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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO
SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
SOUTHERN ARIZONA BANCORP, INC.
(Exact Name of Registrant Specified in Its Charter)
Arizona 86-0528454
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 South Fourth Avenue, Yuma, Arizona 85364
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (520) 782-7505
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
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ITEM 1. BUSINESS
Southern Arizona Bancorp, Inc. (the "Company") is an Arizona
corporation incorporated in 1985 and is registered as a bank holding company
under the Bank Holding Company Act of 1956. Its sole subsidiary is Southern
Arizona Bank (the "Bank"). The Bank provides a wide variety of general
commercial and retail banking services, which include lending, depository, and
related financial services to individuals, businesses, governmental units, and
financial institutions in Arizona. The Bank is a state banking association
chartered under the laws of the State of Arizona. It commenced operations in
Yuma, Arizona on August 2, 1982. At December 31, 1995, the Bank had assets of
$127 million, net loans of $85 million, and deposits of $115 million. The Bank
operates five banking facilities in Yuma County, Arizona and currently has 87
employees.
Commercial Banking and Related Services. The Bank is engaged in the
financing of commerce and industry by providing credit facilities and related
services for business of all sizes. The Bank offers all forms of commercial
lending, including lines of credit, revolving credits, term loans, accounts
receivable financing, residential mortgage lending, and commercial real estate
and other forms of secured financing.
Personal Banking Services. A wide range of personal banking services
is provided to individuals at each of the Bank's branch offices. Among the
services provided are interest-bearing and non-interest-bearing checking
accounts, savings and time accounts, installment and other personal loans, home
equity loans, automobile and other consumer financing, safe deposit services,
and residential mortgage loans. The Bank is a member of regional, national, and
international automated teller machine ("ATM") networks, which permit customers
to access their accounts at thousands of electronic terminals in the Southwest
region, as well as nationally and internationally.
Competition. The Company and the Bank operate in a competitive
environment in Arizona that has intensified in the past few years. Profit
margins in the traditional banking business of lending and deposit gathering
have declined as deregulation, both in the United States and foreign countries,
has allowed foreign banks and non-banking institutions to offer alternative
services to many of the Bank's customers.
The principal competitive factors among financial institutions can
be classified into two categories: pricing and services. Interest rates on
deposits, especially in the area of time deposits, and interest rates and fees
charged to customers on loans are very competitive. From a service standpoint,
financial institutions compete against each other in convenience of location,
types of services, service costs, and banking hours. The Bank is generally
competitive with competing financial institutions in its primary service areas
with respect to interest rates paid on time and savings deposits, charges on
deposit accounts, and interest rates and fees charged on loans.
The Company and the Bank compete with other major commercial banks
based or conducting business in Arizona. In addition, the Company and the Bank
encounter competition from diversified financial institutions, offices of
foreign banks offering domestic services, savings banks, savings and loan
associations, credit unions, money market and other mutual funds, mortgage
companies, leasing companies, finance companies, investment banking companies,
merchant banks, and a variety of other financial services and advisory
companies.
The Company and the Bank consider all banks in its market area to be
competitors; however, of the seven (7) banks (including the Bank) in Yuma,
management considers the large banks to be the major competitors such as The
Bank of America, Banc One, Wells Fargo, and Norwest (Arizona).
In January 1996, the Company entered into an Agreement and Plan of
Reorganization with Zions Bancorporation, a Utah corporation ("Zions"), the
Bank, and National Bank of Arizona, a national banking association ("NBA"),
which provided for the Company to merge with and into Zions with Zions being the
surviving corporation and immediately thereafter for the Bank to merge with and
into NBA with NBA being the surviving corporation (the "Reorganization"). See
"Security Ownership of Certain Beneficial Owners and Management Changes in
Control" for additional information concerning the Reorganization.
See "Financial Information" and "Consolidated Financial Statements"
for additional information concerning the business of the Company and the Bank.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the related notes and
with the Company's management's discussion and analysis of financial condition
and results of operations, provided elsewhere herein. See "Index to Financial
Statements" for the historical financial statements of, and other financial
information regarding, the Company.
AS OF, AND FOR THE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars and outstanding shares in thousands,
except per share and ratio data)
EARNINGS SUMMARY
Net interest income $ 7,042 $ 6,049 $ 5,162 $ 4,474 $ 3,652
Provision for loan losses 401 429 756 753 422
Other operating income 1,281 1,221 1,394 733 438
Other operating expense 4,700 4,289 3,828 3,136 2,714
Net income 1,999 1,632 1,291 950 719
COMMON STOCK DATA
Earnings per common share $ 1.58 $ 1.29 $ 1.02 $ 0.75 $ 0.57
Book value per share at period end 7.00 5.75 4.76 3.98 3.40
Weighted average common and common
equivalent shares outstanding during
the period 1,266 1,266 1,266 1,266 1,266
Common shares outstanding at period end 1,266 1,266 1,266 1,266 1,266
AVERAGE BALANCE SHEET DATA
Securities $ 10,637 $ 12,650 $ 14,990 $ 14,830 $ 10,737
Loans and leases, net 82,615 71,365 57,553 48,198 40,987
Total interest-earning assets 105,018 91,575 79,442 66,579 54,746
Total assets 112,240 97,323 84,742 71,245 59,314
Interest-bearing deposits 73,063 63,464 57,390 50,882 43,290
Total deposits 100,619 87,532 77,596 66,336 54,790
Long-term debt 2,980 2,500 1,143 -- --
Shareholders' equity 8,071 6,654 5,530 4,669 4,025
END OF PERIOD BALANCE SHEET
DATA
Securities $ 1,887 $ 7,672 $ 13,552 $ 13,477 $ 10,665
Loans and leases, net 85,585 80,689 65,147 54,388 43,515
Allowance for loan losses 2,467 2,393 1,990 1,332 873
Total assets 127,418 101,254 91,225 81,938 71,600
Total deposits 114,762 91,205 82,316 76,435 66,981
Long-term debt 2,980 2,500 2,500 -- --
Shareholders' equity 8,858 7,284 6,024 5,036 4,302
Nonperforming assets:
Nonaccrual loans 11 202 18 82 --
Other real estate owned -- 15 18 -- 59
Total nonperforming assets 11 217 36 82 59
SELECTED RATIOS
Net interest margin 69.08% 74.53% 73.67% 68.97% 59.86%
Return on average assets 1.78% 1.68% 1.52% 1.33% 1.21%
Ratio of average common equity to
average assets 7.19% 6.84% 6.53% 6.55% 6.79%
Ratio of nonperforming assets to total
assets .01% .22% .04% .12% .10%
Ratio of allowance for loan losses to
net loans and leases outstanding at
period end 2.88% 2.97% 3.05% 2.45% 2.01%
Ratio of allowance for loan losses to
nonperforming loans 22,427.27% 1,184.65% 11,055.56% 1,624.39% infinite
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
The following analysis of the Company's financial condition and
results of operations as of and for the three year period ended December 31,
1995, should be read in conjunction with the Consolidated Financial Statements
of the Company.
OVERVIEW
The Company does not engage in any substantial business activity
other than as a bank holding company that holds all of the issued and
outstanding stock of the Bank, its principal asset. Unless otherwise noted, the
following discussion relates to the Company and the Bank on a consolidated
basis.
RESULTS OF OPERATIONS
Net Income
Net income for 1995 was $1,999,007, increasing $366,793, or 22.5%,
from 1994. This increase was primarily attributable to growth in the Company's
assets, which resulted in an increase in net interest income of $992,387.
Net income for 1994 was $1,632,214 compared to $1,291,151 in 1993.
The 1994 increase of $341,063, or 26.4%, was primarily attributable to growth in
the Company's assets as well as a decrease in the Company's provision for loan
losses, which resulted from improvement in the quality of the Company's loan
portfolio.
Net-Interest Income
Net interest income, the difference between interest earned on loans
and investments and interest paid on deposits and debt, is the principal
component of the Company's earnings.
During 1995, net interest income was $7,041,643, increasing
$992,387, or 16.4%, from 1994. This increase was primarily attributable to
growth in the Company's earning assets as well as the utilization of pricing
strategies aimed at maintaining an appropriate net interest spread. Average
interest-earning assets of the Company were $105,018,000 during 1995, an
increase of 14.7% or $13,443,000 from $91,575,000 in 1994.
During 1994, net interest income was $6,049,256 compared to
$5,162,110 in 1993. The 1994 increase of $887,146, or 17.2%, was primarily
attributable to growth in the Company's earning assets. Average interest-earning
assets of the Company were $91,575,000 during 1994, an increase of $12,133,000,
or 15.3%, from $79,442,000 in 1993.
Non-Interest Income
During 1995, non-interest income was $1,280,584, an increase of 4.9%
from $1,220,741 in 1994. This increase was primarily attributable to an increase
in customer service fees of $136,564 resulting from increased volume, pricing of
the Bank's services, and fee income from additional checking accounts opened and
maintained at the Bank.
Non-interest income for 1994 had decreased $172,790, or 12.4%, from
the non-interest income of $1,393,531 in 1993. This decrease was primarily
attributable to exceptional gains on the sale of loans and investments realized
in 1993. In 1993, due to favorable interest rates and the Company's focus on
optimum asset allocation, the Company realized gains on the sale of mortgage
loans and investment securities of $882,406 as compared to $513,741 in 1994.
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Non-Interest Expense
Non-interest expense was $4,699,650 for the year ended December 31,
1995 compared to $4,288,619 and $3,827,811 for the years ended December 31, 1994
and December 31, 1993, respectively. Historically, the Company's non-interest
expense has increased relatively proportionately to the growth of the Company's
assets. The increases in non-interest expense for the years 1995 and 1994 have
resulted from the Company's expansion of staff, premises, and other resources to
support the economic progress of the Company.
FINANCIAL CONDITION
Assets
At December 31, 1995, total assets were $127,417,893 as compared to
$101,254,421 on December 31, 1994, representing an increase of 26%. This
increase was primarily attributable to the Bank's implementation of an
aggressive strategy to acquire large, commercial deposits.
Total assets for 1994 had increased 11% from total assets of
$91,225,493 in 1993. This increase was primarily attributable to an increase in
net loans of $16,013,363 and branch remodelings that facilitated customer
service.
Investment
Investment securities held by the Company were $1,886,870 at
December 31, 1995 compared to $7,672,189 at December 31, 1994. This decrease was
primarily attributable to a reallocation of investment securities to Fed Funds.
In addition, the Company had short term investments in time deposits with other
banks and Fed Funds sold of $25,788,000. The Company's portfolio mix is
structured to meet the liquidity needs of the Bank brought about by loan demand
and seasonal swings in the deposit base.
Investment securities held by the Company as of December 31, 1994
decreased 43.4% from investment securities held by the Company of $13,551,719 as
of December 31, 1993. This decrease was primarily attributable to strong loan
demand for the year 1994, which was partially funded by matured securities.
Loans
Loan growth has been somewhat lower than asset growth in order to
maintain acceptable liquidity and to reduce the Company's loan/deposit ratio to
between 75 and 80%.
The Company's loan portfolio grew in 1995 to $85,584,967, increasing
$4,895,982, or 6.1%, from 1994. The Company's loan portfolio also grew in 1994
to $80,688,985, increasing $15,541,589, or 23.9%, from 1993. This growth in the
Company's loan portfolio in both 1995 and 1994 was primarily attributable to the
Company's emphasis on competitive pricing, favorable interest rates, and
strength in the local economy.
The Company's loan portfolio mix has not varied significantly over
the last three years. Commercial loans comprised 73.7% of the Company's loan
portfolio in 1995, decreasing from 78.2% and 77.0% of the Company's loan
portfolio in 1994 and 1993, respectively. Real Estate loans comprised 11.6% of
the Company's loan portfolio in 1995, compared to 10.2% and 11.5% of the
Company's loan portfolio in 1994 and 1993, respectively. Installment and other
loans comprised primarily of automobile loans and home improvement loans, made
up 14.7% of the Company's loan portfolio in 1995, compared to 11.6% and 10.3% of
the Company's loan portfolio in 1994 and 1993, respectively. The 1995 increase
in installment loans was primarily attributable to the Company's emphasis on
mobile home lending and the Company's management's desire for greater liquidity.
The Bank does not have foreign or energy loans.
