<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 6712 76-0519693
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) 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)
DAVID C. FARRIES
EXECUTIVE VICE PRESIDENT
SOUTHWEST BANCORPORATION OF TEXAS, INC.
4400 POST OAK PARKWAY
HOUSTON, TEXAS 77027
(713) 235-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL P. FINCH, ESQ. CHARLES D. POWELL, ESQ.
VINSON & ELKINS L.L.P. BROWN, PARKER & LEAHY, L.L.P.
1001 FANNIN, SUITE 2300 1200 SMITH STREET, SUITE 3600
HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002-4595
(713) 758-2128 (713) 951-5817
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value 1,859,375
$1.00 per share........ shares N/A $19,171,000 $5,810
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</TABLE>
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(1) Based upon the maximum number of shares that may be issued in the
transaction described herein.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f) under the Securities Act of 1933, based upon the book value
as of March 31, 1997, of all shares of capital stock of Pinemont Bank that
may be acquired by the Registrant in the transaction described herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
PINEMONT BANK
12130 HEMPSTEAD HIGHWAY AT BINGLE
HOUSTON, TEXAS 77092
, 1997
Dear Fellow Shareholder:
You are cordially invited to a special meeting of the shareholders (the
"Meeting") of Pinemont Bank, a Texas banking association (the "Bank"), to be
held on , 1997, in the office of the Bank at 12130 Hempstead Highway at
Bingle, Houston, Texas 77092, at a.m. (local time). The matter to be
considered and voted upon at the Meeting is of great importance to the future
of your investment in the Bank.
At the Meeting you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger (the "Merger Agreement"), between
Southwest Bancorporation of Texas, Inc., a Texas corporation ("Southwest
Bancorp"), Southwest Bank of Texas National Association, a national banking
association and wholly owned subsidiary of Southwest Bancorp ("SW Bank")
(Southwest Bancorp and SW Bank are collectively referred to as "Southwest")
and the Bank, pursuant to which the Bank will be merged with and into SW Bank
(the "Merger"), with SW Bank being the surviving entity. Pursuant to the
Merger, each issued and outstanding share of common stock of the Bank ("Bank
Common Stock") will be converted into the right to receive 0.625 of a share of
common stock of Southwest Bancorp.
We are excited about the prospects of combining the Bank with Southwest and
are enthusiastic about the opportunities this brings to the shareholders and
customers of the Bank. As each of you is probably aware, the Bank has grown
significantly in recent years through implementation of its plan of expansion.
The Bank's asset base has grown from approximately $107 million at the end of
1993 to over $235 million today. Earnings and equity have also increased while
the Bank's branch network has expanded dramatically. Although these increases
have been dramatic, we believe that joining Southwest will create synergies
and benefits for the Bank and its shareholders and customers that would not be
present if the Bank remained independent.
Based on total assets, Southwest is the largest independent bank holding
company headquartered in the Houston metropolitan area. As discussed in the
accompanying Proxy Statement/Prospectus, Southwest had assets of $1.07 billion
(which had grown from $43.4 million in 1989 without mergers and acquisitions),
net loans of $643.0 million, total deposits of $868.6 million and total
shareholders' equity of $79.1 million as of March 31, 1997. Southwest provides
a full range of commercial and private banking services, including financial
planning and investment management, to small and middle market businesses and
individuals in the Houston metropolitan area. The common stock of Southwest is
listed for trading on the NASDAQ Stock Market and, as such, would afford each
of you liquidity which has not been present in the Bank Common Stock.
Details of the proposed Merger and other important information are set forth
in the accompanying Proxy Statement/Prospectus, which we urge you to read
carefully.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREIN.
Whether or not you plan to attend the Meeting in person, and regardless of
the number of shares you own, we urge you to complete, sign, date and return
the enclosed proxy promptly in the accompanying postage-paid envelope. You
may, of course, attend the Meeting and vote in person, even if you have
previously returned the proxy.
Sincerely yours,
J. Nolan Bedford
President
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
TODAY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
<PAGE>
PINEMONT BANK
12130 HEMPSTEAD HIGHWAY
HOUSTON, TEXAS 77092
(713) 462-2611
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1997
----------------
A special meeting (the "Special Meeting") of shareholders of Pinemont Bank,
a Texas banking association (the "Bank"), will be held at the Bank's offices,
located at 12130 Hempstead Highway, Houston, Texas, on , 1997, at
10:00 a.m., Houston time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger dated April 28, 1997 (the "Merger Agreement"), among the Bank,
Southwest Bancorporation of Texas, Inc. (the "Company") and Southwest Bank
of Texas National Association, a wholly-owned subsidiary of the Company
("SW Bank"). The Merger Agreement provides that the Bank will merge with
and into SW Bank and shareholders of the Bank will receive 0.625 of a share
of Common Stock, $1.00 par value, of the Company in exchange for each of
their shares of Common Stock, $.66 2/3 par value, of the Bank. A copy of
the Merger Agreement is attached as an appendix to the accompanying Proxy
Statement/Prospectus.
2. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Only shareholders of record on the books of the Bank at the close of
business on , 1997 will be entitled to vote at the Special Meeting or
any adjournments thereof.
Your attention is directed to the Proxy Statement/Prospectus accompanying
this notice for a more complete statement regarding the matters to be acted
upon at the Special Meeting.
By Order of the Board of Directors
Ervin A. Lev
Executive Vice President and Cashier
, 1997
PLEASE COMPLETE, SIGN AND DATE YOUR PROXY AND PROMPTLY MAIL IT IN THE
ENCLOSED ENVELOPE. YOU MAY REVOKE YOUR PROXY IN THE MANNER DESCRIBED IN THE
PROXY STATEMENT/PROSPECTUS AT ANY TIME BEFORE IT IS EXERCISED.
PLEASE DO NOT SEND IN ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 2
SUMMARY................................................................... 3
Parties to the Merger................................................... 3
Special Meeting and Vote Required....................................... 3
The Merger.............................................................. 4
Market Information...................................................... 6
Comparison of Rights of Holders of Bank Capital Stock and Company Common
Stock.................................................................. 6
Historical and Pro Forma Comparative Per Share Data..................... 7
Selected Consolidated Financial Data--Southwest Bancorporation of Texas,
Inc.................................................................... 8
Selected Consolidated Financial Data--Pinemont Bank..................... 9
Pro Forma Combined Condensed Balance Sheet as of March 31, 1997......... 10
Pro Forma Combined Condensed Statements of Income....................... 11
RISK FACTORS.............................................................. 16
Exposure to Local Economic Conditions................................... 16
Interest Rate Risk...................................................... 16
Competition............................................................. 16
Supervision and Regulation.............................................. 17
Dependent on Key Personnel.............................................. 17
Certain Charter and Bylaw Provisions.................................... 18
MEETING INFORMATION....................................................... 18
General................................................................. 18
Record Date; Voting Rights; Vote Required............................... 18
Voting and Revocation of Proxies........................................ 18
Solicitation of Proxies................................................. 19
THE MERGER................................................................ 19
General................................................................. 19
Background and Reasons for the Merger................................... 20
Opinion of the Bank's Financial Advisor................................. 22
Merger Consideration.................................................... 26
Bank Stock Options...................................................... 26
Dissenters' Rights...................................................... 26
Surrender of Certificates............................................... 28
Conditions to the Merger................................................ 28
Regulatory Approvals.................................................... 29
Conduct of Business Pending the Merger.................................. 30
No Solicitation......................................................... 30
Certain Additional Agreements........................................... 30
Termination of the Merger Agreement..................................... 31
Amendment of Merger Agreement........................................... 31
Waiver of Performance of Obligations.................................... 31
Interests of Certain Persons in the Merger.............................. 31
Certain Federal Income Tax Consequences................................. 32
Resale of Company Common Stock.......................................... 33
NASDAQ Listing.......................................................... 33
Accounting Treatment.................................................... 33
Expenses................................................................ 34
</TABLE>
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<PAGE>
<TABLE>
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PAGE
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<S> <C>
MARKET PRICE OF COMPANY COMMON STOCK...................................... 34
COMPANY DIVIDEND POLICY................................................... 34
DESCRIPTION OF SECURITIES OF THE COMPANY.................................. 35
General................................................................. 35
Company Common Stock.................................................... 35
Preferred Stock......................................................... 35
Texas Law and Certain Provisions of the Articles of Incorporation and
Bylaws................................................................. 36
COMPARATIVE RIGHTS OF SHAREHOLDERS........................................ 38
General................................................................. 38
Directors............................................................... 38
Amendment of Articles of Association or Incorporation and Bylaws........ 39
Shareholder Approval of Mergers and Asset Sales......................... 39
Special Meeting......................................................... 39
Limitation of Director Liability........................................ 40
THE BANK.................................................................. 40
Business of the Bank.................................................... 40
Market Areas and Facilities............................................. 41
Employees............................................................... 42
Supervision and Regulation.............................................. 43
Dividend History and Market for Capital Stock........................... 45
Security Ownership of Management and Certain Beneficial Owners.......... 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE BANK................................................... 47
Overview................................................................ 47
Results of Operations................................................... 47
Financial Condition..................................................... 50
THE COMPANY............................................................... 57
Business of the Company................................................. 57
SW Bank................................................................. 58
Facilities.............................................................. 59
Competition............................................................. 59
Employees............................................................... 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY................................................ 60
Overview................................................................ 60
Results of Operations................................................... 60
Financial Condition..................................................... 67
MANAGEMENT OF THE COMPANY................................................. 80
Directors and Executive Officers........................................ 80
Committees and Meetings of the Board of Directors....................... 83
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions................................................. 83
Director Compensation................................................... 83
Executive Compensation.................................................. 84
Interests of Management and Others in Certain Transactions.............. 86
PRINCIPAL SHAREHOLDERS.................................................... 87
</TABLE>
-ii-
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<S> <C>
SUPERVISION AND REGULATION................................................ 88
SW Bank................................................................. 88
The Company............................................................. 91
Enforcement Powers of the Federal Banking Agencies...................... 92
Expanding Enforcement Authority......................................... 93
Effect on Economic Environment.......................................... 93
LEGAL MATTERS............................................................. 94
EXPERTS................................................................... 94
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A AGREEMENT AND PLAN OF MERGER
APPENDIX B OPINION OF THE CHARLES T. MEEKS COMPANY, INC.
APPENDIX C TEXAS BUSINESS CORPORATION ACT, ARTICLES 5.11, 5.12 AND 5.13
</TABLE>
-iii-
<PAGE>
PROXY STATEMENT OF
PINEMONT BANK
FOR A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1997
----------------
PROSPECTUS
OF
SOUTHWEST BANCORPORATION OF TEXAS, INC.
COMMON STOCK $1.00 PAR VALUE
----------------
This Proxy Statement/Prospectus is being furnished to the holders of the
Common Stock, par value $.66 2/3 per share ("Bank Common Stock"), of Pinemont
Bank, a Texas banking association (the "Bank"), in connection with the
solicitation of proxies by the board of directors of the Bank (the "Bank
Board") for a special meeting of the Bank's shareholders to be held on
, 1997 (the "Special Meeting").
At the Special Meeting, the Bank's shareholders will consider and vote upon
a proposal to approve the Agreement and Plan of Merger, dated April 28, 1997
(the "Merger Agreement"), among the Bank, Southwest Bancorporation of Texas,
Inc., a Texas corporation (the "Company"), and Southwest Bank of Texas
National Association, a national banking association and wholly-owned
subsidiary of the Company ("SW Bank"), pursuant to which the Bank will be
merged with and into SW Bank (the "Merger"). If the Merger Agreement is
approved and the Merger becomes effective, a maximum of 1,859,375 shares of
the Common Stock, $1.00 par value, of the Company ("Company Common Stock")
will be issued to the holders of Bank Common Stock (including holders of
outstanding options to purchase Bank Common Stock who exercise such options
prior to the Merger), who will receive 0.625 of a share of Company Common
Stock in exchange for each of their outstanding shares of Bank Common Stock. A
copy of the Merger Agreement is attached as Appendix A to this Proxy
Statement/Prospectus and incorporated herein by reference.
The Company has filed a registration statement on Form S-4 (File No. 333-
) (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") registering under the Securities Act of 1933, as
amended (the "Securities Act"), the shares of Company Common Stock to be
issued in the Merger. In addition to serving as the proxy statement in
connection with the Special Meeting, this document constitutes the prospectus
of the Company filed as part of the Registration Statement.
Company Common Stock trades on The NASDAQ Stock Market ("NASDAQ") under the
symbol "SWBT." The closing price of Company Common Stock as reported by NASDAQ
on , 1997, was $ per share.
All information concerning the Company contained in this Proxy
Statement/Prospectus has been provided by the Company, and all information
concerning the Bank contained in this Proxy Statement/Prospectus has been
provided by the Bank.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to shareholders of the Bank on or about , 1997.
SEE "RISK FACTORS" ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY SHAREHOLDERS OF THE BANK.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMPANY COMMON STOCK OFFERED BY THIS PROXY STATEMENT/
PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A
BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
The date of this Proxy Statement/Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, the Company files reports, proxy statements and other information
with the Commission. The reports, proxy statements and other information filed
by the Company with the Commission can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D. C. 20549 and at the regional offices of the Commission located
at Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other issuers that file electronically with the Commission
(http://www.sec.gov). Reports, proxy statements and other information
concerning the Company also may be inspected at the offices of NASDAQ, located
at 1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. Certain portions
of the Registration Statement have been omitted pursuant to the rules and
regulations of the Commission. Reference is hereby made to such omitted
portions for further information with respect to the Company, the Bank and the
shares of Company Common Stock offered hereby. Statements contained herein
concerning the provisions of certain documents are necessarily summaries of
such documents, and each statement is qualified in its entirety by reference
to the copy of the applicable document filed with the Commission or attached
hereto as an appendix.
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN MADE OR AUTHORIZED BY THE COMPANY OR THE BANK. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO PURCHASE, THE BANK COMMON STOCK OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY, IN
ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY OR THE BANK SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE>
SUMMARY
The following summary of certain information relating to the Merger is not
intended to be complete and is qualified in all respects by the more detailed
information contained in this Proxy Statement/Prospectus and the appendices
hereto. Unless otherwise indicated, all share and per share information has
been adjusted to give effect to a 2.5 for 1 split of the Company Common Stock
(the "Stock Split") effected in the form of a stock dividend issued to
shareholders of record as of November 20, 1996. Shareholders of the Bank are
urged to read this Proxy Statement/Prospectus and the appendices hereto in
their entirety.
PARTIES TO THE MERGER
THE COMPANY. The Company is a bank holding company headquartered in Houston,
Texas. As of March 31, 1997, the Company had assets of $1.07 billion, net loans
of $643.0 million, total deposits of $868.6 million and total shareholders'
equity of $79.1 million. On January 27, 1997, the Company completed its initial
public offering, pursuant to which it issued and sold 1,322,500 shares of
Company Common Stock at a price to the public of $16.50 per share.
Substantially all of the Company's revenue and income is derived from the
operation of its subsidiary, SW Bank, a national bank with seven full service
banking facilities in the Houston area. SW Bank provides a full range of
commercial and private banking services, including financial planning and
investment management, to small and middle market businesses and individuals in
the Houston metropolitan area. Based on total assets as of March 31, 1997, the
Company is the largest independent bank holding company headquartered in the
Houston metropolitan area.
Walter E. Johnson joined SW Bank in June 1989 as President and Chief
Executive Officer and began to assemble the Company's current management team,
utilizing his 30 years of Houston banking experience. An opportunity to develop
a premier middle market franchise existed because many of the large established
Texas banks had either failed or had been acquired by out-of-state banks and
many super-community banks were suffering from severe asset quality problems.
In addition, some of the large regional banks currently operating in Texas had
not entered the market place at that time. As a result, the Company's assets
have grown from $43.4 million at June 30, 1989 to $1.07 billion at March 31,
1997, without acquisitions or mergers.
The Company's business strategy is to (i) target middle market operating
companies and private banking customers in the Houston area for loans, deposits
and treasury management, investment and international services, (ii) explore
selected opportunities to establish branches in areas that demographically
complement the Company's existing and targeted customer base and (iii) pursue
selected opportunities to acquire other financial institutions.
THE BANK. The Bank has nine locations in Houston, Texas. At March 31, 1997,
the Bank had assets of $235.3 million, net loans of $135.5 million, total
deposits of $214.8 million and shareholders' equity of $19.2 million. The Bank
provides a wide range of banking services for its commercial, industrial and
financial customers. Commercial lending activities include short-term and
medium-term loans, revolving credit arrangements, inventory and accounts
receivable financing, equipment financing, and interim and long-term real
estate lending. Consumer banking services include savings and checking
accounts, various savings programs, home improvement loans, real estate loans,
and installment and other personal loans. The Bank also provides a 24-hour
access to routine banking services through automated teller machines.
SPECIAL MEETING AND VOTE REQUIRED
SPECIAL MEETING. The Special Meeting will be held on , 1997, at
the Bank's offices, located at 12130 Hempstead Highway, Houston, Texas for the
purpose of voting on a proposal to approve the Merger Agreement. Only holders
of record of Bank Common Stock at the close of business on , 1997
(the "Record Date") will be entitled to receive notice of and to vote at the
Special Meeting. At such date, there
3
<PAGE>
were 2,670,000 shares of Bank Common Stock outstanding and entitled to vote.
Each share of Bank Common Stock is entitled to one vote. For additional
information relating to the Special Meeting, see "Meeting Information."
VOTE REQUIRED. Approval of the Merger Agreement requires the affirmative vote
of the holders of at least two-thirds of the outstanding shares of Bank Common
Stock. Directors and executive officers of the Bank and their affiliates
beneficially owned an aggregate of 1,551,013, or approximately 56.2%, of the
shares of Bank Common Stock outstanding on the Record Date. For additional
information concerning the number of shares of Bank Common Stock held by the
Bank's management, see "Information Concerning the Bank--Security Ownership of
Management and Certain Beneficial Owners." If the holders of at least two-
thirds of the outstanding shares of Bank Common Stock do not vote in favor of
approval of the Merger Agreement, the Bank will continue to act as a separate
entity and a going concern. A failure to vote, either by not returning the
enclosed proxy or by checking the "Abstain" box thereon, will have the same
effect as a vote against approval of the Merger Agreement. MEMBERS OF THE
BANK'S MANAGEMENT INTEND TO VOTE ALL SHARES OF BANK COMMON STOCK HELD IN THEIR
INDIVIDUAL CAPACITIES IN FAVOR OF THE APPROVAL OF THE MERGER AGREEMENT. See
"Meeting Information--Record Date; Voting Rights; Vote Required."
THE MERGER
EFFECT OF THE MERGER. If the Merger Agreement is approved and the Merger
becomes effective, the Bank will be merged with and into SW Bank and SW Bank,
as the surviving corporation in the Merger, will remain a wholly-owned
subsidiary of the Company. In the Merger, outstanding shares of Bank Common
Stock will be automatically converted into the right to receive 0.625 of a
share (the "Exchange Ratio") of Company Common Stock as set forth in the Merger
Agreement and described herein. In lieu of issuing fractional shares of Company
Common Stock, the Company will pay cash to the holders of Bank Common Stock who
would otherwise be entitled to receive fractional shares. See "The Merger--
Merger Consideration."
BANK STOCK OPTIONS. Pursuant to the Merger, the currently outstanding options
to purchase an aggregate of 305,000 shares of Bank Common Stock (the "Bank
Stock Options") held by certain employees of the Bank will, in accordance with
their terms (unless exercised or terminated prior to the Merger), (i) be
converted into options to purchase an aggregate of 190,625 shares of Company
Common Stock, in each case, at an exercise price per share equal to the
exercise price per share subject thereto divided by 0.625, and (ii) become
fully exercisable.
RECOMMENDATION OF THE BANK'S BOARD OF DIRECTORS. At a meeting of the Board of
Directors of the Bank (the "Bank Board") held on April 28, 1997, after
considering the terms and conditions of the Merger Agreement, the Bank Board
unanimously approved the Merger Agreement. The Bank Board believes that the
Merger is advisable and in the best interests of the Bank and its shareholders
and recommends that shareholders of the Bank vote "FOR" approval of the Merger
Agreement. For a discussion of the circumstances surrounding the Merger and the
factors considered by the Bank Board in making its recommendation, see "The
Merger--Background and Reasons for the Merger."
OPINION OF THE BANK'S FINANCIAL ADVISOR. The Bank Board retained The Charles
T. Meeks Company, Inc. ("Meeks") to act as financial advisor in connection with
the Merger. Meeks has delivered its written opinion to the Bank Board dated as
of April 28, 1997 and reaffirmed as of the date of this Proxy
Statement/Prospectus that the consideration to be received by the shareholders
of the Bank in the Merger is fair from a financial point of view. The opinion
of Meeks is attached as Appendix B to this Proxy Statement/Prospectus.
Shareholders are urged to read such opinion in its entirety for a description
of the procedures followed, matters considered and limitations on the reviews
undertaken in connection therewith. For additional information, see "The
Merger--Opinion of the Bank's Financial Advisor."
4
<PAGE>
CONDITIONS TO THE MERGER; TERMINATION OF THE MERGER AGREEMENT. The
obligations of the Company and the Bank to effect the Merger are subject to the
satisfaction or, if permissible under the Merger Agreement, waiver of a number
of conditions, in addition to approval of the Merger Agreement by the Bank's
shareholders. The Merger Agreement allows one or more parties to the Merger to
terminate the Merger Agreement if one or more of these conditions are not
satisfied or waived. The Merger Agreement may also be terminated at any time
prior to the Merger becoming effective by mutual consent of the Company and the
Bank, or by either the Company or the Bank if the Merger has not been effected
on or before October 31, 1997, provided the failure of the Merger to become
effective by such date is not due to the failure of the party seeking to
terminate to perform or observe in all material respects its covenants and
agreements under the Merger Agreement. See "The Merger--Conditions to the
Merger" and "--Termination of the Merger Agreement."
REGULATORY APPROVALS. The Merger is subject to the approval of the Office of
the Comptroller of the Currency (the "OCC"). 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 Merger is also
subject to certain filing and other requirements of the Texas Department of
Banking and the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). See "The Merger--Regulatory Approvals."
EFFECTIVE TIME AND CLOSING OF THE MERGER. The closing of the transactions
contemplated by the Merger Agreement (the "Closing") shall take place on a
mutually agreeable date following the receipt of all necessary approvals and
satisfaction of all closing conditions. The Merger shall become effective at
the time that the Company and Bank agree to be the effective time (the
"Effective Time").
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, authorize the solicitation of or enter into any discussions
with any third party concerning any proposal for a merger or other business
combination involving the Bank or for the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, the Bank (an
"Acquisition Proposal"). See "The Merger--No Solicitation."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. In the Merger, the directors and
executive officers of the Bank will receive the same consideration for each of
their shares as that received by the other shareholders of the Bank. For
information concerning the number of shares of Bank Common Stock held by the
directors and executive officers of the Bank, see "The Bank--Security Ownership
of Management and Certain Beneficial Owners."
The Company expects to enter into separate three-year employment agreements
(the "Employment Agreements") with J. Nolan Bedford and Maurice L. Junod at
annual salaries of $177,575 and $156,700, respectively. Under the terms of the
Employment Agreements, (i) Mr. Bedford will be the senior officer in charge of
all lending and personnel functions and responsibilities over the Bank's
present nine branch locations and will hold the title of Vice Chairman of the
Board of Directors of SW Bank, and (ii) 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 branch locations. The
Employment Agreements also provide that Messrs. Bedford and Junod will be
entitled to participate in all of 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.
As soon as practicable following the Effective Time, the Company intends to
increase the size of its Board of Directors by one member and 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. See "The Merger--Interests of Certain
Persons in the Merger."
5
<PAGE>
DISSENTERS' RIGHTS. The Texas Banking Act (the "TBA") makes the merger
procedures of Texas corporations under the Texas Business Corporation Act (the
"TBCA") applicable to Texas bank mergers. The TBCA provides that a shareholder
of a Texas corporation who dissents from a merger is generally entitled to
receive payment of the appraised value of his or her stock. See "The Merger--
Dissenters' Rights."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to be a
tax-free reorganization so that no gain or loss will be recognized by the
Bank's shareholders who exchange Bank Common Stock for Company Common Stock in
the Merger. The Merger's effectiveness is conditioned upon the receipt by the
Bank of a written opinion of Brown, Parker & Leahy, L.L.P., counsel to the
Bank, substantially to the effect that, for U.S. federal income tax purposes:
(i) the Merger will constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the
Company, the Bank and SW Bank will each be a party to that reorganization,
(iii) no gain or loss will be recognized by the holders of Bank Common Stock
upon receipt of Company Common Stock except for cash received in lieu of
fractional shares; and (iv) 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 exchanged therefor (reduced by the excess, if any, of the cash received
over the amount of gain recognized on the exchange); and (v) the holding period
of the shares of Company Common Stock (including fractional share interests, if
any) received by the shareholders of the Bank will include the holding period
of the Bank Common Stock, provided such shares of Bank Common Stock were held
as a capital asset as of the Effective Time.
THE U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE MERGER MAY BE DIFFERENT FOR
PARTICULAR TYPES OF BANK SHAREHOLDERS OR IN LIGHT OF EACH BANK SHAREHOLDER'S
PERSONAL INVESTMENT CIRCUMSTANCES. FOR THAT REASON, BANK SHAREHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX
CONSIDERATIONS THAT MAY BE RELEVANT TO THEM IN CONNECTION WITH THE MERGER, AS
WELL AS THE APPLICATION TO THEM OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
SEE "THE MERGER--CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES."
ACCOUNTING TREATMENT. Management of the Company anticipates that the Merger
will be accounted for as a "pooling of interests" under generally accepted
accounting principles. See "The Merger--Accounting Treatment."
MARKET INFORMATION
On April 25, 1997, the last business day preceding public announcement of the
Merger Agreement, and on , 1997, the last practicable date prior to
the mailing of this Proxy Statement/Prospectus, the closing price per share of
Company Common Stock (as reported by The NASDAQ Stock Market) was $19.69 and
$ , respectively.
The market price for Company Common Stock will fluctuate between the date of
this Proxy Statement/Prospectus and the Effective Time. The market value per
share of the Company Common Stock that Bank shareholders ultimately receive in
the Merger could be more or less than its market value on the date of this
Proxy Statement/Prospectus. No assurance can be given concerning the market
price of Company Common Stock before or after the Effective Time.
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."
6
<PAGE>
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>
SELECTED CONSOLIDATED FINANCIAL DATA
SOUTHWEST BANCORPORATION OF TEXAS, INC.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Proxy Statement/Prospectus, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company." The selected historical
consolidated financial data as of the end of and for each of the five years in
the period ended December 31, 1996 are derived from the Company's Consolidated
Financial Statements which have been audited by independent public accountants.
The selected historical consolidated financial data as of and for the three
months ended March 31, 1997 and 1996 have not been audited but in the opinion
of management, contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the consolidated financial position
and consolidated results of operations of the Company as of such dates and for
such periods. The financial information and results of operations as of and for
the three months ended March 31, 1997, are not necessarily indicative of the
financial position or results of operations that may be expected at and for the
year ended December 31, 1997, or for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- -------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........ $ 18,360 $ 14,989 $ 63,433 $ 50,582 $ 34,288 $ 24,690 $ 18,605
Interest expense....... 7,860 6,438 27,262 21,890 11,444 7,750 6,631
---------- -------- ---------- -------- -------- -------- --------
Net interest income.. 10,500 8,551 36,171 28,692 22,844 16,940 11,974
Provision for loan
losses................ 438 280 1,670 925 1,145 1,005 767
---------- -------- ---------- -------- -------- -------- --------
Net interest income
after provision for
loan losses......... 10,062 8,271 34,501 27,767 21,699 15,935 11,207
Noninterest income..... 1,828 1,065 4,888 3,712 3,063 2,159 1,478
Noninterest expenses... 7,090 5,395 23,968 19,458 15,782 12,684 9,042
---------- -------- ---------- -------- -------- -------- --------
Income before taxes.. 4,800 3,941 15,421 12,021 8,980 5,410 3,643
Provision for income
taxes................. 1,681 1,379 5,376 4,214 3,141 1,871 1,252
Cumulative effect of
change in accounting
principle............. -- -- -- -- -- 16 --
---------- -------- ---------- -------- -------- -------- --------
Net income before
extraordinary item.... 3,119 2,562 10,045 7,807 5,839 3,555 2,391
Extraordinary item..... -- -- -- -- -- -- 372
Preferred stock
dividend.............. 36 115 457 50 -- -- --
---------- -------- ---------- -------- -------- -------- --------
Net income available
for common
shareholders.......... $ 3,083 $ 2,447 $ 9,588 $ 7,757 $ 5,839 $ 3,555 $ 2,763
========== ======== ========== ======== ======== ======== ========
PER SHARE DATA:
Net income(1).......... $ 0.32 $ 0.29 $ 1.12 $ 0.92 $ 0.70 $ 0.43 $ 0.44
Book value............. 8.43 6.07 7.07 5.81 4.65 3.84 3.38
Weighted average
common shares and
common share
equivalents
outstanding (in
thousands)............ 9,539 8,488 8,535 8,394 8,302 8,211 6,281
BALANCE SHEET DATA(2):
Total assets........... $1,073,498 $833,926 $1,044,499 $825,474 $578,335 $472,314 $339,114
Securities............. 311,820 318,790 289,217 295,183 151,467 136,504 63,581
Loans.................. 649,334 452,163 601,475 438,259 358,304 285,892 210,458
Allowance for loan
losses................ 6,302 5,198 6,024 4,921 4,294 3,249 2,204
Total deposits......... 868,578 670,114 833,569 672,641 489,836 417,695 303,762
Total shareholders'
equity................ 79,147 46,901 54,669 44,826 35,770 29,443 25,848
PERFORMANCE RATIOS:
Return on average
assets................ 1.23% 1.27% 1.11% 1.16% 1.14% 0.90% 1.02%
Return on average
common equity......... 17.74 21.47 19.44 19.20 17.44 12.93 16.34
Net interest margin.... 4.58 4.53 4.51 4.60 4.82 4.65 4.81
Efficiency ratio(3).... 58.14 56.12 58.10 58.08 60.67 66.41 67.22
ASSET QUALITY RATIOS(2):
Nonperforming assets
to loans and other
real estate........... 0.24% 0.14% 0.21% 0.07% 0.19% 0.22% 0.31%
Net charge-offs
(recoveries) to
average loans......... 0.11 0.00 0.12 0.08 0.03 (0.02) 0.24
Allowance for loan
losses to total
loans................. 0.97 1.15 1.00 1.12 1.20 1.14 1.05
Allowance for loan
losses to
nonperforming
loans(4).............. 489.67 843.90 616.58 1,673.78 1,081.58 1,406.84 1,231.31
CAPITAL RATIOS(2):
Leverage ratio......... 7.77% 6.71% 6.59% 6.29% 6.33% 6.23% 7.62%
Average shareholders'
equity to average
total assets.......... 6.91 5.64 5.71 6.04 6.55 6.99 6.25
Tier 1 risk-based
capital ratio......... 10.83 11.10 9.49 10.72 9.59 10.04 12.23
Total risk-based
capital ratio......... 11.70 12.15 10.41 11.74 10.72 11.15 13.27
</TABLE>
- -------
(1) Net income per share is based upon the weighted average number of common
shares outstanding and common share equivalents during the period.
(2) At period end, except net charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
8
<PAGE>
SELECTED FINANCIAL DATA
PINEMONT BANK
The following selected financial data should be read in conjunction with the
Financial Statements of the Bank and the Notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus, and the information contained in "The Bank--
Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected historical financial data as of the end of and for
each of the five years in the period ended December 31, 1996 are derived from
the Bank's Financial Statements which have been audited by independent public
accountants. The selected historical financial data as of and for the three
months ended March 31, 1997 and 1996 have not been audited but, in the opinion
of management of the Bank, contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the financial position and
results of operations of the Bank as of such dates and for such periods. The
financial information and results of operations as of and for the three months
ended March 31, 1997, are not necessarily indicative of the financial position
or results of operations that may be expected at and for the year ended
December 31, 1997, or for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS AS OF AND FOR THE
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income......... $ 4,227 $ 3,345 $ 14,824 $ 11,113 $ 7,775 $ 6,213 $ 6,489
Interest expense........ 1,468 1,139 5,013 3,619 2,404 2,220 2,695
-------- -------- -------- -------- -------- -------- -------
Net interest income.. 2,759 2,206 9,811 7,494 5,371 3,993 3,794
Provision for loan
losses................. 103 60 420 196 204 32 --
-------- -------- -------- -------- -------- -------- -------
Net interest income
after provision for
loan loss.............. 2,656 2,146 9,391 7,298 5,167 3,961 3,794
Noninterest income...... 501 422 1,959 1,155 923 1,193 1,286
Noninterest expenses.... 2,243 1,862 8,242 6,226 5,121 4,682 4,654
-------- -------- -------- -------- -------- -------- -------
Income before taxes.... 914 706 3,108 2,227 969 472 426
Provision for income
taxes................. 325 264 1,092 705 321 131 136
-------- -------- -------- -------- -------- -------- -------
Net income.............. $ 589 $ 442 $ 2,016 $ 1,522 $ 648 $ 341 $ 290
======== ======== ======== ======== ======== ======== =======
PER SHARE DATA:
Net income(1)........... $ 0.21 $ 0.21 $ 0.78 $ 0.71 $ 0.42 $ 0.23 $ 0.19
Book value.............. 7.18 6.53 7.02 6.36 5.28 5.77 5.59
Weighted average common
shares and common share
equivalents outstanding
(in thousands)......... 2,757 2,139 2,595 2,139 1,552 1,500 1,500
BALANCE SHEET DATA:
Total assets............ $235,311 $185,762 $227,642 $182,142 $125,162 $107,595 $97,964
Securities.............. 58,576 50,281 56,181 52,725 44,866 53,457 64,048
Loans................... 136,982 104,674 130,387 93,511 59,297 41,504 25,630
Allowance for loan
losses................. 1,441 1,167 1,377 1,103 697 552 549
Total deposits.......... 214,814 170,716 207,878 167,533 113,645 98,469 88,881
Total shareholders'
equity................. 19,171 13,848 18,746 13,478 11,199 8,648 8,380
</TABLE>
- --------
(1) Net income per share is based upon the weighted average number of common
shares outstanding and common share equivalents during the period.
9
<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
10
<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
11
<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
12
<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
13
<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
14
<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 shares 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>
15
<PAGE>
RISK FACTORS
Bank shareholders should carefully review the information contained
elsewhere in this Proxy Statement/Prospectus and should particularly consider
the following matters. Information contained in this Proxy
Statement/Prospectus contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "projected," "contemplates" or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology. See, e.g., "Summary--The Company" and "The Company."
No assurance can be given that the future results covered by the forward-
looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered
in such forward-looking statements. Other factors, such as the general state
of the economy, could also cause actual results to vary materially from the
future results covered in such forward-looking statements.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general
economic conditions in the Houston metropolitan area. The banking industry in
Texas and Houston is affected by general economic conditions such as
inflation, recession, unemployment and other factors beyond the Company's
control. During the mid-1980's, severely depressed oil and gas prices
materially and adversely affected the Texas and Houston economies, causing
recession and unemployment in the region and resulting in excess vacancies in
the Houston real estate market and elsewhere in the state. Since 1987, the
local economy has improved in part due to its expansion into non-energy
related industries. As the Houston economy has diversified away from the
energy industry, however, it has become more susceptible to adverse effect
resulting from recession in the national economy. Economic recession over a
prolonged period of time in the Houston area could cause significant increases
in nonperforming assets, thereby causing operating losses, impairing liquidity
and eroding capital. There can be no assurance that future adverse changes in
the local economy would not have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.
INTEREST RATE RISK
The Company's earnings depend to a substantial extent on "rate
differentials," i.e., the differences between the income the Company receives
from loans, securities and other earning assets, and the interest expense it
pays to obtain deposits and other liabilities. These rates are highly
sensitive to many factors which are beyond the Company's control, including
general economic conditions and the policies of various governmental and
regulatory authorities. For example, in an expanding economy, loan demand
usually increases and the interest rates charged on loans usually increase.
Increases in the discount rate by the Federal Reserve Board usually lead to
rising interest rates, which affect the Company's interest income, interest
expense and securities portfolio. Also, governmental policies such as the
creation of a tax deduction for individual retirement accounts can increase
savings and affect the Company's cost of funds. From time to time, maturities
of assets and liabilities are not balanced, and a rapid increase or decrease
in interest rates could have an adverse effect on the net interest margin and
results of operations of the Company. The nature, timing and effect of any
future changes in federal monetary and fiscal policies on the Company and its
results of operations are not predictable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company--
Financial Condition--Interest Rate Sensitivity and Liquidity."
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon its ability to compete in the Houston
metropolitan area. In addition to competing with other commercial and savings
banks and savings and loan associations, the Company competes with credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based
16
<PAGE>
non-bank lenders and governmental organizations that may offer subsidized
financing at lower rates than those offered by the Company. Many of such
competitors have significantly greater financial and other resources than the
Company. Although the Company has been able to compete effectively in the
past, no assurance can be given that the Company will continue to be able to
compete effectively in the future. Various legislative acts in recent years
have led to increased competition among financial institutions. There can be
no assurance that the United States Congress will not enact legislation that
may further increase competitive pressures on the Company. Competition from
both financial and non-financial institutions is expected to continue.
SUPERVISION AND REGULATION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by federal and state
regulatory agencies. The Company is subject to the Bank Holding Company Act of
1956, as amended (the "BHCA"), and to regulation and supervision by the
Federal Reserve Board. SW Bank, as a national banking association, is subject
to regulation and supervision by the OCC and, as a result of the insurance of
its deposits, the Federal Deposit Insurance Corporation (the "FDIC"). These
regulations are intended primarily for the protection of depositors, rather
than for the benefit of investors. The Company and SW Bank are subject to
changes in federal and state law, as well as changes in regulation and
governmental policies, income tax laws and accounting principles. The effects
of any potential changes cannot be predicted but could adversely affect the
business and operations of the Company and SW Bank in the future.
Federal Reserve Board policy requires a bank holding company such as the
Company to serve as a source of financial strength to its banking subsidiaries
and commit resources to their support. The Federal Reserve Board has required
bank holding companies to contribute cash to their troubled bank subsidiaries
based upon this "source of strength" regulation, which could have the effect
of decreasing funds available for distributions to shareholders. See
"Supervision and Regulation."
The Company's principal source of funds is cash dividends from SW Bank. The
payment of dividends by SW Bank to the Company is subject to restrictions
imposed by federal banking laws, regulations and authorities. Without approval
of the OCC, dividends in any calendar year may not exceed SW Bank's total net
profits for that year, plus its retained profits for the preceding two years,
less any required transfers to capital surplus or to a fund for the retirement
of any preferred stock. In addition, a dividend may not be paid in excess of a
bank's cumulative net profits after deducting bad debts in excess of the
allowance for loan losses. As of March 31, 1997, approximately $20.4 million
was available for payment of dividends by SW Bank to the Company under these
restrictions without regulatory approval.
The federal banking statutes also prohibit a national bank from making any
capital distribution (including a dividend payment), if, after making the
distribution, the institution would be "undercapitalized," as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit a national bank from engaging in an unsafe or unsound
practice in conducting its business, as determined by the agency. The payment
of dividends could be deemed to constitute such an unsafe or unsound practice,
depending upon the financial condition of SW Bank. Regulatory authorities
could also impose administratively stricter limitations on the ability of SW
Bank to pay dividends to the Company if such limits were deemed appropriate to
preserve SW Bank's capital. See "Supervision and Regulation" and "Description
of Securities of the Company."
DEPENDENCE ON KEY PERSONNEL
The Company and SW Bank are dependent on certain key personnel, including
Walter E. Johnson, Paul B. Murphy, Jr., Joseph H. Argue, Yale Smith, Steve D.
Stephens, Sharon K. Sokol and David C. Farries, each of whom has relationships
with customers of SW Bank that the Company considers important to its
business. The loss of such individuals or other members of senior management
could have an adverse effect on the Company's growth and profitability. The
Company has entered into employment contracts with theses officers, as
described under "Management of the Company."
17
<PAGE>
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include (i) a Board of
Directors classified into three classes with the directors of each class
having staggered, three-year terms, (ii) a provision establishing certain
advance notice procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at an annual meeting
of shareholders and (iii) a provision that special meetings of the
shareholders of the Company may be called by shareholders only upon the
written request of holders of at least 33 1/3% of the outstanding shares of
capital stock entitled to vote at any such meeting. The Company's Articles of
Incorporation authorize the Board of Directors of the Company to issue shares
of preferred stock without shareholder approval and upon such terms as the
Board of Directors may determine. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions,
financings and other corporate purposes, could also have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, a controlling interest in the Company. See "Description
of Securities of the Company--Texas Law and Certain Provisions of the Articles
of Incorporation and Bylaws."
MEETING INFORMATION
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of Bank Common
Stock in connection with the solicitation of proxies by the Bank Board for use
at the Special meeting to be held on , 1997 and at any adjournments
or postponements thereof. At the Special Meeting, shareholders of the Bank
will consider and vote upon a proposal to approve the Merger Agreement. The
Bank Board is not aware as of the date of this Proxy Statement/Prospectus of
any business to be acted upon at the Special Meeting other than the proposal
to approve the Merger Agreement. If other matters are properly brought before
the Special Meeting or any adjournments or postponements thereof, the persons
appointed as proxies will have discretion to vote or act on such matters
according to their best judgment.
RECORD DATE; VOTING RIGHTS; VOTE REQUIRED
The Bank Board has fixed the close of business on , 1997 as the
record date for the determination of shareholders of the Bank entitled to
receive notice of and to vote at the special Meeting (the "Record Date"). On
the Record Date, there were 2,670,000 shares of Bank Common Stock outstanding.
Each holder of Bank Common Stock is entitled to one vote per share held of
record on the Record Date.
The presence in person or by proxy at the Special Meeting of the holders of
a majority of the outstanding shares of Bank Common Stock will constitute a
quorum for the transaction of business at the Special Meeting. Under the TBA
and the TBCA, approval of the Merger Agreement will require the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Bank
Common Stock. Directors and executive officers of the Bank and their
affiliates beneficially owned on the Record Date an aggregate of 1,551,013, or
approximately 56.2%, of the outstanding shares of Bank Common Stock. MEMBERS
OF THE BANK'S MANAGEMENT AND THEIR AFFILIATES INTEND TO VOTE ALL SHARES OF
BANK COMMON STOCK HELD BY THEM IN FAVOR OF APPROVAL OF THE MERGER AGREEMENT.
For additional information concerning the number of shares of Bank Common
Stock held by the Bank's management and their affiliates, see "The Bank--
Security Ownership of Management and Certain Beneficial Owners."
VOTING AND REVOCATION OF PROXIES
Shares of Bank Common Stock represented by a proxy properly signed and
received at or prior to the Special Meeting, unless subsequently revoked, will
be voted at the Special Meeting in accordance with the instructions thereon.
If a proxy is signed and returned without indicating any voting instructions,
shares of Bank Common Stock represented by such proxy will be voted FOR
approval of the Merger Agreement. Any proxy
18
<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 certain 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.
19
<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 has 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
20
<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.
21
<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"). Some of the
factors, which were considered as a whole, for acceptance of 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.
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
22
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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.
DISSENTERS' RIGHTS
The following is a brief summary of the rights of dissenting shareholders
pursuant to Texas law and 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 shareholders 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, it 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 otherwise directs.
If, within 60 says 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 ceases 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 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 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
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petition, the court determines the shareholder is not entitled to the relief
provided by Article 5.12, 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.
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.
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
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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 of up to four years. For
more information concerning the Employment Agreements, see "--Interests of
Certain Persons in the Merger."
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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
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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.
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.
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.
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
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<PAGE>
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.
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
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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 (through May 14, 1997)................... $23.00 $ 18.00
First Quarter (beginning January 27, 1997).............. $20.50 $17.875
</TABLE>
On , 1997, the closing sale price for the Common Stock as
reported by NASDAQ was $ per share. As of , 1997, the Company
had approximately 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."
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DESCRIPTION OF SECURITIES OF THE COMPANY
GENERAL
The Company has authorized two classes of stock: (i) 50,000,000 authorized
shares of Company Common Stock, $1.00 par value per share, 9,390,933 shares of
which are issued and outstanding as of March 31, 1997; and (ii) 1,000,000
authorized shares of Preferred Stock, $0.01 par value per share ("Preferred
Stock"), none of which have been issued. The following summary is qualified in
its entirety by reference to the Articles of Incorporation and Bylaws of the
Company (the "Company Articles" and "Company Bylaws", respectively), copies of
which have been filed as exhibits to the Registration Statement of which this
Proxy Statement/Prospectus is a part.
COMPANY COMMON STOCK
The holders of the Company Common Stock are entitled to one vote for each
share of Company Common Stock owned. Except as expressly provided by law and
except for any voting rights which may be conferred on any shares of Preferred
Stock issued by the Board of Directors of the Company (the "Company Board"),
all voting power is in the Company Common Stock. Holders of Company Common
Stock may not cumulate their votes for the election of directors. Holders of
Company Common Stock do not have preemptive rights to acquire any additional,
unissued or treasury shares of the Company, or securities of the Company
convertible into or carrying a right to subscribe to or acquire shares of the
Company.
Holders of Company Common Stock will be entitled to receive dividends out of
funds legally available therefor, if and when properly declared by the Company
Board. However, the Company Board may not declare or pay cash dividends on
Company Common Stock, and no Company Common Stock may be purchased by the
Company, unless full dividends on outstanding Preferred Stock for all past
dividend periods and for the current dividend period, if any, have been
declared and paid. See "Risk Factors--Supervision and Regulation" and
"Supervision and Regulation."
On the liquidation of the Company, the holders of Company Common Stock are
entitled to share pro rata in any distribution of the assets of the Company,
after the holders of shares of Preferred Stock have received the liquidation
preference of their shares plus any cumulated but unpaid dividends (whether or
not earned or declared), if any, and after all other indebtedness of the
Company has been retired.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock. The
Preferred Stock is available for issuance from time to time for various
purposes as determined by the Company Board, including, without limitation,
making future acquisitions, raising additional equity capital and financing.
Subject to certain limits set by the Company Articles, the Preferred Stock may
be issued on such terms and conditions, and at such times and in such
situations, as the Company Board in its sole discretion determines to be
appropriate, without any further approval or action by the shareholders
(unless otherwise required by laws, rules, regulations or agreements
applicable to the Company).
Moreover, except as otherwise limited by the Company Articles or applicable
laws, rules or regulations, the Company Board has the sole authority to
determine the relative rights and preferences of the Preferred Stock and any
series thereof without shareholder approval. The Company Articles require all
shares of Preferred Stock to be identical, except as to the following
characteristics, which may vary between different series of Preferred Stock;
(i) dividend rate, preference of dividend with respect to any other class or
series of stock, and cumulativity, non-cumulativity or partial cumulativity of
dividends; (ii) redemption price and terms, including, to the extent permitted
by law, the manner in which shares are to be chosen for redemption if less
than all the shares of a series are to be redeemed; (iii) sinking fund
provisions, if any, for the redemption or purchase of shares; (iv) the amount
payable upon shares in the event of voluntary or involuntary liquidation; (v)
the terms
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<PAGE>
and conditions on which shares may be converted, if the shares of any series
are issued with the privilege of conversion; and (vi) voting rights.
The Company Board does not intend to seek shareholder approval prior to any
issuance of Preferred Stock or any series thereof, unless otherwise required
by law or the rules of any applicable securities exchange. Under the TBCA,
shareholder approval prior to the issuance of shares of Company Common Stock
is required in connection with certain mergers. Frequently, opportunities
arise that require prompt action, such as the possible acquisition of a
property or business or the private sale of securities, and it is the belief
of the Company Board that the delay necessary for shareholder approval of a
specific issuance could be to the detriment of the Company and its
shareholders.
The Preferred Stock could be deemed to have an anti-takeover effect in that,
if a hostile takeover situation should arise, shares of Preferred Stock could
be issued to purchasers sympathetic with the Company's management or others in
such a way as to render more difficult or to discourage a merger, tender
offer, proxy contest, the assumption of control by a holder of a large block
of the Company's securities or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Company
Common Stock could include, among other things, (i) reduction of the amount
otherwise available for payments of dividends on Company Common Stock if
dividends are payable on the series of Preferred Stock; (ii) restrictions on
dividends on Company Common Stock if dividends on the series of Preferred
Stock are in arrears; (iii) dilution of the voting power of Company Common
Stock if the series of Preferred Stock has voting rights, including a possible
"veto" power if the series of Preferred Stock has class voting rights; (iv)
dilution of the equity interest of holders of Company Common Stock if the
series of Preferred Stock is convertible, and is converted, into Company
Common Stock; and (v) restrictions on the rights of holders of Company Common
Stock to share in the Company's assets upon liquidation until satisfaction of
any liquidation preference granted to the holders of the series of Preferred
Stock.
TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of Texas law, the Company Articles and the Company Bylaws
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are intended to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to negotiate first with the
Company.
The following discussion is a summary of certain material provisions of the
Company Articles and the Company Bylaws, copies of which are filed as exhibits
to the Registration Statement of which this Proxy Statement/Prospectus is a
part.
CLASSIFIED BOARD OF DIRECTORS. Under the Company Bylaws, the Company Board
is classified into three classes, with the directors being elected for
staggered, three-year terms. The classification of the Company Board has the
effect of making it more difficult to change the composition of the Company
Board, because at least two annual meetings of the shareholders would be
required to change the control of the Company Board rather than one. In
addition, the Bylaws provide that directors may be removed by the shareholders
only for cause and that vacancies on the Company Board may be filled by the
remaining directors.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINATIONS. The Company Bylaws
establish an advance notice procedure for shareholders to make nominations of
candidates for election as directors or bring other business before an annual
meeting of shareholders of the Company (the "Shareholder Notice Procedure").
The Shareholder Notice Procedure provides that only persons who are nominated
by, or at the direction of, the Company Board, or by a shareholder who has
given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company and
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<PAGE>
that, at an annual meeting, only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Company Board or by
a shareholder who has given timely written notice to the Secretary of the
Company of such shareholder's intention to bring such business before such
meeting.
Under the Shareholder Notice Procedure, for notice of shareholder
nominations or other business to be made at an annual meeting to be timely,
such notice must be received by the Company not less than 70 days prior to the
first anniversary of the previous year's annual meeting (or if the date of the
annual meeting is advanced by more than 20 days not later than the 10th day
after public announcement of the date of such meeting is first made).
Notwithstanding the foregoing, in the event that the number of directors to be
elected is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Company Board
made by the Company at least 80 days prior to the first anniversary of the
preceding year's annual meeting, a shareholder's notice will be timely, but
only with respect to nominees for any new positions created by such increase,
if it is received by the Company not later than the 10th day after such public
announcement is first made by the Company. The Company Bylaws further provide
that, for notice of a shareholder nomination to be made at a special meeting
at which directors are to be elected to be timely, such notice must be
received by the Company not later than the 10th day after public announcement
of the date of such meeting is first made.
Under the Shareholder Notice Procedure, a shareholder's notice to the
Company proposing to nominate a person for election as a director or proposing
other business must contain certain information specified in the Company
Bylaws, including the identity and address of the nominating shareholder, the
class and number of shares of stock of the Company owned by such shareholder,
information regarding the proposed nominee that would be required under the
federal securities laws to be included in a proxy statement soliciting proxies
for the proposed nominee and, with respect to business other than a
nomination, a brief description of the business the shareholder proposes to
bring before the meeting, the reasons for conducting such business at such
meeting and any material interest of such shareholder in the business so
proposed.
The Shareholder Notice Procedure may have the effect of precluding a contest
for the election of directors or the consideration of shareholder proposals if
the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate
of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS. The Company Articles and Company Bylaws
provide that special meetings of shareholders can be called by shareholders
only upon a written request signed by holders of one-third of the outstanding
shares of stock entitled to vote at the meeting.
REDUCED SHAREHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS. The Company Articles
provide that, notwithstanding any provision of the TBCA that would require
approval of more than a majority of the shares entitled to vote on such
matter, the vote or approval of a majority of the shares of the Company's
stock entitled to vote on such matter will be sufficient to approve such
matter. This provision reduces the required shareholder approval level for
certain actions such as a merger, a consolidation, a share exchange, certain
sales of substantially all of the Company's assets, a dissolution or an
amendment to the Company Articles, each of which would otherwise require two-
thirds shareholder approval under Texas law.
