<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) -- AUGUST 1, 1997
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 000-22007 76-0519693
(STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(713) 235-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
N/A
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
- --------------------------------------------------------------------------------
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<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) Effective as of the opening of business on August 1, 1997, Pinemont
Bank, a Texas banking association ("Pinemont" or the "Bank"), was merged
("Merger") with and into Southwest Bank of Texas National Association ("SW
Bank"), a national banking association and wholly-owned subsidiary of
Southwest Bancorporation of Texas, Inc., a Texas corporation (the "Company").
Under the terms of the Merger, (i) the Company issued a total of approximately
1,668,750 shares of Company Common Stock, $1.00 par value ("Company Common
Stock"), to the former shareholders of Pinemont, and (ii) existing options to
purchase shares of Pinemont stock were converted into options to purchase a
total of 190,625 shares of Company Common Stock. The Merger was accounted for
as a pooling-of-interests. The issuance of such shares of Company Common Stock
was registered under the Securities Act of 1933 under the Company's Form S-4
Registration Statement (Reg. No. 333-27897) (the "Registration Statement"). As
a result of the Merger, the nine former banking locations of Pinemont became
branches of SW Bank. For a description of the assets involved, the nature and
amount of consideration given therefor and the principles involved in
determining the amount of such consideration, reference is made to the
information under the following captions in the final Proxy
Statement/Prospectus dated July 3, 1997 to the Registration Statement ("Final
Prospectus") filed by the Company with the Securities and Exchange Commission
pursuant to Rule 424(b) under the Securities Act of 1933 and which consisted
of proxy material sent to the shareholders of Pinemont in connection with the
special meeting of Pinemont shareholders held on July 25, 1997, to approve the
Merger: (i) "Summary--Historical and Pro Forma Comparative per Share Data"
(page 7), (ii) "The Merger" (pages 20-35), and (iii) "The Bank" (pages 41-47).
A set of pages from the Final Prospectus containing the above information is
filed as Exhibit 99.1 hereto, and the referenced sections thereof are
incorporated herein by reference. Prior to the Merger, there were no material
relationships between Pinemont and the Company or any affiliate, director or
officer of the Company or any associate of such director or officer.
(b) The Company intends to continue operating the business of Pinemont by
integrating its operations with those of SW Bank and operating the existing
locations of Pinemont as branches of SW Bank. For a description of the
business of Pinemont and the business of the Company, reference is made to the
information under the following captions in the Final Prospectus: (i) "The
Bank" (pages 41-47), (ii) "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Bank" (pages 48-58), and (iii) "The
Company" (pages 59-61). Such sections are included in the set of pages from
the Final Prospectus filed as Exhibit 99.1 hereto, which sections are
incorporated herein by reference.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
PINEMONT BANK
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants....................... F-1
Balance Sheets as of March 31, 1997 (unaudited), and December 31, 1996
and 1995................................................................ F-2
Statements of Earnings for the Three Months Ended March 31, 1997
(unaudited) and 1996 (unaudited) and the Years Ended December 31, 1996,
1995 and 1994........................................................... F-3
Statements of Shareholders' Equity for the Three Months Ended March 31,
1997 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994... F-4
Statements of Cash Flows for the Three Months Ended March 31, 1997
(unaudited) and 1996 (unaudited) and the Years Ended December 31, 1996,
1995 and 1994........................................................... F-5
Notes to Financial Statements............................................ F-6
</TABLE>
(b) Pro Forma Financial Statements (Unaudited)
<TABLE>
<S> <C>
Pro Forma Combined Condensed Balance Sheet as of March 31, 1997........... F-19
Pro Forma Combined Condensed Statements of Income for the Three Months
Ended March 31, 1997 and the Years ended December 31, 1996 and 1995...... F-20
Notes to Unaudited Pro Forma Financial Statements......................... F-24
</TABLE>
(c) Exhibits
<TABLE>
<C> <S> <C>
2.1 --Agreement and Plan of Merger dated April 28, 1997, among the
Company, SW Bank and Pinemont (incorporated by reference to
Exhibit 2.1 to the Company's Form S-4 Registration Statement No.
333-27897)
99.1 --Set of Pages from Final Proxy Statement/Prospectus dated July 2,
1997 to Form S-4 Registration Statement No. 333-27897 delivered to
shareholders of Pinemont
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Pinemont Bank
We have audited the balance sheets of Pinemont Bank as of December 31, 1996
and 1995 and the related statements of earnings, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pinemont Bank as of
December 31, 1996 and 1995 and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Effective January 1, 1994, Pinemont Bank adopted Statement of Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities.
GRANT THORNTON LLP
Houston, Texas
February 7, 1997
F-1
<PAGE>
PINEMONT BANK
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1997 1996 1995
----------- -------- --------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents
Cash and due from banks...................... $ 10,954 $ 11,650 $ 9,541
Interest-bearing deposits.................... 17,683 18,525 17,595
-------- -------- --------
Total cash and cash equivalents.......... 28,637 30,175 27,136
Securities..................................... 58,576 56,181 52,725
Loans, net .................................... 135,541 129,010 92,408
Premises and equipment, net.................... 8,492 8,509 6,270
Other assets................................... 2,326 1,995 1,676
Cost in excess of fair market value of net
assets acquired, net.......................... 1,739 1,772 1,927
-------- -------- --------
$235,311 $227,642 $182,142
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing.......................... $ 64,486 $ 64,587 $ 54,306
Interest-bearing deposits.................... 150,328 143,291 113,227
-------- -------- --------
Total deposits........................... 214,814 207,878 167,533
Other liabilities.............................. 1,326 1,018 1,131
-------- -------- --------
Total liabilities........................ 216,140 208,896 168,664
Commitments and contingencies.................. -- -- --
Shareholders' equity
Common stock, $.66 2/3 par value, 3,325,000
shares authorized; 2,775,000, 2,775,000 and
2,225,000 shares issued; 2,670,000,
2,670,000 and 2,120,000 shares outstanding.. 1,780 1,780 1,413
Addtional paid in capital.................... 10,395 10,395 7,487
Retained earnings............................ 7,423 6,834 4,818
Net unrealized loss on securities available-
for-sale, net of tax of $220, $135 and $124. (427) (263) (240)
-------- -------- --------
19,171 18,746 13,478
-------- -------- --------
$235,311 $227,642 $182,142
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
PINEMONT BANK
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
THREE MONTHS ENDED 31,
------------------- ---------------------
MARCH 31, MARCH 31,
1997 1996 1996 1995 1994
--------- --------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income
Loans.............................. $3,190 $2,452 $11,062 $7,925 $4,895
Securities......................... 859 735 3,036 2,622 2,632
Federal funds sold and other....... 178 158 726 566 248
------ ------ ------- ------ ------
Total interest income............ 4,227 3,345 14,824 11,113 7,775
Interest expense
Deposits........................... 1,468 1,139 5,013 3,619 2,404
------ ------ ------- ------ ------
Net interest income.............. 2,759 2,206 9,811 7,494 5,371
Provision for loan losses............ 103 60 420 196 204
------ ------ ------- ------ ------
Net interest income after
provision for loan losses....... 2,656 2,146 9,391 7,298 5,167
Other income
Service charges on deposit
accounts.......................... 403 353 1,590 933 736
Other.............................. 98 69 369 222 187
------ ------ ------- ------ ------
Total other income............... 501 422 1,959 1,155 923
Other expense
Salaries and employee benefits..... 1,361 1,115 4,605 3,425 2,725
Occupancy.......................... 389 318 1,406 870 765
Other.............................. 493 429 2,231 1,931 1,631
------ ------ ------- ------ ------
Total other expense.............. 2,243 1,862 8,242 6,226 5,121
------ ------ ------- ------ ------
Earnings before provision for
income taxes...................... 914 706 3,108 2,227 969
Provision for income taxes........... 325 264 1,092 705 321
------ ------ ------- ------ ------
NET EARNINGS..................... $ 589 $ 442 $ 2,016 $1,522 $ 648
====== ====== ======= ====== ======
Earnings per common share............ $ 0.21 $ 0.21 $ 0.78 $ 0.71 $ 0.42
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PINEMONT BANK
STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES TOTAL
COMMON PAID IN RETAINED AVAILABLE- SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR-SALE EQUITY
------ ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... $1,000 $ 5,000 $2,648 $ -- $ 8,648
Unrealized gain from
initial adoption of
Statement 115 effective
January 1, 1994, net of
tax of $163............ -- -- -- 316 316
Net proceeds from sale
of common stock........ 413 2,484 2,897
Net change in unrealized
loss on securities
available for sale, net
of tax of $675......... -- -- -- (1,310) (1,310)
Net earnings............ -- -- 648 -- 648
------ ------- ------ ------ -------
Balance at December 31,
1994................... 1,413 7,484 3,296 (994) 11,199
Other................... -- 3 -- -- 3
Net change in unrealized
loss on securities
available for sale, net
of tax of $389......... -- -- -- 754 754
Net earnings............ -- -- 1,522 -- 1,522
------ ------- ------ ------ -------
Balance at December 31,
1995................... 1,413 7,487 4,818 (240) 13,478
Net proceeds from sale
of common stock........ 367 2,908 -- -- 3,275
Net change in unrealized
loss on securities
available for sale, net
of tax of $12.......... -- -- -- (23) (23)
Net earnings............ -- -- 2,016 -- 2,016
------ ------- ------ ------ -------
Balance at December 31,
1996................... 1,780 10,395 6,834 (263) 18,746
Net change in unrealized
loss on securities
available for sale, net
of tax of $84
(unaudited)............ -- -- -- (164) (164)
Net earnings
(unaudited)............ -- -- 589 -- 589
------ ------- ------ ------ -------
Balance at March 31,
1997 (unaudited)....... $1,780 $10,395 $7,423 $ (427) $19,171
====== ======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PINEMONT BANK
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
------------------- -------------------------
MARCH 31, MARCH 31,
1997 1996 1996 1995 1994
--------- --------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net earnings.................. $ 589 $ 442 $ 2,016 $ 1,522 $ 648
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Provision for loan losses... 103 60 420 196 204
Depreciation and
amortization............... 231 144 795 384 289
Amortization and accretion
of securities premiums and
discounts, net............. 53 43 236 124 373
(Gain) loss on disposal of
premises and equipment..... -- (7) (12) 91 9
Increase in other assets,
net of Kingwood acquisition
in 1995.................... (247) (409) (200) (272) 210
(Decrease) increase in other
liabilities, net of
Kingwood acquisition in
1995....................... 307 66 (112) 386 (160)
------- ------- ------- ------- -------
Net cash provided by
operating activities..... 1,036 339 3,143 2,431 1,573
Cash flows from investing
activities
Proceeds from sales of
available-for-sale
securities................... 3,137 -- -- 4,097 6,566
Proceeds from principal
repayments, maturities, and
calls of available-for-sale
securities................... 4,685 5,627 15,282 9,495 3,705
Proceeds from maturity of
held-to-maturity securities.. -- -- -- -- 18
Purchases of available-for-
sale securities.............. (10,518) (3,989) (19,009) (12,071) (1,577)
Purchases of held-to-maturity
securities................... -- -- -- -- (2,000)
Net increases in loans, net of
Kingwood acquisition in 1995. (6,634) (11,159) (37,128) (19,116) (17,762)
Proceeds from sale of premises
and equipment................ -- 10 16 -- --
Purchases of premises and
equipment.................... (180) (259) (2,885) (2,760) (220)
Net cash paid for Kingwood
acquisition.................. -- -- -- (93) --
------- ------- ------- ------- -------
Net cash used by investing
activities............... (9,510) (9,770) (43,724) (20,448) (11,270)
Cash flows from financing
activities
Net increase in deposits, net
of Kingwood acquisition in
1995.......................... 6,936 3,183 40,345 27,632 15,176
Net proceeds from sale of
common stock.................. -- -- 3,275 -- 2,898
------- ------- ------- ------- -------
Net cash provided by
financing activities..... 6,936 3,183 43,620 27,632 18,074
------- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents... (1,538) (6,248) 3,039 9,615 8,377
Cash and cash equivalents at
beginning of year.............. 30,175 27,136 27,136 17,521 9,144
------- ------- ------- ------- -------
Cash and cash equivalents at end
of year........................ $28,637 $20,888 $30,175 $27,136 $17,521
======= ======= ======= ======= =======
Supplemental disclosure of cash
flow information
Cash paid during the year for
Interest..................... $ 1,448 $ 1,140 $ 4,916 $ 3,392 $ 2,343
Income taxes................. -- -- 1,147 767 350
Nonmonetary transactions
Real estate acquired in
satisfaction of loans....... -- -- 67 102 --
Real estate sold through Bank
financing................... -- -- 174 -- 994
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pinemont Bank (the Bank) is a commercial bank chartered by the State of
Texas. A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Cash Equivalents
For the purpose of presentation in the cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
2. Securities
At the date of purchase, the Bank classifies debt and equity securities into
one of three categories: held-to-maturity, trading or available-for-sale. At
each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held-to-maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading and measured at fair value in the
financial statements with unrealized gains and losses included in earnings.
Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a
separate component of shareholders' equity until realized.
Gains and losses on sales of securities are determined using the specific-
identification method.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are considered to be other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
3. Loans
The Bank grants loans primarily to customers in Houston, Texas. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on the economy in this area.
Loans are stated at the principal amount outstanding, net of the allowance for
loan losses and any unearned income. Interest on consumer loans is recognized
by a method which approximates the level-yield method. Interest on other loans
is recognized by the simple interest method.
Loan origination and commitment fees are deferred and recognized over the
life of the related loan as an adjustment of yield. The unamortized balances
of any loan origination, commitment, and other fees and costs that are being
recognized as an adjustment of yield are reported as part of the loan balance.
A loan is identified as impaired when it is probable that the interest and
principal will not be collected according to the contractual terms of the loan
agreement. 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. As of December 31, 1996, the Bank has no
significant loans which meet the impairment definition.
F-6
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
4. Allowance for Loan Losses
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans and other pertinent
factors. Loans deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged-off are added to
the allowance.
Future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance. Such
agencies may require additions to the allowance based on their judgments of
information available to them at the time of their examination.
5. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization included in operating expenses are computed
principally using the straight-line method over estimated useful lives of 3 to
30 years.
6. Other Real Estate
Real estate properties acquired by foreclosure are recorded at fair value at
the date of foreclosure or acquisition, establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in other noninterest expenses.
7. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. When management determines that its more likely than not that a
deferred tax asset will not be realized, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
8. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with the generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
9. Off-Balance Sheet Financial Instruments
In the ordinary course of business the Bank enters into off-balance sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or the related
fees are incurred or received.
F-7
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
10. Interim Financial Information
Financial information as of March 31, 1997 and for the three months ended
March 31, 1997 and March 31, 1996, included herein, is unaudited. Such
information includes all adjustments (consisting only of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the financial information in the interim periods. The results of
operations for the three months ended March 31, 1997 are not necessarily
indicative of the results for the full fiscal year.
NOTE B--SECURITIES
The Bank has classified all securities as available-for-sale.
The carrying amounts of securities and their approximate fair values at
December 31, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
MARCH 31, 1997 (UNAUDITED)
U.S. Treasury and federal agencies
securities.......................... $47,620 $ 22 $(587) $47,055
Mortgage-backed securities........... 6,801 30 (117) 6,714
Collateralized mortgage obligations.. 2,047 1 (5) 2,043
Small Business Administration Pools.. 555 28 -- 583
Obligations of states and political
subdivisions........................ 942 8 (23) 927
Debt securities issued by U.S.
Corporations........................ 500 -- (3) 497
Other................................ 757 -- -- 757
------- ---- ----- -------
$59,222 $ 89 $(735) $58,576
======= ==== ===== =======
DECEMBER 31, 1996
U.S. Treasury and federal agencies
securities.......................... $43,621 $ 57 $(416) $43,262
Mortgage-backed securities........... 8,207 41 (110) 8,138
Collateralized mortgage obligations.. 2,086 6 -- 2,092
Small Business Administration Pools.. 735 13 (1) 747
Obligations of states and political
subdivisions........................ 685 13 -- 698
Debt securities issued by U.S.
Corporations........................ 500 -- (2) 498
Other................................ 746 -- -- 746
------- ---- ----- -------
$56,580 $130 $(529) $56,181
======= ==== ===== =======
DECEMBER 31, 1995
U.S. Treasury and federal agencies
securities.......................... $38,497 $ 70 $(390) $38,177
Mortgage-backed securities........... 9,604 49 (122) 9,531
Collateralized mortgage obligations.. 2,166 10 2,176
Small Business Administration Pools.. 904 -- (1) 903
Obligations of states and political
subdivisions........................ 686 19 -- 705
Debt securities issued by U.S.
Corporations........................ 525 2 -- 527
Other................................ 706 -- -- 706
------- ---- ----- -------
$53,088 $150 $(513) $52,725
======= ==== ===== =======
</TABLE>
Securities with book values of approximately $7,450, $7,705 and $2,793 at
March 31, 1997, December 31, 1996 and December 31, 1995, respectively were
pledged to secure public deposits and for other purposes as required or
permitted by law.
F-8
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
Securities with an amortized cost of $14,743 and an estimated market value of
$14,477 classified as held-to-maturity were transferred to the available-for-
sale category in December 1995.
The scheduled maturities of securities at December 31, 1996 are as follows.
Contractual maturities may differ from expected maturities because borrowers
may call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less...................................... $11,113 $11,106
Due after one through five years............................. 33,587 33,236
Due after five through ten years............................. 106 116
------- -------
Subtotal................................................... 44,806 44,458
Collateralized mortgage obligations.......................... 2,086 2,092
Small Business Administration Pools.......................... 735 747
Mortgage-backed securities and other......................... 8,953 8,884
------- -------
$56,580 $56,181
======= =======
</TABLE>
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans classified according to type are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial and industrial................. $ 38,441 $ 35,563 $23,979
Real estate............................... 82,690 79,613 54,199
Consumer.................................. 15,791 15,131 15,008
Other..................................... 287 292 588
-------- -------- -------
137,209 130,599 93,774
Less:
Unearned discounts........................ 227 212 263
Allowance for loan losses................. 1,441 1,377 1,103
-------- -------- -------
Loans, net.............................. $135,541 $129,010 $92,408
======== ======== =======
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at January 1..................... $1,377 $1,103 $ 697
Provision charged to operations.......... 103 420 196
Loans fully or partially charged off..... (41) (212) (128)
Recoveries of loans previously charged
off..................................... 2 66 10
Increase from Kingwood acquisition....... -- -- 328
------ ------ -------
Balance at end of period................. $1,441 $1,377 $ 1,103
====== ====== =======
</TABLE>
F-9
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
At March 31, 1997, December 31, 1996 and December 31, 1995, executive
officers and directors and principal shareholders, and entities in which they
have a 10% or more beneficial interest, were indebted to the Bank in the
aggregate amounts of $1,483, $908 and $1,036, respectively. In management's
opinion, all such loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than a normal risk
of collectibility or present other unfavorable features.
There are no significant restructured loans at March 31, 1997, December 31,
1996 and December 31, 1995. Loans on which the accrual of interest had been
discontinued were not significant at March 31, 1997, December 31, 1996 and
December 31, 1995.
NOTE D--PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Premises................................. $ 6,783 $ 6,619 $5,020
Furniture, fixtures and equipment........ 3,665 3,648 2,433
------- ------- ------
10,448 10,267 7,453
Less accumulated depreciation and
amortization............................ 1,956 1,758 1,183
------- ------- ------
$ 8,492 $ 8,509 $6,270
======= ======= ======
</TABLE>
NOTE E--INTEREST-BEARING DEPOSITS
Interest-bearing deposits are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Savings................................... $ 7,702 $ 7,531 $ 6,956
NOW and money market...................... 65,604 65,742 50,900
Certificates of deposit................... 77,022 70,018 55,371
-------- -------- --------
$150,328 $143,291 $113,227
======== ======== ========
</TABLE>
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100, was approximately $39,414, $33,350 and $23,660 at March
31, 1997, December 31, 1996 and December 31, 1995, respectively. At December
31, 1996, the scheduled maturities of certificates of deposit are as follows:
<TABLE>
<S> <C>
Three months or less............................................. $25,465
Over three to twelve months...................................... 35,495
Over twelve months............................................... 9,058
-------
$70,018
=======
</TABLE>
Interest expense on time deposits of $100 and greater was approximately
$1,251, $915 and $499 for the year ended December 31, 1996, 1995 and 1994,
respectively. Interest expense on time deposits of $100 and greater was
approximately $445 and $315 for the three months ended March 31, 1997 and
1996, respectively.