Loans that were 90-days or more past due or nonaccrual constituted
.01% of the Company's net loan portfolio as of December 31, 1995, compared to
.24% and .02% of the Company's loan portfolio at December 31,
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1994 and December 31, 1993, respectively. The 1995 decrease was primarily
attributable to the Company's management's desire to reduce the delinquency
ratio of the Company loan portfolio.
Allowance for Loan Losses
The Company's allowance for loan losses at December 31, 1995, was
$2,466,513 compared to $2,393,242 and $1,990,428 at December 31, 1994 and
December 31, 1993, respectively. The allowance for loan losses as a percent of
gross loans was 2.78%, 2.86%, and 2.94% for the years 1995, 1994, and 1993,
respectively.
Amounts charged-off to the allowance for loan losses in 1995 were
$349,214, compared to $45,294 and $109,455 in 1994 and 1993, respectively.
Factors such as economic conditions and problems with individual borrowers has
affected amounts charged-off to the allowance for loan losses over the last
three years. However, as a result of prudent lending policies and periodic
review, the Company has experienced minimal loan losses.
DEPOSITS
Typically, the Company experiences a large increase in deposits at
year end due to the seasonal local economy, which is not accompanied by a large
increase in loan demand.
The Company's deposits at December 31, 1995 were $114,761,830,
increasing $23,556,446, or 25.8%, from 1994. This increase was primarily
attributable to the Company's focus on acquiring larger, commercial depositors.
Additionally, the merger and closing of several competitors contributed to the
growth in the Company's deposits.
The Company's deposits at December 31, 1994 were $91,205,384,
increasing $8,889,090, or 10.8%, from 1993. This increase was primarily
attributable to the growing local economy and the expansion of two branch
facilities.
LIQUIDITY
The Company has maintained liquidity and continues to maintain
adequate liquidity. Although the Company's loan/deposit ratio was 85.10% in
1995, the Company has reduced its loan growth to lower its loan/deposit ratio to
between 75-80% and, as a result, has adequately maintained its liquidity.
Additionally, the Company had $25,194,000 in Fed Funds as of December 31, 1995
and currently has substantial unused borrowing lines available through
correspondent banks. These borrowing lines are available to the Company in the
event that the seasonal swing in deposits is greater than anticipated.
One source of funds for the Company is dividends received from the
Bank. The amount of dividends that a bank may pay in any year is subject to
certain regulatory restrictions. Generally, dividends paid in a given year by a
bank are limited to its net profit, as defined by regulatory agencies, for the
year combined with its retained net income for the preceding two-years. However,
a bank may not pay dividends if such payments would leave the bank inadequately
capitalized. Hence, the ability of the Bank to pay dividends will depend on its
future net income and capital requirements.
CAPITAL RESOURCES
In 1993, the Company issued $2,500,000 principal amount of 8.75%
Senior Notes (the "Notes"). The proceeds of such issuance were used as capital
for the continued expansion of the Bank. The Company intends to prepay the
Senior Notes on or about May 27, 1996 with the proceeds of a loan from Zions.
Such loan provides for the Company to borrow from Zions that amount which will
enable the company to prepay the Notes, including the premium payable resulting
from the prepayment of the Notes. Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain certain
minimum amounts and ratios of total and Tier I capital (as defined by the
Federal Deposit Insurance Corporation) to risk-weighted assets, and of Tier I
capital to
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average assets. As of December 31, 1995, management believes that the Bank has
met all capital adequacy requirements to which it is subject.
EFFECTS OF INFLATION
The net income of the Company depends to a great extent upon its net
interest margin. Net interest margin is the difference between the income the
Company receives from its loans, securities, and other interest earning assets
and the interest it pays on its deposits and other interest paying liabilities.
Inflation and interest rates are highly sensitive to many factors beyond the
control of the Company, including general economic conditions and policies of
various governmental and regulatory authorities. The Company attempts to limit
adverse exposure to inflation and interest rate changes by properly matching
rate sensitive assets and liabilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1996
The Company has not experienced material changes in its financial
condition or results of operations from December 31, 1995 to the three months
ended March 31, 1996. Additionally, there has been no material changes in the
Company's financial condition or results of operations from the three months
ended March 13, 1995 to the three months ended March 31, 1996 other than those
addressed in the Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three-Year Period Ended December 31, 1995 as set
forth herein.
Pursuant to an Agreement and Plan of Reorganization dated January
17, 1996, the Company has incurred $116,400 since December 31, 1995 in costs in
preparing for the Company to be merged with and into Zions Bancorporation and
the Bank to be merged with and into National Bank of Arizona.
ITEM 3. PROPERTIES
The principal executive offices of the Company are located at 1800
South Fourth Avenue, Yuma, Arizona 85364, telephone (520) 782-7505. The Bank
owns the land and building at this location. Along with its principal executive
offices, the Company maintains the following branch offices:
South Mesa Branch North-End Branch Foothills Branch San Luis Branch
3218 South Fourth Ave. 1150 W. 8th Street 11242 Foothills Blvd. 23359 South First Street
Yuma, Arizona 85365 Suite 1 Yuma, Arizona 85365 San Luis, Arizona 85349
(520) 344-3900 Yuma, Arizona 85364 (520) 342-2895 (520) 627-1100
(520) 783-0117
The Bank owns the property upon which the South Mesa and the San
Luis branches are located and leases the property upon which the North-End and
Foothills branches are located. The lease terms for the North- End and Foothills
branches end on August 31, 2000 and May 1, 2001, respectively. The Bank made
lease payments on the North-End and Foothills branches during 1995 of $7,752.98
and $19,248.78, respectively.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons who were beneficial owners of 5% or more of the issued and
outstanding Common Stock of the Company as of the record date are shown in the
following table:
AMOUNT AND
NAME OF NATURE OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) COMMON STOCK
- ------------------- ----------------------- -------------
Forrest C. Braden 71,511(3) 5.65%
Stephen P. Shadle 75,325(4) 5.95%
Southern Arizona Bank 69,111 5.46%
Employee Stock Ownership Plan
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(1) The address of each named individual is that of the Company.
(2) The table includes, when applicable, any shares owned of record by
such person's minor children and spouse, and by other individuals
and entities over whose shares such person has custody, voting
control, or power of disposition. The number of shares shown
includes shares owned by trusts of which the beneficial owner is
trustee, with sole voting and investment power.
(3) Includes 21,300 shares of Common Stock as to which Mr. Braden has
sole voting power as the trustee of the Braden Trust, 1,800 shares
of Common Stock as to which Mr. Braden has sole voting power as the
trustee of a trust for his grandson, Charles Arthur Braden, and
2,500 shares of Common Stock as to which Mr. Braden has sole voting
power as trustee of a trust for his granddaughter, Meghann Braden.
(4) Includes 2,000 shares of Common Stock as to which Mr. Shadle has
sole voting power as the general partner of the Shadle Family
Limited Partnership, 3,150 shares of Common Stock as to which Mr.
Shadle has sole voting power as the personal representative of the
Francis T. Shadle Estate, 600 shares of Common Stock as to which Mr.
Shadle has sole voting power as the trustee of the Robert E. Harman
Children's Trust, 56,857 shares of Common Stock as to which Mr.
Shadle has shared voting power as the co-trustee of the Stephen P.
Shadle and Roberta G. Shadle Trust, and 12,718 shares of Common
Stock as to which Mr. Shadle has sole voting power as the trustee of
the Westover, Choules & Shadle 401(k) Profit Sharing Trust.
SECURITY OWNERSHIP OF MANAGEMENT
As of the record date, the Company's directors and officers as a
group were beneficial owners of that number of shares of Common Stock shown
below.
AMOUNT OF
NAME OF AND NATURE OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) COMMON STOCK
- ------------------- ----------------------- ------------
Forrest C. Braden 71,511 (3) 5.65%
John E. Byrd 40,523 3.20%
Thomas M. Howell 50,238 (4) 3.97%
Robert W. Kennerly 4,274 *
Jimmy J. Naquin 37,598 (5) 2.97%
Colleen J. Newman 11,000 (6) *
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AMOUNT OF
NAME OF AND NATURE OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) COMMON STOCK
- ------------------- ----------------------- ------------
Donald S. Olsen 10,000 *
Stephen P. Shadle 75,325 (7) 5.95%
Charles N. Urtuzuastegui 9,443 (8) *
All directors and officers as a group 310,150 (3)(4)(5)(6)(7)(8) 24.49%
(12 persons)
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* Less than 1.0% of the outstanding securities or voting power.
(1) The address of each named individual is that of the Company.
(2) The table includes, when applicable, shares owned of record by such
person's minor children and spouse, and by other related individuals
and entities over whose shares such person has custody, voting
control, or power of disposition. The number of shares shown
includes shares owned by trusts of which the beneficial owner is
trustee, with sole voting and investment power.
(3) Includes 21,300 shares of Common Stock as to which Mr. Braden has
sole voting power as the trustee of the Braden Trust, 1,800 shares
of Common Stock as to which Mr. Braden has sole voting power as the
trustee of a trust for his grandson, Charles Arthur Braden, and
2,500 shares of Common Stock as to which Mr. Braden has sole voting
power as trustee of a trust for his granddaughter, Meghann Braden.
(4) Includes 100 shares of Common Stock as to which Mr. Howell has
shared voting power as a one-half owner of Quail Trail Corporation
and 50,138 shares of Common Stock as to which Mr. Howell has shared
voting power as a co-trustee of the Thomas M. Howell & Lea Rae
Howell Trust.
(5) Includes 3,098 shares of Common Stock as to which Mr. Naquin has
sole voting power as the manager of the Naquin Farms Inc. Profit
Sharing Plan.
(6) Includes 2,306 shares held by the Colleen Newman Realty, Inc.
Employees Defined Contribution Plan & Trust-Money Purchase Plan and
4,449 shares held by Colleen Newman Realty, Inc. Employees Defined
Contribution Plan & Trust-Profit Sharing.
(7) Includes 2,000 shares of Common Stock as to which Mr. Shadle has
sole voting power as the general partner of the Shadle Family
Limited Partnership, 3,150 shares of Common Stock as to which Mr.
Shadle has sole voting power as the personal representative of the
Francis T. Shadle Estate, 600 shares of Common Stock as to which Mr.
Shadle has sole voting power as the trustee of the Robert E. Harman
Children's Trust, 56,857 shares of Common Stock as to which Mr.
Shadle has shared voting power as the co-trustee of the Stephen P.
Shadle and Roberta G. Shadle Trust, and 12,718 shares of Common
Stock as to which Mr. Shadle has sole voting power as the trustee of
the Westover, Choules & Shadle 401(k) Profit Sharing Trust.
(8) Includes 630 shares of Common Stock as to which Mr. Urtuzuastegui
has sole voting power as the trustee of a trust for his
granddaughter, Erica Urtuzuastegui, and 630 shares of Common Stock
as to which Mr. Urtuzuastegui has sole voting power as the trustee
of a trust for his granddaughter, Melisa Urtuzuastegui.
CHANGES IN CONTROL
At a Special Meeting on May 22, 1996, the Company's shareholders
voted to approve and adopt the Agreement and Plan of Reorganization dated as of
January 17, 1996 (the "Plan of Reorganization"), between the Company, Zions
Bancorporation, a Utah corporation ("Zions"), the Bank, and National Bank of
Arizona ("NBA"), a wholly-owned subsidiary of Zions. The Plan of Reorganization
provides for the merger of the Company with and into Zions with Zions being the
surviving corporation and immediately thereafter for the merger of the Bank
with and into NBA with NBA being the surviving corporation (the
"Reorganization"). The Plan of Reorganization provides that upon consummation
of the latter merger, NBA will
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continue as a direct wholly-owned subsidiary of Zions (except for directors'
qualifying shares). Shareholder approval for the Reorganization requires the
affirmative vote of at least two-thirds of the holders of the Company's Common
Stock and the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the Company's Common Stock. Each of the Company's
directors has agreed to vote the shares owned by such director in favor or the
Reorganization. Zions is a bank holding company incorporated in Utah. The
principal subsidiaries of Zions are Zions First National Bank with 94 offices
located throughout the state of Utah and one foreign office, Nevada State Bank
with 25 offices in Nevada, and NBA with eleven offices in Arizona.