AMENDMENT OF BYLAWS. The Company Articles and Company Bylaws provide that
the Company Bylaws may be amended only by the Company Board. Shareholders do
not have the power to amend the Company Bylaws.
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<PAGE>
COMPARATIVE RIGHTS OF SHAREHOLDERS
GENERAL
Upon consummation of the transactions contemplated by the Agreement, the
shareholders of the Bank who do not exercise and perfect their statutory
dissenters' rights will become shareholders of the Company. Since the primary
governing corporate law of both the Company and the Bank is the TBCA, holders
of Bank Common Stock and of Company Common Stock have similar rights in many
respects. The principal similarities are as follows: each shareholder is
entitled to one vote for each share held by him; no shareholder is entitled to
cumulative voting rights in the election of directors; each shareholder is
entitled to such dividends as the Board of Directors may declare from legally
available funds; each shareholder is, upon liquidation, entitled to receive,
pro rata, any assets distributed to shareholders; and the directors and
officers are indemnified to the fullest extent permitted by the TBCA. Holders
of Company Common Stock, however, have no pre-emptive rights to subscribe for
or purchase any shares of Company Common Stock which may be issued from time
to time, while holders of Bank Common Stock are entitled to pre-emptive rights
with respect to the Bank Common Stock.
Under the laws of some jurisdictions, shares of Company Common Stock may not
be legal investments for certain institutional investors, such as insurance
companies and savings banks, whereas shares of Bank Common Stock are legal
investments. In addition, dividends on shares of Company Common Stock may be
subject to certain state taxes in jurisdictions other than Texas, whereas
dividends on shares of Bank Common Stock may not be subject to such taxes.
Shareholders may wish to determine whether their status under state laws
applicable to them will be changed as a result of the Merger.
There are certain significant differences between the Company and the Bank.
The Bank is organized under the Texas Banking Code of 1943, and as such, its
activities are generally limited to commercial banking business. The Company
is a Texas business corporation and a bank holding company registered with the
Federal Reserve Board. As a bank holding company, the Company can engage in
certain activities which are not permitted of a bank. Of most significance is
the fact that within the limits and under the conditions of the Bank Holding
Company Act of 1956, as amended (the "1956 Act"), and the regulations issued
thereunder (the "Regulations"), the Company may own interests in other banks.
Also, within the limits and under the conditions of the 1956 Act and
Regulations, the Company may make and acquire loans and other extensions of
credit such as those made by a mortgage company, may act as an insurance agent
or broker, and may act as an underwriter for credit life, accidence and health
insurance related to extensions of credit. The 1956 Act also permits the
ownership of stock in any company, the activities of which the Federal Reserve
Board determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
DIRECTORS
THE BANK. The Bank Bylaws provide for a board of directors consisting of not
less than 5 nor more than 25 directors and that the number of directors may be
changed within those limits at any meeting of Bank Shareholders. The number of
directors of the Bank is currently fixed at 17. Vacancies on the Bank Board
may be filled by a majority of the remaining directors even though such
majority may be less than a quorum of the Bank Board. Directors of the Bank
are elected by the holders of a majority of the shares of stock entitled to
vote thereon, present in person or by proxy at the meeting at which directors
are elected. The Bank Bylaws establish an advance notice procedure for
shareholders to make nominations of candidates for election as directors at an
annual meeting of the shareholders of the Bank, pursuant to which a notice of
such nominations must be delivered to the President of the Bank not less than
14 days nor more than 50 days prior to such meeting of shareholders, with such
notice containing the information specified in the Bank Bylaws.
THE COMPANY. The Company Bylaws provide that the number of directors shall
be fixed from time to time by the Company Board and that the directors shall
be divided into three classes, each serving a three-year term. See
"Description of Securities of the Company--Texas Law and Certain Provisions of
the Articles of Incorporation and Bylaws--Classified Board of Directors,"
above. The number of directors of the Company is
38
<PAGE>
currently fixed at 9. Vacancies on the Company Board may be filled by a
majority of the remaining directors or, in the event a vacancy is not so
filled or if no director remains, by a majority vote of the Company
shareholders. Directors of the Company are elected by plurality of the votes
of shares of Company capital stock entitled to vote thereon present in person
or by proxy at the meeting at which directors are elected. The Company Bylaws
establish an advance notice procedure for shareholders to make nominations of
candidates for election as directors or to bring other business before an
annual meeting of shareholders of the Company, as described under "Description
of Securities of the Company--Texas Law and Certain Provisions of the Articles
of Incorporation and Bylaws--Advance Notice of Shareholder Proposals and
Nominations," above.
AMENDMENT OF ARTICLES OF ASSOCIATION OR INCORPORATION AND BYLAWS
THE BANK. The Bank Articles may be amended only if the proposed amendment is
approved by the Bank Board and thereafter approved by holders of two-thirds of
the outstanding shares of stock entitled to vote thereon. The Bank Bylaws may
be amended by the holders of a majority of the outstanding shares of stock
entitled to vote thereon.
THE COMPANY. The Company Articles may be amended only if the proposed
amendment is approved by the Company Board and thereafter approved by the
holders of a majority of the outstanding shares of stock entitled to vote
thereon. The Company Bylaws may be amended only by a majority of the Company
Board. Shares of Company Preferred Stock currently authorized in the Company
Articles may be issued by the Company Board without amending the Company
Articles or otherwise obtaining the approval of the Company's shareholders.
See "Description of Securities of the Company--Preferred Stock."
SHAREHOLDER APPROVAL OF MERGERS AND ASSET SALES
THE BANK. Except as described below, the affirmative vote of holders of two-
thirds of the outstanding shares of stock entitled to vote thereon is required
to approve a merger or consolidation involving the Bank or the sale, lease or
exchange of all or substantially all of the Bank's assets. No vote of the
shareholders is required, however, in connection with a merger in which the
Bank is the surviving corporation and (i) the agreement of merger does not
amend in any respect the Bank Articles, (ii) each share of Bank capital stock
outstanding immediately before the merger is to be an identical outstanding
share of Bank capital stock after the merger, and (iii) the voting power of
the number of voting shares outstanding immediately after the merger, plus the
voting power of the shares issuable as a result of the merger, will not exceed
by more than 20% the voting power of the total number of voting shares of the
Bank outstanding immediately before the merger.
THE COMPANY. Except as described below, the affirmative vote of a majority
of the outstanding shares of stock entitled to vote thereon is required to
approve a merger or consolidation involving the Company or the sale, lease or
exchange of all or substantially all of the Company's assets. No vote of the
shareholders is required, however, in connection with a merger in which the
Company is the surviving corporation and (i) the agreement of merger for the
merger does not amend in any respect the Company Articles, (ii) each share of
capital stock outstanding immediately before the merger is to be an identical
outstanding or treasury share of the Company after the merger, and (iii) the
number of shares of capital stock to be issued in the merger (or to be
issuable upon conversion of any convertible instruments to be issued in the
merger) does not exceed 20% of the shares of the Company's capital stock
outstanding immediately before the merger.
SPECIAL MEETINGS
THE BANK. The Bank Bylaws provide that special meetings of the shareholders
may be called by the Chairman of the Board or the President, and shall be
called by the Secretary at the request in writing of a majority of the Bank
Board, or at the request in writing of Bank shareholders owning a majority of
all the shares entitled to vote at the meeting.
39
<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.
40
<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.
41
<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.
42
<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
43
<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
44
<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.
45
<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%
Adloph 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.
46
<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.
47
<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>
48
<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>
49
<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
50
<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>
51
<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%.
52
<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>
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>
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>
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>
53
<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>
54
<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>
55
<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 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 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.
56
<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.
While the Company has not entered into any agreement or understanding with
respect to the potential acquisition of any institution other than the Bank,
the Company believes market and regulatory factors may present opportunities
for the Company to acquire other financial institutions.
57
<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.
58
<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
--------
$868,578
========
</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.
59
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's consolidated balance
sheets and consolidated statements of income. This section should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information appearing elsewhere in this
Proxy Statement/Prospectus.
OVERVIEW
Total assets at March 31, 1997, and December 31, 1996 were $1.07 billion and
$1.04 billion, respectively. Loans were $649.3 million at March 31, 1997, an
increase of $47.8 million or 7.9% from $601.5 million at December 31, 1996.
This growth was a result of a strong local economy and the Company's style of
relationship banking. Deposits experienced similar growth, increasing to
$868.6 million at March 31, 1997 from $833.6 million at December 31, 1996.
Shareholders' equity was $79.1 million and $54.7 million at March 31, 1997 and
December 31, 1996, respectively. This increase was primarily due to the
Company's recently completed initial public offering ("IPO") of Company Common
Stock. A total of 1,322,500 shares of Company Common Stock were sold by the
Company at $16.50 per share. Substantially all of the net proceeds from the
IPO were contributed to SW Bank and used to redeem the 750,000 outstanding
shares of SW Bank's preferred stock and for general corporate purposes.
Total assets at December 31, 1996, 1995 and 1994 were $1.0 billion, $825.5
million, and $578.3 million, respectively. This growth was a result of a
strong local economy, the addition of new loan officers and the Company's
style of relationship banking. Loans were $601.5 million at December 31, 1996,
an increase of $163.2 million or 37.2% from $438.3 million at the end of 1995.
Loans were $358.3 million at year end 1994. Deposits experienced similar
growth, increasing to $833.6 million at year end 1996 from $672.6 million at
year end 1995 and $489.8 million at the year end 1994. Shareholders' equity
was $54.7 million, $44.8 million and $35.8 million at December 31, 1996, 1995
and 1994, respectively.
For the three months ended March 31, 1997, the Company had net income
available to common shareholders of $3.1 million, an increase of $636,000 or
26.0% from the same time period in 1996. Net income per share increased to
$0.32 for the three months ended March 31, 1997 from $0.29 for the same time
period in 1996. This strong earnings growth was due primarily to a sharp
increase in net interest income, which was driven by strong loan growth, and
an increase in noninterest income. This resulted in a return on average assets
of 1.23% and an annualized return on average common equity of 17.74% for the
three months ended March 31, 1997 compared to 1.27% and 21.47%, respectively,
for the same time period in 1996.
Net income available for common shareholders was $9.6 million, $7.8 million,
and $5.8 million and earnings per common share was $1.12, $0.92, and $0.70 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 expense control and resulted in returns on average assets of
1.11%, 1.16%, and 1.14% and returns on average common equity of 19.44%,
19.20%, and 17.44% for the years ended 1996, 1995 and 1994, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income represents the amount by which
interest income on interest-earning assets, including securities and loans,
exceeds interest expense incurred on interest-bearing liabilities, including
deposits and other borrowed funds. Net interest income is the principal source
of the Company's earnings. Interest rate fluctuations, as well as changes in
the amount and type of earning assets and liabilities, combine to affect net
interest income.
Net interest income was $10.5 million for the three months ended March 31,
1997 as compared to $8.6 million for the same period in 1996. The increase in
net interest income was primarily due to an increase of
60
<PAGE>
$171.2 million or 22.6% in average interest earning assets from the three
months ended March 31, 1996. Net interest income was also positively affected
by an improved net interest margin. The net interest margin is affected by
changes in the amount and mix of interest-earning assets and interest-bearing
liabilities. The increase in the net interest margin was primarily due to the
increase in the yield on average earning assets which improved six basis
points to 8.00% for the three months ended March 31, 1997. The net interest
margin for the three months ended March 31, 1997 was 4.58% compared to 4.53%
for the comparable period in 1996.
1996 versus 1995. Net interest income totaled $36.2 million in 1996 compared
to $28.7 million in 1995, an increase of $7.5 million or 26.1%. This resulted
in net interest margins of 4.51% and 4.60% and net interest spreads of 3.35%
and 3.42% for 1996 and 1995, respectively.
The increase in net interest income was due primarily to a $176.9 million or
28.3% increase in average earning assets. Average loans grew $100.6 million or
25.9% during 1996 while average securities grew $89.8 million or 43.4% during
the same period. The yield earned on average loans outstanding decreased 41
basis points to 9.14% in 1996 and was partially offset by a 38 basis point
increase in the yield earned on average securities. Overall, the yield earned
on average earning assets declined 18 basis points to 7.92% in 1996 and was
only partially offset by an 11 basis point decrease in the rate paid on
average interest-bearing liabilities.
1995 versus 1994. Net interest income totaled $28.7 million in 1995 compared
to $22.8 million in 1994, an increase of $5.8 million or 25.6%. This resulted
in net interest margins of 4.60% and 4.82% and net interest spreads of 3.42%
and 3.89% for 1995 and 1994, respectively.
The primary reason for higher net interest income was strong growth in
average loans coupled with higher yields on the loan portfolio which increased
to 9.55% from 8.41%. In addition, the securities portfolio experienced
substantial growth and the yield on the portfolio increased 73 basis points to
5.64% for the year ended 1995. Offsetting these increases was a large increase
in interest expense due to the growth in savings and money market account
balances and an increase in the rate paid to 4.54% from 3.17% for the year
ended 1995 versus 1994. Also, interest expense increased due to additional
volume and interest rates paid on certificates of deposit and repurchase
agreements and borrowed funds.
61
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in 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 AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE EXPENSED RATE BALANCE EXPENSED RATE
----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans.................. $ 614,021 $13,590 8.98% $439,489 $10,185 9.32%
Securities............. 290,533 4,418 6.17 307,212 4,629 6.06
Federal funds sold and
other earning assets.. 25,865 352 5.52 12,504 175 5.63
---------- ------- ---- -------- ------- ----
Total interest-earning
assets............... 930,419 18,360 8.00% 759,205 14,989 7.94%
------- ---- ------- ----
Less allowance for loan
losses................ (6,244) (5,065)
---------- --------
Total earning assets,
net of allowance...... 924,175 754,140
Nonearning assets...... 92,496 59,415
---------- --------
Total assets.......... $1,016,671 $813,555
========== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 42,797 145 1.37% $ 31,910 120 1.51%
Savings and money
market accounts....... 352,417 3,947 4.54 303,749 3,285 4.35
Certificates of
deposit............... 154,354 2,056 5.40 132,823 1,770 5.36
Repurchase agreements
and borrowed funds.... 143,211 1,712 4.85 101,979 1,263 4.98
---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 692,779 7,860 4.60% 570,461 6,438 4.54%
---------- ------- ---- -------- ------- ----
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 247,404 184,861
Other liabilities...... 3,524 4,631
---------- --------
Total liabilities..... 943,707 759,953
---------- --------
Bank preferred stock.... 2,441 7,323
Shareholders' equity.... 70,523 46,279
---------- --------
Total liabilities and
shareholders' equity. $1,016,671 $813,555
========== ========
Net interest income..... $10,500 $ 8,551
======= =======
Net interest spread..... 3.40% 3.40%
==== ====
Net interest margin..... 4.58% 4.53%
==== ====
</TABLE>
62
<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 EXPENSED RATE BALANCE EXPENSED RATE BALANCE EXPENSED RATE
- ----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$488,978 $44,709 9.14% $388,329 $37,089 9.55% $317,373 $26,684 8.41%
296,482 17,856 6.02 206,717 11,668 5.64 140,478 6,898 4.91
15,804 868 5.49 29,325 1,825 6.22 15,839 706 4.46
-------- ------- ---- -------- ------- ---- -------- ------- ----
801,264 63,433 7.92% 624,371 50,582 8.10% 473,690 34,288 7.24%
-------- ------- ---- -------- ------- ---- -------- ------- ----
(5,348) (4,700) (3,679)
-------- -------- --------
795,916 619,671 470,011
67,650 49,325 41,160
-------- -------- --------
$863,566 $668,996 $511,171
======== ======== ========
$ 37,325 521 1.40% $ 31,886 626 1.96% $ 34,928 597 1.71%
302,408 13,477 4.46 243,652 11,066 4.54 153,105 4,850 3.17
139,994 7,501 5.36 119,349 6,290 5.27 116,099 4,530 3.90
117,073 5,763 4.92 72,578 3,908 5.38 37,697 1,467 3.89
-------- ------- ---- -------- ------- ---- -------- ------- ----
596,800 27,262 4.57% 467,465 21,890 4.68% 341,829 11,444 3.35%
-------- ------- ---- -------- ------- ---- -------- ------- ----
205,720 151,905 133,696
4,409 8,425 2,173
-------- -------- --------
806,929 627,795 477,698
-------- -------- --------
7,323 804 --
49,314 40,397 33,473
-------- -------- --------
$863,566 $668,996 $511,171
======== ======== ========
$36,171 $28,692 $22,844
======= ======= =======
3.35% 3.42% 3.89%
==== ==== ====
4.51% 4.60% 4.82%
==== ==== ====
</TABLE>
63
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED 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
------ ----- ----- ------ ------- ------- ------- ------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................... $4,044 $(527) $(112) $3,405 $ 9,613 $(1,993) $ 7,620 $5,966 $4,439 $10,405
Securities.............. (239) 79 (51) (211) 5,067 1,121 6,188 3,250 1,579 4,829
Federal funds sold and
other earning assets... 186 (7) (2) 177 (841) (116) (957) 571 490 1,061
------ ----- ----- ------ ------- ------- ------- ------ ------ -------
Total increase in
interest income...... 3,991 (455) (165) 3,371 13,839 (988) 12,851 9,787 6,508 16,295
INTEREST-BEARING
LIABILITIES:
Interest-bearing demand
deposits............... 41 (15) (1) 25 107 (212) (105) (51 ) 96 45
Savings and money market
accounts............... 531 167 (36) 662 2,669 (258) 2,411 2,877 3,325 6,202
Certificates of deposit. 288 17 (19) 286 1,088 123 1,211 127 1,632 1,759
Repurchase agreements
and borrowed funds..... 511 (48) (14) 449 2,396 (541) 1,855 1,358 1,083 2,441
------ ----- ----- ------ ------- ------- ------- ------ ------ -------
Total increase in
interest expense..... 1,371 121 (70) 1,422 6,260 (888) 5,372 4,311 6,136 10,447
------ ----- ----- ------ ------- ------- ------- ------ ------ -------
Increase in net interest
income................. $2,620 $(576) $ (95) $1,949 $ 7,579 $ (100) $ 7,479 $5,476 $ 372 $ 5,848
====== ===== ===== ====== ======= ======= ======= ====== ====== =======
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$438,000 for the three months ended March 31, 1997 from $280,000 for the same
time period in 1996, an increase of $158,000 or 56.4%. The increase was driven
primarily by strong loan growth.
The 1996 provision for loan losses increased to $1.67 million from $925,000
in 1995, an increase of $745,000 or 80.5%. The provision for the year ended
1995 decreased by $220,000 or 19.2% from the year ended December 31, 1994. The
increased provision in 1996 resulted from higher than expected loan growth
rather than higher nonperforming assets.
NONINTEREST INCOME. Noninterest income for the three months ended March 31,
1997 was $1.8 million, an increase of $763,000 or 71.6% over the same period
in 1996.
Noninterest income for the year ended December 31, 1996 was $4.9 million, an
increase of $1.2 million or 31.7% over the same period in 1995. Noninterest
income of $3.7 million earned in the year ended December 31, 1995 represented
an increase of $649,000 or 21.2% over the same period in 1994. The following
table presents for the periods indicated the major changes in noninterest
income.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER
MARCH 31, 31,
------------- --------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.......... $ 927 $ 662 $2,883 $2,386 $2,122
Retail services income....................... 22 22 90 44 37
Corporate services income.................... 11 4 26 11 35
Loan operations.............................. 155 96 535 439 354
Investment services.......................... 508 268 1,201 695 221
Gain on sale of securities, net.............. 137 -- -- -- --
Other noninterest income..................... 68 13 153 137 294
------ ------ ------ ------ ------
Total noninterest income................... $1,828 $1,065 $4,888 $3,712 $3,063
====== ====== ====== ====== ======
</TABLE>
64
<PAGE>
Service charges were $927,000 for the three months ended March 31, 1997,
compared to $662,000 for the three months ended March 31, 1996, an increase of
$265,000 or 40.0%. During this period the Company introduced several new
products which contributed to the increase in service charge income.
Additionally, the number of accounts serviced increased to 19,166 at March 31,
1997 from 15,409 at March 31, 1996.
Other significant increases in noninterest income were recognized in the
categories of loan operations and investment services. Fee income from
investment services has increased significantly in the past year. For the
three months ended March 31, 1997, investment services income grew to
$508,000, an increase of $240,000 or 89.6% over the 1996 level. This increase
is the result of a strategic focus by the Company to increase its competitive
position in providing investment services.
Service charges were $2.9 million for the year ended December 31, 1996,
compared to $2.4 million for the year ended December 31, 1995, an increase of
$497,000 or 20.8%, and increased $264,000 or 12.4% from 1994 to 1995. During
this three year period the Company introduced several new products which
contributed to the increase in service charge income. In addition, the number
of deposit accounts similarly grew from 12,736 at December 31, 1994 to 14,686
at December 31, 1995 and to 17,997 at December 31, 1996.
Other significant increases in noninterest income were recognized in the
categories of loan operations and investment services. Fee income from
investment services has increased significantly in each of the past three
years. For the year ended 1996 investment services income grew to $1.2
million, an increase of $506,000 or 72.8% over the 1995 level, and increased
to $695,000 for the year ended 1995, an increase of $474,000 or 214.5% from
1994. These increases are the result of a strategic focus by the Company to
increase its competitive position in providing investment services.
NONINTEREST EXPENSES. For the three months ended March 31, 1997, noninterest
expenses totaled $7.1 million, an increase of $1.7 million, or 31.4%, from
$5.4 million during the comparable period in 1996. The increase in noninterest
expenses during these periods was due primarily to salaries and employee
benefits. For the same time periods the efficiency ratio increased slightly to
58.14% for the three months ended March 31, 1997, from 56.12% for the
comparable period in 1996. This slight deterioration resulted from an increase
in salaries and benefits which as a percent of average earning assets
increased to 1.84% for the three months ended March 31, 1997 from 1.69% for
the comparable 1996 period.
Salary and benefit expense for the three months ended March 31, 1997 was
$4.2 million, an increase of $1.0 million or 31.2% from $3.2 million for the
three months ended March 31, 1996. This increase was due primarily to the
hiring of additional personnel required to accommodate the Company's growth,
including staffing for two new branches, a second downtown branch at 909
Fannin, and a branch west of downtown in the Memorial area. Total full-time
equivalent employees for the three months ended March 31, 1997 and March 31,
1996 were 332 and 275 respectively.
Occupancy expense increased $415,000 or 51.6% to $1.2 million for the three
months ended March 31, 1997. Major categories included within occupancy
expense are building lease expense, depreciation expense, and maintenance
contract expense. Building lease expense increased to $414,000 for the three
months ended March 31, 1997 from $235,000 for the same period in 1996. This
increase was the result of opening two new branches during the past year and
additionally, by increasing the rentable square feet of the Galleria location
by moving to a larger facility. Depreciation expense increased $187,000 or
54.0% in 1997 from the comparable period in 1996. This increase was due
primarily to depreciation on equipment provided to new employees and expense
related to technology upgrades throughout the Company. Maintenance contract
expense for the three months ended March 31, 1997 was $114,000, an increase of
$29,000 or 34.1% compared to $85,000 in 1996. The Company has purchased
maintenance contracts for major operating systems throughout the organization.
For the year ended 1996, noninterest expenses totaled $24.0 million, an
increase of $4.5 million, or 23.2%, from $19.5 million during 1995, which had
increased from $15.8 million during 1994. The increase in
65
<PAGE>
noninterest expenses during these periods was due primarily to salaries and
employee benefits. For the same time periods the efficiency ratio was 58.10%
in 1996, 58.08% in 1995 and 60.67% in 1994. The improvement was due primarily
to a large increase in earning assets and the Company's continued efforts to
control overhead expenses.
Salary and benefit expense for the year ended December 31, 1996 was $14.4
million, an increase of $3.7 million or 34.6% from $10.7 million for the year
ended December 31, 1995. Salary and benefit expense for the year ended
December 31, 1995 was up $2.0 million or 23.0% from the same period in 1994.
This increase was due primarily to hiring of additional personnel required to
accommodate the Company's growth. Total full-time equivalent employees for the
years ended 1996, 1995 and 1994 were 315, 256, and 205, respectively.
Occupancy expense rose $965,000 and $515,000 or 38.4% and 25.8% in 1996 and
1995, respectively. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance contract
expense. Building lease expense increased to $1,047,000 in 1996 from $779,000
in 1995, an increase of $268,000 or 34.4% and increased $122,000 or 18.6% for
the year ended 1995. Additionally, the Company increased the rentable square
feet of the Galleria location by moving to a larger facility. Depreciation
expense increased $597,000 and $412,000 or 41.5% and 40.1% in 1996 and 1995
respectively. This increase was due primarily to depreciation on equipment
provided to new employees and expense related to technology upgrades
throughout the Company. Maintenance contract expense for the year ended
December 31, 1996 was $339,000, an increase of $92,000 or 37.2% compared to
$247,000 in 1995 and $157,000 in 1994. The Company has purchased maintenance
contracts for major operating systems throughout the organization.
INCOME TAXES. Income tax expense includes the regular federal income tax at
the statutory rate, plus the income tax component of the Texas franchise tax.
The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of nondeductible
interest expense, and the amount of other nondeductible expenses. Taxable
income for the income tax component of the Texas franchise tax is the federal
pre-tax income, plus certain officers' salaries, less interest income from
federal securities. For the three months ended March 31, 1997, income tax
expense was $1.7 million, an increase of $300,000 or 21.4% from the $1.4
million of income tax expense for the same period in 1996. In 1996 income tax
expense was $5.4 million, an increase of $1.2 million or 28.6% from the $4.2
million of income tax expense in 1995. In 1995 income tax expense was $4.2
million, an increase of $1.1 million or 35.5% from the $3.1 million of income
tax expense in 1994. The income tax component of the Texas franchise tax was
$18,600 in 1996, $145,000 in 1995, and $53,000 in 1994.
IMPACT OF INFLATION. The effects of inflation on the local economy and on
the Company's operating results have been relatively modest for the past
several years. Since substantially all of the Company'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 Company 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.
66
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO. Total loans were $649.3 million at March 31, 1997, an
increase of $47.8 million or 7.9% from $601.5 million at December 31, 1996.
Consistent with the Company's historically high rate of growth, this increase
is believed to be the result of the Company's style of relationship banking
featuring professional, attentive and responsive service to customers' needs,
and focusing on commercial lending to middle market companies and private
banking for individuals.
Total loans were $601.5 million at December 31, 1996, an increase of $163.2
million, or 37.2% from December 31, 1995. Total loans were $438.3 million at
December 31, 1995, an increase of $80 million, or 22.3%, from $358.3 million
at December 31, 1994.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial...... $329,568 50.8% $295,003 49.0% $194,095 44.3% $148,177 41.3% $125,062 43.7% $ 95,339 45.3%
Real estate
Construction &
land
development.... 71,193 11.0 71,808 12.0 46,926 10.7 43,895 12.3 35,362 12.4 13,977 6.6
1-4 family
residential.... 123,369 19.0 113,801 18.9 88,120 20.1 75,132 21.0 59,371 20.8 51,510 24.5
Commercial owner
occupied....... 61,109 9.4 52,138 8.7 36,765 8.4 26,907 7.5 21,167 7.4 17,866 8.5
Farmland........ 8,519 1.3 8,845 1.5 5,283 1.2 2,945 0.8 2,998 1.0 2,283 1.1
Other........... 3,435 0.5 3,159 0.5 22,923 5.2 23,766 6.6 13,325 4.7 10,478 5.0
Consumer......... 52,142 8.0 56,721 9.4 44,147 10.1 37,483 10.5 28,607 10.0 19,005 9.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..... $649,335 100.0% $601,475 100.0% $438,259 100.0% $358,305 100.0% $285,892 100.0% $210,458 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
67
<PAGE>
The primary lending focus of the Company is on small and medium sized
commercial, residential mortgage and consumer loans. The Company offers a
variety of commercial lending products including term loans, lines of credit
and equipment financing. A broad range of short- to medium-term commercial
loans, both collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and receivables), business
expansion (including acquisitions of real estate and improvements) and the
purchase of equipment and machinery. The purpose of a particular loan
generally determines its structure.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such
debt from income. As a general practice, the Company takes as collateral a
lien on any available real estate, equipment or other assets. Working capital
loans are primarily collateralized by short-term assets whereas term loans are
primarily collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers.
Additionally, a portion of the Company's lending activity consists of the
origination of single-family residential mortgage loans collateralized by
owner-occupied properties located in the Company's primary market area. The
Company offers a variety of mortgage loan products which generally are
amortized over five to 30 years.
Loans collateralized by single-family residential real estate generally have
been originated in amounts of no more than 80% of appraised value. The Company
requires mortgage title insurance and hazard insurance in the amount of the
loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a three to seven year period,
such loans often remain outstanding for significantly shorter periods than
their contractual terms.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized
loans. The terms of these loans typically range from 12 to 84 months and vary
based upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with fixed
interest rates and floating rates in each maturity range as of December 31,
1996 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
AFTER
ONE
THROUGH AFTER
ONE YEAR FIVE FIVE
OR LESS YEARS YEARS TOTAL
-------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial.................... $190,707 $ 91,637 $12,659 $295,003
Real estate construction..................... 44,004 26,719 1,085 71,808
-------- -------- ------- --------
Total...................................... $234,711 $118,356 $13,744 $366,811
======== ======== ======= ========
Loans with a fixed interest rate............. $ 56,651 $ 39,128 $ 7,714 $103,493
Loans with a floating interest rate.......... 178,060 79,228 6,030 263,318
-------- -------- ------- --------
Total...................................... $234,711 $118,356 $13,744 $366,811
======== ======== ======= ========
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures. Under SFAS No. 114, as amended,
a loan is considered impaired, based on current information and events, if it
is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the
loan agreement. The measurement of impaired loans is based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or the loan's observable market price or based on the fair
68
<PAGE>
value of the collateral if the loan is collateral-dependent. The adoption of
SFAS No. 114 did not result in any additional provision for loan losses.
NONPERFORMING ASSETS. The Company has well developed procedures in place to
maintain a high quality loan portfolio. These procedures include a Credit
Quality Assurance Process that begins with approval of lending policies and
underwriting guidelines by the Board of Directors, an independent loan review
department staffed with OCC experienced personnel, low individual lending
limits for officers, Senior Loan Committee approval for large credit
relationships and quality loan documentation procedures. The loan review
department has consistently identified and analyzed weaknesses in the
portfolio and reports credit risk grade changes on a monthly basis to bank
management and directors. The Company also maintains a well developed
monitoring process for credit extensions in excess of $100,000. The Company
performs monthly and quarterly concentration analyses based on industries,
collateral types, business lines, large credit sizes and officer portfolio
loads. The Company has established underwriting guidelines to be followed by
its officers. The Company also monitors its delinquency levels for any
negative or adverse trends. There can be no assurance, however, that the
Company's loan portfolio will not become subject to increasing pressures from
deteriorating borrower credit due to general economic conditions.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans
past due 90 days, however, are placed on nonaccrual status, unless the loan is
both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction
of principal as long as doubt exists as to collection. The Company is
sometimes required to revise a loan's interest rate or repayment terms in a
troubled debt restructuring.
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets were $1.6 million at March 31, 1997, $1.3
million at December 31, 1996, $294,000 at December 31, 1995 and $688,000 at
December 31, 1994. This resulted in a ratio of nonperforming assets to loans
plus other real estate of 0.24%, 0.21%, 0.07%, and 0.19% for the three months
ended March 31, 1997 and years ended 1996, 1995, and 1994, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------
1997 1996 1995 1994 1993 1992
--------- ------ ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans................. $1,230 $ 955 $291 $397 $202 $179
Accruing loans 90 or more days
past due........................ 57 22 3 -- 29 --
Restructured loans............... -- -- -- -- -- --
Other real estate and foreclosed
property........................ 263 281 -- 291 400 466
------ ------ ---- ---- ---- ----
Total nonperforming assets..... $1,550 $1,258 $294 $688 $631 $645
====== ====== ==== ==== ==== ====
Nonperforming assets to total
loans and other real estate..... 0.24% 0.21% 0.07% 0.19% 0.22% 0.31%
</TABLE>
The Company regularly updates appraisals on loans collateralized by real
estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where updated appraisals reflect reduced
collateral values, an evaluation of the borrower's overall financial condition
is made to determine the need, if any, for possible writedowns or appropriate
additions to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a reserve
established through charges to earnings in the form of a provision for loan
losses. Based on an evaluation of the loan portfolio, management presents a
quarterly review of the allowance for loan losses to the Board of Directors,
indicating any changes in the allowance since the last review and any
recommendations as to adjustments in the allowance. In making its evaluation,
management considers the diversification by industry of the Company's
commercial loan portfolio,
69
<PAGE>
the effect of changes in the local real estate market on collateral values,
the results of recent regulatory examinations, the effects on the loan
portfolio of current economic indicators and their probable impact on
borrowers, the amount of charge-offs for the period, the amount of
nonperforming loans and related collateral security, the evaluation of its
loan portfolio by the loan review function and the annual examination of the
Company's financial statements by its independent auditors. Charge-offs occur
when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans
and other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses determined on an annualized basis to
maintain the allowance for loan losses at an adequate level determined
according to the foregoing methodology.
Management believes that the allowance for loan losses at March 31, 1997 is
adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Company will not sustain losses in future
periods, which could be greater than the size of the allowance at March 31,
1997.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
MARCH 31, ----------------------------------------------
1997 1996 1995 1994 1993 1992
--------- ------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan
losses at January 1.... $6,024 $4,921 $ 4,294 $ 3,250 $ 2,204 $ 1,857
Provision for loan
losses................. 438 1,670 925 1,145 1,005 767
Charge-offs............. (175) (595) (312) (167) (19) (441)
Recoveries.............. 16 28 14 66 60 21
------ ------ -------- -------- -------- --------
Allowance for loan
losses at end of
period................. $6,302 $6,024 $ 4,921 $ 4,294 $ 3,250 $ 2,204
====== ====== ======== ======== ======== ========
Allowance to period-end
loans.................. 0.97% 1.00% 1.12% 1.20% 1.14% 1.05%
Net charge-offs
(recoveries) to average
loans.................. 0.11 0.12 0.08 0.03 (0.02) 0.24
Allowance to period-end
nonperforming loans.... 489.67 616.58 1,673.78 1,081.58 1,406.84 1,231.28
</TABLE>
70
<PAGE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for 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 from 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........... $ 780 50.8% $ 385 49.0% $ 103 44.3%
Real estate:
Construction and
land development... -- 11.0 -- 12.0 -- 10.7
1-4 family
residential........ -- 19.0 -- 18.9 -- 20.1
Commercial owner
occupied........... -- 9.4 -- 8.7 -- 8.4
Farmland............ -- 1.3 -- 1.5 -- 1.2
Other............... -- 0.5 -- 0.5 -- 5.2
Consumer.............. 57 8.0 49 9.4 25 10.1
Unallocated........... 5,465 5,590 4,793
------ ------ ------
Total allowance for loan
losses................. $6,302 $6,024 $4,921
====== ====== ======
</TABLE>
<TABLE>
<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........... $ 88 41.3% $ 100 43.7% $ 140 45.3%
Real estate:
Construction and
land development... -- 12.3 -- 12.4 -- 6.6
1-4 family
residential........ -- 21.0 -- 20.8 -- 24.5
Commercial owner
occupied........... -- 7.5 -- 7.4 -- 8.5
Farmland............ -- 0.8 -- 1.0 -- 1.1
Other............... -- 6.6 -- 4.7 -- 5.0
Consumer.............. 51 10.5 58 10.0 32 9.0
Unallocated........... 4,155 3,092 2,032
------ ------ ------
Total allowance for loan
losses................. $4,294 $3,250 $2,204
====== ====== ======
</TABLE>
SECURITIES. Effective January 1, 1994, the Company adopted SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. At the date
of purchase, the Company is required to classify 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. Securities not classified as either held to maturity or trading are
71
<PAGE>
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. Prior to January 1,
1994, securities were stated at cost, adjusted for accretion of discounts and
amortization of premiums which were recognized as adjustments to interest
income. Gains and losses on sales of securities are determined using the
specific-identification method.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities" which provided a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Company transferred all securities in the held to maturity
portfolio to the available for sale portfolio in November 1995. The
transferred securities had an amortized cost of approximately $150.3 million
and net unrealized losses of approximately $574,000. The transfer resulted in
a decrease of approximately $373,000 to consolidated shareholders' equity.
Such reassessment does not change management's intent to hold other debt
securities to maturity in the future. At this time, classification of all
securities as available for sale allows the Company to manage its investment
portfolio more effectively and to enhance the average yield on the portfolio.
The following table summarizes the amortized cost of securities held by the
Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------------------
1997 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
securities.............. $ 88,461 $ 83,345 $ 97,797 $ 95,336 $ 88,745 $38,231
Mortgage-backed
securities.............. 177,841 159,106 154,083 55,079 45,857 24,003
Federal Reserve Bank
Stock................... 950 950 946 718 716 479
Federal Home Loan Bank
Stock................... 39,966 39,386 37,692 1,421 1,036 718
Other securities......... 4,898 6,161 4,329 150 150 150
-------- -------- -------- -------- -------- -------
Total securities....... $312,116 $288,948 $294,847 $152,704 $136,504 $63,581
======== ======== ======== ======== ======== =======
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1997 1996 1995 1994
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale........................ $311,820 $289,217 $295,183 $ 63,628
Held to maturity.......................... -- -- -- 87,839
Securities at amortized cost.............. -- -- -- --
-------- -------- -------- --------
Total securities........................ $311,820 $289,217 $295,183 $151,467
======== ======== ======== ========
</TABLE>
72
<PAGE>
The following tables present the amortized cost of securities classified as
available for sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED ---------- FAIR AMORTIZED ---------- FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---- ----- -------- --------- ---- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities............. $ 88,461 $101 $(206) $ 88,356 $ 83,345 $315 $ (68) $ 83,592
Mortgage-backed
securities............. 177,841 478 (671) 177,648 159,106 524 (507) 159,123
Federal Reserve Bank
Stock.................. 950 -- -- 950 950 -- -- 950
Federal Home Loan Bank
Stock.................. 39,966 -- -- 39,966 39,386 -- -- 39,386
Other securities........ 4,898 2 -- 4,900 6,161 5 -- 6,166
-------- ---- ----- -------- -------- ---- ----- --------
Total securities...... $312,116 $581 $(877) $311,820 $288,948 $844 $(575) $289,217
======== ==== ===== ======== ======== ==== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------ ----------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED ---------- FAIR AMORTIZED ------------
COST GAIN LOSS VALUE COST GAIN LOSS FAIR VALUE
--------- ---- ----- -------- --------- ---- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities............. $ 97,797 $491 $(200) $ 98,088 $47,584 $29 $ (810) $46,803
Mortgage-backed
securities............. 154,083 451 (416) 154,118 15,142 14 (470) 14,686
Federal Reserve Bank
Stock.................. 946 -- -- 946 718 -- -- 718
Federal Home Loan Bank
Stock.................. 37,692 -- -- 37,692 1,421 -- -- 1,421
Other securities........ 4,329 10 -- 4,339 -- -- -- --
-------- ---- ----- -------- ------- --- ------- -------
Total securities...... $294,847 $952 $(616) $295,183 $64,865 $43 $(1,280) $63,628
======== ==== ===== ======== ======= === ======= =======
</TABLE>
73
<PAGE>
The following table presents the amortized cost of securities classified as
held to maturity and their approximate fair values at December 31, 1994. No
securities were classified as held to maturity at March 31, 1997, December 31,
1996 or December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities............. $47,752 $-- $(1,928) $45,824
Mortgage-backed securities............. 39,937 -- (2,294) 37,643
Other securities....................... 150 -- (7) 143
------- --- ------- -------
Total securities..................... $87,839 $-- $(4,229) $83,610
======= === ======= =======
</TABLE>
Securities totaled $289.2 million at December 31, 1996, a decrease of $6.0
million from $295.2 million at December 31, 1995. During 1995, securities
increased $143.7 million from $151.5 million at December 31, 1994. The yield
on the securities portfolio for 1996 was 6.02% while the yield was 5.64% in
1995.
The Company has no mortgage-backed securities that have been issued by non-
agency entities. Included in the Company's mortgage-backed securities at
December 31, 1996 were $7.5 million in agency issued collateral mortgage
obligations.
At December 31, 1996, 53.6% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. At December 31, 1996,
approximately $78.2 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase.
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at December 31, 1996. 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>
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS TOTAL
-------------- ------------- ------------- -------------- --------------
SECURITY 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. Government
securities............. $ 39,877 5.96% $43,468 6.04% $ -- --% $ -- --% $ 83,345 6.00%
Mortgage-backed
securities............. -- -- 31,638 5.86 42,118 6.76 85,350 6.29 159,106 6.33
Federal Reserve Bank
Stock.................. -- -- -- -- -- -- 950 6.00 950 6.00
Federal Home Loan Bank
Stock.................. -- -- -- -- -- -- 39,386 5.90 39,386 5.90
Other securities........ 6,011 5.02 50 7.86 100 7.86 -- -- 6,161 5.09
Federal funds sold...... 63,832 5.35 -- -- -- -- -- -- 63,832 5.35
Interest-bearing
deposits............... 1,154 5.18 -- -- -- -- -- -- 1,154 5.18
-------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total investments...... $110,874 5.55% $75,156 5.97% $42,218 6.76% $125,686 6.17% $353,934 6.00%
======== ==== ======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
74
<PAGE>
DEPOSITS. The Company offers a variety of deposit accounts having a wide
range of interest rates and terms. The Company's deposits consist of demand,
savings, NOW accounts, money market and time accounts. The Company relies
primarily on advertising, competitive pricing policies and customer service to
attract and retain these deposits. As of December 31, 1996, the Company had
less than five percent of its deposits classified as brokered funds and does
not anticipate any significant increase. Deposits provide generally all the
funding for the Company's lending and investment activities, and the interest
paid for deposits must be managed carefully to control the level of interest
expense.
The Company's ratio of average demand deposits to average total deposits for
three months ended March 31, 1997 and for the years ended December 31, 1996,
1995, and 1994 were 31.0%, 30.0%, 28.4%, and 30.4%, respectively.
Average total deposits during 1996 increased to $685.4 million from $551.7
million in 1995, an increase of $133.7 million or 24.2%. Average noninterest-
bearing deposits increased to $205.7 million in 1996 from $156.8 million in
1995 due to the increase in the number of deposit accounts. Average deposits
in 1995 rose to $551.7 million from $437.8 million in 1994, an increase of
$113.8 million or 25.9%.
The average daily balances and weighted average rates paid on deposits for
the three months ended March 31, 1997 and each of the years ended December 31,
1996, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
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>
NOW accounts............ $ 42,797 1.37% $ 37,325 1.40% $ 31,886 1.96% $ 34,928 1.69%
Regular savings......... 3,218 2.21 2,739 2.30 2,680 2.83 2,126 2.77
Treasury Plus........... 217,751 4.89 172,597 4.84 91,396 5.35 -- --
Money market............ 131,448 4.03 127,073 3.98 149,576 4.08 150,979 3.17
CD's less than $100,000. 45,540 5.28 43,182 5.23 38,306 5.14 40,536 3.99
CD's $100,000 and over.. 99,998 5.46 88,390 5.42 73,760 5.32 70,190 3.83
IRA's & QRP's........... 8,816 5.38 8,421 5.36 7,281 5.46 5,373 4.17
-------- ---- -------- ---- -------- ---- -------- ----
Total interest-bearing
deposits............. 549,568 4.54% 479,727 4.48% 394,885 4.55% 304,132 3.28%
-------- ---- -------- ---- -------- ---- -------- ----
Noninterest-bearing
deposits............... 247,404 -- 205,720 -- 156,776 -- 133,696 --
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits........ $796,972 3.13% $685,447 3.14% $551,661 3.26% $437,828 2.28%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the maturity of the Company's certificates of
deposit that are $100,000 or greater as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1997 1996 1995 1994
--------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
3 months or less............................ $50,719 $ 58,700 $42,418 $43,508
Between 3 months and 6 months............... 21,376 20,608 15,558 9,405
Between 6 months and 1 year................. 19,919 14,559 13,385 10,640
Over 1 year................................. 6,057 10,140 8,538 5,986
------- -------- ------- -------
Total CD's $100,000 and over.............. $98,071 $104,007 $79,899 $69,539
======= ======== ======= =======
</TABLE>
75
<PAGE>
BORROWINGS. Securities sold under repurchase agreements and other short-term
borrowings, consisting of federal funds purchased and treasury, tax, and loan
deposits, generally represent borrowings with maturities ranging from one to
thirty days. Information relating to these borrowings is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1997 1996 1995 1994
--------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities sold under repurchase
agreements:
Average.............................. $126,090 $103,927 $65,674 $33,817
Period-end........................... 116,989 136,119 95,638 42,448
Maximum month-end balance during
period.............................. 123,884 136,119 95,638 44,630
Interest Rate:
Average.............................. 4.78% 4.88% 5.36% 3.80%
Period-end........................... 4.84% 4.93% 5.41% 5.05%
Other short-term borrowings:
Average.............................. $ 17,298 $ 13,137 $ 6,904 $ 3,880
Period-end........................... 5,044 10,027 1,287 8,819
Maximum month-end balance during
period.............................. 32,143 60,044 10,000 11,270
Interest rate:
Average.............................. 5.32% 5.30% 5.58% 4.73%
Period-end........................... 5.68% 5.16% 5.32% 5.22%
</TABLE>
Securities sold under repurchase agreements are maintained in safekeeping by
correspondent banks.
INTEREST RATE SENSITIVITY AND LIQUIDITY. Asset and liability management is
concerned with the timing and magnitude of repricing assets compared to
liabilities. It is the objective of the Company to generate stable growth in
net interest income and to attempt to control risks associated with interest
rate movements. In general, management's strategy is to reduce the impact of
changes in interest rates on its net interest income by maintaining a
favorable match between the maturities or repricing dates of its interest-
earning assets and interest-bearing liabilities. The Company's asset and
liability management strategy is formulated and monitored by the Asset
Liability Committee, which is composed of senior officers of SW Bank, in
accordance with policies approved by SW Bank's Board of Directors. This
Committee meets regularly to review, among other things, the sensitivity of
the Company's assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, purchase
and sale activity, and maturities of investments and borrowings. The Asset
Liability Committee also approves and establishes pricing and funding
decisions with respect to the Company's overall asset and liability
composition. The Committee reviews the Company's liquidity, cash flow
flexibility, maturities of investments, deposits and borrowings, retail and
institutional deposit activity, current market conditions, and interest rates
on both a local and national level.
The Company's policy is to maintain rate sensitive assets minus rate
sensitive liabilities divided by total assets within 15% on a cumulative basis
for one year. At December 31, 1996, this ratio was a positive 5.59%. The
Company estimates that a 100 basis point change in interest rates would have
no significant impact on its net interest income over a twelve-month period.
The Committee regularly reviews interest rate risk exposure by forecasting the
impact of alternative interest rate environments on net interest income. The
Bank adjusts interest sensitivity accordingly during the year through changes
in the mix of assets and liabilities and may use interest rate products such
as interest rate swap and cap agreements.
The interest rate sensitivity ("GAP") is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A GAP is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is
76
<PAGE>
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative GAP would tend to adversely affect net interest income,
while a positive GAP would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative GAP would tend
to result in an increase in net interest income, while a positive GAP would
tend to affect net interest income adversely. While the GAP is a useful
measurement and contributes toward effective asset and liability management,
it is difficult to predict the effect of changing interest rates solely on
that measure. Because different types of assets and liabilities with the same
or similar maturities may react differently to changes in overall market rates
or conditions, changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category.
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change.
Consequently, as the interest rate environment has become more volatile, SW
Bank's management has increased monitoring its net interest rate sensitivity
position and the effect of various interest rate environments on earnings.
The following table sets forth an interest rate sensitivity analysis for the
Company as of December 31, 1996:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
--------------------------------------------------
0-30 31-180 181-360 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Money market funds........ $ 6,011 $ -- $ -- $ -- $ 6,011
Securities................ 42,746 35,137 95,325 108,781 281,989
Loans..................... 383,379 40,641 36,256 139,847 600,123
Overdrafts................ 4,292 -- -- -- 4,292
Federal funds sold........ 64,986 -- -- -- 64,986
-------- -------- -------- -------- --------
Total interest-earning
assets................... 501,414 75,778 131,581 248,628 957,401
-------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand, money market and
savings deposits......... 368,486 -- -- -- 368,486
Certificates of deposit
and other time deposits.. 38,020 71,978 25,701 20,946 156,645
Short term borrowings..... 146,145 -- -- -- 146,145
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.............. 552,651 71,978 25,701 20,946 671,276
-------- -------- -------- -------- --------
Period GAP.................. $(51,237) $ 3,800 $105,880 $227,682 $286,125
Cumulative GAP.............. $(51,237) $(47,437) $ 58,443 $286,125
Period GAP to total assets.. (4.89)% 0.36 % 10.12% 21.77%
Cumulative GAP to total
assets..................... (4.89)% (4.54)% 5.59% 27.35%
</TABLE>
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. For the year ended December 31, 1996, the
Company's liquidity needs have primarily been met by growth in core deposits,
as previously discussed. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on these
external funding sources. The cash and federal funds sold position,
supplemented by amortizing securities and loan portfolios, have generally
created an adequate liquidity position. In January 1997, the Company completed
an initial public offering of Company Common Stock. Substantially all of the
net proceeds (approximately $19.9 million) from the sale of 1,322,500 shares
of Company Common Stock were contributed to SW Bank. Approximately $7.5
million was used to redeem the 750,000 outstanding shares of SW Bank's
preferred stock, and the balance was used for general corporate purposes.
77
<PAGE>
CAPITAL RESOURCES. Capital management consists of providing equity to
support both current and future operations. The Company is subject to capital
adequacy requirements imposed by the Federal Reserve Board and SW Bank is
subject to capital adequacy requirements imposed by the OCC. Both the Federal
Reserve Board and the OCC have adopted risk-based capital requirements for
assessing bank holding company and bank capital adequacy. These standards
define capital and establish minimum capital requirements in relation to
assets and off-balance sheet exposure, adjusted for credit risk. The risk-
based capital standards currently in effect are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among bank
holding companies and banks, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate relative
risk weights. The resulting capital ratios represent capital as a percentage
of total risk-weighted assets and off-balance sheet items.
Bank regulatory authorities in the United States have issued risk-based
capital standards by which all bank holding companies and banks are evaluated
in terms of capital adequacy. The risk-based capital standards issued by the
Federal Reserve Board apply to the Company, and the OCC guidelines apply to SW
Bank. These guidelines relate a financial institution's capital to the risk
profile of its assets. The risk-based capital standards require all financial
organizations to have "Tier 1 capital" of at least 4.0% of risk-adjusted
assets and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of
risk-adjusted assets. "Tier 1 capital" includes, generally, common
shareholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings, and minority interest in equity
accounts of consolidated subsidiaries less deductions for goodwill and various
other intangibles. "Tier 2 capital" may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt
securities, preferred stock not qualifying as Tier 1 capital, and a limited
amount of the general valuation allowance for loan losses ("Tier 2 capital").
The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital."
The agencies have also adopted guidelines which supplement the risk-based
capital guidelines with a minimum leverage ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with
well diversified risk, including no undue interest rate exposure; excellent
asset quality; high liquidity; good earnings; and that are generally
considered to be strong banking organizations, rated composite 1 under
applicable federal guidelines, and that are not experiencing or anticipating
significant growth. Other banking organizations are required to maintain a
leverage ratio of at least 4.0% to 5.0%. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets.
Shareholders' equity increased to $54.7 million at December 31, 1996 from
$44.8 million at December 31, 1995, an increase of $9.80 million, or 22.0%.
This increase was primarily the result of net income of $9.6 million. During
1994, shareholders' equity increased by $6.4 million, or 21.8%, from $29.4
million at December 31, 1993.