F-10
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE F--INCOME TAXES
Federal income taxes currently receivable and deferred tax assets at
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal income taxes receivable...................................... $ 20 $ 33
Deferred tax asset................................................... 374 319
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR-ENDED DECEMBER 31,
------------------- ---------------------------
MARCH 31, MARCH 31,
1997 1996 1996 1995 1994
--------- --------- --------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current........................ $309 $202 $ 1,127 $ 709 $ 413
Deferred....................... 16 63 (35) (4) (91)
---- ---- --------- ------- -------
$325 $265 $ 1,092 $ 705 $ 322
==== ==== ========= ======= =======
</TABLE>
Deferred tax assets and liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
------------
1996 1995
----- -----
<S> <C> <C>
Allowance for loan losses......................................... $ 185 $ 97
Unrealized loss on securities..................................... 135 124
Acquired NOL carryforward......................................... 211 275
Other real estate................................................. 19 19
----- -----
Deferred tax asset............................................... 550 515
Premises and equipment............................................ (87) (104)
Section 481 adjustment............................................ (42) (59)
Federal Home Loan Bank stock dividend............................. (47) (33)
----- -----
Deferred tax liability........................................... (176) (196)
----- -----
Net deferred tax asset............................................ $ 374 $ 319
===== =====
</TABLE>
The reconciliation between the Bank's effective income tax rate and the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate...................... 34.00% 34.00% 34.00%
Permanent differences.................................. 1.63% 0.69% 0.20%
Other.................................................. (0.50%) (3.03%) (1.07%)
------ ------ ------
Effective income tax rate.............................. 35.13% 31.66% 33.13%
====== ====== ======
</TABLE>
NOTE G--COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk
F-11
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
in excess of the amount recognized in the balance sheets. The contractual
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The Bank generally requires collateral or other security to support
financial instruments with credit risk.
Financial instruments whose contract amounts represent credit risk at
December 31, 1996:
<TABLE>
<S> <C>
Commitments to extend credit..................................... $29,145
Standby letters of credit........................................ 2,169
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable; inventory; property, plant and equipment
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank offers its employees a deferred savings plan. Under the plan,
employees may contribute up to 10% of their gross salary. The Bank will match
contributions up to a maximum of 6%. The Bank's contributions for the years
ended December 31, 1996, 1995 and 1994 were $145, $117 and $59, respectively.
The Bank has entered into leases for branch office space. One such lease is
with a director of the Bank and expires on August 21, 2000. The Bank believes
that the terms of this lease are no more favorable to the landlord than would
be available in comparable transactions with a third party. Lease expense
under this lease was $35, $13 and $0 for the years ended December 31, 1996,
1995 and 1994, respectively.
The following is a schedule by years of the future minimum rental payments
required under the leases as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997.............................................................. $110
1998.............................................................. 113
1999.............................................................. 116
2000.............................................................. 169
----
$508
====
</TABLE>
F-12
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H--STOCK OPTION PLAN
In 1994, the Board adopted, and the shareholders approved, the Bank's
Incentive Stock Option Plan ("Stock Option Plan") and the Long-Term Incentive
Compensation Plan ("Incentive Compensation Plan"). At the time of adoption,
the Stock Option Plan authorized the purchase of up to 105,000 shares of
Common Stock. At the time of adoption of the Stock Option Plan, applicable
state law imposed a restriction on the number of shares which could be
authorized under such plan (the "Share Restriction") and provided that no
officer or employee who owns or controls more than five percent of the Common
Stock could participate (the "5% Restriction"). In 1994, 105,000 shares of
common stock were issued and held by the Bank for the Stock Option Plan.
As a result of the restrictions on the number of shares that could be
authorized under the Stock Option Plan, the Incentive Compensation Plan was
adopted as an additional incentive program to supplement the Stock Option
Plan. Under the Incentive Compensation Plan, up to 200,000 incentive
appreciation units ("Units") were authorized to be awarded to key executives.
These Units were intended to provide a means of measuring the incentive
compensation paid to holders. The compensation amount or value of the Units
was measured by the increase in value of the shares of Common Stock. The value
of a share of Common Stock subject to Units granted pursuant to the Incentive
Compensation Plan was $4.85 on the initial grant date. The Unit holders were
eligible to have an account maintained to reflect dividends paid with respect
to Common Stock and vesting was similar to the five year vesting for options
granted under the Stock Option Plan. The cash payment for the value of the
Units was payable by the Bank upon the earlier of (i) termination of
employment for any reason (other than cause), (ii) a change of control of the
Bank or (iii) December 31, 2004.
Amendments to the Texas Banking Code in 1995 eliminated the 5% Restriction
and Share Restriction. Further, the Texas Banking Code now permits authorized
but unissued shares which are not issued until the exercise of the applicable
stock option. As a result of the amendments to the Texas Banking Code, the
Board determined that it was in the best interest of the Bank to effectively
merge the Stock Option Plan and Incentive Compensation Plan by (i) terminating
the Incentive Compensation Plan and (ii) amending and restating the Stock
Option Plan as described in more detail below. These changes were approved by
the shareholders of the Bank on November 21, 1995. The Units previously
granted have been terminated and the value of the Units (i.e., increase in
stock value) of $167,000 is to be paid as compensation to the holders of such
Units. Further, incentive stock options were granted in approximate parity
with the Units surrendered, but the exercise price was increased to reflect
the value of the stock at the date of grant.
The amendments to the Stock Option Plan include provisions which increase
the number of shares of Common Stock subject to the plan to 305,000 from
105,000, eliminate the prohibition against participation in the plan by an
executive who owns or controls more than five percent of the Common Stock,
permit the exercise price of a nonqualified option to be below the fair market
value of the Common Stock at the grant date, and permit the five year vesting
period for nonqualified options to commence on the employment date, the grant
date or any other date determined by the committee.
The Stock Option Plan is now known as the Bank's "Incentive and Nonqualified
Stock Option Plan" and provides for awards of options to purchase up to
305,000 shares of Common Stock to key executives of the Bank. The options can
now be issued as incentive stock options or nonqualified options with the
incentive stock options having an exercise price equal to or greater than the
fair market value of the Common Stock on the date the option is granted. The
terms of the options (subject to certain provisions and limitations in the
plan and the Internal Revenue Code) are left to the discretion of the Board or
a committee appointed by the Board to address such matters. The options become
exercisable based on a five-year vesting schedule which in the case of
F-13
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
incentive stock options commences on the grant date. All options granted
pursuant to the Stock Option Plan have been incentive stock options and it is
contemplated that all options granted pursuant to such plan will most likely
be incentive stock options. In the event of a change in control of the Bank or
the death or disability of the executive, the options become exercisable if
the holder is an employee of the Bank or an affiliate immediately prior to
such event. The options must expire 10 years from the date of grant or, if
earlier, 90 days after termination of employment for any reason other than
death or disability or termination for cause. The options also immediately
expire on termination for cause, and one year after termination due to
disability or death. Option holders are eligible to have an account maintained
to reflect dividends paid with respect to the Common Stock underlying the
options.
The Bank applies APB Opinion 25 in accounting for its Stock Option Plan.
Accordingly, no compensation cost has been recognized for grants in 1996 or
1995. Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net earnings and earnings per common share
would have been reduced to the pro forma amounts indicated below (assuming
that the fair value of options granted during the year are amortized over the
vesting period).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1995
------ ------
<S> <C> <C>
Net earnings
As reported...................................................... $2,016 $1,522
Pro forma........................................................ $1,981 $1,521
Earnings per share
As reported...................................................... $ 0.78 $ 0.71
Pro forma........................................................ $ 0.76 $ 0.71
</TABLE>
Following is a summary of the status of the Stock Option Plan during 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 286,500 $ 5.63 104,000 $ 4.85
Granted................................ 10,000 6.07 182,500 6.07
Exercised.............................. -- -- -- --
Forfeited.............................. (1,000) (4.85) -- --
------- -------
Outstanding at end of year............... 295,500 $ 5.64 286,500 $ 5.63
======= =======
Options exercisable at end of year....... 57,050 $ 5.24 20,263 $ 4.85
======= =======
Weighted average fair value of options
granted................................. $ 1.62 $ 1.42
======= =======
</TABLE>
As of December 31, 1996, the options outstanding have exercise prices
between $4.85 and $6.07 and a weighted average remaining contractual life of
8.5 years.
NOTE I--REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the State of Texas Department of Banking and the Federal Deposit Insurance
Corporation (FDIC). Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that if
F-14
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier 1 capital to risk-weighted assets, and of Tier
1 capital to average assets. Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category. To be
categorized as well capitalized the Bank must maintain minimum Total risk-
based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table
below:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- ------------- -------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk weighted
assets).......................... $18,613 12.37% $12,038 ^8.0% $15,047 ^10.0%
Tier 1 capital (to risk weighted
assets).......................... 17,237 11.46% 6,016 ^4.0% 9,024 ^6.0%
Tier 1 capital (to average
assets).......................... 17,237 7.95% 8,672 ^4.0% 10,841 ^5.0%
As of December 31, 1995
Total capital (to risk weighted
assets).......................... 12,894 11.79% 8,749 ^8.0% 10,936 ^10.0%
Tier 1 capital (to risk weighted
assets).......................... 11,791 10.79% 4,371 ^4.0% 6,557 ^6.0%
Tier 1 Capital (to average
assets)........................... 11,791 6.85% 6,885 ^4.0% 8,607 ^5.0%
</TABLE>
NOTE J--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments:
Cash and cash equivalents, federal funds purchased and repurchase agreements
The carrying amounts of cash and short-term investments approximate their
fair value.
Securities to be held-to-maturity and securities available-for-sale
Fair values for investment securities are based on quoted market prices or
quotations received from securities dealers. If quoted market prices are not
available, fair value estimates may be based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
Loans
Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and consumer loans.
Each of these categories is further subdivided into fixed and adjustable rate
loans and performing and nonperforming loans. The fair value of performing
loans is calculated by discounting scheduled cash flows
F-15
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the various types of
loans. The fair value of nonperforming loans is estimated at the value of the
underlying collateral.
Deposits
The fair value of demand deposits, such as noninterest-bearing deposits and
interest-bearing transaction accounts such as savings, NOW and money market
accounts are equal to the amount payable on demand as of December 31, 1996 and
1995 (i. e., their carrying amounts).
The fair value of demand deposits is the amount payable, and adjustment for
any value derived from the expected retention of such deposits for a period of
time is not considered. That value, commonly referred to as the core deposit
base intangible, is neither included in the fair value amounts nor recorded as
an intangible asset in the balance sheet.
The fair value of certificates of deposits are estimated based on the
discounted value of contractual cash flows. The discount rate used represents
rates currently offered for deposits of similar remaining maturities.
Off-balance sheet instruments
Estimated fair values for the Bank's off-balance sheet instruments are based
on fees currently charged to enter into similar agreements, considering the
remaining terms of the agreements and the counterparties' credit standing.
The following table presents the carrying amounts and fair values of the
Bank's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
December 31, 1996
Financial assets:
Cash and cash equivalents................................... $30,175 $30,175
Available-for-sale securities............................... 56,181 56,181
Loans, net.................................................. 129,010 129,054
Financial liabilities:
Deposits
Noninterest-bearing........................................ 64,587 64,587
Interest-bearing transaction accounts...................... 73,273 73,273
Certificates of deposit.................................... 70,018 70,199
December 31, 1995
Financial assets:
Cash and cash equivalents................................... 27,136 27,136
Available-for-sale securities............................... 52,725 52,725
Loans, net.................................................. 92,408 90,136
Financial liabilities:
Deposits
Noninterest-bearing........................................ 54,306 54,306
Interest-bearing transaction accounts...................... 57,832 57,832
Certificates of deposit.................................... 55,395 55,565
</TABLE>
F-16
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K--KINGWOOD BANK ACQUISITION
Pinemont Bank purchased all of the assets and liabilities of Kingwood Bank
on September 13, 1995 and purchase accounting was applied. The purchase price
was allocated based on the fair value of the assets acquired and liabilities
assumed, and the excess of cost over the fair value of the net assets acquired
was recorded.
A summary of the purchase cost and its allocation follows:
<TABLE>
<S> <C>
Assets acquired:
Cash and due from banks........................................ $ 2,367
Interest-bearing deposits...................................... 135
Securities..................................................... 8,362
Loans.......................................................... 13,967
Fixed assets................................................... 1,146
Other assets................................................... 520
-------
26,497
Liabilities assumed:
Deposits....................................................... 24,612
Other liabilities.............................................. 150
-------
24,762
-------
Net assets acquired.............................................. 1,735
Purchase price................................................... 3,309
Expenses......................................................... 397
-------
Cost in excess of fair market value of net assets acquired....... $ 1,971
=======
</TABLE>
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1994
------- -------
<S> <C> <C>
Revenues.................................................. $13,974 $11,007
Net earnings.............................................. 1,640 491
Net earnings per share.................................... $ 0.77 $ 0.32
</TABLE>
F-17
<PAGE>
PINEMONT BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997 AND RELATING TO THE THREE
MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE M--EARNINGS PER SHARE
Earnings per share is computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings................ $ 589 $ 442 $ 2,016 $ 1,522 $ 648
Divided by average common
shares and common share
equivalents:
Average common shares..... 2,670,000 2,120,000 2,509,583 2,120,000 1,551,417
Average common share
equivalents.............. 86,876 19,227 85,584 19,227 --
--------- --------- --------- --------- ---------
Total average common shares
and common share
equivalents................ 2,756,876 2,139,227 2,595,167 2,139,227 1,551,417
Earnings per common share... $ 0.21 $ 0.21 $ 0.78 $ 0.71 $ 0.42
========= ========= ========= ========= =========
</TABLE>
The FASB has issued Financial Accounting Standards No. 128 Earnings per
Share, which is effective for financial statements issued after December 15,
1997. The new standard eliminates primary and fully diluted earnings per share
and requires the presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. The pro forma
effect of adopting the new standard would be basic earnings per share of $.22
and $.21, and diluted earnings per share of $.21 and $.21, for the quarters
ended March 31, 1997 and 1996.
F-18
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed balance sheet as of
March 31, 1997 and the unaudited pro forma combined condensed statements of
income for the three months ended March 31, 1997 and for the years ended
December 31, 1996, 1995 and 1994 combine the historical financial statements
of the Company and the Bank and are presented under the "pooling-of-interest"
method of accounting for business combinations. The pro forma combined
condensed balance sheet gives effect to the Merger as if the Merger had
occurred on March 31, 1997. The pro forma combined condensed statements of
income give effect to the Merger as if the Merger had occurred at the
beginning of each of the periods presented. The "pooling-of-interests" method
of accounting requires all assets and liabilities to be carried at their book
values. The Merger represents a stock exchange whereby Bank shareholders will
receive 0.625 of a share of Company Common Stock for each share of Bank Common
Stock.
The pro forma statements are provided for informational purposes. The
unaudited pro forma combined condensed financial statements presented are not
necessarily indicative of the results that would have been obtained if the
Merger had occurred on the dates indicated or that may be realized in the
future. The unaudited pro forma combined condensed financial statements should
be read in conjunction with the audited financial statements and the notes
thereto of the Company and the Bank and their unaudited interim financial
statements included herein.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY BANK ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks.......... $ 72,550 $ 10,954 $ 83,504
Federal funds sold and interest-
bearing deposits................ 22,600 17,683 40,283
---------- -------- ----------
Total cash and cash
equivalents................. 95,150 28,637 123,787
Securities--available for sale... 311,820 58,576 370,396
Loans receivable, net............ 643,032 135,541 778,573
Premises and equipment, net...... 9,548 8,492 18,040
Accrued interest receivable...... 7,264 1,350 8,614
Prepaid expenses and other as-
sets............................ 6,684 2,715 9,399
---------- -------- ----------
Total assets................. $1,073,498 $235,311 $1,308,809
========== ======== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
Deposits:
Demand--noninterest-bearing.... $ 287,183 $ 64,486 $ 351,669
Demand--interest-bearing....... 8,523 16,765 25,288
Money market accounts.......... 416,069 48,839 464,908
Savings........................ 3,194 7,702 10,896
Time, $100 and over............ 98,071 39,414 137,485
Other time..................... 55,538 37,608 93,146
---------- -------- ----------
Total deposits............... 868,578 214,814 1,083,392
Securities sold under repurchase
agreements...................... 116,989 -- 116,989
Other short-term borrowings...... 5,044 -- 5,044
Accrued interest payable......... 622 535 1,157
Other liabilities................ 3,118 791 3,909
---------- -------- ----------
Total liabilities............ 994,351 216,140 1,210,491
---------- -------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock................... 9,391 1,780 (111)(a) 11,060
Additional paid-in capital..... 38,135 10,395 111 (a) 48,641
Retained earnings.............. 31,813 7,423 -- 39,236
Net unrealized depreciation on
securities available for sale. (192) (427) -- (619)
---------- -------- ---- ----------
Total shareholders' equity... 79,147 19,171 -- 98,318
---------- -------- ---- ----------
Total liabilities and
shareholders' equity........ $1,073,498 $235,311 -- $1,308,809
========== ======== ==== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
F-19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY BANK ADJUSTMENTS COMBINED
------- ------ ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans................................. $13,590 $3,190 $16,780
Securities............................ 4,418 859 5,277
Federal funds sold and other.......... 352 178 530
------- ------ -------
Total interest income............... 18,360 4,227 22,587
Interest expense on deposits and other
borrowings............................. 7,860 1,468 9,328
------- ------ -------
Net interest income................. 10,500 2,759 13,259
Provision for loan losses............... 438 103 541
------- ------ -------
Net interest income after provision
for loan losses.................... 10,062 2,656 12,718
------- ------ -------
Other income:
Service charges....................... 927 403 1,330
Other operating income................ 764 98 862
Gain on sale of securities, net....... 137 -- 137
------- ------ -------
Total other income.................. 1,828 501 2,329
------- ------ -------
Other expenses:
Salaries and employee benefits........ 4,204 1,361 5,565
Occupancy expense..................... 1,219 389 1,608
Other operating expenses.............. 1,667 493 2,160
------- ------ -------
Total other expenses................ 7,090 2,243 9,333
------- ------ -------
Income before income taxes.......... 4,800 914 5,714
Provision for income taxes.............. 1,681 325 2,006
------- ------ -------
Net income before bank preferred
stock dividend..................... 3,119 589 3,708
SW Bank preferred stock dividend........ 36 -- 36
------- ------ -------
Net income available for common
shareholders....................... $ 3,083 $ 589 $ 3,672
======= ====== =======
Earnings per common share........... $ 0.32 $ 0.21 $ 0.33
======= ====== =======
Weighted average common shares and
common share equivalents
outstanding........................ 9,539 2,861 11,262(b)
======= ====== =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
F-20
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY BANK ADJUSTMENTS COMBINED
------- ------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans................................ $44,709 $11,062 $55,771
Securities........................... 17,856 3,036 20,892
Federal funds sold and other......... 868 726 1,594
------- ------- -------
Total interest income.............. 63,433 14,824 78,257
Interest expense on deposits and other
borrowings............................ 27,262 5,013 32,275
------- ------- -------
Net interest income................ 36,171 9,811 45,982
Provision for loan losses.............. 1,670 420 2,090
------- ------- -------
Net interest income after provision
for loan losses................... 34,501 9,391 43,892
------- ------- -------
Other income:
Service charges...................... 2,883 1,590 4,473
Other operating income............... 2,005 369 2,374
------- ------- -------
Total other income................. 4,888 1,959 6,847
------- ------- -------
Other expenses:
Salaries and employee benefits....... 14,379 4,605 18,984
Occupancy expense.................... 3,475 1,406 4,881
Loss on sale of securities, net 112 -- 112
Other operating expenses............. 6,002 2,231 8,233
------- ------- -------
Total other expense................ 23,968 8,242 32,210
------- ------- -------
Income before income taxes......... 15,421 3,108 18,529
Provision for income taxes............. 5,376 1,092 6,468
------- ------- -------
Net income before bank preferred
stock dividend.................... 10,045 2,016 12,061
SW Bank preferred stock dividend....... 457 -- 457
------- ------- -------
Net income available for common
shareholders...................... $ 9,588 $ 2,016 $11,604
======= ======= =======
Earnings per common share.......... $ 1.12 $ 0.78 $ 1.14
======= ======= =======
Weighted average common shares and
common share equivalents
outstanding....................... 8,535 2,700 10,157(b)
======= ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
F-21
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY BANK ADJUSTMENTS COMBINED
------- ------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans................................ $37,089 $ 7,925 $45,014
Securities........................... 11,668 2,622 14,290
Federal funds sold and other......... 1,825 566 2,391
------- ------- -------
Total interest income.............. 50,582 11,113 61,695
Interest expense on deposits and other
borrowings............................ 21,890 3,619 25,509
------- ------- -------
Net interest income................ 28,692 7,494 36,186
Provision for loan losses.............. 925 196 1,121
------- ------- -------
Net interest income after provision
for loan losses................... 27,767 7,298 35,065
------- ------- -------
Other income:
Service charges...................... 2,386 933 3,319
Other operating income............... 1,326 222 1,548
------- ------- -------
Total other income................. 3,712 1,155 4,867
------- ------- -------
Other expenses:
Salaries and employee benefits....... 10,686 3,425 14,111
Occupancy expense.................... 2,510 870 3,380
Other operating expenses............. 6,262 1,931 8,193
------- ------- -------
Total other expenses............... 19,458 6,226 25,684
------- ------- -------
Income before income taxes......... 12,021 2,227 14,248
Provision for income taxes............. 4,214 705 4,919
------- ------- -------
Net income before bank preferred
stock dividend.................... 7,807 1,522 9,329
SW Bank preferred stock dividend....... 50 -- 50
------- ------- -------
Net income available for common
shareholders...................... $ 7,757 $ 1,522 $ 9,279
======= ======= =======
Earnings per common share.......... $ 0.92 $ 0.71 $ 0.95
======= ======= =======
Weighted average common shares and
common share equivalents
outstanding....................... 8,394 2,244 9,731(b)
======= ======= =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
F-22
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY BANK ADJUSTMENTS COMBINED
------- ------ ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans................................. $26,684 $4,895 $31,579
Securities............................ 6,898 2,632 9,530
Federal funds sold and other.......... 706 248 954
------- ------ -------
Total interest income............... 34,288 7,775 42,063
Interest expense on deposits and other
borrowings............................. 11,444 2,404 13,848
------- ------ -------
Net interest income................. 22,844 5,371 28,215
Provision for loan losses............... 1,145 204 1,349
------- ------ -------
Net interest income after provision
for loan losses.................... 21,699 5,167 26,866
------- ------ -------
Other income:
Service charges....................... 2,122 736 2,858
Other operating income................ 941 187 1,128
------- ------ -------
Total other income.................. 3,063 923 3,986
------- ------ -------
Other expenses:
Salaries and employee benefits........ 8,672 2,725 11,397
Occupancy expense..................... 1,995 765 2,760
Other operating expenses.............. 5,115 1,631 6,746
------- ------ -------
Total other expense................. 15,782 5,121 20,903
------- ------ -------
Income before income taxes.......... 8,980 969 9,949
Provision for income taxes.............. 3,141 321 3,462
------- ------ -------
Net income before bank preferred
stock dividend..................... 5,839 648 6,487
SW Bank preferred stock dividend........ -- -- --
------- ------ -------
Net income available for common
shareholders....................... $ 5,839 $ 648 $ 6,487
======= ====== =======
Earnings per common share........... $ 0.70 $ 0.42 $ 0.70
======= ====== =======
Weighted average common shares and
common share equivalents
outstanding........................ 8,302 1,560 9,272(b)
======= ====== =======
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
F-23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIS OF PRESENTATION
Certain revenues, expenses, assets and liabilities of the Bank have been
reclassified to conform with the presentation utilized by the Company. The
effects of accounting policy differences are immaterial and have not been
adjusted in the unaudited pro forma financial statements.