In the event the Reorganization is consummated, the shareholders of
Southern Arizona (except dissenting shareholders) will become shareholders of
Zions. The Plan of Reorganization provides that the approximately 1,266,362
outstanding shares of Southern Arizona Common Stock (other than shares subject
to dissenters' rights) will be converted into the right to receive that number
of shares of Zions Common Stock calculated by dividing the Benchmark Price of
$25,330,000 plus certain accretions determined on the Effective Date of the
Reorganization by the Average Closing Price of Zions Common Stock (as defined in
the Plan of Reorganization). If the Unadjusted Average Price (as defined in the
Plan of Reorganization) is less than $59.00, the shareholders of Southern
Arizona will also be entitled to a cash payment.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Position(s) and Offices Presently
Name Age Held with the Company
------------------------ --- ----------------------------------
Stephen P. Shadle 59 Chairman of the Board of Directors
and Director
John E. Byrd 57 President, Chief Executive Officer
and Director
Donald S. Olsen 59 Secretary and Director
Forrest C. Braden 87 Director
Thomas M. Howell 63 Director
Robert W. Kennerly 65 Director
Jimmy J. Naquin 67 Director
Colleen J. Newman 61 Director
Charles N. Urtuzuastegui 74 Director
None of the directors of the Company hold other directorships in a
company, or have been nominated or chosen to become a director in a company,
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the
requirements of Section 15(d) of the Exchange Act, or any company registered as
an investment company under the Investment Company Act of 1940.
Stephen P. Shadle has been a Director and the Chairman of the Board
of Directors of the Company since 1985 and a Director and the Chairman of the
Board of Directors of the Bank since 1982. Mr. Shadle, an attorney at law and a
graduate of the University of Iowa Law School, has practiced law with Westover
Law Offices from 1964 to present.
John E. Byrd has been President and Chief Executive Officer of the
Company since 1987 and a Director of the Company since inception of the Company
in 1985. Mr. Byrd has been President and Chief Executive Officer of the Bank
since 1987 and a Director of the Bank since 1982. Prior to joining the Bank, Mr.
Byrd was Vice President and Regional Manager in Yuma, Arizona for First
Interstate Bank, where he had been employed in various capacities since 1962.
Mr. Byrd received a Liberal Arts Degree from the University of Arizona and
graduated from the University of Washington Pacific Coast Banking School.
10
11
Forrest C. Braden has been a Director of the Company since 1986 and
a Director of the Bank since 1986. Mr. Braden is self-employed in investments,
ranching, and seed distribution.
Thomas M. Howell has been a Director of the Company and of the Bank
since 1987. Mr. Howell has been a self-employed farmer since 1955.
Robert W. Kennerly has been a Director of the Company since 1985 and
a Director of the Bank since 1982. From 1989 until his retirement in 1995, Mr.
Kennerly was the land planning and economic development director for the Cocopah
Indian Tribe.
Jimmy J. Naquin has been a Director of the Company since 1985 and a
Director of the Bank since 1982. Mr. Naquin has been a self-employed farmer
since 1954 and currently is President of Naquin Farms, Inc.
Colleen J. Newman has been a Director of the Company and of the Bank
since 1987. Ms. Newman has been the owner and President of Colleen Newman
Realty, Inc., a real estate brokerage company since October, 1981.
Donald S. Olsen has been a Director and the Secretary of the Company
since 1985 and a Director of the Bank since 1982. Mr. Olsen has owned and
operated Olsen's Market Place Stores since 1975.
Charles N. Urtuzuastegui has been a Director of the Company and of
the Bank since 1994. Mr. Urtuzuastegui has been in the retail business since
1940.
11
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ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the
Company's Chief Executive Officer for the last three fiscal years ending
December 31, 1995. No other executive officers of the Company received
compensation in excess of $100,000 during the Company's last three fiscal years,
however, the following table includes an executive officer of the Bank who
received compensation in excess of $100,000 during the Bank's last three fiscal
years. The Company believes that it is appropriate to include such executive
officer because he has performed policy making functions for the Company.
SUMMARY COMPENSATION TABLE
NAME AND Annual Compensation All Other
PRINCIPAL POSITION Year Salary($)(1) Bonus($) Compensation($)(2)
- ------------------ ------------------------------------------------------
John E. Byrd 1995 144,108.66 46,217.00 26,951.06
CEO and President 1994 136,980.00 28,766.00 24,440.09
of the Company 1993 126,740.14 15,294.00 24,973.36
and the Bank
Benny J. Bennight 1995 90,433.92 20,075.00 12,254.82
Executive Vice 1994 87,943.60 15,097.00 16,591.18
President and Chief
Financial Officer of the Bank
- --------------------
(1) Messrs. Byrd and Bennight also received certain perquisites, the value
of which did not exceed 10% of their cash compensation.
(2) Amounts shown include contributions made by the Company to the Bank's
401(k) Plan (as described herein) and the Bank's Employee Stock
Ownership Plan (as described herein) earned during the year shown. In
addition, amounts shown for Mr. Byrd include directors fees and term
life insurance premiums paid by the Company for the benefit of Mr. Byrd.
The amounts shown for Mr. Byrd do not include a one-time premium of
$384,471.55 paid for a retirement policy for Mr. Byrd, which will be
payable to Mr. Byrd in annual installments upon his retirement from the
Company and the Bank. Such policy was established and the one-time
premium was paid in 1987.
401(K) PROFIT SHARING PLAN
In 1986, the Bank adopted a profit sharing plan pursuant to Section
401(k) (the "401(k) Plan") of the Internal Revenue Code of 1986, as amended (the
"Code"). All full-time and part-time employees of the Bank who have reached 21
years of age and have completed one Year of Service (as defined in the 401(k)
Plan) to the Bank are eligible to participate in the 401(k) Plan.
Pursuant to the 401(k) Plan, all eligible employees may make
elective pre-tax contributions through payroll deductions, which may not exceed
those limitations imposed by law. The 401(k) Plan provides that such
contributions shall vest immediately. The 401(k) Plan further provides that the
Bank shall make an annual contribution equal to one-fourth of one percent of a
participant's compensation if such participant completes a Year of Service in
each Plan Year. In addition, the Bank may make discretionary contributions to
the 401(k) Plan in such amounts as may be determined by the Company. The 401(k)
Plan's Trustees, which consist of four members of the Board of Directors of the
Company, have been designated to hold and invest the Plan's assets for the
benefit of the 401(k) Plan's participants. Contributions to the 401(k) Plan
totalled approximately $89,000, $83,000, and $71,000 for the years ended
December 31, 1995, 1994, and 1993, respectively.
12
13
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has sponsored an Employee Stock Ownership Plan (the "Plan")
since 1986. All full-time and part-time employees of the Bank who have reached
21 years of age and have completed one Year of Service (as defined in the Plan)
for the Bank are eligible to participate in the Plan.
The Bank makes voluntary, discretionary contributions to the Plan
each year. The Plan's participants are 100% vested after five Years of Service
to the Bank. Common Stock of the Company held by the Plan is voted by the Plan's
Trustees, which consist of three members of the Board of Directors of the
Company. Contributions to the Plan totaled approximately $54,000, $123,000, and
$128,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Company, members of their immediate
families, and certain affiliates were customers of, and have had transactions
with, the Bank in the ordinary course of business. Similar transactions in the
ordinary course of business may be expected to take place in the future.
All loans to executive officers and directors and members of their
immediate families and certain affiliates were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than
nominal risk of collectibility or present other unfavorable features. Of the
loans outstanding at December 31, 1995, none were contractually past due 90 days
or more as to principal or interest and none were classified as nonaccrual,
restructured, or potential problem loans.
All ongoing and future transactions with affiliates of the Company
will be on terms no less favorable than could be obtained from unaffiliated
parties. All future loans from the Bank to Company officials, affiliates, and/or
shareholders will be approved by a majority of the disinterested directors of
the Company.
In connection with the Bank's purchase of the land and building at
which the San Luis branch currently operates, the Bank entered into a promissory
note for the sum of $480,000 (the "Promissory Note") in which Charles N.
Urtuzuastegui, as Trustee of the Charles N. Urtuzuastegui and Josephine O.
Urtuzuastegui Trust dated February 22, 1972, has a one-third interest. Mr.
Urtuzuastegui is currently a Director of the Company and the Bank. The principal
of the Promissory Note is payable in annual installments of $120,000 or more.
The interest on the Promissory Note is payable annually and is calculated on the
National Prime Rate on each anniversary date of the Promissory Note.
In connection with the Plan of Reorganization, all of the Company's
shareholder-directors, whose common shareholdings aggregate 24.5% of the
outstanding Common Stock of the Company and who represent approximately 2.4% of
the Company's shareholders of record, have entered into agreements with Zions
under which they have agreed, in their capacity as shareholders, to vote their
shares in favor of the Plan of Reorganization and to support the Plan of
Reorganization and to recommend its adoption by the other shareholders of the
Company. The shareholder-directors have also agreed in their capacity as
directors, until the earlier of the consummation of the Reorganization or the
termination of the Plan of Reorganization, to refrain from soliciting or,
subject to their fiduciary duties to shareholders and to Section 7.8 of the Plan
of Reorganization, negotiating or accepting any offer of merger, consolidation,
or acquisition of any of the shares or substantially all of the assets of the
Company or the Bank. See "Security Ownership of Certain Beneficial Owners and
Management-Changes in Control" for additional information concerning the Plan of
Reorganization.
The Plan of Reorganization provides that after the Reorganization
becomes effective, NBA will employ John E. Byrd, currently president and chief
executive officer of the Company and the Bank, pursuant to a three-year
agreement as an executive vice president of NBA. The agreement provides that Mr.
Byrd will receive an initial annual salary substantially the same as his current
annual salary with the Company, will be considered annually for a discretionary
bonus, based upon the financial performance of NBA and upon individual
performance factors (the
13
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target level for the bonus being 25% - 35% of his then current salary), and will
be entitled to other benefits normally afforded executive employees, including
participation in employee benefit and stock option plans, an automobile
allowance, country club membership, retirement and life insurance policies, and
consideration for periodic raises or bonuses, based upon performance and
responsibility. NBA will also continue to maintain a term life insurance policy
on the life of Mr. Byrd and will pay all the premiums therefor. The policy will
be owned by Mr. Byrd and will provide for the payment of death benefits to his
estate.
The employment agreement provides for severance benefits for Mr.
Byrd upon the termination of his employment agreement for reasons other than his
death or disability or "for cause" (as defined in his employment agreement). In
the event of termination for reasons other than set forth in the preceding
sentence, Mr. Byrd shall receive (i) salary payable (as defined in the
employment agreement) for a period commencing on the date immediately following
the termination date and ending upon the third anniversary of the effective date
of the employment agreement and (ii) such benefits as Mr. Byrd has accrued under
NBA's Value Sharing Plan, Incentive Stock Option Plan and employee benefit
plans, reimbursement for expenses accrued as of the date of termination of his
employment, and the right to receive the cash equivalent of paid annual leave
and sick leave accrued as of the date of termination of his employment.
Under his employment agreement, Mr. Byrd has agreed that he will not
for a period of five years from the effective date of the employment agreement
(i) engage in the banking business within Yuma County, Arizona other than on
behalf of NBA or affiliated companies, (ii) own or operate any entity engaged in
the banking business within Yuma County, Arizona other than NBA or affiliated
companies, or (iii) solicit or intentionally cause an officer, director or
employee of NBA to engage in the banking business or own or operate an entity
engaged in the banking business in Yuma County, Arizona. In consideration of
such five-year covenant not to compete, Mr. Byrd will receive a one-time cash
payment of $250,000.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is not listed with a national securities
exchange or quoted on any automated quotation system. No established public
trading market for the Company's Common Stock presently exists and the private
market that has existed is thin and not necessarily indicative of the value of
the Company's Common Stock. There were no trades in the Company's Common Stock
in the fourth quarter of 1995 and the first quarter of 1996 and one trade since
the date of the public announcement of the Plan of Reorganization on January 17,
1996. The following table sets forth the high and low prices for the Company's
Common Stock during the calendar quarters shown below, through May 8, 1996, of
which the Company is aware, and the cash dividends per share declared on the
Company's Common Stock for such periods.