78
<PAGE>
The following table provides a comparison of the Company's and SW Bank's
leverage and risk-weighted capital ratios:
<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 March 31, 1997 (unaudited):
Total capital (to risk weighted
assets)......................... $85,285 11.70% $58,323 *8.0% $72,903 *10.0%
Tier I capital (to risk weighted
assets)......................... 78,983 10.83 29,161 *4.0 43,742 *6.0
Tier I capital (to average
assets)......................... 78,983 7.77 30,495 *3.0 50,820 *5.0
As of December 31, 1996:
Total capital (to risk weighted
assets)......................... 67,728 10.41 52,039 *8.0 65,049 *10.0
Tier I capital (to risk weighted
assets)......................... 61,704 9.49 26,020 *4.0 39,029 *6.0
Tier I capital (to average
assets)......................... 61,704 6.59 28,090 *3.0 46,831 *5.0
As of December 31, 1995:
Total capital (to risk weighted
assets)......................... 56,848 11.74 38,738 *8.0 48,422 *10.0
Tier I capital (to risk weighted
assets)......................... 51,927 10.72 19,369 *4.0 29,053 *6.0
Tier I capital (to average
assets)......................... 51,927 6.29 24,766 *3.0 41,277 *5.0
</TABLE>
- --------------
* Greater than or equal to
Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multifamily mortgages. Also pursuant to FDICIA, each
federal banking agency has promulgated regulations setting the levels at which
an insured institution would be considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the Federal Reserve Board's regulations,
SW Bank is classified "well capitalized" for purposes of prompt corrective
action. See "Supervision and Regulation."
OTHER MATTERS. In the first quarter of 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings per Share ("SFAS 128") and Statement of Financial Accounting
Standards No. 129, Disclosure of Information about Capital Structure ("SFAS
129"). These statements will be adopted by the Company effective December 31,
1997. SFAS 128 simplifies the computation of earnings per common share by
replacing primary and fully-diluted presentations with the new basic and
diluted disclosures. SFAS 129 establishes standards for disclosing information
about an entity's capital structure. Under the provisions of SFAS 128, basic
and diluted earnings per share would have been $0.35 and $0.32, respectively,
for the three months ended March 31, 1997 and $0.32 and $0.29, respectively,
for the three months ended March 31, 1996.
79
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the Company's executive officers and directors, the
principal occupation or employment of each of them during the past five years
and at present, the name and principal business of the corporation or other
organization, if any, in which such occupation or employment is or was carried
on, directorships of other public companies or investment companies held by
them, and the period during which the directors have served in that capacity
with the Company are set forth below. All of the directors of the Company are
also directors of SW Bank except for Mr. Palandjoglou, and all of the
directors live in Houston, Texas. Each of the directors and executive officers
was elected to the position with the Company shown below in 1996, with the
exception of Messrs. Argue and Heaney, who were elected in 1997.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
John B. Brock III.............. Director 64
Ernest H. Cockrell............. Director 51
J. David Heaney................ Director 48
John W. Johnson................ Director 51
Walter E. Johnson.............. Chairman of the Board and Chief Executive 61
Officer
Wilhelmina R. Morian........... Director 50
Paul B. Murphy, Jr............. Director and President 37
Andres Palandjoglou............ Director 49
Michael T. Willis.............. Director 52
Joseph H. Argue................ Executive Vice President 48
David C. Farries............... Executive Vice President, Treasurer and 50
Secretary of the Company
Yale Smith..................... Executive Vice President 60
Sharon K. Sokol................ Executive Vice President 46
Steve D. Stephens.............. Executive Vice President 37
Anthony Torentinos............. Executive Vice President 48
R. John McWhorter.............. Vice President and Controller 32
</TABLE>
John B. Brock III. Mr. Brock became a director of SW Bank in 1991. He has
been the Chairman of the Board and Chief Executive Officer of United Meridian
Corp. ("UMC") since May 1995 and a director of UMC since November 1989. Mr.
Brock served as the President of UMC from May 1996 to October 1996, served as
the President and Chief Executive Officer of UMC from February 1992 to May
1995 and served as the President and Chief Operating Officer of UMC from
November 1989 to February 1992. Mr. Brock is a director and member of the
Executive Committee of the Texas Midcontinent Oil and Gas Association, a
director of the National Midcontinent Oil and Gas Association, a director of
the American Petroleum Institute, a director of St. Luke's Episcopal Hospital
and a director of St. Luke's Episcopal Health System.
Ernest H. Cockrell. Mr. Cockrell became a director of SW Bank in 1982. In
1996 he became Chairman of Cockrell Oil Corporation, a company involved in oil
and gas exploration and production, prior to which he had been President of
such company for more than five years. Mr. Cockrell is also involved in
ranching, farming and investments. He is a Director of Pennzoil Company,
Independent Petroleum Association of America, and the Cockrell Foundation.
J. David Heaney. Mr. Heaney became a director of SW Bank in 1990. He is a
co-founder of Heaney Rosenthal Inc., a private investment company and serves
as its Chairman. In 1986, Mr. Heaney was one of the founders of Sterling
Chemicals, Inc., which later became a public company traded on the New York
Stock Exchange. During his eight years with Sterling, Mr. Heaney served as
Sterling's Administrative Vice President, and later as Chief Financial
Officer. Prior to joining Sterling in 1986, Mr. Heaney was a partner in the
Houston
80
<PAGE>
law firm of Bracewell & Patterson, specializing in business transactions. Mr.
Heaney holds J.D. and B.B.A. degrees from the University of Texas and
currently serves as a trustee of The Memorial Healthcare System.
John W. Johnson. Mr. Johnson became a director and Chairman of the Board of
SW Bank in 1982 and served in that capacity until 1996, when he was named
Chairman of SW Bank's Executive Committee. For more than five years, he has
been Chairman and President of Permian Mud Service, Inc., an oil field service
company with several active subsidiaries including Champion Technologies,
Inc., Densimix, Inc., and Johnson & Lindley, Inc. He is a Director of
Weatherford Enterra, Inc. and is Chairman of the Board of Trustees of St.
John's School. Mr. Johnson received a Bachelor of Engineering degree from
Vanderbilt University in 1968. Mr. Johnson is not related to Walter E.
Johnson.
Walter E. Johnson. Mr. Johnson joined SW Bank in July 1989 as President,
Chief Executive Officer and a director. From October 1972 to February 1988, he
served as President of Allied Bank of Texas, and upon the purchase of that
bank by First Interstate Bancorp, he served as President Central Office of
First Interstate Bank of Texas, N.A. from March 1988 to June 1989. Mr. Johnson
served on the Trust Committee, Profit Sharing Investment Committee, and Board
of Directors of Allied Bank of Texas. He also served as a Director of the
holding company, Allied Bancshares, Inc., which owned 52 banks and reached $9
billion in assets. Mr. Johnson was the Senior Lending Officer of Allied Bank
of Texas and spent the majority of his time directing the lending staff and
business development. Prior to joining Allied Bank of Texas, he accumulated an
additional 12 years of banking experience, primarily with the international
department of Bank of the Southwest. Mr. Johnson is a former member of the
Board of Directors of the Houston Branch of the Dallas Federal Reserve Bank.
He is a board member of the Boy Scouts of America, Junior Achievement and the
American Free Enterprise Society. He is currently active in, and has been
chairman of, numerous major fund raising campaigns for various Houston
charities. Mr. Johnson is a graduate of Texas Christian University.
Wilhelmina R. Morian. Ms. Morian became a director of SW Bank in 1982. Since
1980 she has been President of Westview Development, Inc. (real estate
development) and Cockspur, Inc. and a partner in various real estate and oil
and gas ventures. She is Chairman of the Board of the Cullen Trust for
Healthcare, Past Chair, Board of Regents of the University of Houston Systems
and serves on the Board of the Houston Zoological Society, The Neuhaus
Education Center, The Greater Houston Partnership and The Museum of Fine
Arts--Houston.
Paul B. Murphy, Jr. Mr. Murphy joined SW Bank in January 1990 as an
Executive Vice President, was elected a director in 1994 and became President
in 1996. He began his banking career with Allied Bank of Texas in 1981, where
he first became associated with Walter Johnson, Yale Smith, Sharon Sokol and
several other SW Bank personnel. Mr. Murphy received his B.S. degree from
Mississippi State University and his M.B.A. from the University of Texas at
Austin. He is involved in numerous civic and community organizations
including: Young Presidents Organization, Past Chairman of Houston Arts Fund,
Trustee of Children's Museum of Houston and the Advisory Board of University
of Texas Health Science Center at Houston.
Andres Palandjoglou. Mr. Palandjoglou was elected a director of the Company
upon its formation in 1996, and has been an advisory director of SW Bank since
1990. For more than five years, he has been President of Rio Largo, Inc., a
company involved in real estate investments and, as a partner in Memorial
Builders, in the development of residential subdivisions and the construction
of custom homes. Also, Mr. Palandjoglou is involved in textile manufacturing
and ranching in Argentina. He is a member of the Greater Houston Builders
Association.
Michael T. Willis. Mr. Willis became a director of SW Bank in 1988. He has
over 20 years of experience in the personnel services and temporary help
industry. In 1976 he founded Talent Tree Personnel and guided that company
through more than 15 years of rapid growth with sales growing to an annualized
rate of $300 million per year. Resigning from Talent Tree in March 1993, Mr.
Willis founded COREStaff, Inc. in July 1993 where he is Chairman of the Board,
President and CEO. He is also on the Board of Serv-Tech, Inc.
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<PAGE>
Joseph H. Argue. Mr. Argue joined the Company and SW Bank in April 1997 as
Executive Vice President of the Company and Executive Vice President of SW
Bank's lending division at the Five Post Oak office, with 24 years of banking
and lending experience at Wells Fargo Bank (Texas), N.A., First Interstate
Bank of Texas, N.A. and Allied Bank of Texas. He has both bachelor's and
master's degrees in business administration from Stephen F. Austin State
University.
David C. Farries. Mr. Farries joined SW Bank in 1993 as Senior Vice
President and Treasurer with 19 years of banking and investment experience
with First City National Bank of Houston and 3 years of public accounting
experience with Price Waterhouse & Co. He was promoted to Executive Vice
President and Chief Financial Officer of SW Bank in 1994 and Executive Vice
President of the Company in 1996. Mr. Farries has both bachelor's and master's
degrees in business administration from the University of Texas. He is a CPA
and has his NASD Series 24 (Securities Principal) and Series 7 (Securities
Representative) licenses.
Sharon K. Sokol. Ms. Sokol joined SW Bank in 1990. She has over 26 years of
banking experience, including over eight years of branch administration and
retail services at Indiana National Bank. After moving to Texas in 1978, she
successfully established several new products and departments at Western Bank,
including a Corporate Cash Management Division. She moved on to Texas Commerce
Bank where she was Vice President in Cash Management Marketing. In 1987, she
joined First Interstate Bank of Texas as Vice President and Manager of Cash
Management. Ms. Sokol joined SW Bank in February 1990 to establish its cash
management services. In October 1990, she was appointed Chief Operations
Officer, and in 1992 she was appointed Executive Vice President. Ms. Sokol
serves as the Chairperson of the Board of Directors for the Southwest
Automated Clearing House and also serves on the Board of Directors of the
Clearing House Association of the Southwest. She also serves on the Board of
Trustees for the Houston Heritage Society and the Juvenile Diabetes
Foundation.
Yale Smith. Mr. Smith has over 30 years of banking experience in Houston. He
has focused his career on middle market lending since his days at First City
National Bank where he managed the Metropolitan Division prior to joining
Allied Bank of Texas in 1982. He joined SW Bank in February 1990 as an
Executive Vice President and heads SW Bank's downtown branch offices. Mr.
Smith is very active in the Houston community having served as past Chairman
of the Board of the Salvation Army and currently serving as Director of the
MIT Forum of Texas and as an Administrative Board Member of St. Luke's United
Methodist Church.
Steve D. Stephens. Mr. Stephens has over 15 years of commercial lending
experience, and is currently in charge of SW Bank's Northwest Crossing office,
and the Memorial City office. Prior to joining SW Bank as an Executive Vice
President in 1990, he was Senior Vice President and Manager of Commercial
Lending at Texas Commerce Bank Reagan. Mr. Stephens is active in a variety of
community organizations including being past president of the Kiwanis Club of
Houston, a Board member of the Children's Fund and active in the Muscular
Dystrophy Association. He graduated from the University of Houston with a
B.B.A. in accounting in 1980.
Anthony Torentinos. Mr. Torentinos joined SW Bank in May 1997. He has over
20 years of consulting management experience in the areas of human resources,
planning and administration. He started his Houston banking career in 1979 at
Interfirst Bank, then moved to Capital Bank in 1981 as Vice President,
Director of Human Resources. During the past 12 years he has served as an
executive officer for two large regional banking organizations in the Mid-
Atlantic area. Mr. Torentinos is a former officer of the University of Texas
College of Business Administration and a graduate of the University of Texas
at Austin.
R. John McWhorter. Mr. McWhorter has been Vice President and Controller of
SW Bank since 1990, prior to which he had been employed by Coopers & Lybrand
L.L.P. He graduated from the University of Texas with a B.B.A. in accounting
in 1987 and is a certified public accountant.
Directors are elected for three-year terms, classified into Classes I, II
and III. Messrs. Brock, Heaney and Palandjoglou are Class I directors with
terms of office expiring on the date of the Company's Annual Meeting of
Shareholders in 2000; Messrs. Cockrell, Murphy and Willis are Class II
directors with terms of office expiring on the date of the Company's Annual
Meeting of Shareholders in 1998; and Messrs. John W. Johnson and
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Walter E. Johnson and Ms. Morian are Class III directors with terms of office
expiring on the date of the Company's Annual Meeting of Shareholders in the
year 1999. Each officer of the Company is elected by the Company Board and
holds office until his successor is duly elected and qualified or until his or
her earlier death, resignation or removal.
Following the Effective Time, the Company Board intends to increase the
number of Class II directors by one director and to elect Adolph A. Pfeffer,
Jr. to fill the vacancy created by such increase. Mr. Pfeffer has been a
director of the Bank since 1960. For more than five years, Mr. Pfeffer has
been Chairman of the Bank Board and an investor who also devotes time to
farming interests in Waller County, Texas.
Also following the Effective Time, J. Nolan Bedford will be elected Vice
Chairman of the Board and a director of SW Bank. Mr. Bedford has more than 38
years of banking experience in the Houston area, most recently serving as
President and a director of the Bank since May 1993 and Senior Executive Vice
President and a director of Lockwood National Bank, Houston, Texas for eight
years prior thereto.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Company Board has established audit and compensation committees. The
Audit Committee currently consists of John B. Brock III, J. David Heaney,
Andres Palandjoglou and Wilhelmina R. Morian, none of whom is an employee of
the Company. The Audit Committee reviews the general scope of the audit
conducted by the Company's independent auditors, the fees charged therefor and
matters relating to the Company's internal control systems. In performing its
functions, the Audit Committee meets separately with representatives of the
Company's independent auditors and with representatives of senior management.
The Compensation Committee currently consists of John B. Brock III, John W.
Johnson and Michael T. Willis, none of whom is an employee of the Company. The
Compensation Committee administers the Company's stock option plans and makes
recommendations to the Company Board as to option grants to Company employees
under such plans. In addition, the Compensation Committee is responsible for
making recommendations to the Company Board with respect to the compensation
of the Company's executive officers and is responsible for the establishment
of policies dealing with various compensation and employee benefit matters for
the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Prior to November 18, 1996, the Compensation Committee of SW Bank's Board of
Directors (the "SW Bank Board") consisted of Walter E. Johnson, John W.
Johnson and Michael T. Willis. As a member of this Committee, Walter E.
Johnson participated in the determination of Committee recommendations to the
Executive Committee of the SW Bank Board as to compensation for executive
officers, including himself. Final determinations of such compensation were
made by such Executive Committee. On November 18, 1996, the Company Board
established the Compensation Committee consisting of John B. Brock III, John
W. Johnson and Michael T. Willis, described above, and the former Compensation
Committee was terminated.
DIRECTOR COMPENSATION
In an effort to attract and retain qualified directors, the SW Bank Board
approved a methodology of awarding stock options to directors under the
Company's employee stock option plans, effective beginning in 1994 (the
"Directors' Plan"), which methodology was assumed and continued by the Company
upon the formation thereof in 1996. Pursuant to the Directors' Plan, directors
are awarded options for attendance and participation at monthly directors'
meetings and, additionally, for introducing legitimate business prospects to
the Company. Options to purchase shares of Company Common Stock may be granted
under the Directors' Plan during a calendar year with the exercise price
approximating the fair market value of the stock at December 31 of such year.
Directors' options accumulate throughout the year, are issued during the
following
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year and are considered fully vested upon issuance. Options for 18,050 shares
were granted for 1995 with an exercise price of $8.80 per share, and options
for 19,400 shares were granted for the 1996 calendar year with an exercise
price of $16.50 per share.
Directors of the Company do not receive any cash compensation for attending
Company Board meetings; however, John W. Johnson receives $25,000 per year for
serving as Chairman of the Executive Committee of the SW Bank Board and for
serving on SW Bank's Management Committee. Directors of SW Bank receive a fee
of $500 for each meeting of the SW Bank Board attended and Directors of SW
Bank and the Company receive $200 for each Board Committee meeting attended.
Directors of SW Bank who are also employees of SW Bank do not receive fees for
attending Board Committee meetings.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chairman of the Board and Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company (the "Named
Executives") for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION(1)
------------------ -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Walter E. Johnson...... $325,000 $662,500 $6,006 250,900 $4,500
Chairman & Chief
Executive Officer
Paul B. Murphy, Jr..... 175,000 87,500 6,660 60,425 4,500
President
Sharon K. Sokol........ 125,000 45,000 2,842 7,875 3,750
Executive Vice
President
Yale Smith............. 125,000 14,000 4,732 7,125 3,750
Executive Vice
President
Steve D. Stephens...... 125,000 50,000 3,000 19,625 3,750
Executive Vice
President
</TABLE>
- --------
(1) Consists of the Company's contribution to the Company's 401(k) Plan.
OPTION GRANTS DURING 1996. The following table contains information
concerning the grant of stock options under the Company's 1996 Stock Option
Plan to the Named Executives during fiscal year 1996.
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(1)
OPTIONS FISCAL YEAR PRICE EXPIRATION ----------------------------
NAME GRANTED (#) 1996 ($/SH) DATE 0% ($) 5% ($) 10% ($)
---- ----------- ------------ -------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Walter E. Johnson....... 250,900 60.03% $16.50 11/19/06 $-- $2,603,529 $6,597,855
Paul B. Murphy, Jr...... 60,425 14.46% 16.50 11/19/06 -- 627,016 1,588,981
Sharon K. Sokol......... 7,875 1.88% 16.50 11/19/06 -- 81,717 207,087
Steve D. Stephens....... 19,625 4.70% 16.50 11/19/06 -- 203,644 516,074
Yale Smith.............. 7,125 1.70% 16.50 11/19/06 -- 73,934 187,364
</TABLE>
- --------
(1) The amounts shown under these columns are the result of calculations at 0%
and at the 5% and 10% rates required by the Securities and Exchange
Commission and are not intended to forecast future appreciation of the
Company's stock price.
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<PAGE>
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES. The following table sets
forth certain information concerning the value of unexercised options held by
each of the Named Executives at December 31, 1996. None of the Named
Executives exercised any stock options during the year ended December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Walter E. Johnson........... 342,160 288,750 $5,349,236 $406,500
Paul B. Murphy, Jr.......... 19,400 106,425 288,948 585,133
Sharon K. Sokol............. 14,076 55,425 226,616 614,047
Yale Smith.................. 17,300 45,200 278,530 489,008
Steve D. Stephens........... 17,300 57,700 278,530 489,008
</TABLE>
- --------
(1) The value is based on $16.50 per share.
On January 31, 1997, Walter E. Johnson exercised an option for 250,000 of
the 342,160 exercisable shares shown in the above table. Such option was
granted to Mr. Johnson in 1989 in connection with his employment by the Bank
at that time and was exercisable at a price of $.40 per share. Following his
exercise of such option, Mr. Johnson sold such 250,000 shares in a private
transaction.
EMPLOYMENT AGREEMENTS. Walter E. Johnson, Paul B. Murphy, Jr., Sharon K.
Sokol, Yale Smith, Steve D. Stephens, David C. Farries, Joseph H. Argue and
Anthony Torentinos have entered into change in control agreements with the
Company. Each agreement is for a term of three years and automatically renews
each year absent notice to the contrary from the Company. Each agreement
provides that upon the occurrence of a change in control, (i) the agreement is
converted into a three-year employment agreement, which provides for a minimum
annual compensation equal to the employee's current base salary plus the
highest annual cash bonus paid to the employee during the three preceding
years, (ii) all stock options held by the employee become fully exercisable
(regardless of whether then vested) and (iii) all restrictions on any
restricted stock granted to the employee shall lapse. Such employment
agreement also provides that if the employee is thereafter terminated without
cause or the employee terminates his or her employment as a result of the
employer's breach of the agreement, the employee shall be entitled to receive
from the Company a lump-sum severance payment equal to the discounted present
value of the amount of compensation payable under such agreement for the
remainder of the three-year term thereof. The employment agreements also
automatically renew each year absent notice to the contrary from the Company.
EMPLOYEE STOCK OPTION PLANS. The Company has two employee stock option
plans, which were approved by the Bank's shareholders in 1989 and 1993,
respectively, and were assumed by the Company upon its formation, effective
June 30, 1996. The 1989 and 1993 stock option plans (the "Former Option
Plans") reserve shares for the granting of "non-qualified" options to key
employees of the Company to purchase Company Common Stock at a price which may
be less than the fair market value on the dates of grant. For those options
where the exercise price is less than the fair market value of the stock at
the date of grant, the difference is considered compensation expense and is
recognized ratably over the vesting period. The Company has recognized
approximately $135,000, $132,000 and $187,000 of compensation expense in
connection with the Former Option Plans during 1996, 1995 and 1994,
respectively. Generally, under the Former Option Plans, options vest ratably
over five to seven years, and must be exercised no later than three months
after the employee's termination with the Company.
The Company's shareholders adopted a new stock option plan in 1996 (the
"1996 Option Plan") which authorizes the issuance of up to 650,000 shares of
Company Common Stock under both "non-qualified" and "incentive" stock options
to employees and "non-qualified" stock options to directors who are not
employees. A total of 650,000 shares of Company Common Stock have been
authorized for issuance under the 1996 Option Plan. Generally, under the 1996
Option Plan, it is intended that the options will vest 60% at the end of the
third
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year following the date of grant and an additional 20% at the end of each of
the two following years; however, an individual option may vest as much as 20%
at the end of the first or second year following the date of grant if
necessary to maximize the "incentive" tax treatment to the optionee for the
particular option being granted. Options under the 1996 Option Plan generally
must be exercised within ten years following the date of grant or no later
than three months after the optionee's termination with the Company, if
earlier. Upon adoption of the 1996 Option Plan, the Former Option Plans were
terminated with respect to all authorized shares for which options had not
been granted.
At December 31, 1996, options for 1,523,650 shares granted to 79 employees
and non-employee directors (including options granted under the Directors'
Plan for the 1996 calendar year) were outstanding, with per share exercise
prices ranging from $.40 to $16.50. Options for 418,000 shares were granted in
1996 at exercise prices ranging from $9.00 to $16.50 per share, and no options
were exercised in 1996. At December 31, 1996, options to purchase an aggregate
of 600,443 shares were exercisable and 271,375 shares were reserved for future
grants.
401(K) PLAN. SW Bank has adopted a contributory profit sharing plan pursuant
to Internal Revenue Code Section 401(k) covering substantially all employees
("401(k) Plan"). Each year SW Bank determines, at its discretion, the amount
of matching contributions. Beginning July 1, 1994, SW Bank has elected to
match 50% of the employee contributions not to exceed 3% of the employee's
annual compensation. For the period July 1, 1993 to June 30, 1994, SW Bank
elected to match 100% of the employee contributions not to exceed 5% of the
employee's annual compensation. Total plan expense charged to the Company's
operations for 1996, 1995 and 1994 was approximately $180,000, $136,000 and
$146,000, respectively.
During April, 1993, the 401(k) Plan was amended to allow SW Bank to
contribute shares of SW Bank common stock (valued at the approximate fair
market value on the date of contribution) instead of cash. Pursuant to the
formation of the Company in 1996, all rights to acquire SW Bank common stock
under the 401(k) Plan were converted into rights to acquire Company Common
Stock. Under the 401(k) Plan, 250,000 shares of Company Common Stock are
issuable. A total of 17,435 shares, at prices ranging from $9.20 to $10.20 per
share, were issued to the 401(k) Plan during 1996.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors and executive officers of the Company and their
associates, which include corporations, partnerships and other organizations
in which they are officers or partners or in which they and their immediate
families have at least a 5% interest, are customers of SW Bank. During 1996,
SW Bank made loans in the ordinary course of business to certain directors of
the Company and their associates, all of which the Company believes were on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with persons
unaffiliated with the Company and did not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to directors,
executive officers and principal shareholders of the Company (i.e., those who
own 10% or more of the outstanding shares of Common Stock) are subject to
limitations contained in the Federal Reserve Act, the principal effect of
which is to require that extensions of credit by SW Bank to executive
officers, directors and principal shareholders satisfy the foregoing
standards. On December 31, 1996, all of such loans aggregated approximately
$8.3 million, which was 13.5% of SW Bank's Tier 1 capital at such date. The
Company expects to have such transactions or transactions on a similar basis
with its directors, executive officers and principal shareholders and their
associates in the future.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company Common Stock as of March 31, 1997, by (i) each
director, (ii) each of the Named Executives (as defined under "Executive
Compensation") and (iii) all directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting and dispositive power
over the shares indicated as owned by such person. No person is known by the
Company to own beneficially 5% or more of the outstanding shares of Company
Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF BENEFICIALLY
SHARES OWNED
--------- ------------
<S> <C> <C>
John B. Brock III.............................. 53,818(1) *%
Ernest H. Cockrell............................. 132,812(2) 1.4
J. David Heaney................................ 102,466(3) 1.1
John W. Johnson................................ 207,202(4) 2.2
Walter E. Johnson.............................. 222,400(5) 2.4
Wilhelmina R. Morian........................... 227,935(6) 2.4
Paul B. Murphy, Jr............................. 38,707(7) *
Andres Palandjoglou............................ 168,285(8) 1.8
Yale Smith..................................... 36,805(9) *
Sharon K. Sokol................................ 21,165(10) *
Steve D. Stephens.............................. 24,330(9) *
Michael T. Willis.............................. 140,770(11) 1.5
Directors and executive officers as a group.... 1,412,987(12) 15.2
</TABLE>
- --------
* Does not exceed 1.0%.
(1) Includes 2,550 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(2) Includes 17,500 shares held in trust for the benefit of Ernest H.
Cockrell and 2,450 shares which may be acquired within 60 days pursuant
to outstanding stock options.
(3) Includes 31,160 shares owned by Mr. Heaney's wife, 31,844 shares held in
trust for the benefit of his two children and 3,075 shares which may be
acquired within 60 days pursuant to outstanding stock options.
(4) Includes 40,000 shares held by John W. Johnson, Trustee for the benefit
of his three children and 42,200 shares which may be acquired within 60
days pursuant to outstanding stock options.
(5) Includes 3,750 shares held by Walter E. Johnson's wife and 102,160 shares
which may be acquired by Walter E. Johnson within 60 days pursuant to
outstanding stock options.
(6) Includes 162,635 shares held by Cullen Estate Trust for the benefit of
Wilhelmina R. Morian and 5,100 shares which may be acquired within 60
days pursuant to outstanding stock options.
(7) Includes 26,725 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(8) Includes 168,285 shares held by Rio Largo de Panama S.A., a family
investment corporation in which Mr. Palandjoglou owns a 25% beneficial
interest and shares voting and investment power, and 5,950 shares which
may be acquired by Mr. Palandjoglou within 60 days pursuant to
outstanding stock options.
(9) Includes 21,050 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(10) Includes 17,825 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(11) Includes 3,250 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(12) Includes 255,811 shares which may be acquired within 60 days pursuant to
outstanding stock options.
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SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Company and SW Bank. The
following description of references herein to applicable statutes and
regulations, which are not intended to be complete descriptions of these
provisions or their effects on the Company or SW Bank, are brief summaries and
are qualified in their entirety by reference to such statutes and regulations.
SW BANK
As a national banking association, SW Bank is principally supervised,
examined and regulated by the OCC. The OCC regularly examines such areas as
capital adequacy, reserves, loan portfolio, investments and management
practices. SW Bank must also furnish quarterly and annual reports to the OCC,
and the OCC may exercise cease and desist and other enforcement powers over SW
Bank if its actions represent unsafe or unsound practices or violations of
law. Since the deposits of SW Bank are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Company (the "FDIC"), SW Bank is also
subject to regulation and supervision by the FDIC. Because the Federal Reserve
Board regulates the Company, the Federal Reserve Board has supervisory
authority which affects SW Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. SW Bank is
subject to certain federal statutes limiting transactions with the Company and
its nonbanking affiliates. One set of restrictions is found in Section 23A of
the Federal Reserve Act, which affects loans or other credit extensions to,
asset purchases with and investments in affiliates of SW Bank. Such
transactions with the Company or any of its nonbanking subsidiaries are
limited in amount to ten percent of SW Bank's capital and surplus and, with
respect to the Company and all of its nonbanking subsidiaries together, to an
aggregate of twenty percent of SW Bank's capital and surplus. Furthermore,
such loans and extensions of credit, as well as certain other transactions,
are required to be secured in specified amounts.
Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions
between SW Bank, including its subsidiaries, and its affiliates must be on
terms substantially the same, or at least as favorable to SW Bank or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between SW Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. SW Bank is also
subject to certain prohibitions against any advertising that indicates SW Bank
is responsible for the obligations of its affiliates. The Company does not
have any nonbanking affiliates as of the date of this Proxy
Statement/Prospectus.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O now apply to
all insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must
be met before such loans can be made. There is also an aggregate limitation on
all loans to insiders and their related interests. These loans cannot exceed
the institution's total unimpaired capital and surplus, and the OCC may
determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
INTEREST RATE LIMITS. Interest rate limitations for SW Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where a bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by SW 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 the 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
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28%, rather than 24%). On fixed rate closed-end loans, the maximum non-
usurious 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 rate 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.
EXAMINATIONS. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national
bank and require that it establish specific reserves to compensate for the
difference between the OCC-determined value and the book value of such assets.
Onsite examinations are to be conducted every 12 months, except that certain
well capitalized banks may be examined every 18 months. The Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") authorizes the OCC to
assess the institution for its costs of conducting the examinations.
PROMPT CORRECTIVE ACTION. In addition to the capital adequacy guidelines,
FDICIA requires the OCC to take "prompt corrective action" with respect to any
national bank which does not meet specified minimum capital requirements. The
applicable regulations establish five capital levels, ranging from "well
capitalized" to "critically undercapitalized," which authorize, and in certain
cases require, the OCC to take certain specified supervisory action. Under
regulations implemented under FDICIA, a national bank is considered well
capitalized if it has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 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. A national bank is considered
adequately capitalized if it has a total risk-based capital ratio of 8.0% or
greater, a Tier 1 risk-based capital ratio of at least 4% 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 an undercapitalized institution. A national
bank is considered undercapitalized if it has a total risk-based capital ratio
that is less than 8.0%, a Tier 1 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%, a Tier 1 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%. Under
certain circumstances, a well capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category.
With certain exceptions, national banks will be prohibited from making
capital distributions or paying management fees to a holding company if the
payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be
required to file capital restoration plans with the OCC. Such a plan will not
be accepted unless, among other things, the banking institutions's holding
company guarantees the plan up to a certain specified amount. Any such
guarantee from a depository institution's holding company is entitled to a
priority of payment in bankruptcy. Undercapitalized national banks also will
be subject to restrictions on growth, acquisitions, branching and engaging in
new lines of business unless they have an approved capital plan that permits
otherwise. The OCC also may, among other things, require an undercapitalized
national bank to issue shares or obligations, which could be voting stock, to
recapitalize the institution or, under certain circumstances, to divest itself
of any subsidiary.
The OCC is authorized by the legislation to take various enforcement actions
against any significantly undercapitalized national bank and any national bank
that fails to submit an acceptable capital restoration plan or fails to
implement a plan accepted by the OCC. These powers include, among other
things, requiring the institution to be recapitalized, prohibiting asset
growth, restricting interest rates paid, requiring primary 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 new election of directors, and
requiring the dismissal of directors and officers.
89
<PAGE>
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction
not in the ordinary course of business, amending its charter or bylaws, or
engaging in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making
payments of principal or interest on outstanding subordinated debt. Within 90
days of a national bank becoming critically undercapitalized, the OCC must
appoint a receiver or conservator unless certain findings are made with
respect to the prospect for the institution's continued viability.
As of March 31, 1997, SW Bank met the capital requirements of a "well-
capitalized" institution.
DIVIDENDS. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by SW Bank in an amount in any calendar year which exceeds SW Bank's
total net profits for that year, plus its retained profits for the preceding
two years, less any required transfers to capital surplus. In addition, a
national bank may not pay dividends in excess of total retained profits,
including current year's earnings after deducting bad debts in excess of
reserves for losses. In some cases, the OCC may find a dividend payment that
meets these statutory requirements to be an unsafe or unsound practice. Under
FDICIA, SW Bank cannot pay a dividend if it will cause SW Bank to be
"undercapitalized."
DEPOSIT INSURANCE. The deposits of SW Bank are insured by the FDIC through
the BIF to the extent provided by law. Under the FDIC's risk-based insurance
system, BIF-insured institutions are currently assessed premiums of between
zero and 27c per $100 of eligible deposits, depending upon the institution's
capital position and other supervisory factors. Congress recently enacted
legislation that, among other things, provides for assessments against BlF-
insured institutions that will be used to pay certain Financing Corporation
("FICO") obligations. In addition to any BIF insurance assessments, BIF-
insured banks are expected to make payments for the FICO obligations equal to
$0.01296 per $100 of eligible deposits each year during 1997 through 1999, and
an estimated $0.024 per $100 of eligible deposits thereafter.
CONSERVATOR AND RECEIVERSHIP POWERS. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things,
appointment of the FDIC as conservator or receiver of an undercapitalized
institution under certain circumstances. In the event SW Bank is placed into
conservatorship or receivership, the FDIC is required, subject to certain
exceptions, to choose the method for resolving the institution that is least
costly to the BIF, such as liquidation. In any event, if SW Bank was placed
into conservatorship or receivership, because of the cross-guarantee
provisions of the Federal Deposit Insurance Act, as amended, the Company as
the sole shareholder of SW Bank, would likely lose its investment in SW Bank.
BROKERED DEPOSIT RESTRICTIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
which are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that
event, they may not pay an effective yield of more than 75 basis points over
the effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area,
or the national rate paid on deposits of comparable size and maturity for
deposits accepted from outside the institution's normal market area.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, SW Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic
Funds Transfer Act, the Expedited Funds Availability Act, the Community
Reinvestment Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
among others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. SW Bank
must comply with the applicable provisions of these consumer protection laws
and regulations as part of its ongoing customer relations.
90
<PAGE>
THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA"), and is subject to supervision and regulation
by the Federal Reserve Board. The BHCA and other Federal laws subject bank
holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws
and regulations. As a bank holding company, the Company's activities and those
of its banking and nonbanking subsidiaries are limited to the business of
banking and activities closely related or incidental to banking, and the
Company may not directly or indirectly acquire the ownership or control of
more than five percent of any class of voting shares or substantially all of
the assets of any company, including a bank, without the prior approval of the
Federal Reserve Board.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of SW Bank, the claims of depositors and other
general or subordinated creditors of SW Bank are entitled to a priority of
payment over the claims of holders of any obligation of the institution to its
shareholders, including any depository institution holding company (such as
the Company) or any shareholder or creditor thereof.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. For example, the Federal
Reserve Board's Regulation Y requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve Board may
oppose the transaction if it believes that the transaction would constitute an
unsafe or unsound practice or would violate any law or regulation. As another
example, a holding company could not impair its subsidiary bank's soundness by
causing it to make funds available to nonbanking subsidiaries or their
customers if the Federal Reserve Board believed it not prudent to do so.
FIRREA expanded the Federal Reserve Board's authority to prohibit activities
of bank holding companies and their nonbanking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations. Notably, FIRREA increased the amount of civil money penalties
which the Federal Reserve Board can assess for certain activities conducted on
a knowing and reckless basis, if those activities caused a substantial loss to
a depository institution. The penalties can be as high as $1,000,000 for each
day the activity continues. FIRREA also expanded the scope of individuals and
entities against which such penalties may be assessed.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
ANNUAL REPORTING; EXAMINATIONS. The Company is required to file an annual
report with the Federal Reserve Board, and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may examine a bank holding company or any of its subsidiaries, and
charge the company for the cost of such an examination.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets
and certain off-balance sheet assets such as letters of credit are assigned
different risk weights, based generally on the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to
consist of Tier 1 capital elements).
91
<PAGE>
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy
of bank holding companies. The leverage ratio is a company's Tier 1 capital
divided by its total consolidated assets. Bank holding companies must maintain
a minimum leverage ratio of at least 3.0%, although most organizations are
expected to maintain leverage ratios that are 100 to 200 basis points above
this minimum ratio.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. In
addition, the regulations of the Federal Reserve Board provide that
concentration of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, are
important factors to be taken into account by regulatory agencies in assessing
an organization's overall capital adequacy.
The Federal Reserve Board recently adopted amendments to its risk-based
capital regulations to provide for the consideration of interest rate risk in
the agencies' determination of a banking institution's capital adequacy.
SW Bank is subject to capital adequacy guidelines of the OCC that are
substantially similar to the Federal Reserve Board's guidelines.
ENFORCEMENT POWERS OF THE FEDERAL BANKING AGENCIES
The Federal Reserve Board and the OCC have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines
and other civil and criminal penalties and appoint a conservator or receiver.
Failure to comply with applicable laws, regulations and supervisory agreements
could subject the Company or SW Bank, as well as officers, directors and other
institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. In addition to
the grounds discussed above under "--SW Bank--Prompt Corrective Action," the
appropriate federal banking agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under
certain circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. FDICIA requires
bank regulators to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes "undercapitalized," it
must submit a capital restoration plan. The capital restoration plan will not
be accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan. Under FDICIA, the aggregate liability of all
companies controlling an undercapitalized bank is limited to the lesser of 5%
of the institution's assets at the time it became undercapitalized or the
amount necessary to cause the institution to be "adequately capitalized." The
guarantee and limit on liability expire after the regulators notify the
institution that it has remained adequately capitalized for each of four
consecutive calendar quarters. FDICIA grants greater powers to the bank
regulators in situations where an institution becomes "significantly" or
"critically" undercapitalized or fails to submit a capital restoration plan.
For example, a bank holding company controlling such an institution can be
required to obtain prior Federal Reserve Board approval of proposed dividends,
or might be required to consent to a consolidation or to divest the troubled
institution or other affiliates. At March 31, 1997, however, SW Bank satisfied
the requirements of a "well capitalized" institution and, therefore, these
requirements are presently inapplicable to the Company.
92
<PAGE>
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before it
may acquire all or substantially all of the assets of any bank, or direct or
indirect ownership or control of more than 5% of any class of voting shares of
any bank.
The Federal Reserve Board will allow the acquisition by a bank holding
company of an interest in any bank located in another state only if the laws
of the state in which the target bank is located expressly authorize such
acquisition. The Texas Banking Code permits, in certain circumstances, out-of-
state bank holding companies to acquire banks and bank holding companies in
Texas.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996. On September
30, 1996, President Clinton signed into law the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act"). The
Regulatory Reduction Act's principal provisions relate to capitalization of
the Savings Association Insurance Fund of the FDIC, but it also contains
numerous regulatory relief measures, including provisions to reduce regulatory
burdens associated with compliance with various consumer and other laws
applicable to the Bank, including, for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending
Act and the Real Estate Settlement Procedures Act and modify certain insider
lending restrictions and anti-tying prohibitions.
Congress has been considering legislation in various forms that would
require federal thrifts to convert their charters to national or state bank
charters. The Regulatory Reduction Act required the Treasury Department to
prepare for Congress by March 31, 1997 a comprehensive study on development of
a common charter for federal savings associations and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single Deposit Insurance
Fund on that date. The Company cannot determine whether, or in what form, such
legislation may eventually be enacted.
EXPANDING ENFORCEMENT AUTHORITY
One of the major effects of FDICIA was the increased ability of banking
regulators to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For
example, the FDIC may terminate the deposit insurance of any institution which
it determines has engaged in an unsafe or unsound practice. The agencies can
also assess civil money penalties, issue cease and desist or removal orders,
seek injunctions, and publicly disclose such actions.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to
the Federal Reserve Board to affect the money supply are open market
operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member
bank deposits. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect
of such policies on the business and earnings of the Company and SW Bank
cannot be predicted.
93
<PAGE>
LEGAL MATTERS
The validity of the shares of Company Common Stock to be issued by the
Company will be passed upon by Vinson & Elkins L.L.P., Houston, Texas. Certain
legal matters with respect to the Merger will be passed upon for the Bank by
Brown, Parker & Leahy, L.L.P. Timothy R. Brown, a partner in Brown, Parker &
Leahy, L.L.P. is a director of the Bank and the holder of 21,000 shares of
Bank Common Stock.
EXPERTS
The consolidated balance sheet of Southwest Bancorporation of Texas, Inc. as
of December 31, 1996 and 1995 and the consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996, included in this Proxy
Statement/Prospectus, have been included herein in reliance on the report,
which includes an explanatory paragraph for a change in accounting principles,
of Coopers & Lybrand L.L.P., independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The balance sheets of Pinemont Bank as of December 31, 1996 and 1995 and the
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996, included in this
Proxy Statement/Prospectus, have been included herein in reliance on the
report of Grant Thornton LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES:
Consolidated Financial Statements
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheet as of March 31, 1997 (unaudited), December
31, 1996 and 1995...................................................... F-3
Consolidated Statement of Income for the Three Months Ended March 31,
1997 (unaudited) and 1996 (unaudited) and the Years Ended December 31,
1996, 1995 and 1994.................................................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the Three
Months Ended March 31, 1997 (unaudited) and the Years Ended December
31, 1996, 1995 and 1994................................................ F-5
Consolidated Statement 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-6
Notes to Consolidated Financial Statements.............................. F-7
Financial Statement Schedule
Report of Independent Accountants....................................... F-25
Schedule I--Parent Company Condensed Financial Statements............... F-26
PINEMONT BANK
Report of Independent Certified Public Accountants...................... F-29
Balance Sheets as of March 31, 1997 (unaudited), and December 31, 1996
and 1995............................................................... F-30
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-31
Statements of Shareholders' Equity for the Three Months Ended March 31,
1997 (unaudited) and the Years Ended December 31, 1996, 1995 and 1994.. F-32
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-33
Notes to Financial Statements........................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Southwest Bancorporation of Texas, Inc.:
We have audited the accompanying consolidated balance sheet of Southwest
Bancorporation of Texas, Inc. and Subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of income, changes
in 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 Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southwest
Bancorporation of Texas, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in the notes to the financial statements, the Company changed
its accounting for securities as of January 1, 1994.
Coopers & Lybrand L.L.P.
Houston, Texas
January 31, 1997
F-2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1997 1996 1995
ASSETS ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks..................... $ 72,550 $ 79,734 $ 57,310
Federal funds sold.......................... 22,600 62,954 23,885
----------- ----------- ---------
Total cash and cash equivalents......... 95,150 142,688 81,195
Securities--available for sale.............. 311,820 289,217 295,183
Loans receivable, net....................... 643,032 595,451 433,338
Premises and equipment, net................. 9,548 7,959 5,676
Accrued interest receivable................. 7,264 6,803 5,974
Prepaid expenses and other assets........... 6,684 2,381 4,108
----------- ----------- ---------
Total assets............................ $ 1,073,498 $ 1,044,499 $ 825,474
=========== =========== =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Deposits:...................................
Demand--noninterest-bearing............... $ 287,183 $ 308,438 $ 201,338
Demand--interest-bearing.................. 8,523 53,819 33,350
Money market accounts..................... 416,069 311,499 308,933
Savings................................... 3,194 3,168 2,667
Time, $100 and over....................... 98,071 104,007 79,899
Other time 55,538 52,638 46,454
----------- ----------- ---------
Total deposits.......................... 868,578 833,569 672,641
Securities sold under repurchase agreements. 116,989 136,119 95,638
Other short-term borrowings................. 5,044 10,027 1,287
Accrued interest payable.................... 622 608 598
Other liabilities........................... 3,118 2,184 3,161
----------- ----------- ---------
Total liabilities....................... 994,351 982,507 773,325
Commitments and contingencies...............
Bank preferred stock........................ -- 7,323 7,323
----------- ----------- ---------
Shareholders' equity........................
Common stock--$1 par value, 50,000,000
shares authorized; 9,390,933; 7,734,961
and 7,717,580 shares issued and
outstanding at March 31,1997 (unaudited),
December 31, 1996 and 1995, respectively. 9,391 7,734 7,717
Additional paid-in capital................ 38,135 18,030 17,745
Retained earnings......................... 31,813 28,730 19,142
Net unrealized (depreciation) appreciation
on securities available for sale, net of
deferred taxes of $103, $(94) and $(115)
at March 31, 1997 (unaudited), December
31,1996 and 1995, respectively........... (192) 175 222
----------- ----------- ---------
Total shareholders' equity.............. 79,147 54,669 44,826
----------- ----------- ---------
Total liabilities and shareholders'
equity................................. $ 1,073,498 $ 1,044,499 $ 825,474
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- -------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans..................... $13,590 $10,185 $44,709 $37,089 $26,684
Securities................ 4,418 4,629 17,856 11,668 6,898
Federal funds sold and
other.................... 352 175 868 1,825 706
------- ------- ------- ------- -------
Total interest income... 18,360 14,989 63,433 50,582 34,288
Interest expense on deposits
and other borrowings....... 7,860 6 438 27,262 21,890 11,444
------- ------- ------- ------- -------
Net interest income..... 10,500 8,551 36,171 28,692 22,844
Provision for loan losses... 438 280 1,670 925 1,145
------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 10,062 8,271 34,501 27,767 21,699
------- ------- ------- ------- -------
Other income:
Service charges........... 927 661 2,883 2,386 2,122
Other operating income.... 764 404 2,005 1,258 665
Gain on sale of other
assets................... 68 276
Gain on sale of
securities, net.......... 137
------- ------- ------- ------- -------
Total other income...... 1,828 1,065 4,888 3,712 3,063
------- ------- ------- ------- -------
Other expenses:
Salaries and employee
benefits................. 4,204 3,201 14,379 10,686 8,672
Occupancy expense......... 1,219 804 3,475 2,510 1,995
Loss on sale of
securities, net.......... 112 639 63
Other operating expenses.. 1,667 1,390 6,002 5,623 5,052
------- ------- ------- ------- -------
Total other expenses.... 7,090 5,395 23,968 19,458 15,782
------- ------- ------- ------- -------
Income before income
taxes.................. 4,800 3,941 15,421 12,021 8,980
Provision for income taxes.. (1,681) (1,379) (5,376) (4,214) (3,141)
------- ------- ------- ------- -------
Net income before bank
preferred stock
dividend............... 3,119 2,562 10,045 7,807 5,839
Bank preferred stock
dividend................... 36 115 457 50
------- ------- ------- ------- -------
Net income available for
common shareholders.... $ 3,083 $ 2,447 $ 9,588 $ 7,757 $ 5,839
======= ======= ======= ======= =======
Earnings per common
share.................. $ 0.32 $ 0.29 $ 1.12 $ 0.92 $ 0.70
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ADDITIONAL ON SECURITIES TOTAL
------------------ PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS FOR SALE EQUITY
--------- ------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1993................... 7,659,938 $7,660 $16,237 $ 5,546 $29,443
Cumulative effect of
change in accounting
for securities, net of
deferred taxes of
$(279)................ $ 541 541
Issuance of common
stock to benefit plan. 23,745 24 123 147
Exercise of stock
options............... 12,500 12 23 35
Paid-in capital for
stock options......... 935 935
Deferred compensation
amortization.......... 187 187
Net change in
unrealized
depreciation on
securities available
for sale, net of
deferred taxes of
$699.................. (1,357) (1,357)
Net income for the year
ended December 31,
1994.................. 5,839 5,839
--------- ------ ------- ------- ------ -------
BALANCE, DECEMBER 31,
1994................... 7,696,183 7,696 17,505 11,385 (816) 35,770
Issuance of common
stock to benefit plan. 18,172 18 109 127
Exercise of stock
options............... 3,225 3 (1) 2
Deferred compensation
amortization.......... 132 132
Net change in
unrealized
depreciation on
securities available
for sale, net of
deferred taxes of
$(535)................ 1,038 1,038
Cash dividends on
preferred stock ($.07
per share)............ (50) (50)
Net income for the year
ended December 31,
1995.................. 7,807 7,807
--------- ------ ------- ------- ------ -------
BALANCE, DECEMBER 31,
1995................... 7,717,580 7,717 17,745 19,142 222 44,826
Issuance of common
stock to benefit plan. 17,435 17 151 168
Liquidation of partial
shares................ (54) (1) (1)
Deferred compensation
amortization.......... 135 135
Net change in
unrealized
appreciation on
securities available
for sale, net of
deferred taxes of $25. (47) (47)
Cash dividends on
preferred stock ($.61
per share)............ (457) (457)
Net income for the year
ended December 31,
1996.................. 10,045 10,045
--------- ------ ------- ------- ------ -------
BALANCE, DECEMBER 31,
1996................... 7,734,961 7,734 18,030 28,730 175 54,669
Issuance of common
stock to benefit plan
(unaudited)........... 2,520 3 33 36
Exercise of stock
options (unaudited)... 330,952 331 1,648 1,979
Proceeds of public
offering (unaudited).. 1,322,500 1,323 18,578 19,901
Redemption of Bank
preferred stock
(unaudited)........... (177) (177)
Deferred compensation
amortization
(unaudited)........... 23 23
Net change in
unrealized
appreciation on
securities available
for sale, net of
deferred taxes of $197
(unaudited)........... (367) (367)
Cash dividends on
preferred stock ($.05
per share)
(unaudited)........... (36) (36)
Net income for the
three months ended
March 31, 1997
(unaudited)........... 3,119 3,119
--------- ------ ------- ------- ------ -------
BALANCE, MARCH 31, 1997
(unaudited)............ 9,390,933 $9,391 $38,135 $31,813 $ (192) $79,147
========= ====== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------
1997 1996 1996 1995 1994
----------- ----------- --------- --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 3,119 $ 2,562 $ 10,045 $ 7,807 $ 5,839
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Provision for loan
losses............... 438 280 1,670 925 1,145
Depreciation.......... 702 477 2,037 1,440 1,028
Compensation expense.. 36 33 168 127 147
Deferred compensation
amortization......... 23 33 135 132 187
Deferred tax expense
(benefit)............ 375 (445) (419)
Gain on sale of other
assets............... (68) (276)
Realized (gains)
losses on securities
available for sale... (137) 112 639 63
Net amortization of
premiums and
discounts............ 351 96 1,758 256 314
Dividends on Federal
Home Loan Bank stock. (581) (560) (1,694) (957)
(Increase) decrease in
accrued interest
receivable, prepaid
expenses and other
assets............... (4,595) (857) 823 (3,646) (1,655)
Increase (decrease) in
accrued interest
payable and other
liabilities.......... 2,747 1,123 (1,032) 2,247 392
-------- -------- --------- --------- --------
Net cash provided by
operating activities. 2,103 3,187 14,397 8,457 6,765
Cash flows from
investing activities:
Proceeds from maturity
of securities
available for sale.... 4,000 17,000 38,375 57,000 20,000
Proceeds from maturity
of securities held to
maturity.............. 8,000
Principal paydowns of
mortgage-backed
securities available
for sale.............. 10,285 12,700 50,138 6,691 2,091
Principal paydowns of
mortgage-backed
securities held to
maturity.............. 8,208 4,608
Proceeds from sale of
securities available
for sale.............. 24,608 567 43,011 56,152 7,939
Purchase of securities
available for sale.... (61,693) (54,816) (125,802) (199,587) (42,208)
Purchase of securities
held to maturity...... (78,546) (9,008)
Proceeds from sale of
other real estate and
other loan related
assets................ 18 24 500 750
Net increase in loans
receivable............ (48,020) (13,917) (164,087) (80,393) (72,874)
Purchase of premises
and equipment......... (2,291) (496) (4,320) (2,516) (2,607)
-------- -------- --------- --------- --------
Net cash used in
investing activities. (73,093) (38,962) (162,661) (224,491) (91,309)
Cash flows from
financing activities:
Net (decrease) increase
in noninterest-bearing
demand deposits....... (21,255) (8,108) 107,100 28,745 40,823
Net (decrease) increase
in time deposits...... (3,036) 20,467 30,293 11,159 24,012
Net increase (decrease)
in other interest-
bearing deposits...... 59,300 (14,887) 23,536 142,901 7,306
Net (decrease) increase
in securities sold
under repurchase
agreements............ (19,130) 1,959 40,480 53,190 19,308
Net (decrease) increase
in other short-term
borrowings............ (4,983) 5,823 8,739 (7,531) 8,819
Net proceeds from
issuance of Bank
preferred stock....... 7,323
Net proceeds from
initial public
offering of common
stock................. 19,901
Net proceeds from
exercise of stock
options............... 307
Retirement of Bank
preferred stock....... (7,500)
Payment of dividends on
Bank preferred stock.. (152) (391)
-------- -------- --------- --------- --------
Net cash provided by
financing activities. 23,452 5,254 209,757 235,787 100,268
-------- -------- --------- --------- --------
Net (decrease) increase
in cash and cash
equivalents............ (47,538) (30,521) 61,493 19,753 15,724
Cash and cash
equivalents at
beginning of year...... 142,688 81,195 81,195 61,442 45,718
-------- -------- --------- --------- --------
Cash and cash
equivalents at end of
year................... $ 95,150 $ 50,674 $ 142,688 $ 81,195 $ 61,442
======== ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements for the three months ended March 31,
1997 and year ended December 31, 1996 include the accounts of Southwest
Bancorporation of Texas, Inc. (the "Company") and its wholly-owned
subsidiaries Southwest Bank of Texas National Association (the "Bank") and
Southwest Bancorporation of Delaware, Inc. (the "Delaware Company"). All
material intercompany accounts and transactions have been eliminated. The
interim and annual financial statements for periods prior to June 30, 1996
include the accounts of the Bank.
