and substantial out-of-pocket expenses incurred by Compass and its
Affiliates in connection with the negotiation of this Agreement and the
investigation of the transactions contemplated hereby, and in light of the
difficulty in calculating the value of such management time, resources and other
expenses, the Company agrees to pay Compass in the event that the Company's
shareholders do not approve the Merger and there is no Acquisition Proposal,
$200,000 in cash; provided, however, that the Company shall not be required to
make payment under this Section 10.1(b) if the Company is required to pay a
termination fee pursuant to Section 8.5. In the event that each of the
conditions to Closing contained in Sections 7.1 and 7.2 are fully satisfied and
Compass fails to consummate the Merger, Compass shall pay to the Company an
amount equal to $200,000.
SECTION 10.2 Brokers and Finders. Other than Hovde Financial, Inc. and
Howe Barnes Investments, Inc. which have been engaged by the Company, all
negotiations on behalf of Compass and the Company relating to this Agreement and
the transactions contemplated by this Agreement have been carried on by the
parties hereto and their respective agents directly without the intervention of
any other person in such manner as to give rise to any claim against Compass,
Merger Sub, the Company or its Subsidiaries for financial advisory fees,
brokerage or commission fees, finder's fees or other like payment in connection
with the consummation of the transactions contemplated hereby.
SECTION 10.3 Entire Agreement; Assignment. This Agreement (a)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties or any of them with respect to the subject
matter hereof, and (b) shall not be assigned by operation of law or otherwise,
provided that Compass may assign its rights and obligations or those of Merger
Sub to any direct or indirect, wholly-owned, subsidiary of Compass, but no such
assignment shall relieve Compass of its obligations hereunder.
SECTION 10.4 Further Assurances. From time to time as and when
requested by Compass or its successors or assigns, the Company, the officers and
directors of the Company, or its Subsidiaries, shall execute and deliver such
further agreements, documents, deeds, certificates and other instruments and
shall take or cause to be taken such other actions, including those as shall be
necessary to vest or perfect in or to confirm of record or otherwise the
Company's or its Subsidiaries' title to and possession of, all of their
respective property, interests, assets, rights, privileges, immunities, powers,
franchises and authority, as shall be reasonably necessary or
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advisable to carry out the purposes of and effect the transactions contemplated
by this Agreement.
SECTION 10.5 Enforcement of the Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
SECTION 10.6 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
SECTION 10.7 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered if in person, by cable, telegram or telex or by
telecopy, or five business days after mailing if delivered by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties as follows:
if to Compass or Merger Sub:
Charles E. McMahen
Vice Chairman
Compass Bank
24 Greenway Plaza
Houston, Texas 77046
Telecopy No.: (713) 993-8535
Daniel B. Graves
Associate General Counsel
Compass Bancshares, Inc.
15 South 20th Street
Birmingham, Alabama 35233
Telecopy No.: (205) 933-3043
with a copy to:
Annette L. Tripp
Locke Liddell & Sapp LLP
3400 Chase Tower, 600 Travis
Houston, Texas 77002
Telecopy No.: (713) 223-3717
44
<PAGE> 51
if to the Company:
Thomas R. Kowalski
MegaBank Financial Corporation
8100 East Arapahoe Road, Suite 214
Englewood, Colorado 80112
Telecopy No.: (303) 741-4473
with a copy to:
Ernest J. Panasci
Slivka Robinson Waters & O'Dorisio, A Professional
Corporation
1099 18th Street, Suite 2600
Denver, Colorado 80202-1926
Telecopy No: (303) 297-2750
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
SECTION 10.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 10.9 Descriptive Headings. The descriptive headings are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 10.10 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.11 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
SECTION 10.12 Incorporation by References. Any and all schedules,
exhibits, annexes, statements, reports, certificates or other documents or
instruments referred to herein or attached hereto are incorporated herein by
reference hereto as though fully set forth at the point referred to in the
Agreement.
SECTION 10.13 Certain Definitions.
(a) "Subsidiary" or "Subsidiaries" shall mean, when used with reference
to an entity, any corporation, fifty percent of the outstanding voting
securities of which are owned directly or indirectly by such entity or any
partnership, joint venture, business trust, or other enterprise in which any
entity has, directly or indirectly, any equity interest.