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15
Sales Prices Cash
------------ Dividends
High Low Declared
---- --- ---------
1994 First Quarter.................. $ 9.00 $ 7.62 $ --
Second Quarter................. 9.00 9.00 --
Third Quarter.................. 9.50 9.00 --
Fourth Quarter................. 10.50 10.00 .30
-----
$ .30
=====
1995 First Quarter.................. $15.00 $11.00 $ --
Second Quarter................. 12.50 12.50 --
Third Quarter.................. 15.00 14.00 --
Fourth Quarter................. NO SALES NO SALES .36
-----
$ .36
=====
1996 First Quarter.................. 20.00 20.00 --
Second Quarter
(through May 8, 1996)....... NO SALES NO SALES --
Based upon information available to the management of the Company,
it appears that during the years ended December 31, 1994 and 1995, a total of
159,869 shares and 169,424 shares, respectively, of the Company's Common Stock
were traded (some of which may not have effected changes in the beneficial
ownership of the shares transferred). Additionally, a total of 105 shares of the
Company's Common Stock were traded since January 1, 1996. The foregoing table
may not accurately reflect the full trading range of the Company's Common Stock
during the periods indicated because other transactions may have occurred during
such periods, the terms of which were not conveyed to management. Additionally,
the Company's books and records do not reflect trading prices. Other than with
respect to trades involving officers and directors and trades for which
management may have received information relating to prices, the Company has no
mechanism by which to reconstruct information relating to the per share market
price at which its shares have historically traded.
None of the Company's Common Stock (i) is subject to outstanding
options or warrants to purchase nor are there any securities convertible into
the Company's Common Stock, (ii) is subject to sale pursuant to Rule 144 under
the Securities Act nor has the Company agreed to register any shares of its
Common Stock under the Securities Act for sale by its security-holders, (iii) is
being or is proposed to be publicly offered by the Company. The holders of the
Company's Common Stock are entitled to receive dividends when, as, and if
declared by the Board of Directors of the Company out of funds legally available
therefor. The Company's ability to pay dividends is governed by Arizona law.
Generally, Arizona law prohibits corporations from paying dividends when after
giving the dividend effect, the corporation would not be able to pay its debts
as they become due in the usual course of business or the corporation's total
assets would be less than the sum of its total liabilities plus the amount that
would be needed if the corporation were to be dissolved at the time of the
distribution to satisfy the preferential rights on dissolution of shareholders
whose preferential rights are superior to those receiving the distribution. The
Company's articles provide that the Company's Board of Directors may, from time
to time, distribute dividends out of the capital surplus of the Company.
The Bank is subject to certain limitations on the amount of cash
dividends that it can pay. Arizona law allows the board of directors of a bank
to declare dividends as permitted by the laws governing Arizona corporations,
except that dividends payable other than in the bank's own stock may be paid out
of capital surplus only with the approval of the Arizona Superintendent of
Banks. Additionally, the prior approval of the Board of Governors of the Federal
Reserve System (herein, the "Board") is required if the total of all cash
dividends declared by a state-chartered member bank, such as the Bank, in any
calendar year will exceed the total of such bank's net profits (as defined by
statute) for that year combined with its retained net profits for the preceding
two calendar
15
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years less any required transfers to surplus. In addition, the Board is
authorized to determine under certain circumstances relating to the financial
condition of a state-chartered member bank that the payment of dividends would
be an unsafe and unsound practice and to prohibit payment thereof.
Under FDICIA, all insured banks are generally prohibited from making
any capital distributions and from paying management fees to persons having
control of the bank where such payments would cause the bank to be
undercapitalized. Holding companies of undercapitalized banks may be required to
obtain the approval of the Federal Reserve Board before making capital
distributions to their shareholders.
On May 17, 1996, the Company had approximately 500 shareholders,
based upon the number of shareholders of record. At such date, 1,266,362 shares
of the Company's Common Stock were outstanding.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On June 11, 1993, the Company offered for sale $2,500,000 principal
amount of 8.75% Senior Notes (the "Notes") payable on July 1, 2000. The Company
sold the Notes for cash through its registered broker, Peacock, Hislop, Staley &
Given, Inc., who solicited the Notes on a "best efforts" basis. The Notes were
offered for sale by the Company in reliance upon an exemption from registration
provided by Section 3(a)(11) of the Securities Act of 1933, as amended, and
pursuant to registration in the State of Arizona only. Sales of the Notes were
made only to qualified prospective investors residing in the State of Arizona.
The Company intends to prepay the Notes on or about May 27, 1996 with the
proceeds of a loan from Zions Bancorporation.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company's authorized capital stock consists of 2,000,000 shares
of Common Stock, no par value ("Common Stock"). Prior to the filing of this Form
10, there were outstanding 1,266,362 shares of Common Stock. All of the
currently outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable. At April 17, 1996, there were approximately 500 shareholders of
record of the Company's Common Stock.
The holders of Common Stock are generally entitled to one vote for
each share on all matters submitted to a vote of shareholders. In elections of
directors, Arizona law requires cumulative voting, which means that each
shareholder may cast the number of votes as is equal to the number of shares
held of record, multiplied by the number of directors to be elected. Each
shareholder may cast the whole number of votes for one candidate or distribute
such votes among two or more candidates. The Company's Articles of Incorporation
require the affirmative vote of at least two-thirds of the holders of Common
Stock and the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Common Stock for shareholder approval of a merger,
consolidation or sale of substantially all of the assets of the Company. In
addition, the Company's Articles of Incorporation provide that shareholder
approval for an amendment to the Company's Articles of Incorporation requires
the affirmative vote of three-fourths of the holders of Common Stock and
shareholder approval for an increase in the maximum number of directors requires
a vote of four-fifths of the holders of Common Stock.
The holders of Common Stock are entitled to receive dividends, if
any, as may be declared by the Company's Board of Directors from time to time
out of legally available funds. See "Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters" for additional
information concerning dividends of the Company.
Upon liquidation, dissolution, or winding up of the Company, the
holders of Common Stock will be entitled to share ratably in all assets of the
Company that are legally available for distribution, after payment of all debts
and other liabilities of the Company. The holders of Common Stock have no
preemptive, subscription, redemption, or conversion rights.
Although the Company currently does not have any restrictions on the
alienability of Common Stock, the Company's Articles of Incorporation provide
that the Company has the right to impose restrictions on the
16
17
transfer of Common Stock provided that such restrictions, or notice of such
restrictions, shall be set forth on the Common Stock certificates representing
such shares of stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Arizona Business Corporation Act (the "Business Corporation Act")
provides that the Company's Articles of Incorporation may eliminate or limit the
liability of directors to the company or its shareholders for money damages for
any action taken or any failure to take any action as a director, except
liability for (a) the amount of a financial benefit received by the director to
which the director is not entitled; (b) an intentional infliction of harm on the
Company or its shareholders; (c) certain unlawful distributions to shareholders;
and (d) an intentional violation of criminal law. The effect of this provision
is to limit or eliminate the rights of the Company and its shareholders (through
shareholders' derivative suits on behalf of the Company) to recover money
damages from a director for all actions or omissions as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (a) through (d) above. This provision does not
limit or eliminate the rights of the Company or any shareholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach of a director's duty of care. The Company's Articles of Incorporation do
not set forth such a provision eliminating or limiting director liability.
Under the Business Corporation Act, indemnification is mandatory with
respect to directors in all circumstances in which indemnification is permitted
by the Business Corporation Act, subject to the requirements of the Business
Corporation Act. In addition, the Company may, in its sole discretion, indemnify
and advance expenses, to the fullest extent allowed by the Business Corporation
Act, to any person who incurs liability or expense by reason of such person
acting as an officer, employee, or agent of the Company, except where
indemnification is mandatory pursuant to the Business Corporation Act, in which
case the Company is required to indemnify to the fullest extent required by the
Business Corporation Act.
The Company's Bylaws provide indemnification for any director or
officer of the Company for expenses actually incurred in connection with any
action, suit or proceeding to which such director, officer or employee of the
Company is a party or is threatened to be a party as a result of his or her
being a director, officer or employee of the Company or of any firm,
corporation, or organization which he or she served in any such capacity at the
request of the Company. Such indemnification shall be against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
believed to be in the best interests of the Company, and, with respect to A
criminal action or proceeding for which the director of officer has no
reasonable cause to believe his or her conduct was unlawful. In addition, the
Company's officers and directors shall be indemnified for expenses actually
and reasonably incurred by him or her in connection with an action or suit by
or in the right of the Company to procure a judgement in its favor by reason of
the fact that such director or officer is or was an authorized representative
of the Company.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon,
the notes thereto and the supplementary data commencing at page F-1 of this
report, which financial statements, report, notes and data are incorporated by
reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 28, 1994, Deloitte & Touche LLP ("Deloitte & Touche")
resigned as auditors of the Company and the Bank. Deloitte & Touche's
resignation was not a result of disagreement between Deloitte & Touche and
either the Company or the Bank. Additionally, such resignation did not reflect
upon the integrity of the Company's or the Bank's management or directors, their
financial condition or their accounting policies or practices.
17
18
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITORS' REPORTS F-3
AUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-5
Consolidated Statements of Income F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-10
UNAUDITED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDED MARCH 31, 1996
Consolidated Balance Sheets F-31
Consolidated Statements of Income F-32
Consolidated Statements of Cash Flows F-33
Notes to Consolidated Financial Statements F-34
EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
2.1 Agreement and Plan of Reorganization dated January 17, 1996
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
10.1 Form of 401(k) Profit Sharing Plan
10.2 Form of Employee Stock Ownership Plan
10.3 $480,000 Promissory Note dated October 24, 1994 in favor of Joe
Urtuzuastegui, Frank L. Urtuzuastegui, Connie V. Urtuzuastegui and
Charles N. Urtuzuastegui
10.4 Lease agreement between the Bank and Two Yuma Partners
10.5 Lease agreement and addendums between the Bank and Henry Schechert,
Trustee of the Schechert Trust
10.6 Note and Agency Agreement between the Company and PHS Mortgage, Inc.
dated July 15, 1993
10.7 Loan Agreement, between the Company and Zions dated April 23, 1996
10.8 First Amendment to Loan Agreement between the Company and Zions
dated May 7, 1996
10.9 Agreement to Merge dated as of May 21, 1996 by and between Southern
Arizona Bank and National Bank of Arizona
10.10 Agreement to Merge dated as of May 21, 1996 by and between Zions
Bancorporation and Southern Arizona Bancorp
16 Letter regarding change in certifying accountants
21 Subsidiary of the Company
18
19
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Southern Arizona Bancorp, Inc.
-------------------------------------
Registrant
Date:May 23, 1996 By: /s/John E. Byrd
------------- --------------------------------
John E. Byrd
President, Chief Executive Officer and Director
20
SOUTHERN ARIZONA BANCORP, INC.
FINANCIAL REPORT
DECEMBER 31, 1995
F-1
21
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-3
FINANCIAL STATEMENTS
Consolidated balance sheets F-5
Consolidated statements of income F-6
Consolidated statements of stockholders' equity F-7
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-10
F-2
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Southern Arizona Bancorp, Inc.
and Subsidiary
Yuma, Arizona
We have audited the accompanying consolidated balance sheet of Southern
Arizona Bancorp, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Bancorp's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The statements of income,
stockholders' equity and cash flows of Southern Arizona Bancorp, Inc. for the
year ended December 31, 1993 were audited by other auditors whose report, dated
January 21, 1994, expressed an unqualified opinion on those statements.
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 1995 and 1994 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Southern Arizona Bancorp, Inc. and Subsidiary as of December 31,
1995 and 1994 and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
Phoenix, Arizona
January 24, 1996
F-3
23
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Southern Arizona Bancorp, Inc.