In the opinion of management, the unaudited consolidated interim financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments, necessary to present fairly the Company's consolidated financial
position at March 31, 1997 and the Company's consolidated results of
operations and cash flows for the three-month periods ended March 31, 1997 and
1996. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
Nature of Operations
The Company was incorporated in March 1996 for the purpose of serving as a
holding company for the Bank and the Delaware Company. Substantially all of
the Company's revenue and income is derived from the operation of the Bank.
The Bank provides a full range of commercial and private banking services to
small and middle market businesses and individuals in the Houston metropolitan
area.
On June 30, 1996, the Company acquired the Bank through a one for one
exchange of common shares and assumed the Bank's stock option plans.
Shareholders' equity has been restated for all periods presented to reflect
the recapitalization. Accordingly, Bank preferred stock (See Note 10.), whose
holders are other than the Company and the Delaware Company, was segregated
from shareholders' equity in the accompanying consolidated balance sheet and
consolidated statement of changes in shareholders' equity. In addition,
certain other amounts in the financial statements have been reclassified to
conform to current financial statement presentation. These other
reclassifications had no effect on consolidated net income, shareholders'
equity or cash flows. In November 1996, the Company effected a 2.5 for 1
common stock split in the form of a common stock dividend (the "Stock Split").
All share and per share information for common stock has been retroactively
restated to reflect the Stock Split.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers its federal funds sold, due from bank demand accounts
and other highly liquid investments purchased with a maturity of three months
or less to be cash equivalents. The Company classifies its investments in
money market funds as securities and not cash equivalents.
The Company is required to maintain noninterest-bearing cash reserve
balances with the Federal Reserve Bank. The average balance was approximately
$17,600 for the three months ended March 31, 1997 and $15,200 and $10,900 for
the years ended December 31, 1996 and 1995, respectively.
Securities
The Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115")
on January 1, 1994. The cumulative effect of the
F-7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
change has been included in the accompanying statement of changes in
shareholders' equity for the year ended December 31, 1994.
Securities which management intends and has the ability to hold to maturity
are classified as held to maturity. Securities held to maturity are stated at
cost, increased by accretion of discounts and reduced by amortization of
premiums, both computed by the interest method. The Company held no securities
classified as held to maturity at March 31, 1997 or December 31, 1996 or 1995.
Securities to be held for indefinite periods of time, including securities
that management intends to use as part of its asset/liability strategy, or
that may be sold in response to changes in interest rates, changes in
prepayment risk, the need to increase regulatory capital or other similar
factors, are classified as available for sale and are carried at fair value.
Fair values of securities are estimated based on available market quotations.
Unrealized holding gains and losses, net of taxes, on available for sale
securities are reported as a net amount in a separate component of
shareholders' equity until realized. The carrying value of securities
available for sale is increased by accretion of discounts and reduced by
amortization of premiums, both computed by the interest method. Gains and
losses on the sale of available for sale securities are determined using the
specific identification method.
Trading securities are carried at market value. Realized and unrealized
gains and losses on trading securities are recognized in the consolidated
statement of income as they occur. The Company held no trading securities
during the three months ended March 31, 1997 or the years ended December 31,
1996, 1995, or 1994.
The Company reviews its financial position, liquidity and future plans in
evaluating the criteria for classifying investment securities. Securities are
classified among categories at the time the securities are purchased. Declines
in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary would result in
write-downs of the individual securities to their fair value. The Company
believes that none of the unrealized losses should be considered other than
temporary.
Transfer of securities between classifications are accounted for at fair
value. In November 1995, the Company transferred all of its held to maturity
securities to available for sale as explained further in Note 2.
Loans
Loans are reported at the principal amount outstanding, net of unearned
discount, deferred loan fees and the allowance for loan losses.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Loans are designated as nonaccrual when reasonable doubt
exists as to the full, timely collection of interest or principal. When a loan
is placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where
the future collection of interest and principal is probable. Interest accruals
are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and interest.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
considered impaired, based on current information and events, if it is
probable that the
F-8
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. A
loan is not considered impaired during a period of delay in payment if the
Company expects to collect all amounts due, including interest past due. The
Company generally considers a period of delay in payment to include
delinquency up to 90 days. Accordingly, for purposes of applying SFAS 114, as
amended, impaired loans have been defined as all nonaccrual loans. The
measurement of impaired loans is based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the loan's
observable market price or based on the fair value of the collateral if the
loan is collateral-dependent. If the measure of the impaired loan is less than
the recorded investment in the loan, an impairment is recognized through a
valuation allowance and a corresponding charge to operations. The adoption of
SFAS 114 did not result in additional provisions for loan losses.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for such
losses charged against operations. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to reflect the risks inherent in the existing loan portfolio and
commitments to extend credit and is based on evaluations of the collectibility
and prior loss experience of loans. The evaluations are based on a number of
subjective factors including current and anticipated economic conditions,
changes in the loan portfolio, adequacy of loan collateral and other relevant
factors.
The evaluation of the adequacy of loan collateral is often based upon
estimates and appraisals. Because of changing economic conditions, the
valuations determined from such estimates and appraisals may also change.
Accordingly, the Company may ultimately incur losses which vary from
management's current estimates. Adjustments to the allowance for loan losses
will be reported in the period such adjustments become known or are reasonably
estimable.
Loan Fees and Costs
Nonrefundable loan origination and commitment fees and direct costs
associated with originating loans are deferred and recognized over the lives
of the related loans as an adjustment to the loans' yield using a method which
approximates the interest method.
Premises and Equipment
Premises and equipment are recorded at cost. Expenditures for renewals and
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred. Any gain or loss from disposition of such assets is
reflected in current operations. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets.
Other Real Estate Owned
Real estate acquired through foreclosure is carried at the lower of the
recorded investment in the property or its fair value less estimated selling
costs. Prior to foreclosure, the value of the underlying collateral of the
loan is written down to its estimated fair value less estimated selling costs
by a charge to the allowance for loan losses, if necessary. Any subsequent
write-downs are charged against operations. Operating expenses of such
properties, net of related income is included in other operating expenses.
F-9
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
Earnings Per Common Share
Earnings per common share is calculated by dividing net income available for
common shareholders by the weighted average number of common shares and common
share equivalents. Stock options are regarded as common share equivalents and
are therefore considered in earnings per share calculations, if dilutive. The
number of common share equivalents is determined using the treasury stock
method.
Federal Income Tax
The Company provides for deferred income taxes utilizing the liability
method whereby deferred income taxes are recognized for the tax consequences
in future years of differences in the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be utilized.
Investment tax credits are used to reduce the current provision for federal
income tax in the year in which they are realized.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities ("SFAS 125"). This
statement establishes the accounting standards for certain transactions
related to transfers with continuing involvement in the transferred assets and
the extinguishment of a liability in connection with a transfer. SFAS 125 is
effective for transactions occurring after December 31, 1996. The impact on
the consolidated financial statements of adopting this statement is not
expected to be material to the Company's financial position, operations or
cash flows.
2. SECURITIES:
The amortized cost and approximate fair value of securities classified as
available for sale is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
GROSS
UNREALIZED
AMORTIZED ------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C>
U. S. Government securities................... $ 88,461 $101 $(206) $ 88,356
Mortgage-backed securities.................... 177,841 478 (671) 177,648
Federal Reserve Bank stock.................... 950 950
Federal Home Loan Bank stock, at cost......... 39,966 39,966
Other securities.............................. 4,898 2 4,900
-------- ---- ----- --------
Total securities available for sale......... $312,116 $581 $(877) $311,820
======== ==== ===== ========
</TABLE>
F-10
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------
GROSS
UNREALIZED
AMORTIZED ------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ --------
<S> <C> <C> <C> <C>
U. S. Government securities................... $ 83,345 $315 $ (68) $ 83,592
Mortgage-backed securities.................... 159,106 524 (507) 159,123
Federal Reserve Bank stock.................... 950 950
Federal Home Loan Bank stock, at cost......... 39,386 39,386
Other securities.............................. 6,161 5 6,166
-------- ---- ----- --------
Total securities available for sale......... $288,948 $844 $(575) $289,217
======== ==== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------
GROSS
UNREALIZED
AMORTIZED ------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- ------ --------
<S> <C> <C> <C> <C>
U. S. Government securities................... $ 97,797 $491 $(200) $ 98,088
Mortgage-backed securities.................... 154,083 451 (416) 154,118
Federal Reserve Bank stock.................... 946 946
Federal Home Loan Bank stock, at cost......... 37,692 37,692
Other securities.............................. 4,329 10 4,339
-------- ---- ----- --------
Total securities available for sale......... $294,847 $952 $(616) $295,183
======== ==== ===== ========
</TABLE>
The scheduled maturities of securities classified as available for sale is
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less. $ 46,020 $ 46,090 $ 39,877 $ 40,008 $ 41,533 $ 41,655
Due from one year to
five years............. 42,441 42,266 43,468 43,584 56,264 56,433
-------- -------- -------- -------- -------- --------
88,461 88,356 83,345 83,592 97,797 98,088
-------- -------- -------- -------- -------- --------
Mortgage-backed
securities............. 177,841 177,648 159,106 159,123 154,083 154,118
Federal Reserve Bank
stock.................. 950 950 950 950 946 946
Federal Home Loan Bank
stock.................. 39,966 39,966 39,386 39,386 37,692 37,692
Other securities........ 4,898 4,900 6,161 6,166 4,329 4,339
-------- -------- -------- -------- -------- --------
Total securities
available for sale.... $312,116 $311,820 $288,948 $289,217 $294,847 $295,183
======== ======== ======== ======== ======== ========
</TABLE>
In November 1995, the Financial Accounting Standards Board issued A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities which provided a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Company transferred all securities in the held to maturity
portfolio to the available for sale portfolio in November 1995. The
transferred securities had an amortized cost of $150,278 and net unrealized
losses of $574. The transfer resulted in a decrease of $373 to consolidated
shareholders' equity. Such reassessment does not change management's intent to
hold other debt securities to maturity in the future. At this time
classification of all securities as available for sale allows the Company to
manage its investment portfolio more effectively and to enhance the average
yield on the portfolio.
F-11
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
At March 31, 1997 and December 31, 1996 and 1995, respectively, securities
amounting to $134,606, $168,190 and $148,600 with a market value of $144,762,
$160,167 and $148,538 have been pledged to collateralize repurchase
agreements, public deposits and other items.
3. LOANS:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Commercial...................................... $329,867 $300,315 $194,304
Real estate:
Construction.................................. 75,115 68,205 47,152
1-4 family residential........................ 123,511 113,792 88,297
Other......................................... 69,875 67,392 65,156
Consumer........................................ 52,142 52,762 44,147
-------- -------- --------
650,510 602,466 439,056
Less:
Unearned fees and discounts................... (1,176) (991) (797)
Allowance for loan losses..................... (6,302) (6,024) (4,921)
-------- -------- --------
$643,032 $595,451 $433,338
======== ======== ========
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------
1997 1996 1996 1995 1994
----------- ---------- ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period... $6,024 $4,921 $4,921 $4,294 $3,250
Provision charged against
operations.................... 438 280 1,670 925 1,145
Charge offs.................... (175) (4) (595) (312) (167)
Recoveries..................... 15 1 28 14 66
------ ------ ------ ------ ------
Balance, end of period......... $6,302 $5,198 $6,024 $4,921 $4,294
====== ====== ====== ====== ======
</TABLE>
The Company had approximately $1,230, $955 and $291 in nonaccrual and
impaired loans at March 31, 1997 and December 31, 1996 and 1995, respectively.
The Company has loans, deposits, and other transactions with its principal
shareholders, officers, directors and organizations with which such persons
are associated which were made in the ordinary course of business. At March
31, 1997 and December 31, 1996 and 1995, the aggregate amount of loans and
unfunded lines of credit to such related parties was $10,866, $8,318 and
$6,574, respectively.
F-12
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
Following is an analysis of activity with respect to these amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------
1997 1996 1995
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning of period........................ $ 8,318 $6,574 $9,162
New loans........................................... 2,992 3,374 1,177
Repayments.......................................... (444) (1,630) (3,765)
------- ------ ------
Balance, end of period.............................. $10,866 $8,318 $6,574
======= ====== ======
</TABLE>
4. PREMISES AND EQUIPMENT:
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 955 $ 955 $ 955
Premises and leasehold improvements................. 3,142 2,737 1,892
Furniture and equipment............................. 12,363 10,662 7,539
------- ------- -------
16,460 14,354 10,386
Less accumulated depreciation and amortization...... 6,912 6,395 4,710
------- ------- -------
$ 9,548 $ 7,959 $ 5,676
======= ======= =======
</TABLE>
5. PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------
1997 1996 1995
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Prepaid expenses..................................... $ 531 $ 367 $ 459
Foreclosed real estate............................... 262 262
Deferred taxes....................................... 1,380 1,193 1,883
Banker's acceptances................................. 61 322 1,713
Deposit on service application....................... 4,450
Other................................................ 237 53
------ ------ ------
$6,684 $2,381 $4,108
====== ====== ======
</TABLE>
F-13
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
6. DEPOSITS:
Scheduled maturities of time deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
MATURITY 1997 1996 1995
-------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
1997........................................ $131,778 $137,908 $108,970
1998........................................ 18,653 12,762 9,720
1999........................................ 1,062 3,375 4,989
2000........................................ 1,259 620 1,108
2001........................................ 135 1,410 591
Thereafter.................................. 722 570 975
-------- -------- --------
$153,609 $156,645 $126,353
======== ======== ========
</TABLE>
At March 31, 1997 and December 31, 1996 and 1995, the aggregate amount of
deposits from related parties was $56,466, $36,383 and $45,657, respectively.
7. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS:
Securities sold under repurchase agreements and other short-term borrowings,
consisting of federal funds purchased and treasury, tax, and loan deposits,
generally represent borrowings with maturities ranging from one to thirty days.
Information relating to these borrowings is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Securities sold under repurchase
agreements:
Average............................... $126,090 $103,927 $65,674
Period-end............................ 116,989 136,119 95,638
Maximum month-end balance during
period............................... 123,884 136,119 95,638
Interest rate:
Average............................... 4.78% 4.88% 5.36%
Period-end............................ 4.84% 4.93% 5.41%
Other short-term borrowings:
Average............................... $ 17,298 $ 13,137 $ 6,904
Year-end.............................. 5,044 10,027 1,287
Maximum month-end balance during
period............................... 32,143 60,044 10,000
Interest rate:
Average............................... 5.32% 5.30% 5.58%
Period-end............................ 5.68% 5.16% 5.32%
</TABLE>
Securities sold under repurchase agreements are maintained in safekeeping by
correspondent banks.
F-14
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
8. FEDERAL INCOME TAXES:
The income tax (provision)/benefit for the years ended December 31, 1996,
1995 and 1994 is composed of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current........................................ $(5,001) $(4,659) $(3,560)
Deferred....................................... (375) 445 419
------- ------- -------
$(5,376) $(4,214) $(3,141)
======= ======= =======
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to deferred
income tax assets and liabilities and their approximate tax effects are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCES EFFECT DIFFERENCES EFFECT
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Premises and equipment................... $ 23 $ 8 $ 274 $ 96
Allowance for loan losses................ 5,555 1,944 4,101 1,435
Unearned fees............................ 66 23 162 57
Deferred compensation.................... 1,381 483 1,246 436
Accruals................................. 138 48 68 24
------ ------ ------ ------
Deferred income tax asset.............. $7,163 2,506 $5,851 2,048
====== ------ ====== ------
Unrealized gain on securities available
for sale................................ $ 269 94 $ 336 114
Market discounts on securities........... 255 89 147 51
Federal Home Loan Bank stock dividend.... 3,230 1,130
------ ------ ------ ------
Deferred income tax liability.......... $3,754 1,313 $ 483 165
====== ------ ====== ------
Net deferred income tax asset............ $1,193 $1,883
====== ======
</TABLE>
The reconciliation between the Company'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....................... 35.0% 35.0% 34.0%
Permanent differences................................... 0.5 0.7 0.9
Effect of utilization of graduated tax rates............ (0.7) (0.8)
Other................................................... 0.1 0.2 0.1
---- ---- ----
Effective income tax rate............................. 34.9% 35.1% 35.0%
==== ==== ====
</TABLE>
F-15
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
9. EMPLOYEE BENEFITS:
Stock-Based Compensation Plan
The Company sponsors, and currently grants awards under, the Southwest
Bancorporation of Texas, Inc. 1996 Stock Option Plan (the "Stock Option
Plan"), which is a stock-based compensation plan as described below. The
Company has also sponsored similar stock-based compensation plans in prior
years.
The Company applies Accounting Principle Board Opinion 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations in accounting
for the Stock Option Plan and the Company's other prior stock-based
compensation plans. In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS 123") which, if fully adopted by the Company, would
change the method the Company applies in recognizing the expense of its stock-
based compensation plans. Adoption of the expense recognition provisions of
SFAS 123 is optional and the Company has decided not to elect these provisions
of SFAS 123. However, pro forma disclosures as if the Company adopted the
expense recognition provisions of SFAS 123 in 1995 are required by SFAS 123
and are presented below.
The Stock Option Plan
Under the Stock Option Plan, the Company is authorized to issue up to
650,000 shares of common stock pursuant to "Awards" granted in the form of
incentive stock options, nonqualified stock options, and stock appreciation
rights. Awards may be granted to selected employees and directors of the
Company or any subsidiary. The Stock Option Plan provides that the exercise
price of any incentive stock option may not be less than the fair market value
of the common stock on the date of grant.
The Company granted 418,000 stock options in 1996 and 170,550 stock options
in 1995. These stock options were granted with an exercise price, as
determined in each individual grant agreement. Of the stock options granted in
1996, 19,400 options were 100% vested at grant and the balance vest over a
five year period commencing on the date of grant (i.e., 60% vest on the third
anniversary of the date of grant and 20% vest on each of the next two
anniversaries of the date of grant). Of the stock options granted in 1995,
18,050 options were 100% vested at grant and the balance vest over a five year
period on the same terms as the vesting schedule applicable to the 1996 stock
options.
Included in the 1996 grants were 2,500 nonqualified stock options that will
vest only if a specified performance measure is attained. These performance-
based stock options were not vested at December 31, 1996, but for purposes of
the pro forma amounts shown below, are assumed to become fully vested by the
anniversary of the date of grant in 1997.
In accordance with APB 25, compensation expense is recognized for discounted
stock options granted and for performance-based stock options granted (but not
for the nondiscounted stock options granted). The Company has recognized $23
and $33 of compensation expense in connection with the Stock Option Plan
during the three months ended March 31, 1997 and 1996, respectively, and $135,
$132 and $187 of compensation expense in connection with the Stock Option Plan
during 1996, 1995 and 1994, respectively.
F-16
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
A summary of the status of the Company's stock options as of December 31,
1996, 1995, and 1994 and the change during the years is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES AVERAGE # SHARES AVERAGE # SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year............ 1,129,400 $ 2.97 962,075 $2.19 810,150 $1.51
Granted at a discount. 21,250 $ 9.46 26,250 $6.52 145,000 $5.09
Granted at-the-money.. 394,250 $16.23 126,250 $7.30 29,425 $6.76
Granted at a premium.. 2,500 $10.00 18,050 $8.80 0 n/a
Total granted........... 418,000 $15.85 170,550 $7.34 174,425 $5.37
Exercised............... 0 n/a 3,225 $0.40 12,500 $0.40
Forfeited............... 23,750 $ 8.31 0 n/a 10,000 $4.95
Expired................. 0 n/a 0 n/a 0 n/a
Outstanding at end of
year................... 1,523,650 $ 6.42 1,129,400 $2.97 962,075 $2.19
Exercisable at end of
year................... 600,443 $ 2.08 525,985 $1.64 446,163 $1.43
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes stock option valuation model with the following
weighted-average assumptions for grants in 1996 and 1995: dividend yield of
0.00%; risk-free interest rates are different for each grant and range from
5.33% to 6.93%; and the expected lives of options range from 5 to 6 years. The
weighted average fair value of options granted during the year is as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Weighted-average fair value of options granted at a discount. $3.17 $2.91
Weighted-average fair value of options granted at-the-money.. $4.77 $2.16
Weighted-average fair value of options granted at a premium.. $2.40 $1.91
Weighted-average fair value of all options granted during the
year........................................................ $4.67 $2.25
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.40 to $5.00........... 798,175 * $ 1.53 547,318 $ 1.20
$5.01 to $11.00.......... 346,850 * $ 6.68 33,725 $ 8.06
$11.01 to $16.50......... 378,625 9.89 $16.50 19,400 $16.50
--------- ---- ------ ------- ------
$0.40 to $16.50.......... 1,523,650 * $ 6.42 600,443 $ 2.08
========= =======
</TABLE>
- --------
* All options, with an exercise price between $0.40 to $11.00, are exercisable
while the employee remains an employee at the Company and cease to be
exercisable three months after termination of employment.
F-17
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
If the fair value based method of accounting under SFAS 123 had been
applied, the Company's net income available for common shareholders 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 income available for common shareholders
As reported.................................................... $9,588 $7,757
Pro forma...................................................... 9,455 7,688
Earnings per common share
As reported.................................................... $ 1.12 $ 0.92
Pro forma...................................................... 1.11 0.92
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plans.
In January 1997, an officer of the Company exercised options to purchase
250,000 shares of common stock for an aggregate exercise price of $100,000.
Benefit Plan
The Company has adopted a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees (the
"401-K Plan"). Each year the Company determines, at its discretion, the amount
of matching contributions. For the period July 1, 1993 to June 30, 1994, the
Company elected to match 100% of the employee contributions not to exceed 5%
of the employee's annual compensation. Beginning July 1, 1994 the Company has
elected to match 50% of the employee contributions not to exceed 3% of the
employee's annual compensation. Total plan expense charged to the Company's
operations for the three months ended March 31, 1997 and 1996 was $48 and $41,
respectively, and for the years ended December 31, 1996, 1995 and 1994 was
$180, $136 and $146, respectively.
During April 1993, the 401-K Plan was amended to allow the Company to
contribute shares of common stock of the Company (valued at the approximate
fair market value on the date of contribution) instead of cash. Under the plan
250,000 shares of common stock are issuable. A total of 2,520 and 610 shares
at prices of $14.00 and $9.20 were issued to the 401-K Plan during the three
months ended March 31, 1997 and 1996, respectively, and a total of 17,435,
18,172 and 23,745 shares at prices ranging from $9.20 to $10.20, $6.50 to
$7.60 and $6.20 were issued to the 401-K Plan during the twelve months ended
December 31, 1996, 1995 and 1994, respectively.
F-18
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
10. PREFERRED STOCK:
The Bank authorized 1,500,000 shares of Series 1 Adjustable Rate First
Preferred Stock, $5 par value, ("Bank Preferred Stock") in October 1995 and
issued 750,000 shares in November 1995. The Bank Preferred Stock holders have
no voting rights except in certain circumstances. Each share of Bank Preferred
Stock is entitled to a liquidation preference of $10.
Dividends on the Bank Preferred Stock are noncumulative. The Bank is
prohibited from paying any cash dividends on the common stock unless all
dividends on the Bank Preferred Stock have been paid in full for all completed
quarterly periods. Bank Preferred Stock dividends are payable quarterly in
arrears and are calculated on the $10 subscription price at a rate of 1% above
the United States Treasury bill rate.
The Bank Preferred Stock may be redeemed at any time on or after December
31, 1997, at the option of the Bank, in whole or in part, at $10.10 per share,
together with all unpaid dividends per share, whether or not declared (the
"Redemption Price"). Each quarter after December 31, 1999, the redemption
price increases by $.05 per share. If a change of control occurs prior to
December 31, 1997, the Bank Preferred Stock may be redeemed at the option of
the Bank at the redemption price. Ninety days after a change of control, each
share of Bank Preferred Stock is convertible, at the option of the holder,
into the number of common shares equal to the quotient of $10 divided by the
book value per common share.
In January 1997, upon written approval of the holders of the Bank Preferred
Stock, the Bank redeemed all of the outstanding shares for approximately $7.5
million. (See Note 17.)
11. EARNINGS PER COMMON SHARE:
Earnings per common share is computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------
1997 1996 1996 1995 1994
----------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income available for
common shareholders.... $ 3,083 $ 2,447 $ 9,588 $ 7,757 $ 5,839
Divided by average
common shares and
common share
equivalents:
Average common shares. 8,821,037 7,718,410 7,726,405 7,707,428 7,675,340
Average common share
equivalents.......... 718,274 769,338 808,313 686,690 626,270
---------- ---------- ---------- ---------- ----------
Total average common
shares and common share
equivalents............ 9,539,311 8,487,748 8,534,718 8,394,118 8,301,610
Earnings per common
share.................. $ 0.32 $ 0.29 $ 1.12 $ 0.92 $ 0.70
========== ========== ========== ========== ==========
</TABLE>
Litigation
The Company is involved in various lawsuits that arose in the normal course
of business. The Company's management believes there are substantial defenses
against these claims. In the opinion of management of the Company, after
consultation with its legal counsel, the ultimate liability, if any, will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
F-19
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
Leases
At December 31, 1996, the Company has certain noncancelable operating leases
which cover the Company's premises with approximate future minimum annual
rental payments as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 1,600
1998.............................................................. 1,600
1999.............................................................. 1,600
2000.............................................................. 1,600
2001 and thereafter............................................... 7,500
-------
$13,900
=======
</TABLE>
Rent expense was $414 and $235 for the three months ended March 31, 1997 and
1996, respectively, and $1,047, $779 and $657 for the years ended December 31,
1996, 1995 and 1994, respectively.
On May 1, 1996, the Company entered into a ten year agreement to lease
office space and a motor bank in the Galleria area. The lease commenced on
November 11, 1996 with annual rental payments of approximately $1,200.
13. REGULATORY CAPITAL COMPLIANCE:
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and 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 Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Company and the Bank meet all capital adequacy requirements
to which each is subject.
As of December 31, 1996, the most recent notification from the regulators
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-20
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<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 March 31, 1997 (unaudited):
Total capital (to risk weighted
assets)......................... $85,285 11.70% $58,323 *8.0% $72,903 *10.0%
Tier I capital (to risk weighted
assets)......................... 78,983 10.83 29,161 *4.0 43,742 *6.0
Tier I capital (to average
assets)......................... 78,983 7.77 30,495 *3.0 50,820 *5.0
As of December 31, 1996:
Total capital (to risk weighted
assets)......................... 67,728 10.41 52,039 *8.0 65,049 *10.0
Tier I capital (to risk weighted
assets)......................... 61,704 9.49 26,020 *4.0 39,029 *6.0
Tier I capital (to average
assets)......................... 61,704 6.59 28,090 *3.0 46,831 *5.0
As of December 31, 1995:
Total capital (to risk weighted
assets)......................... 56,848 11.74 38,738 *8.0 48,422 *10.0
Tier I capital (to risk weighted
assets)......................... 51,927 10.72 19,369 *4.0 29,053 *6.0
Tier I capital (to average
assets)......................... 51,927 6.29 24,766 *3.0 41,277 *5.0
</TABLE>
- -------------
* Greater than or equal to
The Company and the Bank are also subject to certain restrictions on the
amount of dividends that they may declare without prior regulatory approval in
addition to dividend restrictions associated with the Bank Preferred Stock.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK:
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of its
customers. These financial instruments include loan commitments and letters of
credit that involve, to varying degrees, elements of credit risk in excess of
the amounts recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the loan commitments and letters of credit is limited to the
contractual amount of those instruments. The Company uses the same credit
policies in evaluating loan commitments and letters of credit as it does for
on-balance sheet instruments.
The approximate amounts of financial instruments with off-balance sheet risk
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
CONTRACT CONTRACT
AMOUNT AMOUNT
------------ ------------
<S> <C> <C>
Financial instruments whole contract amounts
represent credit risk:
Loan commitments including unfunded lines of credit. $257,000 $230,000
Standby letters of credit........................... 25,000 20,000
Commercial letters of credit........................ 5,000 1,000
-------- --------
$287,000 $251,000
======== ========
</TABLE>
F-21
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
Loan commitments 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 loan commitments and letters of credit may expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. Standby letters of credit are conditional
commitments by the Company to guarantee the performance of a customer to a
third party.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment, and real
property.
The Company originates real estate, commercial and consumer loans primarily
to customers in the greater Houston, Texas area. Although the Company has a
diversified loan portfolio, a substantial portion of its customers' ability to
honor their contracts is dependent upon the local Houston economy and the real
estate market.
The Company maintains funds on deposit at correspondent banks which at times
exceed the federally insured limits. Management of the Company monitors the
balance in these accounts and periodically assesses the financial condition of
correspondent banks.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Disclosure about fair value of financial instruments provided below is the
information required by Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS 107"). These
amounts represent estimates of fair values at a point in time. Significant
estimates regarding economic conditions, loss experience, risk characteristics
associated with particular financial instruments and other factors were used
for the purposes of this disclosure. These estimates are subjective in nature
and involve matters of judgment. Therefore, they cannot be determined with
precision. Changes in the assumptions could have a material impact on the
amounts estimated.
While the estimated fair value amounts are designed to represent estimates
of the amounts at which these instruments could be exchanged in a current
transaction between willing parties, many of the Company's financial
instruments lack an available trading market as characterized by willing
parties engaging in an exchange transaction. In addition, it is the Company's
intent to hold most of its financial instruments to maturity and, therefore,
it is not probable that the fair values shown will be realized in a current
transaction.
The estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles)
and other customers is not reflected. The value of these items is significant.
Because of the wide range of valuation techniques and the numerous estimates
which must be made, it may be difficult to make reasonable comparisons of the
Company's fair value information to that of other financial institutions. It
is important that the many uncertainties discussed above be considered when
using the estimated fair value disclosures and to realize that because of
these uncertainties, the aggregate fair value amount should in no way be
construed as representative of the underlying value of the Company.
F-22
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the
consolidated balance sheet for cash and cash equivalents approximate their
fair values.
Securities: Fair values for investment securities are based on quoted
market prices.
Federal Home Loan Bank Stock: The fair value of stock in the Federal Home
Loan Bank of Dallas is estimated to be equal to its carrying amount given
it is not a publicly traded equity security, it has an adjustable dividend
rate, and all transactions in the stock are executed at the stated par
value.
Loan Receivables and Accrued Interest Receivable: For variable-rate loans
that reprice frequently and with no significant change in credit risk, fair
values are based on carrying values. The fair value of all other loans are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest
approximates its fair value.
Off-Balance-Sheet Instruments: The fair values of the Company's off-
balance-sheet instruments (lending commitments and letters of credit) are
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties'
credit standing.
Deposit Liabilities and Accrued Interest Payable: The fair values disclosed
for demand deposits (e.g., interest and noninterest checking and money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date. Fair values for fixed-rate time deposits are
estimated using a discounted cash flow analysis, using interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of
accrued interest approximates its fair value.
Short-term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
The following table summarizes the carrying values and estimated fair values
of financial instruments (all of which are held for purposes other than
trading):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks.............. $79,734 $79,734 $57,310 $57,310
Federal funds sold................... 62,954 62,954 23,885 23,885
Securities available for sale........ 289,217 289,217 295,183 295,183
Loans, net of allowance.............. 595,451 604,870 433,338 434,036
Accrued interest receivable.......... 6,803 6,803 5,974 5,974
Liabilities
Deposits............................. 833,569 833,639 672,641 673,147
Securities sold under repurchase
agreements.......................... 136,119 136,119 95,638 95,638
Other short-term borrowings.......... 10,027 10,027 1,287 1,287
Accrued interest payable............. 608 608 598 598
</TABLE>
F-23
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 IS
UNAUDITED)
The total fair value of the Company's loan commitments and letters of credit
was immaterial at December 31, 1996 and 1995.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information for the years ended December 31,
1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid for interest................................. $27,252 $21,774 $11,356
Cash paid for federal income tax....................... 4,890 4,244 3,560
</TABLE>
During the quarter ended March 31, 1997, the Company reduced its federal
income tax liability by approximately $1.9 million and recorded a
corresponding increase to additional paid-in capital representing the tax
benefit related to the exercise of certain stock options.
17. SUBSEQUENT EVENT:
In January 1997, the Company completed an initial public offering ("IPO") of
its common stock. A total of 1,322,500 shares of common stock were sold by the
Company at $16.50 per share. Substantially all of the net proceeds from the
IPO were contributed to the Bank and used to redeem the 750,000 outstanding
shares of Bank Preferred Stock and for general corporate purposes.
In the first quarter of 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS 129"). These
statements will be adopted by the Company effective December 31, 1997. SFAS
128 simplifies the computation of earnings per common share by replacing
primary and fully-diluted presentations with the new basic and diluted
disclosures. SFAS 129 establishes standards for disclosing information about
an entity's capital structure.
On April 28, 1997, the Company and the Bank entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Pinemont Bank, whereby Pinemont
Bank will merge into the Bank. The Merger Agreement, which is subject to
approval of the shareholders of Pinemont Bank and various regulatory
authorities, provides for the exchange of 0.625 of a share of the Company's
common stock for each share of Pinemont Bank stock, resulting in the issuance
of approximately 1,775,000 shares of the Company's common stock. At March 31,
1997, Pinemont Bank had total assets of approximately $235 million and total
deposits of $215 million. The transaction is expected to be accounted for as a
pooling of interests.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Southwest Bancorporation of Texas, Inc.:
Our report on the consolidated financial statements of Southwest
Bancorporation of Texas, Inc. and Subsidiaries, which includes an explanatory
paragraph regarding the Company's change as of January 1, 1994 in accounting
for securities, is included on page F-2 of this registration statement on Form
S-4. In connection with our audits of such consolidated financial statements,
we have also audited the related financial statement schedule listed in the
index on page F-1 of this registration statement on Form S-4.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information required
to be included therein.
Coopers & Lybrand L.L.P.
Houston, Texas
January 31, 1997
F-25
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
ASSETS ------------
<S> <C>
Cash and cash equivalents.......................................... $ 55
Investment in subsidiaries......................................... 54,560
Intercompany receivables........................................... 55
Other assets....................................................... 71
-------
Total assets................................................... $54,741
=======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Liabilities
Intercompany payables............................................ $ 72
-------
Total liabilities.............................................. 72
-------
Shareholders' equity
Common stock..................................................... 7,734
Additional paid-in capital....................................... 18,030
Retained earnings................................................ 28,730
Net unrealized appreciation on securities available for sale..... 175
-------
Total shareholders' equity..................................... 54,669
-------
Total liabilities and shareholders' equity..................... $54,741
=======
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-26
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Equity in undistributed income of subsidiaries............... $9,588
------
Income before income taxes................................. 9,588
Income taxes............................................... --
------
Net income................................................... $9,588
======
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-27
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
SCHEDULE I--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Cash flows from operating activities
Net income................................................ $ 9,588
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed income of subsidiaries........... (9,588)
Increase in other assets................................. (126)
Increase in other liabilities............................ 72
-------
Net cash used in operating activities................... (54)
-------
Cash flows from investing activities
Return on investment in subsidiaries...................... 20
-------
Net cash provided by investing activities............... 20
-------
Cash flows from financing activities
Net proceeds from issuance of common stock................ 89
-------
Net cash provided by financing activities............... 89
-------
Net increase in cash and cash equivalents................... 55
Cash and cash equivalents at beginning of year.............. --
-------
Cash and cash equivalents at end of year.................... $ 55
=======
Supplemental noncash investing activities:
Common stock issued to acquire subsidiaries............... $44,992
=======
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of
Southwest Bancorporation of Texas, Inc. and Subsidiaries included herein.
F-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
SOUTHWEST BANCORPORATION OF TEXAS, INC.,
SOUTHWEST BANK OF TEXAS NATIONAL ASSOCIATION
AND
PINEMONT BANK
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
THE MERGER
Section 1.1 The Merger............................................... 1
Section 1.2 Conversion of Bank Common Stock and Bank Stock Options... 3
Section 1.3 Dissenters............................................... 3
Section 1.4 Surrender of Bank Stock Certificates..................... 4
ARTICLE II
THE CLOSING
Section 2.1 Closing Date............................................. 5
Section 2.2 Effective Time; Procedure................................ 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BANK
Section 3.1 Organization............................................. 6
Section 3.2 Binding Effect........................................... 7
Section 3.3 Capitalization........................................... 7
Section 3.4 Financial Statements and Reports......................... 8
Section 3.5 Compliance with Applicable Laws; Operating Authorities... 9
Section 3.6 Other Activities of the Bank............................. 10
Section 3.7 Contracts and Commitments................................ 10
Section 3.8 Broker's and Finder's Fees............................... 11
Section 3.9 Corporate Records; Other Information..................... 12
Section 3.10 Real Property Owned or Leased........................... 12
Section 3.11 Personal Property....................................... 13
Section 3.12 Accounting Records; Data Processing..................... 13
Section 3.13 Absence of Certain Changes.............................. 13
Section 3.14 Litigation.............................................. 14
Section 3.15 Undisclosed Liabilities................................. 15
Section 3.16 Tax Matters............................................. 15
Section 3.17 Employment and Similar Agreements; Obligations
Upon Change in Control.................................. 16
Section 3.18 Benefit Plans........................................... 17
Section 3.19 Labor and Employment Matters............................ 19
Section 3.20 Certain Interests....................................... 20
Section 3.21 Registration Statement and Regulatory Applications...... 20
Section 3.22 Insurance............................................... 21
Section 3.23 Environmental Matters................................... 21
A-i
<PAGE>
Section 3.24 Intellectual Property Rights............................ 22
Section 3.25 Site Locations.......................................... 22
Section 3.26 Loans................................................... 23
Section 3.27 Allowance for Losses.................................... 23
Section 3.28 Real Estate Owned....................................... 23
Section 3.29 Interest Rate Risk Management Instruments............... 24
Section 3.30 Disclosure.............................................. 24
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND SW BANK
Section 4.1 Organization............................................. 25
Section 4.2 Binding Effect........................................... 25
Section 4.3 Capitalization........................................... 26
Section 4.4 Financial Statements and Reports......................... 26
Section 4.5 Registration Statement and Regulatory Applications....... 26
Section 4.6 Compliance with Applicable Laws; Operating Authorities... 27
Section 4.7 Absence of Certain Changes............................... 27
Section 4.8 Litigation............................................... 28
Section 4.9 Undisclosed Liabilities.................................. 28
Section 4.10 Tax Matters.............................................. 28
Section 4.11 Environmental Matters.................................... 29
Section 4.12 Allowance for Losses..................................... 29
Section 4.13 Disclosure............................................... 29
ARTICLE V
COVENANTS OF THE PARTIES
Section 5.1 Preparation of Registration Statement and
Prospectus/Proxy Statement.............................. 29
Section 5.2 Pursuit of Regulatory Approvals......................... 30
Section 5.3 Other Consents.......................................... 30
Section 5.4 Bank Activities Pending Closing......................... 31
Section 5.5 Ongoing Financial Disclosure............................ 32
Section 5.6 Access to Information................................... 32
Section 5.7 Confidentiality......................................... 33
Section 5.8 Meeting of Shareholders................................. 34
Section 5.9 Stock Listing........................................... 34
Section 5.10 Affiliates' Letters..................................... 34
Section 5.11 Merger of SW Delaware................................... 34
Section 5.12 Plan Amendments and Participation in Company Plans...... 35
Section 5.13 Assumption of Bank Stock Options........................ 35
Section 5.14 Termination of Severance and Consulting Arrangements.... 35
Section 5.15 Certain Notifications................................... 35
A-ii
<PAGE>
Section 5.16 No Shopping............................................. 35
Section 5.17 No Inconsistent Actions; Pooling; Tax Treatment......... 36
Section 5.18 Taxes; Consent.......................................... 36
Section 5.19 Transactions with Affiliates and Insiders............... 37
Section 5.20 Classification of Loans................................. 37
Section 5.21 Compliance with Applicable Law.......................... 37
Section 5.22 Certain Accounting Adjustments.......................... 37
Section 5.24 Employment Agreements................................... 39
Section 5.25 Indemnification of Directors and Officers; Insurance.... 39
Section 5.26 Company Activities Pending Closing...................... 40
Section 5.27 Access to Information................................... 41
Section 5.28 Further Assurances...................................... 42
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 Conditions to the Bank's Obligation to Close............. 42
Section 6.2 Conditions to the Company's and SW Bank's Obligations
to Close................................................. 44
ARTICLE VII
TERMINATION
Section 7.1 Termination.............................................. 47
Section 7.2 Effect of Termination.................................... 48
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Non-Survival of Representations and Warranties........... 48
Section 8.2 Notices.................................................. 49
Section 8.3 Governing Law............................................ 50
Section 8.4 Entire Agreement......................................... 50
Section 8.5 Amendments and Waivers................................... 50
Section 8.6 Severability............................................. 50
Section 8.7 Counterparts............................................. 50
Section 8.8 Interpretation of Agreement.............................. 51
Section 8.9 Expenses................................................. 51
Section 8.10 Attorney's Fees......................................... 52
Section 8.11 Publicity............................................... 52
Section 8.12 Binding Effect.......................................... 52
Section 8.13 Third Parties........................................... 52
Section 8.14 Gender; Number.......................................... 52
Section 8.15 Certain Definitions..................................... 53
A-iii
<PAGE>
EXHIBITS
Exhibit A - Form of Affiliates' Letter
Exhibit B-1 - Form of Employment Agreement with J. Nolan Bedford
Exhibit B-2 - Form of Employment Agreement with Maurice L. Junod
Exhibit C - Form of Opinion of Counsel for the Company
Exhibit D - Form of Opinion of Counsel for the Bank
Exhibit E - Form of Release (Director)
Exhibit F - Form of Release (Officer)
A-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
SOUTHWEST BANCORPORATION OF TEXAS, INC.,
SOUTHWEST BANK OF TEXAS NATIONAL ASSOCIATION
AND
PINEMONT BANK
This Agreement and Plan of Merger ("Agreement") is entered into as of April
28, 1997 between Southwest Bancorporation of Texas, Inc., a Texas corporation
(the "Company"), Southwest Bank of Texas National Association, a national
banking association ("SW Bank"), and Pinemont Bank, a Texas banking association
(the "Bank").
RECITALS
A. The parties hereto desire to effect a business combination pursuant to
which (i) the Bank will be merged with and into SW Bank, with SW Bank being the
surviving association (the "Merger"), and (ii) the shareholders of record as of
the date of the Merger of the common stock, $0.66 2/3 par value, of the Bank
("Bank Common Stock") (such holders of record of Bank Common Stock are
hereinafter referred to as the "Shareholders"), will receive the shares of
Common Stock, $1.00 par value, of the Company ("Company Common Stock") in
accordance with the terms and conditions of this Agreement, all for the purpose
of effecting a tax-free reorganization pursuant to Section 368(a)(1) of the
Internal Revenue Code of 1986, as amended (the "Code").
B. In connection with the Merger, all options to purchase shares of Bank
Common Stock ("Bank Stock Options") pursuant to the Bank's Incentive and
Nonqualified Stock Option Plan (as amended and restated November 21, 1995) (the
"Bank's Stock Option Plan"), shall be converted into options to purchase Company
Common Stock as described herein.
C. The Merger requires certain shareholder and regulatory approvals as
described herein and shall be effected only after the necessary approvals have
been obtained. Certain capitalized terms not otherwise defined herein shall
have the meanings as defined in Section 8.15 hereof.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER.
(a) Procedure for Merger. The Merger shall take place upon the terms and
subject to the conditions of this Agreement, and in accordance with the
provisions of 12 U.S.C. (S) 215a and Section 3.501 of the Texas Banking Act
("TBA"), pursuant to which, at the Effective Time:
A-1
<PAGE>
(i) the Bank shall be merged with and into SW Bank by a statutory
merger, the separate corporate existence of the Bank shall thereupon cease
and SW Bank shall continue as the Surviving Association in the Merger (the
"Surviving Association");
(ii) each share of stock of SW Bank issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of the holder thereof, continue to be outstanding as one
share of stock of SW Bank, as the Surviving Association;
(iii) each share of Bank Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be canceled and
converted into the right to receive from the Company, upon surrender of the
certificate representing such share, 0.625 of a share of Company Common
Stock, as provided in Section 1.2 hereof;
(iv) the Articles of Association and the Bylaws of SW Bank shall be
the Articles of Association and Bylaws of the Surviving Association.
(v) the authorized capital stock of the Surviving Association shall be
unchanged, consisting of 5,000,000 shares of common stock, $5.00 par value,
of which 3,090,349 shares shall be issued and outstanding;
(vi) the directors of SW Bank at the Effective Time shall be the
directors of the Surviving Association and the officers of SW Bank at the
Effective Time shall be the officers of the Surviving Association, in each
case until their respective successors are duly elected and qualified;
(vii) the corporate existence of each of the Bank and SW Bank shall
be merged into and continued in the Surviving Association and such
Surviving Association shall be deemed to be the same corporation as the
Bank and SW Bank; all rights, franchises, and interests of the Bank and SW
Bank in and to every type of property (real, personal and mixed) and choses
in action shall be transferred to and vested in the Surviving Association
by virtue of the Merger without any deed or other transfer; the Surviving
Association, upon the Merger and without any order or other action on the
part of any court or otherwise, shall hold and enjoy all rights of
property, franchises and interests, including appointments, designations
and nominations, and all other rights and interests as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates,
assignee, receiver and committee of estates of lunatics, and in every other
fiduciary capacity, in the same manner and to the same extent as such
rights, franchises and interests were held or enjoyed by any one of the
Bank and SW Bank at the time of the Merger, subject to the conditions
provided by Applicable Law; and
(viii) the Merger shall have the other effects set forth in 12 U.S.C.
(S) 215a and Section 3.501 of the TBA, including, without limitation, that
the Surviving Association shall be liable for all liabilities of the Bank
and SW Bank.
A-2
<PAGE>
SECTION 1.2 CONVERSION OF BANK COMMON STOCK AND BANK STOCK OPTIONS.
(a) Outstanding Bank Common Stock. At the Effective Time, each share of
Bank Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares of Bank Common Stock (x) held for future issuance pursuant to
the Bank's Stock Option Plan or (y) which are Dissenting Shares, as such term is
defined in Section 1.3 hereof) shall, by virtue of this Agreement and without
any action on the part of the holder thereof, be converted into and exchangeable
for 0.625 (the "Exchange Ratio") of a share of Company Common Stock. All of the
shares of Bank Common Stock converted into Company Common Stock pursuant to this
Section 1.2(a) shall no longer be outstanding and shall automatically be
canceled and shall cease to exist, and each certificate (each a "Certificate")
previously representing any such shares of Bank Common Stock shall thereafter
represent the right to receive (i) the number of whole shares of Company Common
Stock and (ii) cash in lieu of fractional shares into which the shares of Bank
Common Stock represented by such Certificate have been converted pursuant to
this Section 1.2(a) and Section 1.4(e) hereof. Certificates previously
representing shares of Bank Common Stock shall be exchanged for certificates
representing whole shares of Company Common Stock and cash in lieu of fractional
shares issued in consideration therefor upon the surrender of such Certificates
in accordance with Section 1.4 hereof, without any interest thereon. If prior
to the Effective Time, the Company should split or combine the outstanding
shares of Company Common Stock, recapitalize, or pay a dividend or other
distribution payable in Company Common Stock, then the Exchange Ratio shall be
appropriately adjusted to reflect such split, recapitalization, combination,
dividend or distribution.
(b) Treasury Stock. At the Effective Time, all shares of Bank Common Stock
that are held in the Bank's treasury or otherwise owned by the Bank as treasury
stock or held by or for the benefit of the Bank for future issuance under the
Bank's Stock Option Plan shall be canceled and shall cease to exist and no stock
of the Company or other consideration shall be delivered in exchange therefor.
(c) Bank Stock Options. At the Effective Time, each Bank Stock Option
shall, in accordance with its terms, be converted into an option, having the
same terms as such Bank Stock Option, to purchase a number of shares of Company
Common Stock equal to the number of shares of Bank Common Stock subject thereto
multiplied by 0.625, at an exercise price per share equal to the exercise price
per share subject thereto divided by 0.625; provided, however, that no "Dividend
Credits" (as defined in the Bank Stock Option Plan) shall accrue or be paid with
respect to any Bank Stock Option after the Effective Time.
SECTION 1.3 DISSENTERS. Each Shareholder who is entitled to dissenters'
rights pursuant to the TBA, the Texas Business Corporation Act (the "TBCA") or
12 U.S.C. (S) 215a(b) on the Bank Meeting Date, and who continues to be so
entitled as of the Effective Time, is referred to herein as a "Dissenter." Each
Dissenting Share shall be converted into the rights provided by the TBA, the
TBCA and 12 U.S.C. (S) 215a.
A-3
<PAGE>
SECTION 1.4 SURRENDER OF BANK STOCK CERTIFICATES.
(a) As soon as practicable after the Effective Time, American Securities
Transfer & Trust, Inc., as Exchange Agent (the "Exchange Agent"), shall mail to
each holder of record of a Certificate or Certificates a form letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing the
shares of Company Common Stock and the cash in lieu of fractional shares into
which the shares of Bank Common Stock represented by such Certificate or
Certificates shall have been converted pursuant to this Agreement. Upon
surrender of a Certificate for exchange and cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor (x) a certificate
representing that number of whole shares of Company Common Stock to which such
holder of Bank Common Stock shall have become entitled pursuant to the
provisions of Section 1.2 hereof and (y) a check representing the amount of cash
in lieu of fractional shares, if any, which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions of this
Section 1.4, and the Certificate so surrendered shall forthwith be canceled. No
interest will be paid or accrued on the cash in lieu of fractional shares and
unpaid dividends and distributions, if any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the Effective Time
with respect to Company Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate until the
holder thereof shall surrender such Certificate in accordance with this Section
1.4. After the surrender of a Certificate in accordance with this Section 1.4,
the record holder thereof shall be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Company Common Stock represented by such
Certificate.
(c) If any certificate representing shares of Company Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be appropriately endorsed (or
accompanied by an appropriate instrument of transfer) and otherwise in proper
form (reasonably satisfactory to the Company) for transfer, and that the person
requesting such exchange shall pay to the Exchange Agent in advance any transfer
or other taxes required by reason of the issuance of a certificate representing
shares of Company Common Stock in any name other than that of the registered
holder of the Certificate surrendered, or required for any other reason, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not payable.
(d) At the Effective Time, the stock transfer books of the Bank shall be
closed, and no transfer of the shares of Bank Common Stock shall thereafter be
recognized. If, after the Effective Time, Certificates representing such shares
are presented for transfer to the Exchange Agent, they shall be canceled and
exchanged for the certificates representing shares of Company Common Stock and
cash in lieu of fractional shares as provided in Section 1.2 hereof.