(A) Bank Common Stock to be exchanged:
<TABLE>
<S> <C>
Bank Common Stock outstanding at March 31, 1997...................... 2,670
Exchange ratio....................................................... 0.625
-----
Assumed number of shares of Company Common Stock issued ............. 1,669
Par value per share.................................................. $ 1
-----
Total amount of Company Common Stock to be issued.................... 1,669
Amount of Bank Common Stock.......................................... 1,780
-----
Total pro forma adjustment to common stock........................... $(111)
=====
</TABLE>
Bank stock options outstanding at March 31, 1997 totaling 305,000 are
assumed to be converted to Company stock options totaling 190,625.
(B) Pro forma number of common shares and common share equivalents outstanding
represents the historical weighted average shares outstanding of Company
Common Stock in addition to the pro forma number of shares of Company
Common Stock assumed to be issued in exchange for Bank Common Stock.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------
MARCH 31, 1997 1996 1995 1994
-------------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average Bank common
shares and common share
equivalents outstanding......... 2,757 2,595 2,139 1,552
Exchange Ratio................... 0.625 0.625 0.625 0.625
----- -------- -------- --------
Assumed number of shares of
Company Common Stock issued..... 1,723 1,622 1,337 970
===== ======== ======== ========
</TABLE>
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SOUTHWEST BANCORPORATION OF TEXAS, INC.
Date: August 5, 1997 /s/ R. John McWhorter
By________________________________________
R. John McWhorter
Vice President and Controller
<PAGE>
EXHIBIT 99.1
(PAGES INCORPORATED BY REFERENCE FROM FINAL PROXY STATEMENT/PROSPECTUS DATED
JULY 3, 1997)
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- -----
<S> <C>
Summary--Historical and Pro Forma Comparative Per Share Data............. 7
The Merger............................................................... 20-35
The Bank................................................................. 41-47
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Bank............................................... 48-58
The Company.............................................................. 59-61
</TABLE>
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF BANK CAPITAL STOCK AND COMPANY COMMON STOCK
As of the date of this Proxy Statement/Prospectus, the rights of the Bank's
shareholders are governed by the TBA, the TBCA (with respect to certain
matters) and the Bank Articles of Incorporation and Bank Bylaws. At the
Effective Time, the Bank shareholders will become shareholders of the Company.
As such, their rights will thereafter be governed by the TBCA and the Company
Articles of Incorporation and the Company Bylaws. See "Comparative Rights of
Shareholders."
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
Set forth below are the comparative earnings and book value per common share
data of (a) each of the Company and the Bank on an historical basis, (b) the
Company on a pro forma combined basis giving effect to the Merger and (c) the
Bank on an equivalent pro forma combined basis giving effect to the Merger, in
each case giving effect to the Merger under the pooling of interests method of
accounting for business combinations, all on the basis described in the
unaudited pro forma condensed financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus. The equivalent pro forma data for
the Bank was calculated by multiplying the Company pro forma per common share
data by the Exchange Ratio of 0.625. Neither the Company nor the Bank paid any
dividends to their common shareholders during the periods presented.
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of the Company and the Bank and the unaudited pro forma condensed
financial information and notes thereto included elsewhere in this Proxy
Statement/Prospectus.
SOUTHWEST BANCORPORATION OF TEXAS, INC.
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------- -----------------------
1997 1996 1996 1995 1994
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL:
Net Income............................... $0.32 $0.29 $ 1.12 $ 0.92 $ 0.70
Book value............................... 8.43 6.07 7.07 5.81 4.65
PRO FORMA COMBINED AFTER THE MERGER:
Net Income............................... $0.33 $0.29 $ 1.14 $ 0.95 $ 0.70
Book value............................... 8.89 6.72 7.81 6.45 5.21
</TABLE>
PINEMONT BANK
PER COMMON SHARE DATA
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------- -----------------------
1997 1996 1996 1995 1994
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
HISTORICAL:
Net Income.............................. $0.21 $0.21 $ 0.78 $ 0.71 $ 0.42
Book value.............................. 7.18 6.53 7.02 6.36 5.28
EQUIVALENT PRO FORMA COMBINED AFTER THE
MERGER:
Net Income.............................. $0.21 $0.18 $ 0.71 $ 0.59 $ 0.44
Book value.............................. 5.56 4.20 4.88 4.03 3.25
</TABLE>
7
<PAGE>
given pursuant to this solicitation may be revoked by the person giving it at
any time before the proxy is voted by filing either an instrument revoking it
or a duly executed proxy bearing a later date with the cashier of the Bank
prior to or at the Special Meeting or by voting the shares subject to the
proxy in person at the Special Meeting. Attendance at the Special Meeting will
not in and of itself constitute a revocation of a proxy.
A proxy may indicate that all or a portion of the shares represented thereby
are not being voted with respect to a specific proposal. This could occur, for
example, when a broker is not permitted to vote shares held in street name on
certain proposals in the absence of instructions from the beneficial owner.
Shares that are not voted with respect to a specific proposal will be
considered as not present for such proposal, even though such shares will be
considered present for purposes of determining a quorum and voting on other
proposals. Abstentions on a specific proposal will be considered as present
but will not be counted as voting in favor of such proposal. The proposal to
approve the Merger Agreement must be approved by the holders of at least two-
thirds of the shares of Bank Common Stock outstanding on the Record Date.
Because the proposal to approve the Merger Agreement requires the affirmative
vote of a specified percentage of outstanding shares, the nonvoting of shares
or abstentions with regard to this proposal will have the same effect as votes
against the proposal.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
the Bank may solicit proxies from the shareholders of the Bank, either
personally or by telephone or other form of communication. None of the
foregoing persons who solicit proxies will be specifically compensated for
such services. Nominees, fiduciaries and other custodians will be requested to
forward soliciting materials to beneficial owners. The Bank will bear its own
expenses in connection with any solicitation of proxies for the Special
Meeting. See "The Merger--Expenses."
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE SHAREHOLDERS OF THE BANK. SHAREHOLDERS ARE URGED TO READ AND CAREFULLY
CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS AND TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO THE
BANK IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
THE MERGER
This section of the Proxy Statement/Prospectus describes all material
aspects of the Merger. The following description does not purport to be
complete and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference. Shareholders are
urged to read the Merger Agreement in its entirety.
GENERAL
At the Effective Time, the Bank will be merged with and into SW Bank, with
SW Bank being the surviving corporation in the Merger. Following the Merger,
SW Bank will continue to be a wholly-owned subsidiary of the Company, and the
Bank will no longer exist as an independent entity. Except with respect to
fractional shares as discussed below, if the Merger Agreement is approved and
the Merger becomes effective, shareholders of the Bank will receive 0.625 of a
share of Company Common Stock for each of their shares of Bank Common Stock.
See "--Merger Consideration." Shares of Company Common Stock issued and
outstanding immediately before the Effective Time will remain issued and
outstanding immediately after the Effective Time.
The market price for Company Common Stock will fluctuate between the date of
this Proxy Statement/Prospectus and the Effective Time. The market value of
the shares of Company Common Stock that shareholders of the Bank receive at
the Effective Time may be more or less than the market value of such shares on
the date of this Proxy Statement/Prospectus.
20
<PAGE>
BACKGROUND AND REASONS FOR THE MERGER
Over the last several years, the Bank has attempted to expand its customer
base and market share by opening branch offices and acquiring other
institutions in selected markets in the Houston area. These activities have
required significant capital investment which the Bank has financed through
its cash flow and equity offerings. As the banking industry in the Houston
area has undergone significant consolidation over the last several years, the
opportunities to acquire other institutions have required more capital.
Moreover, this consolidation has brought many larger banking institutions into
the markets served by the Bank. These larger banking institutions have greater
access to services and technology than the Bank. As a result, the Bank is
experiencing greater competition, while at the same time requiring additional
capital to expand its operations. While the Bank Board had never solicited
offers to sell the Bank or its assets, the Bank Board had not ruled out the
possibility of combination with a larger banking institution which would allow
the shareholders of the Bank to experience greater value through the access
that such larger institution would have to capital, services and technology.
On January 30, 1997, J. Nolan Bedford, President and Chief Executive Officer
of the Bank, and Maurice L. Junod, Vice Chairman and Chief Operating Officer
of the Bank, were approached by Walter E. Johnson, Chairman of the Board and
Chief Executive Officer of the Company, and Paul B. Murphy, Jr., President of
SW Bank, about the possible merger of the Bank with SW Bank in exchange for
shares of Company Common Stock. Messrs. Bedford and Junod then met with Adolph
A. Pfeffer, Jr., Chairman of the Bank Board, to discuss the proposal.
Thereafter, Messrs. Pfeffer, Bedford and Junod met with Messrs. Johnson and
Murphy in several meetings to further define the potential acquisition and to
develop a framework for the offer by the Company. On April 4, 1997, the
representatives of the Bank presented the proposed offer to the Executive
Committee of the Bank Board which determined that the proposed offer should be
presented to the entire Bank Board.
The framework of the proposed transaction between the Bank and the Company
was presented to the Bank Board at a special meeting held on April 11, 1997.
After reviewing the offer, the Bank Board formed the Southwest Bank
Acquisition Special Committee (the "Special Committee") to determine whether
to proceed with the proposed transaction, and if the decision was to proceed
with the transaction, to negotiate the terms of the proposed transaction and
produce a recommendation for the Bank Board with regard to the transaction.
The Special Committee was comprised of Robert J. Adam, Anan Golub, Robert G.
Pond, Robert A. Skilton and Weems Turner, who are all independent directors of
the Bank. The Bank Board then approved engaging Brown, Parker & Leahy, L.L.P.
("Brown, Parker") as the Bank's legal counsel for the negotiations with the
Company and approved hiring Meeks as the financial advisor to the Bank Board
and the Bank in connection with the proposed transaction.
The Special Committee held its first meeting on April 14, 1997. The Special
Committee confirmed the engagement of Brown, Parker and Meeks to assist the
Special Committee in connection with analyzing and negotiating the proposed
transaction. The Special Committee reviewed the terms of the proposed
transaction as presented to the Bank Board and specifically discussed the
merits of accepting stock versus cash in the transaction, including the
potential for appreciation in value in a stock transaction and the tax-free
nature of the exchange. The Special Committee then discussed the trading risks
involved with holding the Company's Common Stock (e.g., a NASDAQ stock with a
limited trading volume). Thereafter, the Special Committee discussed the
possibility of receiving any additional offers and the responsibilities of the
Special Committee if such additional offers were received. With the assistance
of Meeks, the Special Committee generally discussed the factors and
considerations to be addressed in determining the fair value of the Bank and
whether the price proposed by the Company was within the range of fair values
for the Bank. The factors that were discussed included calculations of
multiples of earnings, the book value of the respective banking institution
and comparable banking institutions and a comparison of the two entities on
both a stand-alone basis and on a combined basis. The Special Committee made
an initial decision to proceed with the negotiation of the proposed
transaction in order to more fully develop the terms of the offer.
The Special Committee held its next meeting on April 18, 1997, and evaluated
the negotiation process to that date. Charles D. Powell of Brown, Parker
presented the Special Committee with a summary of the initial
21
<PAGE>
draft of the Merger Agreement and explained various sections in detail,
including the representations and warranties, the covenants, the breakup fee,
and termination rights. The Special Committee expressed concern that the
restrictive covenants upon the daily business activities of the Bank were too
limiting and should be raised to higher levels in order to allow the Bank to
operate as usual during the negotiation process. The Special Committee agreed
that the breakup fee of $2 million requested by the Company if the Bank did
not consummate the transaction was too high and asked that the amount be
reduced to a more reasonable level. The Special Committee also reviewed the
Bank's due diligence process regarding the Company.
The Special Committee also reviewed the issue of the employment agreements
for senior management of the Bank. The Special Committee agreed that Messrs.
Bedford and Junod should negotiate those contracts separate from the overall
transaction but that the terms of the employment contracts should be made
known to the Special Committee and the Bank Board in order for the Special
Committee and the Bank Board to determine whether the transaction, as a whole,
will be fair to the shareholders of the Bank.
On April 22, 1997, the Bank Board and the Special Committee both met to
update the respective members on the progress of the transaction. The Bank and
the Company had not yet reached agreement on the terms of a definitive Merger
Agreement, but both sides were moving forward in the process and refining the
Merger Agreement. Significant open issues included the Company bearing the
cost of extending liability insurance for the directors of the Bank throughout
the period of the statute of limitations and reduction of the breakup fee to
an acceptable level for the Bank.
The Special Committee convened again on April 23, 1997, and Mr. Adam
reported on the progress of the negotiations. The negotiations remained
focused on the breakup fee, the representations and warranties of the parties,
the covenants restricting the activities of the Bank, and the covenant by the
Company to refrain from any other material transactions during the period
prior to Closing. Mr. Adam reported that the parties had tentatively agreed
upon a new breakup fee of $500,000 plus expenses, which were limited to
$400,000.
The Special Committee then received a fairness opinion report (the
"Opinion") from Meeks. Meeks' general conclusions in the Opinion were that the
offer from the Company was fair to the shareholders of the Bank and should be
accepted by the Bank.
On April 25, 1997 the Special Committee met to conclude its analysis and
review of the transaction. Mr. Adam presented an analysis of the SW Bank's CRA
Compliance Report and discussed SW Bank's fair lending issues. The Special
Committee agreed that there were no areas of concern regarding those issues
and that the Special Committee was comfortable with SW Bank's compliance in
those areas. The Special Committee then heard a report of the due diligence
process of reviewing SW Bank's loan practices. The Special Committee was
impressed by the high credit quality of the loans at SW Bank and the
experience and knowledge of the credit officers at SW Bank. After further
discussion on SW Bank's loan practices, the Special Committee noted that SW
Bank had a very different customer base and a larger number of higher net
worth clients than the Bank. The Special Committee agreed that it was
comfortable with the lending philosophy of SW Bank.
The next topic at the meeting was a discussion regarding the insurance
coverage to be provided to the directors of the Bank throughout the period of
the statute of limitations. The Special Committee agreed that the coverage
would be set for four years and that the legal fee element of the termination
fee would be capped at $125,000.
22
<PAGE>
After further discussion, the Special Committee unanimously adopted a
resolution recommending the adoption of the Merger Agreement by the Bank Board
and stating that the terms and conditions of the Merger Agreement were fair to
the shareholders of the Bank (collectively, the "Recommendation"). All of the
material factors, which were considered as a whole by the Bank Board in
accepting the Company's offer were as follows:
. The Exchange Ratio would result in a premium to the shareholders of the
Bank for their shares which was comparable to premiums in other similar
transactions.
. The increase in liquidity offered to the shareholders of the Bank.
. The ability to consummate the transaction as a tax-free merger.
. The Opinion of Meeks.
. The complementary nature of the Bank's and the Company's respective
businesses and business practices.
. The strength of the Company's management and the potential of aligning
the Bank with the premier independent bank in Houston, Texas.
. The efficiencies and accretive benefits of operating the Bank and SW Bank
as a combined entity.
. The potential for new business and an expanded client base of the
combined entity.
. The investments in technology by the Company and the benefits such
investments would bring to the combined entity.
On April 28, 1997 the Bank Board convened a meeting to review the
Recommendation and to consider the transaction. All directors were present at
the meeting. Each director of the Bank had received a copy of the
Recommendation and the most recent draft of the Merger Agreement prior to the
meeting. At the meeting, Mr. Adam presented the Recommendation and discussed
with the Bank Board the Special Committee's reasons for accepting the offer by
the Company. The Bank Board, after a discussion of the merits of the Merger
Agreement, unanimously voted to accept the Merger Agreement and directed Mr.
Bedford to execute the Merger Agreement on behalf of the Bank. The Bank Board
agreed that accepting the Merger Agreement and effecting the Merger were both
in the best interests of the Bank and its shareholders.
FOR REASONS SET FORTH ABOVE, THE BANK BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AS FAIR TO AND IN THE BEST INTERESTS OF THE BANK'S
SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS OF THE BANK VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
OPINION OF THE BANK'S FINANCIAL ADVISOR
In April, 1997 the Bank retained Meeks, an investment banking firm located
in Austin, Texas, on the basis of its experience, to render the Opinion
regarding the Merger to the Bank Board. Meeks has extensive experience in
consulting for the banking industry, including the appraisal and valuation of
banking institutions and their securities in connection with mergers and
acquisitions, having participated in the completion of over ten mergers and
acquisitions. Meeks has familiarity with and involvement with the banking
industry nationwide, as well as familiarity with the Texas market and recent
transactions in this market, with the owner, Charles T. Meeks, having served
as a banker for 38 years and a bank consultant for eight years. Meeks reviewed
the negotiated terms of the Merger Agreement, including corporate governance
matters. The Bank paid Meeks a fee of $21,500 in connection with its services
relating to the Meger and the rendering of the Opinion.
On April 23, 1997 and in connection with its consideration of the Merger
Agreement, Meeks issued to the Bank Board its opinion (the "Opinion"), that
the terms of the Merger as provided in the Merger Agreement are fair and
equitable, from a financial perspective, to the Bank and its shareholders. The
Opinion was based upon conditions as they existed on April 23, 1997; however,
the Opinion was reaffirmed by Meeks as of the date of
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this Proxy Statement/Prospectus. A copy of the Opinion is attached as Appendix
B to this Proxy Statement/Prospectus and should be read in its entirety by the
Bank's shareholders. The Opinion does not constitute an endorsement of the
Merger or a recommendation to any shareholder as to how such shareholder
should vote in connection with the approval of the Merger and the Merger
Agreement.
In rendering the Opinion, Meeks reviewed certain publicly available
information concerning the Bank, the Company and SW Bank. Meeks also
considered other nonpublic information and factors in making its evaluation.