Yuma, Arizona
We have audited the accompanying consolidated statement of income,
stockholders' equity and cash flows of Southern Arizona Bancorp, Inc. and
Subsidiary for the year ended December 31, 1993. These financial statements are
the responsibility of the Bancorp's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of Southern
Arizona Bancorp, Inc. and Subsidiary for the year ended December 31, 1993 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 21, 1996
F-4
24
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 2) $ 7,701,102 $ 6,459,750
Interest bearing deposits in financial institutions 594,000 297,000
Federal funds sold 25,194,000 1,536,000
Securities (Note 3)
Held to maturity (fair value 1995 $499,400; 1994 $250,850) 498,687 251,283
Available for sale securities 1,388,183 7,420,906
Loans, net of allowance for credit losses 1995 $2,466,513;
1994 $2,393,242 (Notes 4 and 10) 84,532,153 79,646,615
Loans held for sale (Note 4) 1,052,814 1,042,370
Bank premises and equipment, net (Notes 5 and 8) 4,129,523 2,398,755
Accrued interest receivable 537,524 557,000
Deferred income taxes (Note 7) 973,755 871,544
Other assets 816,152 773,198
-------------------------------
$127,417,893 $101,254,421
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 34,453,718 $ 26,290,478
Interest bearing:
NOW accounts 24,362,291 21,412,280
Savings 8,158,478 7,666,686
Time certificates $100,000 and over (Note 6) 13,140,246 8,501,417
Time certificates under $100,000 34,647,097 27,334,523
-------------------------------
114,761,830 91,205,384
Accrued interest payable and other liabilities 817,687 265,338
Senior notes payable (Note 8) 2,500,000 2,500,000
Other note payable (Note 8) 480,000 ---
-------------------------------
118,559,517 93,970,722
-------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 9 and 12)
Common stock, no par value, authorized 2,000,000 shares;
issued and outstanding, 1,266,362 shares 2,483,013 2,483,013
Retained earnings 6,336,125 4,793,010
Unrealized gain on securities available for sale, net 39,238 7,676
-------------------------------
8,858,376 7,283,699
-------------------------------
$127,417,893 $101,254,421
===============================
See Accompanying Notes to Consolidated Statements
F-5
25
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993
-----------------------------------------------
Interest income:
Loans $ 9,045,120 7,344,146 $ 6,165,863
Securities:
U.S. Government agencies 447,475 368,123 375,069
Other investments 207,524 215,795 333,811
Federal funds sold 492,948 188,978 132,770
-----------------------------------------------
10,193,067 8,117,042 7,007,513
Interest expense (Note 11) 3,151,424 2,067,786 1,845,403
-----------------------------------------------
NET INTEREST INCOME 7,041,643 6,049,256 5,162,110
Provision for loan losses (Note 4) 401,000 429,000 755,500
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,640,643 5,620,256 4,406,610
-----------------------------------------------
Other income:
Customer service fees 728,028 591,464 487,990
Gain on sale of loans and investments 446,715 513,741 882,406
Other income 105,841 115,536 23,135
-----------------------------------------------
1,280,584 1,220,741 1,393,531
-----------------------------------------------
Other expenses:
Salaries and employee benefits 2,453,244 2,203,215 1,859,691
Occupancy (Note 9) 294,023 271,317 216,013
Equipment expenses 361,207 308,707 228,098
Supplies and services 773,413 723,570 653,548
Other 817,763 781,810 870,461
-----------------------------------------------
4,699,650 4,288,619 3,827,811
-----------------------------------------------
INCOME BEFORE INCOME TAXES 3,221,577 2,552,378 1,972,330
Income taxes (Note 7) 1,222,570 920,164 681,179
-----------------------------------------------
NET INCOME $ 1,999,007 $ 1,632,214 $ 1,291,151
===============================================
Net earnings per share $ 1.58 $ 1.29 $ 1.02
===============================================
Common shares outstanding 1,266,362 1,266,362 1,266,362
===============================================
See Accompanying Notes to Consolidated Statements
F-6
26
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- -----------------------------------------------------------------------------------------------------------
Unrealized gain on
Retained securities available
Common stock earnings for sale, net Total
------------------------------------------------------------------
Balance, December 31, 1992 $2,483,013 $2,553,477 $ - $5,036,490
Cash dividend - (303,927) - (303,927)
Net income - 1,291,151 - 1,291,151
----------------------------------------------------------------
Balance, December 31, 1993 2,483,013 3,540,701 - 6,023,714
Cash dividend - (379,905) - (379,905)
Net income - 1,632,214 - 1,632,214
Net change in unrealized gain on
securities available for sale - - 7,676 7,676
----------------------------------------------------------------
Balance, December 31, 1994 2,483,013 4,793,010 7,676 7,283,699
Cash dividend - (455,892) - (455,892)
Net income - 1,999,007 - 1,999,007
Net change in unrealized gain on
securities available for sale - - 31,562 31,562
----------------------------------------------------------------
Balance, December 31, 1995 $2,483,013 $6,336,125 $39,238 $8,858,376
================================================================
See Accompanying Notes to Consolidated Statements
F-7
27
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,999,007 $ 1,632,214 $ 1,291,151
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 344,893 295,399 207,372
Provision for loan losses 401,000 429,000 755,500
Amortization of premium (259,859) (59,937) (174,007)
Origination of loans available for sale (21,786,419) (19,737,152) (27,089,894)
Proceeds from sale of loans available for sale 21,775,975 20,208,926 27,305,470
Deferred income tax benefit (102,211) (155,030) (286,167)
Gain on sale of securities available for sale (90,014) (156,474) (387,612)
Change in assets and liabilities:
Accrued income receivable and other assets (23,478) 14,789 66,318
Accrued interest payable and other liabilities 552,349 (120,147) (126,693)
----------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,811,243 2,351,588 1,561,438
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of securities held to maturity 250,000 - -
Purchase of securities held to maturity (489,639) (260,938) -
Purchase of interest bearing deposit in financial institutions (1,980,000) (2,082,000) -
Maturities of interest bearing deposit in financial institutions 1,683,000 2,869,000 -
Purchase of securities available for sale (11,341,297) (14,351,783) (21,312,774)
Proceeds from maturities of securities available for sale 15,500,000 19,250,000 14,000,000
Proceeds from sale of securities available for sale 2,247,690 1,466,338 8,085,700
(Increase) decrease in federal funds sold (23,658,000) 886,000 896,000
Loans made to customers, net (5,286,538) (16,442,363) (11,730,805)
Purchase of bank premises and equipment (2,075,661) (705,645) (402,492)
----------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (25,150,445) (9,371,391) (10,464,371)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 23,556,446 8,889,090 5,880,880
Dividends paid (455,892) (379,905) (303,927)
Proceeds from issuance of other notes payable 480,000 - 2,500,000
Cost of issuing senior notes payable - - (153,515)
----------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,580,554 8,509,185 7,923,438
----------------------------------------------------
INCREASE (DECREASE) IN CASH AN DUE FROM BANKS 1,241,352 1,489,382 (979,495)
Cash and due from banks:
Beginning 6,459,750 4,970,368 5,949,863
----------------------------------------------------
Ending $ 7,701,102 $ 6,459,750 $ 4,970,368
====================================================
F-8
28
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Interest paid to depositors $2,756,010 $1,789,401 $1,758,500
============================================
Interest paid on senior notes payable $ 218,750 $ 210,243 $ -
============================================
Income taxes paid $1,337,145 $1,198,800 $1,234,500
============================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Unrealized gain on securities available for sale, net $ 31,562 $ 7,676 $ -
============================================
Land acquired in exchange for other note payable $ 480,000 $ - $ -
============================================
See Accompanying Notes to Consolidated Statements
F-9
29
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BANKING ACTIVITIES:
Southern Arizona Bancorp, Inc. (the Bancorp) is a holding company which owns
100% of the stock of Southern Arizona Bank (the Bank). The Bank provides a full
range of banking service to its commercial, SBA, residential, agricultural and
consumer customers through its facilities located in Yuma, Arizona.
The Bank grants commercial, residential and consumer loans to customers located
primarily in southern Arizona. The loan portfolio includes a significant credit
exposure to the real estate industry of this area. As of December 31, 1995,
loans with real estate as collateral accounted for approximately 54.9% of total
loans. Substantially all of these loans are secured by first liens with an
initial loan to value ratio of generally not more than 60%.
The loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers. The Bank's policy requires that collateral be
obtained on substantially all loans. Such collateral is primarily first trust
deeds on property.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent asset and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
BASIS OF CONSOLIDATION:
The consolidated financial statements include all the accounts of the Bancorp
and the Bank. All material intercompany accounts and transactions have been
eliminated.
EARNINGS PER SHARE:
Earnings per share are computed using the weighted average method. The effect of
stock options on earnings per share was not material.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks (including cash items in process of clearing). Cash
flows from loans originated by the Bank, deposits, and federal funds purchased
are reported net.
The Bank maintains amounts due from banks which, at times, may exceed federally
insured limits. The bank has not experienced any losses in such accounts.
F-10
30
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
HELD TO MATURITY SECURITIES:
Securities classified as held to maturity are those debt securities the Bank has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
The sale of a security within three months of maturity date or after at least 85
percent of the principal outstanding has been collected is considered a maturity
for purposes of classification and disclosure.
AVAILABLE FOR SALE SECURITIES:
Securities classified as available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
TRANSFERS:
Transfers of debt securities into the held-to-maturity classification from the
available-for-sale classification are made at fair value on the date of
transfer. The unrealized holding gains or losses on the date of transfer are
retained as a separate component of stockholders' equity and in the carrying
value of the held-to-maturity securities. Such amounts are amortized over the
remaining contractual lives of the securities by the interest method.
LOANS:
Loans are stated at the amount of unpaid principal, reduced by net deferred loan
costs and an allowance for possible loan losses.
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other
conditions. In addition, the Federal Deposit Insurance Corporation (FDIC), as an
integral part of their examination process, periodically reviews the Bank's
allowance for credit losses, and may require the Bank to make additions to the
allowance based on their judgment about information available for them at the
time of their examinations.
F-11
31
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
INTEREST AND FEES ON LOANS:
Interest on loans is recognized over the terms of the loans and is calculated on
principal amounts outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield. The Bank is generally amortizing these amounts over the contractual life.
SALES OF LOANS:
The Bank sells loans to provide funds for additional lending and to generate
servicing income. Under such agreement, the Bank may continue to service the
loans with the buyer receiving the principal collected together with interest.
Loans held for sale are valued at the lower of cost or market value.
Gains and losses on sales are recognized at the time of sale are calculated
based on the difference between the selling price and the book value of loans
sold. Any inherent risk of loss on loans sold is transferred to the buyer at the
date of sale.
OTHER REAL ESTATE OWNED:
Other real estate owned (OREO) represents properties acquired through
foreclosure or other proceedings. OREO is held for sale and is recorded at the
lower of the recorded amount of the loan or fair value of the properties less
estimated costs of disposal. Any write-down to fair value at the time of
transfer to OREO is charged to the allowance for loan losses. Property is
evaluated regularly to ensure the recorded amount is supported by its current
fair value and valuation allowances to reduce the carrying amounts to fair value
less estimated costs to dispose. Depreciation is recorded based on the recorded
amount of depreciable assets after they have been owned for one year.
Depreciation and additions to or reductions from valuation allowances are
recorded in income.
F-12
32
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
-----
Furniture, fixtures, and equipment 3 - 25
Building and improvements 30
INCOME TAXES:
The Bank files its income tax return on a consolidated basis. Deferred taxes are
provided on a liability method whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Effective January 1, 1995, the Bank adopted FASB Statement No. 107, Disclosures
About Fair Value of Financial Instruments, which requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Bank could have realized in a sales transaction at December 31, 1995. The
estimated fair value amounts for 1995 have been measured as of year end, and
have not been reevaluated or updated for purposes of these financial statements
subsequent to that date. As such, the estimated fair values of these financial
instruments subsequent to the reporting date may be different than the amounts
reported at each year end.
This disclosure of fair value amounts does not include the fair values of any
intangibles, including core deposit intangibles.
Due to the wide range of valuation techniques and the degree of subjectivity
used in making the estimate, comparisons between the Bank's disclosures and
those of the banks may not be meaningful.
F-13
33
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and short-term instruments: The carrying amounts reported in the
balance sheet for cash and due from banks, interest bearing deposits and
federal funds sold approximate their fair values.
Securities: Carrying amounts approximate fair values for securities
available for sale. Fair values for securities held to maturity are based on
quoted market prices.
Loans: For variable-rate loans that reprice frequently and that have
experienced no significant change in credit risk, fair values are based on
carrying values. At December 31, 1995, variable rate loans comprised
approximately 71% of the loan portfolio. Fair values for all other loans are
estimated based on discounted cash flows, using interest rates currently
being offered for loans with similar terms to borrowers with similar credit
quality. Prepayments prior to the repricing date are not expected to be
significant. Loans are expected to be held to maturity and any unrealized
gains or losses are not expected to be realized.
Loans held for sale: Fair value of loans held for sale are estimated based
upon the subsequent selling price.