A-4
<PAGE>
(e) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Company Common Stock
shall be issued upon the surrender for exchange of Certificates, no dividend or
distribution with respect to Company Common Stock shall be payable on or with
respect to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a shareholder of the
Company. In lieu of the issuance of any such fractional share, the Company
shall pay to each former holder of Bank Common Stock who otherwise would be
entitled to receive a fractional share of Company Common Stock an amount in cash
determined by multiplying (i) the Average Closing Price by (ii) the fraction of
a share of Company Common Stock which such holder would otherwise be entitled to
receive pursuant to Section 1.2 hereof. The term "Average Closing Price" means
the average closing sales price per share of Company Common Stock on The NASDAQ
Stock Market ("NASDAQ"), (as reported by The Wall Street Journal or, if not
reported thereby, another authoritive source selected by the Company), for the
five consecutive NASDAQ trading days immediately prior to the Closing Date.
(f) None of the Company, the Bank, the Exchange Agent or any other person
shall be liable to any former holder of shares of Bank Common Stock for any
Company Common Stock (or dividends or distributions with respect thereto) or
cash properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Company, the
posting by such person of a bond in such amount as the Company may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Company Common Stock and cash in lieu of
fractional shares deliverable in respect thereof pursuant to this Agreement.
ARTICLE II
THE CLOSING
SECTION 2.1 CLOSING DATE. The Closing (the "Closing") of the
transactions contemplated by this Agreement shall take place on a date to which
the Company and the Bank may agree (the "Closing Date"); provided, however, that
in the absence of an agreement by the parties to the contrary such Closing Date
shall be the last business day of the month in which the last of the conditions
to Closing set forth in Sections 6.1 and 6.2 have been satisfied, but in no
event later than the date specified in Section 7.1(h) hereof.
SECTION 2.2 EFFECTIVE TIME; PROCEDURE.
(a) The Bank and SW Bank shall, in accordance with 12 U.S.C. (S) 215a(a)
and the TBA, if necessary, file certified copies of the minutes of all
proceedings had by their respective directors and shareholders regarding the
Merger, together with copies of this Agreement and such other information as may
be required, with the Office of the Comptroller of the Currency ("OCC") and the
Texas Banking Commissioner for approval, and upon receipt of such approvals and
the expiration
A-5
<PAGE>
of any applicable waiting periods, make such filings as may be necessary to
consummate the Merger. The Merger shall become effective at the time that the
parties agree is to be the effective time (the "Effective Time"). The parties
hereto shall take all such other and further actions as may be required by
Applicable Law to make the Merger effective at the Effective Time.
(b) If at any time the Company shall consider or be advised that any
further assignment or assurances in law or any other actions are reasonably
necessary or desirable to vest the title of any property or rights of the Bank
in the Surviving Association after the Effective Time, the last acting officers
and directors of the Bank (prior to the Effective Time) shall execute and make
all such proper assignments and assurances and do all things necessary or proper
to vest title in such property or rights in the Surviving Association after the
Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank has delivered to the Company prior to the execution hereof a
disclosure schedule with respect to the representations and warranties set forth
below (the "Disclosure Schedule"). Sections of the Disclosure Schedule are
hereinafter sometimes referred to as a "Schedule." The representations and
warranties of the Bank made with respect to or subject to the Disclosure
Schedule, any exception taken therein or any information or documentation
provided or required to be provided thereby shall be deemed to have been made as
of the date of this Agreement. The Disclosure Schedule shall in each case
specifically reference the Section or subsection of this Agreement to which any
exception, information or documentation set forth therein applies (disclosure in
any Section or subsection of the Disclosure Schedule shall apply only to the
referenced Section or subsection of this Agreement).
The Bank hereby represents and warrants to the Company and SW Bank as
follows:
SECTION 3.1 ORGANIZATION.
(a) The Bank is a banking association, duly organized, validly existing and
in good standing under the laws of the State of Texas. The deposit accounts of
the Bank are insured by the Bank Insurance Fund of the FDIC to the fullest
extent permitted under Applicable Law. The Bank is duly licensed by the Texas
Banking Commissioner to conduct a banking business at all locations at which it
is now conducting business. The Bank is not a member of the Federal Reserve
System.
(b) The Bank has all requisite corporate power and corporate authority to
own or lease its properties and to carry on its business as currently conducted.
The nature of the business of the Bank and its activities, as currently
conducted, do not require it to be qualified or registered to do business in any
jurisdiction other than the State of Texas.
(c) The Bank has the corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated herein, subject to receipt of the approval of the
Shareholders.
A-6
<PAGE>
(d) The Bank has delivered to the Company true and complete copies of the
Articles of Association and Bylaws of the Bank and all amendments thereto. Such
Articles of Association and Bylaws are in full force and effect.
SECTION 3.2 BINDING EFFECT. Subject to receipt of Shareholder approval,
this Agreement has been duly and validly authorized, executed and delivered by
the Bank and constitutes the legal, valid and binding obligations of the Bank,
enforceable against the Bank in accordance with its terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies). The Bank's Board of Directors has unanimously determined that the
Merger is fair to, and in the best interest of, the Bank's shareholders and has
unanimously resolved to recommend approval and adoption of this Agreement by the
Bank's shareholders. Except as otherwise disclosed on Schedule 3.2, neither the
execution and delivery of this Agreement by the Bank, nor the consummation by
the Bank of the transactions contemplated hereby, nor compliance with any of the
provisions hereof will (i) conflict with or result in the breach of any
provision of the Bank's Articles of Association or Bylaws, (ii) conflict with or
result in the breach of any term, condition or provision of, or constitute a
default under (upon the giving of notice, the lapse of time or otherwise), or
give rise to any right of termination, cancellation or acceleration with respect
to, or result in the creation of any lien, charge or encumbrance upon any
property or assets of the Bank or otherwise require the consent of any Person
under, any agreement or obligation to which the Bank is a party or by which any
of its properties or assets may be bound, which conflict, breach, default,
right, lien or right of consent could reasonably be expected to cause a Material
Adverse Effect on the Bank, or (iii) violate or conflict with (or require any
filing, notification, report, approval or other similar action under) any
Applicable Laws, subject to obtaining the approval of the Shareholders and the
Regulatory Approvals specified in Section 5.2(a).
SECTION 3.3 CAPITALIZATION.
(a) The authorized capital stock of the Bank consists of 3,325,000 shares
of Bank Common Stock, 2,775,000 shares of which are issued and outstanding
(including 105,000 shares held for future sale under the Bank's Stock Option
Plan), and 200,000 shares are reserved for issuance upon the exercise of options
granted under the Bank's Stock Option Plan. All outstanding shares of Bank
Common Stock have been and are, duly authorized and validly issued, fully paid
and nonassessable and have not been issued in violation of the preemptive rights
of any person. There are outstanding Bank Stock Options to purchase 305,000
shares of Bank Common Stock. Schedule 3.3(a) sets forth a list of the exercise
prices, vesting schedules, expiration dates, holders of and numbers of shares
subject to all such Bank Stock Options. All Bank Stock Options have been duly
authorized and all Bank Stock Options (i) were granted at a per share price
which is not less than the fair market value per share of the Bank Common Stock
at the date of grant, and (ii) meet all other requirements under the Code for
treatment as "incentive" stock options under Section 422(b) thereof.
A-7
<PAGE>
(b) Except as otherwise disclosed on Schedule 3.3(a), there are no
outstanding or authorized subscriptions, options, warrants, convertible
securities, calls, rights, commitments or any other agreements of any character
relating to the issued or unissued capital stock or other securities of the Bank
obligating the Bank to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other securities of the Bank or
convertible security or other similar agreement or commitment. There are no
outstanding contractual obligations of the Bank to repurchase, redeem or
otherwise acquire any outstanding shares of Bank Common Stock and there are no
outstanding stock appreciation rights or similar rights granted by the Bank.
There are no voting trusts or other agreements with respect to the voting of
Bank Common Stock (i) to which the Bank is a party or (ii) to the Bank's
knowledge, to which any other Person is a party. No bonds, debentures, notes or
other indebtedness having the right to vote (or convertible into or exercisable
for securities having the right to vote) on any matters on which Shareholders
may vote are issued and outstanding, and none will be outstanding as of the
Effective Time. All outstanding Bank Common Stock was issued, and all shares of
Common Stock issuable pursuant to the Bank Stock Options will be issued, in
compliance with Applicable Law. Except as set forth in Schedule 3.3(b), no
Person holds of record, or, to the Bank's knowledge, beneficially, 5% or more of
the outstanding shares of Bank Common Stock.
(c) The Bank does not have any Subsidiaries and does not own any equity
interest in any other entity. There is no arrangement pursuant to which the
stock of any corporation is held in trust (whether express, constructive,
resulting or otherwise) for the benefit of the shareholders of the Bank.
SECTION 3.4 FINANCIAL STATEMENTS AND REPORTS.
(a) The Bank has delivered to the Company true and complete copies of the
Bank's audited balance sheets and related statements of earnings, shareholders'
equity and cash flows for the years ended December 31, 1996 and 1995, and the
unaudited balance sheets and related statements of earnings for the three-month
periods ended March 31, 1997 and 1996. Such financial statements have been
prepared from the books and records of the Bank, present fairly the financial
condition as of the relevant dates, and the results of operations and cash flows
for the relevant periods, all in accordance with generally accepted accounting
principles consistently applied throughout the periods covered, except as stated
therein (subject, in the case of unaudited financial statements, which are in
condensed format, to the exclusion of normal year-end adjustments and footnote
disclosures required by generally accepted accounting principles). The Bank
does not have any Liabilities of a type which should be included in or reflected
in such financial statements, except (i) as to the extent disclosed or reflected
in such financial statements, (ii) Liabilities incurred in the ordinary course
of business since March 31, 1997, which individually or in the aggregate would
not result in a Material Adverse Effect upon the Bank, or (iii) Liabilities
under this Agreement and fees and expenses related thereto. The Bank does not
have any off-balance sheet Liabilities associated with financial derivative
products or potential liabilities associated with financial derivative products.
The Bank has delivered to the Company true and complete copies of all management
letters delivered to the Bank by Grant Thornton LLP (or any predecessor thereto)
relating to the internal controls of the Bank during any period from and after
December 31, 1991.
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(b) The Bank has filed all material documents and reports required to be
filed by it with the Texas Banking Commissioner, the FDIC and any other
Governmental Authority under all other Applicable Laws (the "Governmental
Filings"). All such Governmental Filings, as finally amended or corrected,
complied in all material respects at the time of filing and at the time of any
amended or supplemented filing with all requirements of their respective forms
and with all Applicable Laws.
(c) The Bank has not changed its independent auditing firm since December
31, 1994, and there has been no disagreement (as such term is used in Item 304
of Regulation S-K promulgated under the Securities Act) between the Bank and its
independent auditing firm(s) since December 31, 1994 concerning any aspect of
the manner in which the Bank maintains its books and records or the manner in
which it has reported upon its financial condition and results of operations
during such period.
SECTION 3.5 COMPLIANCE WITH APPLICABLE LAWS; OPERATING AUTHORITIES.
(a) The business of the Bank and any advertising related to such business
or otherwise conducted by or on behalf of the Bank, including without limitation
the business of originating, acquiring, holding or disposing of assets and
liabilities, is being conducted in compliance in all material respects with all
Applicable Laws, and the forms, procedures, disclosures and practices now or
previously used by it are or were in compliance in all material respects with
all Applicable Laws as in effect at the relevant times. No formal investigation
or review by any Governmental Authority concerning any possible conflicts or
violations of Applicable Laws is pending, nor to the Bank's knowledge, is any
such investigation threatened, nor has any such investigation occurred during
the last three years. No Governmental Authority has delivered any written
notice to the Bank, or to the Bank's knowledge, otherwise asserted an intention
to conduct any such investigation or review, nor, to the Bank's knowledge, is
there any basis for any investigation or review of the type described above.
(b) The Bank is not (i) a party to any written agreement, stipulation,
conditional approval, memorandum of understanding or notice of determination
with any Governmental Authority or (ii) subject to any judgment, order, decree
or directive of such a Governmental Authority which specifically identifies the
Bank, that, in either case, restricts or monitors the conduct of its business,
or in any manner relates to its capital adequacy, credit policies, management or
customer base.
(c) The Bank holds all material registrations, licenses, permits and
franchises as are required to conduct its business as now conducted (including,
without limitation, any insurance or securities activities), and all such
licenses, permits and franchises which it holds are valid and in full force and
effect. To the Bank's knowledge, no suspension of any of the foregoing
operating rights or cancellation thereof has been initiated or threatened and
all filings, applications and registrations with respect thereto are current.
Schedule 3.5(c) contains a list of and true, correct and complete copies of all
registrations, licenses, permits and franchises currently held by the Bank.
(d) To the knowledge of the Bank, no entity is a "bank holding company" as
defined in the Bank Holding Company Act of 1956, as amended, and the regulations
promulgated thereunder, with respect to the Bank, nor is any person or persons
acting in concert deemed to "control" the Bank under the Federal Deposit
Insurance Act, as amended, and the regulations promulgated thereunder.
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SECTION 3.6 OTHER ACTIVITIES OF THE BANK.
(a) The Bank engages only in activities permissible under the TBA and
applicable FDIC regulations. To the knowledge of the Bank, the Bank does not
currently engage in any activities which would be impermissible for a national
bank.
(b) Except as set forth on Schedule 3.6(b), the Bank does not engage in any
insurance activities. Schedule 3.6(b) contains a list of and true and correct
copies of all licenses and approvals held by the Bank (and any officer, director
or employee of the Bank) to conduct any insurance activities, whether as
principal, agent, broker or otherwise.
(c) Except as set forth in Schedule 3.6(c), the Bank does not engage in any
securities sales, underwriting, brokerage, management or dealing activities,
whether as principal or agent, either directly or under contractual or other
arrangements with third parties. Schedule 3.6(c) contains a list of and true
and correct copies of all licenses and approvals held by the Bank (and any
officer, director or employee of the Bank) to conduct any such activities.
(d) Except as set forth on Schedule 3.6(d), the Bank, in connection with
its activities relating to funds transfers, (i) is not in default under any
agreement to which it is a party relating to the transfer of funds or settlement
with respect to such transfers; or (ii) has not agreed to be or is liable for
consequential damages for its error or delay in acting on requests for the
transfer of funds. The Bank has adopted procedures to avoid such errors and
delay; has adopted security procedures for verifying the authenticity of
requests received for the transfer or funds, which procedures are identified on
or attached to Schedule 3.6(d); and, to the Bank's knowledge, is in compliance
with Applicable Law in all material respects relating to the transfer of funds
and settlement with respect thereto with the applicable operating laws of each
funds transfer system of which it is a member or by which it is bound.
(e) The Bank does not engage in any trust activities.
SECTION 3.7 CONTRACTS AND COMMITMENTS.
(a) Except for Plans, Employee Agreements, deposits, securities sold under
repurchase agreements, bankers' acceptances and loans and extensions of credit
by the Bank in the ordinary course of business, Schedule 3.7(a) contains a list
of each agreement that: (i) obligates the Bank to pay an amount of $50,000 or
more in any twelve-month period; (ii) binds the Bank and has an unexpired term
in excess of two years and requires aggregate payments by any party of $50,000
or more; (iii) relates to the purchase or sale by the Bank of any loan
(including any participation interest), lease or other extension or commitment
to extend credit or any interest therein, or the servicing rights or obligations
with respect thereto, in each case for an aggregate amount exceeding $50,000,
whether or not servicing rights or obligations have been retained by the Bank;
(iv) restricts the Bank (or would, to the Bank's knowledge, restrict the Company
or any of its Subsidiaries after the Effective Time) from carrying on its
business or any part thereof anywhere in the world or from competing in any line
of business with any Person, (v) is a debt obligation of the Bank for borrowed
money in excess of $50,000, including, without limitation, guarantees of or
agreements to acquire any such debt obligation of others or for a leasing
transaction of a type required to be capitalized in
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accordance with SFAS No. 13 (in the case of any such leasing transaction, under
which payments to such third Person exceed $50,000 per annum); (vi) obligates
the Bank as guarantor, surety, co-signer, endorser, co-maker, indemnitor or
otherwise (including any "recourse" sale of assets) in respect of the
obligations of any other Person (other than routine endorsements and other
routine bank collection obligations entered into in the ordinary course of the
operations of the Bank) in the amount of $50,000 or more; (vii) is an agreement
involving the payment of a commission in the amount of $10,000 or more per annum
to any Person; (viii) obligates the Bank in an amount of $50,000 or more in
respect of any capital expenditure or commitment therefor for additions to
property, facilities, equipment or leasehold interests; (ix) is a lease of
personal property involving aggregate payments by or to the Bank of $50,000 or
more; (x) is a mortgage, pledge, conditional sales contract, security agreement,
option or any other similar agreement with respect to any interest of the Bank
(other than as mortgagee, secured party or deed of trust beneficiary in the
ordinary course of its lending business) in property having a value of $150,000
or more; (xi) is an agreement for the sale of any property or assets having a
value of $150,000 or more in which the Bank has an ownership interest (other
than leasehold interests that do not become subject to termination upon such
sale) or for the grant of any preferential right to purchase any such property
or asset (excluding properties and assets in which the Bank holds a security
interest granted in the ordinary course of its lending business); or (xii)
involves the ownership or licensing of software or hardware or involves the
provision of data processing services (other than incidental software products
involving annual expenditures of less than $10,000). All items included or
required to be included in Schedule 3.7(a) are being referred to herein as
"Scheduled Contracts." The Bank has delivered to the Company true and complete
copies of each of the Scheduled Contracts.
(b) Except as disclosed in Schedule 3.7(b), to the knowledge of the Bank,
each Scheduled Contract is a legal, valid and binding obligation enforceable in
accordance with its terms (except as may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting the rights of creditors
generally and the availability of equitable remedies), and is in full force and
effect; the Bank has duly performed all of its obligations thereunder to the
extent that such obligations to perform have accrued; there are no breaches,
violations, defaults (or events that have occurred that with notice, lapse of
time or the happening or occurrence of any other event would constitute a
default) or allegations or assertions of any of the foregoing by the Bank or, to
the Bank's knowledge, any other party under any such agreement, except for such
non-performances, breaches, violations or defaults which could not in the
aggregate reasonably be expected to cause a Material Adverse Effect on the Bank;
each such agreement was entered into in the ordinary course of business
consistent with prudent banking practice; and, except as disclosed in Schedule
3.7(b), no breaches disclosed therein, individually, could reasonably be
expected to result in a loss to the Bank in excess of $50,000 and all of such
breaches, in the aggregate, could not reasonably be expected to result in a loss
to the Bank in excess of $100,000.
SECTION 3.8 BROKER'S AND FINDER'S FEES. Except as disclosed in Schedule
3.8, neither the Bank, nor anyone acting on its behalf has paid or become
obligated to pay any fee or commission to any broker, finder, intermediary,
financial advisor or financial consultant or other Person (other than legal and
accounting advisors acting as such) in connection with the transactions
contemplated hereby (including, without limitation, any restructuring of
obligations, refinancings or other transactions that have been entered into as
part of the transactions contemplated hereby) and, except as stated above, no
Person is entitled to receive from the Bank any such fee or commission.
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SECTION 3.9 CORPORATE RECORDS; OTHER INFORMATION. The minute books of
the Bank constitute complete and accurate records of all material actions taken
by the Board of Directors, committees of the Board of Directors and the
Shareholders. All documents and other written information as to existing facts
relating to the Bank and its assets and liabilities provided to the Company by
the Bank or its agents in connection with this Agreement are true and complete
in all material respects except to the extent that any documents or other
written information was later specifically supplemented or corrected prior to
the date of this Agreement with additional documents or written information that
was provided to the Company.
SECTION 3.10 REAL PROPERTY OWNED OR LEASED.
(a) Other than Real Estate Owned, Schedule 3.10(a) contains a true, correct
and complete list of all real property owned or leased by the Bank (the "Bank
Real Property"). The Bank has delivered to the Company true and complete copies
of all of its deeds, leases and title insurance policies for the properties
referred to in Schedule 3.10(a).
(b) No lease with respect to any Bank Real Property and no deed with
respect to any Bank Real Property contains any restrictive covenant that
materially restricts the use, transferability or value of such Bank Real
Property. To the Bank's knowledge, each of such leases is a legal, valid and
binding obligation enforceable in accordance with its terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and is in full force and effect; there are no existing defaults by
the Bank or, to the Bank's knowledge, the other party thereunder; to the Bank's
knowledge, there are no allegations or assertions of such by any party under
such agreement or any events that with notice, lapse of time or the happening or
occurrence of any other event would constitute a default thereunder.
(c) None of the buildings and structures located on any Bank Real Property,
nor any appurtenances thereto or equipment therein, nor the operation or
maintenance thereof, violates in any material manner any restrictive covenants
or encroaches on any property owned by others, nor does any building or
structure of third parties encroach upon any Bank Real Property, except for
those violations and encroachments which in the aggregate could not reasonably
be expected to cause a Material Adverse Effect on the Bank. No condemnation
proceeding is pending or, to the Bank's knowledge, threatened, which would
preclude or materially impair the use of any Bank Real Property in the manner in
which it is currently being used.
(d) The Bank has good and indefeasible title to, or a valid and enforceable
leasehold interest in, or a contract vendee's interest in, the Bank Real
Property, and such interest is free and clear of all liens, charges or other
encumbrances, except (a) statutory liens for amounts not yet delinquent or which
are being contested in good faith through proper proceedings and (b) those liens
related to real property taxes, local improvement district assessments,
easements, covenants, restrictions and other matters of record which do not
individually or in the aggregate materially adversely affect the use and
enjoyment of the relevant real property.
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(e) All buildings and other facilities used in the business of the Bank are
adequately maintained and are free from defects which could materially interfere
with the current or future use of such facilities.
SECTION 3.11 PERSONAL PROPERTY. The Bank has good title to, or a valid
leasehold interest in, all personal property, whether tangible or intangible,
used in the conduct of its business (the "Bank Personalty), free and clear of
all liens, charges or other encumbrances, except (a) statutory liens for amounts
not yet delinquent or which are being contested in good faith through proper
proceedings, and (b) such other liens, charges, encumbrances and imperfections
of title as do not individually or in the aggregate materially adversely affect
the use and enjoyment of the relevant Bank Personalty. Subject to ordinary wear
and tear, to the knowledge of the Bank, the Bank Personalty is in good operating
condition and repair and is adequate for the uses to which it is being put.
SECTION 3.12 ACCOUNTING RECORDS; DATA PROCESSING.
(a) The Bank maintains records that accurately, validly and fairly reflect
its transactions and dispositions of assets and maintains a system of internal
accounting controls, policies and procedures sufficient to insure that (i) such
transactions are executed in accordance with its management's general or
specific authorization, (ii) such transactions are recorded and in such a manner
as to permit preparation of financial statements in accordance with generally
accepted accounting principles and any other criteria applicable to such
statements and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management's general or specific
authorization, (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals as determined by the Bank and
appropriate action is taken with respect to any differences, and (v) records of
such transactions are retained, protected and duplicated in accordance with
prudent banking practices and applicable regulatory requirements.
(b) The data processing equipment, data transmission equipment, related
peripheral equipment and software used by the Bank in the operation of its
business (including any disaster recovery facility) to generate and retrieve
such records (whether owned or leased by the Bank, or provided under any
agreement or other arrangement with a third party for data processing services)
are adequate for the needs of the Bank.
SECTION 3.13 ABSENCE OF CERTAIN CHANGES. There has not been since March
31, 1997.
(a) 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;
(b) any direct or indirect redemption, purchase or other acquisition of
shares of the Bank's capital stock, convertible securities or securities
exercisable for capital stock of the Bank, by the Bank, any declaration, setting
aside or payment of any dividend by the Bank, or any alteration of any right
attaching to any shares of capital stock of the Bank, or any combination or
subdivision of any shares of capital stock of the Bank;
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(c) any increase in the compensation or benefits payable or to become
payable by the Bank including, without limitation, compensation or benefits
under any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other plan, agreement, trust,
fund or arrangement for the benefit of employees to any of its officers,
directors, employees or agents except for routine increases and bonuses
(including annual bonuses prorated through the Effective Time) and other than as
permitted in this Agreement, as set forth in Schedule 3.13(c) or pursuant to
Employee Agreements or as may be required to comply with Applicable Law;
(d) any amendment or termination of any agreement to which the Bank is a
party, other than amendments or terminations which do not and will not,
individually or in the aggregate, have a Material Adverse Effect on the Bank;
(e) any establishment of any new or material modification of any currently
existing Plan;
(f) any amendment to the Articles of Association or Bylaws of the Bank;
(g) any change by the Bank in accounting principles or methods, except as
required by the Financial Accounting Standards Board ("FASB") or FDIC or TBA
regulations and listed on Schedule 3.13(g);
(h) any loss, damage or destruction (whether or not covered by insurance)
affecting any of the tangible assets or business of the Bank that may involve a
loss of more than $50,000, individually, or $150,000, in the aggregate
(including deductibles), in excess of applicable insurance coverage; or
(i) any sale, transfer or other disposition of any material properties or
assets of the Bank except in the ordinary course of business.
SECTION 3.14 LITIGATION.
(a) Schedule 3.14(a) contains a true, correct and complete list of as of
the date of this Agreement of all suits, claims, actions, investigations or
proceedings of any nature by any Person that are pending or, to the Bank's
knowledge, threatened (as used in this Agreement, the term "threatened" shall
include matters that are under consideration or investigation whether or not any
formal demand has been made) (i) against or otherwise involving, directly or
indirectly, the Bank, or any of its properties (including, without limitation,
any such matter with respect to Taxes), or (ii) against or otherwise involving,
directly or indirectly, any officer, director, employee or agent of the Bank (in
connection with such officer's, director's, employee's or agent's activities on
behalf of it or that otherwise relate, directly or indirectly, to the Bank or
any of its properties, securities or activities).
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(b) Schedule 3.14(b) contains a true, correct and complete list as of the
date of this Agreement of all pending suits, claims, actions, investigations and
proceedings of any nature involving claims in the amount of $50,000 or more or
involving claims for specific performance or injunctive relief by or on behalf
of the Bank, or any officer, director, employee or agent of the Bank that
relate, directly or indirectly to the Bank or any of its properties, securities
or activities, including, without limitation, the types of actions referred to
in Section 3.14(a), but excluding routine collection actions involving single
family home loans and consumer loans in which the debtor has not asserted a
counterclaim of $50,000 or more.
SECTION 3.15 UNDISCLOSED LIABILITIES. Except as disclosed in Schedule
3.15, the Bank is not subject to any Liabilities of any nature (whether or not
required to be accrued or disclosed under SFAS No. 5) which exceed or may
reasonably be expected to exceed $100,000 in the aggregate except (i) as set
forth in the Bank's unaudited financial statements as of March 31, 1997, (ii)
Liabilities incurred since March 31, 1997 in the ordinary course of business and
consistent with prudent banking practice, which individually or in the aggregate
would not result in a Material Adverse Effect upon the Bank, or (iii)
Liabilities under this Agreement and fees and expenses related thereto.
SECTION 3.16 TAX MATTERS.
(a) Definitions. For purposes of this Agreement, the following definitions
shall apply:
(i) The term "Taxes" shall mean all taxes, however denominated,
including, without limitation, any interest, penalties or other additions
that may become payable in respect thereof, imposed by any Governmental
Authority, which taxes shall include, without limiting the generality of
the foregoing, all income or profits taxes (including, without limitation,
federal income taxes and state income taxes), payroll and employee
withholding taxes, back-up withholding and other withholding taxes,
unemployment insurance, social security taxes, sales and use taxes, ad
valorem taxes, excise taxes, franchise taxes, gross receipts taxes,
business license taxes, occupation taxes, real and personal property taxes,
stamp taxes, environmental taxes, transfer taxes, workers' compensation and
Pension Benefit Guaranty Corporation premiums, and other obligations of the
same or of a similar nature to any of the foregoing, which the Bank is
required to pay, withhold or collect.
(ii) The term "Returns" shall mean all reports, estimates,
declarations of estimated tax, information statements and returns required
to be prepared or filed in connection with, any Taxes.
(b) Returns Filed and Taxes Paid. The Bank has filed with the appropriate
agencies all material Returns required to be filed, and having reasonably relied
on the advice of its tax advisors, the Bank warrants that such Returns were
true, correct and complete in all material respects. All Taxes shown to be
payable on the Returns or on subsequent assessments with respect thereto have
been paid in full on a timely basis, and no other Taxes are owing or payable by
the Bank with respect to items or periods covered by such Returns or with
respect to any period prior to the date of this representation and warranty. No
security interests, liens, encumbrances, attachments or similar interests exist
on or with respect to any of the assets of the Bank that arose in connection
with any failure or alleged failure to pay any Taxes. The Bank has withheld and
paid all Taxes required to
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have been withheld and paid in connection with amounts paid or owing to any
officer, director, employee or agent (including, without limitation, any
independent contractor, foreign person or other third Person) in compliance with
all tax withholding provisions of applicable federal, state, local and foreign
law (including, without limitation, income, social security, employment tax
withholding, and withholding under Code Sections 1441 through 1445). The Bank
has timely complied in all material respects with all requirements under
Applicable Laws relating to information, reporting and withholding and other
similar matters for customer and other accounts (including back-up withholding
and furnishing of Forms 1099 and all similar reports).
(c) Tax Reserves. With respect to the periods for which Returns have not
yet been filed, the Bank has established adequate reserves determined in
accordance with generally accepted accounting principles for the payment of all
Taxes.
(d) Returns Furnished. The Bank has delivered or made available to the
Company true and complete copies of the Bank's federal income tax returns for
all periods for which the statute of limitations has not expired. The Bank has
made available to the Company true and complete copies of all other Returns and
other reports and statements relating to Taxes arising during such periods,
including, without limitation, income tax audit reports, statements or income or
gross receipts tax, franchise tax, sales tax and transfer tax, deficiencies, and
closing or other agreements relating to income or gross receipts tax, franchise
tax, sales tax and transfer tax received by the Bank. The Bank will promptly
furnish to the Company true and correct copies of any other Returns filed by the
Bank prior to the Closing Date. The Bank is not (nor ever has been) a party to
any tax sharing agreement.
(e) Tax Deficiencies; Audits; Statutes of Limitations. Except as set forth
in Schedule 3.16(e), (i) no deficiencies have been formally asserted with
respect to Taxes of the Bank that remain unpaid; (ii) the Bank is not a party to
any formal action or proceeding for assessment or collection of Taxes, and such
action or proceeding has not been asserted or threatened against the Bank or any
of its assets; and (iii) no waiver or extension of any statute of limitations is
in effect with respect to Taxes or Returns of the Bank. Except as set forth in
Schedule 3.16(e), the Returns of the Bank for all tax years for which the
statute of limitations has not expired have never been audited by a Governmental
Authority (which term includes any taxing authority), nor is any such audit in
process, pending or threatened.
SECTION 3.17 EMPLOYMENT AND SIMILAR AGREEMENTS; OBLIGATIONS UPON CHANGE
IN CONTROL. Except as set forth in Schedule 3.17 or Schedule 3.18(a), there are
no written or oral employment, consulting, non-competition, retirement,
parachutes, severance or indemnification agreements or other agreements of any
nature whatsoever (collectively "Employee Agreements") between the Bank, on the
one hand, and any officer, director, employee or agent of the Bank, or any of
their respective family members, on the other hand, including, without
limitation, any such agreement concerning the continued employment or use of
such officer, director, employee, agent or family member after the consummation
of the transactions contemplated by this Agreement, or any other benefits to be
granted to any such officer, director, employee, agent or family member, upon,
after or in connection with the consummation of the transactions contemplated by
this Agreement. Except as set forth in Schedule 3.17 and except for the Bank
Stock Options, there are no such Employee Agreements or any other agreements
under which the transactions contemplated by this Agreement (including, without
limitation, the change in control resulting from the Merger)
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(i) will require any payment by the Bank to, or any consent or waiver from, any
officer, director, employee or agent of the Bank, or any other Person, or (ii)
will result in a change of any nature in the rights of any party under an
agreement with any officer, director, employee or agent of the Bank, or any
other Person, including, without limitation, any acceleration or change in the
award, grant, vesting or determination of options, warrants, rights, severance
payments, or other contingent obligations of any nature whatsoever of the Bank.
Except as set forth in Schedule 3.17, the Bank has no agreements with any
employee or officer that are inconsistent with the status of all employees and
officers of the Bank being "at-will" employees. Each reference in this Agreement
to "officer," "director," "employee" or "agent" of the Bank, unless otherwise
specified, shall include, without limitation, consultants of the Bank. The Bank
has delivered to the Company true, correct and complete copies of all Employee
Agreements.
SECTION 3.18 BENEFIT PLANS.
(a) The Bank has delivered to the Company true and complete copies of all
Plans (as defined below) to which the Bank is a party and in which any current
or former officer, director, employee or agent of the Bank participates. All
such Plans are listed on Schedule 3.17 or Schedule 3.18(a). There are no Plans
of the Bank which are not evidenced by such written documents. The term "Plan"
shall include each of the following: (i) any "employee benefit plan" within the
meaning of Section 3(3) of ERISA, (ii) any profit-sharing, pension, deferred
compensation, bonus, stock option, stock purchase, severance, retainer,
consulting, "cafeteria" benefits under Section 125 of the Code, health, welfare
or incentive plan or agreement, including any post-employment benefits, (iii)
any plan, agreement, contract, program, arrangement, or policy providing for
"fringe benefits" to Bank employees, including but not limited to vacation, paid
holidays, personal leave, employee discount, educational benefit or similar
programs, and (iv) any Employee Agreement.
(b) With respect to each Plan:
(i) it has been administered in all material respects in accordance
with its terms and all Applicable Laws applicable to the Plan, including,
without limitation, ERISA and the Code;
(ii) no formal action, claims (other than routine claims for benefits
made in the ordinary course of Plan administration) or investigation by any
Governmental Authority are pending, or to the knowledge of the Bank,
threatened or imminent against or with respect to the Plan, the Bank or any
employer who is participating (or who has participated) in any Plan or any
fiduciary of the Plan; and
(iii) it provides that it may be amended or terminated at any time
and, except for benefits already accrued or which will have accrued at the
time of closing, claims already incurred or benefits protected under
Section 411(d) of the Code, all benefits payable to current, terminated or
retired employees or any beneficiary, including, without limitation, post-
employment health care or insurance benefits, if any, may be amended or
terminated by the Bank at any time without liability.
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(c) With respect to each Plan which is an employee benefit plan, as defined
under Section 3(3) of ERISA:
(i) no prohibited transaction (as defined in Section 406 of ERISA or
Section 4975 of the Code) or breach of fiduciary responsibility has
occurred that could result in a Material Adverse Effect on the Bank;
(ii) except as set forth in Schedule 3.18(c) and except for any non-
compliance that would not have a Material Adverse Effect on the Bank, all
reports, forms and other documents required to be filed with any
Governmental Authority or distributed to Plan participants (including,
without limitation, summary plan descriptions, Forms 5500 and Summary
annual reports) have been timely filed (if applicable) and distributed (if
applicable) and were accurate. The Bank has made available for inspection
by the Company copies of all such reports, forms and documents required to
have been filed or distributed since January 1, 1994; and
(iii) no accumulated funding deficiency (within the meaning of
Section 302 or ERISA or Section 412 of the Code) has been incurred with
respect to any Plan, whether or not waived.
(d) Except as set forth in Schedule 3.18(d), each Plan that is intended to
qualify under Section 401(a) of the Code and Section 501(a) of the Code and its
related trust, if any, complies in all material respects in form and in
operation with Section 401(a) and 501(a) of the Code and has been determined by
the Internal Revenue Service to comply and nothing has occurred since the date
of the determination letter to cause the loss of the Plan's (or the related
trust's) qualification.
(e) The Bank has not within the past six years (i) maintained or made any
contribution to, (ii) been a member of a controlled group which has maintained
or contributed to, or (iii) been under common control with an employer that
maintained or contributed to, any defined benefit pension plan subject to Title
IV of ERISA, including a Multiemployer Plan.
(f) All contributions to each Plan for all periods ending prior to the
Closing Date (including periods from the first day of the current plan year to
the date immediately preceding the Closing Date) that are required to be made
prior to the Closing Date by the Bank will be made prior to such date by the
Bank in accordance with past practice and the recommended contribution in any
applicable actuarial report.
(g) All insurance premiums have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to the Plans for
policy years or other applicable policy periods ending before the date of this
representation and have been paid as required under the policies for policy
years or other applicable policy periods beginning on or before the date of its
representation and ending on or after such Closing Date.
(h) All expenses and Liabilities relating to all of the Plans have been
fully and properly accrued on the Bank's books and records in accordance with
generally accepted accounting principles.
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(i) As to any Plan intended to be qualified under Section 401(a) of the
Code, there has been no termination or partial termination of the Plan within
the meaning of Section 411(d)(3) of the Code.
SECTION 3.19 LABOR AND EMPLOYMENT MATTERS. Except to the extent set
forth in Schedule 3.19, (a) the Bank is and has been in compliance with all
Applicable Laws respecting employment and employment practices, terms and
conditions of employment ad wages and hours, including, without limitation, the
Immigration Reform and Control Act ("IRCA"), the Worker Adjustment and
Retraining Notification Act ("WARN"), any Applicable Law respecting employment
discrimination, disability rights and benefits, equal opportunity, plant closure
issues, affirmative action, worker's compensation, employee benefits, severance
payments, labor relations, employee leave issues, wage and hour standards,
occupational safety and health requirements and unemployment insurance and
related matters, and is not engaged in and has not engaged in any unfair labor
practice, except for such noncompliances which in the aggregate could not
reasonably be expected to cause a Material Adverse Effect on the Bank; (b) to
the knowledge of the Bank, no investigation or review by or before any
Governmental Authority concerning any possible conflicts with or violations of
any such Applicable Laws is pending, nor is any such investigation threatened,
nor has any such investigation occurred during the last three years and no
Governmental Authority has provided any notice to the Bank or otherwise asserted
an intention to conduct any such investigation or review, nor is there any basis
for any such investigation or review; (c) there is no labor strike, dispute,
slowdown or stoppage actually pending or, to the knowledge of the Bank,
threatened against or directly affecting the Bank; (d) no union representation
question or, to the knowledge of the Bank, union organizational activity exists
respecting the employees of the Bank; (e) no collective bargaining agreement
exists which is binding on the Bank, nor has the Bank been a party to any
collective bargaining agreement within the last ten years; (f) the Bank has not
experienced any work stoppage or other labor difficulties; (g) the Bank is not
delinquent in payments to any of its officers, directors, employees or agents
for any wages, salaries, commissions, bonuses or other direct compensation for
any services performed by them or amounts required to be reimbursed to such
officers, directors, employees or agents; (h) prior to the Effective Time,
except as provided in any Plan or Employee Agreement, the Bank has not and will
not do anything or enter into any agreement that would cause the Bank, the
Company, the Surviving Association or any other Subsidiaries of the Company to
be liable to any of said officers, directors, employees or agents, in the event
of termination for any reason of the employment of any said officers, directors,
employees or agents, for so-called "severance pay" or any other similar payments
or benefits, including, without limitation, post-employment healthcare (other
than pursuant to COBRA) or insurance benefits; and (i) within the three-year
period prior to the date hereof there has not been any termination of employment
of any officer, director, employee or agent of the Bank who receives salary or
compensation in excess of $40,000 per annum or any termination of any officer,
director, employee or agent of the Bank that could result in a Liability to the
Company in excess of $40,000. In furtherance and not in limitation of the
representations and warranties set forth in Section 3.14, there are no pending
or, to the Bank's knowledge, threatened suits, claims, actions, charges,
investigations or proceedings of any nature (A) under or alleging violation of
IRCA, WARN or any Applicable Law respecting employment and employment practices,
including without limitation discrimination, disability rights or benefits,
equal opportunity, plant closures, affirmative action, worker's compensation,
employee benefits, severance payments, labor relations, employee leave issues,
wage and hour standards, occupational safety and health requirements or
unemployment insurance and
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related matters, (B) relating to alleged unfair labor practices (or the
equivalent thereof under any Applicable Law).
SECTION 3.20 CERTAIN INTERESTS. Except as set forth in Schedule 3.20, to
the Bank's knowledge: (i) no officer, director, employee or agent of the Bank,
any of their respective family members, any corporation or organization (other
than the Bank) of which any of the foregoing Persons is an officer, director or
beneficial owner of 10% or more of any class of its equity securities, or any
trust or other estate in which any of the foregoing Persons has a substantial
beneficial interest or as to which such Person serves as a trustee or in a
similar capacity, nor any Affiliate of the Bank, nor any current or former
beneficial owner of 5% or more of any of the outstanding stock of the Bank has
any material interest in any property, real or personal, tangible or
intangible, used in or pertaining to the business of the Bank or in any
transaction or series of similar transactions to which the Bank is a party; (ii)
no such Person is indebted to the Bank except for (A) normal business expense
advances, and (B) loans that have been entered into in the ordinary course of
business on terms no less favorable to such Person, or the Bank, as the case
shall be, than if the loan had been entered into on an arm's length basis
pursuant to normal commercial terms and conditions and in compliance with
Applicable Law; (iii) the Bank is not indebted to any such Person except for
amounts due under normal salary or reimbursement or ordinary business expenses
and (iv) no such Person is a party to an agreement (other than an Employee
Agreement, a Plan or Bank Stock Options) with the Bank. Except as set forth in
Schedule 3.20, to the Bank's knowledge, none of the Persons or entities
described in clause (i) hereto has any other relationship or has engaged or
proposes to engage in any other transaction or series of transactions that would
be required to be disclosed pursuant to Item 404 of Regulation S-K under the
Securities Act.
SECTION 3.21 REGISTRATION STATEMENT AND REGULATORY APPLICATIONS.
(a) When the Prospectus/Proxy Statement referred to in Section 5.1, or any
amendment or supplement thereto, shall be mailed to the Shareholders, and at all
times subsequent to such mailing up to and including the Bank Meeting Date, (i)
such Prospectus/Proxy Statement and all amendments or supplements thereto, with
respect to all information set forth therein, other than that relating to the
Company and SW Bank, will comply in all material respects with the provisions
(to the extent applicable) of the Securities Act and the Exchange Act and the
rules and regulations of the SEC thereunder, and (ii) the information set forth
in the Prospectus/Proxy Statement, other than that relating to the Company and
the Bank, as filed with the SEC under the Securities Act and the Exchange Act
and the Registration Statement as filed with the SEC under the Securities Act,
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading.
(b) When the applications for the Regulatory Approvals are filed, or
amended or supplemented, information that is provided to the Company by the Bank
for inclusion in applications for such Regulatory Approvals shall comply in all
material respects with all Applicable Laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
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SECTION 3.22 INSURANCE.
(a) Schedule 3.22 contains an accurate and complete description of all
policies of general liability, theft, life, fire, worker's compensation, health,
directors and officers, and other forms of insurance owned or held by the Bank
(other than title insurance, FHA mortgage insurance and private mortgage
insurance obtained in the ordinary course of business of the Bank that, to the
Bank's knowledge, have been entered into on an arm's length basis pursuant to
normal commercial terms and conditions) specifying the insurer, amount of
coverage, deductions, exclusions, type of insurance, policy number and any
pending claims thereunder involving more than $50,000 of which the Bank has
knowledge.
(b) All policies of general liability, theft, life, fire, worker's
compensation, health, directors and officers, and other forms of insurance owned
or held by the Bank (i) are in full force and effect and all premiums that are
due and payable with respect thereto are currently paid; (ii) are sufficient for
compliance with all requirements of Applicable Law and of all agreements to
which the Bank is a party; (iii) are, to the Bank's knowledge, valid,
outstanding and enforceable policies (except as may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the rights of
creditors generally and the availability of equitable remedies); and (iv) to the
Bank's knowledge will remain in full force and effect through the Closing Date.
No insurer under any such policy or bond has canceled or indicated an intention
to cancel or not to review any such policy or bond effective at any time prior
to the Closing Date or generally disclaimed liability thereunder. The Bank is
not in default under any such policy or bond and all material claims thereunder
have been filed in a timely fashion. The Bank, during the last three fiscal
years, has not been denied or had revoked or rescinded any policy of insurance.
SECTION 3.23 ENVIRONMENTAL MATTERS. Neither the Bank, nor any properties
or businesses owned or operated by the Bank, whether or not held in a fiduciary
or representative capacity, has been or is in violation of or liable under any
Environmental Law (as hereinafter defined). There are no actions, suits or
proceedings, or demands, claims, notices or investigations (including, without
limitation, notices, demand letters or requests for information from any
environmental agency) instituted, pending, or, to the knowledge of the Bank,
threatened relating to the liability of any properties or businesses owned or
operated by the Bank, whether or not held in a fiduciary or representative
capacity, under any Environmental Law. The Bank is not responsible under any
Environmental Law for any release by any Person at or in the vicinity of real
property of any contaminant, pollutant, hazardous substance, hazardous waste,
hazardous pollutant, toxic pollutant, toxic waste or toxic substance
("Contaminant"), including, without limitation, by spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing of any such Contaminant into the environment (collectively,
"Release") nor is the Bank responsible for any material costs of any response
action required by virtue of any Release of any Contaminant into the environment
including, without limitation, costs arising from investigation, removal or
remediation of Contaminants, security fencing, alternative water supplies,
temporary evacuation and housing and other emergency assistance undertaken by
any environmental regulatory body or any other person. The representations
contained in the foregoing three sentences are qualified to the extent that
there may be certain exceptions to such representations; however, all exceptions
to such representations in the aggregate could not reasonably be expected to
cause a Material Adverse Effect on the Bank. Notwithstanding the foregoing,
"Contaminant" shall not
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include materials employed in normal consumer or office uses, such as gasoline,
lubricants, printing materials, cleaners, disinfectants, pesticides, building
materials, fluorescent lights and ballasts, batteries and refrigerants, as long
as such materials are used and stored only in quantities typical of consumer and
office uses. "Environmental Law" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
Governmental Authority relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, surface soil, subsurface
soil, plant and animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release (or threatened release) or disposal of any
substance presently listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous by any Governmental Authority or otherwise
regulated, whether by type or by quantity, including any material containing any
such substance as a component. The Bank has established policies and procedures
for the purpose of complying with applicable laws and regulations of
Governmental Authorities relating to Environmental Laws, and has caused its
operations to be conducted in compliance therewith in all material respects.
SECTION 3.24 INTELLECTUAL PROPERTY RIGHTS. Schedule 3.24 contains a
true, correct and complete list of all trademarks, service marks, trademark and
service mark applications, trade names, copyrights and licenses presently owned
or held by the Bank or used by the Bank in the conduct of its business. The
Bank owns, has the exclusive right to use, sell, license or dispose of, has the
exclusive right to bring actions for the infringement of, and has taken all
appropriate actions and made all applicable applications and filings, pursuant
to any Applicable Laws to perfect or protect its interest in, all such
trademarks, service marks and trade names. The Bank owns or has the right to
use and continue to use such copyrights and licenses in the operation of its
business. The Bank is not infringing or violating any patent, copyright,
trademark, service mark, label filing or trade name owned or otherwise held by
any other party, nor has the Bank used any confidential information or any trade
secrets owned or otherwise held by any other party, unless a valid licence for
such use is held by the Bank. The Bank is not engaging, nor has it been charged
with engaging, in any kind of unfair or unlawful competition. Neither the
execution, delivery and performance of this Agreement nor the consummation of
the Merger or any of the other transactions contemplated hereby will in any way
impair the right of the Bank or the Surviving Association to use, sell, license
or dispose of or to bring any action for the infringement of, any such
trademarks, service marks or trade names. The Bank has taken all reasonable
steps necessary or appropriate to safeguard and maintain the Bank's proprietary
rights in all such trademarks, service marks and trade names, as applicable.
SECTION 3.25 SITE LOCATIONS.
(a) Schedule 3.25(a) contains a true, correct and complete list of all
locations of offices in which the Bank is doing business as of the date thereof,
including, without limitation, any branch, loan production and agency offices.
Except as disclosed on Schedule 3.25(a), the Bank has not applied for or
received permission to open any additional offices at any such location or any
other locations.
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(b) The Bank has not filed any application, made any agreement or taken any
other action to discontinue operations at any existing branch or agency,
commence operations at any new branch or agency, or relocate any existing branch
or agency, except for such applications, agreements or other actions as are set
forth in Schedule 3.25(b).
SECTION 3.26 LOANS.
(a) Except as disclosed on Schedule 3.26(a) and except for those matters
which, in the aggregate, could not reasonably be expected to cause a Material
Adverse Effect on the Bank, (i) each outstanding loan, lease or other extension
of credit or commitment to extend credit of the Bank is a legal, valid and
binding obligation, is in full force and effect and is enforceable in accordance
with its terms except as may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws affecting the rights of creditors generally or
equitable principles limiting the right to obtain specific performance or other
similar relief; (ii) the Bank has duly performed all of its respective
obligations thereunder to the extent that such obligations to perform have
accrued; (iii) all documents and agreements necessary to the Bank to enforce
such loan, lease or other extension of credit are in existence and in the Bank's
possession; (iv) no claims, counterclaims, set-off rights or other rights exist,
nor do the grounds for any such claim, counterclaim, set-off rights or other
rights exist, with respect to any such loans, leases or other extensions of
credit which could impair the collectability thereof; and (v) each such loan,
lease and extension of credit has been originated and served in accordance with
the Bank's then applicable underwriting guidelines, the terms of the relevant
credit documents and agreements and Applicable Law. Except as set forth in
Schedule 3.26(a), as of the date hereof: (i) there are no loans, leases, other
extensions of credit or commitments to extend credit of the Bank that have been
or, to the Bank's knowledge, should have been classified by the Bank in its
reasonable determination as "Other Assets Especially Mentioned," "Substandard,"
"Doubtful," "Loss" or any comparable classification, and (ii) there are no loans
due to the Bank as to which any payment of principal, interest or any other
amount is 30 days or more past due.
(b) Schedule 3.26(b) lists all loan commitments of the Bank (with
conforming single family loan commitments and consumer commitments less than
$500,000 listed in the aggregate only) outstanding as of the date hereof.
SECTION 3.27 ALLOWANCE FOR LOSSES. To the knowledge of the Bank, the
Bank's allowance for possible credit losses is adequate in relation to the
outstanding loans, leases and other extensions of credit of the Bank and is
strictly in accordance with the safety and soundness standards administered by,
and the practices and procedures of, the FDIC for state nonmember banks, as such
standards, practices and procedures may be amended from time to time (the "FDIC
Standards").
SECTION 3.28 REAL ESTATE OWNED.
(a) Schedule 3.28(a) contains a true, correct and complete list of all Real
Estate Owned by the Bank, stating with respect to each its type and carrying
value.
(b) All Real Estate Owned is booked at the lower of cost or "fair value."
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(c) Except as set forth in Schedule 3.28(c), the Bank has good and
indefeasible title to, or a valid and enforceable leasehold interest in, all of
the Bank's Real Estate Owned, and such interest is free and clear of all liens,
charges or other encumbrances, except those related to real property taxes,
local improvement district assessments, easements, covenants, restrictions and
other matters of record which do not individually or in the aggregate materially
adversely affect the use and enjoyment of the relevant real property.
SECTION 3.29 INTEREST RATE RISK MANAGEMENT INSTRUMENTS.
(a) Schedule 3.29 contains a true, correct and complete list of all
interest rate swaps, caps, floors, and option agreements and other interest rate
risk management arrangements to which the Bank is a party or by which any of its
properties or assets may be bound. True and complete copies of all such
interest rate risk management agreements and arrangements have been provided to
the Company.
(b) All interest rate swaps, caps, floors and option agreements and other
interest rate risk management arrangements to which the Bank is a party or by
which any of their properties or assets may be bound were entered into in the
ordinary course of business and, to the Bank's knowledge, in accordance with
prudent banking practice and all applicable rules, regulations and policies of
applicable Governmental Authorities with counterparties believed to be
financially responsible at the time and are legal, valid and binding obligations
enforceable in accordance with their terms (except as may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the
rights of creditors generally and the availability of equitable remedies), and
are in full force and effect. The Bank has duly performed in all material
respects all of its obligations thereunder to the extent that such obligations
to perform have accrued; and to the Bank's knowledge, there are no breaches,
violations or defaults or allegations or assertions of such by any party
thereunder.