In arriving at the Opinion, Meeks reviewed: (i) the Merger Agreement; (ii) the
most recent audited balance sheets and income statements of the Bank; (iii)
the most recent listing of the Bank's marketable securities showing rate,
maturity and market value as compared to book value; (iv) the Bank's internal
loan classification list; (v) the 1997 budget and performance to date of the
Bank; (vi) the minutes of meetings of the Bank Board and special committees
thereof; (vii) the most recent monthly report of the Bank Board; (viii) the
analysis of loan loss reserve adequacy for the Bank; (ix) market conditions
and current trading levels of the Bank Common Stock; (x) information regarding
lawsuits in which the Bank is a defendant; (xi) information regarding real
estate owned and leased by the Bank, and (xii) other information as supplied
by the Bank. Meeks also reviewed all of the above items with regard to the
Company and SW Bank. Reviews were conducted primarily onsite at the applicable
corporate headquarters.
In reaching the Opinion, Meeks analyzed the total purchase price on a fair
market value basis using standard evaluation techniques (as discussed below)
including comparable sales multiples (market value), net present value, return
on investment and the price as a percentage of total assets based on certain
assumptions of projected growth, earnings and dividends. Meeks also
considered, as one of the methods of determining the fairness of the
transaction, the financial projections for both the Bank and the Company,
compared to the projected earnings per share and equity per share following
the Merger.
In performing its analysis, Meeks relied upon financial projections for the
Bank which were prepared and furnished by management of the Bank and certain
financial projections made by Meeks. Meeks also relied on financial
projections for the Company made by Meeks following discussions with the
management of the Company and a review of the financial information supplied
by management. The internal management projections provided to Meeks in
connection with its review of the Merger are not publicly disclosed, as they
were not prepared with a view towards public disclosure. The projections were
based on reasonable assumptions which are reasonably believed by management
and which are inherently uncertain, including without limitation, factors
related to general economic and competitive conditions. Accordingly, actual
results could vary significantly from those set forth in such projections.
In addition, Meeks discussed with management of the Bank and the Company the
relative operating performance and future prospects of each organization,
primarily with respect to the current level of their earnings and future
expected operating results, giving weight to Meeks' assessment of the future
of the banking industry and each organization's performance within the
industry. Meeks also extensively discussed with management of the Bank and the
Company the future prospects for the Company following the Merger.
Many variables affect the value of banks, not the least of which is the
uncertainty of future events, so that the relative importance of the valuation
variables fluctuates in different situations, with the result that appraisal
theorists argue about which variables are the most appropriate. However, most
appraisers agree that the primary financial variables to be considered are
earnings, equity, dividends or dividend-paying capacity and asset quality. In
addition, in most instances, if not all, value is further tempered by non-
financial factors such as marketability, voting rights, block size, history of
past sales of the banking company's stock, nature and relationship of the
other shareholdings in the bank, and special ownership or management
considerations.
NET ASSET VALUE. Net asset value is the value of the net equity of a bank,
including every kind of property and value. This approach normally assumes
liquidation on the date of appraisal with the recognition of securities gains
or losses, real estate depreciation or appreciation, adjustments to the loan
loss reserve, discounts to the loan portfolio and changes in the net value of
other assets. As such, net asset value is not the best approach to
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use when valuing a going concern, because it is based on historical costs and
varying accounting methods. Even if the assets and liabilities are adjusted to
reflect prevailing prices and yields (which is often of limited accuracy
because readily available data is often lacking) this method still results in
a liquidation value for the concern. Furthermore, since this method does not
take into account the values attributable to a going concern such as the
interrelationship among a company's assets and liabilities, customer
relations, market presence, image and reputation, and staff expertise and
depth, Meeks has given limited weight to the net asset value method of
valuation in its analysis.
MARKET VALUE. Market value is generally defined as the price, established on
an "arms-length" basis, at which knowledgeable, unrelated buyers and sellers
would agree. The market value is frequently used to determine the price of a
minority block of stock when both the quantity and quality of the comparable
data are deemed sufficient. However, the relatively limited trading market for
the stock of the banking company being appraised may require alternative
methods for comparative pricing purposes. Such is the case when valuing the
Bank Common Stock. The hypothetical market value for a small bank with a
thinly trading market for its stock is normally determined by comparison to
the average price-to-earnings, price-to-equity and dividend yield of local or
regional publicly-traded bank issues, adjusting for significant differences in
financial performance criteria and for any lack of marketability or liquidity.
The market value in connection with the evaluation of control of a bank is
determined by the previous sales of banks in the state or region. In valuing a
business enterprise, when sufficient comparable trade data is available, the
market value deserves greater weight than the net asset value and similar
emphasis as to investment value discussed below.
Meeks accesses files concerning the prices paid for banking institutions
nationwide. The information includes transactions involving Texas banking
organizations which sold for 100% common stock during 1996 and for the five
prior years. The information provides comparable pricing and financial
performance data for banking organizations sold or acquired. The information
presents averages of financial performance and purchase price levels, thereby
facilitating a valid purchase price analysis. In analyzing the transaction
value of the Merger, Meeks considered the market approach and evaluated price-
to-equity and price-to-earnings multiples of transactions in Texas during
1996.
COMPARABLE SALES MULTIPLES. Meeks calculated an "Adjusted Book Value" of
$11.41 per share of Bank Common Stock based on the Bank's April 23, 1997
shareholders' equity and the average price-to-equity multiple of 1.80x for
Texas bank transactions during 1996. This calculation result was then compared
to the transaction value of $12.11 per share, which is 1.90x the book value
per share of the Bank Common Stock. (The transaction value of $12.11 per share
is equal to 0.625 multiplied by $19.375, which was the market price per share
of the Company Common Stock at the time of the determination of the Exchange
Ratio.) Meeks calculated an "Adjusted Earnings Value" of $8.00 per share based
on the Bank's estimated 1997 earnings and the average price-to-earnings
multiple of 11.43x for Texas bank transactions during 1996. Meeks then
compared this to the transaction price of $12.11 per share, which is 17.28x
the Bank's estimated 1997 earnings per share. The financial performance
characteristics of the banking organizations in Texas may vary substantially
in many cases from those of the Bank. When the variance is significant for
relevant performance factors, adjustment to the price multiples are
appropriate when comparing them to the transaction value.
INVESTMENT VALUE. Investment value is sometimes referred to as the income
value or earnings value. One frequently used investment value method estimates
the present value of a bank's future earnings. Another popular investment
value method determines the level of current annual benefits (earnings,
dividends, etc.), and then capitalizes one or more of the benefit types using
an appropriate capitalization rate such as an earnings or dividend yield. The
investment value methods which were analyzed in connection with this
transaction were the net present value analysis and the return on investment
analysis, which are discussed below.
NET PRESENT VALUE ANALYSIS. The investment or earnings value of any banking
organization's stock is an estimate of the present value of the future
benefits, usually earnings or dividends, which will accrue to the stock. An
earnings value is calculated using an annual future earnings stream over ten
years normally and the residual value of the earnings stream after ten years,
using an appropriate capitalization rate (the net present value
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discount rate). Meeks' computations were based on an analysis of the banking
industry, the economic and competitive situations in the Bank's market area,
its current financial condition and historical levels of growth and earnings.
Using a net present value discount rate of 12%, the "Net Present Value of
Future Earnings" equaled $5.40 per share of Bank Common Stock compared to the
transaction value of $12.11 per share.
RETURN ON INVESTMENT ANALYSIS. Return on investment analysis (ROI) analyzes
the ten-year ROI of an equity investment at the fair market value of $9.00 per
share for Bank Common Stock compared to a liquidation at projected book value
ten years forward. This ROI analysis provides a benchmark for assessing the
validity of the value of a majority block of stock. The ROI analysis is one
approach to valuing a going concern, and is directly impacted by the earnings
stream, dividend payout levels and levels of debt, if any. Other financial and
nonfinancial factors indirectly affect the ROI; however, these factors more
directly influence the level of ROI an investor would demand from an
investment in a majority block of stock of a specific bank at a certain point
in time. The ROI assuming liquidation of the Bank Common Stock at book value
in ten years equaled 7.89%, which compares unfavorably to the ROI generated in
comparable transactions.
TRANSACTION VALUE AS A PERCENTAGE OF TOTAL ASSETS. A price level indicator,
the transaction value as a percentage of total assets, may be used to confirm
the validity of the transaction value. The transaction value as a percentage
of total assets facilitates an accurate price level comparison with comparable
banking organizations, regardless of the differing levels of equity capital
and earnings. In this instance the transaction value as a percentage of total
assets of the Bank as of April 23, 1997 was 14.54%, which was well within the
acceptable range and compares very favorably to the average of 16.01%
generated in comparable transactions.
Finally, another test of appropriateness for the transaction value of a
majority block of stock is the net present value-to-transaction value ratio.
Theoretically, an earnings stream may be valued through the use of a net
present value analysis. In Meeks' experience with majority block community
bank stock valuations, it has determined that a relationship does exist
between the net present value of an "average" community banking organization
and the transaction value of a majority block of the banking organization's
stock. The net present value-to-transaction value ratio is 45% for the Bank,
which compares very favorably to the percentages generated in comparable
transactions. There are many other factors to consider, when valuing a going
concern, which do not directly impact the earnings stream and the net present
value but which do exert a degree of influence over the fair market value of a
going concern. These factors, include, but are not limited to, the general
condition of the industry, the economic and competitive situations in the
market area and the expertise of the management of the organization being
valued.
PROJECTED IMPACT ON THE BANK'S SHAREHOLDERS. Meeks recognized this
transaction as a merger rather than a purchase. An accretive value analysis
was performed, thus giving consideration to the levels of book value and
earnings per share of the Company over the next five years following
completion of the Merger. To justify the fairness of the transaction for the
Bank's shareholders, it is important to project, based upon realistic
projections of future performance, a positive impact for the Bank's
shareholders. These projections developed by Meeks support the Opinion as to
the fairness of the transaction to the Bank's shareholders from a financial
point of view. This analysis does not address future shareholder transactions
involving the Company Common Stock after consummation of the transaction.
Neither the Bank nor the Company imposed any limitations upon the scope of
the analysis performed by Meeks in formulating the Opinion. In rendering the
Opinion, Meeks did not independently verify the asset quality and financial
condition of the Bank, the Company or SW Bank, but instead relied upon the
data provided by or in behalf of the Bank, the Company and SW Bank to be true
and accurate in all material aspects.
For its services as an independent financial analyst for the Merger,
including the rendering of the Opinion referred to above, the Bank has paid a
fee to Meeks. Prior to being retained for this assignment, Meeks provided
other professional but non-investment banking services to the Bank. The
revenues derived from such services were insignificant when compared to Meeks'
total gross revenues.
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MERGER CONSIDERATION
SHARES OF COMPANY COMMON STOCK. Except with respect to fractional shares as
described below, if the Merger Agreement is approved and the Merger becomes
effective, each share of Bank Common Stock outstanding immediately prior to
the Effective Time will be automatically converted into 0.625 of a share of
Company Common Stock. If no Bank Stock Options are exercised prior to the
Effective Time, the 2,670,000 outstanding shares of Bank Common Stock will be
converted into a total of 1,668,750 shares of Company Common Stock at the
Effective Time. Up to 190,625 additional shares of Company Common Stock could
be issued at the Effective Time to holders of the Bank Stock Options if such
options are exercised prior to the Effective Time. At the Effective Time, each
unexercised Bank Stock Option will be converted into a fully-exercisable
option to purchase Company Common Stock as described under "--Bank Stock
Options."
CASH IN LIEU OF FRACTIONAL SHARES. The Company will not issue any fractional
shares of Company Common Stock in the Merger. The Company will pay cash to
each holder of Bank Common Stock who would otherwise be entitled to receive a
fractional share of Company Common Stock. The cash payment will be equal to
the product of the fractional part of the share of Company Common Stock
multiplied by the average closing sales price per share of Company Common
Stock as reported by The Wall Street Journal over the five consecutive trading
day period ending on the trading day immediately preceding the Closing Date.
BANK STOCK OPTIONS
In accordance with the terms of the Bank Stock Options, at the Effective
Time, each Bank Stock Option (i) will become fully exercisable as to the total
number of shares subject thereto, and (ii) be automatically converted into an
option to purchase a number of shares of Company Common Stock equal to the
total number of shares subject to such Bank Stock Option multiplied by 0.625,
at an exercise price per share equal to the exercise price per share of such
Bank Stock Option divided by 0.625. The Company shall enter into an agreement
with each holder of a Bank Stock Option whereby the parties acknowledge the
foregoing conversion and acknowledge the continuation of the other terms of
the Bank Stock Options, which will remain substantially the same, except that
no "dividend credits" (as defined in the Bank's Stock Option Plan) shall be
accrued or paid with respect to any Bank Stock Option after the Effective
Time. See "--Interests of Certain Persons in the Merger."
DISSENTERS' RIGHTS
The following is a brief summary of the rights of dissenting shareholders
pursuant to Texas law and, although it discusses all material aspects of such
rights, it does not purport to be a complete statement thereof. The summary is
qualified in its entirety by reference to Articles 5.11 through 5.13 of the
TBCA, which are set forth in full in Appendix C to this Proxy
Statement/Prospectus.
Record holders of Bank Common Stock will have the right to dissent with
respect to the Merger and, subject to certain conditions, receive a cash
payment equal to the fair value of their shares under the TBCA. ANY
SHAREHOLDER WHO WISHES TO ASSERT HIS OR HER DISSENTER'S RIGHTS MUST CAUSE THE
BANK TO RECEIVE, BEFORE THE VOTE ON THE MERGER IS TAKEN, WRITTEN NOTICE OF HIS
OR HER INTENT TO DEMAND PAYMENT FOR HIS OR HER SHARES IF THE MERGER IS
EFFECTED AND MAY NOT VOTE ANY OF HIS OR HER SHARES IN FAVOR OF THE MERGER.
VOTING AGAINST THE MERGER IS NOT SUFFICIENT, IN AND OF ITSELF, FOR A
SHAREHOLDER TO ASSERT HIS OR HER DISSENTER'S RIGHTS.
In the event the Bank's shareholders approve the Merger at the Special
Meeting, the Bank is required to deliver or mail a written notice to all
shareholders who are entitled to demand payment for their shares no later than
10 days after the Effective Time. Any shareholder to whom a notice is sent by
the Bank and who desires to exercise his or her dissenter's rights must,
within 10 days from the delivery or mailing of the Bank's notice, make written
demand on the Bank for the payment of the fair value of his or her shares.
Pursuant to the TBCA, the fair value of the shares is the value thereof as of
the day immediately preceding the Special Meeting, excluding any appreciation
or depreciation in anticipation of the Merger. The demand must state the
number of shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder who does not demand payment for
his or her shares within the 10 day period is bound by the Merger.
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Upon receiving a demand for payment from a dissenting shareholder, the Bank
must make an appropriate notation of the demand in its shareholder records.
Within 20 days after making such demand, the dissenting shareholder must
submit his or her share certificates to the Bank for notation thereon that
demand has been made.
Within 20 days after the Bank's receipt of a demand from a dissenting
shareholder, the Bank must deliver or mail to the shareholder a written notice
that either accepts the amount claimed in the shareholder's demand as the fair
value of the shares or sets forth the Bank's estimate of the fair value of the
shares. If the shareholder's amount is accepted, the notice must state that
the Bank will pay that amount to the shareholder within 90 days after the date
the Merger was effected, upon surrender of the certificates for the
shareholder's shares, duly endorsed. If the notice includes the Bank's
estimate of the fair value of the shares, such notice must also include an
offer to pay the amount of that estimate to the shareholder within 90 days
after the date the Merger was effected, upon receipt of notice within 60 days
after that date from the shareholder that he or she agrees to accept that
amount and surrenders the certificates for the shareholder's shares. The
failure of a dissenting shareholder to submit his or her share certificates
for notation terminates such shareholder's right to dissent, at the option of
the Bank, unless a court of competent jurisdiction for good and sufficient
cause directs otherwise.
If, within 60 days after the date on which the Merger was effected, the
value of the shares is agreed upon by the Bank and the dissenting shareholder,
then payment for the shares must be made by the Bank to the shareholder within
90 days after the date on which the Merger was effected, upon the
shareholder's surrender of the certificates, duly endorsed. Upon payment of
the agreed value, the shareholder will cease to have any interest in the
shares or the Bank.
If, however, within 60 days after the date on which the Merger was effected,
the dissenting shareholder and the Bank do not agree upon the value of the
shares, then either may, within an additional 60 days after the expiration of
the first 60 day period, file a petition in any court of competent
jurisdiction in Harris County, Texas, asking the court to determine the fair
value of the shareholder's shares. If the petition is filed by the
shareholder, the Bank must, within 10 days after service of the petition upon
it, file in the office of the clerk of the court a list containing the names
and addresses of all shareholders who have demanded payment for their shares
and with whom agreements as to the value of their shares have not been reached
by the Bank. If the petition is filed by the Bank, then the petition must be
accompanied by such list. The clerk of the court then gives notice of the time
and place fixed for the hearing by the court of the petition by registered
mail to the Bank and each of the shareholders named on the list at the
addresses stated therein, and the shareholders as notified and the Bank are
bound by the final judgment of the court.
After the hearing of the petition, the court determines the shareholders who
have complied with the foregoing procedure and become entitled to the
valuation of and payment for their shares and appoints one or more appraisers
to determine that value. The appraisers may examine the books and records of
the Bank and are required to afford a reasonable opportunity to the interested
parties to submit pertinent evidence as to the value of the shares. The
appraisers then determine the fair value of the shares of all of the
shareholders entitled to payment for their shares and file their report of
that value in the office of the clerk of the court, who gives notice of such
filing to the parties in interest. After hearing any exceptions to the report,
the court then determines the fair value of the shares of all the shareholders
entitled to payment and directs the Bank to pay that value, together with
interest thereon, beginning 91 days after the date on which the Merger was
effected until the date of the judgment, to the shareholders entitled to
payment, upon surrender of the certificates for their shares, duly endorsed.
Upon payment of the judgment, the dissenting shareholders will cease to have
any interest in those shares or the Bank. The court allows the appraisers a
reasonable fee as court costs, and all court costs are allotted between the
parties in a manner as the court determines to be fair and equitable.
Any shareholder who has demanded payment for his or her shares may withdraw
such demand at any time before payment for the shares or before any petition
is filed seeking a determination of the fair value of the shares and, with the
consent of the Bank, after any such petition is filed. If (i) the demand is
withdrawn, (ii) the Bank has terminated the shareholder's rights under Article
5.12 of the TBCA because of the failure of the shareholder to submit the
certificates for his other shares for notation of demand, (iii) no petition is
timely filed, or (iv) after hearing the petition, the court determines the
shareholder is not entitled to the relief provided by Article 5.12
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of the TBCA, then the shareholder is conclusively presumed to have approved
the Merger and is bound thereby, and his or her status as a shareholder is
restored and he or she is entitled to receive any dividends paid to
shareholders in the interim.
In the absence of fraud, the remedy provided by Article 5.12 of the TBCA to
a shareholder objecting to the proposed Merger is the exclusive remedy for the
recovery of the value of his or her shares and, if the Bank complies with
Article 5.12, then any shareholder who fails to comply with the requirements
of Article 5.12 is not entitled to bring suit for the recovery of the value of
his or her shares or money damages to the shareholder with respect to the
Merger.
SURRENDER OF CERTIFICATES
Promptly following the Effective Time, the Company's transfer agent,
American Securities Transfer & Trust, Inc., acting in the capacity of exchange
agent for the Company (the "Exchange Agent"), will mail to each holder of
record of shares of Bank Common Stock a form of letter of transmittal,
together with instructions for the exchange of such holder's stock
certificates for a certificate representing the shares of Company Common Stock
to which he or she is entitled.
SHAREHOLDERS OF THE BANK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender to the Exchange Agent of one or more certificates for Bank
Common Stock, together with a properly completed letter of transmittal, there
will be issued and mailed to the holder a certificate representing the number
of whole shares of Company Common Stock to which such holder is entitled and,
if applicable, a check for the amount representing any fractional share
(without interest). A certificate for Company Common Stock may be issued in a
name other than the name in which the surrendered certificate is registered
only if (i) the certificate surrendered is properly endorsed and is otherwise
in proper form for transfer and (ii) the person requesting the issuance of
such certificate either pays to the Exchange Agent any transfer or other taxes
required by reason of the issuance of a certificate for such shares in a name
other than the registered holder of the certificate surrendered or establishes
to the satisfaction of the Exchange Agent that such taxes have been paid or
are not due.