Off-balance sheet instruments: Fair values of off-balance sheet instruments
are not considered material.
Deposit liabilities: Fair values disclosed for demand deposits equal their
carrying amounts, which represent the amount payable on demand. The carrying
amounts for variable-rate money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregate expected monthly maturities on time
deposits. Early withdrawals of fixed-rate certificates of deposit are not
expected to be significant.
Accrued interest receivable and payable: The fair values of both accrued
interest receivable and payable approximate their carrying amounts.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN:
On January 1, 1995, the Bank adopted Financial Accounting Standards Board (FASB)
Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures. There was no effect on the Bank's financial
statements for this change, which generally requires impaired loans to be
measured on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as an expedient at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance with
the terms of the loan agreement. At January 1, 1995, the Bank has classified
$1,313,529 of its loans as impaired with a specific loss reserve of $387,000.
F-14
34
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF:
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Statement No.
121 establishes accounting standard for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Statement No. 121 will first be required for the Bank's year
ending December 31, 1996. Based on its preliminary analysis, the Bank does not
anticipate that the adoption of Statement No. 121 will have a material impact on
the financial statements as of the date of adoption.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS:
In May 1995, the FASB issued Statement No. 122, Accounting for Mortgage
Servicing Rights an Amendment of Financial Accounting Standards Board Statement
No. 65. Statement No. 122 requires a mortgage banking enterprise to recognize as
separate assets, rights to service mortgage loans for others, whenever those
servicing rights are acquired. Statement No. 122 will first be required for the
Bank's year ending December 31, 1996. The Bank has not addressed the potential
future impact of the application of this Statement.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans such as a stock purchase
plan. The statement generally suggests, but does not require, stock-based
compensation transactions be accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. An enterprise may continue to follow the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require compensation to be reported if the consideration to be received is at
least equal to its fair value at the measurement date. If an enterprise elects
to follow APB Opinion No. 25, it must disclose the proforma effects on net
income as if the compensation were measured in accordance with the guidelines of
Statement No. 123. The Bank has not determined if it will continue to follow APB
Opinion No. 25 or follow the guidance of Statement No. 123. However, if adopted
in 1996, this pronouncement is not expected to have a material impact on the
financial statements.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances with Federal Reserve Banks.
The total of those reserve balances were approximately $51,000 and $63,000 at
December 31, 1995 and 1994, respectively.
F-15
35
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 3. SECURITIES
Carrying amounts and approximate fair values of securities held to maturity as
of December 31, 1995 and 1994 are summarized as follows:
1995
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
Cost gains losses fair value
-------------------------------------------------------
United States Treasury Security $498,687 $ 713 $ - $499,400
=====================================================
1994
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
Cost gains losses fair value
------------------------------------------------------
United States Treasury Security $251,283 $ - $ 433 $250,850
=====================================================
The amortized cost and fair value of securities being held to maturity as of
December 31, 1995 by contractual maturity are shown below.
Amortized Approximate
Cost fair value
---------------------------
Due in one year or less $498,687 $499,400
==========================
Carrying amounts and approximate fair values of investment securities available
for sale as of December 31, 1995 and 1994 are summarized as follows:
1995
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
Cost gains losses fair value
---------------------------------------------------------
United States Treasury Securities $ 798,204 $17,166 $ - $ 815,370
Obligations of states and political
subdivisions $ 524,583 $48,230 $ - 572,813
-------------------------------------------------------
$1,322,787 $65,396 $ - $1,388,183
=======================================================
F-16
36
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 3. SECURITIES (CONTINUED)
1994
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
Cost gains losses fair value
--------------------------------------------------------
United States Treasury Securities $4,723,062 $ 7,886 $(22,818) $4,708,130
Obligations of states and political
subdivisions 2,685,050 66,091 (38,365) 2,712,776
-------------------------------------------------------
$7,408,112 $73,977 $(61,183) 7,420,906
=======================================================
The amortized cost and approximate fair value of investment securities available
for sale as of December 31, 1995 by contractual maturity are shown below.
Amortized Approximate
Cost fair value
--------------------------
Due in one year or less $ 300,110 $ 301,770
Due after one year through five years 498,094 513,600
Due after five years through ten years 524,583 572,813
-------------------------
$1,322,787 $1,388,183
=========================
Realized gains on the sale of investment securities available for sale amounted
to $90,014, $156,474, and $387,612 for the years ended December 31, 1995, 1994,
and 1993, respectively.
Securities available for sale with an amortized cost of $1,821,484 and $733,980
as of December 31, 1995 and 1994, respectively, were pledged as collateral in
public deposits and for other purposes as required or permitted by law.
F-17
37
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 4. LOANS
Loans consist of the following at December 31:
1995 1994
--------------------------
Commercial $63,062,496 $62,336,364
Real estate - mortgage 9,503,874 7,273,963
Real estate - construction 435,006 939,898
Installment - mobile home 5,604,752 4,757,365
Installment - other 9,466,726 7,894,146
Personal credit line 338,779 362,196
Other 164,498 38,497
--------------------------
88,576,131 83,602,429
Deduct:
Unearned net loan fees and costs (524,651) (520,202)
Allowance for loan losses (2,466,513) (2,393,242)
--------------------------
$85,584,967 $80,688,985
==========================
Classified as:
Loans, net $84,532,153 $79,646,615
Loans held for sale 1,052,814 1,042,370
At December 31, 1995 and 1994, the total of Small Business Administration (SBA)
loans serviced for others amounted to approximately $793,000 and $17,500,
respectively. Loans totaling approximately $850,000 and $862,000 were secured by
Bank time certificates of deposit at December 31, 1995 and 1994.
Changes in the allowance for loan losses are as follows for the years ended
December 31:
1995 1994 1993
-----------------------------------------
Balance, beginning $ 2,393,242 $ 1,990,428 $ 1,332,068
Provision charged to operating expense 401,000 429,000 755,500
Recoveries of amounts charged off 21,485 19,108 12,315
-----------------------------------------
2,815,727 2,438,536 2,099,833
Amounts charged off (349,214) (45,294) (109,455)
-----------------------------------------
Balance, ending $ 2,466,513 2,393,242 $ 1,990,428
=========================================
F-18
38
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 4. LOANS (CONTINUED)
Impaired loans: Impairment of loans, having recorded investments of $4,466,859
at December 31, 1995, has been recognized in conformity with FASB Statement No.
114 as amended by FASB Statement No. 118. The total allowance for credit losses
related to these loans was $1,066,483 on December 31, 1995 and are fully or
partially allowed for.
Management believes commercial real estate loans have a greater risk of
uncollectibility because repayment depends on income production from the
property or future development of the real estate. Commercial loans summarized
by type of collateral are as follows at December 31, 1995: real estate
non-residential, $36,408,913; multi-family residential, $2,265,642; accounts
receivable, inventory and contract rights, $9,170,308; agriculture, $8,142,940;
unsecured, $4,141,161; and other, $2,933,532.
During the years ended December 31, 1995, 1994, and 1993, residential mortgage
loans totaling $21,775,975, $20,208,296, and $27,305,470, respectively, were
sold. Total income from such loan sales was $558,577, $357,267, and $494,794 for
the years ended December 31, 1995, 1994, and 1993, respectively.
NOTE 5. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows at December 31:
1995 1994
--------------------------------
Land $ 1,067,453 $ 477,000
Building improvements 2,652,944 1,701,815
Furniture and Equipment 2,313,943 1,779,864
--------------------------------
6,034,340 3,958,679
Less accumulated depreciation (1,904,817) (1,559,924)
--------------------------------
$ 4,129,523 $ 2,398,755
================================
F-19
39
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 6. TIME CERTIFICATES OF DEPOSIT
Aggregate maturities of time certificates $100,000 and over are as follows at
December 31:
1995 1994
---------------------------------
Three months or less $ 4,168,319 $ 4,258,472
Three through six months 6,123,001 1,000,000
Six through twelve months 1,116,361 1,526,000
Over twelve months 1,732,565 1,716,945
---------------------------------
$13,140,246 $ 8,501,417
=================================
NOTE 7. INCOME TAX MATTERS
The following table shows the cumulative tax effects of the primary temporary
differences as of December 31:
1995 1994
------------------------------
Deferred tax assets:
Loan loss allowances $ 834,755 $ 731,544
Deferred loan fees 226,000 224,000
------------------------------
Total deferred tax assets 1,060,755 955,544
------------------------------
Deferred tax liabilities:
Property and equipment (70,000) (81,000)
Unrealized gain on available-for-sale securities (17,000) (3,000)
------------------------------
Total deferred tax liabilities (87,000) (84,000)
------------------------------
Net deferred tax asset $ 973,755 $ 871,544
==============================
F-20
40
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 7. INCOME TAX MATTERS (CONTINUED)
The provision for income taxes charged to operations consists of the following
for the years ended December 31:
1995 1994 1993
-------------------------------------------------
Current tax expense $ 1,324,781 $ 1,075,194 $ 967,346
Deferred tax expense (benefit) (102,211) (155,030) (286,167)
-------------------------------------------------
$ 1,222,570 $ 920,164 $ 681,179
=================================================
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 31, 1995 and 1994 as follows:
1995 1994 1993
-------------------------------------------
Computed "expected" tax expense $ 1,127,000 $ 893,000 $ 690,000
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 258,000 204,000 158,000
Tax-exempt interest income (net of disallowed expenses) (59,000) (64,000) -
Other (103,430) (112,836) (166,821)
-------------------------------------------
$ 1,222,570 $ 920,164 $ 681,179
===========================================
NOTE 8. NOTES PAYABLE SENIOR NOTES PAYABLE:
Bancorp has issued $2,500,000 of 8.75% Senior Notes payable which require that
interest be paid semi-annually. These notes are due July 1, 2000. The net
proceeds from the issuance were contributed to be capital of the Bank. The terms
of the Senior Notes include certain restrictions on the issuance of additional
debt and payment of dividends. The costs, totaling approximately $154,000, of
issuing the Senior Notes have been deferred and are being amortized over the
contract terms of such notes.
OTHER NOTES PAYABLE:
Other notes payable consists of a 8.5% note payable to a director arising from
the purchase of the land for the Bank's San Luis branch. Principal in the amount
of $120,000 per year, plus interest, is due commencing January 1996. Final
payment is due January 1999. The note is secured by real estate.
F-21
41
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 9. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist of commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making conditional obligations as they do for
on-balance-sheet instruments. A summary of the Bank's commitments at December
31, 1995 and 1994 are as follows:
1995 1994
----------------------------
Commitments to extend credit $ 16,384,611 $ 12,604,126
============================
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. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral held
varies, but may include accounts receivable, inventory, property and equipment,
residential real estate and income-producing commercial properties.
CONCENTRATIONS OF CREDIT RISK:
All of the Bank's loans and commitments to extend credit have been granted to
customers in the Bank's market area. The concentrations of credit by type of
loan are set forth in Note 4. The distribution of commitments to extend credit
approximates the distribution of commercial and real estate loans outstanding.
The Bank, as a matter of policy, does not extend credit to any single borrower
or group of related borrowers in excess of the Bank's legal lending limit.
F-22
42
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS:
The Bank leases two of its branches under terms of noncancellable operating
leases.
At December 31, 1995, approximate future minimum lease payments under this
agreement is as follows:
Year
----
1996 $ 43,624
1997 38,850
1998 38,850
1999 38,850
2000 22,663
--------
$182,837
========
Rent expense totaled approximately $52,063, $33,768, and $32,436 for the years
ended December 31, 1995, 1994, and 1993, respectively, and is included in
occupancy expense.
CONTINGENCIES:
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Bank's financial
statements.
STOCK OPTIONS:
At December 31, 1995 and 1994, there were 57,000 shares of stock available for
grant under a company stock option plan. No options were outstanding. The option
price of the shares may not be less than the fair market value of common shares
as of the date of grant.
SALES OF LOANS:
The Bank has issued various representations and warranties associated with the
sale of loans. These representations and warranties may require the Bank to
repurchase loans with underwriting deficiencies as defined per the applicable
sales agreements. The Bank experienced no losses during the years ended December
31, 1995 and 1994, regarding these representations and warranties.