SECTION 3.30 DISCLOSURE. Without limiting any of the representations and
warranties contained herein, no representation or warranty by the Bank in this
Agreement, no statement contained in any document (including, without
limitation, the financial statements, the Disclosure Schedule, and the
information to be provided pursuant to Section 5.5 hereof), certificate or other
writing and no other information furnished or to be furnished by the Bank to the
Company or any of its representatives pursuant to the provisions hereof or in
connection with the transactions contemplated hereby, contains or will contain
any untrue statement of material fact or omits or will omit to state any
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND SW BANK
The Company and SW Bank jointly and severally make the following
representations and warranties to the Bank:
SECTION 4.1 ORGANIZATION.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas. Southwest Bancorporation of
Delaware, Inc. ("SW Delaware") is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. SW Bank is a
national banking association duly organized, validly existing and in good
standing under the laws of the United States of America. The Company owns
directly all of the outstanding capital stock of SW Delaware, and SW Delaware
owns directly all of the outstanding capital stock of SW Bank. Each of the
Company, SW Delaware and SW Bank has all requisite corporate power and corporate
authority to own or lease its properties and to carry on its business as
currently conducted and is qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which such qualification is
necessary under Applicable Law, except for such jurisdictions in which the
failure to be so qualified or in good standing would not have a Material Adverse
Effect on the Company. Each of the Company and SW Bank has the corporate power
and corporate authority to execute and deliver this Agreement and perform its
obligations hereunder.
(b) As of the date hereof, each of the Company and SW Delaware is a
registered bank holding company pursuant to 12 U.S.C. (S)(S) 1841 et seq.
SECTION 4.2 BINDING EFFECT. This Agreement has been duly and validly
authorized, executed and delivered by the Company and SW Bank and constitutes
the legal, valid and binding obligation of each of the Company and SW Bank
enforceable against each of the Company and SW Bank in accordance with its terms
(except as may be limited by bankruptcy, insolvency, moratorium, reorganization
or similar laws affecting the rights of creditors generally and the availability
to equitable remedies). Neither the execution and delivery of this Agreement by
the Company or SW Bank nor the consummation by either of them of the
transactions contemplated hereby, nor compliance by either of them with any of
the provisions hereof, will (i) conflict with or result in a breach of any
provision of the Company's or SW Bank's Articles of Incorporation (or, in the
case of SW Bank, Articles of Association) or Bylaws, (ii) conflict with or
result in the breach of any term, condition or provision of, or constitute a
default under (upon the giving of notice, the lapse of time or otherwise), or
give rise to any right of termination, cancellation or acceleration with respect
to, or result in the creation of any lien, charge or encumbrance upon any
property or assets of the Company or SW Bank pursuant to, or otherwise require
the consent of any Person under, any material agreement obligation to which the
Company or SW Bank is a party or by which any of their properties or assets may
be bound, which conflict, breach, default, right, lien or right of consent could
reasonably be expected to have a Material Adverse Effect on the Company, or
(iii) violate or conflict in any material respect with any Applicable Laws
applicable to the Company or SW Bank
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or any of their respective properties or assets, subject to obtaining any
necessary approvals of shareholders and the Regulatory Approvals specified in
Section 5.2(a).
SECTION 4.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 1,000,000 shares of preferred stock, $.01 par value, none of which
shares were issued as of March 31, 1997, and 50,000,000 shares of Company Common
Stock, of which 9,390,933 shares were issued and outstanding as of March 31,
1997. All outstanding shares of Company Common Stock have been and are duly
authorized and validly issued, fully paid and nonassessable and have not been
issued in violation of the preemptive rights of any person. The shares of
Company Common Stock to be issued to the Shareholders pursuant to the provisions
of this Agreement have been duly authorized, will be validly issued, fully paid
and nonassessable and will not be issued in violation of the preemptive rights
of any person. At March 31, 1997 options to purchase a total of 1,229,173
shares of Company Common Stock were outstanding under the Company's stock option
plans and a total of 226,775 additional such shares were available for future
option grants under such plans.
SECTION 4.4 FINANCIAL STATEMENTS AND REPORTS. The Company has delivered
to the Bank true and complete copies of its (i) Annual Report on Form 10-K for
the year ended December 31, 1996 (the "Annual Report"), as filed with the SEC,
which contains the Company's audited financial statements for the years ended
December 31, 1996 and 1995 and (ii) unaudited balance sheet as of March 31,
1997, unaudited statements of income for the three month periods ending March
31, 1997 and 1996, and unaudited statement of changes in shareholders' equity
for the three month period ending March 31, 1997. Such financial statements
have been prepared from the books and records of the Company and its
Subsidiaries, present fairly the financial position and operating results of the
Company and its Subsidiaries as of the date and during the periods indicated and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods covered, except as stated therein
(subject, in the case of unaudited financial statements, to the exclusion of
normal year-end adjustments and footnote disclosures required by generally
accepted accounting principles). The Company does not have any Liabilities of a
type which should be included in or reflected in such financial statements or
the notes thereto, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated, or otherwise, and
that are material in the aggregate to the Company, except as to the extent
disclosed or reflected in such financial statements. The Annual Report did not
at the time it was filed contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
SECTION 4.5 REGISTRATION STATEMENT AND REGULATORY APPLICATIONS.
(a) When the Prospectus/Proxy Statement referred to in Section 5.1, or any
amendment or supplement thereto, shall be mailed to the Shareholders, and at all
times subsequent to such mailing up to and including the Bank Meeting Date, (i)
such Prospectus/Proxy Statement and all amendments or supplements thereto, with
respect to all information set forth therein relating to the Company and its
Subsidiaries, will comply in all material respects with the provisions (to the
extent applicable) of the Securities Act and the Exchange Act and the rules and
regulations of the SEC thereunder, and (ii) the information relating to the
Company and its Subsidiaries set forth in the
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Prospectus/Proxy Statement as filed with the SEC under the Securities Act and
the Exchange Act and the Registration Statement as filed with the SEC under the
Securities Act, will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
(b) When the applications for the Regulatory Approvals are filed, or
amended or supplemented, the information relating to the Company and its
Subsidiaries or to this Agreement that is provided by the Company or any of its
Subsidiaries shall comply in all material respects with all Applicable Laws and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
SECTION 4.6 COMPLIANCE WITH APPLICABLE LAWS; OPERATING AUTHORITIES.
(a) The business of the Company and SW Bank and any advertising related to
such business or otherwise conducted by or on behalf of the Company or SW Bank,
including without limitation the business of originating, acquiring, holding or
disposing of assets and liabilities, is being conducted in compliance in all
material respects with all Applicable Laws, and the forms, procedures,
disclosures and practices now or previously used by it are or were in compliance
in all material respects with all Applicable Laws, and the forms, procedures,
disclosures and practices now or previously used by it are or were in compliance
in all material respects with all Applicable Laws as in effect at the relevant
times. No investigation or review by any Governmental Authority concerning any
possible conflicts or violations of Applicable Laws is pending, nor to the
Company's knowledge, is any such investigation threatened, nor has any such
investigation occurred during the last three years. No Governmental Authority
has delivered any written notice to the Company or SW Bank, or to the Company's
knowledge, otherwise asserted an intention to conduct any such investigation or
review, nor, to the Company's knowledge, is there any basis for any
investigation or review of the type described above.
(b) Neither the Company nor SW Bank is (i) a party to any written
agreement, stipulation, conditional approval, memorandum of understanding or
notice of determination with any Governmental Authority or (ii) subject to any
judgment, order, decree or directive of such a Governmental Authority, that, in
either case, restricts or monitors the conduct of its business, or in any manner
relates to its capital adequacy, credit policies, management or customer base.
SECTION 4.7 ABSENCE OF CERTAIN CHANGES. There has not been since March
31, 1997.
(a) 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;
(b) any direct or indirect redemption, purchase or other acquisition of
shares of the Company's capital stock, convertible securities or securities
exercisable for capital stock of the Company, by the Company, any declaration,
setting aside or payment of any dividend by the Company, or any alteration of
any right attaching to any shares of capital stock of the Company, or any
combination or subdivision of any shares of capital stock of the Company;
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(c) any amendment or termination of any agreement to which the Company or
SW Bank is a party, other than amendments or terminations which do not and will
not, individually or in the aggregate, have a Material Adverse Effect on the
Company;
(d) any amendment to the Articles of Incorporation or Bylaws of the
Company;
(e) any change by the Company in accounting principles or methods, except
as required by the Financial Accounting Standards Board ("FASB") or OCC
regulations;
(f) any loss, damage or destruction (whether or not covered by insurance)
affecting any of the tangible assets or business of the Company that may involve
a loss of more than $200,000, individually, or $500,000, in the aggregate
(including deductibles), in excess of applicable insurance coverage; or
(g) any sale, transfer or other disposition of any material properties or
assets of the Company except in the ordinary course of business.
SECTION 4.8 LITIGATION. As of the date of this Agreement there are no
suits, claims, actions, investigations or proceedings of any nature by any
Person which are pending or, to the Company's knowledge, threatened (i) against
or otherwise involving, directly or indirectly, the Company or SW Bank, or any
of their properties (including, without limitation, any such matter with respect
to Taxes), or (ii) against or otherwise involving, directly or indirectly, any
officer, director, employee or agent of the Company or SW Bank (in connection
with such officer's, director's, employee's or agent's activities on behalf of
it or that otherwise relate, directly or indirectly, to the Company or SW Bank
or any of its properties, securities or activities), which in the aggregate have
had or may reasonably be expected to have a Material Adverse Effect on the
Company.
SECTION 4.9 UNDISCLOSED LIABILITIES. The Company is not subject to any
Liabilities of any nature (whether or not required to be accrued or disclosed
under SFAS No. 5) which exceed or may reasonably be expected to exceed $400,000
in the aggregate except (i) as set forth in the Company's unaudited financial
statements as of March 31, 1997, (ii) Liabilities incurred since March 31, 1997
in the ordinary course of business and consistent with prudent banking practice,
which individually or in the aggregate would not result in a Material Adverse
Effect upon the Company, or (iii) Liabilities under this Agreement and fees and
expenses related thereto.
SECTION 4.10 TAX MATTERS. The Company has filed with the appropriate
agencies all Returns required to be filed, and such Returns were true, correct
and complete in all material respects. All Taxes shown to be payable on the
Returns or on subsequent assessments with respect thereto have been paid in full
on a timely basis, and no other Taxes are owing or payable by the Bank with
respect to items or periods covered by such Returns or with respect to any
period prior to the date of this representation and warranty.
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SECTION 4.11 ENVIRONMENTAL MATTERS. Neither the Company, nor any
properties or businesses owned or operated by the Company or SW Bank, whether or
not held in a fiduciary or representative capacity, has been or is in violation
of or liable under any Environmental Law (as hereinafter defined). There are no
actions, suits or proceedings, or demands, claims, notices or investigations
(including, without limitation, notices, demand letters or requests for
information from any environmental agency) instituted, pending, or, to the
knowledge of the Company, threatened relating to the liability of any
properties or businesses owned or operated by the Company, whether or not held
in a fiduciary or representative capacity, under any Environmental Law.
SECTION 4.12 ALLOWANCE FOR LOSSES. The Company's allowance for possible
credit losses is adequate in relation to the outstanding loans, leases and other
extensions of credit of the Company and is strictly in accordance with the
safety and soundness standards administered by, and the practices and procedures
of, the OCC, as such standards, practices and procedures may be amended from
time to time.
SECTION 4.13 DISCLOSURE. Without limiting any of the representations and
warranties contained herein, no representation or warranty by the Company or SW
Bank in this Agreement, no statement contained in any document (including,
without limitation, the Annual Report and the Quarterly Report and the
information to be provided pursuant to Section 5.5 hereof), certificate or other
writing and no other information furnished or to be furnished by the Company or
SW Bank to the Bank or any of its representatives pursuant to the provisions
hereof or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of material fact or omits or will omit to
state any material fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
COVENANTS OF THE PARTIES
SECTION 5.1 PREPARATION OF REGISTRATION STATEMENT AND PROSPECTUS/PROXY
STATEMENT. The Bank and the Company contemplate that a Registration Statement on
Form S-4 (the "Registration Statement") will be filed with the SEC under the
Securities Act for registration of the Company Common Stock to be issued in
connection with the transactions contemplated hereby and that the parties will
prepare a related Prospectus/Proxy Statement (the "Prospectus/Proxy Statement")
to be mailed to the shareholders of the Bank in connection with the
Shareholders' Meeting. The parties hereby agree (i) to cooperate with each
other in preparing and filing such Registration Statement and Prospectus/Proxy
Statement, and (ii) to use reasonable efforts to effectuate such filing with the
SEC by May 30, 1997. The parties hereby further agree (i) to file such
Prospectus/Proxy Statement with the SEC, the OCC and the Texas Banking
Commissioner, as necessary, as soon as reasonably practicable after the date
hereof and (ii) to use their reasonable efforts to obtain the clearance of the
SEC, the OCC and the Texas Banking Commissioner, as necessary, to issue such
Prospectus/Proxy Statement as soon as practicable thereafter. Without limiting
the generality of the foregoing, nothing shall be contained in the Registration
Statement or the Prospectus/Proxy Statement or any proxy soliciting materials
with respect to any party unless approved by such party, which approval shall
not be unreasonably withheld.
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SECTION 5.2 PURSUIT OF REGULATORY APPROVALS.
(a) The parties shall cooperate and use their reasonable efforts (i) to
obtain all necessary approvals, consents, authorizations and the like from
Governmental Authorities required to consummate the Merger, including, without
limitation, the approval of the Federal Reserve, the OCC, the Texas Banking
Commissioner and such other Persons as may be required under Applicable Law, and
(ii) to prepare and file the requisite application with the OCC (subject to the
determination by the OCC of the completeness of such application) by May 30,
1997. In addition, the consummation of the transactions contemplated hereby is
subject to the following:
(i) the expiration of any applicable waiting period with respect to
any of the foregoing matters (including, without limitation, any extension
thereof by reason of a request for additional information or as a result of
any pending or threatened action, suit or proceeding by the U.S. Department
of Justice or the Federal Trade Commission under federal antitrust laws)
and the publication of any notice required by Applicable Law;
(ii) the declaration of effectiveness of the Registration Statement,
which must not be the subject of a stop order or threatened stop order on
the Closing Date; and
(iii) the shares of Company Common Stock being delivered by the
Company to the Shareholders in exchange for their shares of Bank Common
Stock having been qualified or registered for offering and sale under the
securities or Blue Sky laws of each jurisdiction in which the Shareholders
reside (or exempted therefrom); provided that the Company shall not be
obligated to execute or file any general consent to service of process or
to qualify as a foreign corporation in any jurisdiction in which it is not
so qualified.
All such approvals, together with any other approvals of Governmental
Authorities that are necessary to effectuate the Merger, are referred to herein
as the "Regulatory Approvals."
(b) The Company shall have primary responsibility for the preparation of
all Federal Reserve and OCC applications and filings required in connection with
Section 5.2 above and the parties shall be jointly responsible for the
preparation of all applications and filings with the Texas Banking Commissioner
required in connection with Section 5.2 above. Each party shall cooperate with
the other parties hereto in preparation of all applications for such Regulatory
Approvals and will furnish promptly upon request all documents, information,
financial statements or other materials as may be required in order to complete
such applications. Should the appearance of any of the officers, directors,
employees or agents of any of the parties hereto be requested by any of the
parties or by any Governmental Authority at any hearing or otherwise in
connection with any such application, such party shall promptly use its
reasonable efforts to arrange for those appearances.
SECTION 5.3 OTHER CONSENTS. The Bank and the Company and SW Bank (where
appropriate) agree to apply for and reasonably and diligently seek to obtain all
waivers, consents and approvals of other Persons required in connection with the
transactions contemplated by this Agreement, including, without limitation, the
consent of any Person which may be required under any Scheduled Contract.
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SECTION 5.4 BANK ACTIVITIES PENDING CLOSING. Except as otherwise
specifically provided in this Agreement and subject to Applicable Law, from the
date hereof to and including the Effective Time, the Bank shall, as long as this
Agreement remains in effect or unless the Company otherwise consents in writing
(which consent shall not be unreasonably withheld):
(a) conduct its affairs (including, without limitation, the making of or
agreeing to make any loans or other extensions of credit) 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, including,
without limitation, making all changes required upon completion of any
regulatory examination, and use all reasonable efforts to preserve intact its
present business organization, keep available the services of its present
officers, directors, key employees and agents and preserve its relationships and
goodwill with all Persons having business dealings with it, and provided that
the Bank shall not make or agree to make any loans or other extensions of credit
to any borrower in excess of $500,000 without the prior consent of the Company;
(b) refrain from issuing or selling or obligating itself to issue or sell
any shares of its capital stock or any warrants, rights or options to acquire,
or any securities convertible into, any shares of its capital stock, except for
shares issued upon the exercise of Bank Stock Options outstanding on the date
hereof;
(c) except as set forth in Schedule 3.25(b), refrain from opening or
closing any branch office, or acquiring or selling or agreeing to acquire or
sell, any branch office or any deposit liabilities, and otherwise consult with
and seek the advice of the Company with respect to basic policies relating to
branching, site location and relocation;
(d) not enter into, amend or terminate any agreement of the type that would
be required to be disclosed on Schedule 3.7(a), or any other material agreement,
or acquire or dispose of any material amount of assets or liabilities, except in
the ordinary course of business consistent with prudent banking practices;
(e) not grant any severance or termination pay (otherwise than pursuant to
the Bank's policies in effect on the date hereof) to, or enter into any
employment, consulting, non-competition, retirement, parachute or
indemnification agreement with, any officer, director, employee or agent of the
Bank;
(f) not cause or suffer to exist any of the things listed in Section 3.13
to occur;
(g) not foreclose upon or otherwise acquire any real property described in
Section 3.23 hereof or any non-residential property prior to receipt and
approval by the Company of a Phase I environmental review therefor;
(h) not change its deposit account interest rate pricing policies or its
loan pricing policies except in response to changes in the applicable market;
(i) not establish any Subsidiary;
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(j) not make any material change in the interest rate risk profile of the
Bank as of March 31, 1997;
(k) not materially deviate from policies and procedures existing as of the
date of this Agreement with respect to (i) classification of assets, (ii) the
allowance for possible credit losses, and (iii) accrual of interest on assets,
except as otherwise required by the provisions of this Agreement; and
(l) not make or agree to make any overdrafts in excess of $100,000 per
account, unless an overdraft line of credit is in place consistent with the
Bank's ordinary course of business and policies and Applicable Laws.
SECTION 5.5 ONGOING FINANCIAL DISCLOSURE. The Bank shall provide to the
Company as soon as practicable but in no event later than fifteen (15) days
following the end of each calendar month, from the date hereof through the
Closing Date, copies of all financial statements and other written information
provided to the Board of Directors of the Bank, and, to the extent permitted by
Applicable Law, all reports filed by the Bank with federal or state regulatory
agencies. The Company shall send to the Bank, promptly after they become
publicly available, copies of all Company filings from and after the date hereof
made under Sections 13(a) and 14 of the Exchange Act and copies of all news
releases made by the Company from and after the date hereof. The Company shall
provide to a single designee of the Bank copies of all non-public financial and
other written information provided to the Boards of Directors of the Company and
SW Bank, and, to the extent permitted by Applicable Law, all reports filed by
the Bank with federal or state regulatory agencies. Such designee shall not
copy or circulate any such information to anyone without the prior written
consent of the Company, which consent shall not be unreasonably withheld, and
the Bank hereby acknowledges its obligations under the federal securities laws
with respect to maintaining the confidentiality of such information and insider
trading matters.
SECTION 5.6 ACCESS TO INFORMATION OF THE BANK.
(a) During the period from the date hereof until the Effective Time, the
Bank shall provide the information and access described in paragraphs (b) and
(c) below during normal business hours, upon reasonable written or oral notice
and in such manner as will not unreasonably interfere with the conduct of the
Bank's business.
(b) To the extent permitted by law, the Bank shall authorize and permit the
Company and its representatives, accountants and counsel to have full and
complete access to all of the properties, books, records, branch operating
reports, branch audit reports, customer accounts and records, any reports of
Governmental Authorities and responses thereto, operating instructions and
procedures (and all correspondence with Governmental Authorities), tax returns,
tax settlement letters, financial statements and other financial information
(including the work papers of Grant Thornton LLP used to audit the Bank's
balance sheets as of December 31, 1996 and 1995 and its statements of income,
changes in shareholders' equity and cash flows for the years ended December 31,
1996, 1995 and 1994), contracts and documents of the Bank and all other
information with respect to the business affairs, financial condition, assets
and Liabilities of the Bank as the Company may from time to time request, to
make copies of such books, records and other documents and to discuss the
business
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affairs, condition (financial and otherwise), assets and Liabilities of the Bank
with such third persons, including, without limitation, the directors, officers,
employees, agents, accountants (including Grant Thornton LLP) and attorneys of
the Bank, as the Company considers reasonably necessary or appropriate for the
purposes of familiarizing itself with the business and operations of the Bank,
determining any breach of the representations, warranties and covenants of the
Bank set forth herein, obtaining any necessary orders, consents or approvals of
the transactions contemplated by this Agreement by Governmental Authorities,
conducting further evaluations of the assets and Liabilities of the Bank, and
accomplishing the integration of the business operations of the Bank with those
of SW Bank at the earliest possible date.
(c) For purposes of the Company's investigation pursuant to this Section
5.6, the Bank shall use its reasonable efforts to cause any service bureau,
accountant, third party servicer or other third party under contract to it to
furnish to the Company and its authorized representatives full access to such
party's premises and all of its books, records and properties, including,
without limitation, all loan, investment, regulatory, financial, accounting, tax
and property records and files relating to the operations of the Bank including,
without limitation, all files, computer records and customer information,
relating to assets serviced by third parties or necessary for the conversion on
the Closing Date of all accounts, products and branch operating systems of the
Bank to such systems as the Company may designate. The Bank shall use its
reasonable efforts to cause any service bureau, accountant, third party servicer
or other third party to provide adequate space and facilities and the
cooperation of its personnel, including, without limitation, copying facilities,
to the end that such examination shall be completed expeditiously, completely
and accurately. The Bank shall, upon request, provide the Company and its
authorized representatives with reasonable access to any and all real and
personal properties securing loans made by the Bank, to the extent legally
permissible. Without limiting any of the foregoing, the Company and its
authorized representatives shall be specifically entitled to conduct at the
Company's own expense (and the Bank shall use its reasonable efforts to enable
them to conduct) such tests of accounts receivable and other matters as they
deem appropriate. Any examination or investigation made by the Company or other
Persons as contemplated by this Section shall not affect any of the
representations and warranties hereunder.
SECTION 5.7 CONFIDENTIALITY. Except as contemplated by this Agreement or
as necessary to carry out the transactions contemplated herein, all information
or documents furnished hereunder by any party or any other party shall be kept
confidential by the party to whom it is furnished (and such party shall use
reasonable efforts to cause its agents and representatives to maintain the
confidentiality of such documents) and in the event such transactions are not
consummated, each shall return to the other or destroy all information furnished
hereunder and shall not thereafter use the same for any purpose until such time
as such information becomes publicly available, except to the extent (i) it was
known by such other party prior to being received other than through the
violation or breach of such party or any other Person of any duty of
confidentiality, or (ii) it is or thereafter becomes lawfully obtainable from
other sources, or (iii) it is necessary or appropriate to disclose the same to
any Governmental Authority having jurisdiction over the parties or their
Subsidiaries or as otherwise may be required by Applicable Laws (to the extent
permitted by law, the party intending to make disclosure in such circumstances
shall give the other parties prompt notice prior to making such disclosures so
that such other parties may seek a protective order or other appropriate remedy
prior to such disclosure), or (iv) such duty of confidentiality is waived in
writing by the other party. Notwithstanding the foregoing, information and
documents furnished by or on
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behalf of the Bank hereunder may be disclosed by the Company or SW Bank to the
Federal Reserve, the OCC, the Texas Banking Commissioner and any other
Governmental Authority whose approval, consent, authorization or other action is
necessary for the consummation of the Merger and the transactions contemplated
hereby.
SECTION 5.8 MEETING OF SHAREHOLDERS.
(a) The Bank shall duly call a meeting of its shareholders (the
"Shareholders' Meeting") for the purpose of obtaining the approval of said
shareholders to the Merger, this Agreement and all other matters necessary to
consummate the transactions contemplated by this Agreement, which meeting shall
be held not earlier than 20 nor later than 30 business days following the date
upon which the Registration Statement shall have been declared effective. In
connection with the Shareholders' Meeting, the Board of Directors of the Bank
shall recommend approval of the transactions contemplated by this Agreement,
indicate the determination by the Board of Directors that the Merger is fair to
and in the best interests of the Bank's shareholders and use its reasonable
efforts (including, without limitation, soliciting proxies for such approvals)
to obtain such shareholder approval. Notice of the Shareholders' Meeting shall
be accompanied by the Prospectus/Proxy Statement.
(b) In obtaining the approval of shareholders referred to in this Section
5.8, the Bank and its officers, directors and 5% shareholders will comply with
applicable provisions of and the rules and regulations under the Securities Act
and the Exchange Act, the TBA, the TBCA and any other Applicable Law.
SECTION 5.9 STOCK LISTING. The Company shall, prior to the Effective
Time, notify NASDAQ with respect to the listing of the shares of Company Common
Stock to be issued pursuant to the Merger and shall obtain any approval required
by NASDAQ necessary in connection with the issuance of the Company Common Stock.
SECTION 5.10 AFFILIATES' LETTERS. No later than the 30th day following
the date hereof, the Bank shall deliver to the Company, after consultation with
legal counsel, a list of names and addresses of those persons who are
"Affiliates" of the Bank with respect to the Merger within the meaning of Rule
145 under the Securities Act. There shall be added to such list the names and
addresses of any other person (within the meaning of such Rule) which the
Company identifies (by written notice to the Bank within three business days
after receipt of such list) as possibly being a person who may be deemed to be
an "Affiliate" of the Bank within the meaning of Rule 145. The Bank shall use
all reasonable efforts to deliver, or cause to be delivered, to the Company, not
later than the Closing Date from each of the "Affiliates" of the Bank identified
as aforesaid, a letter dated as of the date of delivery thereof in the form of
Exhibit A attached hereto.
SECTION 5.11 MERGER OF SW DELAWARE. Prior to the Closing Date, the
Company shall cause SW Delaware to be either dissolved or merged into the
Company (the "SW Delaware Merger") so that on the Closing Date, the Company will
own directly 100% of the outstanding capital stock of SW Bank.
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SECTION 5.12 PLAN AMENDMENTS AND PARTICIPATION IN COMPANY PLANS. The
Bank shall execute and deliver such instruments and take such other actions as
the Company may reasonably require in order to cause the amendment or
termination of any Plan on terms satisfactory to the Company and in accordance
with Applicable Law and effective as of the Effective Time.
SECTION 5.13 ASSUMPTION OF BANK STOCK OPTIONS. The Bank shall use its
reasonable efforts to cause each of the holders of Bank Stock Options to execute
and deliver to the Company, at least 10 days prior to the Closing Date, an
agreement in form and substance satisfactory to the Company, with substantially
the same terms as those of the Bank Stock Options, pursuant to which each such
Bank Stock Option shall be converted into an option to purchase a number of
shares of Company Common Stock equal to the number of shares of Bank Common
Stock subject thereto multiplied by 0.625, at an exercise price per share equal
to the exercise price per share subject thereto divided by 0.625; provided,
however, that no "Dividend Credits" (as defined in the Bank Stock Option Plan)
shall be accrued or be paid with respect to any Bank Stock Option after the
Effective Time.
SECTION 5.14 TERMINATION OF SEVERANCE AND CONSULTING ARRANGEMENTS. On or
prior to the Closing Date, subject to Applicable Law, the Bank shall use its
reasonable efforts to terminate those arrangements (pursuant to reasonable
severance arrangements) as the Company or SW Bank shall notify the Bank in
writing pursuant to which the Bank is or may be obligated to make payments after
the Closing Date to any Person pursuant to any employment, consulting,
severance, employment termination or other similar agreement with any current or
former officer, director, employee or agent of the Bank.
SECTION 5.15 CERTAIN NOTIFICATIONS.
(a) Each party to this Agreement shall notify the other parties promptly
both orally and in writing (i) after becoming aware of any misrepresentation or
breach of warranty on its part under this Agreement, (ii) after becoming aware
of the occurrence of, or the impending or threatened occurrence of, any event
that would constitute a breach on its part of any obligation under this
Agreement or the occurrence of any event that would cause any representation or
warranty made by it herein to be false or misleading in any material respect if
such representation and warranty were restated at such time, or (ii) upon the
occurrence of, or the discovery of, any event that could reasonably be expected
to cause it to be unable to satisfy a condition to any other party's obligation
to proceed with the Merger.
(b) The Bank shall notify the Company promptly both orally and in writing
if it becomes aware that there exists a basis for any material suit, claim,
action, investigation or proceeding of any nature to be brought against or by or
on behalf of the Bank, or any of its properties.
SECTION 5.16 NO SHOPPING.
The Bank shall not, directly or indirectly, through any officer, director,
employee or agent or otherwise, solicit, initiate, encourage or facilitate any
Acquisition Proposal, or, except as otherwise required in the opinion of Brown,
Parker & Leahy, L.L.P. or other independent counsel reasonably acceptable to the
Company in order for its Board of Directors to fulfill its fiduciary
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duties, participate in any negotiation in respect of or cooperate with
(including, without limitation, by way of furnishing any nonpublic information
concerning the business, properties or assets of the Bank or any access to such
properties or assets) any Acquisition Proposal. The Bank shall notify the
Company promptly by telephone, and thereafter promptly confirm such notification
in writing, if any such information is requested from, or any Acquisition
Proposal or inquiry with respect to any Acquisition Proposal is received by, the
Bank and shall provide the Company with a reasonably detailed description of the
contents thereof, including without limitation, the identity of the other
persons or entities involved. Unless and until the Bank shall have exercised its
right to terminate this Agreement pursuant to Section 7.1(e) hereof, no
Acquisition Proposal shall be accepted, approved, adopted or recommended by the
Board of Directors of the Bank, or presented by the Bank, or by its Board of
Directors or management, to the Shareholders for vote or approval by written
consent, and no such meeting of Shareholders shall be called by the Bank or
noticed for purposes of taking Shareholder action with respect to any
Acquisition Proposal. Unless and until the Bank shall have exercised its right
to terminate this Agreement pursuant to Section 7.1(e) hereof, the Board of
Directors of the Bank shall not rescind the approval of this Agreement or any of
the transactions contemplated hereby. Unless and until the Bank shall have
exercised its right to terminate this Agreement pursuant to Section 7.1(e)
hereof, or except as otherwise required by any Governmental Authority having
jurisdiction with respect to a party, the Bank shall not prepare or assist in
the preparation of or file or assist in the filing of any notice or application
to any Governmental Authority pertaining to or seeking approval of any change in
control incident to or which would result from any Acquisition Proposal.
SECTION 5.17 NO INCONSISTENT ACTIONS; POOLING; TAX TREATMENT. None of
the parties hereto will take or omit to take any action, the effect of the
taking or omission of which would reasonably be expected to cause any of its
representations and warranties herein to be inaccurate in any material respect
at the Closing or at any time prior to the Closing as if such representation and
warranty were restated at such time. Each party hereto shall use all reasonable
efforts to cause the Merger to be treated for financial accounting purposes as a
"pooling of interests," and shall not take, and shall use all reasonable efforts
to prevent any Affiliate of such party from taking, any actions which could
prevent the Merger from being treated as such for financial accounting purposes.
Each party hereto shall use all reasonable efforts to cause the Merger to
qualify, and shall not take, and shall use all reasonable efforts to prevent any
Affiliate of such party from taking, any actions which could prevent the Merger
from qualifying, as a reorganization under the provisions of Section 368(a) of
the Code.
SECTION 5.18 TAXES; CONSENT. The Bank shall prepare and timely file all
Returns and amendments thereto required to be filed by the Bank on or before the
Closing Date. The Company shall have a reasonable opportunity to review all
Returns and amendments thereto prior to filing. The Bank shall pay and discharge
all Taxes, assessments and governmental charges upon or against it or any of its
properties or assets, and all liabilities at any time existing, before the same
shall become delinquent and before penalties accrue thereon, except to the
extent and as long as: (a) the same are being contested in good faith and by
appropriate proceedings pursued diligently and in such a manner as not to cause
any material adverse effect upon the condition (financial or otherwise) or
operations of the Bank; and (b) the Bank shall have set aside on its books
reserves (segregated to the extent required by sound accounting practice) in the
amount of the demanded principal imposition (together with interest and
penalties relating thereto, if any).
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SECTION 5.19 TRANSACTIONS WITH AFFILIATES AND INSIDERS. From the date
hereof until the Effective Time, the Bank shall not, without the prior written
consent of the Company, make any loan or establish any relationship, of the type
or engage or propose to engage in any transaction of the type that would be
required to be disclosed on Schedule 3.20 had such loan been made, relationship
been established or transaction been entered into or proposed as of the date
hereof.
SECTION 5.20 CLASSIFICATION OF LOANS. During the period from the
execution of this Agreement until the Effective Time, the Bank (i) to the extent
permitted by Applicable Law, shall promptly inform the Company of the amounts
and categories of any loans, leases or other extensions of credit that are
classified by any Governmental Authority or by the Bank as "Other Assets
Especially Mentioned," "Substandard," "Doubtful," "Loss" or any comparable
classification; (ii) shall classify all assets in accordance with FDIC Standards
and its own current internal classification system; and (iii) shall apply the
standards regarding accrual of interest set forth in the then most recent Call
Report Instructions of the Federal Financial Institutions Examination Council.
SECTION 5.21 COMPLIANCE WITH APPLICABLE LAW. During the period from the
date of this Agreement until the Effective Time, the Bank shall take any and all
actions reasonably requested by the Company in order to conform the conduct of
the business of the Bank, including, without limitation, the business of
originating, acquiring, holding or disposing of assets and liabilities, with the
requirements of any Applicable Law.
SECTION 5.22 CERTAIN ACCOUNTING ADJUSTMENTS. After all of the Regulatory
Approvals have been obtained, the Bank shall, if requested by the Company, make
such accounting entries prior to the Effective Time as the Company may
reasonably request in order to conform the accounting records of the Bank to the
accounting policies and practices of the Company and its Subsidiaries, such
adjustments to be effective immediately prior to the Effective Time. No such
adjustment shall of itself constitute grounds for termination of this Agreement
or an acknowledgment by the Bank (i) of any adverse circumstances for purposes
of determining whether the conditions to the Company's obligations under this
Agreement have been satisfied, or (ii) that such adjustment is required for
purposes of determining satisfaction of the condition to the Company's
obligations under this Agreement set forth in Section 6.2(a) hereof or (iii)
that such adjustment has any bearing on the number of shares of Company Common
Stock issuable hereunder.
SECTION 5.23 ENVIRONMENTAL INVESTIGATION; RIGHT TO TERMINATE AGREEMENT.
(a) The Company and its designated consultants, agents and representatives
shall have the right to the same extent that the Bank has such right, but not
the obligation or responsibility, to inspect any Bank Real Property or Real
Estate Owned, including, without limitation, conducting asbestos surveys and
sampling, environmental assessments and investigation, and other environmental
surveys and analyses including soil and ground sampling ("Environmental
Inspections") at any time on or prior to May 31, 1997. The Company shall notify
the Bank prior to any physical inspections of any such properties, and the Bank
may place reasonable restrictions on the time of such inspections. (If, as a
result of any such Environmental Inspection, further investigation ("secondary
investigation") including, without limitation, test borings, soil, water and
other sampling is deemed desirable by the Company, the Company shall (i) notify
the Bank of any property for which it intends to conduct such a secondary
investigation and the reasons for such
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secondary investigation, and (ii) commence such secondary investigation, on or
prior to June 30, 1997. All secondary investigations must be approved in advance
by the Bank. The Company shall give reasonable notice to the Bank of such
secondary investigations, and the Bank may place reasonable time and place
restrictions on such secondary investigations.
(b) The Bank agrees to indemnify and hold harmless the Company for any
claims for damage to property, or injury or death to persons, made as a result
of any Environmental Inspection or secondary investigation conducted by the
Company or its agents, which damage or injury is attributable to the negligent
actions or negligent omissions of the Bank or its agents. The Company agrees to
indemnify and hold harmless the Bank for any claims for damage to property, or
injury or death to persons, attributable to the negligent actions or omissions
of the Company or its agents in performing any Environmental Inspection or
secondary investigation except to the extent caused in whole or in part by the
negligence of the Bank. The Company shall not have any liability or
responsibility of any nature whatsoever for the results, conclusions or other
findings related to any Environmental Inspection, secondary investigation or
other environmental survey. If this Agreement is terminated, then except as
otherwise required by law, reports to any governmental authority of the results
of any Environmental Inspection, secondary investigation or other environmental
survey shall be made by the Bank and not by the Company. The Company shall make
no such report prior to the Closing unless required to do so by law, and in such
case will give the Bank reasonable notice of the Company's intentions.
(c) The Company shall have the right to terminate this Agreement if (i) the
factual substance of any warranty or representation set forth in Section 3.23 is
not true and accurate in any material respect; (ii) the results of such
Environmental Inspection, secondary investigation or other environmental
inspection, secondary investigation or other environmental survey identifies
material violations of Environmental Laws; (iii) the Bank has refused to allow
the Company to conduct an Environmental Inspection or secondary investigation in
a manner that the Company reasonably considers necessary; or (iv) the
Environmental Inspection, secondary investigation or other environmental survey
identifies any past or present events, conditions or circumstances (including
but not limited to the presence of any asbestos-containing material or
underground storage tank) that would require remedial or cleanup action at an
aggregate estimated cost which is in excess of $500,000. On or prior to July
15, 1997, the Company shall advise the Bank in writing as to whether the Company
intends to terminate this Agreement because the Company disapproves of the
results of the Environmental Inspection, secondary investigation or other
environmental survey. The Bank shall have the opportunity to correct any
objected to violations or conditions to the Company's reasonable satisfaction
prior to August 31, 1997. In the event that the Bank fails to demonstrate its
satisfactory correction of the violations or conditions to the Company, the
Company may terminate the Agreement on or before August 31, 1997.
(d) The Bank agrees to make available to the Company and its consultants,
agents and representatives all documents and other material relating to
environmental conditions of any Bank Real Property and Real Estate Owned
including, without limitation, the results of other environmental inspections
and survey. The Bank also agrees that all engineers and consultants who
prepared or furnished such reports may discuss such reports and information with
the Company and shall be entitled to certify the same in favor of the Company
and its consultants, agents and
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representatives and make all other data available to the Company and its
consultants, agents and representatives.
SECTION 5.24 EMPLOYMENT AGREEMENTS. The Company shall use its best
efforts to enter into Employment Agreements with J. Nolan Bedford and Maurice L.
Junod substantially in the form of Exhibits B-1 and B-2 hereto effective as of
the Effective Time.
SECTION 5.25 INDEMNIFICATION OF DIRECTORS AND OFFICERS; INSURANCE. (a)
The Articles of Association and By-Laws of the Surviving Association shall
contain the provisions with respect to indemnification set forth in the Articles
of Association and By-Laws of SW Bank on the date of this Agreement, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years after the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who at any time prior to the Effective Time
were directors or officers of the Bank in respect of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement), unless such modification is
required by Applicable Law.
(b) From and after the Effective Time, the Company and the Surviving
Association shall indemnify, defend and hold harmless the present and former
directors, officers, employees and agents of the Bank (collectively, the
"Indemnified Parties") against all losses, expenses, claims, damages,
liabilities or amounts (including all amounts paid in settlement with the
approval of the Company and the Surviving Association, which approval shall not
unreasonably be withheld) in connection with, any claim, action, suit,
proceeding or investigation (a "Claim"), 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 at or prior to the Effective
Time (including, without limitation, the transactions contemplated by this
Agreement), in each case to the fullest extent permitted under applicable law
(and shall pay expenses in advance of the final disposition of any such action
or proceeding to each Indemnified Party to the fullest extent permitted under
applicable law, upon receipt from the Indemnified Party to whom expenses are
advanced an undertaking to repay such advances, if any, contemplated by
applicable law). If the assets of the Surviving Association are insufficient to
satisfy its indemnity obligations hereunder, then the Company shall assume and
become liable for the performance of such obligations.
(c) Without limiting the foregoing, in the event any Claim is brought
against any Indemnified Party (whether arising before or after the Effective
Time) after the Effective Time (i) the Indemnified Parties may retain the Bank's
regularly engaged independent legal counsel, or other independent legal counsel
satisfactory to them provided that such other counsel shall be reasonably
acceptable to the Surviving Association, (ii) the Surviving Association shall
pay all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and (iii) the Surviving Association
will use its reasonable efforts to assist in the vigorous defense of any such
matter, provided that the Surviving Association shall not be liable for any
settlement of any Claim effected without its written consent, which consent
shall not be unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.25, upon learning of any such Claim, shall
notify the Surviving Association (although the failure so to notify the
Surviving Association shall not relieve the Surviving Association from any
liability which the Surviving Association may have under this Section 5.25
except to the extent such failure
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prejudices the Surviving Association), and shall deliver to the Surviving
Association the undertaking, if any, contemplated by applicable law. The
Indemnified Parties as a group may retain one law firm to represent them with
respect to each such matter unless there is, under applicable standards of
professional conduct (as determined by counsel to the Indemnified Parties), a
conflict on any significant issue between the positions of any two or more
Indemnified Parties, in which event, such additional counsel as may be required
may be retained by the Indemnified Parties.
(d) Commencing at the Effective Time, the directors and officers of the
Surviving Association shall be insured under the policies of directors and
officers insurance currently or hereafter maintained by the Company. In
addition, for a period of four years following the expiration after the
Effective Time of the Bank's current directors and officers liability insurance
policy, the Company shall secure and cause to be maintained in effect the Bank's
existing directors' and officers' liability insurance or "tail" coverage, or
policies with terms and conditions substantially similar to the Bank's current
insurance policies, with respect to claims arising from facts or events which
occurred before the Effective Time (including the transactions which are the
subject of this Agreement). Notwithstanding the foregoing, the Company's
obligation to maintain liability insurance under the immediately preceding
sentence may, prior to the expiration of such four year period, be modified or
terminated as agreed between the Company and a committee consisting of Robert J.
Adam, Anan Golub, Robert Pond, Robert A. Skilton and Weems Turner (or, if a
vacancy occurs therein, any successor(s) thereto appointed by the remaining
members thereof), which committee, acting by a majority, is hereby instructed by
the Bank to agree to such actions with respect to the maintenance, early
termination or modification of such insurance as such committee deems fair, as
determined in its sole discretion, to the Company on the one hand and the
indemnified parties on the other hand, based on the cost of such insurance and
the likelihood of the need to ever file any claim thereunder. Such committee
members shall be afforded the same indemnification rights generally available to
directors so long as such members shall have acted in good faith.
(e) This Section 5.25 is intended to be for the benefit of, and shall be
enforceable by, the Indemnified Parties, their heirs and personal
representatives and shall be binding on the Company and SW Bank and the
Surviving Association and their representative successors and assigns.
SECTION 5.26 COMPANY ACTIVITIES PENDING CLOSING. Except as otherwise
specifically provided in this Agreement and subject to Applicable Law, from the
date hereof to and including the Effective Time, the Company shall, as long as
this Agreement remains in effect or unless the Bank otherwise consents in
writing:
(a) conduct its consolidated affairs (including, without limitation, the
making of or agreeing to make any loans or other extensions of credit) 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,
including, without limitation, making all changes required upon completion of
any regulatory examination;
(b) 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
form that of the Company at the time such agreement is entered into.
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SECTION 5.27 ACCESS TO INFORMATION OF THE COMPANY.
(a) During the period from the date hereof until the Effective Time, the
Company and SW Bank shall provide the information and access described in
paragraphs (b) and (c) below during normal business hours, upon reasonable
written or oral notice and in such manner as will not unreasonably interfere
with the conduct of the Company's or SW Bank's business.
(b) To the extent permitted by law, the Company and SW Bank shall authorize
and permit the Bank and its representatives, accountants and counsel to have
full and complete access to all of the properties, books, records, branch
operating reports, branch audit reports, customer accounts and records, any
reports of Governmental Authorities and responses thereto, operating
instructions and procedures (and all correspondence with Governmental
Authorities), tax returns, tax settlement letters, financial statements and
other financial information (including the work papers of Coopers & Lybrand
L.L.P. used to audit the Company's balance sheets as of December 31, 1996 and
1995 and its statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994), contracts and
documents of the Company and SW Bank and all other information with respect to
the business affairs, financial condition, assets and Liabilities of the Company
and SW Bank as the Bank may from time to time reasonably request, to make copies
of such books, records and other documents and to discuss the business affairs,
condition (financial and otherwise), assets and Liabilities of the Company and
SW Bank with such third persons, including, without limitation, the directors,
officers, employees, agents, accountants (including Coopers & Lybrand L.L.P.)
and attorneys of the Company and SW Bank, as the Bank considers reasonably
necessary or appropriate for the purposes of familiarizing itself with the
business and operations of the Company and SW Bank, determining any breach of
the representations, warranties and covenants of the Company and SW Bank set
forth herein, obtaining any necessary orders, consents or approvals of the
transactions contemplated by this Agreement by Governmental Authorities and
conducting further evaluations of the assets and Liabilities of the Company and
SW Bank.
(c) For purposes of the Bank's investigation pursuant to this Section 5.27,
the Company and SW Bank shall use its reasonable efforts to cause any service
bureau, accountant, third party servicer or other third party under contract to
it to furnish to the Bank and its authorized representatives full access to such
party's premises and all of its books, records and properties, including,
without limitation, all loan, investment, regulatory, financial, accounting, tax
and property records and files relating to the operations of the Company and SW
Bank including, without limitation, all files, computer records and customer
information, relating to assets serviced by third parties. The Company and SW
Bank shall use their reasonable efforts to cause any service bureau, accountant,
third party servicer or other third party to provide adequate space and
facilities and the cooperation of its personnel, including, without limitation,
copying facilities, to the end that such examination shall be completed
expeditiously, completely and accurately. Without limiting any of the
foregoing, the Bank and its authorized representatives shall be specifically
entitled to conduct at the Bank's own expense (and the Company and SW Bank shall
use their reasonable efforts to enable them to conduct) such tests of accounts
receivable and other matters as they deem appropriate. Any examination or
investigation made by the Bank or other Persons as contemplated by this Section
shall not affect any of the representations and warranties hereunder.
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SECTION 5.28 FURTHER ASSURANCES. Each party hereto shall execute and
deliver such instruments and take such other actions as the other party or
parties, as the case may be, may reasonably require in order to carry out the
intent of this Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 CONDITIONS TO THE BANK'S OBLIGATION TO CLOSE. The obligation
of the Bank to consummate the transactions contemplated by this Agreement is
subject to the satisfaction or waiver on or before the Closing Date (or as
otherwise provided below) of all of the following conditions.
(a) Representations and Warranties.
(i) Except for such breaches of the representations and warranties
contained in Article IV hereof as have not, and cannot reasonably be
expected to have, in the aggregate, a Material Adverse Effect on the
Company, all representations and warranties of the Company contained in
Article IV of this Agreement shall be true and correct on and as of the
Closing Date with the same force and effect as those such representations
and warranties were being made on and as of the Closing Date (except to the
extent such representations and warranties speak as of a specific date, in
which case they shall be deemed to have been made as of the Closing Date
but speaking only as of such specific date). Solely for purposes of this
Section and in determining compliance with the condition set forth herein,
any representation and warranty made by the Company and SW Bank in this
Agreement shall be read and interpreted as if the qualification set therein
with respect to materiality or Material Adverse Effect were not contained
therein;
(ii) The Company and SW Bank shall have performed and satisfied in all
material respects all covenants and conditions required by this Agreement
to be performed and satisfied by any or both of them at or prior to the
Closing Date; and
(iii) There shall have been delivered to the Bank on the Closing
Date, a certificate executed by the Chief Executive Officer, the President
or any Executive Vice President, of the Company certifying compliance with
all the provisions of this Section 6.1(a).
(b) Regulatory Approvals. All of the Regulatory Approvals for the
transactions contemplated by this Agreement shall have been obtained; such
Regulatory Approvals shall be in effect and no proceedings shall have been
initiated or threatened with respect thereto; all applicable waiting periods
with respect to such Regulatory Approvals shall have expired; and all conditions
and requirements prescribed by Applicable Law or by such Regulatory Approvals
shall have been satisfied.
(c) Registration Statement. The Registration Statement, as it may have
been amended or supplemented, shall have become effective and no stop order
suspending the effectiveness of such Registration Statement shall have been
issued and shall remain in effect, and no proceedings for that purpose shall
have been initiated or threatened by the SEC the basis for which shall remain in
effect.
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(d) Board and Shareholder Approval.
(i) The Company shall have furnished the Bank with:
(A) a certified copy of the resolutions duly adopted by the
Boards of Directors of the Company and SW Bank approving this
Agreement, the Merger and the transactions contemplated hereby and
thereby, and, in the case of SW Bank and the Company, directing the
submission thereof to a vote of shareholders; and
(B) a certified copy of evidence of the consummation of the SW
Delaware Merger; and
(C) a certified copy of resolutions duly adopted by the Company
following the SW Delaware Merger, as the holder of 100% of the
outstanding shares of SW Bank capital stock entitled to vote thereon,
approving this Agreement, the Merger and the transactions contemplated
hereby and thereby; and
(ii) At least two-thirds of the outstanding shares of Bank Common
Stock entitled to vote shall have approved this Agreement, the Merger and
the transactions contemplated hereby and thereby.
(e) No Violations of Law, Litigation. The transactions contemplated by
this Agreement shall not violate any Applicable Law. There shall be no pending
or threatened suits, claims, actions, investigations or proceedings by any
Person or Governmental Authority (or determinations by any Governmental
Authority) challenging or in any manner seeking to restrict or prohibit the
transactions contemplated hereby or seeking to obtain any material damages
against any Person as a result of the transactions contemplated hereby.
(f) Opinions of Counsel. The Bank shall have received an opinion addressed
to them of Vinson & Elkins L.L.P., counsel to the Company and SW Bank, dated the
Closing Date, substantially in the form of Exhibit C hereto.
(g) Tax Opinion. The Bank shall have received from Brown Parker & Leahy
L.L.P., an opinion of counsel reasonably satisfactory to the Bank to the effect
that for federal income tax purposes (i) the Merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Code; (ii) the
Company, SW Bank and the Bank will each be a party to that reorganization; (iii)
no gain or loss will be recognized to the former Shareholders of the Bank who
receive Company Common Stock in exchange for their Bank Common Stock, except to
the extent they receive cash; (iv) the basis of the Shareholders in the Company
Common Stock received in the Merger 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 (v)
the holding period of the shares of Company Common Stock received by a
Shareholder will include the holding period of the shares of Bank Common Stock
surrendered therefor, provided that such Bank Common Stock was held as a capital
asset by such Shareholder. In rendering any such opinion, such counsel may
require and, to the extent they deem necessary or appropriate, may rely upon
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representations made in certificates of officers of the Bank and the Company,
affiliates of the foregoing, and others.
(h) The Company shall have entered into Employment Agreements with J.
Nolan Bedford and Maurice L. Junod substantially in the form of Exhibits B-1 and
B-2 hereto, respectively.
SECTION 6.2 CONDITIONS TO THE COMPANY'S AND SW BANK'S OBLIGATIONS TO
CLOSE. The obligations of the Company and SW Bank to consummate the
transactions contemplated by this Agreement are subject to the satisfaction or
waiver on or before the Closing Date (or as otherwise provided below) of all of
the following conditions:
(a) Representations and Warranties; Covenants.
(i) Except for such breaches of the representations and warranties
contained in Article III hereof as have not, and cannot reasonably be
expected to have, in the aggregate, a Material Adverse Effect on the Bank,
all representations and warranties of the Bank contained in Article III of
this Agreement shall be true and correct on and as of the Closing Date,
with the same force and effect as though such representations and
warranties were being made on and as of the Closing Date (except to the
extent such representations and warranties speak as of a specific date, in
which case they shall be deemed to have been made as of the Closing Date
but speaking only as of such specific date). Solely for purposes of this
Section and in determining compliance with the condition set forth herein,
any representation and warranty made by the Bank in this Agreement shall be
read and interpreted as if the qualification stated therein with respect to
materiality or Material Adverse Effect were not contained therein.
(ii) The Bank shall have performed and satisfied in all material
respects all covenants and conditions required by this Agreement to be
performed and satisfied at or prior to the Closing Date.