All Company Common Stock issued pursuant to the Merger will be deemed issued
as of the Effective Time. No dividends in respect of the Company Common Stock
with a record date after the Effective Time will be paid to the former
shareholders of the Bank entitled to receive certificates for shares of
Company Common Stock until such shareholders surrender their certificates
representing shares of Bank Common Stock. Upon such surrender, there shall be
paid to the shareholder in whose name the certificates representing such
shares of Company Common Stock are issued any dividends the record and payment
dates of which shall have been after the Effective Time and before the date of
such surrender. After such surrender, there shall be paid to the person in
whose name the certificate representing such shares of Company Common Stock is
issued, on the appropriate dividend payment date, any dividend on such shares
of Company Common Stock which shall have a record date after the Effective
Time, as the case may be, and prior to the date of surrender, but a payment
date subsequent to the surrender. In no event shall the persons entitled to
receive such dividends be entitled to receive interest on amounts payable as
dividends.
CONDITIONS TO THE MERGER
The effectiveness of the Merger is subject to the satisfaction as of the
Closing Date or, if permissible under the Merger Agreement, waiver of a number
of conditions.
CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES. Conditions to the obligations
of both parties to effect the Merger include but are not limited to the
following: (i) the approval of the Merger Agreement by the requisite vote of
the Bank's shareholders, (ii) the receipt of all requisite regulatory
approvals; and (iii) the absence of any
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pending or threatened suits, claims, actions, investigations or proceedings
challenging or in any manner seeking to restrict or prohibit the transactions
contemplated by the Merger Agreement or seeking to obtain any damages against
any person as a result of the transactions contemplated by the Merger
Agreement.
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. Conditions to the obligation
of the Company to effect the Merger include but are not limited to the
following: (i) the receipt by the Company of a certificate from the Bank's
chief executive officer certifying compliance with the Bank's representations,
warranties and covenants and confirming the absence of any pending or
threatened litigation against the Bank that, when aggregated with any breaches
of representations and warranties, would have a material adverse effect on the
Bank; (ii) the absence of any general banking moratorium or general suspension
of payments in respect of banks in the United States or any event that
significantly and adversely affects the normal functioning or operation of the
convertibility of major European currencies into United States dollars; (iii)
the holders of not more than 10% of the outstanding shares of Bank Common
Stock having taken action entitling them to exercise dissenters' rights of
appraisal; (iv) the receipt by the Company of an opinion of counsel to the
Company at the Closing regarding certain federal income tax consequences of
the Merger to the Company and SW Bank; (v) the execution and delivery by
holders of the Bank Stock Options of agreements confirming the conversion of
such options into options to purchase Company Common Stock as described under
"--Bank Stock Options;" (vi) the qualification of the Merger as a "pooling of
interests" for financial accounting purposes and the receipt by the Company of
appropriate opinions from Coopers & Lybrand L.L.P. and Grant Thornton LLP to
that effect; (vii) the receipt by the Company of agreements substantially in
the form of Exhibit A to the Merger Agreement from each of the "affiliates" of
the Bank; (viii) the receipt by the Company of releases from the directors and
officers of the Bank; and (ix) the receipt by the Company of an opinion of
counsel from Brown Parker & Leahy L.L.P., special counsel to the Bank.
CONDITIONS TO THE OBLIGATION OF THE BANK. Conditions to the obligations of
the Bank to effect the Merger include but are not limited to the following:
(i) the receipt of an opinion of counsel to the Bank at the Closing regarding
certain federal income tax consequences of the Merger to the Bank shareholders
as described under "--Certain Federal Income Tax Consequences," (ii) the
Company shall have entered into the Employment Agreements, (iii) the receipt
by the Bank of a certificate from the Company's chief executive officer,
president or any executive vice president, certifying compliance with the
Company's representations, warranties and covenants, and (iv) the receipt by
the Bank of an opinion of Vinson & Elkins L.L.P., counsel to the Company and
SW Bank.
Those conditions to consummation of the Merger which are required by law,
such as the approval of the Merger Agreement by the requisite vote of the
Bank's shareholders and the receipt of all requisite regulatory approvals, may
not be waived by either party to the Merger Agreement. If any other condition
to the consummation of the Merger which is material to the Bank shareholders,
such as receipt of the opinion that the Merger will constitute a tax free
reorganization, is not fulfilled, the Bank Board will call another special
meeting of the Bank's shareholders requesting reapproval of the Merger
Agreement with such fact being disclosed to the Bank's shareholders in the
proxy solicitation materials relating to such meeting. For a complete
description of all of the conditions to the obligations of the parties to
effect the Merger, see Article VI of the Merger Agreement.
REGULATORY APPROVALS
The Merger is subject to prior approval by the OCC under the National Bank
Act. The Merger is also subject to certain filing and other requirements of
the Texas Department of Banking and the Federal Reserve Board. The Company has
filed an application with the OCC requesting approval of the Merger; however,
there can be no assurances that the necessary regulatory approval will be
obtained or as to the timing of or conditions placed on such approval.
The approval of any application merely implies satisfaction of regulatory
criteria for approval, which does not include review of the Merger from the
standpoint of the adequacy of the consideration to be received by, or fairness
to, shareholders. Regulatory approvals do not constitute an endorsement or
recommendation of the proposed Merger.
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The Company and the Bank are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for the Merger
to become effective other than those described above. The parties currently
intend to seek to obtain any other approval and to take any other action that
may be required to effect the Merger. There can be no assurance that any
required approval or action can be obtained or taken prior to the Special
Meeting. The receipt of all necessary regulatory approvals is a condition to
effecting the Merger. See "--Conditions to the Merger" and "--Termination of
the Merger Agreement."
CONDUCT OF BUSINESS PENDING THE MERGER
BY THE BANK. The Merger Agreement requires the Bank to maintain the general
character of its business and conduct its business in the ordinary and usual
manner at all times prior to the Effective Time. In addition, without the
prior written consent of the Company, the Bank may not, among other things,
(i) make any loans or other extensions of credit to any borrower in excess of
$500,000; (ii) enter into any material agreement, contract or commitment
exceeding $50,000 (other than banking transactions in the ordinary course of
business); (iii) issue, sell or otherwise dispose of any shares of its capital
stock other than pursuant to the exercise of Bank Stock Options; (iv) sell or
otherwise dispose of any of its material assets or properties other than in
the ordinary course of business; (v) declare, set aside, make or pay any
dividend or other distribution with respect to its capital stock; (vi) amend
its Articles of Association or Bylaws; (vii) open or close any branch office;
or (viii) make any material change in its interest rate risk profile as of
March 31, 1997.
BY THE COMPANY. The Company is required (i) to conduct its consolidated
affairs only in the ordinary course of business consistent with prudent
banking practice and in accordance with applicable laws and its compliance,
loan and other policies; and (ii) to refrain from entering into any agreement
which would provide for the sale of the Company or its assets to another
entity pursuant to which the management of the acquiring or surviving entity
would be substantially different from that of the Company as of the date of
the Merger Agreement.
See Article V of the Merger Agreement for additional restrictions on the
conduct of the business of the Bank and the Company pending the Merger.
NO SOLICITATION
The Bank has agreed under the Merger Agreement that neither it nor any of
its directors, officers, employees or agents, will directly or indirectly
solicit, initiate, encourage or facilitate any Acquisition Proposal, or,
except as otherwise required in the opinion of Counsel to the Bank in order
for the Bank Board to fulfill its fiduciary duties to the Bank's shareholders,
participate in any negotiation in respect of or cooperate with any Acquisition
Proposal. If any third party makes an offer or inquiry to the Bank concerning
any Acquisition Proposal, the Bank is required to promptly disclose such offer
or inquiry (including the terms thereof) to the Company.
CERTAIN ADDITIONAL AGREEMENTS
THE BANK. The Bank has also agreed under the Merger Agreement to (i) if
requested by the Company, terminate or amend, effective as of the Effective
Time, certain employment, consulting, severance or similar agreements which
would otherwise extend past the Effective Time; (ii) establish such additional
accruals and reserves as may be necessary to conform the Bank's accounting and
credit loss reserve practices and methods to those of the Company with respect
to the conduct of the Bank's business after the Effective Time; and (iii)
cooperate with the Company in obtaining and delivering environmental
assessment reports on certain properties.
THE COMPANY. The Company has also agreed under the Merger Agreement to (i)
enter into the Employment Agreements; and (ii) indemnify the directors,
officers, employees and agents of the Bank against all losses, expenses,
claims, damages and liabilities in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on the fact that such
person is or was a director, officer, employee or agent of the Bank and
arising out of actions or omissions occurring prior to the Effective Time, in
each case to the fullest extent permitted under applicable law, and to provide
liability insurance for such purpose for a period
31
<PAGE>
of up to four years. For more information concerning the Employment
Agreements, see "--Interests of Certain Persons in the Merger."
For information concerning additional agreements and covenants of the Bank
and the Company, see Article V of the Merger Agreement.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) by mutual written consent of the parties; (ii) by either party if the
Merger has not become effective by October 31, 1997, unless the party seeking
to terminate is in default under the Merger Agreement; (iii) by either party
upon the expiration of 15 days after any governmental authority having
jurisdiction over the Merger indicates that it intends to deny or to refuse to
grant its approval (provided, that with respect to governmental authorities
other than the OCC or the Texas Banking Commissioner, the parties shall use
their reasonable efforts during such 15 day period to obtain the withdrawal of
such denial or refusal); (iv) by the Company upon the expiration of 30 days
after the date the Company has given notice to the Bank of the Bank's material
failure to satisfy any covenant or agreement in the Merger Agreement or of the
Bank's breach of representations and warranties which in the aggregate
represent a material adverse effect on the Bank (provided the Bank has not
corrected the grounds for such termination within such 30 day period); (v) by
the Bank upon the expiration of 30 days following the date that the Bank has
given written notice to the Company of the Company's or SW Bank's material
failure to satisfy any covenant or agreement contained in the Merger Agreement
or of the Company's breach of representations and warranties which in the
aggregate represent a material adverse effect on the Company (provided that
the Company has not corrected such grounds for termination within such 30 day
period); (vi) by either the Company or the Bank if the requisite approval of
the Bank's shareholders is not obtained at the meeting thereof or the Bank
Board has determined not to recommend approval of the Merger to the Bank's
shareholders in order to fulfill its fiduciary duty to such shareholders;
(vii) by the Company if there shall have occurred since March 31, 1997, any
change in or effect on the business of the Bank or any occurrence, development
or event of any nature that has had or may reasonably be expected to have,
together with all such other changes and effects, a material adverse effect on
the Bank; and (viii) by the Bank, if there shall have occurred since March 31,
1997, any change in or effect on the business of the Company or any
occurrence, development or event of any nature that has had or may reasonably
be expected to have, together with all such other changes and effects, a
material adverse effect on the Company. The Company may also terminate the
Merger Agreement if it advises the Bank in writing on or prior to July 15,
1997, that it disapproves of the results of the environmental inspections of
the Bank's properties because of material violations of environmental laws or
because estimated aggregate cleanup costs for such properties exceed $500,000;
provided, however, that the Bank shall have the opportunity to correct any
such violations or conditions to the Company's reasonable satisfaction prior
to August 31, 1997 in order to prevent such termination.
AMENDMENT OF MERGER AGREEMENT
The Merger Agreement may be amended by the parties thereto, pursuant to
action taken by their respective boards of directors or pursuant to authority
delegated by their respective boards of directors, at any time before or after
approval of the Merger Agreement by the Bank's shareholders; provided that,
after the Merger Agreement is approved by the Bank's shareholders, no
amendment can be made to the Merger Agreement that reduces the consideration
to be received by the Bank's shareholders in the Merger.
WAIVER OF PERFORMANCE OF OBLIGATIONS
Any of the parties to the Merger Agreement may, in writing, waive any of the
inaccuracies in the representations and warranties of the other party or
compliance by the other party with any of the covenants or conditions
contained in the Merger Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Merger Agreement provides, as a condition to the Bank's obligations
thereunder, that the Company shall have entered into the Employment Agreements
with J. Nolan Bedford and Maurice L. Junod. Mr. Bedford's
32
<PAGE>
Employment Agreement has a three year term with an annual salary of $177,575.
Mr. Bedford will also be entitled to normal salary increases, to be determined
in the sole discretion of the Company, and to be included in the Company's
employee bonus plan, stock option plan, 401(k) Plan and health insurance plan
in a manner comparable to SW Bank's other senior officers. Mr. Bedford will be
the senior officer of SW Bank in charge of all lending and personnel functions
and responsibilities over the Bank's present nine locations (which will become
branches of SW Bank). Mr. Bedford will also become a member of SW Bank's
Management Committee and Vice Chairman of SW Bank's Board of Directors.
Mr. Junod's Employment Agreement provides for an annual salary of $156,700.
He will also be entitled to normal salary increases, determined at the sole
discretion of the Company, and to participate in the Company's employee bonus
plan, stock option plan, 401(k) Plan and health insurance plan in a manner
comparable to SW Bank's other senior officers. Mr. Junod will report to Mr.
Bedford and will be the senior officer supervising all lending and personnel
functions and responsibilities over the Bank's present nine locations.
Messrs. Bedford and Junod each hold Bank Stock Options which will be
converted into options to purchase 52,500 shares of Company Common Stock at a
weighted average exercise price of $9.04 per share on the Effective Date of
the Merger, as described under "The Merger--Bank Stock Options." Based on the
closing price of the Company Common Stock of $27.625 per share quoted on the
NASDAQ National Market on June 30, 1997, the options held by each of Messrs.
Bedford and Junod would have a value of $975,713. The Bank Stock Options
currently held by Messrs. Bedford and Junod are currently exercisable as to
45% and 62%, respectively, of the underlying shares; however, upon the
Effective Date of the Merger, the options to purchase shares of Company Common
Stock into which such Bank Stock Options will be converted will become fully
exercisable in accordance with their terms.
As soon as practicable following the Effective Time, the Company intends to
increase the size of its Board of Directors by one member and to elect Adolph
A. Pfeffer, Jr. to fill the vacancy created by such increase. In addition, the
Company intends to cause the Board of Directors of SW Bank to be increased by
four members and to elect Adolph A. Pfeffer, Jr., Stanley D. Stearns, Jr., J.
Nolan Bedford and Timothy R. Brown as directors of SW Bank to fill the
vacancies created by such increase. None of the foregoing proposed director
elections is a condition to the consummation of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of the following opinions from Brown, Parker & Leahy, L.L.P.,
the Bank's counsel, as to the Federal income tax consequences of the Merger,
in form and substance satisfactory to the Bank, is a condition to the
consummation of the Merger:
(a) the proposed merger qualifies as a tax-free "reorganization" within
the meaning of Section 368(a) of the Code;
(b) the Company, the Bank and SW Bank will each be a party to that
reorganization;
(c) no gain or loss will be recognized to the shareholders of the Bank on
the receipt by them of shares of Company Common Stock in exchange for their
shares of Bank Common Stock, except to the extent they receive cash;
(d) the basis of the Company Common Stock received by the shareholders of
the Bank will be the same as the basis of the Bank Common Stock surrendered
in exchange therefor (reduced by the excess, if any, of the cash received
over the amount of gain recognized on the exchange); and
(e) the holding period of the Company Common Stock (including fractional
share interests, if any) received by shareholders of the Bank will include
the period during which the Bank Common Stock exchanged therefor was held,
provided the surrendered Bank Common Stock was held as a capital asset on
the date of the exchange.
The above opinion of counsel, which will be delivered on the Closing Date,
is filed as an exhibit to the Registration Statement. A further condition to
the consummation by the Company of the Merger is the receipt of additional
opinions of the Company's counsel, in form and substance satisfactory to the
Company, as to the Federal income tax consequences of the Merger as they
affect the Company and SW Bank.
33
<PAGE>
With respect to a holder of Bank Common Stock who dissents from the Merger
and receives cash for the value of his stock, it is believed that the Internal
Revenue Service will take the position that the cash payment constitutes a
distribution by the Bank in redemption of the dissenting shareholder's Bank
Common Stock and that the redemption (i) occurs immediately prior to the
Merger, and (ii) is separate and distinct from the Merger. Under the Internal
Revenue Service's position, a dissenting shareholder will be entitled to
capital gain or loss treatment (provided that the Bank Common Stock was held
as a capital asset on the date of redemption) with respect to his shares of
Bank Common Stock "redeemed" by the Bank only if such transaction does not
have the effect of the distribution of a dividend under Section 302 of the
Code. In determining whether the transaction has such effect, the constructive
ownership rules of Section 318 of the Code will be applied.
The foregoing discussion is only a summary of the tax consequences as
described above. An opinion of counsel only represents counsel's best legal
judgment and has no binding effect or official status of any kind, and no
assurance can be given that contrary positions may not be taken by the
Internal Revenue Service or a court considering the issues. Neither the Bank
nor the Company has requested or will request a ruling from the Internal
Revenue Service with regard to the federal income tax consequences of the
Merger.
THE ABOVE SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IS
NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING ON AN INDIVIDUAL BASIS.
IN ADDITION TO THE FEDERAL INCOME TAX CONSEQUENCES DISCUSSED ABOVE,
CONSUMMATION OF THE MERGER MAY HAVE SIGNIFICANT STATE AND LOCAL INCOME TAX
CONSEQUENCES WHICH ARE NOT DISCUSSED IN THIS PROSPECTUS-PROXY STATEMENT.
ACCORDINGLY, PERSONS CONSIDERING THE MERGER ARE URGED TO CONSULT THEIR TAX
ADVISORS WITH SPECIFIC REFERENCE TO THE EFFECT OF THEIR OWN PARTICULAR FACTS
AND CIRCUMSTANCES ON THE MATTERS DISCUSSED HEREIN.
RESALE OF COMPANY COMMON STOCK
The shares of Company Common Stock issuable to shareholders of the Bank upon
the Merger becoming effective have been registered under the Securities Act.
Such shares may be traded freely and without restriction by those shareholders
not deemed to be "affiliates" of the Bank or the Company as that term is
defined in the rules under the Securities Act. Persons who may be deemed to be
affiliates of the Bank generally include individuals or entities that control,
are controlled by or are under common control with, the Bank and may include
the executive officers and directors of the Bank as well as certain principal
shareholders of the Bank. Company Common Stock received by those shareholders
of the Bank who are deemed to be "affiliates" of the Bank may be resold
without registration as provided for by Rule 145 under the Securities Act (or
in the case of such persons who become "affiliates" of the Company, Rule 144
under the Securities Act) or as otherwise permitted under the Securities Act.
Under guidelines published by the Commission, the sale or other disposition of
Company Common Stock or Bank Common Stock by an affiliate of either of the
Company or the Bank as the case may be, within 30 days prior to the Effective
Time or the sale or other disposition of Company Common Stock thereafter prior
to the publication of financial results that include at least 30 days of post-
Merger combined operations of the Company and the Bank could preclude pooling
of interests accounting treatment of the Merger. In the Merger Agreement, the
Bank has agreed to use its reasonable efforts to cause the Merger to qualify
for pooling of interests accounting treatment and to cause each executive
officer, director or shareholder who may reasonably be deemed an affiliate of
the Bank to represent to the Company that such affiliate will not sell,
transfer or otherwise dispose of the shares of Company Common Stock to be
received by such person in the Merger except in compliance with the applicable
provisions of the Securities Act and the rules and regulations promulgated
thereunder and to deliver to the Company an agreement in the form of Exhibit A
to the Merger Agreement with respect thereto. This Proxy Statement/Prospectus
does not cover any resales of Company Common Stock received by affiliates of
the Bank.
NASDAQ LISTING
The Merger Agreement provides for the filing by the Company of a listing
application with NASDAQ covering the shares of Company Common Stock issuable
upon the Merger becoming effective. The Merger's effectiveness is conditioned
on the authorization for listing of such shares on NASDAQ.
34
<PAGE>
ACCOUNTING TREATMENT
The Merger is designed to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the
recorded assets and liabilities of the Company and the Bank will be carried
forward to the consolidated financial statements of the Company at their
recorded amounts; income of the Company will include income of the Bank for
the entire fiscal year in which the Merger occurs; and the reported income of
the separate corporations will be combined and restated as income for prior
periods of the Company. The receipt by the Company of a letter from Coopers &
Lybrand L.L.P. and by the Bank of a letter from Grant Thornton LLP, their
respective independent accountants, stating that the transaction will qualify
as a pooling of interests, is a condition to the consummation of the Merger.
See "The Merger--Conditions to the Merger" and "Unaudited Pro Forma Combined
Condensed Financial Statements."
Representatives of Grant Thornton LLP are expected to be present at the
Bank's Special Meeting and to be available to respond to questions, and will
have an opportunity to make a statement if they desire to do so.