F-23
43
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 10. TRANSACTIONS WITH RELATED PARTIES
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
Aggregate loan transactions with related parties were as follows for the years
ended December 31:
1995 1994
-----------------------------------
Balance, beginning $ 2,351,175 $ 1,735,788
New loans 64,350 944,647
Repayments (1,008,468) (329,260)
-----------------------------------
Balance, ending $ 1,407,057 $ 2,351,175
===================================
NOTE 11. INTEREST EXPENSE
The components of interest are as follows for the year ended December 31:
1995 1994 1993
--------------------------------------------
NOW accounts $ 486,186 $ 559,383 $ 495,015
Savings accounts 147,428 151,504 141,982
Time certificates of deposit $100,000 and over 502,455 292,005 258,002
Certificates under $100,000 1,755,415 842,341 848,932
Senior notes payable 218,750 218,750 100,128
Other 41,190 3,803 1,344
--------------------------------------------
$3,151,424 2,067,786 $1,845,403
============================================
F-24
44
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 12. EMPLOYEE BENEFIT PLAN
The Bank has adopted a 401(k) plan (the Plan) and sponsored an employee stock
ownership plan (ESOP) to which the Bank makes contributions. All full-time and
part-time employees of the Bank who have completed 1,000 hours per year and have
reached 21 years of age are eligible to participate.
Under the 401(k) plan, the Bank matches 100% of employee contributions.
Contributions to the Plan totalled approximately $89,000, $83,000, and $71,000
for the years ended December 31, 1995, 1994, and 1993, respectively.
The Bank makes voluntary contributions to the ESOP each year. Participants vest
in the contributions over a five year period. Common stock of the Bancorp held
by the ESOP is voted by the ESOP's administrative committee, consisting of three
members of the Board of Directors. For the years ended December 31, 1995, 1994,
and 1993, contributions were approximately $54,000, $123,000, and $128,000,
respectively.
In the event a terminated ESOP participant desires to sell his or her shares of
the Company's stock, the Company may be required to purchase the shares from the
participant. At December 31, 1995, the ESOP held 66,851 shares of Bancorp stock.
NOTE 13. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1995, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that management
believes have changed the institution's category.
F-25
45
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 13. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's actual capital amounts and ratios are presented in the following
table:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
--------------------------------------------
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) 12.8% 8% 10%
Tier I Capital (to Risk Weighted Assets) 11.7% 4% 6%
Tier I Capital (to Average Assets) 8.4% 4% 5%
As of December 31, 1994:
Total Capital (to Risk Weighted Assets) 9.9% 8% 10%
Tier I Capital (to Risk Weighted Assets) 8.7% 4% 6%
Tier I Capital (to Average Assets) 9.4% 4% 5%
NOTE 14. MERGER
During January, 1996 Southern Arizona Bancorp, Inc. entered into an Agreement
and Plan of Reorganization with Zions Bancorporation. Under the terms of this
agreement, the stockholders of the Bancorp will exchange their shares for shares
of Zions Bancorporation. The exchange rate will be set at the time of closing so
that the Bancorp shareholders collectively receive Zions Bancorporation stock
valued at $25,330,000, plus earnings of the Bancorp for the period October 1,
1995 through the closing date. This merger is contingent upon and awaiting
governmental regulatory approval.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Bank's financial instruments are as follows:
Carrying Fair
---------------------------
Financial assets:
Cash and due from banks $ 7,701,102 $ 7,701,102
Interest bearing deposits in financial institutions 594,000 594,000
Federal funds sold 25,194,000 25,194,000
Securities 1,886,870 1,888,000
Loans, net 84,532,153 84,815,000
Loans available for sale 1,052,814 1,053,000
Accrued interest receivable 537,524 537,000
Financial liabilities:
Deposits 114,761,830 113,787,000
Senior notes payable 2,500,000 2,500,000
Other note payable 480,000 480,000
Fair value of commitments: The estimated fair value of off-balance-sheet loan
commitments are not considered to be significant.
F-26
46
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 16. PARENT ONLY FINANCIAL INFORMATION
BALANCE SHEETS
1995 1994
- ----------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 115,322 $ 118,838
Investment in Southern Arizona Bank 11,004,815 9,506,650
Prepaid senior note costs and other assets 104,758 126,941
Deferred taxes 250,049 147,838
$11,474,944 $ 9,900,267
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest payable and other accrued liabilities $ 116,568 $ 116,568
Note payable 2,500,000 2,500,000
-------------------------------
2,616,568 2,616,568
-------------------------------
Stockholders' Equity
Common Stock 2,483,013 2,483,013
Retained earnings 6,336,125 4,793,010
Net unrealized gain 39,238 7,676
-------------------------------
8,858,376 7,283,699
-------------------------------
$11,474,944 $ 9,900,267
=============================
F-27
47
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 16. PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
1995 1994 1993
-------------------------------------------------
REVENUES
Equity in earnings of Southern Arizona Bank $ 2,151,244 $ 1,784,665 $ 1,360,461
Other income 1,475 2,500 5,912
-------------------------------------------------
2,152,719 1,787,165 1,366,373
-------------------------------------------------
EXPENSES
Interest expense on senior notes $ 218,750 $ 218,750 $ 110,080
Amortization of senior note cost 22,183 22,183 -
Other expense 14,990 15,649 11,348
-------------------------------------------------
255,923 256,582 121,428
-------------------------------------------------
Income tax benefit 102,211 101,631 46,206
-------------------------------------------------
Net income $ 1,999,007 $ 1,632,214 $ 1,291,151
=================================================
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income 1,999,007 1,632,214 1,291,151
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Undistributed equity in income of subsidiary (1,466,603) (1,186,004) (884,666)
Amortization expense 22,183 22,183 8,402
Deferred taxes (102,211) (101,632) (46,206)
Changes in assets and liabilities:
Accrued interest payable and other liabilities - 6,955 102,418
-------------------------------------------------
Net cash provided by operating activities 452,376 373,716 471,099
-------------------------------------------------
Cash flows used in investing activities,
capital contribution to Southern Arizona Bank - - (2,390,000)
-------------------------------------------------
F-28
48
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 16. PARENT ONLY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
1995 1994 1993
-------------------------------------------------
Cash flows used in financing activities:
Payment of dividends $ (455,892) $ (379,905) $ (303,927)
Proceeds from issuance of senior notes payable - - 2,500,000
Cost of issuing senior notes payable - - (153,515)
-------------------------------------------------
Net cash (used in) provided by financing activities (455,892) (379,905) 2,042,558
=================================================
Net (decrease) increase in cash (3,516) (6,189) 123,657
Cash and due from banks
Beginning of year 118,838 125,027 1,370
-------------------------------------------------
End of year $ 115,322 $ 118,838 $ 125,027
=================================================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash payments for interest $ 218,750 $ 210,243 $ 9,212
=================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities $ 31,562 $ 7,676 $ -
=================================================
F-29
49
SOUTHERN ARIZONA BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
CONTENTS
Page
----
Consolidated financial statements:
Balance sheet F-31
Statement of income F-32
Statement of cash flows F-33
Notes to consolidated financial statements F-34
F-30
50
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996
(UNAUDITED)
03/31/96
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,164,756
Interest bearing deposits in financial institutions 396,000
Federal funds sold 33,279,000
Securities
Held to maturity 0
Available for sale securities 1,079,414
Loans, net of allowance for credit losses 1996 $2,542,068;
1995 $2,447,728 85,037,001
Loans held for sale 1,257,228
Bank premises and equipment, net 4,076,153
Accrued interest receivable 541,363
Deferred income taxes 999,961
Other assets 813,772
------------
$135,634,648
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing demand $ 38,376,971
Interest bearing:
NOW accounts 26,330,921
Savings 8,917,371
Time certificates $100,000 and over 13,102,774
Time certificates under $100,000 35,903,374
------------
122,631,411
Accrued interest payable and other liabilities 842,901
Senior notes payable 2,500,000
Other note payable 360,000
------------
126,334,312
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 2,000,000 shares;
issued and outstanding, 1,266,362 shares 2,483,013
Retained earnings 6,783,711
Unrealized gain on securities available for sale, net 33,612
------------
9,300,336
------------
$135,634,648
============
F-31
51
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDING
- -----------------------------------------------------------------------------------------
03/31/96 03/31/95
---------------------------
Interest Income:
Loans $2,354,818 $2,132,163
Securities:
U.S. Government agencies 20,175 122,950
Other investments 24,629 54,192
Federal funds sold 371,565 91,589
---------------------------
2,771,187 2,400,694
Interest expense 884,469 668,288
---------------------------
Net Interest Income 1,886,718 1,732,606
Provision for loan losses 72,000 53,000
---------------------------
Net Interest Income after provision for loan losses 1,614,718 1,679,606
---------------------------
Other Income:
Customer service fees 216,182 179,175
Gain on sale of loans and investments 106,757 78,623
Other income 26,724 39,411
---------------------------
349,663 297,209
---------------------------
Other expenses:
Salaries and employee benefits 626,387 604,352
Occupancy 88,376 76,372
Equipment expenses 120,937 90,746
Supplies and service 265,380 191,047
Other 212,913 234,915
Costs of Merger 116,400 0
---------------------------
1,430,403 1,196,432
---------------------------
Income before income taxes 733,978 780,363
Income taxes 286,392 293,070
---------------------------
Net Income $ 447,586 $ 487,313
===========================
Net earnings per share $ 0.35 $ 0.38
===========================
Common shares outstanding 1,266,362 1,266,362
===========================
F-32
52
SOUTHERN ARIZONA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE FIRST QUARTER PERIOD ENDED
- -------------------------------------------------------------------------------------------------------
03/31/96 03/31/95
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 447,586 $ 487,313
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 103,553 84,972
Provision of loan losses 72,000 53,000
Accretion of discount (1,650) (115,672)
Origination of loans available for sale (5,692,222) (5,098,037)
Proceeds from sale of loans available for sale 5,487,808 4,604,519
Deferred income tax benefit (26,206) (24,504)
Gain on sale of securities available for sale _ _
Change in assets and liabilities:
Accrued income receivable and other assets (1,459) (67,269)
Accrued interest payable and other liabilities 25,214 528,016
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 414,624 452,438
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of securities held to maturity 500,000 250,000
Purchase of securities held to maturity - (489,639)
Purchase of interest bearing deposit in financial institutions (99,000) 297,000
Maturities of interest bearing deposit in financial institutions 297,000 (297,000)
Purchase of securities available for sale - (7,395,273)
Proceeds from maturities of securities available for sale 300,000 2,000,000
Proceeds from sale of securities available for sale - -
(increase) decrease in federal funds sold (8,085,000) (5,084,000)
Loans made to customers, net (576,848) 1,842,886
Purchase of bank premises and equipment (46,703) (206,526)
------------------------------
NET CASH USED IN INVESTING ACTIVITIES (7,710,551) (9,082,552)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,869,581 8,464,160
Dividends paid - -
Cost of issuing senior notes payable - -
Note payment (120,000) -
------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,749,581 8,484,160
------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 453,654 (165,954)
Cash and due from banks:
Beginning 7,701,102 6,459,750
------------------------------
Ending $ 8,154,756 $ 6,293,796
==============================
F-32
53
SOUTHERN ARIZONA BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim financing reporting:
The accompanying unaudited Consolidated Financial Statements for
Southern Arizona Bancorp, Inc. (the "Company") have been prepared in accordance
with the generally accepted accounting principles for interim financial
information and the instructions to Form 10. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations, and cash flows for
the periods presented have been made. The results of operations for the three
month period ended March 31, 1996 is not necessarily indicative of the operating
results that may be expected for the entire fiscal year ending December 31,
1996. These financial statements should be read in conjunction with the
Company's annual audited financial statements attached to the Company's
Registration Statement on Form 10 filed with the Securities and Exchange
Commission on May 22, 1996.
F-34
54
STATISTICAL INFORMATION AND ANALYSIS
The following tables present certain statistical information regarding
Southern Arizona and should be read in connection with Southern Arizona
Consolidated Financial Statements and Notes set forth elsewhere in this
Registration Statement.
SOUTHERN ARIZONA BANCORP, INC.