(iii) There shall not have been instituted or threatened any suit,
claim, action, investigation or proceeding of any nature by any Person that
would have been required to be listed on Schedule 3.14(a) hereto had such
suit, claim, action or proceeding been instituted or threatened as of the
date of this Agreement, and that, individually or in the aggregate, or when
aggregated with the breaches, if any, of representations and warranties
contained in Article III hereof, has had, or can reasonably be expected to
have, a Material Adverse Effect on the Bank.
(iv) There shall have been delivered to the Company on the Closing
Date a certificate executed by the Chief Executive Officer of the Bank
certifying compliance with all the provisions of this Section 6.2(a).
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(b) Regulatory Approvals; Covenants. All the Regulatory Approvals for the
transactions contemplated by this Agreement shall have been obtained without the
imposition of any conditions that are or would become applicable to the Company,
the Surviving Association, or any other Subsidiary of the Company after the
Effective Time that the Company in good faith determines would be burdensome (in
the context of the transactions contemplated by this Agreement) upon the conduct
of the business of the Company, the Surviving Association, or any other
Subsidiary of the Company or the business of the Bank, as such businesses have
been conducted prior to the Effective Time or as such businesses are anticipated
to be conducted after the Effective Time. All such Regulatory Approvals shall
be in effect and no proceedings shall have been instituted or threatened with
respect thereto; all applicable waiting periods with respect to such Regulatory
Approvals shall have expired; and all conditions and requirements prescribed by
Applicable Law or by such Regulatory Approvals shall have been satisfied. All
other consents, approvals, waivers and other actions required from any other
Person pursuant to the Scheduled Contracts in connection with the transactions
contemplated by this Agreement shall have been obtained in form satisfactory to
the Company, except where the failure to obtain such consents, approvals, and
waivers and to take such other action is not in the Company's good faith
judgment material.
(c) Registration Statement. The Registration Statement, as it may have
been amended or supplemented, shall have become effective and not stop order
suspending the effectiveness of such Registration Statement shall have been
issued and shall remain in effect, and no proceedings for that purpose shall
have been initiated or threatened by the SEC and the basis for which shall
remain in effect.
(d) Board and Shareholder Approval.
(i) The holders of at least a two-thirds of the outstanding shares of
Bank Common Stock entitled to vote thereon shall have approved this
Agreement, the Merger and the transactions contemplated hereby and thereby;
and
(ii) the Bank shall have furnished the Company with:
(A) a certified copy of the resolutions duly adopted by the Board
of Directors of the Bank approving this Agreement, the Merger and the
transactions contemplated hereby and directing the submission thereof
to a vote of the Bank's shareholders;
(B) a certified copy of resolutions duly adopted by the holders
of at least two-thirds of the outstanding shares of Bank Common Stock
entitled to vote thereon approving this Agreement, the Merger and the
transactions contemplated hereby and thereby.
(e) No Violations of Law, Litigation. The transactions contemplated by
this Agreement shall not violate any Applicable Law. There shall be no pending
or threatened suits, claims, actions, investigations, or proceedings by any
Person or Governmental Authority (or determinations by any Governmental
Authority) challenging or in any manner seeking to restrict or prohibit the
transactions
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contemplated hereby or seeking to obtain any damages against any Person as a
result of the transactions contemplated hereby.
(f) Opinion of Counsel. The Company and SW Bank shall have received an
opinion addressed to them of Brown Parker & Leahy L.L.P., special counsel to the
Bank, dated the Closing Date, substantially in the form of Exhibit D hereto.
(g) Tax Opinion. The Company shall have received from Vinson & Elkins
L.L.P. an opinion of counsel, to the effect that for federal income tax purposes
(i) the Merger will constitute a tax-free reorganization within the meaning of
Section 368(a) of the Code; (ii) the Company, SW Bank and the Bank will each be
a party to that reorganization, and (iii) no gain or loss will be recognized by
the Company, SW Bank or the Bank by reason of the Merger. In rendering any such
opinion, such counsel may require and, to the extent they deem necessary or
appropriate, may rely upon representations made in certificates of officers of
the Bank and the Company, affiliates of the foregoing, and others.
(h) Banking Crisis. There shall not have occurred and be continuing 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.
(i) Bank Stock Options. Each of the holders of Bank Stock Options shall
have executed and delivered to the Company the agreement contemplated by Section
5.13 hereof.
(j) Releases of Officers and Directors.
(i) Each director of the Bank shall have delivered to the Company an
instrument, substantially in the form of Exhibit E hereto dated as of the
Effective Time, releasing the Bank from any and all claims of such
directors (except as to their deposits and accounts at the Bank, and as to
rights of indemnification pursuant to Applicable Law, this Agreement and
the Bylaws of the Bank, which shall survive the Merger) and shall have
delivered to the Company their resignations as directors of the Bank.
(ii) Each officer of the Bank shall have delivered to the Company an
instrument, substantially in the form of Exhibit F hereto in form and
substance satisfactory to the Company and dated the Effective Time,
releasing the Bank from any and all claims of such officers (except as to
deposits and accounts, accrued compensation permitted by their respective
agreements and rights of indemnification pursuant to Applicable Law, this
Agreement and the Bylaws of the Bank, which shall survive the Merger).
(k) Dissenters. The holders of no more than 10% of the outstanding shares
of Bank Common Stock shall have demanded or be entitled to demand payment of the
fair value of their shares as dissenting shareholders.
(l) SW Delaware Merger. The SW Delaware Merger shall have been duly
consummated.
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(m) Affiliates' Letters. Each Affiliate of the Bank shall have delivered
to the Company an executed copy of the letter contemplated by Section 5.10
hereof.
(n) Pooling of Interests. The Merger shall qualify as a "pooling of
interests" for financial accounting purposes, and the Company shall have
received appropriate opinions from Coopers & Lybrand L.L.P. and Grant Thornton
LLP dated the Closing Date to that effect.
ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. This Agreement and the obligations of the
parties hereunder may be terminated:
(a) By mutual written consent of the parties at any time whether or not
theretofore approved by the Company's, SW Bank's or the Bank's shareholders;
(b) By the Company or the Bank upon the expiration of 15 days after any
Governmental Authority having jurisdiction over any of the transactions set
forth herein indicates that it intends to deny or to refuse to grant any
Regulatory Approval; provided, however, that in the case of a denial or refusal
to grant approval by any Governmental Authority 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;
(c) By the Company immediately upon the expiration of 30 days from the date
that the Company has given notice to the Bank of the Bank's material failure to
satisfy any covenant or agreement herein, or of the Bank's breach of any
warranties or representations contained herein which in the aggregate represent
a change in the Bank from that represented to the Company which is equivalent to
a Material Adverse Effect on the Bank; provided, however, that no termination
under this Section 7.1(c) shall take effect if the Bank shall have fully and
completely corrected the grounds for termination as specified in the
aforementioned notice within the earlier to occur of (i) 30 days after the date
of receipt of such notice and (ii) the date specified in paragraph (h) below,
and provided further, however, that solely for purposes of this Section 7.1(c),
any representation and warranty made by the Bank in this Agreement shall be read
and interpreted as if the qualification stated therein with respect to
materiality or Material Adverse Effect were not contained therein;
(d) By the Bank immediately upon the expiration of 30 days from 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 herein,
or of the Company's breach of any warranties or representations contained herein
which in the aggregate represent a change in the Company from that represented
to the Bank which is equivalent to a Material Adverse Effect on the Company;
provided, however, that no termination under this Section 7.1(d) shall take
effect if the Company and SW Bank shall have fully and completely corrected the
grounds for termination as specified in the aforementioned notice within the
earlier to occur of (i) 30 days after the date of receipt of such notice and
(ii) the date specified in paragraph (h) below, and provided further, however,
that solely for purposes of this Section 7.1(d), any representation and warranty
made by the Company and SW Bank
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in this Agreement shall be read and interpreted as if the qualification stated
therein with respect to materiality or Material Adverse Effect were not
contained therein;
(e) By either the Company or the Bank (provided that if the terminating
party is the Bank, the Bank shall not be in material breach of any of its
obligations under this Agreement) if any approval of the Shareholders required
for the consummation of the Merger shall not have been obtained by reason of the
failure to obtain the required vote at the Shareholders' Meeting or any
adjournment or postponement thereof or the Board of Directors of the Bank has
determined not to recommend approval of the Merger to the Shareholders;
(f) 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;
(g) 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; or
(h) Notwithstanding any of the foregoing, immediately by a party hereto
that is not in default hereunder, if the Closing has not occurred on or before
October 31, 1997.
SECTION 7.2 EFFECT OF TERMINATION. In the event of a termination under
Section 7.1, this Agreement shall become void, and there shall be no liability
on the part of any party or any of such party's directors, officers, employees,
agents or shareholders to the other party or such other party's directors,
officers, employees, agents or shareholders; provided, however, that the
obligations of any party under Sections 5.7, 5.23, 8.9, 8.10 and 8.11 shall
survive the termination of this Agreement; and provided further that a
termination under Section 7.1(c) or (d) shall not relieve any party of any
liability for breach of this Agreement or for any misrepresentation hereunder or
be deemed to constitute a waiver of any remedy available for such breach or
misrepresentation. Liability, if any, for an inadvertent or non-intentional
breach or misrepresentation under the foregoing provisions shall be limited to
the recovery of out-of-pocket costs and expenses and shall not include punitive,
special or consequential damages. The parties acknowledge and agree that
breaches of representations and warranties which in the aggregate do not give
rise to a right of termination hereunder shall not give any right to any party
as to offset or any other remedy or right hereunder.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations, warranties, conditions and covenants of the parties contained
in this Agreement or in any instrument of transfer or other document delivered
in connection with the transactions contemplated hereby shall survive the
Closing, and no party, including any of its directors, officers, employees,
agents and shareholders, shall be under any liability whatsoever with respect to
such
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representations, warranties, conditions and covenants following the Closing,
except that the obligations set forth in Section 2.2(b) (with respect to the
Bank) and Section 5.25 (with respect to the Company and SW Bank) shall survive
the Closing and the obligations of the Company set forth in Article I hereof
shall survive the Closing.
SECTION 8.2 NOTICES. Any notice or communication required or permitted
hereunder shall be sufficiently given if in writing and (i) delivered in person
or by overnight delivery or courier service (ii) sent by facsimile or (iii)
deposited in the United States mail, by certified mail postage prepaid and
return receipt requested (provided that any notice given pursuant to clause (ii)
is also confirmed by the means described in clause (i) or (iii)), as follows:
To the Company or SW Bank:
Southwest Bancorporation of Texas, Inc.
4400 Post Oak Parkway
Houston, Texas 77027
Attention: Paul B. Murphy, Jr.
President
Fax: (713) 439-5905
With copies to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin Street
Houston, Texas 77002-6760
Attention: Michael P. Finch, Esq.
Fax: (713) 615-5282
To the Bank:
Pinemont Bank
12130 Hempstead Highway
Houston, Texas 77092
Attention: J. Nolan Bedford
President
Fax: (713) 462-3486
With copies to:
Brown Parker & Leahy L.L.P.
3600 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Attention: Charles D. Powell, Esq.
Fax: (713) 654-1871
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Such notice or other communication shall be deemed given when so delivered
personally, or sent by facsimile transmission, or, if sent by overnight delivery
or courier service, the business day after being sent from within the United
States, or if mailed, four days after the date of deposit in the United States
mails.
SECTION 8.3 GOVERNING LAW. Except as otherwise provided in any exhibit
hereto, this Agreement and the legal relations between the parties shall be
governed by and construed in accordance with the internal laws of the State of
Texas without taking into account provisions regarding choice of law, except to
the extent certain matters may be governed by the laws of the United States, as
the jurisdiction of organization of SW Bank.
SECTION 8.4 ENTIRE AGREEMENT. All exhibits and schedules (including,
without limitation, the Disclosure Schedule) referred to in this Agreement are
integral parts hereof, and this Agreement, together with such exhibits and
schedules (including, without limitation, the Disclosure Schedule), constitutes
the entire agreement among the parties hereto with respect to the matters herein
and therein and supersedes all prior agreements and understandings between the
parties with respect thereto, including, without limitation, the Confidentiality
Agreement dated April 9, 1997 between the Bank and the Company.
SECTION 8.5 AMENDMENTS AND WAIVERS. This Agreement may not be amended
except upon the written consent of each party hereto. By an instrument in
writing, the Company may waive compliance by the Bank and the Bank may waive
compliance by the Company or SW Bank with any term or provision of this
Agreement that such other party was or is obligated to comply with or perform;
provided, however, that such waiver shall not operate as a waiver of, or
estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy or power provided herein or by law or
in equity. The waiver by any party of the time for performance of any act or
condition hereunder does not constitute a waiver of the act or condition itself.
Unless required by Applicable Law, no such waiver, amendment or modification
effected after approval of this Agreement by the shareholders of the Bank shall
require any further shareholder approval.
SECTION 8.6 SEVERABILITY. If any provision of this Agreement, or the
application thereof to any Person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other Persons,
places and circumstances shall remain in full force and effect only if, after
excluding the portion deemed to be unenforceable, the remaining terms shall
provide for the consummation of the transactions contemplated hereby in
substantially the same manner as originally set forth at the later of the date
this Agreement was executed or last amended.
SECTION 8.7 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall constitute one and the same instrument.
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SECTION 8.8 INTERPRETATION OF AGREEMENT. The article, section and other
headings used in this Agreement are for reference purposes only and shall not
constitute a part hereof or affect the meaning or interpretation of this
Agreement. References herein to the transactions contemplated by this Agreement
or other similar words shall include, without limitation, the Merger and all of
the other transactions contemplated hereunder.
SECTION 8.9 EXPENSES.
(a) Subject to paragraphs (b) through (d) below and except as otherwise
provided in this Agreement, whether or not the Merger is consummated, all costs
and expenses incurred in connection with the Merger and all other terms and
conditions of this Agreement, and the transactions contemplated hereby, will be
paid by the party incurring such costs and expenses.
(b) In the event this Agreement is terminated pursuant to Section 7.1
hereof, all out-of-pocket costs and expenses of the parties relating to the
printing, filing, shipping and distribution of the Registration Statement and
Prospectus/Proxy Statement shall be borne equally by the Company and its
Subsidiaries, on the one hand, and the Bank, on the other hand.
(c) In the event this Agreement is terminated pursuant to Section 7.1(e)
hereof and the Board of Directors of the Bank has either failed to recommend, or
has recommended against, approval of the Merger because of the receipt by the
Bank of an Acquisition Proposal, the parties agree that it would be
impracticable or extremely difficult to fix the actual damages resulting
therefrom, and, therefore, the parties agree that the Bank shall pay to the
Company as liquidated damages and not as a penalty, subject to the following
provisions, the sum of (i) $500,000 (the "Damages"), plus (ii) all of the
Company's reasonable out-of-pocket expenses, not to exceed $400,000 (including,
without limitation, amounts paid or payable to accountants, attorneys, printers
and investment bankers, provided, however, that reimbursable attorneys' fees
shall not exceed $125,000) incurred by the Company or any of its Affiliates in
connection with or arising out of the transactions contemplated by this
Agreement in respect thereof (the "Expenses"). The parties hereby further agree
that such amount represents a reasonable endeavor on their parts to estimate a
fair compensation for the foreseeable damages that might be suffered as a result
thereof. The Company hereby agrees that its sole remedy therefor shall be the
Damages and Expenses provided for herein. The Damages and Expenses shall be
payable as follows:
(i) Following the termination of the Agreement, the Bank shall pay to
the Company the Expenses. Such payment shall become due and payable
promptly after (but in no event later than three business days following)
delivery by the Company to the Bank of an itemization of Expenses.
(ii) If the Bank consummates the transaction contemplated by an
Acquisition Proposal within one year following the termination of the
Agreement, the Damages shall become due and payable on the effective date
of the consummation of such transaction. If no such transaction is
consummated before the expiration of such one year period, no Damages shall
be payable by the Bank to the Company.
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(iii) The Bank acknowledges that the agreements contained in this
Section 8.9(c) are an integral part of the transactions contemplated in
this Agreement, and that without these agreements, the Company would not
enter into this Agreement; accordingly, if the Bank fails to promptly pay
the Expenses or Damages when due, the Bank shall in addition thereto pay to
the Company all costs and expenses (including fees and disbursements of
counsel) incurred in collecting such Expenses or Damages, together with
interest thereon (or any unpaid portion thereof) from the date such payment
was required to be made to the date such payment is received by the Company
at the prime rate of SW Bank as in effect from time to time during such
period.
(d) Except as provided in paragraph (c) above, the rights and remedies
provided in this Section 8.9 are cumulative and not exclusive of any rights and
remedies provided by Applicable Law.
SECTION 8.10 ATTORNEY'S FEES. In addition to the rights granted pursuant
to Section 8.9, if any legal action is brought for the enforcement of this
Agreement or because of an alleged dispute, breach or default in connection with
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in such action or proceeding, in
addition to any other relief to which it may be entitled.
SECTION 8.11 PUBLICITY. The parties hereto will consult with each other
with regard to the terms and substance of any and all press releases,
announcements or other public statements with respect to the transactions
contemplated hereby. The parties agree further that none of them will release
any such press release, announcement or other public statement without the prior
approval of the other parties, unless such release is required by law and the
parties cannot reach agreement upon a mutually acceptable form of release, in
which event the party releasing the information, announcement or public
statement shall not be deemed to be in breach of this Agreement. The parties
agree further that such approval will not be unreasonably withheld, and they
pledge to make a good faith effort to reach agreement expeditiously on the terms
of any such press release, announcement or other public statement.
SECTION 8.12 BINDING EFFECT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
SECTION 8.13 THIRD PARTIES. Each party intends that this Agreement shall
not benefit or create any right or cause of action or remedy of any nature
whatsoever in any Person other than the parties to this Agreement, including,
without limitation, conferring upon any person the right to remain an employee
of the Bank or the Company or any of its Subsidiaries, or restraining the Bank,
the Surviving Association or any of their Subsidiaries from changing the terms
and conditions of employment of any person or terminating such person's
employment, following the Effective Time.
SECTION 8.14 GENDER; NUMBER. Whenever the context of this Agreement
requires, the masculine gender shall include the feminine or neuter, and the
singular number shall include the plural.
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SECTION 8.15 CERTAIN DEFINITIONS.
"Acquisition Proposal" shall mean any proposal for a merger or other
business combination involving the Bank or for the acquisition of a substantial
equity interest in, or a substantial portion of the assets of, the Bank.
"Affiliate" or "Associate" shall have the meaning assigned thereto in Rule
405, as presently promulgated under the Securities Act of 1933, as amended.
"agent" of the Bank shall have the meaning as defined in Section 3.17
hereof.
"Agreement" shall mean this Agreement and Plan of Merger.
"agreement" shall mean with respect to any Person any note, bond,
indenture, license, agreement, lease, contract, indenture, mortgage, deed of
trust, lien, instrument, commitment, arrangement or other understanding, whether
written or oral, to which such Person is a party or by which its properties or
assets may be bound or affected or under which it or its respective business,
properties or assets receive benefits.
"Applicable Law" shall mean any domestic or foreign, federal, state or
local statute, law, ordinance, rule, administrative interpretation, regulation,
order, writ, injunction, directive, judgment, decree or other requirement of any
Governmental Authority applicable, in the case of the Bank, to the Bank or its
properties, assets, officers, directors, employees or agents (in connection with
such officers', directors', employees' or agents' activities on behalf of it),
and, in the case of the Company, SW Bank or any other Subsidiary of the Company,
to the Company, SW Bank, or such other Subsidiary of the Company, respectively,
or the respective properties, assets, officers, directors, employees or agents
(in connection with such officers', directors', employees' or agents' activities
on behalf of it) of any of them.
The "Bank" shall mean Pinemont Bank, a Texas banking association.
"Bank Common Stock" shall mean the common stock, par value $0.667, of the
Bank.
"Bank Meeting Date" shall have the meaning as defined in Section 1.4 (e)
hereof.
"Bank Stock Options" shall have the meaning as defined in Recital B hereof.
"Bank's Stock Option Plan" shall have the meaning as defined in Recital B
hereof.
"Bank Personalty" shall have the meaning as defined in Section 3.11 hereof.
"Bank Real Property" shall have the meaning as defined in Section 3.10 (a).
"Certificate" shall have the meaning as defined in Section 1.2(b) hereof.
"Closing" shall have the meaning as defined in Section 2.1 hereof.
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"Closing Date" shall have the meaning as defined in Section 2.1 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of
1986.
"Company" shall mean Southwest Bancorporation of Texas, Inc., a Texas
corporation.
"Company Common Stock" shall mean the Company's Common Stock, $1.00 par
value.
"Contaminant" shall have the meaning as defined in Section 3.23 hereof.
"damages" shall mean all demands, claims, actions or causes of action,
assessments, losses, damages, Liabilities, judgments, awards, fines, sanctions,
penalties, charges, and amount paid in settlement of any such matter, including,
without limitation, interest, penalties, costs, fees and expenses of attorneys,
experts, witnesses, investigators and any other agents.
"director" of the Bank shall have the meaning as defined in Section 3.17
hereof.
"Disclosure Schedule" shall have the meaning as defined in Article III
hereof.
"Dissenter" shall have the meaning as defined in Section 1.3 hereof.
"Dissenting Shares" shall mean outstanding shares of Bank Common Stock
that were not voted in favor of, or otherwise consented to, the Merger and for
which there has been compliance with all of the relevant provisions of 12 U.S.C.
(S) 215a and Article 5.12 of the TBCA, as appropriate, for asserting appraisal
rights.
"Effective Time" shall have the meaning as defined in Section 2.2(a)
hereof.
"employee" of the Bank shall have the meaning as defined in Section 3.17
hereof.
"Employee Agreements" shall have the meaning as defined in Section 3.17
hereof.
"Environmental Law" shall have the meaning as defined in Section 3.23
hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning as defined in Section 1.4(a)
hereof.
"Exchange Ratio" shall have the meaning as defined in Section 1.2(b)
hereof.
"executive officer" shall have the meaning as defined in Section 3.17.
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"FASB" shall have the meaning as defined in Section 3.13(g) hereof.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FDIC Standards" shall have the meaning as defined in Section 3.27 hereof.
"FHA" shall mean the U.S. Federal Housing Authority.
"Governmental Authority" shall mean any foreign, domestic, federal,
territorial, state or local governmental authority, quasi-governmental
authority, court, government or self-regulatory organization , commission,
tribunal, organization or any regulatory, administrative or other agency, or any
political or other subdivision, department or branch of any of the foregoing.
"Governmental Filings" shall have the meaning as defined in Section 3.4(b)
hereof.
"IRCA" shall have the meaning as defined in Section 3.19 hereof.
"joint venture" shall mean with respect to an entity any general or limited
partnership or joint venture an interest in which is owned directly or
indirectly by such entity.
"knowledge" when used with respect to any party means actual knowledge
(after inquiry) of any current executive officer or director of such party or
any of its Subsidiaries or any other officer with supervising responsibility for
the matter to which knowledge refers.
"Liabilities" shall mean obligations of any nature (absolute, accrued,
contingent or otherwise, and whether due or to become due).
"Material Adverse Effect" shall mean any change or effect that would be
material and adverse to the consolidated business, operations, condition
(financial or other), properties or results of operations of a specified Person
and its Subsidiaries, if any, taken as a whole.
"Merger" shall have the meaning as defined in Recital A hereof.
"Multiemployer Plan" shall mean a plan described in Section 3(37) of ERISA.
"NASDAQ" shall have the meaning as defined in Section 1.4(e) hereof.
"OCC" shall mean the Office of the Comptroller of the Currency.
"officer" of the Bank shall have the meaning as defined in Section 3.17
hereof.
"Person" shall include any individual, partnership, joint venture,
corporation, trust or unincorporated organization, any other business entity and
any Governmental Authority, in each case whether acting in an individual,
fiduciary or other capacity.
"Plans" shall have the meaning as defined in Section 3.18(a) hereof.
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"Prospectus/Proxy Statement" shall have the meaning as defined in Section
5.1 hereof.
"Real Estate Owned" shall mean all real estate or loans secured by real
estate that are classified or would be classified as: "covered transactions" or
"loans to facilitate;" "real estate owned;" "in-substance foreclosure;" "in-
substance repossession;" foreclosed real estate; real estate acquisition, or
construction arrangements that are accounted for as investments in real estate;
real estate that is held for sale (or that is intended to be sold within two
years); property formerly but no longer used for the operations of the Bank,
property originally acquired for future expansion but that is no longer intended
to be used for that purpose; real estate acquired in any manner for debts
previously contracted (even if the Bank has not yet received title to the
property), real estate sold when (i) less than 10% of the total sales price is
in cash, (ii) there is financing by the Bank of all or a portion of the sales
price on terms more favorable than those customarily required by the Bank when
it is involved only as a lender, or (iii) the transaction does not transfer from
the Bank to the purchaser the usual risks and all or most of the rewards of
ownership; receivables resulting from sales of other real estate owned accounted
for under the installment, cost recovery, reduced profit, or percentage-of-
completion method of accounting in accordance with FASB Statement No. 66,
"Accounting for Sales of Real Estate," when the buyer's initial investment is
less than 10% of the sales value of the real estate sold; other real estate
owned sold under contract and accounted for under the deposit method of
accounting in accordance with FASB Statement No. 66; and any other similar
category of loan or real estate.
"Registration Statement" shall have the meaning as defined in Section 5.1
hereof.
"Regulatory Approvals" shall have the meaning as defined in Section 5.2(a)
hereof.
"Release" shall have the meaning as defined in Section 3.23 hereof.
"Returns" shall have the meaning as defined in Section 3.16(a)(ii) hereof.
"Scheduled Contracts" shall have the meaning as defined in Section 3.7(a)
hereof.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SFAS" shall mean a Statement of Financial Accounting Standards,
promulgated by the Financial Accounting Standards Board.
"Shareholders" shall have the meaning as defined in Recital A hereof.
"Shareholders' Meeting" shall have the meaning as defined in Section 5.8
hereof.
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"Subsidiary" shall mean, as to any particular parent corporation, any
corporation as to which more than 50% of the outstanding stock having ordinary
voting rights or power (and excluding stock having voting rights only upon the
occurrence of a contingency unless and until such contingency occurs and such
rights are to be exercised) at the time is owned or controlled, directly or
indirectly, by such parent corporation and/or by one or more Subsidiaries, and
any general partnership, limited partnership, association, joint venture
arrangement or trust of any kind with respect to which such parent corporation
or any Subsidiary thereof has an equity or management interest or as to which
any such entity serves as trustee.
"Surviving Association" shall mean SW Bank.
"SW Bank" shall mean Southwest Bank of Texas National Association, a
national banking association.
"SW Delaware" shall mean Southwest Bancorporation of Delaware, Inc., a
Delaware corporation.
"SW Delaware Merger" shall have the meaning as defined in Section 5.24.
"Taxes" shall have the meaning as defined in Section 3.16(a)(i) hereof.
"TBA" shall have the meaning as defined in Section 1.1(a) hereof.
"TBCA" shall have the meaning as defined in Section 1.3 hereof.
"threatened" shall have the meaning as defined in Section 3.14(a) hereof.
"WARN" shall have the meaning as defined in Section 3.19 hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SOUTHWEST BANCORPORATION OF TEXAS, INC.
By: /s/ WALTER E. JOHNSON
----------------------
Walter E. Johnson
Chairman of the Board and Chief Executive Officer
SOUTHWEST BANK OF TEXAS
NATIONAL ASSOCIATION
By: /s/ WALTER E. JOHNSON
----------------------
Walter E. Johnson
Chairman of the Board and Chief Executive Officer
PINEMONT BANK
By: /s/ J. NOLAN BEDFORD
---------------------
J. Nolan Bedford
President
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EXHIBIT A
[To be dated the closing date]
Southwest Bancorporation of Texas, Inc.
4400 Post Oak Parkway
Houston, Texas 77027
Gentlemen:
I have been advised that as of the date hereof I am an "affiliate" of
Pinemont Bank, Houston, Texas (the "Bank"), as that term is defined for purposes
of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933 (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger dated __________________, 1997 (the "Agreement"),
between Southwest Bancorporation of Texas, Inc., a Texas corporation (the
"Company"), and the Bank, providing for the merger of the Bank with and into
Southwest Bank of Texas National Association (the "Merger'), as a result of
which I will receive shares of Company Common Stock (the "Company Shares") in
exchange for the shares of Bank Common Stock owned by me at the Effective Time
of the Merger as defined in the Agreement.
I represent and warrant that:
A. I shall not make any sale, transfer or other disposition of the
Company Shares in violation of the Act or the Rules and Regulations.
B. I know of no plan (written or oral) pursuant to which the holders of
50% or more of the outstanding shares of Bank Common Stock intend to sell or
otherwise dispose of the Company Shares to be received by them in connection
with the Merger. [The following sentence to be included only if the affiliate
is a record or beneficial owner of 5% or more of the outstanding Bank Common
Stock.] I have no present intention or plan to sell or otherwise dispose of a
number of Company Shares which would reduce my holdings of Company Shares to an
amount having, in the aggregate, a value at the time of the Merger of less than
50% of all shares of Bank Common Stock owned by me immediately prior to the
Merger.
C. I have been advised that the issuance of the Company Shares to me
pursuant to the Merger has been registered with the Company under the Act on a
Registration Statement on Form S-4. However, I have also been advised that,
since at the time the Agreement was submitted for a vote of the shareholders of
the Bank, I was an "affiliate" of the Bank, any public offering or sale by me of
any of the Company Shares will, under current law, require either (i) the
further registration under the Act of the Company Shares to be sold or (ii)
compliance with Rule 145 promulgated under the Act or (iii) the availability of
another exemption from such registration.
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<PAGE>
D. I have carefully read this letter and discussed its requirements and
other applicable limitations upon the sale, transfer or other disposition of the
Company Shares, to the extent I felt necessary, with my counsel or counsel for
the Bank.
E. I have carefully read the Agreement and discussed its requirements and
impact upon my ability to sell, transfer or otherwise dispose of the Company
Shares, to the extent I felt necessary, with my counsel or counsel for the Bank.
F. I have been informed by the Company that the distribution by me of the
Company Shares has not been registered under the Act and that the Company Shares
must be held by me indefinitely unless (i) such distribution of the Company
Shares has been registered under the Act, (ii) a sale of the Company Shares is
made in conformity with the volume and other limitations of Rule 145 promulgated
by the Commission under the Act, or (iii) in the opinion of counsel acceptable
to the Company, some other exemption from registration is available with respect
to any such proposed sale, transfer or other disposition of the Company Shares.
G. I have been informed by the Company that I may not transfer, or in any
way reduce my risk with respect to, the Company Shares until such time as the
Company shall have publicly released its first regular earnings report after the
Effective Time which includes the results of the combined operations of the
Company and the Bank for a period of at least thirty (30) days subsequent to the
Effective Time.
H. I understand that the Company is under no obligation to register the
sale, transfer or other disposition of the Company Shares by me or on my behalf,
or to take any other action necessary in order to make compliance with an
exemption from registration available, other than as set forth in the Agreement.
I. I also understand that stop transfer instructions will be given to the
Company's transfer agent with respect to the Company Shares and that there will
be placed on the certificates for the Company Shares, or any substitutions
therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of 1933
applies. The shares represented by this certificate may only be
transferred in accordance with the terms of an agreement dated
______________, 1997, between the registered holder hereof and Southwest
Bancorporation of Texas, Inc., a copy of which agreement is on file at the
principal office of Southwest Bancorporation of Texas, Inc."
J. I also understand that unless the transfer by me of my Company Shares
has been registered under the Act or is a sale made in conformity with the
provisions of Rule 145, the Company reserves the right to put the following
legend on the certificates issued to my transferee:
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<PAGE>
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 and were acquired from a person who
received such shares in a transaction to which Rule 145 promulgated under
the Securities Act of 1933 applies. The shares have been acquired by the
holder not with a view to, or for the resale in connection with, any
distribution thereof, within the meaning of the Securities Act of 1933 and
may not be sold, pledged or otherwise transferred except in accordance with
an exemption from the registration requirements of the Securities Act of
1933."
It is understood and agreed that the legend set forth in paragraphs I and J
above shall be removed by delivery of substitute certificates without such
legend (i) if the undersigned shall have delivered to the Company a copy of a
letter from the staff of the Commission or an opinion of counsel in form and
substance satisfactory to the Company to the effect that such legend is not
required for purposes of the Act or (ii) upon request of the undersigned at any
time after two years following the Effective Time, provided that the undersigned
has not been an "affiliate" of the Company within the three-month period
immediately prior to the date of such request.
Very truly yours,
--------------------------------
ACCEPTED this _____ day
of ____________, 1997, by
SOUTHWEST BANCORPORATION OF TEXAS, INC.
By __________________________
David C. Farries
Executive Vice President
and
Chief Financial Officer
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<PAGE>
EXHIBIT B-1
EMPLOYMENT CONTRACT
This Agreement is made this _____ day of ____________, 1997, between
Southwest Bancorporation of Texas, Inc., a Texas corporation, having a principal
place of business at 5 Post Oak Park, 4400 Post Oak Parkway, Houston, Texas
77027, hereinafter referred to as the "Employer", and J. Nolan Bedford who
resides at 16307 Lakestone Drive, Tomball, Texas 77375, hereinafter referred to
as the "Employee" (this "Agreement").
W I T N E S S E T H:
WHEREAS, references herein to the Employee's employment by the Employer
shall also mean his employment by Southwest Bank of Texas National Association
(the "Bank") and references hereto to payments of any nature to be made by the
Employer to the Employee shall mean that either the Employer will make such
payments or it will cause the Bank to make such payments to the Employee; and
The Employee is willing to render services to the Employer and the Bank on
the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, the Employer and the Employee agree as follows:
ARTICLE I
TERM OF EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts
employment with the Employer for a period of three (3) years beginning on the
Closing Date (as that term is defined in that certain Agreement and Plan of
Merger among the Employer, the Bank and Pinemont Bank dated the _____ day of
_____________, 1997); however, this Agreement may be terminated earlier as
hereinafter provided.
ARTICLE II
DUTIES OF EMPLOYEE
1. Primary Duties. The Employee is hereby employed by Employer and shall
diligently perform such work to the best of his abilities as shall be consistent
with the type and nature of work normally performed by senior banking officers,
which in this case shall include, but not be limited to the following:
(a) Being the senior officer in charge of all lending and personnel
functions and responsibilities over the present nine branch locations of
Pinemont Bank,
A-B1-1
<PAGE>
(b) Being a member of the Bank's Management Committee and Vice
Chairman of the Bank's Board of Directors.
2. Location. Employee shall work at 12130 Hempstead Highway, Houston,
Texas 77092 or such other place or places as may be directed by the Employer and
shall be furnished with an office and other business facilities and services
sufficient to carry out his duties of office.
3. Changes in Duties - Mutual Consent. The duties of the Employee may be
changed from time to time by the mutual consent of the Employer and the Employee
without resulting in a rescission of this Agreement. Notwithstanding any such
change, the employment of the Employee shall be construed as continuing under
this Agreement as modified.
ARTICLE III
ENGAGING IN OTHER EMPLOYMENT
Subject to the below provisions relating to a reduction in the Employee's
work week, the Employee shall devote his entire productive time, ability, and
attention to the business of the Employer. The Employee shall not directly or
indirectly render any services of a business, commercial, or professional nature
relating to banking or financial matters to any other person or organization,
whether for compensation or otherwise, without the prior written consent of the
Employer; whether employed on a full time basis or part time basis.
ARTICLE IV
COMPENSATION
1. Basic Compensation. As compensation for employment services rendered
under this Agreement, the Employee shall be entitled to receive from the
Employer a salary ("Base Salary") of $14,797.92 per month prorated for any
partial employment period during the entire period of this agreement following
the Closing Date; and
2. Additional Compensation.
(a) Salary Increases, Employee Bonus Plan, Stock Option Plans, 401(k)
Plan and Health Insurance. Other than the Base Salary set forth in IV.1
above, and the reimbursements and payments set forth in Article V, Employee
shall be paid additional compensation from the Employer for services
rendered hereunder as the compensation may be adjusted upward from time to
time at the time Employer adjusts its normal salaries to other senior
officers; provided, however, that any such additional compensation shall be
determined in the sole discretion of the Employer. Furthermore, the
Employee shall be included in the Employer's employee bonus, stock option
plan, 401(k) plan and Health Insurance plan effective as of the Closing
Date in the same manner comparable to the Bank's other senior officers.
A-B1-2
<PAGE>
3. Vacation, Etc. Employee shall be entitled to four (4) weeks vacation
per year commencing upon the Closing Date, and shall receive the same sick and
other leave rights as afforded other senior officers of Employers.
4. Salary Adjustments. Employee's salary and fringe benefits mentioned
above shall continue as described above; however, in the event Employer reduces
or cancels any of Employee's fringe benefits (i.e. - health insurance, car
allowance, etc.), other than reductions and cancellations which are also made
with respect to other similarly situated employees, then Employee's salary shall
be increased to equal, after tax, such reduction or cancellation. Such benefits
shall include a monthly automobile allowance of $500.00.
5. Director of the Bank. Employee shall be elected a director of the
Bank and shall be paid regular directors' fees and shall be granted all other
benefits which are customarily received by directors of the Bank.
ARTICLE V
REIMBURSEMENT OF EMPLOYEE BUSINESS EXPENSES
1. Out of Pocket Expenses. The Employee is authorized to incur
reasonable business expenses for promoting the business of the Employer,
including expenditures for cellular telephone, entertainment and travel and
monthly dues and costs for maintaining Employee's membership at Champions
Country Club and Golf Course. The Employer and Employee will mutually determine
a reasonable range for such business expenses. The Employer will reimburse the
Employee from time to time for all such business expenses provided that the
Employee presents the Employer with appropriate documentation of such
expenditures in accordance with the Employer's established procedures relating
to such reimbursements.
ARTICLE VI
PROPERTY RIGHTS
1. Trade Secrets and Confidentiality. During the term of employment, the
Employee will have access to and become familiar with various trade secrets,
consisting of customer lists, analytical information, financial data, and
compilations of information, records and specifications, owned by the Employer
and regularly used in the operation of the business of the Employer.
Accordingly, the Employee agrees that he will not, at any time during or after
his employment by the Employer, disclose any such trade secrets to any third
party, directly or indirectly, nor use them in any way, during the term of this
Agreement, except as required in the course of his employment with the Employer.
All files, records, documents, drawings, specification, equipment, and similar
items relating to the business of the Employer, whether or not prepared by the
Employee, shall remain the exclusive property of the Employer and shall not be
removed from the premises of the Employer under any circumstances without the
prior written consent of the Employer. Notwithstanding the foregoing, if
Employee's employment with Employer is terminated, nothing contained herein
shall be deemed to prevent the Employee from contacting his previous customers
for the purpose of obtaining their business on behalf of his successor employer.
The Employee
A-B1-3
<PAGE>
acknowledges that, as a result of his employment by Employer, he may from time
to time have access to, or knowledge of various such trade secrets of third
parties. The Employee agrees to preserve and protect the confidentiality of such
third-party trade secrets to the same extent, and on the same basis as Employer
trade secrets.
2. Processes and Improvements. The Employee agrees that he will promptly
from time to time fully inform and disclose to the Employer all inventions,
processes, designs, improvements and discoveries which he now has or may
hereafter have during the term of this Agreement which pertain or relate to the
business of the Employer or to any experimental work carried on by the Employer,
whether conceived by the Employee alone or with others and whether or not
conceived during regular working hours. All such inventions, processes,
designs, improvements and discoveries shall be the exclusive property of the
Employer. The Employee shall assist the Employer in obtaining patents on all
such inventions, designs, improvements and discoveries deemed patentable by the
Employer and shall execute all documents and do all things necessary to obtain
letters patent, vest the Employer with full and exclusive title thereto, and
protect the same against infringement by others.
ARTICLE VII
TERMINATION RIGHTS
1. Employer's Termination Rights. The Employer shall have the right to
terminate the Employee, but only for good cause. For purposes of this
Agreement, "good cause" shall mean:
(a) Employee's willful and repeated failure to perform his duties
under Article II.1 of this Agreement;
(b) Employee's willful and repeated violation of Employer's written
policies and procedures;
(c) Habitual use of alcohol or drugs that prevents Employee from
performing his duties under Article II.1 of this Agreement;
(d) Conviction of a felony, or conviction of a misdemeanor involving
active and willful fraud or moral turpitude; or
(e) Acts of gross disloyalty to Employer, including but not limited to
theft, embezzlement, intentional unauthorized disclosure of confidential
information or engaging in activity competitive with or detrimental to that
of the Bank.
In the event of the termination for good cause factors a., b., c., d. or e.
above the Employer's obligations to pay the compensation described in Article IV
shall automatically cease. In the event of death or disability of Employee
during the term of this Agreement, the Employer's obligation to pay compensation
described in Article IV shall automatically cease. As used herein, "disability"
means that the Employee is unable to perform the essential functions of his job
because he has become permanently disabled within the meaning of, and actually
begins to receive disability
A-B1-4
<PAGE>
benefits pursuant to, the long-term disability plan in effect for senior
executives of the Bank or, if applicable, employees of the Bank at the time of
the "disability."
ARTICLE IX
GENERAL PROVISIONS
1. Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to the parties at the addresses appearing in the
introductory paragraph of this Agreement, but each party may change his address
by written notice in accordance with this paragraph. Notices delivered
personally shall be deemed communicated as of actual receipt; mailed notices
shall be deemed communicated as of three (3) days after mailing as above
prescribed.
2. Inclusion of Entire Agreement Herein. This Agreement supersedes any
and all other agreements, either oral or in writing, between the parties hereto
with respect to the employment of the Employee by the Employer and contains all
of the covenants and agreements between the parties with respect to such
employment in any manner whatsoever.
3. Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
4. Modification. This Agreement shall not be amended, modified, or
altered in any manner except in a writing signed by both parties.
5. Failure to Enforce; Not Waiver. Any failure or delay on the part of
either the Employer or the Employee to exercise any remedy or right under this
Agreement shall not operate as a waiver. The failure of either party to require
performance of any of the terms, covenants, or provisions of this Agreement by
other party shall not constitute a waiver of any of the rights under the
Agreement. No forbearance by either party to exercise any rights or privileges
under this Agreement shall be construed as a waiver, but all rights and
privileges shall continue in effect as if no forbearance had occurred. No
covenant or condition of this Agreement may be waived except by the written
consent of the waiving party. Any such written waiver of any term of this
Agreement shall be effective only in the specific instance and for the specific
purpose given.
6. Partial Invalidity. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall remain in full force and effect, as if this Agreement
had been executed without any such invalid provisions having been included.
Such invalid provision shall be reformed in a manner that is both (i) legal and
enforceable, and (ii) most closely represents the parties' original intent.
7. Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which he may be entitled.
A-B1-5
<PAGE>
8. Counterparts. This Agreement has been executed in multiple
counterparts, each of which shall be deemed an original, but both of which shall
constitute one and the same instrument.
9. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Employer and the Employee, and their respective
heirs, executors, administrators, successors and assigns, including, without
limitation, any successor by merger, consolidation or stock purchase of the
Employer and any entity or person that acquires all or substantially all of the
assets of the Employer.
AGREEMENT FOR BINDING ARBITRATION. The parties agree to be bound by the
terms and provision of the Arbitration Program of even date herewith, which is
attached as Annex A hereto and incorporated by reference herein and is
acknowledged as received by the parties pursuant to which any and all disputes
(as defined in the Arbitration Program and/or Arbitration Agreement) shall be
resolved by mandatory binding arbitration upon the request of any party.
EMPLOYER:
SOUTHWEST BANCORPORATION OF TEXAS, INC.
----------------------------------------
By:
Title:
EMPLOYEE:
----------------------------------------
J. NOLAN BEDFORD
A-B1-6
<PAGE>
STATE OF TEXAS (S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on this _____ day of
______________, 19___, by __________________________ of SOUTHWEST
BANCORPORATION OF TEXAS, INC., and in the capacity therein stated.
----------------------------------------
Notary Public - State of Texas
----------------------------------------
Typed or Printed Name of Notary
My Commission Expires:
------------------
STATE OF TEXAS (S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on this _____ day of
_________________, 1997, by J. NOLAN BEDFORD.
----------------------------------------
Notary Public - State of Texas
----------------------------------------
Typed or Printed Name of Notary
My Commission Expires:
__________________
A-B1-7
<PAGE>
ANNEX A
ARBITRATION PROGRAM
Re: Employment Contract dated _____________, 1997, by and between
Southwest Bancorporation of Texas, Inc., as Employer and J. Nolan
Bedford, as Employee
In consideration of the premises and the mutual agreements herein, the
undersigned agree as follows:
Binding Arbitration. Notwithstanding any provision of any Documents
(defined below) to the contrary, upon the request of any of the undersigned
(collectively called the "parties" and individually called a "party"), whether
made before or after the institution of any legal proceeding, any action,
dispute, claim or controversy of any kind (for example, whether in contract or
in tort, under statutory or common law, or legal or equitable) now existing or
hereafter arising between or among the parties in any way arising out of,
pertaining to or in connection with (1) the referenced contract, any related
agreements, documents or instruments (collectively, the "Documents") or any
transaction contemplated thereby, or (2) all past, present and future contracts
or agreements and all other aspects of any past, present or future relationships
of the parties to the Documents shall be resolved by mandatory and binding
arbitration in accordance with the terms of this Arbitration Program. The
occurrence of any of the foregoing matters shall be referred to as a "Dispute."
Any party to this Arbitration Program may bring by summary proceedings (for
example, a plea in abatement or motion to stay further proceedings) an action in
court to compel arbitration of any Dispute.
Governing Rules. Notwithstanding any provision in any Documents to the
contrary, all Disputes between parties shall be resolved by mandatory and
binding arbitration administered by the American Arbitration Association (the
"AAA") in accordance with, and in the following order of priority: (1) the
terms of this Arbitration Program, (2) in the Commercial Arbitration Rules of
the AAA, (3) the Federal Arbitration Act (Title 9 of the United States Code) and
(4) to the extent the foregoing are inapplicable, unenforceable or invalid,
under the laws of the State of Texas. The validity and enforceability of this
Arbitration Program shall be determined in accordance with this same order of
priority. To the extent that any inconsistency exists between this Arbitration
Program and such statutes and rules, this Arbitration Program shall control.
Judgment upon the award rendered by the arbitrators may be entered in and
enforced by any court having jurisdiction and in accordance with the practice of
such court; provided, however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protection afforded to it under
12 U.S.C. Sec. 91, Texas Banking Code art. 342-6-09 or 342-705, or any other
protection provided by the laws of Texas or the United States.
Arbitrator Powers and Qualifications; Awards; Modification or Vacation of
Award. Arbitrators are empowered to resolved Disputes by summary rulings
substantially similar to summary judgments and motions to dismiss. Arbitrators
shall resolve all Disputes in accordance with the applicable substantive law.
Any arbitrator selected shall be required to be a practicing attorney licensed
to practice law in the State of Texas and shall be required to be experienced
and
A-B1-8
<PAGE>
knowledgeable in the substantive laws applicable to the subject matter of the
Dispute. With respect to a Dispute in which the claims or amounts in controversy
do not exceed $1,000,000, a single arbitrator shall be chosen and shall resolved
the Dispute. In such case, the arbitrator shall be required to make specific,
written findings of fact, and shall have authority to render an award up to but
not to exceed $1,000,000, including all damages of any kind whatsoever,
including costs, fees and expenses. A dispute involving claims or amounts in
controversy exceeding $1,000,000, shall be decided by a majority vote of a panel
of three arbitrators (an "Arbitration Panel"), the determination of any two of
the three arbitrators constituting the determination of the Arbitration Panel,
provided, however, that all three Arbitrators on the Arbitration Panel, may
grant any remedy or relief deemed just and equitable and within the scope of
this Arbitration Program and may also grant such ancillary relief as is
necessary to make effective any award. Arbitration Panels shall be required to
make specific, written findings of fact and conclusions of law, and in such
proceedings before an Arbitration Panel only, the parties shall have the
additional right to seek vacation or modification of any award of an Arbitration
Panel that is based in whole, or in part, on an incorrect or erroneous ruling of
law by appeal to a Federal or State Court of Appeals, following the entry of
judgment on the award in Federal or State District Court, as appropriate. For
these purposes, the award and judgment entered by the Federal or State District
Court shall be considered to be the same as the award and judgment of the
Arbitration Panel. All requirements applicable to appeals from any Federal or
State District Court judgment shall be applicable to appeals from judgments
entered on decisions rendered by Arbitration Panels. The Appellate Courts shall
have the power and authority to vacate or modify an award based upon a
determination that there has been an incorrect or erroneous ruling of law. The
Appellate Court shall also have the power to reverse and/or remand the decision
of an Arbitration Panel. Subject to the foregoing, the determination of an
Arbitrator or Arbitration Panel shall be binding on all parties and shall not be
subject to further review or appeal except as otherwise allowed by applicable
law.
Other Matters and Miscellaneous. To the maximum extent practicable, the
AAA, the Arbitrator (or the Arbitration Panel, as appropriate) and the parties
shall take any action necessary to require that an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of the Dispute with
AAA. Arbitration proceedings hereunder shall be conducted in Houston, Texas.
Arbitrators shall be empowered to impose sanctions and to take such other
actions as they deem necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure and
applicable law. With respect to any Dispute, each party agrees that all
discovery activities shall be expressly limited to matters directly relevant to
the Dispute and any Arbitrator, Arbitration Panel and the AAA shall be required
to fully enforce this requirement. This Arbitration Program constitutes the
entire agreement of the parties with respect to its subject matter and
supersedes all prior discussions, arrangements, negotiations and other
communications on dispute resolution. The provisions of this Arbitration
Program shall survive any termination, amendment, or expiration of the
Documents, unless the parties otherwise expressly agree in writing. To the
extent permitted by applicable law, Arbitrators, including any Arbitration
Panel, shall have the power to award recovery of all costs and fees (including
attorneys' fees, administrative fees, and arbitrators' fees) to the prevailing
party. This Arbitration Program may be amended, changed or modified only by the
express provisions of a writing which specifically refers to this Arbitration
Program and which is signed by all the parties hereto. If any term, covenant,
condition or provision of this Arbitration Program is found to be unlawful,
invalid or unenforceable, such illegality or invalidity or unenforceability
shall not affect the legality, validity or enforceability of the remaining
A-B1-9
<PAGE>
parts of this Arbitration Program, and all such remaining parts hereof shall be
valid and enforceable and have full force and effect as if the illegal, invalid
or unenforceable part had not been included. The captions or headings in this
Arbitration Program are for convenience of reference only and are not intended
to constitute any part of the body or text of this Arbitration Program. Each
party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information required in the ordinary
course of business of the parties or by applicable law or regulation. To the
maximum extent permitted by law, this Arbitration Program modifies and
supersedes any and all prior agreements for arbitration between the parties.
Executed in Houston, Texas, this _____ day of _____________, 1997.
SIGNATURE OF EMPLOYER: SIGNATURE OF EMPLOYEE:
SOUTHWEST BANCORPORATION
OF TEXAS, INC.
- ------------------------------- --------------------------------
By: J. Nolan Bedford
Title:
A-B1-10
<PAGE>
EXHIBIT B-2
EMPLOYMENT CONTRACT
This Agreement is made this _____ day of ____________, 1997, between
Southwest Bancorporation of Texas, Inc., a Texas corporation, having a principal
place of business at 5 Post Oak Park, 4400 Post Oak Parkway, Houston, Texas
77027, hereinafter referred to as the "Employer", and Maurice L. Junod who
resides at 17706 Deep Brook, Spring, Texas 77379, hereinafter referred to as the
"Employee" (this "Agreement").
W I T N E S S E T H:
WHEREAS, references herein to the Employee's employment by the Employer
shall also mean his employment by Southwest Bank of Texas National Association
(the "Bank") and references hereto to payments of any nature to be made by the
Employer to the Employee shall mean that either the Employer will make such
payments or it will cause the Bank to make such payments to the Employee; and
The Employee is willing to render services to the Employer and the Bank on
the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, the Employer and the Employee agree as follows:
ARTICLE I
TERM OF EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts
employment with the Employer for a period of three (3) years beginning on the
Closing Date (as that term is defined in that certain Agreement and Plan of
Merger among the Employer, the Bank and Pinemont Bank dated the _____ day of
_____________, 1997); however, this Agreement may be terminated earlier as
hereinafter provided.