45
<PAGE> 52
(b) "Material Adverse Effect" shall mean any material adverse
circumstance, event or series of events or circumstances with respect to the
financial condition, assets, liabilities (absolute, accrued, contingent or
otherwise), reserves, business or results of operations of the Company and its
Subsidiaries taken as a whole (or when the reference is to Compass, to Compass
and its Subsidiaries, taken as a whole).
(c) "Environmental Laws" shall mean all federal, state and local laws,
ordinances, rules, common law, regulations, guidance documents, directives, and
decisions, interpretations and orders of courts or administrative agencies or
authorities, relating to the release, threatened release, recycling, processing,
use, handling, transportation treatment, storage, disposal, remediation,
removal, inspection or monitoring of, or exposure to, Hazardous Substances or
protection of human health or safety or the environment (including, without
limitation, wildlife, air, surface water, ground water, land surface, and
subsurface strata), including, without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, as amended
("SARA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), Hazardous and Solid Waste Amendments of 1984, as amended ("HSWA"), the
Hazardous Materials Transportation Act, as amended ("HMTA"), the Toxic
Substances Control Act ("TSCA"), Occupational Safety and Health Act ("OSHA"),
Federal Water Pollution Control Act, as amended ("FWPCA"), Clean Air Act
("CAA"), and any and all regulations promulgated pursuant to any of the
foregoing, as amended.
(d) "Hazardous Substances" shall mean those substances included within
the statutory or regulatory definitions, listings or descriptions of
"pollutant," "hazardous material," "contaminant," "toxic waste," "hazardous
substance," "hazardous waste," "solid waste," or "regulated substance" pursuant
to CERCLA, SARA, RCRA, HSWA, HMTA, TSCA, OSHA, and/or any other Environmental
Laws, as amended, and shall include, without limitation, any material, waste or
substance which is or contains explosives, radioactive materials, oil or any
fraction thereof, asbestos, or formaldehyde. To the extent that the laws or
regulations of the State of Colorado establish a meaning for "hazardous
substance," "hazardous waste," "hazardous material," "solid waste," "pollutant,"
"contaminant," "regulated substance," or "toxic waste," which is broader than
that specified in any of CERCLA, SARA, RCRA, HSWA, HMTA, TSCA, OSHA or any other
Environmental Law such broader meaning shall apply.
(e) "Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
disposing, discarding or abandoning.
(f) "Knowledge" or "known" -- An individual shall be deemed to have
"knowledge" of or to have "known" a particular fact or other matter if (i) such
individual is actually aware of such fact or other matter, or (ii) a prudent
individual could be expected to discover or otherwise become aware of such fact
or other matter in the course of conducting a reasonably comprehensive
investigation concerning the truth or existence of such fact or other matter. A
corporation or bank shall be deemed to have "knowledge" of or to have "known" a
particular fact or other matter if any individual who is serving, or who has at
any time served, as
46
<PAGE> 53
a director or officer serving in the capacities set forth on Schedule 10.13(f)
hereto (or in any similar capacity) of the corporation or bank, has, or at any
time had, knowledge of such fact or other matter.
(g) "Empire Merger Agreement" shall mean that certain Agreement and
Plan of Merger dated as of April 1, 1999 among the Company, MB Title Company,
Empire Title and Escrow Corporation, John P. Dwyer, Jr., James A. Cimino, Brian
R. Gray, Linda J. Kelsey, Roger W. Smith, Jr., Gregory C. Erpelding and Lynn T.
Cisneros.
[SIGNATURE PAGE FOLLOWS]
47
<PAGE> 54
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
ATTEST: COMPASS BANCSHARES, INC.
By By
--------------------------- ------------------------------------
Its: Its
ATTEST: MEGABANK FINANCIAL CORPORATION
By By
--------------------------- ------------------------------------
Its: Its
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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<INT-BEARING-DEPOSITS> 177
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<TRADING-ASSETS> 18,108
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<LOANS> 271,799
<ALLOWANCE> 3,674
<TOTAL-ASSETS> 327,634
<DEPOSITS> 280,711
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<NET-INCOME> 6,146
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<LOANS-NON> 4,095
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