Allocation of the Allowance for Loan Losses
As of December 31, 1995
1995 1994 1993 1992 1991
-------------------- -------------------- --------------------- --------------------- --------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
Per Category Per Category Per Category Per Category Per Category
(000's) Amount To Total Ln Amount To Total Ln Amount To Total Ln Amount To Total Ln Amount To Total Lns
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
Commercial 2,237 71.20 2,083 74.56 1,772 74.20 1,077 71.03 758 71.34
Real Estate 36 11.22 49 9.83 38 11.06 61 11.16 22 12.85
Consumer
Loans 194 17.58 261 15.61 180 14.74 194 17.81 93 15.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total 2,467 100% 2,393 100% 1,990 100% 1,332 100% 873 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
ST-1
55
SOUTHERN ARIZONA BANCORP, INC.
Analysis of the Allowance for Loan Losses
Years Ended December 31, 1991 - 1995
----------------------------------------------------------------------
(000's) 1995 1994 1993 1992 1991
----------------------------------------------------------------------
Balance at beginning of period 2,393 1,990 1,332 873 679
Charge-offs:
Commercial 291 37 65 143 131
Real Estate 48 0 3 149 74
Installment 10 8 41 23 97
----------------------------------------------------------------------
Total 349 45 109 315 302
Recoveries:
Commercial 14 14 7 18 35
Real Estate 6 0 0 0 0
Installment 2 5 4 3 39
----------------------------------------------------------------------
Total 22 19 11 21 74
Net (charge-offs) / recoveries (327) (26) (98) (294) (228)
Additions charged to operation 401 429 756 753 422
----------------------------------------------------------------------
Balance at end of period 2,467 2,393 1,990 1,332 873
----------------------------------------------------------------------
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.40 0.04 0.16 0.60 0.55
----------------------------------------------------------------------
ST-2
56
SOUTHERN ARIZONA BANCORP, INC.
Deposit Analysis
Based on Averages
Years Ended December 31, 1993 - 1995
1995 1994 1993
---------------------- ------------------- ----------------------
Average Average Average Average Average Average
(000's) Amount Rate Paid Amount Rate Paid Amount Rate Paid
------- --------- ------- --------- ------ ---------
Noninterest bearing demand deposits 27,556 0 24,068 0 20,206 0
Interest bearing demand deposits 22,819 2.13 27,045 2.07 22,523 2.20
Savings deposits 9,632 1.53 8,538 1.78 7,704 1.84
Certificates of deposit 40,612 5.56 27,881 4.07 27,163 4.08
--------------------- ------------------- ----------------------
Total 100,619 87,532 77,596
======= ====== =======
Time Deposit Maturity Schedule
$100,000 and over
As of December 31, 1995
--------------------------------------------
3 Months 3 - 6 6 - 12 Over
or Less Months Months One Year
--------------------------------------------
$100,000 and over 4,168 6,123 1,116 1,733
======== ======= ======= ========
ST-3
57
SOUTHERN ARIZONA BANCORP, INC
Return on Equity and Assets
Years Ended December 31, 1993 - 1995
1995 1994 1993
------ ------ -----
Return on average assets 1.78 1.68 1.52
Return on average equity 24.77 24.53 23.35
Dividend payout ratio 22.78 23.26 23.53
Average equity to average assets 7.19 6.84 6.53
ST-4
58
SOUTHERN ARIZONA BANCORP, INC.
Balance Sheets
Based on Average Balances
Years Ended December 31
(000) 1995 1994 1993
----------------------------------------------
Assets
Cash and due from banks 5,673 4,913 4,509
Federal funds sold 8,757 4,878 4,766
US Treasury obligations 7,202 8,769 9,180
Municipal obligations 2,302 2,485 3,742
Other investments 1,133 1,396 2,068
Loans
Commercial loans 54,465 49,275 38,751
Agriculture loans 6,926 5,599 4,509
Real estate loans 9,605 7,410 6,401
Installment loans 14,628 11,763 10,025
Less - Deferred loan fees (571) (509) (422)
Allowance for loan losses (2,438) (2,173) (1,711)
----------------------------------------------
Total loans 82,615 71,365 57,553
Fixed and other assets 4,558 3,517 2,924
----------------------------------------------
Total Assets 112,240 97,323 84,742
==============================================
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing demand 27,556 24,068 20,206
Interest bearing 22,819 27,045 22,523
Money market and savings 9,632 8,538 7,704
Certificates of deposit 40,612 27,881 27,163
----------------------------------------------
Total deposits 100,619 87,532 77,596
Other Liabilities 570 637 473
Senior Notes Payable 2,980 2,500 1,143
----------------------------------------------
Total Liabilities 104,169 90,669 79,212
Stockholders' equity 8,071 6,654 5,530
----------------------------------------------
Total Liabilities and
Stockholders' equity 112,240 97,323 84,742
==============================================
ST-5
59
SOUTHERN ARIZONA BANCORP, INC.
Analysis of Net Interest Earnings
Years Ended December 31, 1993-1995
RESULTS OF OPERATIONS
Average Balance, Interest Rates and Yields. The following table presents for the
periods indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollar
amounts and rates, and the net interest margin. The table does not reflect any
effect of income taxes. All average balances are monthly average balances and
include the balances of non-accruing loans. The yields and costs for the periods
indicated include fees which are considered adjustments to yield.
Avg. Amt Interest Average
1995 (000) Outstanding Earned Yield
- ---------------------------------------------- --------------------------------------
Assets
Federal funds sold 8,757 493 5.63%
US Treasury obligations 7,202 447 6.21%
Other investments 3,435 208 6.06%
Loans 85,624 9,045 10.56%
-------------------------------------
Total 105,018 10,193 9.71%
=====================================
Liabilities
Deposits
Interest bearing demand 22,819 486 2.13%
Money market and savings 9,632 147 1.53%
Certificates of deposit 40,612 2,258 5.56%
Long-Term Debt 2,980 261 8,76%
-------------------------------------
Total 76,043 3,152 4.15%
=====================================
Avg. Yield Int Earning Assets 9.71%
Avg. Rate Pd Int Earning Liabilities 4.15%
Net Yield on Assets 6.70%
Avg. Amt Interest Average
1994 (000) Outstanding Earned Yield
- ---------------------------------------------- --------------------------------------
Assets
Federal funds sold 4,878 189 3.87%
US Treasury obligations 8,769 368 4.20%
Other investments 3,881 216 5.57%
Loans 74,047 7,344 9.92%
-------------------------------------
Total 91,575 8,117 8.86%
=====================================
Liabilities
Deposits
Interest bearing demand 27,045 559 2.07%
Money market and savings 8,538 152 1.78%
Certificates of deposit 27,881 1,134 4.07%
Other 90 4 4.44%
Long-Term Debt 2,500 219 8.76%
-------------------------------------
Total 66,054 2,068 3.13%
=====================================
Avg. Yield Int Earning Assets 8.86%
Avg. Rate Pd Int Earning Liabilities 3.13%
Net Yield on Assets 6.61%
Avg. Amt Interest Average
1993 (000) Outstanding Earned Yield
- ---------------------------------------------- --------------------------------------
Assets
Federal funds sold 4,766 133 2.79%
US Treasury obligations 9,180 375 4.08%
Other investments 5,810 334 5.75%
Loans 59,686 6,166 10.33%
-------------------------------------
Total 79,442 7,008 8.82%
=====================================
Liabilities
Deposits
Interest bearing demand 22,523 495 2.20%
Money market and savings 7,704 142 1.84%
Certificates of deposit 27,163 1,107 4.08%
Other 42 1 2.38%
Long-Term Debt 1,143 100 8.75%
-------------------------------------
Total 58,575 1,845 3.15%
======================================
Avg. Yield Int Earning Assets 8.82%
Avg. Rate Pd Int Earning Liabilities 3.15%
Net Yield on Assets 6.50%
ST-6
60
SOUTHERN ARIZONA BANCORP, INC.
Analysis of Change in Interest
Years Ended December 31, 1994 - 1995
RATE/VOLUME OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate multiplied by old
volume. Changes attributable to both rate and volume which cannot be segregated
have been allocated proportionately to the change due to volume and the change
due to rate.
Interest Int Change Int Change
Change Due To Due To
1995 1994-1995 Volume Rates
- ---------------------------------------------- ----------------------------------------
Assets
Federal funds sold 304 193 111
US Treasury obligations 79 (74) 153
Other investments (8) (26) 18
Loans 1,701 1,201 500
--------------------------------------
Total 2,076 1,294 782
======================================
Liabilities
Deposits
Interest bearing demand (73) (90) 17
Money market and savings (5) 18 (23)
Certificates of deposit 1,124 623 501
Senior Notes 42 42 0
Short term borrowings (4) (2) (2)
--------------------------------------
Total 1,084 591 493
======================================
Interest Int Change Int Change
Change Due To Due To
1994 1993-1994 Volume Rates
- ---------------------------------------------- ----------------------------------------
Assets
Federal funds 56 3 53
US Treasury obligations (7) (17) 10
Other investments (118) (107) (11)
Loans 1,178 1,433 (255)
--------------------------------------
Total 1,109 1,312 (203)
======================================
Liabilities
Deposits
Interest bearing demand 64 94 (30)
Money market and savings 10 15 (5)
Certificates of deposit 27 29 (2)
Senior Notes 119 119 0
Short term borrowing 3 1 2
--------------------------------------
Total 223 258 (35)
======================================
ST-7
61
SOUTHERN ARIZONA BANCORP, INC.
Loan Portfolio
As of December 31,
-----------------------------------------------------
(000) 1995 1994 1993 1992 1991
-----------------------------------------------------
Commercial 63,062 62,336 50,155 39,820 31,893
Real Estate - Mortgage 9,504 7,274 6,946 5,976 4,184
Real Estate - Construction 435 940 531 277 254
Installment - Mobile Home 5,605 4,757 3,501 1,363 1,307
Installment - Other 9,467 7,894 5,972 8,044 6,504
Personal Credit Line 339 362 428 522 527
Other 164 39 63 57 37
-----------------------------------------------------
Total 88,576 83,602 67,596 56,059 44,706
-----------------------------------------------------
Loan Portfolio Maturity Schedule
As of December 31, 1995
------------------------------------------
Within 1 - 5 After 5
(000) 1 year years years Total
------------------------------------------
Loans at fixed interest rates 4,421 9,437 12,328 26,186
Loans at variable interest rates 24,889 26,108 11,393 62,390
------------------------------------------
Total 29,310 35,545 23,721 88,576
------------------------------------------
ST-8
62
SOUTHERN ARIZONA BANCORP, INC.
Investment Portfolio
As of December 31,
1995 Book 1994 Book 1993 Book
(000) Value Value Value
----------------------------------------
U.S. Treasury Obligations 1,314 4,959 10,296
Municipal Obligations 573 2,713 3,256
---------------------------------------
Total 1,887 7,672 13,552
---------------------------------------
Investment Portfolio Maturity Schedule
As of December 31, 1995
-------------------------------------------------------
Within 1 - 5 6 - 10 After 10
(000) 1 year years years Years Total
-------------------------------------------------------
U.S. Treasury Obligations
Carrying amount 800 514 0 0 1,314
Weighted average yield 7.10% 8.39% 7.59%
Municipal obligations
Carrying amount 0 0 573 573
Weighted yield 7.00% 7.00%
-------------------------------------------------------
Total 800 514 573 0 1,887
-------------------------------------------------------
ST-9
63
SOUTHERN ARIZONA BANCORP, INC.
Past Due and Nonaccrual Loans
As of December 31,
-------------------------------------------------
(000) 1995 1994 1993 1992 1991
-------------------------------------------------
Nonaccrual Loans 0 15 18 0 59
Other Real Estate Owned 11 202 18 82 0
-------------------------------------------------
Total 11 217 36 82 59
-------------------------------------------------
ST-10
64
SOUTHERN ARIZONA BANCORP, INC.
AVERAGE BALANCE SHEET DATA
Years Ended December 31,
(000) 1995 1994 1993 1992 1991
--------------------------------------------------------
Securities 10,637 12,650 14,990 14,830 10,737
Loans and Leases, net 82,615 71,365 57,553 48,198 40,987
Total interest earning assets 105,018 91,575 79,442 66,579 54,746
Total assets 112,240 97,323 84,742 71,245 59,314
Total deposits 100,619 87,532 77,596 66,336 54,790
Interest bearing deposits 73,063 63,464 57,390 50,882 43,290
Long-term debt 2,980 2,500 1,143 0 0
Shareholders' Equity 8,071 6,654 5,530 4,669 4,025
ST-11