EXPENSES
Except as otherwise provided in the Merger Agreement, the Company and the
Bank will each pay their own expenses in connection with the Merger, including
fees and expenses of their respective independent auditors and counsel. In
addition, if the Merger Agreement is terminated because the Board of Directors
of the Bank has either failed to recommend approval of the Merger to the
Bank's shareholders or has recommended against approval of the Merger because
of the receipt by the Bank of an Acquisition Proposal, the Bank shall
reimburse the Company for all of its reasonable out of pocket expenses up to
$400,000 (with reimbursable legal fees being limited to $125,000) upon such
termination and shall pay to the Company the additional sum of $500,000 upon
consummation by the Bank of an Acquisition Proposal within one year following
termination of the Merger Agreement.
MARKET PRICE OF COMPANY COMMON STOCK
The Company Common Stock commenced trading on NASDAQ on January 27, 1997
under the symbol "SWBT." Quotations of the sales volume and the closing sales
prices of the Company Stock are listed daily in NASDAQ's national market
listings. The following table sets forth the range of high and low sale prices
of the Common Stock as quoted by NASDAQ's monthly statistical report for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
1997
Second Quarter........................................... $28.00 $18.00
First Quarter (beginning January 27, 1997)............... $20.50 $17.875
</TABLE>
On June 30, 1997, the closing sale price for the Common Stock as reported by
NASDAQ was $27.625 per share. As of June 30, 1997, the Company had
approximately 568 stockholders of record.
COMPANY DIVIDEND POLICY
The Company has not previously paid any cash dividends on the Company Common
Stock and does not intend to declare dividends on the Company Common Stock for
the foreseeable future.
In the future, the declaration and payment of dividends on the Company
Common Stock will depend upon the earnings and financial condition of the
Company, liquidity and capital requirements, the general economic and
regulatory climate, the Company's ability to service any equity or debt
obligations senior to the Common Stock and other factors deemed relevant by
the Company Board. See "Description of Securities of the Company." For a
foreseeable period of time, the principal source of cash revenues to the
Company will be dividends paid by SW Bank with respect to SW Bank's common
stock. As of March 31, 1997, approximately $20.4 million was available for
payment of dividends by SW Bank to the Company under applicable restrictions
without regulatory approval. Regulatory authorities could impose
administratively stricter limitations on the ability of SW Bank to pay
dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. See "Risks Factors--Supervision and
Regulation" and "Supervision and Regulation."
35
<PAGE>
THE COMPANY. The Company Bylaws provide that a special meeting of
shareholders may be called by the Chairman of the Board, the President or a
majority of the Company Board, and shall be called by the President at the
request of the holders of not less than one-third of the shares entitled to
vote at the meeting.
LIMITATION OF DIRECTOR LIABILITY
Article 1302-7.06 of the Texas Civil Statutes provides that the articles of
incorporation may provide that a director of the corporation shall not be
liable, or shall be liable only to the extent provided in the articles of
incorporation, to the corporation or its shareholders for monetary damages for
an act or omission in the director's capacity as a director, provided that
there shall be no limitation of liability of a director to the extent the
director is found liable for (i) a breach of the director's duty of loyalty to
the corporation or its shareholders, (ii) an act or omission not in good faith
that constitutes a breach of duty of the director to the corporation or that
involves intentional misconduct or a knowing violation of law, (iii) a
transaction from which the director received an improper benefit, whether or
not the benefit resulted from an action taken within the scope of the
director's office, or (iv) an act or omission for which the liability of a
director is expressly provided by an applicable statute. The Bank Articles do
not contain any special provisions relating to limitation of liability of
directors; however, such special provisions are contained in the Company
Articles.
THE BANK
BUSINESS OF THE BANK
The Bank was organized as a Texas state banking association in 1960 under
the laws of the state of Texas. The Bank provides a full range of commercial
and consumer banking services from nine full-service banking locations in the
east, northeast, northwest and west areas of Houston, Texas, including its
headquarters in northwest Houston and eight branches--Bell Tower, Kingwood,
Memorial, Northport, Pasadena, Porter, Spring and Tanglewood. All of the
Bank's locations are in permanent buildings except for the Pasadena and
Tanglewood offices, which are now in temporary quarters but are expected to be
in permanent quarters before the end of 1997. At March 31, 1997, the Bank had
total assets of $235.3 million, net loans of $135.5 million, total deposits of
$214.8 million, and total shareholders' equity of $19.2 million.
The business strategy of the Bank is to provide its customers with full-
service banking together with a community bank's level of customer services.
The Board of Directors and senior management of the Bank have maintained the
Bank's community orientation by tailoring products and services to meet
community and customer needs. By endeavoring to understand the needs of its
customers and communities, the Bank is working to maintain and further enhance
its reputation of providing excellent customer service. The Bank believes that
it is able to make credit and other banking decisions rapidly. Management
believes that this capability, when compared to competing financial
institutions, enables the Bank to provide a higher degree of service and
responsiveness to creditworthy customers. Management believes that the Bank is
well positioned in its markets due to its responsive customer service, strong
community involvement, knowledge of its market areas and financial strength.
Bank employees actively participate in a variety of civic and community
activities and organizations within each market, including local chambers of
commerce and charitable and civic activities. The Bank believes that these
activities assist the Bank's marketing efforts through increased visibility
and development of new customer relationships and maintenance and expansion of
existing customer relationships.
The Bank serves as a community bank, providing for the banking needs of
retailers, manufacturers, real estate developers and builders, and other
businesses in its market areas. For businesses, the Bank offers checking
facilities, certificates of deposit, short-term loans for working capital
purposes, construction financing, mortgage loans, loans for fixed assets and
expansion needs, other commercial loans to fit the needs of its business
customers, and a variety of non-credit services.
41
<PAGE>
The services provided for individuals by the Bank include checking accounts,
savings accounts, certificates of deposit, individual retirement accounts and
consumer loan programs, including installment loans for home repairs and
purchases of consumer goods (primarily automobiles, trucks and boats),
mortgage loans, travelers checks, money orders and safe deposit facilities.
The Bank provides 24-hour access to routine banking services through automated
teller machines (ATM), network affiliations for shared ATMs and point-of-sale
(POS) services with organizations such PULSE EFT Association and other
regional and national/international organizations.
MARKET AREAS AND FACILITIES
The principal banking office of the Bank is located in the northwest area of
Houston; and its branches are located in the east, northeast, northwest and
west areas of Houston. The market areas served by the Bank consist of all
economic levels of consumers and nearly all types of commercial activity. The
Bank's operations are located in the Houston Primary Metropolitan Statistical
Area ("PMSA"), which consists of six counties in Southeast Texas. The City of
Houston, where the Bank is based, serves as the center of a 598 square mile
commercial and consumer market. The economy of the region relies on widely-
diversified industries.
The bank services its customers through the following banking locations.
<TABLE>
<CAPTION>
BANKING LOCATION DATE OPENED(1)
- ---------------- --------------
<S> <C>
Main Office Location............................................. 1960
12130 Hempstead Highway
Houston, Texas 77092
Memorial......................................................... 1992
14803 Memorial Drive
Houston, Texas 77079
Spring........................................................... 1994
2000 Spring Cypress Road
Spring, Texas 77388
Kingwood......................................................... 1995
29805 Loop 494
Kingwood, Texas 77325
Northport........................................................ 1995
9191 North Loop East
Houston, Texas 77029
Bell Tower....................................................... 1995
1330 Wirt Road
Houston, Texas 77055
Porter........................................................... 1995
2 Porterwood Village Center
Porter, Texas 77365
Pasadena(2)...................................................... 1996
4207 Fairmont Parkway
Pasadena, TX 77504
Tanglewood(2).................................................... 1996
5791 Woodway
Houston, TX 77057
</TABLE>
- --------
(1) Represents the date the facility opened for business as a commercial bank.
(2) The bank is currently engaged in the construction of permanent facilities
for its Pasadena and Tanglewood branches, located at 4500 Fairmont Parkway
and at 1075 Augusta, respectively. It is anticipated that these new
facilities will open for business in 1997.
42
<PAGE>
The Bank owns its main-office banking location on Hempstead Highway and the
Memorial, Spring, Kingwood and Northport branch locations. The Bell Tower and
Porter locations are leased under separate long term (five year or greater)
lease arrangements. The Pasadena location is on a month-to-month lease. The
Tanglewood location is on a six month lease with month-to-month thereafter.
The banking locations include drive-through facilities at the main banking
location and at the Memorial, Spring, Northport, Kingwood, Bell Tower and
Porter branches.
EMPLOYEES
At March 31, 1997, the Bank employed 126 full-time equivalent employees. The
following table is a listing of all senior officers of the Bank:
<TABLE>
<CAPTION>
OFFICER
NAME AGE OFFICE SINCE
---- --- ------ -------
<S> <C> <C> <C>
J. Nolan Bedford....... 59 President and Chief Executive Officer 1993
Maurice L. Junod....... 56 Vice Chairman of the Board and Chief 1994
Operating Officer
John B. Avara.......... 43 Executive Vice President 1994
Larry R. Bone.......... 50 Executive Vice President 1991
J. Clifton Green....... 38 Executive Vice President 1996
Ervin A. Lev........... 53 Executive Vice President Operations and 1994
Cashier
Milan B. Saunders...... 52 Executive Vice President 1993
Stephen Bertram........ 44 Senior Vice President 1997
Harry J. Brooks........ 39 Senior Vice President 1995
James B. Coleman....... 36 Senior Vice President 1995
Linda Cruz............. 41 Senior Vice President 1994
William H. Fowler, II.. 41 Senior Vice President 1995
John Shirley........... 42 Senior Vice President 1996
Laurie Stockstill...... 46 Senior Vice President 1996
</TABLE>
The background of each of the senior management officers listed above is
described below.
J. Nolan Bedford. Mr. Bedford has served as President and Chief Executive
Officer of the Bank since 1993. Previously, Mr. Bedford served as Senior
Executive Vice President, Chief Lending Officer and Director of Lockwood
National Bank in Houston from 1985 to 1993.
Maurice L. Junod. Mr. Junod has served as Vice Chairman and Chief Operating
Officer of the Bank since 1994. Previously, Mr. Junod was the founding
President and Organizing Director of Spring National Bank in Spring, Texas,
where he also served as Chief Executive Officer from 1984 to 1993.
John B. Avara. Mr. Avara joined the Bank in 1994 as Senior Vice President
and Commercial Loan Officer. Previously, Mr. Avara served as Senior Vice
President at Spring National Bank in Spring, Texas from 1989 to 1993.
Larry R. Bone. Mr. Bone joined the Bank in 1991 as Senior Vice President and
Senior Lending Officer. Previously, Mr. Bone served as Middle Market
Relationship Manager at First Interstate Bank of Texas, formerly Allied
Bancshares, Inc., and as Chief Executive Officer at Allied Fairbanks Bank from
1979 to 1991.
43
<PAGE>
J. Clifton Green. Mr. Green joined the Bank in June, 1996 as an Executive
Vice President in commercial lending. Previously, Mr. Green served as a Vice
President in lending at Northern Trust Bank of Texas, N.A., and its
predecessor, Tanglewood Bank, N.A., from 1991 to 1996. He has been active in
lending since 1980.
Ervin A. Lev. Mr. Lev joined the Bank in 1994 as Senior Vice President of
Operations and Cashier. Prior to that time, Mr. Lev served as Executive Vice
President and Advisory Director at Peoples National Bank, Houston from 1990 to
1993 and as Senior Vice President and Cashier at North Houston Bank from 1986
to 1990.
Milan B. Saunders. Mr. Saunders joined the Bank in 1993 as Senior Vice
President and Commercial Loan Officer. Previously, Mr. Saunders served as
Branch President for the Humble branch of First City Bank of Texas, N.A. from
1988 to 1993.
Stephen Bertram. Mr. Bertram joined the Bank in 1997 as a Senior Vice
President, commercial lender. He has been in banking since 1977, most recently
with Coastal Banc and its predecessor, Texas Capital Bank, N.A. from 1994 to
1996. He was also President and Chief Executive Officer of a $50 million
subsidiary of First City Bank of Texas, N.A. from 1988 to 1993.
Harry J. Brooks. Mr. Brooks joined the Bank in July, 1995 as a Senior Vice
President in commercial lending. Prior to joining the Bank, he was in lending
at First Freeport National Bank (1985-1988), First City Bank of Texas, N.A.
(1988-1992), Bank One of Texas, N.A. (1992) and Prime Bank (1993-1995).
James B. Coleman. Mr. Coleman joined the Bank in October, 1995 as a Vice
President in commercial lending. He was promoted to Senior Vice President in
January, 1997. Prior to joining the Bank, he was President of CTY Mortgage
Company during 1994 after serving as a Vice President in commercial lending
for nine years at Spring National Bank, predecessor to Compass Bank.
Linda Cruz. Mrs. Cruz joined the Bank in September, 1994 as a Branch Manager
of the Spring location. She was promoted to Assistant Cashier in 1995. Her
previous experience includes Chief Financial Officer and Cashier of Spring
National Bank for six years, having worked in banking operations since 1978.
William H. Fowler, II. Mr. Fowler joined the Bank in May, 1995 as Senior
Vice President and Commercial Loan Officer. Previously, he was Vice President-
Private Client Services, First Interstate Bank of Texas from 1993 to 1995.
From 1989 to 1993 he was Vice President and Senior Commercial Lending Officer,
First City Bank of Texas, N.A.
John Shirley. Mr. Shirley joined the Bank in 1988 as a commercial lender and
was promoted to Senior Vice President in 1996. Mr. Shirley has worked in
banking since 1979, primarily in commercial lending.
Laurie Stockstill. Mrs. Stockstill joined the Bank in April, 1996 as a
Senior Vice President in commercial lending. For the nine years prior to
joining the Bank, she served as a Senior Vice President, Senior Loan Officer
and Compliance Officer at Woodforest National Bank.
SUPERVISION AND REGULATION
In addition to the generally applicable state and federal laws governing
businesses and employers, the Bank is further extensively regulated by special
federal and state laws applicable only to financial institutions. Virtually
all aspects of the Bank's operations are subject to specific requirements or
restrictions and general regulatory oversight, from laws regulating consumer
finance transactions, such as the Truth in Lending Act, the Home Mortgage
Disclosure Act and the Equal Credit Opportunity Act, to laws regulating
collections and confidentiality, such as the Fair Debt Collections Practices
Act, the Fair Credit Reporting Act and the Right to
44
<PAGE>
Financial Privacy Act. With few exceptions, state and federal banking laws
have as their principal objective either the maintenance of the safety and
soundness of the federal deposit insurance system or the protection of
consumers or classes of consumers, rather than the specific protection of
shareholders of the Bank. To the extent the following material describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statute or regulation.
The Bank is a Texas state-chartered banking association subject to
regulation by the Texas Department of Banking. The Bank, the deposits of which
are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit
Insurance Corporation ("FDIC"), is not a member of the Federal Reserve System,
and therefore the FDIC is the primary federal regulator for the Bank.
The requirements and restrictions applicable to the Bank under the laws of
the United States and the State of Texas include (i) the requirement that
reserves be maintained, (ii) restrictions on the nature and amount of loans
which can be made, (iii) restrictions on the business activities in which the
Bank may engage, (iv) restrictions on the payment of dividends to
shareholders, and (v) the maintenance of minimum capital requirements.
Although the Bank has not historically paid dividends, subject to applicable
minimum capital and safety and soundness restrictions, the Bank may distribute
dividends from its undivided profits without regulatory approval. See "--
Dividend History and Market for Capital Stock." Minimum capital requirements
and other rules and regulations applicable to the Bank may restrict dividend
payments by the Bank. The Texas Department of Banking and the FDIC can each
further limit payment of dividends if the regulatory authority finds that the
payment of dividends would constitute an unsafe or unsound practice. Except to
absorb losses in excess of undivided profits and uncertified surplus, such
certified surplus may not be reduced without the prior written consent of the
Banking Commissioner.
Interest rate limitations for the Bank are governed primarily by the laws of
the State of Texas. The maximum annual interest rate that may be charged on
most loans made by the Bank is based on doubling the average auction rate, to
the nearest 0.25%, for United States Treasury Bills, as computed by the Office
of Consumer Credit Commissioner of the State of Texas. However, the maximum
rate does not decline below 18% or rise above 24% (except for loans in excess
of $250,000 that are made for business, commercial, investment or other
similar purposes (excluding agricultural loans), in which case the maximum
annual rate may not rise above 28%, rather than 24%). Generally, on fixed rate
closed-end loans, the maximum nonusurious rate is to be determined at the time
the rate is contracted, while on floating rate and open-end loans (such as
credit cards), the ceiling varies over the term of the indebtedness. State
usury laws (but not late charge limitations) have been preempted by federal
law for loans secured by a first lien on residential real property.
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, which regulate the national supply of
bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve Board have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet
specified minimum capital requirements. The applicable regulations establish
five capital levels which require or permit the FDIC and other regulatory
authorities to take supervisory action. The relevant classifications range
from "well capitalized" to "critically undercapitalized." Under these
regulations, which became effective December 19, 1992, an institution is
considered well capitalized if it has a total risk-based capital ratio of
10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a
leverage ratio of 5.0% or greater, and it is not subject to an order, written
agreement, capital directive, or prompt corrective action directive to meet
and maintain a specific capital level for any capital measure. An institution
is considered adequately capitalized if it
45
<PAGE>
has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based
capital ratio and leverage capital ratio of 4.0% or greater (or a leverage
ratio of 3.0% or greater if the institution is rated composite 1 in its most
recent report of examination, subject to appropriate federal banking agency
guidelines), and the institution does not meet the definition of a well
capitalized institution. An institution is considered undercapitalized if it
has a total risk-based capital ratio that is less than 8.0%, or a Tier I risk-
based capital ratio that is less than 4.0%, or a leverage ratio that is less
than 4.0% (or a leverage ratio that is less than 3.0% if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines). A significantly
undercapitalized institution is one which has a total risk-based capital ratio
that is less than 6.0%, or a Tier I risk-based capital ratio that is less than
3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
The FDIC is authorized by the legislation to take various enforcement
actions against any significantly undercapitalized institution and any
undercapitalized institution that fails to submit an acceptable capital
restoration plan or fails to implement a plan accepted by the appropriate
agency. These powers include, among other things, requiring the institution to
be recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the institution of
its subsidiaries or by the holding company of the institution itself,
requiring a new election of directors, and requiring the dismissal of
directors and officers.
Based on the Bank's capital ratios as of March 31, 1997, the Bank was
classified as "well capitalized" under the applicable regulations. As a
result, the Bank does not believe that FDICIA's prompt corrective action
regulations will have any material effect on its activities or operations.
However, if the Bank were to become undercapitalized and these restrictions
were to be imposed, the restrictions, either individually or in the aggregate,
could have a significant adverse impact on the operations of the Bank.
DIVIDEND HISTORY AND MARKET FOR CAPITAL STOCK
The Bank has not historically paid dividends on the Bank Common Stock. If
the Merger is not consummated, the Bank Board does not have any plans to pay
dividends in the foreseeable future. The final determination of the timing,
amount and payment of dividends on the Bank Common Stock is at the discretion
of the Bank Board, subject to certain restrictions imposed by federal and
state banking laws, regulations and authorities.
The Bank Common Stock is not traded in any recognized market and is only
traded on a sporadic and isolated basis in privately arranged sales.
46
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the information indicated regarding
beneficial ownership of the Bank Common Stock, as of March 31, 1997, by (i)
each director of the Bank, (ii) all directors and executive officers of the
Bank as a group and (iii) each person known to the Bank to be the beneficial
owner of more than 5% of the issued and outstanding Bank Common Stock. Unless
otherwise indicated, each person has sole voting and dispositive power over
the shares indicated as owned by such person.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF BENEFICIALLY
NAME RELATIONSHIP TO THE BANK SHARES(1) OWNED
---- ------------------------ --------- ------------
<S> <C> <C> <C>
Robert J. Adam.......... Director 53,891 2.0%
J. Nolan Bedford........ President, Chief Executive 49,098 1.8%
Officer and Director
Timothy R. Brown........ Director 21,000 *
Harry L. Chambers, Director 7,500 *
Sr.(2).................
Dale C. Cheesman, Jr.... Director 6,000 *
Sam M. Eng.............. Director 0 *
Donald J. Genitempo..... Director 37,147 1.4%
A. J. Gerland, Jr....... Director 160,680 6.0%
Anan Golub.............. Director 40,000 1.5%
Maurice L. Junod........ Vice Chairman of the Board, Chief 58,720 2.2%
Operating Officer and Director
Herbert E. Koenig....... Director 106,040(3) 4.0%
Dennis M. Malloy........ Director 84,800 3.2%
Robert N. Murray........ Director 142,977 5.4%
Adolph A. Pfeffer, Jr... Chairman of the Board 446,453(4) 16.7%
Robert G. Pond.......... Director 20,618 *
Robert A. Skilton....... Director and Secretary to the 22,500 *
Board
Stanley D. Stearns, Jr.. Director 276,508 10.4%
Weems D. Turner......... Director 17,081 *
Directors and executive
officers as a group.... 1,551,013 56.2%
</TABLE>
- --------
(*) Does not exceed 1.0%
(1) These amounts include shares which are beneficially owned by each person
including shares underlying options which may be exercised within 60 days
of March 31, 1997. The share amounts for Messrs. Bedford and Junod include
37,813 and 52,005 shares, respectively, underlying such options.