ARTICLE II
DUTIES OF EMPLOYEE
1. Primary Duties. The Employee is hereby employed by Employer and shall
perform such work to the best of his abilities as shall be consistent with the
type and nature of work normally performed by senior banking officers, which in
this case shall include, but not be limited to the following:
(a) Being the senior officer supervising all lending and personnel
functions and responsibilities over the present nine branch locations of
Pinemont Bank, whose immediate supervisor shall be J. Nolan Bedford or his
successor.
A-B2-1
<PAGE>
2. Location. Employee shall work at 12130 Hempstead Highway, Houston,
Texas 77092 or such other place or places as may be directed by the Employer and
shall be furnished with an office and other business facilities and services
sufficient to carry out his duties of office.
3. Changes in Duties - Mutual Consent. The duties of the Employee may be
changed from time to time by the mutual consent of the Employer and the Employee
without resulting in a rescission of this Agreement. Notwithstanding any such
change, the employment of the Employee shall be construed as continuing under
this Agreement as modified.
ARTICLE III
ENGAGING IN OTHER EMPLOYMENT
Subject to the below provisions relating to a reduction in the Employee's
work week, the Employee shall devote his entire productive time, ability, and
attention to the business of the Employer. The Employee shall not directly or
indirectly render any services of a business, commercial, or professional nature
relating to banking or financial matters to any other person or organization,
whether for compensation or otherwise, without the prior written consent of the
Employer; whether employed on a full time basis or part time basis.
ARTICLE IV
COMPENSATION
1. Basic Compensation. As compensation for employment services rendered
under this Agreement, the Employee shall be entitled to receive from the
Employer a salary ("Base Salary") of $13,058.33 per month prorated for any
partial employment period during the entire period of this agreement following
the Closing Date; and
2. Additional Compensation.
(a) Salary Increases, Employee Bonus Plan, Stock Option Plans, 401(k)
Plan and Health Insurance. Other than the Base Salary set forth in IV.1
above, and the reimbursements and payments set forth in Article V, Employee
shall be paid additional compensation from the Employer for services
rendered hereunder as the compensation may be adjusted upward from time to
time at the time Employer adjusts its normal salaries to other senior
officers; provided, however, that any such additional compensation shall be
determined in the sole discretion of the Employer. Furthermore, the
Employee shall be included in the Employer's employee bonus, stock option
plan, 401(k) plan and Health Insurance plan effective as of the Closing
Date in the same manner comparable to the Bank's other senior officers.
3. Vacation, Etc. Employee shall be entitled to four (4) weeks vacation
per year commencing upon the Closing Date, and shall receive the same sick and
other leave rights as afforded other senior officers of Employers.
A-B2-2
<PAGE>
4. Salary Adjustments. Employee's salary and fringe benefits mentioned
above shall continue as described above; however, in the event Employer reduces
or cancels any of Employee's fringe benefits (i.e. - health insurance, car
allowance, etc.), other than reductions and cancellations which are also made
with respect to other similarly situated employees, then Employee's salary shall
be increased to equal, after tax, such reduction or cancellation. Such benefits
shall include a monthly automobile allowance of $500.00.
ARTICLE V
REIMBURSEMENT OF EMPLOYEE BUSINESS EXPENSES
1. Out of Pocket Expenses. The Employee is authorized to incur
reasonable business expenses for promoting the business of the Employer,
including expenditures for cellular telephone, entertainment and travel and
monthly dues and costs for maintaining Employee's membership at Woodlands
Country Club. The Employer and Employee will mutually determine a reasonable
range for such business expenses. The Employer will reimburse the Employee from
time to time for all such business expenses provided that the Employee presents
the Employer with appropriate documentation of such expenditures in accordance
with the Employer's established procedures relating to such reimbursements.
ARTICLE VI
PROPERTY RIGHTS
1. Trade Secrets and Confidentiality. During the term of employment, the
Employee will have access to and become familiar with various trade secrets,
consisting of customer lists, analytical information, financial data, and
compilations of information, records and specifications, owned by the Employer
and regularly used in the operation of the business of the Employer.
Accordingly, the Employee agrees that he will not, at any time during or after
his employment by the Employer, disclose any such trade secrets to any third
party, directly or indirectly, nor use them in any way, during the term of this
Agreement, except as required in the course of his employment with the Employer.
All files, records, documents, drawings, specification, equipment, and similar
items relating to the business of the Employer, whether or not prepared by the
Employee, shall remain the exclusive property of the Employer and shall not be
removed from the premises of the Employer under any circumstances without the
prior written consent of the Employer. Notwithstanding the foregoing, if
Employee's employment with Employer is terminated, nothing contained herein
shall be deemed to prevent the Employee from contacting his previous customers
for the purpose of obtaining their business on behalf of his successor employer.
The Employee acknowledges that, as a result of his employment by Employer, he
may from time to time have access to, or knowledge of various such trade secrets
of third parties. The Employee agrees to preserve and protect the
confidentiality of such third-party trade secrets to the same extent, and on the
same basis as Employer trade secrets.
A-B2-3
<PAGE>
2. Processes and Improvements. The Employee agrees that he will promptly
from time to time fully inform and disclose to the Employer all inventions,
processes, designs, improvements and discoveries which he now has or may
hereafter have during the term of this Agreement which pertain or relate to the
business of the Employer or to any experimental work carried on by the Employer,
whether conceived by the Employee alone or with others and whether or not
conceived during regular working hours. All such inventions, processes,
designs, improvements and discoveries shall be the exclusive property of the
Employer. The Employee shall assist the Employer in obtaining patents on all
such inventions, designs, improvements and discoveries deemed patentable by the
Employer and shall execute all documents and do all things necessary to obtain
letters patent, vest the Employer with full and exclusive title thereto, and
protect the same against infringement by others.
ARTICLE VII
TERMINATION RIGHTS
1. Employer's Termination Rights. The Employer shall have the right to
terminate the Employee, but only for good cause. For purposes of this
Agreement, "good cause" shall mean:
(a) Employee's willful and repeated failure to perform his duties
under Article II.1 of this Agreement;
(b) Employee's willful and repeated violation of Employer's written
policies and procedures;
(c) Habitual use of alcohol or drugs that prevents Employee from
performing his duties under Article II.1 of this Agreement;
(d) Conviction of a felony, or conviction of a misdemeanor involving
active and willful fraud or moral turpitude; or
(e) Acts of gross disloyalty to Employer, including but not limited to
theft, embezzlement, intentional unauthorized disclosure of confidential
information or engaging in activity competitive with or detrimental to that
of the Bank.
In the event of the termination for good cause factors a., b., c., d. or e.
above the Employer's obligations to pay the compensation described in Article IV
shall automatically cease. In the event of death or disability of Employee
during the term of this Agreement, the Employer's obligation to pay compensation
described in Article IV shall automatically cease. As used herein, "disability"
means that the Employee is unable to perform the essential functions of his job
because he has become permanently disabled within the meaning of, and actually
begins to receive disability benefits pursuant to, the long-term disability plan
in effect for senior executives of the Bank or, if applicable, employees of the
Bank at the time of the "disability."
A-B2-4
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
1. Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to the parties at the addresses appearing in the
introductory paragraph of this Agreement, but each party may change his address
by written notice in accordance with this paragraph. Notices delivered
personally shall be deemed communicated as of actual receipt; mailed notices
shall be deemed communicated as of three (3) days after mailing as above
prescribed.
2. Inclusion of Entire Agreement Herein. This Agreement supersedes any
and all other agreements, either oral or in writing, between the parties hereto
with respect to the employment of the Employee by the Employer and contains all
of the covenants and agreements between the parties with respect to such
employment in any manner whatsoever.
3. Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
4. Modification. This Agreement shall not be amended, modified, or
altered in any manner except in a writing signed by both parties.
5. Failure to Enforce; Not Waiver. Any failure or delay on the part of
either the Employer or the Employee to exercise any remedy or right under this
Agreement shall not operate as a waiver. The failure of either party to require
performance of any of the terms, covenants, or provisions of this Agreement by
other party shall not constitute a waiver of any of the rights under the
Agreement. No forbearance by either party to exercise any rights or privileges
under this Agreement shall be construed as a waiver, but all rights and
privileges shall continue in effect as if no forbearance had occurred. No
covenant or condition of this Agreement may be waived except by the written
consent of the waiving party. Any such written waiver of any term of this
Agreement shall be effective only in the specific instance and for the specific
purpose given.
6. Partial Invalidity. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall remain in full force and effect, as if this Agreement
had been executed without any such invalid provisions having been included.
Such invalid provision shall be reformed in a manner that is both (i) legal and
enforceable, and (ii) most closely represents the parties' original intent.
7. Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which he may be entitled.
8. Counterparts. This Agreement has been executed in multiple
counterparts, each of which shall be deemed an original, but both of which shall
constitute one and the same instrument.
A-B2-5
<PAGE>
9. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Employer and the Employee, and their respective
heirs, executors, administrators, successors and assigns, including, without
limitation, any successor by merger, consolidation or stock purchase of the
Employer and any entity or person that acquires all or substantially all of the
assets of the Employer.
AGREEMENT FOR BINDING ARBITRATION. The parties agree to be bound by the
terms and provision of the Arbitration Program of even date herewith, which is
attached as Annex A hereto and incorporated by reference herein and is
acknowledged as received by the parties pursuant to which any and all disputes
(as defined in the Arbitration Program and/or Arbitration Agreement) shall be
resolved by mandatory binding arbitration upon the request of any party.
EMPLOYER:
SOUTHWEST BANCORPORATION OF TEXAS, INC.
----------------------------------------
By:
Title:
EMPLOYEE:
----------------------------------------
MAURICE L. JUNOD
STATE OF TEXAS (S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on this _____ day of
______________, 19___, by __________________________ of SOUTHWEST
BANCORPORATION OF TEXAS, INC., and in the capacity therein stated.
----------------------------------------
Notary Public - State of Texas
----------------------------------------
Typed or Printed Name of Notary
My Commission Expires:
------------------
A-B2-6
<PAGE>
STATE OF TEXAS (S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on this _____ day of
_________________, 1997, by MAURICE L. JUNOD.
----------------------------------------
Notary Public - State of Texas
----------------------------------------
Typed or Printed Name of Notary
My Commission Expires:
------------------
A-B2-7
<PAGE>
ANNEX A
ARBITRATION PROGRAM
Re: Employment Contract dated _____________, 1997, by and between
Southwest Bancorporation of Texas, Inc., as Employer and Maurice L.
Junod, as Employee
In consideration of the premises and the mutual agreements herein, the
undersigned agree as follows:
Binding Arbitration. Notwithstanding any provision of any Documents
(defined below) to the contrary, upon the request of any of the undersigned
(collectively called the "parties" and individually called a "party"), whether
made before or after the institution of any legal proceeding, any action,
dispute, claim or controversy of any kind (for example, whether in contract or
in tort, under statutory or common law, or legal or equitable) now existing or
hereafter arising between or among the parties in any way arising out of,
pertaining to or in connection with (1) the referenced contract, any related
agreements, documents or instruments (collectively, the "Documents") or any
transaction contemplated thereby, or (2) all past, present and future contracts
or agreements and all other aspects of any past, present or future relationships
of the parties to the Documents shall be resolved by mandatory and binding
arbitration in accordance with the terms of this Arbitration Program. The
occurrence of any of the foregoing matters shall be referred to as a "Dispute."
Any party to this Arbitration Program may bring by summary proceedings (for
example, a plea in abatement or motion to stay further proceedings) an action in
court to compel arbitration of any Dispute.
Governing Rules. Notwithstanding any provision in any Documents to the
contrary, all Disputes between parties shall be resolved by mandatory and
binding arbitration administered by the American Arbitration Association (the
"AAA") in accordance with, and in the following order of priority: (1) the
terms of this Arbitration Program, (2) in the Commercial Arbitration Rules of
the AAA, (3) the Federal Arbitration Act (Title 9 of the United States Code) and
(4) to the extent the foregoing are inapplicable, unenforceable or invalid,
under the laws of the State of Texas. The validity and enforceability of this
Arbitration Program shall be determined in accordance with this same order of
priority. To the extent that any inconsistency exists between this Arbitration
Program and such statutes and rules, this Arbitration Program shall control.
Judgment upon the award rendered by the arbitrators may be entered in and
enforced by any court having jurisdiction and in accordance with the practice of
such court; provided, however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protection afforded to it under
12 U.S.C. Sec. 91, Texas Banking Code art. 342-6-09 or 342-705, or any other
protection provided by the laws of Texas or the United States.
Arbitrator Powers and Qualifications; Awards; Modification or Vacation of
Award. Arbitrators are empowered to resolved Disputes by summary rulings
substantially similar to summary judgments and motions to dismiss. Arbitrators
shall resolve all Disputes in accordance with the applicable substantive law.
Any arbitrator selected shall be required to be a practicing attorney licensed
to practice law in the State of Texas and shall be required to be experienced
and
A-B2-8
<PAGE>
knowledgeable in the substantive laws applicable to the subject matter of the
Dispute. With respect to a Dispute in which the claims or amounts in controversy
do not exceed $1,000,000, a single arbitrator shall be chosen and shall resolved
the Dispute. In such case, the arbitrator shall be required to make specific,
written findings of fact, and shall have authority to render an award up to but
not to exceed $1,000,000, including all damages of any kind whatsoever,
including costs, fees and expenses. A dispute involving claims or amounts in
controversy exceeding $1,000,000, shall be decided by a majority vote of a panel
of three arbitrators (an "Arbitration Panel"), the determination of any two of
the three arbitrators constituting the determination of the Arbitration Panel,
provided, however, that all three Arbitrators on the Arbitration Panel, may
grant any remedy or relief deemed just and equitable and within the scope of
this Arbitration Program and may also grant such ancillary relief as is
necessary to make effective any award. Arbitration Panels shall be required to
make specific, written findings of fact and conclusions of law, and in such
proceedings before an Arbitration Panel only, the parties shall have the
additional right to seek vacation or modification of any award of an Arbitration
Panel that is based in whole, or in part, on an incorrect or erroneous ruling of
law by appeal to a Federal or State Court of Appeals, following the entry of
judgment on the award in Federal or State District Court, as appropriate. For
these purposes, the award and judgment entered by the Federal or State District
Court shall be considered to be the same as the award and judgment of the
Arbitration Panel. All requirements applicable to appeals from any Federal or
State District Court judgment shall be applicable to appeals from judgments
entered on decisions rendered by Arbitration Panels. The Appellate Courts shall
have the power and authority to vacate or modify an award based upon a
determination that there has been an incorrect or erroneous ruling of law. The
Appellate Court shall also have the power to reverse and/or remand the decision
of an Arbitration Panel. Subject to the foregoing, the determination of an
Arbitrator or Arbitration Panel shall be binding on all parties and shall not be
subject to further review or appeal except as otherwise allowed by applicable
law.
Other Matters and Miscellaneous. To the maximum extent practicable, the
AAA, the Arbitrator (or the Arbitration Panel, as appropriate) and the parties
shall take any action necessary to require that an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of the Dispute with
AAA. Arbitration proceedings hereunder shall be conducted in Houston, Texas.
Arbitrators shall be empowered to impose sanctions and to take such other
actions as they deem necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure and
applicable law. With respect to any Dispute, each party agrees that all
discovery activities shall be expressly limited to matters directly relevant to
the Dispute and any Arbitrator, Arbitration Panel and the AAA shall be required
to fully enforce this requirement. This Arbitration Program constitutes the
entire agreement of the parties with respect to its subject matter and
supersedes all prior discussions, arrangements, negotiations and other
communications on dispute resolution. The provisions of this Arbitration
Program shall survive any termination, amendment, or expiration of the
Documents, unless the parties otherwise expressly agree in writing. To the
extent permitted by applicable law, Arbitrators, including any Arbitration
Panel, shall have the power to award recovery of all costs and fees (including
attorneys' fees, administrative fees, and arbitrators' fees) to the prevailing
party. This Arbitration Program may be amended, changed or modified only by the
express provisions of a writing which specifically refers to this Arbitration
Program and which is signed by all the parties hereto. If any term, covenant,
condition or provision of this Arbitration Program is found to be unlawful,
invalid or unenforceable, such illegality or invalidity or unenforceability
shall not affect the legality, validity or enforceability of the remaining
A-B2-9
<PAGE>
parts of this Arbitration Program, and all such remaining parts hereof shall be
valid and enforceable and have full force and effect as if the illegal, invalid
or unenforceable part had not been included. The captions or headings in this
Arbitration Program are for convenience of reference only and are not intended
to constitute any part of the body or text of this Arbitration Program. Each
party agrees to keep all Disputes and arbitration proceedings strictly
confidential, except for disclosures of information required in the ordinary
course of business of the parties or by applicable law or regulation. To the
maximum extent permitted by law, this Arbitration Program modifies and
supersedes any and all prior agreements for arbitration between the parties.
Executed in Houston, Texas, this _____ day of _____________, 1997.
SIGNATURE OF EMPLOYER: SIGNATURE OF EMPLOYEE:
SOUTHWEST BANCORPORATION
OF TEXAS, INC.
_______________________________ ________________________________
By: Maurice L. Junod
Title:
A-B2-10
<PAGE>
EXHIBIT C
OPINION OF COUNSEL FOR THE COMPANY
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Texas. SW Bank is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States of America. The Company owns directly all of the outstanding capital
stock of SW Bank. Each of the Company and SW Bank has the corporate power to
own or lease its properties and to carry on its business as currently conducted,
and is not required to be licensed or qualified to do business as a foreign
corporation in any jurisdiction in which the failure to be so licensed,
qualified or in good standing would have a Material Adverse Effect on the
Company.
2. The authorized capital stock of the Company consists of 1,000,000
shares of Preferred Stock, $.01 par value, none of which shares were issued as
of March 31, 1997, and 50,000,000 Company Common Stock, of which [9,390,933]
shares were issued and outstanding as of March 31, 1997. All outstanding shares
of Company Common Stock have been duly authorized and validly issued, are fully
paid and nonassessable and have not been issued in violation of the preemptive
rights of any person. The shares of Company Common Stock to be issued to the
Shareholders pursuant to the provisions of the Agreement have been duly
authorized, will be validly issued, fully paid and nonassessable and will not be
issued in violation of the preemptive rights of any person.
3. The Company has full power and authority to execute and deliver the
Agreement and to consummate the transactions contemplated thereby. The
Agreement has been duly authorized by all necessary corporate action on the part
of the Company and SW Bank, has been duly and validly executed and delivered by
and constitutes the valid and binding agreement of the Company and SW Bank,
enforceable against the Company and SW Bank in accordance with its terms, except
to the extent that such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting enforcement of
creditors' rights generally and by general principles of equity (whether applied
at law or in equity).
4. The Company and SW Bank have received approval from all necessary
governmental agencies and authorities (including the Federal Reserve, the OCC
and the Texas Banking Commissioner) for the consummation of the transactions
contemplated by the Agreement. Neither the execution nor delivery of the
Agreement nor the consummation by the Company and SW Bank of the transactions
contemplated thereby, nor the compliance with and fulfillment of the terms and
provisions thereof by the Company and SW Bank will conflict with, or result in a
breach of, any term, condition or provisions of, or constitute a default under,
(a) the Articles of Incorporation or Bylaws of the Company, (b) the Articles of
Association or Bylaws of SW Bank, (c) to our knowledge, any material agreement
or instrument to which the Company or SW Bank is a party or by which either of
them is bound, or (d) to our knowledge, any material order, judgment, or decree
to which the Company or SW Bank is subject, or result in the creation of any
material lien, charge or encumbrance on any properties of the Company or SW
Bank.
A-C-1
<PAGE>
EXHIBIT D
OPINION OF COUNSEL FOR THE BANK
1. The Bank is a Texas banking association, duly organized and validly
existing under the laws of the State of Texas, has the corporate power to
own or lease its properties and to carry on its business as currently
conducted, and is not required to be licensed or qualified to do business
as a foreign corporation in any jurisdiction in which the failure to be so
licensed, qualified or in good standing would have a Material Adverse
Effect on the Bank.
2. The authorized capital stock of the Bank consists of 3,325,000 shares of
Bank Common Stock, of which, 2,775,000 shares are issued and outstanding
(including 105,000 shares held for future sale under the Bank's Stock
Option Plan). All such shares have been duly authorized and validly
issued, are fully paid and nonassessable, and have not been issued in
violation of the preemptive rights of any person. To our knowledge, there
are no outstanding options, warrants, subscriptions, calls, contracts or
other rights, arrangements or commitments of any kind, however denominated,
relating to the purchase or other acquisition of capital stock of the Bank,
or securities convertible into, capital stock of the Bank, except for the
outstanding Bank Stock Options to purchase 305,000 shares of Bank Common
Stock. The Bank's Stock Option Plan and the Bank Stock Options have been
duly authorized by all necessary corporate action on part of the Bank and
constitute valid and legally binding obligations of the Bank, enforceable
in accordance with their terms, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors' rights
generally and by general principles of equity (whether applied at law or in
equity).
3. The Bank has full power and authority to execute and deliver the Agreement
and to consummate the transactions contemplated thereby, subject to
approval by the Federal Reserve, the Comptroller and the Texas Banking
Commissioner. The Agreement has been duly authorized by all necessary
corporate action on the part of the Bank, has been duly and validly
executed and delivered by and constitutes the valid and binding agreement
of the Bank, enforceable against the Bank in accordance with its terms,
except to the extent that such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
enforcement of creditors' rights generally and by general principles of
equity (whether applied at law or in equity).
4. Except for receipt of approval by the Federal Reserve, the OCC and the
Texas Banking Commissioner or as set forth on the Disclosure Schedule,
neither the execution nor delivery of the Agreement nor the consummation by
the Bank of the transactions contemplated thereby, nor the compliance with
and fulfillment of the terms and provisions thereof by the Bank will
conflict with, or result in a breach of, any term, condition, or provision
of, or constitute a default under, (a) the Articles of Association or
Bylaws of the Bank, (b) to our knowledge, any material agreement or
instrument to which the Bank is a party or by which it is bound, or (c) to
our knowledge, any material order, judgment, or decree to which the Bank is
subject, or result in the creation of any material lien, charge or
encumbrance on any properties of the Bank.
A-D-1
<PAGE>
5. To our knowledge, except as disclosed on the Disclosure Schedule, there is
no action, suit, proceeding or claim pending, or any investigation by any
government or governmental agency or instrumentality, domestic or foreign,
pending or threatened, against the Bank or any employee benefit plan
maintained by it or the assets, business or goodwill of the Bank before any
court, government or governmental agency or instrumentality, domestic or
foreign, nor is there any outstanding order, writ, judgment, stipulation,
injunction, decree, determination, award or other order of any court,
government or governmental agency or instrumentality, domestic or foreign,
against the Bank.
A-D-2
<PAGE>
EXHIBIT E
RELEASE
(Director)
This Release (the "Release"), dated as of ___________, 1997, is made by
______________ (the "Director"), in favor of Pinemont Bank, Houston, Texas, a
Texas banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), dated as of _________, 1997, by and between the Bank and Southwest
Bancorporation of Texas, Inc., it is a condition to the consummation of the
transactions contemplated by the Merger Agreement that the Director shall have
executed and delivered to the Bank an instrument releasing the Bank from any and
all claims of such Director;
WHEREAS, the purpose of this Release is to serve as the instrument referred
to in Section 6.2(j)(i) of the Merger Agreement as discussed above;
WHEREAS, the Director desires to enter into this Release in consideration
of the matters set forth herein;
NOW, THEREFORE, for and in consideration of $1.00 and other good and
valuable consideration, the receipt and sufficiency of which is hereby expressly
acknowledged, the Director agrees as follows:
1. The Director acknowledges that he has no existing claims or defenses,
personal or otherwise, or rights of set off whatsoever against the Bank, except
as a result of the Director's capacity as a depositor with the Bank. The
Director for himself and on behalf of his heirs and assigns (the "Director
Releasing Parties") releases, acquits and forever discharges the Bank, its
predecessors, successors, assigns, officers, directors, employees, agents and
servants, and all persons, natural or corporate, in privity with them or any of
them, from any and all claims or causes of action of any kind whatsoever, at
common law, statutory or otherwise, which the Director Releasing Parties, or any
of them, has now or might have in the future, known or unknown, now existing or
that might arise hereafter, except such claims or causes of action as may exist
as a result of or may arise out of (i) the Director's capacity as a depositor
with the Bank, (ii) any claim for indemnification by the Bank the Director may
have in the future pursuant to applicable laws or the Bank's Articles of
Association or Bylaws (a "Statutory Indemnification") or the indemnity and
insurance covenants contained in the Merger Agreement (a "Contractual
Indemnification"), or (iii) the matters set forth on Schedule A hereto. It is
intended that this Release shall release all claims of any kind or nature that
any of the Director Releasing Parties might have against those hereby released
whether asserted or not and except as may exist as a result of or may arise out
of (i) the Director's capacity as a depositor with the Bank or (ii) Statutory
Indemnifications and Contractual Indemnifications.
A-E-1
<PAGE>
2. It is expressly understood and agreed that the terms hereof are
contractual and not merely recitals, and that the agreements herein contained
and the consideration herein transferred is to compromise doubtful and disputed
claims, if any, and that no releases made or other consideration given hereby or
in connection herewith shall be construed as an admission of liability, all
liability being expressly denied by the Bank. The Director hereby represents
and warrants that the consideration hereby acknowledged for entering into this
Release and the transactions contemplated hereby is greater than the value of
all claims, demands, actions and causes of action, if any, herein relinquished,
released, renounced, abandoned, acquitted, waived and/or discharged, and that
this Release is in full settlement, satisfaction and discharge of any and all
such claims, demands, actions and causes of action that the Director may have or
be entitled to against the Bank, and its predecessors, assigns, legal
representatives, officers, directors, employees, attorneys and agents.
3. The Director represents and warrants that he has full power and
authority to enter into, execute and deliver this Release, all proceedings
required to be taken to authorize the execution, delivery and performance of
this Release and the agreements and undertakings relating hereto and the
transactions contemplated hereby have been validly and properly taken and this
Release constitutes a valid and binding obligation of the Director in the
capacity in which executed. The Director further represents and warrants that
he has entered into this Release freely of his own accord and without reliance
on any representations of any kind or character not set forth herein. The
Director enters into this release upon the advice of and in concurrence with
legal counsel.
4. This Release shall be construed and enforced in accordance with the
laws of the State of Texas, and to the extent applicable, the laws of the United
States. If any provision of this Release or the application thereof to any
person or circumstances shall be determined to be invalid or unenforceable to
any extent, such provision shall be deemed severable, the remainder of this
Release and the application of all other provisions shall not be affected
thereby and shall be enforced to the greatest extent permitted by law,
consistent with the intent of the parties hereto to enter into a mutual release.
This Release is executed as of the date first above written. As used herein,
the singular includes the plural, the masculine includes the feminine and
neuter, and vice versa.
THE DIRECTOR:
----------------------------------------
Print Name:
-----------------------------
A-E-2
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on _________________, 1997, by
_______________________, Individually.
-------------------------------------------
Notary Public in and for the State of Texas
Printed Name:
------------------------------
My Commission Expires:
---------------------
A-E-3
<PAGE>
EXHIBIT F
RELEASE
(Officer)
This Release (the "Release"), dated as of ___________, 1997, is made by
______________ (the "Officer"), in favor of Pinemont Bank, Houston, Texas, a
Texas banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Agreement and Plan of Merger (the "Merger
Agreement"), dated as of _________, 1997, by and between the Bank and Southwest
Bancorporation of Texas, Inc., it is a condition to the consummation of the
transactions contemplated by the Merger Agreement that the Officer shall have
executed and delivered to the Bank an instrument releasing the Bank from any and
all claims of such Officer;
WHEREAS, the purpose of this Release is to serve as the instrument referred
to in Section 6.2(j)(ii) of the Merger Agreement as discussed above;
WHEREAS, the Officer desires to enter into this Release in consideration of
the matters set forth herein;
NOW, THEREFORE, for and in consideration of $1.00 and other good and
valuable consideration, the receipt and sufficiency of which is hereby expressly
acknowledged, the Officer agrees as follows:
1. The Officer acknowledges that he or she has no existing claims or
defenses, personal or otherwise, or rights of set off whatsoever against the
Bank, except as a result of the Officer's capacity as a depositor with the Bank,
or for salary or bonus due to such Officer in the ordinary course of business.
The Officer for himself or herself and on behalf of his heirs or her heirs and
assigns (the "Officer Releasing Parties") releases, acquits and forever
discharges the Bank, its predecessors, successors, assigns, officers, directors,
employees, agents and servants, and all persons, natural or corporate, in
privity with them or any of them, from any and all claims or causes of action of
any kind whatsoever, at common law, statutory or otherwise, which the Officer
Releasing Parties, or any of them, has now or might have in the future, known or
unknown, now existing or that might arise hereafter, except such claims or
causes of action as may exist as a result of or may arise out of (i) the
Officer's capacity as a depositor with the Bank, (ii) for salary, bonus and
other compensation and benefits due to such Officer in the ordinary course of
business (including any pro rata bonus based on 1997 services through the
Effective Time), (iii) any claim for indemnification by the Bank the Officer may
have in the future pursuant to applicable law or the Bank's Articles of
Association or Bylaws (a "Statutory Indemnification") or the indemnity and
insurance covenants contained in the Merger Agreement (a "Contractual
Indemnification"), or (iv) the matters set forth on Schedule A hereto. It is
intended that this Release shall release all claims of any kind or nature that
any of the Officer Releasing Parties might have against those hereby released
whether asserted or not and except as may exist as a result of or may arise out
of (i) the Officer's capacity as a depositor with the
A-F-1
<PAGE>
Bank, for salary, bonus and other compensation and benefits due to such Officer
in the ordinary course of business or (ii) for Statutory Indemnifications and
Contractual Indemnifications.
2. It is expressly understood and agreed that the terms hereof are
contractual and not merely recitals, and that the agreements herein contained
and the consideration herein transferred is to compromise doubtful and disputed
claims, if any, and that no releases made or other consideration given hereby or
in connection herewith shall be construed as an admission of liability, all
liability being expressly denied by the Bank. The Officer hereby represents and
warrants that the consideration hereby acknowledged for entering into this
Release and the transactions contemplated hereby is greater than the value of
all claims, demands, actions and causes of action, if any, herein relinquished,
released, renounced, abandoned, acquitted, waived and/or discharged, and that
this Release is in full settlement, satisfaction and discharge of any and all
such claims, demands, actions and causes of action that the Officer may have or
be entitled to against the Bank, and its predecessors, assigns, legal
representatives, officers, directors, employees, attorneys and agents.
3. The Officer represents and warrants that he or she has full power and
authority to enter into, execute and deliver this Release, all proceedings
required to be taken to authorized the execution, delivery and performance of
this Release and the agreements and undertakings relating hereto and the
transactions contemplated hereby have been validly and properly taken and this
Release constitutes a valid and binding obligation of the Officer in the
capacity in which executed. The Officer further represents and warrants that he
or she has entered into this Release freely of his or her own accord and without
reliance on any representations of any kind or character not set forth herein.
The Officer enters into this release upon the advice of and in concurrence with
legal counsel.
4. This Release shall be construed and enforced in accordance with the
laws of the State of Texas, and to the extent applicable, the laws of the United
States. If any provision of this Release or the application thereof to any
person or circumstances shall be determined to be invalid or unenforceable to
any extent, such provision shall be deemed severable, the remainder of this
Release and the application of all other provisions shall not be affected
thereby and shall be enforced to the greatest extent permitted by law,
consistent with the intent of the parties hereto to enter into a mutual release.
This Release is executed as of the date first above written. As used herein,
the singular includes the plural, the masculine includes the feminine and
neuter, and vice versa.
THE OFFICER:
----------------------------------------
Print Name:
----------------------------
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<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
This instrument was acknowledged before me on ______________, 1997, by
______________________, Individually.
-------------------------------------------
Notary Public in and for the State of Texas
Printed Name:
------------------------------
My Commission Expires:
---------------------
A-F-3
<PAGE>
APPENDIX B
THE CHARLES T. MEEKS COMPANY, INC.
101 WEST SIXTH STREET, SUITE 409
AUSTIN, TEXAS 78701-2933
April 23, 1997
Board of Directors
Pinemont Bank
12130 Hempstead Road
Houston, Texas 77240
Members of the Board:
In our capacity as a banking consultant, analyst and bank stock appraiser,
The Charles T. Meeks Company, Inc. ("Meeks") has been asked to render an opinion
as to the fairness of the proposed exchange ratio of common stock to be used in
the proposed merger of Pinemont Bank, Houston, Texas ("Pinemont") with Southwest
Bank of Texas, N.A., Houston, Texas ("SW Bank"), a wholly-owned subsidiary of
Southwest Bancorporation of Texas, Inc. (the "Company"), from a financial point
of view.
Charles T. Meeks, the President of Meeks, has served as a banker for
thirty-eight years and a bank consultant for eight years. He has familiarity
with and involvement with the banking industry nationwide, as well as
familiarity with the Texas market and recent transactions in this market. He is
continually engaged in the valuation of bank and bank holding company securities
in Texas and other states.
In rendering the Opinion, Meeks reviewed certain publicly available
information concerning Pinemont, 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 terms of the negotiated Merger
Agreement; (ii) the most recent audited balance sheets and income statements of
Pinemont; (iii) the most recent listing of Pinemont's marketable securities
showing rate, maturity and market value as compared to book value; (iv)
Pinemont's internal loan classification list; (v) the 1997 budget and
performance to date of Pinemont; (vi) the minutes of meetings of Pinemont's
Board and special committees; (vii) the most recent monthly report of the
Pinemont Board; (viii) the analysis of loan loss reserve adequacy for Pinemont;
(ix) market conditions and current trading levels of Pinemont's outstanding
common stock; (x) information regarding lawsuits in which Pinemont is a
defendant; (xi) information regarding real estate owned and leased by Pinemont,
and (xii) other information as supplied by Pinemont. Meeks also reviewed all of
the above with regard to the Company and SW Bank. Reviews were conducted
primarily onsite at the applicable corporate headquarters.
B-1
<PAGE>
In performing its analysis, Meeks relied upon financial projections for
Pinemont which were prepared and furnished by management of Pinemont and certain
financial projections made by Meeks. Meeks also relied on financial projections
for the Company and SW Bank made by Meeks following discussions with the
management of the Company and a review of the financial information supplied by
management.
In rendering the Opinion, Meeks did not independently verify the asset
quality and financial condition of Pinemont, the Company or SW Bank, but instead
relied upon the data provided by or on behalf of Pinemont, the Company and SW
Bank to be true and accurate in all material aspects.
Having reviewed all factors which we deem to be relevant, and using the
assumption that all information provided us was accurate and complete, it is our
FAIR OPINION that the proposed exchange ratio, i.e., 0.625 of a share of
Southwest Bancorporation of Texas, Inc. for each share of Pinemont Bank, is FAIR
AND EQUITABLE to the shareholders of Pinemont Bank, from a financial point of
view.
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.
Prior to being retained for this assignment, Meeks provided other
professional but non-investment banking services to Pinemont. The revenues
derived from such services are insignificant when compared to Meeks' total gross
revenues.
We hereby consent to the reference to our firm in the proxy statement
related to the merger transaction and to the inclusion of the Opinion as an
exhibit to the proxy statement related to the merger transaction.
THE CHARLES T. MEEKS COMPANY, INC.
------------------------------------
Charles T. Meeks, President
B-2
<PAGE>
APPENDIX C
TEXAS BUSINESS CORPORATION ACT
ARTICLES 5.11, 5.12 AND 5.12
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholders of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation
requiring the special authorization of the shareholders as provided by this
Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
ART. 512. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise the right to dissent only by complying with the following
procedures:
<PAGE>
(1) (a) With respect to proposed corporate action that is submitted
to a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action
is effected and the shareholder shall not have voted in favor of the
action, the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporation action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a
copy of this Article and any articles or documents filed by the corporation
with the Secretary of State to effect the action. If the shareholder shall
not have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall
C-2
<PAGE>
contain an estimate by the corporation (foreign or domestic) or other
entity of the fair value of the shares, together with an offer to pay the
amount of that estimate within ninety (90) days after the date on which the
action was effected, upon receipt of notice within sixty (60) days after
that date from the shareholder that the shareholder agrees to accept that
amount and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporation
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the
county in which the principal office of the domestic corporation is located,
asking for a finding and determination of the fair value of the shareholder's
shares. Upon the filing of any such petition by the shareholder, service of a
copy thereof shall be made upon the corporation (foreign or domestic) or other
entity, which shall, within ten (10) days after service, file in the office of
the clerk of the court in which the petition was filed a list containing the
names and addresses of all shareholders of the domestic corporation who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the corporation (foreign or domestic) or
other entity. If the petition shall be filed by the corporation (foreign or
domestic) or other entity, the petition shall be accompanied by such a list.
The clerk of the court shall give notice of the time and place fixed for the
hearing of the petition by registered mail to the corporation (foreign or
domestic) or other entity and to the shareholders named on the list at the
addresses therein stated. The forms of the notices by mail shall be approved by
the court. All shareholders thus notified and the corporation (foreign or
domestic) or other entity shall thereafter be bound by the final judgment of the
court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
C-3
<PAGE>
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
C-4
<PAGE>
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company provide that, subject to
certain limitations, its officers and directors (and certain other individuals
acting on behalf of the Company) will be indemnified by the Company against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by such persons, to the fullest extent permitted under the Texas
Business Corporation Act (the "TBCA"). Generally, Article 2.01-1 of the TBCA
permits a corporation to indemnify a person who was, is, or is threatened to
be made a named defendant or respondent in a proceeding because the person was
or is a director or officer if it is determined that such person (i) conducted
himself in good faith, (ii) reasonably believed (a) in the case of conduct in
his official capacity as a director or officer of the corporation, that his
conduct was in the corporation's best interests, or (b) in other cases, that
his conduct was at least not opposed to the corporation's best interests, and
(iii) in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful. In addition, the TBCA requires a
corporation to indemnify a director or officer for any action that such
director or officer is wholly successful in defending on the merits.
The Company's Articles of Incorporation provide that a director of the
Company will not be liable to the corporation for monetary damages for an act
or omission in the director's capacity as a director, except to the extent not
permitted by law. Texas law does not permit exculpation of liability in the
case of (i) a breach of the director's duty of loyalty to the corporation or
the shareholders, (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's officer, (iv)
an action or omission for which the liability of the director is expressly
provided by statute, or (v) an act related to an unlawful stock repurchase or
dividend.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) *Exhibits:
<TABLE>
<C> <S>
**2.1 --Agreement and Plan of Merger dated April 28, 1997, among Southwest
Bancorporation of Texas, Inc., Southwest Bank of Texas National
Association and Pinemont Bank (included as Appendix A to Proxy
Statement/Prospectus)
3.1 --Articles of Incorporation of the Company
3.2 --Bylaws of the Company (Restated as of December 31, 1996)
3.3 --Amendment dated December 18, 1996 to Articles of Incorporation of
the Company
4.1 --Specimen Common Stock certificate
**5.1 --Opinion of Vinson & Elkins L.L.P.
**8.1 --Form of Tax Opinion of Brown, Parker & Leahy, L.L.P.
10.1 --1989 Stock Option Plan
10.2 --1993 Stock Option Plan
10.3 --Form of Stock Option Agreement under 1989 Stock Option Plan and 1993
Stock Option Plan
10.4 --1996 Stock Option Plan
10.5 --Form of Incentive Stock Option Agreement under 1996 Stock Option
Plan
10.6 --Form of Non-Qualified Stock Option Agreement under 1996 Stock Option
Plan
10.7 --Directors Stock Option Plan, adopted October, 1993
10.8 --Form of Stock Option Agreement under Directors Stock Option Plan
10.9 --Form of Change in Control Agreement between the Company and each of
Walter E. Johnson, Paul B. Murphy, Jr., Joseph H. Argue, David C.
Farries, Sharon K. Sokol, Yale Smith, Steve D. Stephens and Anthony
Torentinos
**10.10 --Form Employment Contract between the Company and J. Nolan Bedford
(included as Exhibit B-1 to Exhibit 2.1 hereof).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
**10.11 --Form of Employment Contract between the Company and Maurice L. Junod
(included as Exhibit B-2 to Exhibit 2.1 hereof).
21.1 --List of subsidiaries of the Company
**23.1 --Consent of Coopers & Lybrand L.L.P.
**23.2 --Consent of Grant Thornton LLP
**23.3 --Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1 hereto)
**23.4 --Consent of Brown, Parker & Leahy, L.L.P.
**23.5 --Consent of The Charles T. Meeks Company, Inc. (included in Appendix
B to Proxy Statement/Prospectus)
**24.1 --Powers of Attorney (included on the signature page to this
Registration Statement)
**99.1 --Form of Proxy for Special Meeting of Shareholders of Pinemont Bank
</TABLE>
- --------
* All Exhibits except Exhibits 2.1, 5.1, 8.1, 10.10, 10.11, 23.1, 23.2, 23.3,
23.4, 23.5, 24.1 and 99.1 are incorporated herein by reference to the
Exhibits bearing the same Exhibit numbers in the Registrant's Form S-1
Registration Statement No. 333-16509, declared effective by the Commission
on January 27, 1997.
** Filed herewith.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted either
because they are not required or because the required information is included
in the financial statements and notes thereto included herein. See "Index to
Financial Statements" on page F-1 of the Proxy Statement/Prospectus.
ITEM 23. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(3) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 under the Securities Act, will
be filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON THE 28TH DAY OF MAY, 1997.
SOUTHWEST BANCORPORATION OF TEXAS,
INC.
/s/ Walter E. Johnson
By:__________________________________
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul B. Murphy, Jr., David C. Farries and R.
John McWhorter, or any of them, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Walter E. Johnson Chairman of the Board and May 28, 1997
____________________________________ Chief Executive Officer
Walter E. Johnson (Principal Executive
Officer)
/s/ David C. Farries Executive Vice President, May 28, 1997
____________________________________ Treasurer and Secretary
David C. Farries (Principal Financial
Officer)
/s/ R. John McWhorter Vice President and May 28, 1997
____________________________________ Controller (Principal
R. John McWhorter Accounting Officer)
/s/ J. David Heaney Director May 28, 1997
____________________________________
J. David Heaney
/s/ John W. Johnson Director May 28, 1997
____________________________________
John W. Johnson
/s/ John B. Brock III Director May 28, 1997
____________________________________
John B. Brock III
/s/ Ernest H. Cockrell Director May 28, 1997
____________________________________
Ernest H. Cockrell
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Wilhelmina R. Morian Director May 28, 1997
____________________________________
Wilhelmina R. Morian
/s/ Paul B. Murphy, Jr. Director and President May 28, 1997
____________________________________
Paul B. Murphy, Jr.
/s/ Andres Palandjoglou Director May 28, 1997
____________________________________
Andres Palandjoglou
/s/ Michael T. Willis Director May 28, 1997
____________________________________
Michael T. Willis
</TABLE>
II-4
<PAGE>
EXHIBIT 5.1
[VINSON & ELKINS LETTERHEAD APPEARS HERE]
May 23, 1997
Southwest Bancorporation of Texas, Inc.
4400 Post Oak Parkway
Houston, Texas 77027
Gentlemen:
We have acted as counsel for Southwest Bancorporation of Texas, Inc. (the
"Company") and have participated in all proceedings in connection with the
registration by the Company with the Securities and Exchange Commission
("Commission") on a Form S-4 Registration Statement under the Securities Act of
1933, as amended, of an aggregate of 1,859,375 shares of Company Common Stock,
par value $1.00 ("Common Stock"), which may be issued to the shareholders of
Pinemont Bank (the "Bank") in exchange for their shares of Common Stock of the
Bank, $.66 2/3 par value ("Bank Common Stock"), at an exchange ratio of 0.625 of
a share of Company Common Stock for each share of Bank Common Stock, in
connection with the proposed merger of the Bank with and into Southwest Bank of
Texas National Association, a wholly-owned subsidiary bank of the Company ("SW
Bank").
Before rendering the opinion set forth below, we have examined, among other
things, the Articles of Incorporation, as amended, and bylaws of the Company,
the corporate proceedings of the Company with respect to the proposed merger
with the Bank, the Agreement and Plan of Merger ("Agreement") entered into
between the Company, SW Bank and the Bank, and the Registration Statement on
Form S-4 ("Registration Statement") filed by the Company with the Commission in
connection with the above described proposed merger. In addition, we have
relied as to factual matters on certificates of certain public officials and
officers of the Company. We are rendering this opinion as of the date on which
the Registration Statement becomes effective.
Based on the foregoing, we are of the opinion that the 1,859,375 shares of
Company Common Stock, which are proposed to be exchanged by the Company for
shares of capital stock of the Bank pursuant to the Agreement at the exchange
ratio of 0.625 of a share of Company Common Stock for each share of Bank Common
Stock have been validly authorized for issuance, and, subject to compliance with
any applicable Blue Sky laws, upon the issuance and delivery of such 1,859,375
shares in accordance with the provisions of the Agreement, as set forth in the
Registration Statement, such shares of Company Common Stock will be validly
issued, fully paid and nonassessable.
<PAGE>
Southwest Bancorporation of Texas, Inc.
Page 2
May 23, 1997
We hereby consent to the use of our name in the Registration Statement and
to the filing of this opinion as an exhibit to the Registration Statement. In
giving this consent, however, we do not admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
and the rules and regulations of the Commission thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 8.1
[BROWN, PARKER & LEAHY, L.L.P. LETTERHEAD]
______, 1997
Pinemont Bank
12130 Hempstead Highway
Houston, Texas 77092
Gentlemen:
You have asked for our opinion regarding certain federal income tax
consequences of the proposed merger ("Merger") of Pinemont Bank, a Texas banking
association ("Pinemont") with and into Southwest Bank of Texas National
Association, a national banking association ("Southwest"). Southwest is a
wholly-owned direct subsidiary of Southwest Bancorporation of Texas
Inc., a Texas corporation ("Parent").
In rendering the limited opinion expressed below, we have examined and
relied upon originals or copies of the Merger Agreement, the proxy
statement/prospectus of Southwest dated _______________, 1997 and such documents
and matters as we have considered necessary.
For the purpose of these opinions, we have assumed (i) the due
authorization, execution and delivery of each document by the parties thereto,
(ii) the genuineness of all signatures, (iii) authenticity of all documents
submitted to us as originals, and (iv) the conformity with the originals of all
documents submitted to us as copies. With respect to certain matters of
material fact to these opinions, we have relied upon certificates of
representatives of Pinemont. Except as specifically described herein, we have
not undertaken any independent investigation to determine existence or absence
of such facts. No inferences to our knowledge of the existence of such facts
should be drawn from the fact of our representation of Pinemont or any other
person. For purposes of these opinions, we assume that none of such information
contains any untrue statement of a material fact or omits any material fact
necessary to make the statements made under the circumstances which they are
made, not misleading. Furthermore, we have assumed and these opinions are
conditioned upon Pinemont, Parent and Southwest being organized and operated in
accordance with the description in the Merger Agreement and the Merger being
consummated as described in the Merger Agreement.
Further, the opinions are also based upon the following assumptions and
conditions: (1) the Pinemont shareholders are acquiring Parent common stock,
$1.00 par value ("Parent Common Stock"), pursuant to the Merger for their own
account and intend to hold such stock for their own interest without any
preconceived disposition plan, (2) the historic Pinemont business will be
continued by Southwest after the Merger, (3) Southwest will hold all or
substantially all of the historic assets of Southwest and Pinemont after the
Merger, (4) the Pinemont shareholders have
<PAGE>
May 27, 1997
Page 2
not disposed of or acquired Pinemont stock in contemplation of the Merger, and
(5) Parent has no preconceived plan or intention to dispose of the Southwest
stock or liquidate Southwest after the Merger.
We have not made a review of the laws of any jurisdiction other than
Federal income tax laws of the United States of America. Accordingly, the
opinions expressed herein are limited exclusively to the income tax laws of the
United States of America.
The opinions are expressly limited to the matters enumerated below. No
opinions should be inferred as to any other matters (tax or otherwise).
The opinions are not binding on the Internal Revenue Service, or other
agencies or the courts and are limited to the interpretation of the Internal
Revenue Code of 1986, as amended ("Code"), and concomitant regulations. Future
administrative and legislative changes, court decisions or governmental
interpretations may significantly modify the opinions expressed herein. While
the opinions are based upon our best interpretation of existing laws and express
what we believe a court would conclude at that time, no assurances can be given
that such interpretations would be followed if they became subject to judicial
or administrative proceedings.
These opinions are as of the date hereof, we undertake no, and hereby
disclaim any, obligation to advise you of any change. Further, these opinions
are solely for the benefit of the addressee; these opinions may not be relied in
any manner, nor used, by any other person without the prior written approval of
the Firm.
These opinions are subject to interpretation and construction under the
laws of the State of Texas. To the extent permitted by applicable law, any
cause of action relating to an opinion expressed herein shall be brought in a
federal or state court sitting in Harris County, Texas.
Based on the foregoing, we advise you that in our opinion for federal
income tax purposes:
1. The Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code;
2. Each of Parent, Pinemont and Southwest will be a party to the
reorganization within the meaning of Section 368(b) of the Code;
3. No gain or loss will be recognized by Southwest, Parent or Pinemont
as a result of the Merger;
4. The basis of the Pinemont shareholders in the Parent Common Stock
received in the Merger will be the same as the basis of the
Pinemont 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
<PAGE>
May 27, 1997
Page 3
5. The holding period of the shares of Parent Common Stock received by
a shareholder will include the holding period of the shares of
Pinemont common stock surrendered therefor, provided that such
Pinemont common stock was held as a capital asset by such
shareholder.
Very truly yours,
BROWN, PARKER & LEAHY, L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(File No. 333 ____) of our reports, which include an explanatory paragraph
regarding the Company's change as of January 1, 1994 in accounting for
securities, dated January 31, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Southwest Bancorporation of
Texas, Inc. and Subsidiaries. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
May 27, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 7, 1997, accompanying the
financial statements of Pinemont Bank contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts".
GRANT THORNTON LLP
Houston, Texas
May 28, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF BROWN, PARKER & LEAHY, L.L.P.
CONCERNING FEDERAL INCOME TAX CONSEQUENCES
We hereby consent to the use of the form of our opinion as herein set
forth as Exhibit 8.1 to the Registration Statement and to the use of our name
under the captions "The Merger - Certain Federal Income Tax Consequences" and
"Legal Matters" in the Proxy Statement/Prospectus forming a part of the
Registration Statement. This consent is not to be construed as an admission that
we are a person whose consent is required to be filed with the Registration
Statement under the provisions of the Securities Act.
Houston, Texas
May 27, 1997
<PAGE>
EXHIBIT 99.1
PINEMONT BANK
SPECIAL MEETING OF SHAREHOLDERS
, 1997
Proxy Solicited on Behalf of the Board of Directors
The undersigned hereby (a) acknowledges receipt of the Notice of Special
Meeting of Shareholders of Pinemont Bank (the "Bank") to be held on ,
1997 and the Proxy Statement/Prospectus in connection therewith, each dated
, 1997, (b) appoints Stanley D. Stearns, Jr., Robert A. Skilton and
Robert J. Adam, or any of them, as Proxies, each with the power to appoint a
substitute, (c) authorizes the Proxies to represent and vote, as designated
below, all the shares of Bank Common Stock (as defined in the Proxy
Statement/Prospectus), held of record by the undersigned on , 1997 at
the Special Meeting and at any adjournment(s) thereof, and (d) revokes any
proxies heretofore given.
1. Approval and adoption of the Agreement and Plan of Merger dated as of April
28, 1997, by and among the Bank, Southwest Bancorporation of Texas, Inc.
(the "Company") and Southwest Bank of Texas National Association, a wholly-
owned subsidiary of the Company ("SW Bank"), pursuant to which the Bank will
merge with and into SW Bank which shall be the surviving entity, and
whereupon the shareholders of the Bank will receive 0.625 of a share of
Company Common Stock (as defined in the Proxy Statement/Prospectus) in
exchange for each share of Bank Common Stock:
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment(s) or
postponement(s) thereof.
(Continued and to be signed on reverse side)
(Continued from other side)
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS INDICATED, THIS
PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
MERGER AND, IN THE DISCRETION OF THE PROXIES, ON ANY OTHER BUSINESS.
DATED , 1997
--------------------------------
--------------------------------------------
Signature
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Signature if held jointly
IMPORTANT. Please date this proxy and sign
exactly as your name or names appear on
your stock certificate(s). If stock is held
jointly, all holders must execute this
proxy. Executors, administrators, trustees,
guardians and others signing in a
representative capacity, please so indicate
when signing.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE ACCOMPANYING POSTPAID
ENVELOPE