(2) Mr. Chambers serves as an Advisory Director of the Bank.
(3) This amount includes 53,020 shares which are held in a testamentary trust
for which Mr. Koenig acts as the trustee.
(4) This amount includes (i) 400,568 shares held by the Pfeffer Family Limited
Partnership of which the general partner is controlled by Mr. Pfeffer,
(ii) 23,393 shares held by Pfeffer & Sons, an affiliate of Mr. Pfeffer, of
which he is a general partner, (iii) 5,817 shares held by The Margaret
Sayer Pfeffer Estate Trusts for which Mr. Pfeffer acts as trustee and (iv)
16,675 shares held by Mr. Pfeffer's wife.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE BANK
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Bank's balance sheets and
statements of income. This section should be read in conjunction with the
Bank's financial statements and accompanying notes and other detailed
information appearing elsewhere in this document.
OVERVIEW
Total assets at March 31, 1997, and December 31, 1996 were $235.3 million
and $227.6 million, respectively. Loans were $137.0 million at March 31, 1997,
an increase of $6.6 million or 5.1% from $130.4 million at December 31, 1996.
This growth was a result of a strong economy and the Bank's ability to build
relationships with commercial and consumer customers. Deposits experienced
similar growth, increasing to $214.8 million at March 31, 1997 from $207.9
million at December 31, 1996. Shareholders' equity was $19.2 million and $18.8
million at March 31, 1997 and December 31, 1996, respectively.
Total assets at December 31, 1996, 1995 and 1994 were $227.6 million, $182.1
million, and $125.2 million, respectively. This growth was a result of a
strong local economy, the addition of new loan officers, the acquisition of
Kingwood Bank and the addition of new service locations. Loans were $130.4
million at December 31, 1996, an increase of $36.9 million or 39.5% from $93.5
million at the end of 1995. Loans were $59.3 million at year end 1994.
Deposits experienced similar growth, increasing to $207.9 million at year end
1996 from $167.5 million at year end 1995 and $113.7 million at the year end
1994. Shareholders' equity was $18.8 million, $13.5 million and $11.2 million
at December 31, 1996, 1995 and 1994, respectively.
The Bank acquired Kingwood Bank on September 13, 1995 for a price of $3.3
million in a transaction accounted for as a purchase. In 1996, the Bank sold
550,000 shares of Bank Common Stock in a private placement, with net proceeds
to the Bank being $3.3 million.
For the three months ended March 31, 1997, the Bank had net income of
$589,000, an increase of $147,000 or 33.3% from the same period in 1996. Net
income per share was $0.21 for the three months ended March 31, 1997 and for
the same period in 1996. This earnings growth was due primarily to a sharp
increase in net interest income, which was driven by strong loan growth. The
reason that the per share income did not increase at the same rate as net
income was due to an offering of Bank Common Stock which closed subsequent to
March 31, 1996, resulting in an increase in the number of outstanding shares.
This resulted in a return on average assets of 1.03% and an annualized return
on average equity of 12.42% for the three months ended March 31, 1997 compared
to 0.97% and 12.68%, respectively, for the same time period in 1996.
Net income was $2.0 million, $1.5 million, and $648,000 and earnings per
common share was $0.78, $0.71, and $0.42 for the years ended 1996, 1995 and
1994, respectively. This increase in net income was primarily the result of
strong loan growth, maintaining strong asset quality and branch expansion and
resulted in returns on average assets of 1.01%, 1.08%, and 0.56% and returns
on average common equity of 12.07%, 12.06%, and 7.54% for the years ended
1996, 1995, and 1994, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income is defined as interest income less
interest expense. Net interest income for the three months ending March 31,
1997 was $2.8 million, reflecting an increase of $600,000, or 27.3%, compared
to $2.2 million for the three months ending March 31, 1996. The increase in
net interest income was primarily the result of an increase of $34.3 million
in the Bank's average loan portfolio during the same period.
Net interest income was $9.8 million for the year ended December 31, 1996,
an increase of $2.3 million or 30.7% compared to the year ended December 31,
1995. The majority of the growth in net interest income for 1996 and 1995 was
due to strong loan growth and higher yields on loans, while increases in
interest expense from deposit rates lagged behind. Net interest income in the
period ending December 31, 1994 was $5.4 million.
48
<PAGE>
Interest on investment securities for the three months ended March 31, 1997
was $859,000 which represents an increase of approximately $124,000, as
compared to the same period in 1996. Interest on investment securities was
$3.0 million for the year ended December 31, 1996, representing an increase of
$400,000, or 15.4%, from the year ended December 31, 1995. These increases
reflect the decision of the Bank's management beginning in 1994 to increase
the size of the Bank's investment portfolio through the growth of the Bank's
deposit base.
Interest on federal funds sold and other earning assets was $178,000 for the
three months ended March 31, 1997 representing an increase of $20,000, or
12.7%, over the same period in 1996. Interest on federal funds sold and other
earning assets was $726,000 for the year ended December 31, 1996, representing
an increase of $160,000, or 28.3%, over the same period in 1995. Interest on
federal funds sold was $566,000 at December 31, 1995 and 248,000 in 1994,
representing an increase of 128.2%.
Interest expense on deposits for the three months ended March 31, 1997 was
$1.5 million representing an increase of $400,000, or 36.4%, from the same
period in 1996. Interest expense on deposits for the year ended December 31,
1996 was $5.0 million representing an increase of $1.4 million, or a 38.9%
increase from the year ended December 31, 1995. These increases were primarily
the result of the growth in deposits at the Bank. Further impacting the
changes in interest expense on deposits were average cost of funds which was
4.04% for the three months ending March 31, 1997 as compared to 3.95% for the
same period in 1996, and 3.95% for the year ended December 31, 1996, as
compared to 4.01% for the year ended December 31, 1995 and 3.05% for the year
ended December 31, 1994.
The Bank actively performs sensitivity analyses to understand and react to
market conditions. Areas such as loan and deposit pricing to insulate the Bank
from adverse market conditions are continually addressed by management through
the use of outside econometric consultants and internal asset/liability
analyses.
The following tables present, 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 dollars and rates. No tax equivalent
adjustments were made and all average balances are daily average balances.
Nonaccruing loans have been included in the table as loans carrying a zero
yield. The yield on the securities portfolio is based on average historical
cost balances and does not give effect to changes in fair value that are
reflected as a component of consolidated shareholders' equity.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ AVERAGE OUTSTANDING EARNED/ AVERAGE
BALANCE PAID YIELD/RATE BALANCE PAID YIELD/RATE
----------- -------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans................. $134,086 $3,190 9.52% $ 99,517 $2,452 9.91%
Securities............ 59,038 859 5.90 50,858 735 5.81
Federal funds sold and
other earning assets. 13,221 178 5.46 12,300 158 5.17
-------- ------ ---- -------- ------ ----
Total interest-
earning assets..... 206,345 4,227 8.19% 162,675 $3,345 8.27%
------ ---- ------
Less allowance for loan
losses................. (1,399) (1,133)
-------- --------
Total earning assets,
net of allowance....... 204,946 161,542
Nonearning assets....... 24,162 19,882
-------- --------
Total assets........ $229,108 $181,424
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
demand deposits...... $ 13,601 48 1.44% $ 13,083 71 2.19%
Money market and
savings deposits..... 64,292 557 3.51 48,286 378 3.15
Certificates of
deposits............. 69,589 863 5.03 54,719 690 5.07
-------- ------ ---- -------- ------ ----
Total interest-
bearing
liabilities........ 147,482 1,468 4.04% 116,088 1,139 3.95%
------ ---- ------ ----
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits...... 61,317 50,225
Other liabilities..... 1,307 1,217
-------- --------
Total liabilities... 210,106 167,530
Shareholders' equity.... 19,002 13,894
-------- --------
Total liabilities
and shareholders'
equity............. $229,108 $181,424
======== ========
Net interest income..... $2,759 $2,206
====== ======
Net interest spread..... 4.26% 4.31%
==== ====
Net interest margin..... 5.42% 5.45%
==== ====
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans.................. $113,506 $11,062 9.75% $ 74,481 $7,925 10.64% $ 53,052 $4,895 9.23%
Securities............. 52,732 3,036 5.76 44,169 2,622 5.94 47,733 2,632 5.51
Federal funds sold and
other earning assets.. 13,667 726 5.31 9,610 566 5.89 5,839 248 4.25
-------- ------- ---- -------- ------ ----- -------- ------ ----
Total interest-
earning assets...... 179,905 14,824 8.24% 128,260 11,113 8.66% 106,624 7,775 7.29%
------- ---- ------ ----- ------ ----
Less allowance for loan
losses................. (1,245) (832) (833)
-------- -------- --------
Total earning assets,
net of allowance....... 178,660 127,428 105,791
Nonearning assets....... 21,693 13,656 8,981
-------- -------- --------
Total assets......... $200,353 $141,084 $114,772
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
demand deposits....... $ 14,531 262 1.80% $ 11,300 276 2.44% $ 11,656 287 2.46%
Money market and
savings deposits...... 51,447 1,695 3.30 35,445 1,148 3.24 36,284 1,014 2.79
Certificates of
deposits.............. 61,078 3,056 5.00 43,580 2,195 5.04 30,857 1,103 3.57
-------- ------- ---- -------- ------ ----- -------- ------ ----
Total interest-
bearing liabilities. 127,056 5,013 3.95% 90,325 3,619 4.01% 78,797 2,404 3.05%
------- ---- ------ ----- ------ ----
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 55,062 37,165 26,865
Other liabilities...... 1,532 969 528
-------- -------- --------
Total liabilities.... 183,650 128,459 106,190
Shareholders' equity.... 16,703 12,625 8,582
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $200,353 $141,084 $114,772
======== ======== ========
Net interest income..... $ 9,811 $7,494 $5,371
======= ====== ======
Net interest spread..... 4.29% 4.66% 4.24%
==== ===== ====
Net interest margin..... 5.45% 5.84% 5.04%
==== ===== ====
</TABLE>
The following table presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguishes between the increase (decrease)
related to higher outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------- ---------------------- ----------------------
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
------------------------- ---------------------- ----------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------------ -------------- --------------
VOLUME RATE DAYS TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ---- ----- ------ ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans.................... $849 $(84) $(27) $738 $4,152 $(1,015) $3,137 $1,977 $1,053 $3,030
Securities............... 119 13 (8) 124 508 (94) 414 (197) 187 (10)
Federal funds sold and
other earning assets.... 12 10 (2) 20 239 (79) 160 160 158 318
---- ---- ---- ---- ------ ------- ------ ------ ------ ------
Total increase
(decrease) in interest
income................ 980 (61) (37) 882 4,899 (1,188) 3,711 1,940 1,398 3,338
---- ---- ---- ---- ------ ------- ------ ------ ------ ------
INTEREST-BEARING
LIABILITIES:
Interest-bearing demand
deposits................ 3 (25) (1) (23) 79 (93) (14) (9) (2) (11)
Money market and savings
deposits................ 125 58 (4) 179 518 29 547 (23) 157 134
Certificates of deposits. 188 (7) (8) 173 881 (20) 861 455 637 1,092
---- ---- ---- ---- ------ ------- ------ ------ ------ ------
Total increase
(decrease) in interest
expense............... 316 26 (13) 329 1,478 (84) 1,394 423 792 1,215
---- ---- ---- ---- ------ ------- ------ ------ ------ ------
Increase in net interest
income.................. $664 $(87) $(24) $553 $3,421 $(1,104) $2,317 $1,517 $ 606 $2,123
==== ==== ==== ==== ====== ======= ====== ====== ====== ======
</TABLE>
50
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses represents an
amount charged to earnings to bring the total allowance for loan losses to a
level deemed appropriate by management based on such factors as historical
experience, the volume and type of lending conducted by the Bank, the amount
of non-performing assets, regulatory policies, generally accepted accounting
principles, general economic conditions, particularly as they relate to the
Bank's lending region, and other factors related to the collectibility of the
Bank's loan portfolio.
The provision for loan losses for the three months ending March 31, 1997,
was $103,000, reflecting an increase of 71.7% compared to the three months
ending March 31, 1996. The provision for loan losses for the year ended
December 31, 1996 was $420,000 which increased $224,000 from the year ended
December 31, 1995. The Bank did not experience any significant loan losses
during the three-month period ended March 31, 1997. The provision for loan
losses for the year ending December 31, 1994 was $204,000.
NON-INTEREST INCOME. Non-interest income for the three months ending March
31, 1997, was $501,000, reflecting a net increase of $79,000 or 18.7% compared
to $422,000 for the three months ending March 31, 1996. Non-interest income of
$2.0 million for the year ended December 31, 1996, increased $800,000 or 66.7%
compared to $1.2 million for the year ended December 31, 1995 and $923,000 for
the year ended December 31, 1994. The year-to-year increases are primarily a
result of the Bank's growth and a continual review and adjustment of service
fees. Customer service fees on deposit accounts for the year ended December
31, 1996 were $1.6 million, representing an increase of $700,000, or 77.8%,
from the year ended December 31, 1995.
NON-INTEREST EXPENSE. Non-interest expense for the three months ending March
31, 1997, was $2.2 million reflecting a net increase of $300,000 or 15.8%
compared to $1.9 million for the three months ending March 31, 1996. Occupancy
expense increased $71,000, or 22.3%, in the three months ended March 31, 1997,
as compared to the same period in 1996, primarily as a result of a 21.3%
increase in net occupancy and a 32.7% increase in fixtures and equipment
associated with the opening of new branches.
Non-interest expense was $8.2 million for the year ended December 31, 1996,
an increase of $2.0 million or 32.3% compared to $6.2 million for the year
ended December 31, 1995 and $5.1 million for the year ended December 31, 1994.
Several of the elements of the overall expense changed significantly. Salaries
and employee benefits increased $1.2 million, or 35.3%, which resulted
primarily from the addition of personnel in the Bank's expanding operations.
Also resulting from expanded operations was occupancy expense increasing
$536,000, or 61.6%, furniture and fixtures increasing $239,000, or 50.0%
offset by a reduction in legal expense of 280.0%.
INCOME TAX. Income taxes for the three months ending March 31, 1997, were
$325,000, reflecting a net increase of $61,000 or 23.1% compared to $264,000
for the three months ending March 31, 1996. The Bank recorded income tax
expense of $1.1 million for the year ended December 31, 1996, compared to
$705,000 for the year ended December 31, 1995 and $321,000 for the year ended
December 31, 1994. Income taxes have increased as a direct result of increases
in the Bank's net taxable income before taxes.
IMPACT OF INFLATION. The effects of inflation on the local economy and on
the Bank's operating results have been relatively modest for the past several
years. Since substantially all of the Bank's assets and liabilities are
monetary in nature, such as cash, securities, loans and deposits, their values
are less sensitive to the effects of inflation than to changing interest
rates, which do not necessarily change in accordance with inflation rates. The
Bank tries to control the impact of interest rate fluctuations by managing the
relationship between its interest rate sensitive assets and liabilities. See
"--Financial Condition--Interest Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
LOAN PORTFOLIO. Total loans of $137.0 million as of March 31, 1997,
reflected an increase of $6.6 million or 5.1% from $130.4 million as of
December 31, 1996. Total loans increased by $36.8 million, or 39.4%, from
December 31, 1995 to December 31, 1996 to $130.4 million compared to $93.5
million and $59.3 million at
51
<PAGE>
December 31, 1995 and 1994, respectively. These increases are due mainly to
the addition of experienced loan officers with large, established customer
bases and the addition of new branches. As mentioned above, the Bank has
increased its focus on increasing its loan portfolio.
The Bank's loans are widely diversified by borrower and industry group due
to the Bank's strong orientation toward the small business market. The Bank
has a significant involvement in the local real estate industry, in both
construction and real estate loans. Real estate loans make up approximately
60.4% of the Bank's total loan portfolio as of March 31, 1997. These real
estate loans consist primarily of commercial building loans to small business
individuals. These loans are typically part of a larger lending relationship
and are normally subject to cross-collateralization and guarantees. The other
segment of the real estate portfolio, construction, consists primarily of
loans to builders of one to four family residences. Most of these loans are
made to builders based on a permanent take-out commitment from a secondary
lender. This category of loans has yielded high returns both in the interest
rate earned on the loans, as well as origination fees charged when these loans
are initiated.
Consumer loans, net of unearned discount, comprise approximately 11.4% of
the loan portfolio as of March 31, 1997. The Bank's objective is to make high
quality consumer loans based on credit quality and yield rather than acquiring
a large number of consumer loans at very low rates through third parties such
as the dealer paper market.
The following table presents the composition of the loan portfolio at the
end of each of the last five years and at March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------
1997 1996 1995 1994 1993 1992
--------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
Construction and land
development........... $ 18,019 $ 17,995 $15,634 $ 9,221 $ 7,026 $ 3,656
Secured by farmland.... 28 34 44 152 -- --
Secured by 1-4 family
residential
properties............ 17,521 16,606 11,220 6,017 5,393 2,773
Secured by multifamily
(5 or more)
residential
properties............ 354 367 417 1,280 1,167 --
Secured by non-farm
non-residential
properties............ 46,768 44,611 26,884 14,846 7,778 3,487
-------- -------- ------- ------- ------- -------
Total real estate
loans............... 82,690 79,613 54,199 31,516 21,364 9,916
Loans to finance
agricultural production
and other loans to
farmers................ -- -- -- -- -- 2
Commercial and
industrial loans....... 38,441 35,563 23,979 18,621 10,789 8,801
Loans to individuals for
household, family and
other personal
expenditures, credit
card and related plans. 157 153 1,246 1,576 776 773
Other (includes single
payment, installment
and student loans)..... 15,407 14,766 13,499 7,103 5,381 3,889
Obligations of states
and political
subdivisions of the
U.S.................... 93 93 130 -- -- --
All other loans......... 194 199 458 481 3,194 2,249
-------- -------- ------- ------- ------- -------
Total loans............. 136,982 130,387 93,511 59,297 41,504 25,630
Less: Allowance for loan
losses................. 1,441 1,377 1,103 697 552 549
-------- -------- ------- ------- ------- -------
Net loans............... $135,541 $129,010 $92,408 $58,600 $40,952 $25,081
======== ======== ======= ======= ======= =======
</TABLE>
52
<PAGE>
The following table sets forth the maturity distribution of the Bank's loan
portfolio at December 31, 1996:
<TABLE>
<CAPTION>
ONE
ONE YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real Estate Loans
Construction and land development............. $16,881 $ 953 $ 161
Secured by farmland........................... -- 34 --
Secured by 1-4 family residential properties.. 9,948 5,645 1,013
Secured by multifamily (5 or more) residential
properties................................... -- 367 --
Secured by non-farm non-residential
properties................................... 21,413 16,506 6,692
------- ------- ------
Total real estate loans..................... 48,242 23,505 7,866
Commercial and industrial loans................. 24,717 10,704 142
Loans to individuals for household, family and
other personal expenditures, credit card and
related plans.................................. 153 -- --
Other (includes single payment, installment and
student loans)................................. 2,038 12,728 --
Obligations of states and political subdivisions
of the U.S..................................... -- 93 --
All other loans................................. -- 199 --
------- ------- ------
Total loans..................................... $75,150 $47,229 $8,008
======= ======= ======
</TABLE>
The following table sets forth the sensitivity to changes in interest rates
of the Bank's loan portfolio as of December 31, 1996:
<TABLE>
<CAPTION>
ONE
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS
-------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Predetermined interest rates...................... $ 6,400 $47,229 $7,649
Floating or adjustable rates...................... 68,750 -- 359
------- ------- ------
Total........................................... $75,150 $47,229 $8,008
======= ======= ======
</TABLE>
OFF-BALANCE SHEET ASSETS. Off-balance sheet assets consist of unfunded
commitments and letters of credit. All letters of credit are standby
performance or commercial related and are issued to meet a range of customer
financing needs. Off-balance sheet commitments are analyzed as if they were
funded and appropriate collateral is procured at the origination of the
commitment. The unfunded real estate related commitments are related primarily
to construction of one to four family housing, where there is typically a
permanent take-out commitment in place from a third party prior to funding.
Fees are generally collected on real estate related commitments; however,
there is normally no fee associated with the commercial related or credit card
unfunded commitments. As of March 31, 1997, off-balance sheet assets were
$33.8 million, representing an increase of 71.6% over $19.7 million as of
March 31, 1996 and an increase of 7.3% over the amount as of December 31,
1996, being primarily for standby letters of credit and other commitments to
extend credit. Off-balance sheet assets were $25.5 million and $21.5 million
at December 31, 1995 and 1994, respectively.
NONPERFORMING ASSETS. Nonperforming loans include loans on which interest
has ceased to be recognized due to management's determination that the
borrower's financial and collateral condition has weakened and the ability of
the borrower to pay interest or principal on such loans is doubtful. Payments
received on such loans in excess of interest recognized are applied to reduce
the principal balance.
The Bank with its experienced lending staff manages its loans very closely
and has been able to maintain net chargeoffs and other asset-quality ratios
below its peers. For the three-month period ending March 31, 1997, net
chargeoffs as a percentage of average loans was 0.12%, and watchlist loans as
a percentage of total loans was 1.82%. Nonperforming loans as a percentage of
total loans was 0.70%.
53
<PAGE>
The following table sets forth loans accounted for on a nonaccrual basis;
accruing loans which are contractually past due 90 days or more as to
principal or interest payments; and loans not included above which are
troubled debt restructurings as of the end of each reported period:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------
1997 1996 1995 1994 1993 1992
--------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual......................... $891 $660 $578 $ -- $ -- $ 60
Accruing loans 90 or more days past
due............................... 24 -- 20 2 6 76
Restructured bonds................. 40 -- -- -- -- --
Other real estate and foreclosed
property.......................... -- -- 102 80 190 88
---- ---- ---- ---- ---- ----
Total nonperforming assets....... $955 $660 $700 $ 82 $196 $224
==== ==== ==== ==== ==== ====
Nonperforming assets to total
loans and other real estate..... 0.70% 0.51% 0.75% 0.14% 0.47% 0.87%
</TABLE>
If non-accrual loans at December 31, 1996 had been current according to
their original terms and had been outstanding throughout 1996, or since
origination if originated during the year, interest income on these loans for
1996 would have been $68,000. There was no interest actually recognized on
these loans during 1996.
SUMMARY OF LOAN LOSS EXPERIENCE. The Bank's management believes that the
Bank's allowance for loan losses as of March 31, 1997 of $1.4 million was
determined in accordance with generally accepted accounting principles and is
in conformity with regulatory standards. Presented on the following table is a
summary of the Bank's loan loss experience for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------
1997 1996 1995 1994 1993 1992
--------- ------ ------ ----- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of period........ $1,377 $1,103 $ 697 $ 552 $549 $ 608
Provision for loan losses... 103 420 196 204 32 --
Chargeoffs.................. (41) (212) (128) (76) (63) (97)
Recoveries.................. 2 66 10 17 34 38
Increase from Kingwood
acquisition................ -- -- 328 -- -- --
------- ------ ------ ----- ---- ------
Allowance for loan losses at
end of period.............. $ 1,441 $1,377 $1,103 $ 697 $552 $ 549
======= ====== ====== ===== ==== ======
Ratios:
Net loan chargeoffs to
average loans.............. 0.12% 0.13% 0.16% 0.11% 0.09% 0.23%
Allowance for loan losses to
loans at end of period..... 1.05 1.06 1.18 1.18 1.33 2.14
Allowance for loan losses to
nonperforming loans at end
of period.................. 161.73 208.64 190.83 N/A N/A 915.00
</TABLE>
54
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following tables describe
the allocation of the allowance for loan losses among various categories of
loans and certain other information as of the dates indicated. The allocation
is made for analytical purposes and is not necessarily indicative of the
categories in which future loan losses may occur. The total allowance is
available to absorb losses for any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
MARCH 31, 1997 1996 1995
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for
loan losses applicable
to:
Commercial and
industrial............ $ 96 28.08% $ 83 27.27% $ 6 25.64%
Real estate:
Construction and land
development.......... 16 13.15 53 13.80 1 16.72
1-4 family
residential.......... 7 12.83 7 12.73 6 12.00
Commercial owner
occupied............. 64 34.42 29 34.52 75 29.20
Farmland.............. -- 0.02 -- 0.02 -- 0.05
Other................. 1 0.26 1 0.22 5 0.62
Consumer............... 6 11.24 5 11.44 6 15.77
Unallocated............ 1,251 1,199 1,004
------ ------ ------
Total allowance for loan
losses................. $1,441 $1,377 $1,103
====== ====== ======
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1994 1993 1992
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for
loan losses applicable
to:
Commercial and
industrial............ $ 52 31.40% $ 15 25.99% $ 67 34.34%
Real estate:
Construction and land
development.......... 24 15.55 140 16.93 21 14.26
1-4 family
residential.......... 10 10.15 15 13.00 12 10.82
Commercial owner
occupied............. 63 27.20 23 21.55 18 13.60
Farmland.............. -- 0.26 -- 0.00 -- 0.00
Other................. 4 0.80 -- 7.70 -- 8.80
Consumer............... 2 14.64 4 14.83 15 18.18
Unallocated............ 542 355 416
------ ------ ------
Total allowance for loan
losses................. $ 697 $ 552 $ 549
====== ====== ======
</TABLE>
SECURITIES. The following table summarizes the book values and the categories
of the securities held as of the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------- -----------------------
1997 1996 1995 1994
--------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities............ $13,491 $11,512 $13,274 $ 4,029
U.S. Government Agencies............ 34,147 32,497 25,806 24,342
Mortgage-backed securities.......... 8,756 10,230 11,707 14,618
Corporate notes and other........... 2,181 1,942 1,938 1,876
------- ------- ------- -------
Total........................... $58,575 $56,181 $52,725 $44,865
======= ======= ======= =======
</TABLE>
55
<PAGE>
The following table summarizes the amortized cost of remaining maturity and
weighted average yields of securities as of December 31, 1996:
<TABLE>
<CAPTION>
WITHIN ONE ONE TO FIVE FIVE TO TEN OVER TEN
YEAR YEARS YEARS YEARS TOTAL
------------- ------------- ------------ ------------ -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------ ----- ------ ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities............. $ 7,531 5.07% $ 3,968 6.11% $ -- 0.00% $ -- 0.00% $11,499 5.43%
U.S. Government
Agencies............... 3,004 5.22 29,119 5.62 -- 0.00 -- 0.00 32,123 5.58
Mortgage-backed
securities............. 2,716 6.76 5,511 6.63 1,913 6.55 894 6.38 11,034 6.63
Corporate notes and
other.................. 1,318 4.68 500 5.90 106 6.22 -- 0.00 1,924 5.08
------- ------- ------ ---- -------
Total................. $14,569 $39,098 $2,019 $894 $56,580
======= ======= ====== ==== =======
</TABLE>
DEPOSITS. The Bank offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of demand, savings,
NOW accounts, money market and time accounts. The Bank relies primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. As of December 31, 1996, the Bank had less than five
percent of its deposits classified as brokered funds and does not anticipate
any significant increase in the foreseeable future. Deposits provide generally
all the funding for the Bank's lending and investment activities, and the
interest paid for deposits must be managed carefully to control the level of
interest expense.
Interest-bearing deposits increased $7.0 million or 4.9% to $150.3 million
at March 31, 1997, compared to $143.3 million at December 31, 1996, $113.2
million at December 31, 1995 and $79.3 million at December 31, 1994.
Demand deposits remained flat at $64.5 million, at March 31, 1997, compared
to $64.6 million at December 31, 1996, but represented an increase over $54.3
million and $34.3 million at December 31, 1995 and 1994, respectively. The
Bank has a stable non-interest bearing source of funds as reflected in the
ratio of demand deposit to total deposits at March 31, 1997 of 30.0% and at
December 31, 1996, and 1995, of 31.1% and 32.4%, respectively.
The following table sets forth information for the periods indicated
regarding the average balances of and weighted average rates paid on deposits
by category:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------------------
1997 1996 1995 1994
-------------- -------------- -------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non interest-bearing
deposits............... $ 61,317 0.00% $ 55,062 0.00% $ 37,165 0.00% $ 26,865 0.00%
Interest-bearing demand
deposits............... 66,242 3.14 58,762 3.04 39,828 3.15 39,756 2.72
Savings deposits........ 7,336 2.40 7,215 2.37 6,924 2.49 6,957 2.44
Time deposits........... 73,905 5.00 61,079 4.99 43,573 5.01 32,084 3.57
-------- -------- -------- --------
Total deposits.......... $208,800 $182,118 $127,490 $105,662
======== ======== ======== ========
Ratio of public deposits
to total private
deposits............... 3.68% 1.47% 2.10% 1.16%
======== ======== ======== ========
</TABLE>
56
<PAGE>
The following table indicates the maturity of certificates of deposit in
denominations of $100,000 or greater as of March 31, 1997:
<TABLE>
<CAPTION>
PERCENT
MATURITY AMOUNT OF TOTAL
-------- ------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Less than three months............................... $20,996 53.27%
Over three to six months............................. 7,116 18.05
Over six to twelve months............................ 8,966 22.75
Over twelve months................................... 2,336 5.93
------- ------
Total............................................ $39,414 100.00%
======= ======
</TABLE>
INTEREST RATE SENSITIVITY AND LIQUIDITY. The successful management of risk
is integral to the continued growth and profitability of the Bank. The Bank's
asset/liability management policy is to generally maintain a balanced position
of rate-sensitive assets as compared to rate-sensitive liabilities. The Bank
does not attempt to predict interest rate movements and therefore monitors its
"GAP" position on a monthly basis to ensure this position is maintained.
The following table sets forth an interest rate sensitivity (GAP) analysis
for the Bank as of December 31, 1996:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
---------------------------------------------
AFTER
0-30 31-180 181-360 ONE
DAYS DAYS DAYS YEAR TOTAL
------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest earning DDA-FHLB...... $14,348 -- -- -- $ 14,348
Securities..................... 5,620 10,040 7,327 33,194 56,181
Loans.......................... 70,601 10,713 9,306 39,614 130,234
Overdraft Loans................ 153 -- -- -- 153
Federal funds sold............. 4,177 -- -- -- 4,177
------- -------- ------- ------- --------
Total interest-earning
assets...................... 94,899 20,753 16,633 72,808 205,093
------- -------- ------- ------- --------
Interest-bearing liabilities:
Demand, money market and
savings deposits.............. 73,273 -- -- -- 73,273
Certificates of deposit and
other time deposits........... 12,141 30,857 17,962 9,058 70,018
------- -------- ------- ------- --------
Total interest-bearing
liabilities................. 85,414 30,857 17,962 9,058 143,291
------- -------- ------- ------- --------
Period GAP....................... $ 9,485 $(10,104) $(1,329) $63,750 $ 61,802
Cumulative GAP................... $ 9,485 $ (619) $(1,948) $61,802
Period GAP to total assets....... 4.17% -4.44% -0.58% 28.00%
Cumulative GAP to total assets... 4.17% -0.27% --0.86% 27.15%
</TABLE>
The Bank intends to maintain a diversified asset base to minimize the
adverse impact of any single event or set of occurrences and to periodically
review the loan portfolio by industry segment to ensure this diversity. While
the Bank continuously seeks deposits and strives to remain competitive with
other financial institutions, it does not have a policy of paying above market
rates to attract deposits, including certificates of deposit of $100,000 or
more.
Liquidity is simply the measure of the Bank's ability to fulfill its cash
requirements. The Bank strives to increase its loan-to-deposit ratio to a
maximum level of 75%. As of March 31, 1997, the loan-to-deposit ratio was
63.4% compared to 62.7% for December 31, 1996. The loan-to-deposit ratios for
the periods ended December 31, 1995 and 1994 were 55.8% and 52.2%,
respectively. The Bank sells the portion of its loans that
57
<PAGE>
are above its legal lending limit. The security portfolio as well as scheduled
repayments and maturities of loans represent a substantial source of funds as
well as new deposits. The Bank has a line of credit with the Federal Home Loan
Bank, but historically has had limited need for such short-term borrowings.
SHAREHOLDERS' EQUITY. Shareholders' equity for the Bank at March 31, 1997
was $19.2 million, an increase of 39.1% compared to $18.7 million at December
31, 1996. Shareholders' equity was $13.5 million and $11.2 million at December
31, 1995 and 1994, respectively. Retained earnings and the sale of additional
common stock were the primary reasons for these increases.
58
<PAGE>
THE COMPANY
BUSINESS OF THE COMPANY
The Company was incorporated as a business corporation under the laws of the
State of Texas on March 28, 1996, for the purpose of serving as a bank holding
company for SW Bank. The holding company formation was consummated and the
Company acquired all of the outstanding shares of capital stock of SW Bank as
of the close of business on June 30, 1996. On January 27, 1997, the Company
completed its initial public offering of Company Common Stock, following which
the Company Common Stock commenced trading on NASDAQ. Based upon total assets
as of March 31, 1997, the Company ranks as the largest independent bank
holding company headquartered in the metropolitan Houston area. The Company's
headquarters are located at 4400 Post Oak Parkway, Houston, Texas 77027, and
its telephone number is (713) 235-8800.
The Company provides an array of sophisticated products typically found only
in major regional banks. These services are provided to middle market
businesses in the metropolitan Houston area through seven full service banking
facilities. Each banking office has seasoned management with significant
lending experience who exercises substantial autonomy over credit and pricing
decisions, subject to loan committee approval for larger credits. This
decentralized management approach, coupled with the continuity of service by
the same staff members, enables the Company to develop long-term customer
relationships, maintain high quality service and provide quick responses to
customer needs. The Company believes that its emphasis on local relationship
banking, together with its conservative approach to lending and resultant
strong asset quality, are important factors in the success and the growth of
the Company.
The Company seeks credit risks of good quality within its target market that
exhibit good historical trends, stable cash flows and secondary sources of
repayment from tangible collateral. The Company extends credit for the purpose
of obtaining and continuing long term relationships. Lenders are provided with
detailed underwriting policies for all types of credit risks accepted by the
Company and must obtain appropriate approvals for credit extensions in excess
of conservatively assigned individuals' lending limits. The Company also
maintains strict documentation requirements and extensive credit quality
assurance practices in order to identify credit portfolio weaknesses as early
as possible so any exposures that are discovered might be reduced.
The Company has a three-part strategy for growth. First, the Company
continues to actively target the "middle market" and private banking customers
in Houston for loan and deposit opportunities as it has successfully done for
the past seven years. The "middle market" is generally characterized by
privately owned companies having annual revenues ranging from $1 million to
$250 million and borrowings ranging from $50,000 to $10 million, but primarily
in the $150,000 to $5 million range. Typical middle market customers seek a
relationship with a local independent bank that is sensitive to their needs
and understands their business philosophy. These customers desire a long-term
relationship with a decision-making loan officer who is responsive and
experienced and has ready access to a bank's senior management. In
implementing this part of its strategy, the Company continues to explore
opportunities (i) to solidify its existing customer relationships and build
new customer relationships by providing new services required by its middle
market customers and (ii) to expand its base of services in the professional
and executive market to meet the demands of that sector.
Second, the Company intends to establish branches in areas that
demographically complement its existing or targeted customer base. As other
local banks are acquired by out-of-state organizations, the Company believes
that the establishment of branches will better meet the needs of customers in
many Houston area neighborhoods who feel disenfranchised by larger regional or
national organizations.
Third, the Company may pursue selected acquisitions of other financial
institutions. The Company intends to conduct thorough studies and reviews of
any possible acquisition candidates to assure that they are consistent with
the Company's existing goals, both from an economic and strategic perspective.
The Company has not entered into any agreement or understanding with respect
to the potential acquisition of any institution other than the Bank.
59
<PAGE>
SW BANK
SW Bank, a national banking association, was chartered in January 1982 and
commenced business operations in October 1982. In July 1989, SW Bank hired as
its President and Chief Executive Officer, Walter E. Johnson who had worked in
the banking industry for over 30 years. From 1972 to 1988 Mr. Johnson had been
president of Allied Bank of Texas, a premier Houston middle market lender
whose total assets approached $4 billion at the time it was acquired by First
Interstate Bancorp in 1988. Prior to the formation of the Company and the
completion of its initial underwritten public offering, SW Bank completed two
earlier successful capital offerings (without any underwriters), raising $13
million and $8 million of new capital in 1990 and 1992, respectively,
primarily as a result of Mr. Johnson's reputation and community contacts. Mr.
Johnson also improved SW Bank's credit review practices and lending policies
and assembled an experienced team of loan officers, consisting primarily of
individuals with whom he had worked at Allied Bank of Texas and First
Interstate Bank. Under Mr. Johnson's leadership, SW Bank's assets have grown
from $43.4 million at June 30, 1989 to $1.07 billion at March 31, 1997.
SW Bank provides a complete range of retail and commercial banking services
that compete directly with major regional banks. Loans consist of commercial
loans to middle market businesses, loans to individuals, commercial real
estate loans, residential mortgages and construction loans. In addition, SW
Bank offers a broad array of fee income products including merchant card
services, letters of credit, customized cash management services, brokerage
and mutual funds and drive-in banking services. In the second half of 1997, SW
Bank intends to introduce a home banking product.
SW Bank maintains a staff of professional treasury management marketing
officers who consult with middle market companies to design custom cost-
effective cash management systems. SW Bank offers a full product line of cash
concentration, disbursement and automated information reporting services
comparable to those offered by any major regional bank. Through SW Bank's
continued investment in new technology and people, SW Bank has been able to
attract some of Houston's largest middle market companies to utilize SW Bank's
treasury management products. SW Bank has also been able to attract new loan
customers through their use of SW Bank's treasury management products, such as
an image-based lock box service and controlled disbursement and sweep
products, which allow borrowers to minimize interest expense and convert
excess operating funds into interest income. Through the use of an interactive
terminal or personal computer, SW Bank's STAR system provides customers with
instant access to all bank account information with multiple intraday updates.
SW Bank makes business communication more efficient through Electronic Data
Interchange ("EDI"), which is an inter-organizational computer-to-computer
exchange of business documentation in a standard computer-processable format.
Through the use of EDI and electronic payments, SW Bank can provide the
customer with a paperless funds management system. Positive Pay, a service
under which SW Bank only pays checks listed on a legitimate "company issue"
file, is another recent product addition which helps prevent check fraud. SW
Bank's average commercial customer uses five treasury management services.
Because these services help customers improve their treasury operations and
achieve new efficiencies in cash management, they are extremely useful in
building and maintaining long-term relationships.
SW Bank maintains a strong community orientation by, among other things,
supporting active participation of all employees in local charitable, civic,
school and church activities. Each banking office also appoints selected
customers to a business development board that assists in introducing
prospective customers to SW Bank and in developing or modifying products and
services to better meet customer needs.
60
<PAGE>
FACILITIES
The Company currently has seven leased facilities, each of which is located
in a major business or professional area of Houston. The following table sets
forth specific information on each branch, each of which offers full service
banking. The Company's headquarters are located at 4400 Post Oak Parkway, in a
35-story office tower located in the Galleria area.
<TABLE>
<CAPTION>
BRANCH
SQ. DEPOSITS AT
BRANCH FT. LOCATION MARCH 31, 1997
------ ------ --------------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Galleria/Headquarters............... 83,770 4400 Post Oak Parkway $507,436
Downtown--1100 Louisiana............ 10,000 1100 Louisiana 92,200
Northwest Crossing.................. 8,134 Hwy 290 at Tidwell 111,032
Memorial City....................... 3,554 899 Frostwood 67,264
Greenway Plaza...................... 2,669 12 Greenway Plaza 52,384
Medical Center...................... 2,437 6602 Fannin 5,828
Downtown--Two Houston Center........ 2,219 909 Fannin 32,434
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$868,578
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</TABLE>
COMPETITION
The banking business is highly competitive, and the profitability of the
Company will depend principally upon the Company's ability to compete in its
market area. The Company competes with other commercial and savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms, asset-based non-
bank lenders and certain other non-financial institutions, including certain
governmental organizations which may offer subsidized financing at lower rates
than those offered by the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing technology and
customer service, including local office decision-making on loans,
establishing long-term customer relationships and building customer loyalty,
and by providing products and services designed to address the specific needs
of its customers.
The success of the Company is also highly dependent on the economic strength
of the Company's general market area. Significant deterioration in the local
economy or economic problems in the greater Houston area could substantially
impact the Company's performance.
EMPLOYEES
As of March 31, 1997, the Company had 341 full-time employees, 111 of whom
were officers of SW Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company has also provided most of
its employees with the benefit of Common Stock ownership through the Company's
contributions to a 401(k) plan, in which 162 of its employees are currently
participating. The Company considers its relations with its employees to be
excellent.
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